Challenges to Arbitral Awards: Is the Tide Turning in the English Courts?
London has a well-established reputation as an arbitration-friendly seat due, among other things, to the English courts’ approach to challenges to arbitral awards. Statistical reports published by the Commercial Court, which is where most challenges to arbitral awards will be heard in the first instance, show that, in recent years, the chances of successfully challenging a final award under the English Arbitration Act 1996 (“EAA”) have been very low – around 5%, and even lower in some years.1
However, during the first eight months of the 2020-2021 court year (i.e., October 2020 through May 2021), challenges to arbitral awards under the EAA were successful in seven out of 17 reported Commercial Court judgments (41%).2 While there will be many more unreported challenges that were dismissed before a full hearing, we explore whether this marks a shift in the approach of the English courts in recent months.
Challenges under the EAA
Under the EAA, there are three grounds on which a party can challenge a final arbitral award rendered by an arbitral tribunal seated in England and Wales.
- Substantive jurisdiction (section 67 of the EAA): where the tribunal lacked jurisdiction under the arbitration agreement to determine the issues in the award.
- Serious irregularity (section 68 of the EAA): where there has been a serious procedural irregularity affecting the tribunal, proceedings or award that has or will cause substantial injustice.
- Appeal on a point of law (section 69 of the EAA): where the tribunal wrongly determined a question of law that will substantially affect the rights of the parties.
Recent Trends in the English Commercial Court
The seven reported successful challenges to arbitral awards in the Commercial Court since October 2020 included:
- two challenges under section 68 (and one further successful challenge in the Privy Council under the equivalent provision of Bermudan law);
- four challenges under section 69; and
- one challenge under section 67.3
Successful challenges on the basis of a serious procedural irregularity (section 68)
All three successful section 68 challenges centered on issues of damages determined in final awards.
The court concluded that, irrespective of the tribunal’s intentions (explained outside the award), there was a significant computation mistake “on the face of the Award”.5 The paragraphs of the award including the erroneous calculation (as well as certain other affected calculations) and the total damages amount were remitted to the tribunal for reconsideration. The remainder of the award, including the tribunal’s assessment of the amount of the tax liabilities, was preserved.6
In Kazakhstan v World Wide Minerals Ltd and Another [2020] EWHC 3068 (Comm), Kazakhstan challenged a final award issued in an investment treaty arbitration. WWM had sought damages for expropriation of its investments. The tribunal rejected WWM’s claim for expropriation, but concluded that there had been other limited treaty breaches by Kazakhstan. The tribunal awarded damages to WWM, using a damages model that had not been pleaded by the parties.
The court concluded that Kazakhstan had not had a fair opportunity to deal with the issue of damages. The judge set aside the paragraphs of the award relating to quantification of WWM’s losses and remitted the determination of damages back to the tribunal.7 The remainder of the award (on Kazakhstan’s liability) was preserved.
In RAV Bahamas Ltd v Therapy Beach Club Inc [2021] UKPC 8, RAV challenged a final award given in a commercial arbitration arising from a breach of a lease agreement relating to two hospitality developments in the Bahamas. The sole arbitrator had determined that the breach only affected one of the developments and awarded damages to Therapy Beach Club. The Privy Council concluded that the award did not take into account pleadings made by RAV on the duration of the lease and relied on a damages model that had not been pleaded by either party in the arbitration (approving the judgment in Kazakhstan v Word Wide Minerals).8 However, the Privy Council concluded that the arbitrator had been entitled to make a 15% deduction to the damages award on the basis of the unreliability of Therapy Beach Club’s evidence. This was because it “should have been obvious” that the evidence was problematic, and therefore RAV did, in fact, have an opportunity to deal with this issue in the arbitration.9 The relevant paragraphs of the final award were remitted back to the sole arbitrator, and the remainder of the award (including the 15% deduction) was preserved.
Successful challenges on points of law (section 69)
The four successful challenges under section 69 all related to shipping disputes over implied terms in charterparty agreements and related contracts.
In Herculito Maritime Limited and Others v Gunvor International Bv and Others [2020] EWHC 3318 (Comm) and Alpha Marine Corp v Minmetals Logistics Zhejiang Co. Ltd [2021] EWHC 1157 (Comm), the court concluded that certain terms should not have been implied into the relevant contracts as the terms – relating to compensation sought by the shipowners following an insured risk – were not necessary for the efficacy of the contracts.10 Similarly, in CVLC Three Carrier Corp, CVLC Four Carrier Corp v Arab Maritime Petroleum Transport Company [2021] EWHC 551 (Comm) the question of law was whether a guarantee of performance of another contract includes an implied term that the creditor will not seek security over and beyond that provided by the guarantee when there is an alleged breach of contract. Again, the court concluded that such a term should not be implied into the contract,11 and varied the award by substituting its conclusion for that of the arbitrator’s, concluding the dispute.
In contrast, in Regal Seas Maritime S.A. v Oldendorff Carriers Gmbh & Co KG [2021] EWHC 566 (Comm), the court considered that an implied term allowing for adjustments to a benchmark tonnage used to calculate the hire price of a cargo ship was required for the contract to function for its duration.12 The final award was set aside, but a separate issue of estoppel was remitted to the tribunal for determination.
