Editor: Melanie Willems
IN THIS ISSUE
Go Ahead, Make My Day: Adverse Costs Orders for Refusal to Engage with ADR
by Ryan Deane
THE ARBITER SPRING 2015 2
Pleadings: Please, please tell me now, is there something I should know?
by Melanie Willems
Shot Down: A Major Arbitration Award Defeated (for now?)
by Robert Blackett
THE ARBITER SPRING 2015 3
Go Ahead, Make my Day: Adverse Costs Orders for Refusal to Engage with ADR
by Ryan Deane
Most disputes are capable of solution through a suitable alternative dispute resolution (“ADR”) process. It remains the most efficient and cost effective way to resolve outstanding issues between parties to litigation. Despite the attractions of ADR, many parties refuse to contemplate its use and often dismiss it out of hand or attempt to argue that it is not appropriate in the circum-stances.
This article examines the English courts’ approach to the refusal of a party to litigation to engage with an ADR process suggested by another party or the court. It sets out the law in the leading case of Halsey v Milton Keynes General NHS Trust  1 WLR 3002 and analyses how the Halsey decision has been applied in several recent cases. The article concludes with advice on how to avoid the impo-sition of an adverse costs order by the court for refusal to engage with ADR.
Halsey v Milton Keynes General NHS Trust
The principle that parties to litigation should generally be en-couraged to engage with ADR is imbedded within the legal system of England & Wales. The courts’ case management duties include “encouraging the parties to use an alternative dispute resolution procedure if the court considers that appropriate and facilitating the use of such procedure” (Civil Procedure Rules, r.1.4(2)(e)). In practice, references to ADR in this context almost invariably mean some form of mediation by a third party.
Before the Halsey decision, the courts did engage in patchwork encouragement of ADR by imposing adverse cost orders on parties that unreasonably refused to engage in mediation. The reasoning behind what constituted unreasonable conduct for these purposes differed significantly between judges. This was, no doubt, as a re-sult of the disparate views among members of the judiciary on the merits of mediation as an effective means of resolving parties’ dis-putes.
Halsey was the first case in which the Court of Appeal addressed, as a matter of principle, the extent to which it was appropriate for the court to use its powers to encourage parties to settle their dis-putes otherwise than by trial. It restated that the court should have regard to the parties’ conduct when deciding whether to de-part from the general rule that the unsuccessful party should pay the successful party’s costs. One particularly relevant element of a party’s conduct was whether it had unreasonably refused to agree to ADR.
If a successful party was shown to have unreasonably refused to engage in ADR, the court would, all things being equal, reduce the amount of recoverable costs which would otherwise be due from the unsuccessful party. The court would not compel the parties to mediate, but would instead engage in a robust form of indirect encouragement.
Giving the judgment of the court, Lord Justice Dyson, as he then was, laid down non-exhaustive factors for deciding whether, in particular cases, a refusal to participate in ADR was unreasonable. He stressed that no single factor would be decisive, and the unrea-sonableness of the party’s conduct must be determined having regard to all the circumstances of the case.
The burden of proof is on the party who alleges the other unrea-sonably refused to mediate. However the court in Halsey made clear that the burden is not an onerous one. The relevant question is whether there was a reasonable prospect that the mediation would be successful, not whether it would have been successful on the balance of probabilities. Most disputes are likely to meet this criterion in the eyes of the court, if not in the eyes of the parties.
The factors to be taken into account (“the Halsey factors”) are the following:
(a) the nature of the dispute;
(b) the merits of the case;
(c) the extent to which other settlement methods have been attempted;
(d) whether the costs of the ADR would be disproportionately high;
(e) whether any delay in setting up and attending the ADR would have been prejudicial;
(f) whether the ADR had a reasonable prospect of success; and
(g) whether the court had encouraged the parties to pursue ADR.
The nature of the dispute
The court in Halsey recognised that some disputes are intrinsical-ly unsuitable for ADR:
“The most obvious kind is where the parties wish the court to determine issues of law or construction which may be essen-tial to the future trading relations of the parties, as under an on-going long term contract, or where the issues are general-ly important for those participating in a particular trade or market. There may also be issues which involve allegations of fraud or other commercially disreputable conduct against an
4 THE ARBITER SPRING 2015
individual or group which most probably could not be suc-cessfully mediated.”
A party will not generally be acting unreasonably in refusing ADR if it can identify a point of law or construction which, if determined by the courts, would avoid future disputes by the parties on the same issue in their continuing legal relationship.
Similarly, if a particular trade or market has an interest in obtain-ing a definitive legal answer by the court, it is less likely that a member of that trade or market’s refusal to engage in ADR will be found to be unreasonable. In Halsey, for example, a factor rein-forcing the finding that the defendant had acted reasonably in refusing mediation was that, as an insurance company, it had a legitimate interest in obtaining a definitive legal determination of the meaning of one of its standard clauses.
Allegations of fraud or other commercially disreputable conduct are a serious matter and may make it less likely that the parties will see eye to eye in mediation. A party may want the allegations pub-licly refuted in court. However, the relevance of this factor remains highly fact specific. It may depend, for example, on how central the fraud allegations are to the other party’s case, or whether those allegations have been made public. Any allegation of fraud or other disreputable conduct should not be thought of as a reason that automatically makes refusal to engage in ADR reasonable.
The merits of the case
A party’s belief in the merits of the case is a relevant factor:
“The fact that a party reasonably believes that he has a strong case is relevant to the question whether he has acted reasonably in refusing ADR. If the position were otherwise, there would be considerable scope for a claimant to use the threat of costs sanctions to extract a settlement from the defendant even where the claim is without merit. Courts should be particularly astute to this danger.
… Borderline cases are likely to be suitable for ADR unless there are significant countervailing factors which tip the scales the other way. ... The fact that a party unreasonably believes that his case is watertight is no justification for re-fusing mediation. But the fact that a party reasonably be-lieves that he has a watertight case may well be sufficient justification for a refusal to mediate.”
The presumption is that borderline cases are suitable for ADR. Only in genuinely one-sided disputes will a party’s belief in the strength of its case have significant weight. The court gave the example of a case where a party would have succeeded in an appli-cation for summary judgment, but did not, for whatever reason, make that application. Parties often take the position that the strength of their case is the most valid reason to refuse to mediate; the courts will rarely agree.
It should be noted that a party’s subjective belief in the merits of its case is not relevant to this factor. Only if the belief is reasona-ble, viewed objectively, will that constitute a valid reason to refuse ADR. This underlines the importance for a party to obtain inde-pendent and objective legal advice, and for legal advisors to pro-vide a frank appraisal of the merits.
The extent to which other settlement methods have been attempted
The court held that previous failed attempts to settle may be relevant:
“The fact that settlement offers have already been made, but rejected, is a relevant factor. It may show that one party is making efforts to settle, and that the other party has unreal-istic views of the merits of the case. But it is also right to point out that mediation often succeeds where previous attempts to settle have failed.”
This guidance demonstrates the difficulty a party might have in trying to assess whether its conduct in refusing to engage in media-tion is reasonable. On the one hand the court says that failed attempts to settle may show that at least one party has an unrealis-tic view of the case, the implication being that any attempt to me-diate would likely fail and can reasonably be refused. On the other hand, the court points out that mediation may succeed where pre-vious attempts to settle have failed, the implication being that any refusal to mediate in such circumstances would be unreasonable.
In circumstances where attempts to settle have been made, whether a party’s conduct is reasonable will likely be determined by a wide range of considerations including how realistic the posi-tions of the parties in the settlement negotiations were, how long ago the settlement negotiations took place, whether there has been a material change in the parties’ positions, and the likelihood that the impasse in the settlement negotiations could be overcome by the introduction of a third party mediator.
Again, the fact that multiple attempts at settlement have failed should not be regarded as an automatic justification to refuse me-diation. The court will examine the reasons for the failure and attempt as best it can to determine whether those past failures would have impacted on the mediation’s prospects of success.
Whether the costs of the ADR would be dispro-portionately high
The court held the potential cost of pursuing mediation can be a relevant factor:
“This is a factor of particular importance where, on a realistic assessment, the sums at stake in the litigation are compara-tively small. A mediation can sometimes be at least as expen-sive as a day in court … the possibility of the ultimately suc-cessful party being required to incur the costs of an abortive
THE ARBITER SPRING 2015 5
mediation is a relevant factor that may be taken into account in deciding whether the successful party acted unreasonably in refusing to agree to ADR.”
