ENGLISH COURT UPHOLDS MULTIPLE CHALLENGES TO ARBITRAL AWARD FOR BREACH OF THE TRIBUNAL'S DUTY OF FAIRNESS

In PBO v DONPRO and others [2021] EWHC 1951 (Comm), the English High Court (the Court) allowed a number of challenges brought by PBO under s68 of the Arbitration Act 1996 (the Act) against an arbitral award rendered by the Federation of Cocoa Commerce (FCC) Board of Appeal (the Board). As such, this is an unusual example of a successful s68 challenge, made all the more unusual by the number of irregularities raised by the applicant, all of which were upheld by the Court.

Background

As we have discussed in previous blog posts (here), section 68 of the Act allows an applicant to challenge an arbitral award "on the grounds of serious irregularity affecting the tribunal, the proceedings or the award". In addition, the applicant must show that this irregularity has caused or will cause it substantial injustice.

The Underlying Dispute

The underlying dispute concerned claims by two of the respondents (DONPRO and 2DON) for sums allegedly due by PBO under a number of standard form FCC contracts. These contracts provided for disputes to be resolved by way of arbitration under the FCC Arbitration and Appeal Rules (the FCC Rules). DONPRO and 2DON commenced arbitration proceedings against PBO in respect of the sums, and during the arbitration proceedings, PBO succeeded in joining and bringing a counterclaim against the third respondent (CODON, collectively the Respondents) on the basis of related agreements (the CODON Contracts). PBO alleged that the Contracts replaced agreements made with DONPRO.

The Appeal Award

In an initial arbitral award, the tribunal found in favour of the Respondents and PBO's counterclaim was dismissed. PBO subsequently appealed the award to the Board and, prior to the end of the appeal process, changed legal representation. PBO's new lawyers identified possible new grounds of appeal, and PBO therefore sought the Board's permission to amend its Statement of Case. This application was refused, and in its award (the Appeal Award), the Board found in favour of the Respondents. This included a finding that CODON was justified in "cancelling" the CODON Contracts (the Cancellation Finding). The Board also found that it did not have jurisdiction over some losses alleged by PBO in the appeal (the Jurisdictional Finding).

The s68 Challenges

PBO brought three challenges to the Appeal Award under s68 of the Act, alleging three serious procedural irregularities causing PBO substantial injustice, namely:

(i) the Board's refusal to allow PBO to amend its Statement of Case meant that PBO was unable to advance its full defence by pleading potentially determinative arguments (including that the Respondents' claims were time barred);

(ii) the Board "departed from the way in which the case was presented by the parties and did so without warning such that PBO was not afforded a reasonable (or any) opportunity of putting its case" in relation to: (a) the Cancellation Finding; and (b) the Jurisdictional Finding.

PBO argued that each of these instances amounted to breaches of the Board's duty of fairness to the parties as guaranteed by s33 of the Act.

Decision

The Court upheld all of PBO's challenges, and found that the Appeal Award should be remitted to the tribunal for "reconsideration of the points raised in each s68 challenge".

The Court did not consider it appropriate to set aside the Appeal Award in its entirety as, apart from the policy of "striving to uphold arbitration awards", there had been no challenge to the impartiality of the Board, and to set aside entirely would result in unnecessary cost and delay.

PBO had also challenged the Appeal Award under s67 (lack of substantive jurisdiction) and s69 (appeal on point of law) of the Act. However, as the primary s68 applications were successful, the Court did not consider it necessary to deal with these alternative arguments.

Amendment of pleadings

The Court recognised that PBO was challenging a "discretionary procedural decision" of the Board. According to s33(1)(b) of the Act, a tribunal must adopt procedures which are suited to the circumstances of the parties' case whilst also avoiding "unnecessary delay or expense". The Court noted that such decisions could therefore amount to serious irregularities for the purposes of s68 if no reasonable arbitrator would have come to the decision in question.

