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Determination of preliminary points of law by courts in arbitration and adjudication

The Palladium is a mighty fine looking “superyacht”. It is an impressive 95 metres long and has all the features one would expect on such a luxury craft, including a helicopter landing pad and swimming pool. A Google search suggests that the yacht is worth circa $200 million, so one can see that a defect in the paint finish would be costly to rectify. It is this defect that ultimately led the parties to an arbitration, for which a five-week hearing was set.

The case ended up before the court because, during the arbitration, an issue arose as to whether the yacht builder’s without prejudice settlement offer had been accepted by the purchaser in correspondence. The purchaser contended that a binding settlement had been reached, which the builder denied.

Goodwood Investments Holdings Inc v Thyssenkrupp Industrial Solutions AG

As Males J says at the start of his judgment:

“This is an application under section 45 of the Arbitration Act 1996 for determination by the court of a question of law arising in the course of an arbitration. In my experience this section is relatively little used but, as this application shows, it has a useful role to play…

As the arbitrators pointed out in giving permission for this application to be made, all concerned in the arbitration would be uncomfortable if the arbitrators were to consider this without prejudice correspondence only to determine that no settlement had been concluded. They would then be faced with either having to resume the arbitration, excluding from their minds material which it would be better if they had not seen, or being replaced with a new and untainted tribunal. An application under section 45 avoids that danger.”

The arbitration was adjourned on the basis that the arbitrators remained available to resume, if necessary.

In his judgment Males J was careful not to disclose the details of the offer as these would then have been in the public domain. He ultimately concluded that the offer was not capable of acceptance but, even if it was, it had not been accepted. I won’t go into the detail of his reasoning because the interesting part of this case for me concerns section 45 of the Arbitration Act 1996.

Section 45 of the Arbitration Act 1996

Section 45 of the Arbitration Act 1996 deals with the determination of a preliminary point of law:

“… the court may on the application of a party to arbitral proceedings (upon notice to the other parties) determine any question of law arising in the course of the proceedings which the court is satisfied substantially affects the rights of one or more of the parties.”

Section 45(2) provides that the application “shall not be considered” unless it is made with either the:

  • Agreement of all the other parties to the proceedings.
  • Tribunal’s permission, and the court is satisfied that the determination of the question is likely to produce substantial savings in costs and the application was made without delay.

For some background about the purpose of section 45, I can do no better than to refer you to The Arbitration Act 1996, A Commentary:

“The usefulness of the section would arise, for example, where a particular point of law is central to the arbitration, and an authoritative decision one way or the other will effectively determine the whole or a large part of the dispute between the parties. It may also arise where a major event affects a large number of arbitrations, and early and definitive consideration by the court would assist a large number of parties to different proceedings…”

The Palladium case was clearly ripe for a section 45 application as the question of whether the claim had been settled was central to the outcome of the arbitration.

I’m sure we can all think of cases where the arbitration would have benefited from a section 45 application, particularly when we’ve seen parties appeal on a point of law under section 69 of the Arbitration Act 1996. One such example is Maurice J Bushell & Co v Graham Irving Born, which I discussed last year.

Should section 45 be used more?

It also begs the question as to why we don’t see more applications under section 45. Grigori Lazarev tried to answer that question in his blog a couple of years ago, after identifying that up to August 2016 there had only been three reported cases where section 45 had been used.

Grigori speculated that it may be because parties perceive that they are unlikely to save time or costs by proceeding with a section 45 application, and also because many arbitrators are legally qualified and should be well qualified to determine points of law arising in arbitration. I’ve certainly dealt with a number of points of law in arbitration awards, and the parties have clearly been content for me to do so.

Part 8 applications in adjudication

It also got me thinking as to why more parties aren’t tempted to use Part 8 proceedings to determine preliminary points of law before proceeding with an adjudication (obviously not an option if the parties have selected arbitration).

After all, in the long run, this could save considerable time and cost, and leave the adjudicator to decide the issues arising from the point of law decided by the court. It could also save some of the time and money spent after the adjudicator’s decision in trying to unpick that decision in the enforcement proceedings!

Anyway, we may well never know the outcome of the Palladium arbitration, but one thing is for sure, the Palladium is going to be Sittin’ On the Dock of The Bay at some point in the not too distant future while it is repainted!

MCMS Ltd Jonathan Cope

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