English High Court rejects Section 68 challenge to arbitral award on the grounds of "serious irregularity"

In the case of Republic of Kosovo v ContourGlobal Kosovo LLC [2024] EWHC 877 (Comm), the English High Court (the High Court) has rejected a challenge by the Government of Kosovo (Kosovo) to an arbitral award on the grounds of serious irregularity, pursuant to Section 68 of the Arbitration Act 1996 (the Act). The final award was issued by a London seated ICC tribunal (the Tribunal), which held Kosovo liable to pay ContourGlobal Kosovo LLC (CKL) sums in excess of 20 million euros.

Section 68(2)(a) of the Act provides that an arbitral award can be set aside if an arbitral tribunal fails to comply with Section 33 of the Act, amounting to a “serious irregularity”, that causes “substantial injustice” to a party. Section 33 in turn requires that a tribunal must act fairly and impartially between parties, giving each party a reasonable opportunity to put its case, and to adopt procedures which provide a fair means for the resolution of the issues in dispute.

Kosovo argued that the Tribunal failed to comply with Section 33 of the Act, on the basis that the Tribunal had referred to certain deficiencies in the quantum evidence on record in a procedural order issued following the substantive hearing on the matter, but had not provided Kosovo with the opportunity to make further submissions on quantum in the light of this.  Instead, the Tribunal had issued a final award in favour of CKL. Kosovo alleged that the Tribunal accordingly contravened Section 33, amounting to a “serious irregularity", thereby giving rise to grounds to set aside the award pursuant to Section 68(2)(a) of the Act.

The High Court dismissed Kosovo’s challenge, once again demonstrating that a challenging party must overcome a significant hurdle in order to successfully challenge an arbitral award for serious irregularity under Section 68.

Background

The arbitration arose out of a series of contracts pursuant to which CKL was to design, construct and maintain a power plant in Kosovo. Kosovo failed to perform certain conditions precedent under one of the agreements, as a result of which CKL terminated the agreements and claimed the contractual cap of up to €19.7 million of its development costs from Kosovo. Kosovo declined to pay the sums claimed, maintaining that it was not liable to CKL, and the dispute was accordingly referred to arbitration.

In the arbitration, Kosovo disputed both liability and quantum. Specifically in relation to quantum, Kosovo claimed that CKL failed to prove that it had incurred the development costs which it had claimed. For its part, CKL relied on quarterly summaries between August 2018 and April 2020 to prove that it had incurred the development costs, while Kosovo challenged this evidence and requested that CKL produce a variety of documents in relation to the issue of quantum. CKL then produced 1,577 invoices in response.

Throughout the arbitration, Kosovo maintained that CKL failed to prove the quantum it sought and argued that there were discrepancies between the quarterly summaries on which CKL relied and the invoices which had been produced.

Following the substantive hearing, the Tribunal issued a procedural order (PO5) which was concerned with the production of additional documents. The Tribunal stated in PO5, among other things, that it had not reached any decision on either the liability or the quantum issues raised in the case. On the quantum issues, the Tribunal remarked that the evidence and analysis was “not sufficiently complete” and that the Tribunal “may decide to appoint an expert to investigate and report on those matters pursuant to Article 25(3) [of the ICC Rules of Arbitration]. If so, the Tribunal will consult with the parties regarding the terms of reference for such an expert and the identification of an appropriate expert”. Following this, the Tribunal issued another procedural order (PO6) which, among other things, reiterated this point.

Thereafter, the Tribunal proceeded to issue its final award, finding in favour of CKL on both liability and quantum.

Kosovo's Challenge

Kosovo argued that the language of PO5 (as emphasised by PO6) created a reasonable expectation that the Tribunal "would not proceed to determine the quantum issue without further evidence or submissions". Kosovo argued that in issuing its award without the benefit of such further evidence, the Tribunal breached its obligations under Section 33 of the Act.