The Court was convinced that the Board had not carried out any substantive analysis of the arguments advanced by PBO in its proposed amendments. The Board had failed to set out and apply the relevant test of whether those amendments had a "reasonable prospect of success". Without reaching a view on the merits of PBO's amendments, the Court found that PBO had met this relatively low threshold. Furthermore, had PBO's amendments been allowed, they could realistically have led to a "significantly different outcome" to the case. Indeed, PBO's proposed time bar defence would have been a "complete answer" to the Respondents' claims.

The Board had also failed to establish and weigh the likely prejudice that granting or denying the application would have caused each of the parties. The Court noted that the Board had given undue weight to the timing of the change of legal representation, even though the proposed arguments were of limited scope and would not have caused significant delay to the proceedings. On the other hand, denying the application disproportionately prejudiced PBO's case.

Accordingly, the Court concluded that had the Board conducted the analysis required of it, the only reasonable outcome would have been for it to allow the amendments.

Opportunity of putting its case

PBO noted that the Board had deviated from the case as argued by the parties by relying on issues which had not been raised or addressed during the appeal proceedings.

Under s33(1)(a) of the Act, a tribunal must provide each party with a reasonable opportunity to present its case, which includes allowing submissions on "any issue that will be relied on by the tribunal when writing its award". This required the Court to look for the "essential building blocks" of the Board's decision and determine whether those issues had been "in play" before the parties.

The Court found that for both the Cancellation and Jurisdictional Findings, the Board had relied on determinative issues of law and fact which it had raised of its own motion. Considering their importance, the Board was expected under its duty of fairness to provide an "express invitation" for the parties to address the issues.

Having failed to do so, substantial injustice had been caused to PBO, as it was at least reasonably arguable that the Board would have come to a different decision in both Findings had PBO been given a chance to make submissions on these issues. Indeed, PBO advanced arguments before the Court that it had not exhibited the conduct required to justify the cancellation of the CODON Contracts, and that its counterclaimed losses were indeed captured by the terms of the Contracts. PBO was therefore entitled to have the Findings reopened and for the Board to consider the merits of these submissions.

Comment

Advancing multiple s68 challenges can be a risky approach, potentially bringing into doubt the merits of the applicant's wider application and whether they are employing a scattergun approach to increase their chances of success. However, where multiple challenges are warranted, this case demonstrates that due consideration will be given to each by the Court. Indeed, PBO succeeded on each of the three targeted grounds by presenting specific evidence of the Board's shortcomings, as well as strong arguments regarding the prejudice caused to the outcome of its case.

The Board clearly believed that the parties had "missed the real point" of their dispute as evidenced by its decision to raise significant issues and arguments of its own volition in its Appeal Award. Importantly, the Court does not suggest in this judgment that a tribunal cannot depart when necessary from the case as pleaded by the parties. It instead reminds the Board that an express invitation to the parties is required to "put in play" such issues. This is a common sense approach which reconciles the duty of fairness with the tribunal's decision making mandate.

From a practical viewpoint, it is a reminder that arbitral Tribunals which identify new points which they intend to include in their Award reasoning should take care to ensure that the Parties are given an opportunity to consider and respond to such points. Of course, reopening the record and giving an opportunity for new submissions after the evidential hearing has concluded may raise procedural complications of its own. However, it is a practical approach which is to be preferred to the alternative of surprising the Parties with a decision which is not based upon the pleaded case or points put squarely to the Parties.

The Court's commentary on challenges to procedural decisions is of particular note. It recognises the wide range of case management decisions incumbent on a tribunal, which span from practical arrangements to issues which are likely to affect the outcome of the arbitration, such as amendments to pleadings. The Court suggests that the likelihood of success of a s68 challenge will be proportionate to the stakes of the decision in question, with more significant decisions bringing the duty of fairness into "sharp focus".

For more information, please contact Craig Tevendale, Partner, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

The authors would like to thank Louis Austin and Luke Hard for their assistance in preparing this blog post.