'Obvious accounting mistake' sinks LMAA arbitrator's award in rare successful s.68 challenge by charterer

In Ducat Maritime Ltd v Lavender Shipmanagement Inc [2022] EWHC 766 (Comm), the English High Court set aside part of an award under section 68(2)(a) of the Arbitration Act 1996 on the grounds that an 'obvious accounting mistake' by an arbitrator had breached the duty of fairness under section 33 of the Arbitration Act 1996. Contrary to common ground between the parties and without giving them an opportunity to comment on a departure from that common ground, the arbitrator had mistakenly included the value of an unsuccessful counterclaim in the award, thereby inflating the amount awarded by approximately 33%.

This High Court authority will give comfort to parties whose arbitration award contains obvious errors but which the arbitrator fails to correct.

Background

The owners and charterers of a vessel entered into a charterparty which contained an LMAA arbitration clause. The owners brought an arbitration against the charterers claiming $37,831.83 in respect of an unpaid hire. The charterers denied the claim and sought to set-off and counterclaim $15,070.00 due to the vessel's underperformance; the set-off and counterclaim were ultimately unsuccessful.

Based on the arbitrator's findings on liability, the owners should have been awarded $28,277.91. However, the arbitrator mistakenly added the value of the charterers' unsuccessful counterclaim to the value of the owners' total claim. As a result, the value of the owners' total claim was held to be $53,692.66. The arbitrator determined that they could not award the owners a sum which exceeded the amount actually claimed and accordingly awarded the owners $37,831.83.

The charterers applied to correct the award under section 57(3) of the Arbitration Act 1996 on two separate occasions. The arbitrator declined to do so on both occasions on the basis that there was "no error or mistake in the calculations". Against this background, the charterers brought an application before the English High Court to set aside part of the award under section 68(2)(a) of the Arbitration Act 1996.

Decision

The Judge, Butcher J, began by reiterating that the charterers had to show an irregularity that falls within the exhaustive list of categories set out in section 68(2) of the Arbitration Act, and that that irregularity has caused or will cause substantial injustice to the applicant. In so doing, Butcher J emphasised the "high hurdle" and "heavy burden", as was said in Bandwidth Shipping Corporation v Intaari (The 'Magdalena Oldendorff') [2007] 2 CLC 537 at [35] and New Age Alzarooni 2 Ltd and Another v Range Energy Natural Resources Inc [2014] EWHC 4358 (Comm) at [12] respectively. As was explained in paragraph 280 of the DAC report on the Arbitration Bill which led to the Arbitration Act 1996, the section was "really designed as a long stop, only available in extreme cases, where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected".

Irregularity

The charterers submitted that there was an irregularity falling within section 68(2)(a) of the Arbitration Act 1996 on two alternative bases:

• the arbitrator reached a conclusion that was contrary to the common position of the parties, without providing the parties with an opportunity to address the arbitrator on that issue (contrary to section 33); and
• the arbitrator had made an obvious accounting mistake.

In respect of the charterers' first submission, Butcher J accepted there was "common ground between the parties", namely, that (i) the owners' total claim amounted to $37,831.83, and (ii) the underperformance claim was the charterers' counterclaim, not the owners' claim. By departing from that common ground – for reasons which had not been advanced by either party and without giving them an opportunity to comment – this amounted to an irregularity. Butcher J held that this represented a failure to comply with the section 33 duty which fell within the closed list of categories set out in section 68(2), specifically section 68(2)(a).

Butcher J further held that, when the arbitrator realised that the owners' total claim ($53,692.66) exceeded the amount the owners had in fact claimed ($37,831.83) – such difference being unexplained – the arbitrator should have given the parties an opportunity to comment. This was likewise considered to be a sufficient basis to conclude that there was an irregularity within the context of section 68(2)(a) of the Arbitration Act 1996.

In respect of the charterers' second submission that the arbitrator had made "an obvious accounting mistake", Butcher J noted that the focus of a section 68 enquiry is whether there has been a failure of due process, not whether the tribunal has reached the correct answer. In particular, illogicality or irrationality of the tribunal's reasoning does not, in and of itself, render an arbitral award open to challenge under section 68.

However, Butcher J found that a "gross and obvious accounting mistake, or an arithmetical mistake of the 2 + 2 = 5 variety", might well represent a failure to conduct the proceedings fairly. This was not because such mistakes represented an "extreme illogicality", but rather, because they constituted a departure from the cases put forward by the parties without giving them an opportunity to comment.

Substantial injustice

Butcher J had no issues in finding substantial injustice in this case and accordingly granted the charterers' application to set aside part of the award. By virtue of the arbitrator's mistake, the charterers were ordered to pay the owners $9,553.92 more – equating to approximately 33% – than the owners were entitled to be paid. Had the charterers been given an opportunity to comment on the arbitrator's departure from the common ground between the parties, the arbitrator may have reached a different view and the result may have been significantly different.

Comment

This decision underlines that, whilst successful s.68 challenges face a high hurdle, an "obvious accounting mistake", which the arbitral tribunal refuses to correct, is capable of founding a s.68 challenge and will provide comfort to parties faced with similar deficiencies in awards.

In order to protect arbitral awards from challenges under section 68 in the future, arbitral tribunals should (i) be vigilant in identifying the common ground between the parties and ensuring that they give the parties an opportunity to comment on any proposed departures from that common ground (ii) diligently engage in any applicable award correction procedure, and – of course – avoid "doubling down" on obvious errors in the first place, which is an approach which may amount to a failure to conduct the proceedings fairly.

For more information, please contact Craig Tevendale, Partner, Jake Savile-Tucker, Associate, or your usual Herbert Smith Freehills contact.

The authors would like to thank Jordan Robinson for their assistance in preparing this blog post.