In large commercial disputes this factor will almost never be significant. The costs of taking a matter to trial will heavily out-weigh the costs of mediation. One situation where it will be rele-vant is if mediation is suggested after the trial has taken place but before an appeal is heard. In those circumstances the costs of preparing for a day in mediation may be disproportionately high relative to the costs of preparing for a more narrowly defined ap-peal.
Whether any delay in setting up and attending the ADR would have been prejudicial
The court held that the time the mediation is suggested is a rele-vant factor:
“If mediation is suggested late in the day, acceptance of it may have the effect of delaying the trial of the action. This is a factor which it may be relevant to take into account in de-ciding whether a refusal to agree to ADR was unreasonable.”
This factor is straightforward. The closer to trial mediation is suggested, and the more disruptive mediation would be to a par-ty’s preparation for trial, the more likely it is that a party’s refusal to participate in the mediation will be reasonable. The courts will be keenly aware of any offers to mediate made in an attempt to appear reasonable, but which come too late to be realistically ac-cepted.
Whether the ADR had a reasonable prospect of success
The next factor the court discussed was whether the proposed mediation had a reasonable prospect of success. The court spent most time considering this issue:
“In our view, the question whether the mediation had a rea-sonable prospect of success will often be relevant to the rea-sonableness of A's refusal to accept B's invitation to agree to it. But it is not necessarily determinative of the fundamental question, which is whether the successful party acted unrea-sonably in refusing to agree to mediation. This can be illus-trated by a consideration of two cases. In a situation where B has adopted a position of intransigence, A may reasonably take the view that a mediation has no reasonable prospect of success because B is most unlikely to accept a reasonable compromise. That would be a proper basis for concluding that a mediation would have no reasonable prospect of suc-cess, and that for this reason A's refusal to mediate was rea-sonable.
On the other hand, if A has been unreasonably obdurate, the court might well decide, on that account, that a mediation would have had no reasonable prospect of success. But obvi-ously this would not be a proper reason for concluding that A's refusal to mediate was reasonable. A successful party cannot rely on his own unreasonableness in such circum-stances.”
It follows that although the court will look objectively at wheth-er the proposed mediation had reasonable prospects of success, it will also take into account subjective factors, such as a party’s will-ingness to compromise and the reasonableness of their attitudes in deciding whether a refusal to mediate was reasonable. A party cannot rely on its own stubbornness to argue that the mediation would never have reached a resolution.
Whether the court has encouraged the parties to pursue ADR
Although not traditionally referred to as one of the Halsey fac-tors, the court placed special emphasis on the question of whether a party had ignored the court’s encouragement of ADR when decid-ing whether that party’s conduct was unreasonable:
“Where a successful party refuses to agree to ADR despite the court's encouragement, that is a factor which the court will take into account when deciding whether his refusal was unreasonable. The court’s encouragement may take different forms. The stronger the encouragement, the easier it will be for the unsuccessful party to discharge the burden of showing that the successful party’s refusal was unreasonable.”
Even before Halsey, this factor was often decisive in the deter-mination of whether a party’s conduct was unreasonable. The courts do not like being ignored. In Dunnett v Railtrack plc  1 W.L.R. 2434, three of the claimant’s horses walked onto the de-fendant’s railway tracks and were struck by an express train and killed. The claimant failed in her negligence claim at first instance and again in the Court of Appeal. However, when giving permis-sion to appeal, Lord Justice Schiemann suggested that both parties engage in ADR.
The defendant was confident of victory and refused the claim-ant’s offer of mediation, seemingly without giving the offer any serious consideration. The Court of Appeal was highly critical of the defendant’s behaviour, and held that the defendant, the suc-cessful party, should bear its own costs of the appeal. In circum-stances where the court has expressly encouraged a party to con-sider pursuing ADR it will be rare for a party to escape sanction if it does not do so. The fact that the court gives its express encourage-ment suggests that it has determined that the dispute is suitable for resolution by an appropriate ADR process.
6 THE ARBITER SPRING 2015
The general trend of decisions since Halsey has been to strength-en the encouragement of ADR through the more robust use of ad-verse cost orders against parties who unreasonably refuse to en-gage in mediation. The courts have not yet taken the step of com-pelling the parties to mediate but have instead broadened the cir-cumstances under which a failure to engage with ADR will be deemed to be unreasonable and strengthened the sanctions against such behaviour. This section analyses two recent decisions that are illustrative of the courts’ approach.
The Court of Appeal revisited the Halsey decision in PGF II SA v OMFS Co 1 Ltd  1 WLR 1386. In PGF II the claimant freeholder brought proceedings against the defendant tenant for breach of repairing covenants. Both parties made offers to settle pursuant to Part 36 of the Civil Procedure Rules (“CPR”). Under Part 36, if A makes an offer to B complying with certain formalities, and B ac-cepts that offer, B is liable to pay A’s costs from the date of expiry of the ‘relevant period’ (defined as 21 days after the offer was made) to the date of acceptance of the offer, unless the court orders oth-erwise.
After the Part 36 offers were made the claimant sent the defend-ant two written invitations to pursue mediation, three months apart, but the defendant failed to respond to either. On the eve of the trial the claimant accepted the defendant's Part 36 offer and the case was settled save as to costs.
The judge at first instance found that the defendant’s silence in the face of serious invitations to mediate amounted to an unreason-able refusal to engage in ADR. Consequently, in the exercise of his discretion, he deprived the defendant of its costs pursuant to CPR Part 36 to which it would otherwise have been entitled.
The Court of Appeal agreed. It held that that silence in the face of an invitation to participate in ADR is, as a general rule, of itself unreasonable, regardless of whether a contemporaneous refusal might have been justified by the identification of reasonable grounds. A party must not only have good reasons for failing to engage in mediation, but it must communicate those reasons to the other party.
The court was at pains to extol the benefits of mediation both to parties to litigation and their lawyers. Mediation was described as a process that was “still insufficiently understood and still under-used”. The judgment leaves no doubt that in future the courts will continue to be robust in their encouragement of ADR. The court went so far as to suggest that the successful party could pay the unsuccessful party’s costs if there was a “serious and flagrant” fail-ure to engage in ADR, for example when the court’s encouragement of ADR had been ignored.
The expansion of the courts encouragement of ADR continued in the first instance decision of Phillip Garritt-Critchley v Andrew Ron-nan  EWHC 1774 (Ch). Unusually, the unsuccessful party, the defendant, had refused an offer to mediate by the successful party, the claimant. HHJ Waksman QC held that the refusal was unreason-able and ordered that the claimant was entitled to be paid its costs of the whole action on the indemnity basis.
The judge placed particular importance on the suitability of the particular dispute to mediation. The case contained “an obvious sliding scale of compensatory award if the claimant’s succeeded”. There was expert evidence on quantum that contemplated a wide range of possible awards. In these circumstances, the judge consid-ered this was a classic matter where mediation should be consid-ered, and was robust in his criticism of the defendant for not doing so.
HHJ Waksman QC dismissed one by one the defendant’s argu-ments that its conduct in refusing mediation was reasonable. The defendant’s belief that its case was watertight was misconceived, and it was telling that it was not so confident in its belief to apply for summary judgment. Neither was the fact that there was consid-erable dislike and mistrust between the parties relevant. The judge thought this entirely commonplace, and if anything strengthened the case for ADR.
Finally, the argument that the parties were too far apart in their evaluation of the case was given short shrift:
“Parties don’t know whether in truth they are too far apart unless they sit down and explore settlement. If they are irrec-oncilably too far apart, then the mediator will say as much within the first hour of mediation. That happens very rarely in my experience.”
The reasons given by the defendant will be familiar to anyone habitually involved in litigation. Their dismissal by the court should serve as a warning to parties or their lawyers seeking to rely on them. It is the Halsey factors that should be at the forefront of par-ties’ minds when considering whether to refuse an offer of ADR, not the more common, now discredited, arguments.
The English courts are increasingly taking a stricter approach towards parties that unreasonably refuse to mediate. They have broadened both the circumstances under which a failure to engage with ADR will be deemed unreasonable and the sanctions against such behaviour. What actions can a party who wishes to refuse ADR take, therefore, to avoid the imposition of an adverse costs order by the court?
