Challenging Arbitrators and their Awards under English Law
The principal law in England and Wales in respect of arbitration is at present the Arbitration Act 1996[1] (the "Arbitration Act").
Here we will provide a short overview of practice in respect of two important questions demonstrating the support of arbitration by the state courts in this jurisdiction. England, particularly since the introduction of the Arbitration Act, is considered to be an arbitration-friendly jurisdiction in which state courts support and favourably the practice of arbitration and therefore avoid interfering in arbitration disputes. This approach is shown by the high threshold level it is necessary to achieve in order for a state court to interfere in the jurisdiction of an arbitration in respect of questions discussed in the current section.
Challenging decisions about the competency of arbitrators
As a norm, in accordance with the Arbitration Act arbitrators have the right to determine their own competence and any challenge to a state court is only possible once the arbitrators have issued a final decision in the arbitration. This reflects the approach of the courts in England of avoiding interfering in arbitration proceedings to the extent that this is possible. Nevertheless, there are rare occasions in England when the state courts could consider the question of competence of arbitrators in certain conditions, for example, the courts may review the decision of the arbitrators on this issue or consider this question in the event where one of the parties does not take part in the arbitration.
Applications in accordance with Article 32 of the Arbitration Act
Article 32 of the Arbitration Act empowers a state court to rule on jurisdictional questions with regards to arbitrators prior to the conclusion of the arbitration process but only in specific situations.
Such an application to the state court can only be made on the basis of agreement of all parties taking part in the dispute or if the arbitrators agree to such an application. Moreover, the court needs to be certain that:
(i) the resolution of this question will result in a substantial savings of costs;
(ii) the application of this kind is made without any delay; and
(iii) there is a good reason for this question to be determined by the state court.
If all these conditions are fulfilled then the court may consider the question of competency of arbitrators. Usually the court in such a case issues a ruling in the form of a declarative decision on the competency of arbitrators. Other forms of decision, such as a prohibition, cannot be made in respect of this type of application.
Parties may try to make an application to the court in accordance with Article 32 after the arbitrators have decided the issue of their own competency (using their rights in accordance with Article 30 and 31 of the Arbitration Act).
The state court will consider applications under Article 32 in exceptional circumstances only as it is considered that the requirements for the conditions set create a very high threshold which is not achieved in most cases and the parties must rely on the decision of the arbitrators as to their competency.
Even if formal requirements for the making of the application are satisfied it is usually very difficult to persuade the state court to interfere with the independence of the arbitration process by way of reaching a decision about the competency of arbitrators and their ability to take part in the arbitration process.
Applications in accordance with Article 72 of the Arbitration Act
If a party is certain that the arbitrators lack competence, it has an alternative option to completely ignore the arbitration in order so that in the future it can challenge the competency of the arbitrators in state court. In this case the party will be considered a non-participating party and should be able to maintain its right to make an application in accordance with Article 72 of the Arbitration Act. In such applications the abilities of the party to request different types of determinations from the court (for example, by way of a prohibition or declaration) are much wider than under Article 32 of the Arbitration Act, however, it is important to understand that participation in any part of the arbitration process will result in the loss of the right to make an application in accordance with Article 72. A party that wishes to prove that it is not participating in an arbitration should not take part in any part, or stage of the arbitration process such as, the appointment of arbitrators or confirmation as to whether or not there is an arbitration agreement or by making any kinds of declarations about the competency of the arbitrators or the substance of the dispute to the arbitrators.
This issue was considered in the Court of Appeal in the case of Broda Agro Trade (Cyprus) Limited v Alfred C Toepfer International GmbH[2]. The applicant initially ignored the arbitration process which was commenced by the claimant due to alleged breaches of a contract. After the arbitrators issued an intermediary decision about their competence which was addressed to both parties for the provision of subsequent statements, the applicant took part in this stage of the process and ultimately lost the case.
The applicant subsequently attempted to question the competency of the arbitrators under Article 72 of the Arbitration Act relying on arguments that it should be considered a non-participating party in the arbitration due to the apparent reference in Article 72 to a party that did not take part in the process in which the arbitrators determined the question of their competency. As the applicant did not take part in this particular part of the arbitration process, it believed in its right to rely on the provisions of Article 72.
