JUDICIAL COMMITTEE OF THE PRIVY COUNCIL FINDS THAT NO EXPRESS ALLEGATION, CONSIDERATION OR FINDING OF ‘SUBSTANTIAL INJUSTICE’ IS REQUIRED TO ESTABLISH A SERIOUS PROCEDURAL IRREGULARITY

In the recent decision of RAV Bahamas Ltd and another v Therapy Beach Club Incorporated the Judicial Committee of the Privy Council (the “Privy Council”) considered that s90 of the Bahamas Arbitration Act 2009 (the “Bahamas Arbitration Act”) - which provides for challenges to arbitration awards on the grounds of serious irregularity - did not require an express allegation, consideration and finding of “substantial injustice” for a serious irregularity to be established.

The decision of the Privy Council is likely to be of interest to users of London seated arbitration as s90 of the Bahamas Arbitration Act is materially identical to s68 Arbitration Act 1996 (the “English Arbitration Act”), which provides for English seated arbitral awards to be challenged on the same basis. While the decision of the Privy Council is not necessarily binding on the English courts, it provides guidance on the likely position under s68. The decision further identifies a number of points of “best practice” for arbitration practitioners and the courts when dealing with a challenge to an arbitral award on the basis of a serious irregularity.

Background

The Underlying Dispute

Bahamas Ltd and Bimini Bay Resort Management Ltd (collectively “RAV”) leased Therapy Beach Club Ltd (“TBC”) some land for a period of three years for the building and operation of a restaurant and a beach club (collectively the “Sakara Beach Club”). Under the terms of the agreement TBC was to pay rent to RAV based on TBC’s gross revenue from the Sakara Beach Club, alongside some other sums. The agreement also provided, among other things, that RAV would construct the Sakara Beach Club within 120 days of receiving payment of certain sums from TBC, and that TBC would have the option to renew the lease for a further three years, “subject to the parties agreeing to rents to apply for the renewal term”.

A dispute arose between TBC and RAV in which TBC alleged that RAV had breached the contract by not properly completing the construction of the Sakara Beach Club, and that TBC had to complete the construction at its own expense. In response, RAV commenced proceedings in the Supreme Court of the Bahamas alleging that the lease was “void, illegal and of no effect”. Before the judgment was handed down (and while the lease was still within its original three-year term), RAV demolished the Sakara Beach Club and evicted TBC from the land. After the demolition of the Sakara Beach Club and TBC’s eviction, the Supreme Court of the Bahamas found that the lease was in fact valid.

The Award

The dispute arising out of the destruction of the Sakara Beach Club and eviction of TBC by RAV was referred to arbitration. In the resulting award (the “Award”) the arbitrator held, inter alia, that:

• TBC was wrongly evicted;
• The lease had not been varied (as had been argued by TBC) and so did not include the lease of a nearby restaurant in addition to the Sakara Beach Club.
• RAV was to pay TBC $6.8 million for TBC’s general damages for consequential loss of profits (the "Damages Calculation").

This Damages Calculation was reached by the arbitrator accepting TBC’s expert’s calculation of loss of profits for a six year period, which included a three year renewal period, and then the arbitrator applying deductions of one third and 15% to reflect that she had rejected TBC’s claim that the lease had been varied (point (ii) above) and that the expert’s figures were based on his memory and not documentation respectively.

S90 Grounds of Challenge to Award

RAV challenged the award in the Supreme Court of the Bahamas (the "Supreme Court") alleging a number of procedural irregularities which fit into two main grounds.

Ground 1: RAV maintained that the time period for assessing the loss of profits should not have extended beyond the three year term of the original lease and should not have included the three year renewal period. RAV argued that the arbitrator had failed to deal with issues put to her about the renewal of the lease, including (i) that the requirement of six months’ notice to renew the lease was not complied with and (ii) that the option clause was “uncertain, illusory and unenforceable” (together the "Lease Renewal Point").

Ground 2: RAV maintained that in regards to the Damages Calculation, the arbitrator disaggregated or discounted losses (by one third and 15%) on bases not canvassed with or addressed by the parties.

Supreme Court Decision and Court of Appeal Decision  

In the Supreme Court of the Bahamas (the “Supreme Court Decision”), both grounds of challenge were upheld.

In respect of Ground 1, the Supreme Court found that the arbitrator did not deal with the issue of the Lease Renewal Point and, having reviewed the relevant authorities, the issue of whether the option clause was “uncertain, illusory and unenforceable” was an important issue. In respect of Ground 2, the Court found that there was a procedural irregularity in the arbitrator not affording RAV the opportunity to make representations on the assessment of damages prior to her decision on the discounts.