Kosovo submitted that in order to comply with its duty to act fairly under Section 33(1)(a), there were only three alternatives available to the Tribunal after issuing PO5: (i) dismissing CKL’s claim for damages, (ii) appointing an expert, or (iii) summoning the parties to provide further evidence or submissions.

The High Court's Decision

The Serious Irregularity Issue

The High Court rejected Kosovo's interpretation of PO5. It asserted that a fair and reasonable reading of the text of PO5 made it clear that the Tribunal had not made any decision on either liability or quantum, and indeed this message was repeated in PO6.

The High Court emphasised that in interpreting procedural orders, the language used must be interpreted in a “reasonable and commercial way” considering “what a reasonable person, reading that paragraph in its relevant context, would have concluded the Tribunal was saying” rather than trying to find “technical inconsistencies and faults”.

The High Court held that through the relevant wording in PO5 and PO6, the Tribunal was merely reserving its right to appoint an expert should that be necessary when considering the quantum issues that arose before it. Nothing said in either PO5 or PO6 could reasonably justify the conclusion Kosovo was attempting to draw, to the effect that the Tribunal had decided that it could not proceed further on the quantum issue without additional evidence or submissions.

Additionally, the reference in PO5 to the insufficiency of evidence and analysis in relation to the development costs did not further Kosovo's argument. The High Court held that this was a reference to a point made by a member of the Tribunal during closing arguments that the Tribunal would itself be required to complete the analysis. The appointment of an expert to carry out this analysis on behalf of the Tribunal was merely a suggestion – one way for the Tribunal to reserve its position regarding the appointment of an expert, and to notify the parties as to how it would proceed should it decide to do so. On that basis, the High Court also rejected the argument that the Tribunal should have notified Kosovo that it would depart from PO5.

The High Court further remarked that the Tribunal, which was comprised of experienced arbitrators, could not reasonably have intended to determine a quantum claim, which it expressly stated it had not decided at the time, through a single paragraph in a procedural order. Indeed, the Tribunal addressed the quantum issues comprehensively during the arbitration and in its award, and in dismissing Kosovo’s challenge, the High Court noted that it appeared to be an “after-the-event construct”.

Substantial Injustice

The High Court considered the substantial injustice limb of the test under Section 68 only in obiter, as it had already rejected Kosovo's challenge. It commented that, in order for Kosovo to satisfy this requirement, it must have shown what the alternative outcome would have been had the Tribunal acted as Kosovo argued that it should have. In that regard, it noted that Kosovo had not set out what additional evidence or submissions it would have presented to the Tribunal to further support its analysis of the quantum issue, had the Tribunal given the parties the opportunity to do so. It was therefore “entirely unreal” to suggest that if the Tribunal had obtained the additional evidence in question, the consequence would have been the dismissal of the quantum claim in the arbitration.

Comment

This decision is another reminder of the significant threshold which parties must meet to successfully challenge an arbitral award under Section 68 of the Act. The High Court has once again confirmed the non-interventionist approach adopted by English courts in respect of London seated arbitrations, notably reminding parties that court intervention under the Act will only be justified in “extreme cases”, where the conduct of arbitration is so far removed from what can reasonably be expected from a just and fair arbitral process.

It is often the case that Section 68 challenges are founded upon allegations that the Tribunal has failed to take proper account of evidence, including that it has not taken into account additional evidence that may have been important in its decision.  Such challenges are very rarely successful, underlining the wide discretion granted to the Tribunal under Section 34(1) of the Act, which provides that "[i]It shall be for the tribunal to decide all procedural and evidential matters, subject to the right of the parties to agree any matter."

Finally, the case also underlines the importance of giving careful consideration to the "counterfactual" scenario in order to satisfy the substantial injustice test in a Section 68 challenge: even if something has gone badly wrong in the arbitration, can it be shown that the outcome would have been substantially different had it been done correctly?

For more information, please contact Craig Tevendale, Partner, Arushie Marwah, Associate (India), or your usual Herbert Smith Freehills contact.

The authors would like to thank Wajih Jaroudi for his contribution to this blog post.