The appeal court did not agree with the position of the applicant and determined that there was no basis for interpreting the statement, "Does not take any part in the process" in such a way as to only apply to the part of the process relating to the determination of the competency of arbitrators. To put it another way, if a party completely ignores the arbitration then its right to make an application to the court cannot be limited as the party did not take part in the arbitration. But if the party takes part in the arbitration, either at the stage of the determination of the competency of the arbitrators or by making any claims in respect of the stated competency, such party is unable to rely on Article 72, but may make claims to the state court only in respect of the arbitration award in accordance with Article 67 of the Arbitration Act within a strictly limited timeframe which, in this case, the applicant failed to do.
This decision confirms that in order for a party to maintain its right to apply to the state court in accordance with Article 72 it should not take any part in the arbitration process.
English courts will support the legitimate right of a party to ignore the arbitration process. According with the principal which was determined in the Dallah[3] case, a party which challenges jurisdiction has the right not to participate in the arbitration process if it believes that the arbitration process is illegitimate.
The decision of the Dallah case was confirmed in the case of the The London Steam Ship Owner's Mutual Insurance Association Ltd v The Kingdom of Spain[4]. In this case, Spain started a proceeding in the Spanish courts against the claimant arguing significant damage to the environment (an oil spill) as a result of the actions of the opponent. The claimant refused to take part in the Spanish process and instead commenced an arbitration process in London. Spain refused to take part in the arbitration. The arbitrators ruled that they have the necessary competency to determine the case and ultimately determined the case in favour of the claimant. But when the claimant attempted to enforce the decision Spain objected, but only after 4 months, and requested additional time in order to submit a substantive challenge.
In this case, the court upheld the decision of the Supreme Court in the Dallah case supporting that this principle will be applied even in cases where arbitrators made a positive decision about their competence to determine a case. The inaction of Spain prior to the attempt to enforce the decision cannot be used against this party, therefore, Spain was granted the additional time.
This decision supports the fact that parties may ignore an arbitration process if they are certain that the arbitrators lack competency.
Challenge to arbitration decisions
One of the main advantages of arbitration in England is the fact that arbitral awards may be challenged only in very limited specific circumstances. The Arbitration Act allows three possible bases (Article 67, 68 and 69) in order to challenge arbitration awards in the courts of England. A large number of decisions demonstrate that the threshold for a successful challenge on the basis of any of these three articles is very high as the courts in England are not willing to interfere in the arbitration process.
Challenging the award: substantive jurisdiction
In accordance with Article 67 of the Arbitration Act the arbitrators' award may be challenged on the basis that it was outside the substantive jurisdiction of the arbitrators. Article 67 may be used only after a substantive arbitration award has been issued. During earlier stages of the dispute it may be possible to rely on the procedures set out in Articles 32 and 72 (as described previously).
In accordance with Article 67 parties may challenge the award which was issued by the arbitrators specifically about their own jurisdiction or about the substance of the dispute. Issuing an award as to their jurisdiction the arbitrators determine the following questions (in accordance with Article 30(1) of the Arbitration Act):
(a) whether there is a valid arbitration agreement;
(b) whether the arbitral tribunal is properly constituted; and
(c) what matters have been submitted to arbitration in accordance with the arbitration agreement.
When the court determines the question of the existence of the arbitrators' jurisdiction it may confirm, change or set aside (partially or completely) the award issued by the arbitrators/tribunal.
What happens in accordance with Article 67 when there is an unclear arbitration agreement?
In the case of A v B[5] the respondent argued that the arbitration agreement was unclear in order to determine the jurisdiction of the arbitrator in accordance with Article 67.
In the relevant document there were 2 clauses. The first stated: "Arbitration dispute – London Court of International Arbitration, in accordance with laws of the United Kingdom…" . The second cause of the same document stated that any dispute was to be determined "by way of arbitration in…London" and also contained a provision about the procedure for the appointment of arbitrators.
When one of the parties tried to commence arbitration in accordance with the LCIA Rules the other party challenged this attempt arguing that a tribunal formed in accordance with the CIA Rules lacked jurisdiction under the provisions of the document.
In this case a question arose whether parties agreed to arbitration to be administered by the LCIA or to ad hoc arbitration in London. On balance of probabilities the court determined that the parties did not intend to resolve their dispute by way of LCIA arbitration for the following reasons:
a) the text of the second provision did not reflect the agreement of the parties to determine the dispute in accordance with the LCIA Rules;
b) there was no certainty that the parties would have agreed to LCIA arbitration for the purpose of determining shipping disputes which were being considered in the current case;
c) if parties had intended to use arbitration in accordance with the LCIA Rules they would have been more careful in setting this provision and would have clearly determined the specific arbitral institution.