Advice on this point was given by the Court of Appeal in the PGF II case. It expressly endorsed paragraph 11.56 of the Jackson ADR Handbook (2013), which sets out at length what steps a party should take in these circumstances. The court summarised the ad-vice as follows:
“The advice includes: (a) not ignoring an offer to engage in ADR; (b) responding promptly in writing, giving clear and full reasons why ADR is not appropriate at the stage, based if possible on the Halsey guidelines; (c) raising with the oppos-ing party any shortage of information or evidence believed to
THE ARBITER SPRING 2015 7
be an obstacle to successful ADR, together with consideration of how that shortage might be overcome; (d) not closing off ADR of any kind, and for all time, in case some other method than that proposed, or ADR at some later date, might prove to be worth pursuing.”
A party’s approach must be one of constructive engagement, having taken into account all the relevant factors and communicat-ed its decision to the other side. If these steps are taken, the court is much less likely to sanction the refusing party.
Having said this, mechanistically following these steps should not be taken as a guarantee that an adverse costs order will not be made. The reasons given by the parties must be objectively rea-sonable. In Phillip Garritt-Critchley, the defendants had duly com-municated their refusal to the other party with reasons. However, HHJ Waksman QC viewed the reasoning itself as deficient:
“Mr Maynard-Connor has referred me to the PGF case and in that case he has drawn my attention to paragraph 30 which talks about the ADR Handbook: not ignoring an offer, re-sponding promptly, not closing it off and raising any shortage of information. None of that assists the defendants here. They did respond, they gave reasons but they were miscon-ceived. So the fact that they responded promptly each time a letter was written is neither here nor there. It wasn’t a ques-tion of shortage of information being an obstacle.”
Both the form and the substance of the refusal are important. This is a difficult path to walk for parties not familiar with litigation. The above passages highlight the importance for parties consider-ing whether to refuse an offer to mediate to obtain independent and objective legal advice on their dispute, and for legal advisors to provide a full and frank appraisal of the merits of these disputes to their clients.
Pleadings: Please, please tell me now, is there some-thing I should know?
by Melanie Willems
The commercial world generates enormous amounts of information. Transactions pro-duce great quantities of documentation, helped by the incontinent use of email and electronic communication. When disputes arise, there is usually a great deal of materi-al to sift through. But the complexity of the subject matter does not give lawyers license to expand their pleadings commensurately.
The English courts have issued clear warnings against the ever increasing length of statements of case. Recently, Mr Justice Leg-gatt sent a powerful reminder, lest anyone had forgotten how much judges dislike a verbose party, in Tchenguiz & Others v Grant Thornton UK LLP & Others  EWHC 405 (Comm). The claim-ant’s legal team has had to go back to the drawing board because the statement of claim was simply too long. This article looks at how English courts control statements of case in commercial claims, and considers the role of so-called ‘pleadings’ in English civil litigation.
Pleading in the English tradition - what is it all about?
Going back to basics, it is necessary to recall that statements of case in English litigation are meant to serve a specific purpose. That is to assist the court by identifying all the facts that are neces-sary to support a cause of action (or a defence), thereby identifying precisely what a party would have to prove at the trial to be suc-cessful.
If one were to adhere strictly to that purpose, here are some things that have no place in a traditional English pleading:
- The background facts, or matters that serve to ‘set the scene’ or (as happens in practice) are intended to portray one party in a particular light.
- Evidence. Pleadings should be limited to the facts on which the claim rests, not on how those facts are known, or how they will be established at trial.
- Legal argument, or even legal authorities. The legal basis of the claim is not to be spelt out in a pleading.
- Reasons why one party’s case is right and the other party’s case is wrong.
- ‘Rhetoric’. Instead, the language should be businesslike and neutral. If the claim is that the defendant did something dishon-est, use that word, and use it once for each allegation.
The result of this is that a perfect English court pleading would probably please nobody but the judge. It would be dry, and a client might be tempted to ask: where is all the good stuff that is going to convince the judge? The answer lies in the distinction that is drawn in English litigation between statements of case, and submissions that will be presented before, during and (usually) after the trial, when the case is argued. The meat of the case will be put onto the bones of the pleading in the further course of the proceedings. This may seem counterintuitive. Should a claimant not provide all the information and arguments on which the case is going to rest at the outset, so that a defendant can deal with the allegations that are being made? Not so, say the English Courts, because the ulti-mate aim is to identify precisely only the necessary building blocks on which the case is going to be constructed, no more (and no less). Lengthy and embellished pleadings distract from the legal essentials underlying the case.
8 THE ARBITER SPRING 2015
Are lengthy pleadings a new phenomenon?
It seems the problem of loquacious litigants is not entirely new. Possibly the oldest recorded example of judicial chastisement ap-peared some 419 years before Tchenguiz v Grant Thornton. In Mylward v Weldon (1596) Tothill 102, 21 ER 136, the son of a party filed a reply on 120 sheets of paper when, according to the Lord Keeper, he would have had ample room to say what needed saying on 16 pages. He was promptly imprisoned in the Fleet (a notorious debtor’s prison near Farringdon) until he paid £10, then an enor-mous amount, to the Crown, and a further not insignificant sum to the defendant for the affront caused by having to read the docu-ment.
Not content with an adverse costs order, the Lord Keeper or-dered the following unusual further sanction:
“… that the Warden of the Fleet shall take the said Richard Mylward … and shall bring him into Westminster Hall on Saturday next, about ten of the clock in the forenoon and then and there shall cut a hole in the myddest of the same engrossed [reply] … and put the said Richard’s head through the same hole and so let the same [reply] hang about his shoulders with the written side outward; and then, the same so hanging, shall lead the same Richard, bare headed and bare faced, round about Westminster Hall, whilst the Courts are sitting and shall shew him at the bar of every of the three Courts within the Hall and shall then take him back to the Fleet ….”.
Things were simpler then.
The modern approach
In 2007, the Commercial Court Long Trials Working Party pro-duced a report that ultimately led to provisions on pleadings being introduced into the Commercial Court Guide in 2009. One of the new measures adopted at that time was a guillotine - a 25 page limit, not to be exceeded without the permission of the court. It is expressly stated that permission to exceed the page limit would only be given exceptionally, where there are good reasons, and following an application for permission. Pausing for a moment, and not naming any names, one can imagine a number of lawyers who might be capable of already exceeding the 25 page limit when mak-ing such an application.
Pleaders in the Commercial Court however seem to have contin-ued to provide overlong submissions, which moved the Court of Appeal to declare in Standard Bank PLC v Via Mat International Ltd  EWCA Civ 490 that:
“Overlong pleadings and written submissions … which are manufactured by parties and their lawyers have become the bane of commercial litigation in England and Wales.”
The commercial court has been clear that the complexity of claims has only reinforced the need for concision and surgical accu-racy. In Tchenguiz v Grant Thornton, Mr Justice Leggatt empha-sised that point:
“As commercial transactions have become more complex and more heavily documented (including electronically), adhering to the basic rules of pleading has become both increasingly difficult and all the more important. It is increasingly difficult because it is harder for pleaders to distil what is essential from the material with which they are provided and because they can feel pressure to show their mettle and enthusiasm for their client’s case by treating the pleadings as an opening salvo of submissions in the litigation. It is all the more im-portant because prolixity adds substantial unnecessary costs to litigation at a time when it is harder than ever to keep such costs under control.”
Tchenguiz v Grant Thornton follows on from a failed criminal investigation. In 2011, Mr Vincent Tchenguiz and his brother Rob-ert were the subject of a high-profile investigation by the Serious Fraud Office (“SFO”). Their homes and business premises were searched. Arrests were made. They say that the investigation had a very serious impact on them professionally and personally. In July 2012, the High Court found that the search warrants issued to the SFO were unlawful. The warrants had been obtained by mis-representation and failures to disclose material matters to the judge issuing them.
The transactions that the SFO were investigating primarily con-cerned events following the collapse of Kaupthing, the Icelandic bank. The suspicion was that corporate vehicles ultimately con-trolled by the Tchenguiz brothers had fraudulently sought to put assets beyond the reach of Kaupthing’s liquidators, so that they could not sell these assets for the benefit of the bank’s creditors. A series of claims were commenced in the English courts in the fall-out from Kaupthing’s collapse. Grant Thornton prepared a number reports for the purpose of such litigation (instructed by a party to the proceedings). Grant Thornton then contacted the SFO, stating that, in the course of their work, they had discovered evidence of dishonesty and fraudulent accounting to which the Tchenguiz brothers appeared to be parties. The SFO was allowed to see some of Grant Thornton’s reports, and decided that there were reasons to suspect criminal offences had been committed. The warrants against Vincent and Robert Tchenguiz were issued following a hear-ing during which the SFO presented what they had been told by Grant Thornton (amongst other matters) to a criminal judge.