TBC appealed the Supreme Court Decision to the higher Court of Appeal of the Bahamas which, by a majority, allowed the appeal.

The Court of Appeal found (the "Court of Appeal Decision") that in respect of both Ground 1 and Ground 2 the Supreme Court Decision did not “expressly and separately consider and find that substantial injustice had been caused to RAV by the irregularity … found; and similarly RAV had failed expressly and separately to plead and establish any such substantial injustice” which, having reviewed the relevant authorities, were required. The majority also found that Ground 1 and Ground 2 did not give rise to any procedural irregularities. RAV appealed the Court of Appeal decision to the Privy Council.

Decision

The Privy Council allowed RAV’s appeal, finding that “while it is good practice and should be encouraged, it is not a requirement of section 90 of the 2009 Act that there be a separate and express allegation, consideration and finding of substantial injustice” (the “s90 Finding”).

The Privy Council also found that Ground 1 and Ground 2 did give rise to procedural irregularities and therefore the Award should be remitted to the tribunal (the “Award Findings”).

The s90 Finding

Turning to the question on appeal, the Privy Council agreed with a number of English law authorities that had held that "some irregularities may be so serious that substantial injustice is 'inherently likely' or 'likely in the very nature of things' to result" and "goes almost without saying".

The Privy Council further considered that because of the definition of serious irregularity under s90 (that "a seriously irregularity… 'means' a listed irregularity which has caused or will cause substantial injustice"), a finding of a "serious irregularity" in substance meant that there was also a finding by the court of "substantial injustice". The Privy Council noted that "in this context, substance is more important than form", considering that "it is implicit in any section 90 application that substantial injustice is being alleged". A lack of express and separate consideration by the courts of substantial injustice "does not mean that the issue has not been considered and determined", instead it is only "important… as a matter of substance, substantial justice has been considered and found".

The Award Findings

In its consideration of Ground 1, the Privy Council noted that "given the very limited attention given to the issue of substantial injustice in the parties' submissions, it is perhaps not surprising that [the judge in Supreme Court Decision] did not expressly refer to it as an issue". The Privy Council went on to consider that the Lease Renewal Point was considered in the Supreme Court Decision to be a "central issue" that was not put to the arbitrator, and that the Supreme Court Decision recognised that "a failure to deal with a central issue might well affect the outcome of the award and thereby cause substantial injustice". The Privy Council concluded that this was "one of those cases in which the nature of the irregularity and failure of due process mean[t] that it [was] 'inherently likely' that there has been substantial injustice". Applying its construction of s90, the Privy Council found that substantial injustice had been found in substance, which was all that s90 required.

In regards to Ground 2, the Privy Council found that "for essentially the same reasons" as Ground 1 (that is, substantial injustice had been found in substance) there was also serious procedural irregularity in the arbitrator applying a one third deduction. It was "self-evident that an arbitrary deduction of damages… [was] seriously prejudicial to RAV". In so finding, the Privy Council rejected the Court of Appeal's characterisation that the one third reduction undertaken by the arbitrator was an error of law, holding instead that it was "correctly identified as an irregularity" by RAV. On the question of the 15% deduction applied by the arbitrator in respect of TBC's expert's evidence being unsupported by documents, in the eyes of the Privy Council this was not a procedural irregularity. This was because it "should have been obvious to RAV that [TBC's expert's evidence] was problematic and weakened" and RAV had "ample opportunity to address the arbitrator on the matter" and as such the issue was "in play" or "in the arena".

Comment

It is well known (and reiterated in this case) that parties seeking to challenge arbitral awards under s68 of the English Arbitration Act on the basis of procedural irregularity face a "high hurdle" for success, and this decision (although under s90 of the Bahamas Arbitration Act) provides an instructive illustration of the type of irregularities that justify court intervention into the arbitral process.

In this regard, it is important for both arbitration practitioners and commercial parties to be aware that if the English courts adopt the same approach in respect of s68 of the English Arbitration Act as the Privy Council did for s90 of the Bahamas Arbitration Act, this will not in any way lower the high hurdle faced by applicants. The Privy Council's approach still requires parties to demonstrate that any procedural irregularity faced caused the applicant substantial injustice, although depending on the irregularity this may not require express allegation by the applicant, or express consideration or an express finding by the court. In this sense the decision clarifies form, and not substance.

It remains best practice, as confirmed by the Privy Council in this case, to expressly allege substantial injustice. Express allegation will likely lead to express consideration and express finding by the supervisory court, reducing the risk of appeal of the supervisory court's decision.

For more information, please contact Craig Tevendale, Partner, Rebecca Warder, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

The authors would like to thank Luke Hard for his assistance in preparing this blog post.