This case demonstrates that parties must very clearly formulate their arbitration agreements as an unclear formulation may become a barrier for the resolution of the dispute by way of arbitration in accordance with the rules of the institution which may have been intended by a party. Consideration of questions of arbitrators' jurisdiction in accordance with Article 67 by reference to foreign law.
The dispute arose as a result of the claimants stating that the respondents by way of a tortious breach organised a corporate raid with the aim of illegally taking over the interests of the claimants in the project for the construction of a hotel in Moscow. The claimants were parties to a shareholders’ agreement and to a sale and purchase agreement. These agreements were subject to English law and contained an identical arbitration clause which referred to LCIA arbitration in London.
The tribunal nevertheless found that it lacked competency. The arbitrators decided that English law must apply to the agreements and accordingly that Article 105 of the Civil Code of the Russian Federation did not have any force.
When this matter was set out for determination by the English court the judge stated that in accordance with principles of international private law, as determined by English law the law applicable to questions of incorporation of subsidiary organisations (lex societatis) determines whether the parent company has any obligation to perform the agreement to which a subsidiary company is party to. Thus, the questions of legal capacity should be determined by Russian law and the parent company could be joined in accordance with Article 105 of the Civil Code of the Russian Federation. As a result of which the Administration of the City of Moscow was subject to the arbitration clause.
This decision demonstrates the importance of consideration of aspects of all possible applicable systems of law, including systems of law of the place of incorporation of the parties, in the drafting of arbitration clauses as the English court may refer to provisions of these systems of law in accordance with the principles of international private law.
Challenging the award: serious irregularity
An arbitral award may be challenged in accordance with Article 68 of the Arbitration Act in circumstances where there were serious irregularities during the process which affected the tribunal, the proceedings or the award. A serious irregularity is one where the courts determine that it has caused or may cause a substantial injustice to the applicant. Article 68(2) of the Arbitration Act includes an exhaustive list of the types of breaches which may be considered in accordance with this article which include:
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failure by the tribunal to comply with Article 33 (general duty of tribunal);
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the tribunal exceeding its powers (otherwise than by exceeding its substantive jurisdiction see commentary to Article 67);
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failure by the tribunal to conduct the proceedings in accordance with the procedure agreed by the parties; and
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failure by the tribunal to deal with all the issues that were put to it.
In the case of P v D[7] the arbitral award was challenged by reference to the failure of the arbitrators to consider all questions which were put before them by the parties. The arbitrators issued an award in which the claimant was to pay the respondent US$11million however the arbitrators failed to consider the claimants' claim relating to the additional responsibility of the second respondent. A commercial court ruled that the claimant had lost a potentially significant right as a result of the failure by the arbitrators to consider claims about the additional liability of the second respondent and this constituted a serious procedural breach which resulted in a significant injustice by reference to the claimant and accordingly the award was returned to the arbitrators for reconsideration.
This is a rare example of a successful application of Article 68 of the Arbitration Act. Most applications under this article are rejected by the English courts usually even without an oral hearing. In order to limit the number of cases where parties refer to this article and ask the court to reconsider any issue during a hearing under Article 68, the High Court of England and Wales has provided certain procedural clarifications in the case of Midnight Marine Limited and Thomas Miller Speciality Underwriting Agency Limited[8] where it was determined that if an application in accordance with Article 68 is rejected without an oral hearing then references should be made to Paragraph O8.5 of the Rules of the Commercial Court[9] which gives the applicant the right to make an additional application to court to set aside the court's refusal and to request the court nevertheless to consider the question by way of oral hearing. However an oral hearing under this additional application must be brief and must only consider the question of whether "there is a real chance of success, which is sufficient in order for the case to be reconsidered in a full hearing in accordance with an application under Article 68".
For the purposes of procedural economy and in particular in order to avoid full hearings under Article 68 the court subsequently proposed the following procedural recommendations:
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the hearing under the additional application must take no more than 30 minutes;
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the hearing under the additional application should, if possible, be conducted by the very judge who initially refused the application without a hearing;
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there is no need for further written statements apart from a short explanation from the applicant outlining the errors that occurred when the court refused the application on the basis of documents; and
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the respondents should not attend the oral hearing regarding the additional application or in any event should not have an ability to claim compensation of costs if they decide to attend.
These remarks indicate that the English courts will only allowing applications under Article 68 in exceptional circumstances. To further illustrate this thesis, in 2017 no applications to the state court under Article 68 where successful.[10]
Appeals on a point of law
Article 69 of the Arbitration Act permits to challenge an arbitral award on the basis of errors made in the application of law if parties have not directly excluded such a possibility in the arbitration agreement or by way of reference to the applicable arbitration rules which contain such an exclusion.