As has been widely reported, the SFO was heavily criticised for failing to investigate (and understand) the commercial background to the transactions. Vincent Tchenguiz was awarded damages of £3 million. When setting aside the warrants, the High Court noted that the SFO had placed too much reliance on what Grant Thornton had said, noting that they had “… owed duties to their own clients
THE ARBITER SPRING 2015 9
which rightly took precedence over the interests of the public.” In November 2014, Mr Tchenguiz then commenced the present pro-ceedings against Grant Thornton and Kaupthing bank, alleging that they had conspired against him by unlawful means and had com-mitted the tort of malicious prosecution. It will come as no surprise that Mr Tchenguiz’s claim for damages of £2.2 billion involves com-plex facts and multiple causes of action.
How not to plead
The claim in Tchenguiz v Grant Thornton was not, as the Com-mercial Court found, difficult or complicated to plead. The allega-tions were that the defendants together conspired to bring about an SFO investigation on a false basis, and that they did this by mak-ing statements to the SFO which the defendants did not believe to be true. That case required particulars as to what false statements were made, by whom and to whom, and when, and particulars of the matters relied on in the assertion that the defendants did not believe that the statements were true. Pleading dishonesty or fraud is a serious matter, and such a case should only be advanced if there is cogent evidence in support of it.
The statement of claim amounted to 94 pages, and it had been served without applying for permission to exceed the 25 page limit. The judge found that the necessary particulars of the untrue state-ments had been addressed, but unfortunately only from page 61. The preceding part of the document is said to have consisted only of background narrative, “liberally interspersed with allegations of fraud, falsity, dishonesty and improper motive” of a general nature, without any specifics or particulars. It did not help that much of the language used was tendentious, and that headings introducing the defendants called them: ‘The Conspirators’. Other headings de-clared the existence of “The Plot”, before stating: “The Plot Evolves”. In contrast, the Commercial Court Guide is hopeful that headings will be “in a form that will enable them to be adopted without issue by the other party”.
Counsel were taken to task by the judge as to whether they were aware of the Commercial Court Guide’s 25 page limit. The most senior of the four authors is reported to have said that they had been “conscious” of the limit at the outset of the drafting process, which took months, but that by the end of it, when the document had emerged in its full length, they were “no longer conscious” of the relevant provisions. The judge may have chosen his words quite carefully here. Ultimately, having heard further argument as to the merits of going back to the drawing board or simply soldier-ing on with the deficient document, Legatt J struck out the claim, disallowed all the claimant’s costs and required a new pleading of no more than 45 pages within 21 days. The learned judge so held in 17 succinct paragraphs.
Comment and conclusion
It is difficult to conceive of any lawyer who sets out to draft a pleading with the aim of preparing a long, overly complicated docu-ment that is short on particulars and long on hyperbole. However, there is a danger that even with the best of intentions, statements of case may end up longer and less helpful to the decision-maker than they could be. One driver behind this is that the lawyer draft-ing the claim cannot be sure precisely what point the judge will find holds the key to the case. An abundance of caution may lead to an abundance of causes of action, just to make sure all the bases are covered. Being selective, short and very much to the point is a bold move that requires strong conviction, and perhaps also a straightforward case. Some pleadings are long because, as the old adage tells us, it is easier and quicker to write a long document than a short one, which requires more thought, precision and careful drafting.
A factor to bear in mind may be a desire to put on a good show for the client: few would find a traditional English pleading to be an entertaining read. Ultimately, though, when in court, the interests of the client are best served by advancing the case in the manner expected by the English courts, even though that may seem sterile and technical at the outset of the case.
One can contrast the approach taken in English civil litigation with the prevalent practice in international arbitration. Long docu-ments are not unusual in complex arbitration claims, but they usu-ally comprise full details of the supporting evidence (factual and expert), legal arguments, reasoning and authorities, together with a narrative account of what happened, and why. Statements of case in arbitrations seek to combine the role played by both pleadings and submissions in English litigation.
The long and short of it is that, however tempted we are to hang overly lengthy submissions around our counterparty’s neck, the best course is to appreciate that different fora have very different rules and requirements for pleadings.
Shot Down: A Major Arbi-tration Award Defeated (for now?)
by Robert Blackett
It is not often that a commercial arbitration gives rise to a big news story and becomes a political hot potato. For that reason alone, the two judgments which have been made to date in Secretary of State for the Home Office v Raytheon Systems Limited  EWHC 4375 (TCC) and  EWHC 311 (TCC) would make for interesting reading. But the case is also unusual in other ways.
Raytheon (best known as a manufacturer of missiles, though in this case supplying an IT system) obtained a nine-figure arbitration award against the British Government after a long, expensive arbi-
10 THE ARBITER SPRING 2015
tration process, only to then have the award completely set aside by the court, with the case now required to be reheard by an entirely new tribunal, unless Raytheon succeeds in its appeal.
It is fundamental that parties should be free to agree how their disputes are resolved “subject only to such safeguards as are neces-sary in the public interest” (Section 1(b) of the Arbitration Act 1996). One such “safeguard” is the right of a party to challenge an award on the grounds of “serious irregularity affecting the tribunal, the proceedings or the award …”. So far as relevant, section 68 pro-vides:
“68 Challenging the award: serious irregularity.
(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challeng-ing an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award. …
(2) 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 -”
There follows a list of categories of serious irregularity. These are not just examples of serious irregularity. To succeed in a challenge under section 68 the case must actually fit within one of the listed categories. The relevant category in the Raytheon case was:
“(d) failure by the tribunal to deal with all the issues that were put to it;
(3) If there is shown to be serious irregularity affecting the tribunal, the proceedings or the award, the court may—
(a) remit the award to the tribunal, in whole or in part, for reconsideration,
(b) set the award aside in whole or in part, or
(c) declare the award to be of no effect, in whole or in part.
The court shall not exercise its power to set aside or to declare an award to be of no effect, in whole or in part, unless it is satisfied that it would be inappropriate to remit the matters in question to the tribunal for reconsideration.
(4) The leave of the court is required for any appeal from a decision of the court under this section.”
In the first of the Raytheon judgments, the law and practice in relation to section 68 was summarised as follows (references to authorities omitted):
“(a) Section 68 reflects “the internationally accepted view that the Court should be able to correct serious failures to comply with the “due process” of arbitral proceedings: cf art 34 of the Model Law.” …; relief under Section 68 will be appropriate only where the tribunal has gone so wrong in the conduct of the arbitration that “justice calls out for it to be corrected” ...
(b) The test will not be applied by reference to what would have happened if the matter had been litigated …
(c) The serious irregularity requirement sets a “high threshold” and the requirement that the serious irregularity has caused or will cause substantial injustice to the applicant is designed to eliminate technical and unmeritorious challenges ...
(d) The focus of the enquiry under Section 68 is due process and not the correctness of the Tribunal’s decision ...
(e) Section 68 should not be used to circumvent the prohibi-tion or limitations on appeals on law or of appeals on points of fact …
(f) Whilst arbitrators should deal at least concisely with all essential issues …, courts should strive to uphold arbitration awards … and should not approach awards with a meticulous legal eye endeavouring to pick holes, inconsistencies and faults on awards with the objective of upsetting or frustrating the process of arbitration”.
(h) In relation to the requirement for substantial injustice to have arisen, this is to eliminate technical and unmeritorious challenges … It is inherently likely that substantial injustice would have occurred if the tribunal has failed to deal with essential issues …
(i) For the purposes of meeting the “substantial injustice” test, an applicant need not show that it would have succeeded on the issue with which the tribunal failed to deal or that the tribunal would have reached a conclusion favourable to him; it necessary only for him to show that (i) his position was “reasonably arguable”, and (ii) had the tribunal found in his favour, the tribunal might well have reached a different con-clusion in its award …
[j] The substantial injustice requirement will not be met in the event that, even if the applicant had succeeded on the issue
THE ARBITER SPRING 2015 11
with which the tribunal failed to deal, the Court is satisfied that the result of the arbitration would have been the same by reason of other of the tribunal’s findings not the subject of the challenge.
