UK High Court: Award remitted to an arbitral tribunal for serious irregularity which has caused or will cause substantial injustice

Brockton Capital LLP v Atlantic-Pacific Capital Inc, Inc, 7 may 2014 [2014] EWHC 1459

On 7 May 2014, in Brockton Capital v Atlantic-Pacific Capital, the High Court of Justice of England and Wales has ruled that an arbitral tribunal, by dealing with an issue of which one of the parties had had no notice and no opportunity to address, failed to act fairly and impartially, thus breaching Section 33(1)(a) of the 1996 Arbitration Act, which constitutes a serious irregularity which has or will cause substantial injustice to the aggrieved party, requirement for an award to be challenged under Section 38 of the same Act.

The facts of the case are as follows: in 2008, Brockton Capital LLP, a UK private equity fund manager, and APC, a US fund placement agent, entered into a contract appointing APC as the executive global placement agent with the role of raising capital for a Brockton real estate fund.  In 2010, the largest investor in the fund entered into a tripartite agreement with APC and Brockton to ensure that Brockton and APC did not engage into any objectionable practices, such as bribery.  Both agreements were governed by New York law and each of them contained an arbitration clause pursuant to which disputes arising thereunder would be determined by “binding” ICC arbitration in London.

In 2011, Brockton terminated the contracts as per the second paragraph of the termination clause included in the tripartite agreement, invoking a breach by APC of this agreement.  APC, in turn, denied having breached the parties’ agreements.

The dispute was referred to arbitration.  After the hearing, the arbitral tribunal ordered the parties to submit simultaneous post-hearing briefs, limited in their extent.  In its submission, APC invoked new arguments, including that the first paragraph of the termination provision was unenforceable under New York law because it amounted to a penalty.

Following receipt of APC’s post-hearing submission, Brockton wrote to the arbitral tribunal to “ensure that we do not waive any consideration of or objection to APC’s new arguments” and request that the tribunal “consider this letter in making its ruling”.  However, while Brockton responded to some of APC’s arguments, it did not make any comment regarding the issue of the unenforceability of the termination clause under New York law.  APC requested Brockton’s answer be disregarded.  The arbitral tribunal noted that both parties had filed submissions and accepted them, but added that no further submissions would be allowed.

In a partial award, the arbitral tribunal found that (i) APC had breached its obligations under the agreement and held that any breach by APC constituted grounds for termination but (ii) the entire termination clause (i.e., paragraphs 1 and 2, whereas APC had only invoked the unenforceability of paragraph 1) being a penalty provision unenforceable under the applicable law, Brockton could not terminate the contractual relationship.  This solution was further confirmed in the final award.

Brockton challenged both awards before the High Court under Section 68 of the 1996 Arbitration Act, contending that the arbitral tribunal had acted unfairly in deciding that the entire termination clause was unenforceable when Brockton was not given the opportunity to make submissions on this issue.

Pursuant to Section 68(1) and (2)(a) of the 1996 Arbitration Act, “Challenging the award: serious irregularity”:

“(1) A party to arbitral proceedings may (…) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the Tribunal, the proceedings or the award. (…)

(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant:

(a) failure by the Tribunal to comply with section 33 (general duty of the Tribunal); (…)”

Section 33(1)(a) of the same Act provides that the arbitral tribunal is to “act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting his case and dealing with that of his opponent (…)”.

In its decision of 7 May 2014, the High Court stated that the “threshold of the test of a serious irregularity giving rise to a substantial injustice is set deliberately high” and, thus, “relief under s.68 will only be appropriate where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected.”  Such is the case when the arbitral tribunal decides “on the basis of a point which one party had not had a fair opportunity to deal with”, as opposed to a party failing to recognize or take the opportunity which exists.

Therefore, the High Court agreed with Brockton that the latter had not been given the opportunity to respond to APC’s post-hearing submissions and sufficient opportunity to deal with the issue the tribunal relied on to make its decision.  However, contrary to Brockton’s request that the awards be “vacated”, the High Court decided to remit to the existing arbitral tribunal. Its decision was based on Section 68(3) of the 1996 Arbitration Act which, in case of a serious irregularity affecting the tribunal, provides the possibility either to “reemit the award to the tribunal, in whole or in part, for reconsideration”, “set the award aside in whole or in part”, or “declare the award to be of no effect, in whole or in part”.

Section 68(3) adding that “The court shall not exercise its power to set aside or to declare an award to be of no effect, in whole or in part, unless it is satisfied that it would be inappropriate to remit the matters in question to the tribunal for reconsideration”, the High Court considered that remitting the award to the arbitral tribunal was in the present case the appropriate solution since “members of the tribunal are distinguished lawyers and arbitrators of high reputation”.  There were thus no reasons to conclude that confidence could not be placed in the tribunal’s ability reach a fair and balanced decision.

It is clear that the High Court demonstrates its will to show that the priority is set on the efficiency of the arbitral procedure.  This decision permits to bring to light a great difference with French International Arbitration law: indeed, pursuant to Article 1485, paragraph 1 of the French Code of Civil Procedure, the arbitral tribunal is in principle no longer vested with the power to rule on claims once an award is rendered.  Consequently, the award can no longer be remitted to the arbitrators, except under strict conditions:

  • Under Article 1485, paragraph 2 of the French Code of Civil Procedure, in three circumstances: (i) to interpret the award, (ii) to rectify clerical errors and omissions or (iii) to make an additional award where it failed to rule on a claim, i.e., in case of infra petita, after having heard the parties or given them an opportunity to be heard;
  • Under Article 1502, paragraphs 1 and 2 of the French Code of Civil Procedure, revision of the award is permitted where (i) it comes to light, after the award is rendered, that it was obtained fraudulently by the party in whose favour it was rendered, (ii) decisive evidence has been withheld and is recovered after the award is rendered, (iii) the award is based on documents or affidavits, testimonies or oaths that are false.

Therefore, should the case have been decided under French law, it is possible that none of the conditions to remit the awards to the arbitral tribunal would have been found fulfilled and the awards would probably have been annulled instead of remitted to the arbitral tribunal.

The 1996 Arbitration Act’s solution is, on this particular point, more pragmatic than French law for offering a solution other than annulment, in favour of the parties’ interests and the efficiency of the arbitration.

This decision is also of interest because it shows that, in the event an arbitral tribunal relies on a last-minute contention, and although arbitrators are generally reluctant to re-open the debates after the post-hearing submissions – which inevitably delays the arbitration and increases its costs –, it is highly recommended to re-open the debates in order to comply with due process and to give the parties a fair opportunity to reply, especially when the issue at hand is decisive. Re-opening the debates, in this case, would have permitted to avoid the challenge of the awards.

The decision is available here.

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