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Arbitrations, agreements and alternative arguments

The TCC’s decision in The Secretary of State for Defence v Turner Estate Solutions Ltd provides yet another example of the courts refusing to interfere with the arbitration process and disturb an arbitral tribunal’s award. In addition, it:

  • Is further evidence of the difficulties a party faces in making a challenge under section 68 of the Arbitration Act 1996.
  • Reinforces the now well-established principle (see for example Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd (1985) 2 EGLR 14) that the courts will strive to uphold arbitration awards and will only intervene in the most extreme cases.

The case also provides a useful analysis of the approach that a court may take to various provisions of section 68 of the Act.

Section 68 of the Arbitration Act 1996

As readers will be aware, section 68 provides parties to arbitrations with various grounds for seeking to overturn an arbitral tribunal’s decision. At the heart of such challenges lies serious irregularity, which the court considers has caused – or will cause – substantial injustice to the applicant on the basis of (amongst other things), a failure by the tribunal to:

  • Comply with section 33 of the Act (the general duty of the tribunal) (section 68(2)(a)).
  • Conduct the proceedings in accordance with the procedure agreed by the parties (section 68(2)(c)).
  • Deal with all the issues that were put to it (section 68(2)(d)).

The parties’ agreement

In the second of two part awards to date, the tribunal found that the parties had agreed that the tribunal ought to determine the defendant’s alternative case regardless of whether the defendant succeeded in its primary argument. Importantly, however, the defendant indicated that the question of whether or not to do so was left in the hands of the tribunal (as master of the arbitration procedure).

When the defendant succeeded in its primary case (that decision was handed down in the first part award, and after the agreement was made), it suggested that it was no longer necessary for the tribunal to determine its alternative case. In its second part award, the tribunal accepted that there was an agreement between the parties. However, as there had been a change in circumstances, it took the view that it should first decide on the relevancy of (or need to determine) the alternative case in light of the terms of the first part award before proceeding any further.

Challenge to the award

The claimant challenged the tribunal’s second part award because the tribunal had not followed the parties’ earlier agreement. It argued that:

  • To ignore the parties’ agreement as to the procedure to be adopted amounted to a serious irregularity under section 68(2)(c).
  • Since further time and money would be spent seeking a decision on the relevancy of the matter, the tribunal had failed to adopt procedures that avoid unnecessary delay or expense (section 68(2)(a)).
  • The effect of the parties’ agreement was that the matter should be determined as a stand alone issue. As such, the tribunal had failed to deal with all of the issues that were put to it (section 68(2)(d)).
  • Given the time and money already spent on the alternative case, the serious irregularity had caused or would cause substantial injustice to the claimant (a further requirement of a successful challenge under section 68).

The defendant argued that:

  • The parties’ agreement was made on a conditional basis with the relevant condition never being fulfilled.
  • The agreement was insufficiently specific to be binding.
  • Under the contract, the tribunal retained an unfettered right to decide procedural issues. Accordingly, even if the claimant established that the agreement was unconditional, the tribunal was not bound to give effect to it.

Ramsey J’s judgment

Ramsey J noted that, in arbitration proceedings, the issues that an arbitral tribunal should determine are usually derived from the parties’ pleadings. In this case, the parties’ pleaded cases did not seek a determination of the matter in question come what may. Importantly, the claimant did not seek determination of the matters to which the defendant’s alternative case related, and the defendant’s case was pleaded in just that manner, that is, in the alternative.

The court held:

  • That arbitral tribunals generally have a discretion as to whether they determine a party’s alternative case.
  • (Critically) that it could not interfere with the tribunal’s decision as the tribunal itself had considered the effect of the agreement.

However, in a useful judgment, the court went on to consider the position had the tribunal not decided on the nature and effect of the agreement.

Findings

The starting point of the analysis was that the parties’ agreement was not procedural in nature. It was incorrect to categorise an agreement as procedural if it was an agreement as to what issues a tribunal ought to determine. Rather, this agreement defined the issues that the tribunal had jurisdiction over.

The court held that the parties were agreeing the way in which they considered the tribunal ought to exercise its discretion, but the tribunal retained a discretion as to how it should deal with the defendant’s alternative case. As a consequence, the tribunal did not fail to deal with all the issues put to it (section 68(2)(d)).

As the court did not consider the agreement to be of a procedural nature, it followed that sections 68(2)(a) and (c) were not engaged. Despite this, the court also considered what the position might be if the agreement could properly be characterised as procedural:

  • The court considered that the agreement fell short of an agreement that the tribunal would determine the alternative case in any event. However, if this was not the case, then it held that the tribunal was not bound to follow the parties’ agreed procedure since the parties’ contract provided (in the Disputes Review Procedure that regulated the arbitration) that the tribunal would decide all procedural and evidential matters. Unlike some other contract provisions, this was not subject to an agreement between the parties. Hence there could be no failure by the tribunal under section 68(2)(c).
  • Furthermore, the court held that there could be no failure under section 68(2)(a) since it was clear that the tribunal had considered the time and costs already expended on dealing with the alternative case when considering whether to give effect to the agreement (and incur additional time and expense as a consequence).

Accordingly, the claimant’s application failed.

Points to consider

A number of points arise:

  • A party contemplating challenging an arbitral tribunal’s decision should continue to carefully balance its wish to overturn an award with the inherent difficulties of making an application under section 68. There is a clear line of authority that the courts will not readily interfere with an award. Moreover, a party is unlikely to succeed under section 68(2)(c) if it founds upon an agreement where the effect of that agreement has already been considered by the tribunal.
  • Parties should also consider their pleadings carefully to ensure that they do not confer jurisdiction on a tribunal in a particular matter which they may not ultimately wish to be determined at a later stage.
  • The drafters of contracts – and, in particular, disputes resolution procedures – should consider including provisions that give a tribunal unfettered discretion to control matters of procedure. While not controversial in this case, there was no express wording that the tribunal’s procedural decision took precedence over the parties’ agreement. Rather, this was inferred from a separate provision that was said not to be subject to the agreement of the parties.

Pinsent Masons LLP represented the defendant, Turner Estate Solutions Ltd.

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