A useful summary of the law and practice with respect to Section 68(2)(d) specifically also appears in the first Raytheon judgment (references to authorities omitted):
“(i) There must be a “failure by the tribunal to deal” with all of the “issues” that were “put” to it.
(ii) There is a distinction to be drawn between “issues” on the one hand and “arguments”, “points”, “lines of reasoning” or “steps” in an argument, although it can be difficult to decide quite where the line demarking issues from arguments falls. However, the authorities demonstrate a consistent concern that this question is approached so as to maintain a “high threshold” that has been said to be required for establishing a serious irregularity.
(iii) While there is no expressed statutory requirement that the Section 68(2)(d) issue must be “essential”, “key” or “crucial”, a matter will constitute an “issue” where the whole of the applicant’s claim could have depended upon how it was resolved, such that “fairness demanded” that the ques-tion be dealt with ...
(iv) However, there will be a failure to deal with an “issue” where the determination of that “issue” is essential to the decision reached in the award ... An essential issue arises in this context where the decision cannot be justified as a partic-ular key issue has not been decided which is critical to the result and there has not been a decision on all the issues nec-essary to resolve the dispute or disputes …
(v) The issue must have been put to the tribunal as an issue and in the same terms as is complained about in the Section 68(2) application …
(vi) If the tribunal has dealt with the issue in any way, Section 68(2)(d) is inapplicable and that is the end of the enquiry … it does not matter for the purposes of Section 68(2)(d) that the tribunal has dealt with it well, badly or indifferently.
(vii) It matters not that the tribunal might have done things differently or expressed its conclusions on the essential issues at greater length …
(viii) A failure to provide any or any sufficient reasons for the decision is not the same as failing to deal with an issue ... A failure by a tribunal to set out each step by which they reach its conclusion or deal with each point made by a party is not a failure to deal with an issue that was put to it …
(ix) There is not a failure to deal with an issue where arbitra-tors have misdirected themselves on the facts or drew from the primary facts unjustified inferences … The fact that the reasoning is wrong does not as such ground a complaint un-der Section 68(2)(d) …
(x) A tribunal does not fail to deal with issues if it does not answer every question that qualifies as an “issue”. It can “deal with” an issue where that issue does not arise in view of its decisions on the facts or its legal conclusions. A tribunal may deal with an issue by so deciding a logically anterior point such that the other issue does not arise ... If the tribunal decides all those issues put to it that were essential to be dealt with for the tribunal to come fairly to its decision on the dispute or disputes between the parties, it will have dealt with all the issues …
(xi) It is up to the tribunal how to structure an award and how to address the essential issues; if the issue does not arise because of the route the tribunal has followed for the purpos-es of arriving at its conclusion, Section 68(2)(d) will not be engaged. However, if the issue does arise by virtue of the route the Tribunal has followed for the purposes of arriving at its conclusion, Section 68(2)(d) will be engaged.
(xii) Whether there has been a failure by the tribunal to deal with an essential issue involves a matter of a fair, commercial and commonsense reading (as opposed to a hypercritical or excessively syntactical reading) of the award in question in the factual context of what was argued or put to the tribunal by the parties (and where appropriate the evidence) … The Court can consider the pleadings and the written and oral submissions of the parties to the tribunal in this regard.”
The Agreement for the provision of e-Borders
Most people will have heard of the “e-Borders” programme (one could be forgiven for thinking it was properly called “the disastrous e-Borders programme”, since this is how it is generally referred to in the media).
The British government wished to collect, store and analyse in-formation on all travellers entering or leaving the UK, whether by air, sea or rail. For this purpose, the Immigration, Asylum and Na-tionality Act 2006 created powers for the UK Border Agency (“UKBA”) and police to require data from carriers in advance of movements into or out of the UK.
To allow the rapid collection, storage and analysis of information obtained under these powers, a new IT system was needed. In
12 THE ARBITER SPRING 2015
2007 the then Home Secretary, Jacqui Smith, signed a nine year contract on behalf of the Government (the “Agreement”) for such a system to be provided by Raytheon Systems Limited (“Raytheon”). Raytheon is involved in several industries, but is perhaps best known as a manufacturer of missiles. Raytheon was reportedly to be paid around £750 million.
The Agreement (which remains largely confidential) ran to 218 pages and cross-referenced nearly 60 separate schedules, a “compressed” version of which filled three further volumes. In this article, quotes from and about the Agreement are taken from the first court judgment.
The project was broken down into four stages known as Release Projects: RP1, RP2, RP3 and RP4. Each RP was broken down into five distinct phases numbered ATP1 to ATP5 relating respectively to “design, development, system testing, end-to-end testing and live operational testing” with the successful completion of each stage being termed either a “Milestone” or “Key Milestone”. Once a Mile-stone was achieved, this would trigger a payment to Raytheon. The payments to Raytheon were ‘sculpted’ so that early in the project it would be paid less than the cost which it incurred in providing the assets and services. Only later would there be any element of profit for Raytheon.
Clause 23.2 provided that Raytheon was to notify the Govern-ment “as soon as reasonably practicable” if “the design, develop-ment, testing or implementation of the System or the delivery of the Services … does not conform with the Implementation Plans and may cause Delay to”, amongst other things, achieving “any Milestone by its associated Milestone Date”.
Clause 23.3 required that, within 10 days of becoming aware of such actual or potential delays, the parties were to “comply with the Remedial Plan Process to rectify any Delay”.
The Agreement provided that where a “Delay arises from an event other than a Force Majeure Event, Compensation Event or Relief Event, [Raytheon] shall be responsible for such a Delay”. If Raytheon was responsible for a delay, the Agreement provided for “Delay Deductions” (in effect a form of liquidated damages) to be imposed on Raytheon.
The “Compensation Events” included an “Authority Cause”, meaning “any material breach” by the Government.
Where the Delay was caused by such a “Compensation Event”, Raytheon could potentially claim “Compensation”. It was, however:
“at least highly arguable that the provisions of Clause 25 pro-vide for conditions precedent which required [Raytheon] to give effective and timely Compensation Notices, failing which it was not to “be entitled to any Compensation or relief in respect of the Compensation Event concerned” (Clause 25.2.5).
Clause 57.3 also required [Raytheon] to give [the Govern-ment] an “OS Relief/Compensation Notice” within 10 days of it becoming aware that a Relief Event (such as fire, explosion or strike) or Authority Cause had “adversely affected or [was] likely to adversely affect the ability of [Raytheon] to observe and/or perform its other obligations”; if such a Notice was not provided within the requisite time-frame then [Raytheon] “shall not be entitled to any relief … in respect of the Authori-ty Causes …” (Clause 57.3.8).”
Clause 69 set out the various circumstances in which the Govern-ment would be entitled to terminate for cause (including failure by Raytheon to meet Milestones) and then concluded:
“In determining whether to exercise any right of termination pursuant to this Clause 69.1.2 [the Government] shall:
(i) act in a reasonable and proportionate manner having regard to such matters as the gravity of any offence and the identity of the person committing it; and
(ii) give all due consideration, where appropriate, to ac-tion other than termination of this Agreement.”
The underlined text came to be referred to as the “Process Re-quirements”.
Termination by the Government
In July 2009, the Government issued a “Notice of Material De-fault” alleging that Raytheon was in default in having failed to meet certain Milestones.
From February 2010 “Reset Negotiations” took place between the parties about the possible restructuring of the Agreement.
In May 2010 there was change of Government. The Labour Gov-ernment which had signed the Agreement was replaced by a coali-tion of the Conservatives and Liberal Democrats. The new coalition government established the “Major Project Review Group” (“MPRG”) to review major IT contracts.
It is Raytheon’s position that, by the beginning of July 2010 the restructuring of the Agreement had been agreed (at least in princi-ple) and that Raytheon was ready to implement it.
In July 2010 the MPRG, however, recommended that the Agree-ment instead be terminated for cause. The new Home Secretary (Theresa May MP) gave notice purporting to terminate the Agree-ment and, thereafter, retained an alternative service provider. Raytheon’s position was that the Government had no right to termi-nate, and that this purported termination was a repudiation of the Agreement by the Government, which Raytheon accepted.
The Government gave instructions in July 2010 purportedly pur-suant to the “Exit Management” provisions of the Agreement, iden-tifying assets which it required Raytheon to transfer. Raytheon agreed to transfer these assets but reserved its position that the Exit Management provisions had no contractual force following the repudiation.