In Black Sea Commodities Ltd v Lemarc Agromond PTE Ltd [2021] EWHC 287 (Comm), a contract to purchase grain was agreed by a series of emails, in which the parties first agreed the core terms of the purchase, and then exchanged various drafts of an industry standard contract, which included an arbitration clause. The parties proceeded with the transaction without having agreed on a final draft of the document.
Key Considerations for Parties and Counsel
The unusually significant number of successful challenges reported in the current court year begs the question whether we are witnessing an exceptional outlier or a new interventionist trend.
- The three successful section 68 challenges do not appear to be symptomatic of a relaxation of standards of review.15 These successful challenges are better seen as an appeal to caution directed from the courts to arbitral tribunals when deciding on matters of damages.
- Similarly, the four successful section 69 challenges should not be interpreted as a change in the courts’ approach to allowing challenges on points of law. All the successful section 69 challenges discussed above related to shipping disputes, and all except CVLC v Arab Maritime were about implied terms in heavily used industry-standard documents. This is a reminder that, unless the tribunal was “obviously wrong”, the courts will only review a point of law that is “one of general public importance” (and “at least open to serious doubt”).16
- The courts are continuing to give deference to arbitral tribunals. The default outcome following a successful challenge under section 68 or section 69 is for the court to remit the award to the tribunal for reconsideration whenever possible.17 The successful section 68 challenges all show that, even when a challenge is successful, the court will seek to preserve as much of the final award as possible.
Nevertheless, the successful challenges provide useful lessons for parties and counsel.
- To limit the risk of a successful section 68 challenge, claimants and their counsel should be careful when it comes to pleading damages before a tribunal. The judgments given in both Kazakhstan v World Wide Minerals and RAV Bahamas v Therapy Beach Club make it clear that the English courts will remit the relevant part of an award where the tribunal has made a damages determination on the basis of an unpleaded model that the parties were not able to address. In cases where the claimant cannot know on what basis to plead a damages model until liability is established, the English courts encourage arbitrators to make a partial award on liability and “… come back to the parties on damages for the part that the Tribunal finds liability on”.18 It is to be expected that arbitrators sitting in English seated arbitrations will take due note of the recent section 68 challenges in their case management decisions.
- When faced with section 69 challenges, the English courts may take a pragmatic approach by recasting a question of law so that it is not exactly the same point of law that the tribunal was asked to determine19 and/or considering points of fact as context for the question of law.20 If parties are concerned about the risk of an award being challenged on a point of law, the parties have the option to exclude the right to challenge a final award under section 69 in their arbitration agreement. Incorporation of the rules of an arbitral institution sometimes includes such an opt-out.21
- Finally, the outcome to the section 67 challenge in Black Sea v Agromond is a reminder of the importance of ensuring that any arbitration agreement is expressly agreed to in writing by both parties.
2 Based on analysis of reported judgments of claims brought under sections 67, 68 and 69 of the EAA during the relevant period.
3 By comparison, during the 2018-2019 and 2019-2020 court years, only one challenge under section 68 (out of 54 applications) and only two challenges under section 69 (out of 86 applications) were noted as having been successful (see pages 12-14 of the Commercial Court Report 2019-2020). There were 39 applications made to the Commercial Court under section 67 during the 2018-2019 and 2019-2020 court years. Although the Commercial Court has not stated how many of these were successful, we note that during this same two-year period there were three reported Commercial Court judgments in which a challenge made under section 67 was successful.
4 Doglemor Trade v Caledor Consulting at [46].
5 Doglemor Trade v Caledor Consulting at [60].
6 Doglemor Trade v Caledor Consulting at [73].
7 Kazakhstan v World Wide Minerals at [49] and [59].
8 RAV Bahamas v Therapy Beach Club at [60] and [83].
9 RAV Bahamas v Therapy Beach Club at [86].
10 Herculito Maritime v Gunvor International at [65], [103] and [110]; Alpha Marine v Minmetals at [50].
11 CVLC v Arab Maritime at [60] and [85].
12 Regal Seas Maritime v Oldendorff Carriers at [62].
13 Black Sea Commodities v Lemarc Agromond at [23].
14 Black Sea Commodities v Lemarc Agromond at [30]-[34].
15 For example, in RAV Bahamas v Therapy Beach Club, the Privy Council reiterated that the test for establishing a serous irregularity is a “high hurdle” (at [31]). In fact, the Commercial Court has recently commented that because the chances of success are so low, it is now asking that judges review all applications to bring a challenge to an arbitral award on the basis of procedural irregularity, even if the respondent has not applied for summary dismissal (Minutes of the Commercial Court User Group meeting, 28 April 2021, page 5). Additionally, the circumstances in Doglemor v Caledor, in which the tribunal had already acknowledged making a serious mistake, were highly unusual.
16 Section 69(3)(c) of the EAA.
17 Sections 68(3) and 69(7) of the EAA.
18 Kazakhstan v World Wide Minerals at [32].
19 CVLC v Arab Maritime at [36].
20 CVLC v Arab Maritime at [48].
21 See, for instance, Rule 26.8 of the 2020 LCIA Rules: “…the parties also waive irrevocably their right to any form of appeal, review or recourse to any state court or other legal authority, insofar as such waiver shall not be prohibited under any applicable law.”
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.
