There have been two arbitration cases recently, in England and in Hong Kong, where an arbitrator has made a ruling which neither of the parties had asked for. Both arbitration awards have been set aside by the supervising courts. This is a reminder to arbitrators that they must take proper submissions from the parties in relation to any award that they propose to make.
Setting aside the award in England
The details of the arbitration in England were reported on an anonymised basis in the subsequent judgment of the English Commercial Court (RJ & L Ltd v HB ), as follows:
- HB and RJ are two wealthy individuals. HB intended to acquire a controlling interest in a bank, and RJ wanted to invest US$ 75m in the deal. For regulatory reasons, RJ could not lend HB this money, so they agreed in December 2013 that RJ would pay US$ 75m in return for shares in two companies owned by HB that would control the bank. RJ paid over the money but the shares were not transferred pending the purchase of the bank. The transaction structure was then changed by further agreement in March 2014 so that RJ would take a stake directly in the bank, subject to the obtaining of any necessary authorisations.
- HB bought the bank but the bank shares were not transferred to RJ. A dispute arose about why this had not happened. HB claimed that RJ had breached an obligation to obtain, or to seek reasonably diligently to obtain, the necessary authorisation for the transfer; RJ denied there had been such a breach. HB commenced arbitration.
- The arbitrator was jointly appointed by the parties and was a senior English QC. He concluded that RJ was in breach of the obligation to obtain authorisation. However, he also ruled that RJ was the "beneficial owner" of the bank shares. This was a different outcome than HB had sought: HB had claimed RJ should perform its obligation to obtain the necessary authorisations and take the shares, or else pay damages to HB; while RJ's position was that, while he had not taken the shares, this was not the result of any breach of contract by him. Neither side said in the arbitration that RJ had actually acquired any ownership (legal or beneficial) in the shares.
RJ challenged the award in the Commercial Court, under section 68 of the Arbitration Act 1996. The judge noted that neither side had made any submission to the arbitrator about RJ already having legal title or equitable ownership in the shares; and the arbitrator did not put the parties on notice that he might rule that RJ had acquired beneficial ownership. As a result, the judge concluded, there had been a procedural irregularity – and it caused a substantial injustice because the award left RJ with beneficial ownership of shares that he did not want and for which he did not have regulatory approval.
The judge set the relevant parts of the award aside, and sent back to the arbitrator the question of the relief for HB as a result of RJ's breach.
Setting aside the award in Hong Kong
The Hong Kong arbitration was also reported on an anonymised basis, with the details being set out in the subsequent judgment of the Hong Kong Court of First Instance (P v M ) as follows:
- P engaged M as its main contractor to carry out some construction works. The contract contained a domestic arbitration agreement, meaning that Schedule 2 of the Hong Kong Arbitration Ordinance applied. Schedule 2 contains the same provision as in section 68 of the English Arbitration Act, allowing a judge to set aside an arbitration award if there has been a serious irregularity in the arbitration resulting in a substantial injustice.
- Disputes arose, and an arbitration was started in which M claimed loss and expense from P. One of the arguments that P raised in its defence was that M had been required under the contract to give notice of its claims but had failed to do so. In response, M said that there was no such requirement in the contract, but even if there had been, P had waived it. M did not say that it had actually given such notice.
- The arbitrator made an award in which he ordered P to pay HK$ 6.2m to M. As part of his award, he accepted that M had been required to give notice of its claims – but he ruled that M had in fact done this, via certain communications in September and November 2013.
P challenged the award in the High Court. P complained that it had not had the opportunity to make submissions about whether the 2013 communications were a proper notice under the contract. In reply, M submitted that the arbitrator should be entitled to decide an issue on a basis not advanced by the parties, so long as the parties had been given the opportunity to address all the “essential building blocks” leading to the arbitrator's conclusion, and that had happened here.
The judge rejected M's argument and found that P had not been given a fair opportunity to make submissions on the notice issue. She concluded that there had been a serious irregularity and a substantial injustice because the arbitrator's decision in relation to the notice issue was a key part of the award. Consequently, the award was remitted to the arbitrator for reconsideration of the meaning and effect of the 2013 communications.
It is rare for arbitration awards to be set aside in either England or Hong Kong. However, a situation where the tribunal has made a ruling that neither party had argued for can justify the setting aside of an award, as these two cases demonstrate. The judgment of the English Commercial Court also lists, in an appendix, 13 other English cases since 2001 in which awards have been set aside for this reason.
Arbitrators need to take care that their awards are based on the submissions that the parties have made. If an idea occurs to them during the drafting of the award which has not been argued by the parties, they need to reopen the proceedings so that the parties can make submissions. They must not proceed to issue the award without going back to the parties.