THE ARBITER SPRING 2015 13
At the time it purported to terminate the Agreement, the Gov-ernment had paid Raytheon around £259.3 million under the Agree-ment. It was common ground that this was less than the costs Ray-theon had incurred pursuant to the Agreement.
In April 2011 the Government drew some £50 million on letters of credit which had been provided by Raytheon under the Agree-ment. The Government brought a claim by way of arbitration seek-ing damages.
Raytheon counterclaimed, seeking around £500 million. Raythe-on’s position was that there was no event of Default, that if any Default did occur it was caused by the Government’s wrongdoing and that the Government did not act in a reasonable and propor-tionate manner in deciding whether to terminate and did not give due consideration to action other than termination for cause. Ray-theon alleged that the Government had caused the Defaults to arise, including by failures to manage the Programme or to engage and manage the relationship with various other parties. Raytheon alleged that the Government did not consider termination for con-venience, conclusion of the Reset negotiations or continuing the Agreement.
It is not clear what (if any) institutional rules governed the arbi-tration. Three arbitrators were appointed, none of whom is named in the judgment. The Government nominated an English arbitrator and Raytheon nominated an American arbitrator. The chairman was Canadian. The first judgment refers to:
“… the known experience of at least one of the members of the tribunal in the construction and technology field (and indeed in the TCC)”
Presumably, therefore, at least one of the tribunal was either a former TCC judge or senior QC specialising in TCC work. The arbi-tration reportedly involved 4,000 pages of pleadings, 60 factual witnesses with 2 or 3 statements per witness, 8 expert witnesses, several procedural hearings, and a final hearing which took 42 working days.
A central issue in the arbitration seems to have been an enquiry as to the Home Secretary’s motives for having wished to terminate the Agreement. It is not entirely clear whether the Home Secretary herself gave evidence in the arbitration. If she did then that is a further unusual feature of the case - the office of Home Secretary is one of the four most senior posts in the British government.
On 4 August 2014, more than three years after the commence-ment of the arbitration, and sixteen months after the hearing, the tribunal handed down a Partial Final Award. The tribunal held that the Government had unlawfully terminated, and thereby repudiat-ed, the Agreement and that Raytheon had accepted that repudia-tion. The tribunal dismissed the Government’s money claims, and awarded Raytheon damages, though one of the arbitrators appar-ently gave a dissenting opinion on one issue related to quantum.
It was immediately widely reported in the media that the arbitral tribunal - which the BBC described as a “secret court” - had ordered the Government to pay Raytheon £224 million (Raytheon an-nounced that the Government had also been ordered to pay Ray-theon’s costs, which were not included in this figure).
The coalition Government blamed the loss on problems it had inherited from its predecessor. Labour blamed the coalition’s deci-sion to terminate, and called for the Government to disclose the legal advice on which it acted, and to reveal how much it had paid the lawyers representing it. The Home Secretary said:
“The situation the Government inherited was … a mess with no attractive options.
The Government stands by the decision to end the e-Borders contract with Raytheon …
Key milestones had been missed and parts of the programme were running at least a year late. Raytheon Systems Ltd had been in breach of contract since 2009. Prolonged negotiations had taken place under the previous Government which had led nowhere.
All other alternatives available to the Government would have led to greater costs than the result of this Tribunal ruling. Continuing with the contract and trying to rectify the deep rooted problems was estimated at the time as likely to cost £97 million more than terminating it, even with today’s settle-ment.
Since the Raytheon contract was signed, the Government has improved its approach to procurement and would never enter into such a contract today.”
The Chairman of the Home Affairs Select Committee (a labour MP) was quoted as saying:
“Minister after minister and successive heads of the UKBA told the select committee that the government was the inno-cent party and that Raytheon had failed to deliver. … It is now clear that the UKBA didn’t know what they wanted from the e-Borders programme.”
The Government challenged the award under section 68 of the Arbitration Act 1996. The grounds for the challenge are discussed below.
On 19 December 2014, Akenhead J handed down the first judg-ment in the Raytheon case. He upheld the Government’s challenge, holding that there had been serious irregularity, and that the sub-stantial injustice had resulted. He left open the question of what the appropriate relief was.
On 17 February 2015 Akenhead J gave the second judgment in the Raytheon case. He ordered that the award be set aside for resolution by a different tribunal. He also granted Raytheon per-mission to appeal both judgments under section 68(4) of the Arbi-tration Act 1996.
14 THE ARBITER SPRING 2015
A “Consolidated List of Issues” had been submitted to the tribu-nal by the parties. The tribunal said that their analysis: was “guided by the Consolidated List of Issues, keeping in mind the parties’ recognition that it may not be necessary for the tribunal to deter-mine all of the issues that the parties have identified”.
In its Partial Final Award, the arbitral tribunal had refrained from attributing responsibility or fault for the delays which occurred. There was no determination as to how much (if any) of the delay was attributable to Raytheon, how much (if any) to the to the Gov-ernment and how much (if any) to some other cause (“Force Majeure” or a “Relief Event”).
Instead, the tribunal asked whether - assuming that there had been a relevant Default, and that there was therefore a prima facie right on the part of the Government to terminate - the Government had complied with the Process Requirements.
The tribunal held that the Government had failed to comply with the Process Requirements in four ways, the first being:
“(a) [the Home Secretary] failed to address in any adequate fashion the difficult question of whether and, if so, to what extent [the Government] had caused or contributed to the Defaults on which [the Home Secretary] was relying to termi-nate the Agreement;”
As to the other three failings, it is not easy, from the description in the judgment, to understand what these were. In summary, they appear to have been that:
(a) the Home Secretary deferred to the MRPG’s recommendation;
(b) The Government invoked as among the grounds for termination an alleged failure by Raytheon to comply with the Remedial Plan, in circumstances where the Government had “abused the Remedial Plan Process”, had rejected a Remedial Plan proposed by Raytheon and had “unfairly kept Raytheon in a contractual limbo for six months”.
(c) The Government had invoked alleged “Service Management failures” as among the grounds for termination of the Agree-ment. Some of the failures alleged did not occur. The other failures were “bedding in issues”, and had taken place long be-fore termination (and presumably been cured).
Since the Government had failed to comply with the Process Requirements, it did not matter who was responsible for the delay. By not following the Process Requirements and by purporting to terminate, the Government was in repudiatory breach of contract which was accepted by Raytheon.
Before the court, the Government argued that in adopting this reasoning, the tribunal had failed to deal with two issues which were put to it, and that the tribunal’s failure to deal with these issues had caused the Government substantial injustice. These issues are referred to in the judgement as the “Liability Grounds”.
Liability Ground 1 was that the tribunal did not make any deter-mination as to the legal consequences of Raytheon’s failure to serve notices, as a result of which failure the Government had con-tended that any delay necessarily became Raytheon’s contractual responsibility. As such, it was irrelevant that the Home Secretary had failed to consider “whether and to what extent [the Govern-ment] had caused or contributed to the Defaults on which the Home Secretary was relying” - the Defaults were Raytheon’s con-tractual responsibility.
The court rejected Liability Ground 1. In order for the Process Requirements ever to come into play there must first, necessarily, always be at least some default for which Raytheon was contractu-ally responsible. The fact that Raytheon was contractually respon-sible for the default could not, therefore, be determinative of whether it was “reasonable and proportionate” to terminate for that Default. The Government had to have regard to whether, even if Raytheon was contractually responsible (by reason of hav-ing failed to serve the required notices) the Government was factu-ally responsible. The judge noted that it might be said that this was “wrong as a matter of contractual construction”, but held that this was by implication the tribunal’s conclusion, and so that the tribu-nal had dealt with the issue.
Liability Ground 2 was:
“although it is common ground that the Tribunal had to judge the reasonableness and proportionality of the termination for cause pursuant to Clause 69.1.2(i) the tribunal failed to make any assessment of the nature and seriousness of any relevant Default(s) on the part of [Raytheon] which prima facie enti-tled a termination for cause, in order to consider whether, in light of the same, it was objectively reasonable and propor-tionate to terminate the Agreement.”
The Court accepted Liability Ground 2. There was a concentra-tion on what the Home Secretary did or did not do in relation to the possible responsibility of the Government in fact for the delays but the tribunal did not consider the scenario that Raytheon may have been responsible for all the delay. The tribunal had been critical of the fact that the Home Secretary had made her decision based on submissions which consistently avoided any suggestion that the Government might be to blame for causing or contributing to the delays. But the tribunal never considered whether those advising the Home Secretary were factually justified in telling her this.
