Challenges to arbitral awards on the basis of ‘Serious Irregularity’
In this article we discuss challenges to arbitration awards in the context of alleged ‘serious irregularity’ in the award given by the arbitral tribunal. This was addressed in the recent decision by the Privy Council in London, on appeal from the courts of the Bahamas, in RAV Bahamas Ltd and another v Therapy Beach Club Incorporated  UKPC 8.
Given the similarities between the relevant legislation of the Bahamas and England, as well as that the Privy Council contained members of the UK Supreme Court, the decision is likely to act as an important guide to challenges to awards in English-seated arbitrations on grounds of serious irregularity as well as being considered by courts of other jurisdictions that are called upon to address challenges to awards.
Challenges to Awards
The 1996 Arbitration Act (the “English Act”), provides the following discrete grounds on which an arbitration with an English seat may be challenged:
- Section 67: Challenge to the arbitral tribunal’s substantive jurisdiction (i.e. that an award was made by a tribunal without jurisdiction to issue it).
- Section 68: Challenge on the basis of a ‘serious irregularity’ affecting the tribunal, the proceedings or the award.
- Section 69: Appeal on a point of law (i.e. an error of law in the award).
While it is possible to exclude the right to challenge an award on the basis of Section 69, which the rules of a number of arbitral institutions such as the LCIA and ICC do, Sections 67 and 68 are mandatory provisions and cannot be excluded by the parties. The threshold for success in challenging an award is high under each ground and the vast majority of applications to the English courts to challenge arbitral awards are rejected.
In this article we focus on the basis for a Section 68 challenge for serious irregularity. Section 68 provides a list of circumstances where substantial injustice will be established if the court considers they have caused or will cause substantial injustice to the applicant, including:
- failure by the tribunal to comply its general duties, such as the duty to give each party a reasonable opportunity to put its case;
- the tribunal exceeding its powers;
- failure by the tribunal to deal with all the issues that were put to it; and
- the award being obtained by fraud or in a manner contrary to public policy.
The requirement that the relevant irregularity has caused “substantial injustice” means not only will the irregularity need to be established, but also that injustice. The intention of that requirement was to limit challenges to only the most extreme circumstances and not merely where a party considers that the tribunal has failed to reach the ‘correct decision’.
The RAV Bahamas case involved Section 90 of the Bahamas Arbitration Act 2009 (the “Bahamas Act”) which is materially the same as Section 68 of the English Act. Bahamas Ltd and Bimini Bay Resort Management Ltd (“RAV”) challenged an arbitral award against them in ad hoc arbitration (i.e. non-institutional arbitration).
RAV had leased land to Therapy Beach Club (“Therapy”) on which RAV was to construct a beach club which Therapy would operate. Disputes arose regarding the construction, leading RAV to demolish the beach club and evict Therapy. Therapy’s claims for wrongful eviction, trespass and unlawful interference with economic interests was referred to arbitration. Although the arbitrator found for Therapy on these claims, Therapy had also claimed a variation of the lease to include the lease of a nearby restaurant, leading to additional damages being suffered. That additional claim was unsuccessful and the arbitrator reduced the award of damages by one third, and by a further 15% on the basis that figures for loss of profits were based on the expert’s memory and not documented evidence.
RAV alleged serious irregularity in the award on two grounds:
- The arbitrator had failed to deal with a central issue affecting the period for which damages were calculated; and
- The arbitrator had not afforded RAV the opportunity to respond to adjustments made to figures of loss which had previously been presented on a global basis and where evidence was based on the expert’s memory.
The Supreme Court of the Bahamas agreed with RAV finding that both grounds gave rise to serious irregularity.
- On the first ground, the arbitrator had awarded damages for consequential loss of profits beyond the original term of the lease (the termination of which was at the root of the original dispute), thereby failing to deal with the fact that the lease agreement required six months’ notice in order to renew. RAV was entitled to demand consideration of this issue as it was so central to the award of damages. This fell within Section 90(2)(d) of the Bahamas Act which sets out that irregularity occurs where there is a failure by the tribunal to deal with all issues that were put to it (identical to Section 68(2)(d) of the English Act).
- On the second ground, the Court agreed that the Arbitrator had acted unfairly in not affording RAV the opportunity to make representations regarding the level of damages awarded and the basis on which they were calculated. This failure fell within Section 90(2)(a) of the Bahamas Act, materially identical to Section 68(2)(a) of the English Act which both refer to the general duties of a tribunal.
The Court of Appeal of the Bahamas reversed this decision on the premise that RAV had not separately evidenced and established that the irregularities had caused them substantial injustice. They considered that this was a necessary part of the due process in establishing Section 90/Section 68 and that the burden is on the applicant seeking to set aside an award to establish substantial injustice. RAV subsequently appealed this decision to the Judicial Committee of the Privy Council in London.
For those unfamiliar with the Judicial Committee of the Privy Council, this is based in London and is the court of final appeal for the UK overseas territories and Crown dependencies. It also serves those countries of the Commonwealth, such as the Bahamas, that have retained the right of appeal to it.
The Privy Council’s decision
The principal legal issue for the Privy Council was whether Section 90/Section 68 required there to be a separate and express allegation, consideration and finding of substantial injustice for a serious irregularity to be established. In allowing the appeal, the Privy Council decided that it is not a requirement of serious irregularity that there be a separate investigation and finding of substantial injustice, instead taking a pragmatic approach to the analysis of whether substantial injustice had in fact occurred.
On the first ground, the nature of the irregularity of failing to deal with a central issue was inherently likely to cause substantial injustice, therefore serious irregularity would be established. On the second ground, the Privy Council allowed the appeal in part, finding that the failure of the arbitrator to provide RAV with a fair opportunity to address adjustments made to damages did constitute serious irregularity and again substantial injustice was self-evident. They noted that it ‘goes without saying’ that arbitrarily reducing damages by a third is seriously prejudicial to RAV. However, RAV did in fact have a fair opportunity to address the obvious failure of Therapy’s expert in not relying on documented evidence (because this fact was obvious to the parties) and therefore this part of the challenge was dismissed.
The RAV Bahamas judgment provides a useful source of guidance as to whether there is a serious irregularity in an award and how that might be established, including that:
- Failure by an arbitrator to address central issues and/or precluding a party from addressing an alteration of award can constitute serious irregularity, with the court looking at the resulting injustice to the party.
- There is no mandatory requirement to have a separate, express allegation of substantial injustice in every circumstance, but it is good practice to do so as that will still need to be established.
- Ambiguous and even incorrect reasoning is not sufficient for a successful challenge under Section 68.
In the present case the irregularities in question were significant and would likely have had a material impact on the outcome of the award. While the Privy Council was careful to emphasise that challenges under Section 90/Section 68 would not easily succeed, the decision will no doubt give hope to parties who feel that an award issued against them resulted from or was impacted by a serious irregularity, particularly where a party has not had the opportunity to address a material issue that impacts on their liability.