In an anonymised judgment dated 11 June 2014, Mr Justice Andrew Smith considered whether the terms of section 70(2) and/or section 73(2) of the Arbitration Act 1996 (the Act) precluded the Claimants (referred to as A) from bringing a challenge to an arbitral award (the Award) under sections 67 and 68 of the Act.
The judgment provides a helpful clarification in respect of what a party seeking to challenge an award under the Act must have done to satisfy the requirement in section 70(2)(a) to have first exhausted any available arbitral process of appeal or review in a two-tier arbitration.
This case concerned an arbitration between parties referred to as “A” and “B” which was conducted under the rules of the International Cotton Association Limited (ICA). These rules give parties a right to appeal the award of the tribunal to a “Technical Appeal Committee” (TAC) – a process which involves a new hearing of the dispute.
B claimed that A entered into two contracts to buy cotton from B, then failed to make payment under them. A denied the contracts, and so denied having agreed to ICA (or any) arbitration, but participated nonetheless in the arbitration brought by B in order to dispute the tribunal’s jurisdiction.
When the tribunal found that it had jurisdiction to hear B’s claims, and issued an Award against A, A sent the ICA a notice of appeal within the period specified in the Award, but failed to pay the advance on costs requested by the ICA by the specified deadline of 26 March 2013. A subsequently sent ICA its grounds of appeal on 18 April 2013 without paying the sums required. On 24 April 2013, after chasing A for payment, the ICA dismissed A’s appeal in accordance with its bylaws. On 3 May 2013, A sent the ICA the sums requested, but the ICA refused A’s application for an extension.
Having on its case been shut out from appealing the Award to the TAC, A then sought to challenge the Award in court pursuant to sections 67 and 68 of the Act. B contested A’s right to do so, on the basis of the jurisdictional bars in sections 70(2)(a) and 73(2).
Section 70(2)(a) prevents an application or appeal under sections 67, 68 or 69 of the Act being brought if the applicant has not first exhausted any available arbitral process of appeal or review. Section 73(2) deals with circumstances where a party has not questioned an arbitral tribunal’s ruling on its substantive jurisdiction when it could have done so, but later seeks to object to the tribunal’s substantive jurisdiction on a ground which was the subject of that ruling.
It was not disputed that if A had not sought to invoke the ICA appeal process, its challenge to the Award under the Act would have been barred by section 70(2)(a). A person cannot exhaust a right of appeal without exercising it – in other words, it is not sufficient to permit the time limit for an appeal to expire, and to then assert that the right to appeal has been “‘exhausted”. The court noted that this was consistent with authorities about when a challenge to an award under section 67, 68 or 69 is precluded under section 70(2)(b) because no application has been made under section 57 for a correction of an award or an additional award.
B argued, however, that the arbitral process is exhausted only if it has been concluded by determination on the merits, or alternatively if the appeal or review has been concluded by an award. In this case, that had not occurred; A’s failure to pay its advance on costs for the appeal had brought the TAC process to an abrupt and early end. The court disagreed with B’s test. The question was whether the arbitral process had been exhausted or not. The natural meaning of the word “exhausted” conveys that what matters is that the process is fully spent, not how it became spent. Andrew Smith J noted that he was therefore “unimpressed by observations about the general ‘merits’ of the parties’ conduct” as a relevant factor, and made the colourful observation that “food supplies can be exhausted whether they are used prudently or frittered away“.
On the facts of this case, the court found that the process was exhausted not when the ICA dismissed A’s appeal on 24 April 2013, but only when A’s application for an extension was refused. The court noted that the process might well have been exhausted on 24 April 2013 “if it was simply impossible for them to provide the required deposit at any time, and there was no point in them seeking an extension. But here there was point in them applying for an extension“.
The court went on to consider the parties’ arguments in respect of the policy reflected in section 70(2) of the Act. Andrew Smith J accepted A’s argument that “[t]he essential policy is not to exclude the court process altogether, but to deal with the risk of concurrent proceedings in the court and the arbitral process”.
In respect of section 73(2), Andrew Smith J held that he could not accept that A had waived its objection to the jurisdiction of the ICA tribunal or its challenge to that jurisdiction. In the language of section 73, A did question the ruling that the tribunal had jurisdiction, and did so within the time allowed in the Award.
The court accordingly held that A’s challenge to the Award pursuant to sections 67 and/or 68 of the Act was not precluded by the terms of section 70(2) or section 73(2) of the 1996 Act.
This underlines how important it is for a party wishing to challenge a tribunal’s ruling to ensure that it does so at the earliest opportunity, having exercised any right of appeal or review available. It also demonstrates the distinction between “exhausting” a right of appeal for the purposes of the Act and simply permitting that right to expire, or indeed deciding not to exercise that right at all. In this context, “exhausting” the right meant invoking the appeal process and pursuing it as far as A was able – even if, on one “merits” view, the reason the appeal process had come to an abrupt and early end was the “fault” of A by its failure to pay its advance on costs in time. This “merits” point going to the reasons for exhaustion of the appeal process was not a matter which could decide whether or not, for the purpose of the Act, the process had been exhausted – meaning that A’s statutory right to challenge the Award was preserved.