The court concluded:
“I am satisfied that there is substantial injustice here, either because the tribunal did not obviously consider in principle whether there could be or was compliance with the Process Requirements in circumstances in which the entire responsi-bility for the milestone delay was that of [Raytheon] and/or whether the substantial responsibility for such delay was that of [Raytheon]. The substantial injustice arises not simply from the fact that these issues were not clearly dealt with. They arise in the context that both parties spent a large amount of
THE ARBITER SPRING 2015 15
time, resources and indeed money in presenting their cases and evidence as to responsibility for the delays, disruption and inefficiencies. The fact that these issues were not ad-dressed even in the context of compliance with the Process Requirements might well lead an objective party or informed bystander to consider that the tribunal was simply seeking to avoid getting into the detail. I do not suggest however that, subjectively or consciously, that is what the tribunal was here actually doing.”
The Government’s other section 68 challenges related to quan-tum. One of Raytheon’s claims was in respect of assets it had agreed to transfer to the Government, while reserving its position that the Government had no contractual right to those assets. Ray-theon claimed £126,013,801 for these assets, being their cost to Raytheon, and claimed a further 15% profit. The tribunal explained how this had been arrived at:
“714. By calculating the percentage of [Raytheon’s] costs incurred on the whole project that had been recovered and applying the unrecovered percentage to the cost of the assets transferred to [the Government]. Thus [Raytheon] maintains that it incurred costs totalling £413,021,490. It has been paid £141,598,315 and has therefore recovered 34.3% of its costs; 65.7% are unrecovered.
715. [A witness] lists the assets included in the Asset Register and the costs allocated to those assets. He identifies the sum of £191,753,736 as attributable to the assets that were … transferred. As he explains, the assets comprise not merely hardware, software and such like, but “[a]ll of [Raytheon’s] cost base (and its subcontractor costs) [that were] involved (directly or indirectly) in the provision of these Assets”.
716. On the basis that the cost of the transferred assets is £191,753,736 and [Raytheon] has recovered 34.3% of these costs through payments from Y, the remaining balance, 65.7% of £191,753,736, results in [Raytheon's] claim of £126,013,801.
717. It is therefore apparent that [Raytheon] has not followed the contractual route to arrive at Unrecovered Costs and there is reason to believe that sum claimed would not approx-imate with the Unrecovered Costs, calculated in accordance with Agreement.”
The tribunal went on:
“719. That is not, of course, fatal to [Raytheon’s] claim. Since the tribunal has found that [the Government] repudiated the contract, [Raytheon] was released from further performance of its obligations under the Agreement, including the perfor-mance of the Exit Management provisions. As recorded above, [Raytheon] reserved its position and therefore in trans-ferring the assets at the request of [the Government], [Raytheon] was conferring a benefit on [the Government]. The entitlement to a remedy arises from the fact that [the Government] purported to exercise a right which it knew (and accepts) would entitle [Raytheon] to additional payment, on the assumption that it had properly terminated the Agree-ment. However [the Government] also knew that [Raytheon] disputed the termination and that it contended that [the Gov-ernment] had repudiated the Agreement. Thus, as recorded above, [Raytheon] reserved its position when agreeing to transfer the assets which are the subject of [Raytheon's] Damages Claim A4. In the tribunal’s view, in these circum-stances, were [the Government] to retain the benefit of the Transferred Assets without payment to [Raytheon], this would give rise to unjust enrichment. Z is accordingly entitled to maintain a claim in unjust enrichment.”
The tribunal held, by a majority, that: “on the balance of proba-bilities [Raytheon’s] calculations are broadly correct”. The tribunal declined to add the 15% profit uplift, and awarded Raytheon £126,013,801 as damages for the “transferred assets” claim.
The Government claimed that, in doing this, the tribunal had failed to deal with three issues that were put to it (referred to in the judgment as the “Quantum Grounds”):
“1 that the calculation of compensation should follow the method agreed by the parties in accordance with express provisions;
2 that the assessment of compensation should not exceed the amount that would have been recoverable had the agree-ment been performed according to its terms;
3 that [Raytheon] should not be permitted to recover sums on a global basis without any consideration of its own actual or possible breaches of contract.”
In the list of issues, the issue about the evaluation of the trans-ferred assets claim was expressed in broad terms:
“What monetary award (if any) is [Raytheon] entitled to ei-ther on the basis of (i) the provisions of the Agreement; or (ii) [the Government’s] alleged unjust enrichment, representing the value of the Transferred Assets that were transferred … at [the Government’s] request following termination of the Agreement?”
The court dismissed Ground 1. The tribunal considered that the tribunal had found that by reason of the repudiation by the Govern-ment the contractual route did not have to be followed, and Ray-theon had instead a claim in unjust enrichment.
16 THE ARBITER SPRING 2015
Ground 2 was, in essence, that the tribunal had failed to consider an argument that if the services or thing provided by a supplier is something which was to be supplied under a contract price and values for which had been agreed, but the contract for one reason or another is not or is no longer enforceable, then the quantum meruit or reasonable price is often to be determined by reference to what the parties had otherwise agreed. This was relevant be-cause of the ‘sculpting’ of the contractual prices, with the contractu-al prices for assets to be supplied early in the project set below cost.
It was held that:
“in effect the arbitrators did address it by saying that it was difficult to determine what was or would have been due under the Agreement and that, rightly or wrongly, it felt obliged to fall back on the cost approach. ... One might say that this was, again, in law or in fact, wrong but that is not a proper basis of challenge under Section 68(2)(d). The fact that some arbitra-tors might simply have said that Z had not proved its case in this context is not enough for such a challenge.”
The Government did, however, succeed on Ground 3. The court held:
“Assuming, as the arbitrators did, that they had to and should go down the cost route of evaluation of the unjust enrich-ment, which is readily comprehensible as a pragmatic and practical solution, the background, of which the arbitrators were well aware having heard evidence and argument about it over 42 days, was that both [Raytheon] and [the Govern-ment] had been arguing that the fault and responsibility for the apparently undoubted delay, disruption and inefficiency in the delivery of the project which had occurred was the other party’s. This was not simply an argument about whether or not [Raytheon] had served contractual notices claiming for delay or compensation events; there were substantive issues as to the fault and responsibility for that delay, disruption and inefficiency. At the very least, given the arbitrators’ experience and in particular the known experience of at least one of the members of the tribunal in the construction and technology field (and indeed in the TCC), it must have been within their collective horizon of knowledge that [the Government] was arguing that all or at least most of the delay, disruption and inefficiency was the actual fault of [Raytheon] and that, if one was to base an unjust enrichment award on total costs in-curred, at least a credible argument might have been that one needed to take out of the evaluation costs attributable to delay, disruption and inefficiency which was the fault of [Raytheon]. Of course, there is virtually nothing in this nearly 300 page award about who was responsible or at fault in respect of the delay, disruption and inefficiency which seems to have occurred, given that it was common ground that key Milestones had not been achieved and by the time of the ter-mination had been substantially delayed.
The issue therefore comes down to whether there was before the arbitrators an issue that in relation to Claim A4 that, if the arbitrators were to go down the cost route approach to evalu-ate the unjust enrichment said to have occurred as a result of the transfer of the Assets, account should be taken of the extent to which those costs related to any delay, disruption and inefficiency which was the fault or responsibility of [Raytheon]?”
The Judge went on to find that:
“it was or should have been clear to the arbitrators that Claim A4 was being challenged as a “global cost” claim which was said to be unjustified and unsound in effect at least in large part because it assumed, wrongly, that all the problems of delay, disruption and inefficiency were attributable to the Government. I say “wrongly” because there was a mass of evidence from both sides as to the fault and responsibility for the delay, disruption and inefficiency which had occurred up to the date of termination, with both parties blaming the oth-er. That was something which the arbitrators decided either consciously or subconsciously (in relation to this Claim A4) that it was unnecessary to bear in mind.
It follows that the arbitrators overlooked the need to address the issue of Claim A4 being a global claim and therefore to address the fault and responsibility of Raytheon (if any) in relation to the delay, disruption and inefficiencies which it seems to have been common ground had occurred to a signifi-cant extent before the termination. They therefore failed to deal with this issue. It was a very important issue, not least because the consequence of the failure has been that some £126 million has been awarded to Raytheon. It almost goes without saying that, necessarily, there has been substantial injustice because the arbitrators have not addressed the key issues as to (a) whether or not there were problems which were the fault and responsibility of Raytheon and (b) if so, what impact that had on the cost recovery claim which formed the basis of the substantial award in relation to Claim A4. This cannot be classified as anything less than substantial injustice because the arbitrators have not applied their minds to the issue at all and any right minded party to arbitration would feel that justice had not been served”.