The arbitral determinations as to issues of facts or any procedural breaches cannot be the subject of an application in accordance with Article 69 as these are not breaches on points of law. It is notable that appeals under questions of foreign law do not fall within the remit of this article. The right to consider an application under Article 69 will be granted by the court only in if all of the following conditions are satisfied:
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the determination of the question will substantially affect the rights of one or more of the parties;
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the question is one which the tribunal was asked to determine;
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on the basis of the findings of fact in the award:
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the decision of the tribunal on the question is obviously wrong, or
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the question is one of general public importance and the decision of the tribunal is at least open to serious doubt, and
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despite the agreement of the parties to resolve the matter by arbitration, it is just and proper in all the circumstances for the court to determine the question.
If the court gives the right for the consideration of this type of application it can subsequently confirm, change or set aside (in part or in full) the arbitration award.
Risk of error as to the question of law may be sufficient
In circumstance where the arbitration award is not clear or is confusing the court may return the arbitration award to the arbitrators for reconsideration. In the case of Fehn Schiffahrts GmbH & Co KG v Romani SPA[11] unclear argumentation and conclusions of the arbitrators caused doubt as to the correctness of the application of the law by the arbitrators. Nevertheless the High Court of England and Wales refused the application to set aside the arbitration award due to the assessment of the question of law potentially causing the reconsideration of the facts of the case. Taking into account this legal dilemma the High Court preferred to return the arbitration award to the arbitrators for reconsideration.
This example demonstrates that the court may return the arbitration award for reconsideration even in circumstances when an error on the question of law cannot be formally proven. The existence of a substantive risk of a possible error on the question of law can be a sufficient basis for the successful application of Article 69 of the Arbitration Act. However, the threshold for the application of Article 69 remains very high and the courts of England permit applications under Article 69 only in the most exceptional circumstances.
Challenging of foreign arbitral awards
It is widely accepted that the state court at the seat/place of arbitration has the exclusive supervisory jurisdiction with regards to such an arbitration dispute.
This position has found support in the case of C v D[12] where the court issued an anti-suit injunction against the continuation of proceedings in the state court in New York whose aim was the setting aside of an arbitration award issued in England. The fact that the law of New York was the applicable law under the contract on its own was not enough to give parties a right to challenge the English arbitration decision in New York. The English court rejected arguments of one of the parties that the choice of law or New York would have meant that the laws of England could not be applied to the proceedings after the arbitration award had been issued. Instead, the judge found that the choice of London as the seat of arbitration was decisive for the determination of the relevant court with jurisdiction to hear any challenge to the award. Consequently, in the present case the arbitral award could only be challenged in the English courts under Articles 67 to 69 of the Arbitration Act.
This case emphasises the great importance of the choice by the parties of the place/seat of arbitration as this will determine the courts in which in the first instance it may potentially be possible to challenge the arbitration award.
This article was written for the RAA book “Recognition and enforcement of arbitral awards under the New-York convention” and its translation was published in the Russian edition in 2019.
Artem Doudko
FCIArb, Partner, Osborne Clarke LLP
[1] https://www.legislation.gov.uk/ukpga/1996/23/contents.
[2] Broda Agro Trade (Cyprus) Ltd v Alfred C Toepfer International GmbH
http://www.bailii.org/ew/cases/EWCA/Civ/2010/1100.html.
[3] Dallah Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46/
[4] The London Steam Ship Owners Mutual Insurance Association Ltd v. the Kingdom of Spain [2013] EWHC 2840 (Comm).
[5] A v B [2018] EWHC 1370 (Comm).
[6] Egiazaryan and another v OJSC OEK Finance and the City of Moscow [2015] EWHC 3532 (Comm).
[7] P v D [2017] EWHC 3273 (Comm).
[8] Midnight Marine Ltd v Thomas Miller Speciality Underwriting Agency Ltd [2018] EWHC 3431 (Comm).
[9] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/672422/The_Commercial_Court_Guide_new_10th_Edition_07.09.17.pdf.
[10] Commercial Court Users' Group: Meeting Report – March 2018.
[11] Fehn Schiffahrts GmbH & Co KG v Romani SPA [2018] EWHC 1606 (Comm).
[12] C v D [2007] EWHC 1541.
Artem Doudko
Osborne Clarke LLP
Partner