A London-seated ICC arbitral award has been sent back to the tribunal by the English High Court following a successful challenge on grounds of serious irregularity, by Brockton Capital in its dispute with Atlantic-Pacific Capital.  The dispute related to the consequences of Brockton exercising its right to terminate an agreement under which Atlantic was appointed as a placing agent to raise capital for Brockton’s real estate funds.

The tribunal had ruled that two key provisions in the agreement between Brockton and Atlantic were contractual penalties that were unenforceable under New York law (being the governing law of the agreement).  Since the arbitration was seated in London, Brockton challenged the award under section 68 of the Arbitration Act 1996 (the “Act”).  Section 68 allows parties to apply to the English court to challenge an award where there was a “serious irregularity” affecting the tribunal.  One of the grounds of “serious irregularity” is where the tribunal has failed to act fairly and impartially, giving each party a reasonable opportunity to put its case and to deal with that of its opponent (as set out in section 33 of the Act).

Brockton’s challenge was based on the following grounds:

  1. Atlantic had raised the contractual penalty issue only in its post-hearing submissions.  The argument was not raised in any of Atlantic’s Statements of Case.  Since Brockton did not have an opportunity to respond to the post-hearing submission, Brockton was denied the chance to present its case in response – theFirst Ground.
  2. Brockton also contended that Atlantic had raised the penalty argument only in relation to one of the two key provisions in dispute.  The tribunal had, however, ruled that both provisions were penalties.  This again resulted in Brockton being denied a fair opportunity to present its case on an issue that the tribunal had determined – the Second Ground.
  3. The tribunal had ignored and made no mention of the relevant evidence given by Atlantic’s chief executive when deciding an issue of contractual interpretation – theThird Ground.

Court’s ruling

In deciding on Brockton’s challenge the court noted that the bar for demonstrating a serious irregularity is set deliberately high because the purpose of the Act was to minimise the extent of intervention by the courts in the arbitral process.  It emphasised that there is an important distinction to be drawn between a party who had no opportunity to address a point, and a party who failed to recognise or take the opportunity which existed.  A tribunal is not in breach of its duty where it is entitled to conclude that a party had appreciated that a new submission had been advanced by the other side, but had not addressed it.

First Ground

This challenge failed.  This was because, following receipt of Atlantic’s post-hearing submissions Brockton had written to the tribunal to address “new arguments” presented for the first time in Atlantic’s post-hearing submission.  In its letter Brockton noted that it did not waive any objection to Atlantic’s new arguments (but did not formally object to them), and then commented on some of those arguments.  Brockton did not address Atlantic’s penalty argument.  The court ruled that this entitled the tribunal to conclude that Brockton had decided not to take the opportunity to respond to those arguments.  The court was particularly swayed by the fact that: (a) Brockton had merely reserved its right to object to new arguments being raised, but had not actually submitted an objection; (b) Brockton had responded to some, but not all, of the new arguments; and (c) after the tribunal had indicated they would take account of the new arguments and Brockton’s response, Brockton did not request permission from the tribunal to make submissions on the new penalty argument; this would have reinforced the tribunal’s conclusion that Brockton had chosen not to address that argument.

Second Ground

Brockton won the challenge on the Second Ground.

The court ruled that Atlantic’s new penalty argument was directed at only one of the key provisions.  As such, the tribunal was not entitled to conclude that Brockton had notice of the penalty argument in relation to the second key provision and had knowingly passed up an opportunity to deal with that issue.  Therefore, in deciding that the second key provision was an unenforceable penalty as well, the tribunal had acted in breach of its duty to act fairly and impartially.

The court ruled that this failure amounted to a serious irregularity that caused Brockton substantial injustice.  This was because the court considered that Brockton’s submission on the new penalty argument was “plainly arguable” and might have persuaded the tribunal to reach a contrary conclusion.

Third Ground

This challenge failed.

The court ruled that the tribunal’s duty to act fairly is distinct from the autonomous power of the tribunal to make findings of fact.  The court reiterated the well-established English law principle that findings of fact were for the tribunal.

The court emphasised that it will only be “in the most exceptional case, if ever, that a failure to refer to a particular part of the evidence will constitute a serious irregularity within s 68”. 

Outcome 

Since Brockton won on the Second Ground, it argued that the court should dismiss the award made by the tribunal, rather than sending it back to the same tribunal to decide the outstanding issues; a reasonable person would no longer have confidence in the tribunal’s ability to reach a fair and balanced conclusion.  The court rejected this argument and held that there were no grounds to support an objective conclusion that confidence could not be placed in the tribunal to reach a fair and balanced conclusion on the outstanding issues.  The court appears to have been particularly swayed by the identity of the members of the tribunal and their “high reputation”. 

The court sent the award back to the tribunal.  The terms on which the award was to be sent back to the tribunal was subject to further submissions from the parties.

Conclusion

Post-hearing submissions are common in arbitrations and are particularly useful where different heads of argument are put forward in the Statements of Case and the witness evidence is key to determining some, if not all, of the issues.  A developing practice is to invite the tribunal to direct the issues on which they require post-hearing submissions or to agree a list of issues on which the parties are to provide them.  However, difficulties often arise when one party goes beyond the directed or agreed list of issues and raises additional arguments.  This case provides practical guidance on what to do (or not to do) in such situations.

Where a party goes beyond the permitted scope and raises new arguments in its submissions, the other party should raise this with the tribunal and either set out its objections to the new arguments being raised (which the tribunal will then need to determine) or seek the tribunal’s permission to respond to them.  It will not be sufficient for a party simply to reserve its right to object to the new arguments at some undefined future date.  Addressing some, but not all, of the new arguments should also be avoided because this may be treated as a choice not to address those other arguments, leaving it to the tribunal to make a ruling on those issues without further response.

Case reference: Brockton Capital LLP v Atlantic-Pacific Capital, Inc. [2014] EWHC 1459 (Comm).  Please click here for a copy of the judgment.