The second judgment concerned the question of whether the award should be remitted, or set aside in whole or in part.
There are relatively few authorities on this issue, many of which pre-date the Arbitration Act 1996.
There is some evidence that the correct approach is to ask:
“whether a reasonable person would no longer have confi-
THE ARBITER SPRING 2015 17
dence in the present arbitrator’s ability to come to a fair and balanced conclusion on the issues if remitted.”
This was the test applied by Mance J (as he then was) in Lovell Partnerships (Northern) Ltd v AW Construction plc (1996) 81 BLR 83. In James Moore Earthmoving v Miller Construction Ltd  BLR 322 Clark LJ (as he then was) appeared to favour that ap-proach, albeit that the issue did not need to be finally determined. In Brockton Capital LLP v Atlantic-Pacific Capital Inc  2 Lloyd's Rep 275 Field J applied effectively the same test.
In the Raytheon case, Akenhead J concluded that the award should be set aside, and not remitted to the tribunal. His reasons were as follows:
“(a) Both grounds under Section 68(2)(d) were towards the more serious end of the spectrum of seriousness in terms of irregularity. It is not for the Court to speculate why the tribu-nal felt that it did not need to address the issues concerned. However, the fact that the tribunal took some 16 months after final oral submissions to produce their award might lead a fair minded and informed observer to wonder (rightly or wrongly) at least whether (sub-consciously) the tribunal was seeking some sort of shortcut. …
(b) Like Mance J on the Lovell case, I can see that it would be “invidious and embarrassing [for the tribunal] to be required to try to free [itself] of all previous ideas and to re-determine the same issues” and that even for a conscientious tribunal seeking to re-determine such issues the exercise could well “create its own undesirable tensions and pressures”. Of course, it is not possible to predict what this tribunal would do if matters were remitted to them. If however, albeit con-scientiously and competently, the tribunal in effect reached exactly the same conclusions as before, that might well lead to a strong belief objectively that justice had not been or not been seen to have been done.
(c) I do not see that it is likely that there will be any signifi-cant re-drawing of the issues in the arbitration. Indeed, I would anticipate that, on many of the individual issues on which each party lost, the losing party would not seek to re-argue them; the sanction will be costs so that, if a party which lost on a given factual or legal issue before the current tribunal argues it again and loses it before the new tribunal, it should not be surprised when it faces an indemnity cost sanction, whatever the overall result. …
(d) I would anticipate that much of the factual and expert evidence, adduced before the current tribunal, would be re-deployed before the new tribunal; if anything, it would be rationalised to reflect concessions made by witnesses in cross-examination before the current tribunal. … Although, un-doubtedly there will be substantial costs in pursuing the arbi-tration before another tribunal, the “extra over” cost com-pared with a remission to the current tribunal will be relative-ly insubstantial in the context of claims and cross claims which run to nine-figure sums. I would very much doubt for instance that there would need to be another hearing run-ning to anything like 42 days …
(e) I would also very much doubt that the current tribunal, having probably not considered in any detail the evidence relating to the delays on the project and the responsibility for such delays for two years or more (to date), will have any significant recall of that evidence. Given the probability that any re-hearing and re-consideration of the evidence will not happen for some months yet, the eventual time lapse after the giving of the evidence will be closer to 3 years. If, of course, appeals are pursued, depending on the timing of the appeal, that time lapse may edge closer to 4 years delay. …”
The setting aside of the award can really be traced to the tribu-nal having declined to make any findings about the causes of the delay, to allocate responsibility for it. It seems possible that there might have been a desire - subconscious or otherwise - to shortcut that process.
Sometimes, of course, there is a legitimate shortcut, which is when there are conditions precedent which the contractor has failed to satisfy (such as service of a notice within a particular time period). As a result of the contractor is made contractually respon-sible for any delay, whatever the cause. It may be possible to deal with the question of whether conditions precedent have been com-plied with by way of a preliminary issue, avoiding the need for de-tailed evidence on delay.
A relatively unusual feature of the Raytheon case is that there was an express obligation on the part of the employer to act rea-sonably and proportionately in deciding whether to exercise any right of termination. This meant that it was not open to the arbi-trators simply to say that Raytheon had failed to comply with the conditions precedent, meaning that the Raytheon was responsible for the delay, and the Government could terminate based on that delay. The question of who bore (factual) responsibility for the delay, and to what extent, was relevant to the question of whether the Government had acted reasonably/proportionately.
The case provides a useful illustration of a particular problem associated with this kind of reasonableness/proportionality obliga-tion, in reducing certainty and making it harder to advise as to whether a right to terminate has arisen. Such clauses increase the scope for disputes, and will tend to mean that such disputes re-quire more evidence and will be more complex to resolve.
The case also shows how there may sometimes be a fine line
18 THE ARBITER SPRING 2015
between an award which is vulnerable to a section 68(2)(d) chal-lenge and one which is not.
None of the issues which the Government later said the tribunal had failed to decide had been set out in those same terms in the agreed list of issues. The listed issue was apparently simply wheth-er termination had been reasonable and proportionate, and, on the face of the award, the tribunal had decided that issue.
Often, an issue will be put to a tribunal which only needs to be considered or decided if the legal relevance of the issue is that con-tended for by the party which puts it forward. A tribunal might be asked to decide whether something is fit for purpose. The designer says that it is fit for purpose because the designer acted with rea-sonable care and skill. The tribunal does not need to decide wheth-er the designer acted with reasonable care and skill, because that is, in fact, legally irrelevant to the question of whether the design was fit for purpose.
So, in the Raytheon case, the Government asked the tribunal to determine who was factually responsible for the delay. But there was no need to decide that unless the tribunal had first concluded that the question of who was responsible for the delay was legally relevant: (i) to the question of whether the Government had acted reasonably / proportionately in terminating; and/or (ii) to the as-sessment of Raytheon’s unjust enrichment claim.
Suppose the tribunal in Raytheon had stated expressly in its award its decision on these ‘threshold’ questions: “we consider that the question of who is factually responsibility for the delay is not relevant to the question of whether the Government acted reasona-bly / proportionately, and is also not relevant to the assessment of Raytheon’s unjust enrichment claim”. In that case it would be much harder for the Government to argue that the tribunal had failed to determine the issues that were put to it.
Sometimes, it will be possible to infer from a tribunal’s decision on a given issue, what its decision on an antecedent issue must have been. So, for example, it might have been said that because the tribunal did not make any determination as to responsibility for the delay, and decided that the Government had not acted reason-ably or proportionately, the tribunal must necessarily have conclud-ed that responsibility for the delay was of no relevance to the ques-tion of reasonableness / proportionality.
The court in Raytheon considered it obvious, or at least strongly arguable, that delay was of relevance to those questions. There-fore the tribunal cannot have arrived at its conclusion by asking “is delay relevant” and concluding that it was not. Rather, the tribunal must never have addressed its mind to whether delay was relevant. The court’s assessment of the strength of the Government’s argu-ment informs the court’s finding as to whether the tribunal consid-ered the issue. And so, while s68(2)(d) is not an appeal on the mer-its, a court’s view on the merits of the decision can have an indirect effect, where a question arises whether a lacuna in the award is intentional or unintentional.
Of course, the case is the subject of an appeal, and so the posi-tion is subject to change. For the moment, the case underlines the uncertainty which can be created when a contract imposes a duty to exercise a termination right reasonably / proportionately. The case illustrates how a successful section 68 challenge may arise, and offers tribunals a stark reminder of the scrutiny to which their awards may be subject.
THE ARBITER SPRING 2015 19
WHAT WE OFFER
An international dispute resolution team which handles matters from start to finish with the ability to conduct the advocacy at a final hearing, before a tribunal, decision-maker or court, where no commercial settlement can be achieved.
An integrated service that helps to save costs and avoids fragmentation and duplication.
A team which works closely with you and your resources to provide a cost-efficient service.
A core team of dedicated lawyers that effectively manag-es even the most complex of cases.
An efficient, transparent and predictable approach to fees which allows you to budget appropriately internally.