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Arbitration appeals - admitted error by the tribunal

The grounds for appealing an arbitration award are limited.  Even when the tribunal admits that it has made a mistake that is not always enough.  So, when is an admitted error serious enough to permit an appeal?

This was the question before the court in Doglemor Trade Ltd and others v Caledor Consulting Ltd and another [2020] EWHC 3342 (Comm).

The Facts

Mr Khabarov (majority owner of Caledor) was granted an option to purchase 30% of the share capital of Doglemor. This option could be exercised in a two-year period. However, the companies’ owners fell out before the period began. Caledor issued arbitration proceedings which, following agreement that the option had been repudiated, required the tribunal to determine the value of damages awardable to Caledor.

The tribunal issued its award on 21 January 2020. Unfortunately, it contained a significant calculation error. In calculating the value of the shares the tribunal added, instead of deducting, tax liabilities totalling £90 million. It therefore awarded Caledor £58 million, instead of £4 million (based solely on the calculation).

Doglemor asked the tribunal to correct this error pursuant to rule 27.1 of the LCIA Rules. However, the tribunal declined. In its Response the tribunal stated that, if it had deducted the tax liabilities, it would also have made other adjustments to increase the value of the damages, and that it believed that the award made was reasonable.
Doglemor appealed the award pursuant to section 68 of the Arbitration Act 1996 (the “AA96”).

Section 68

Section 68 is one of two mandatory rights to appeal an arbitration award. It permits an appeal where there has been a substantial irregularity on one or more of nine grounds, listed in section 68(2). Where the tribunal has made a mistake in its award, section 68(2)(i) is of particular import:

“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:

  1. (any irregularity in the conduct of the proceedings or in the award which is admitted by the tribunal or by any arbitral or other institution or person vested by the parties with powers in relation to the proceedings or the award.”

Before Doglemor there was little case law relating to section 68(2)(i). It had been suggested, albeit obiter (i.e. in passing), that it could apply to an inadvertent failure to adjust a costs award (Gannet Shipping Ltd v Eastrade Commodities Inc [2002]), or that it could apply to an admission that evidence had not been considered (New Age Alzarooni 2 Ltd v Range Energy Natural Resources Inc [2014]). There was, however, no case law relating to irregularities in the award itself.

Further, an irregularity on its own is not enough. The irregularity must also cause substantial injustice to the applicant. In other words, an applicant to the court must show that, “had he had an opportunity to address the point, the tribunal might well have reached a different view and produced a significantly different outcome.” (per Popplewell J in Terna Bahrain Holding Co WLL v Al Shamsi [2013]).

The Doglemor Decision

Sir Ross Cranston, sitting as a judge of the Commercial Court, was left in little doubt that the tribunal’s award in Doglemor fell squarely within section 68(2)(i). The calculation error was not an error of fact, which could not be reopened (Lesotho Highlands Development Authority v Impregilo SpA [2006]), but an admitted error of implementation. Therefore, the award was subject to an irregularity, which could be appealed under section 68(2)(i).

Further, the calculation error did cause substantial injustice to Doglemor. The tribunal’s statement, that even if it had corrected the award the result would not have been radically different, was not relevant. It was enough that, had the error been corrected, the tribunal might have produced a substantially different result.

Having decided that the tribunal’s award was subject to section 68(2)(i), the court remitted the award to the tribunal for correction. The remission did not permit a complete review of the award, as the award remained conclusive in all respects other than those subject to the court’s decision (per Lord Sumption in Sans Souci Ltd v VRL Services Ltd [2012] UKPC 6). The tribunal was, therefore, limited to (i) correcting its calculation error; (ii) reaching a concluded view on the EBITDA margin (which the tribunal had not fully examined in its award); and (iii) calculating Caledor’s losses in light of the updated calculation and EBITDA margin.

Comment

Parties who choose to settle their disputes through arbitration look for certainty in awards. They generally do not want court interference. However, they also want decisions that are correct and free from errors.

This leaves the court with a fine balance to strike. It is generally reluctant to step in, having been criticised in the past for being too heavy handed (particularly under the “Special Case” rules of the Arbitration Act 1950). This was also the reason that the “substantial injustice” test was included within section 68(2). The Departmental Advisory Committee, in reporting on the draft bill (which became the AA96) stated:

“…it is only in those cases where it can be said that what has happened is so far removed from what could reasonably be expected of the arbitral process that we would expect the court to take action. ... Having chosen arbitration, the parties cannot validly complain of substantial injustice unless what has happened simply cannot on any view be defended as an acceptable consequence of that choice. In short, Clause 68 is 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.”

It will only, therefore, be in extreme cases such as Doglemor where the courts will interfere with an arbitration award.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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