In this case, the Court considered an arbitration appeal brought on the grounds of serious irregularity under s.68 of the Arbitration Act 1996 (the Act). The appeal brought with it a number of questions relating to the powers and duties of a Tribunal and is a helpful examination of s.68 challenges. The case also provides useful insight into situations where the seat of an arbitration differs from the law governing the dispute.
The underlying dispute between the parties concerned the applicable tariff rate to a gas transportation agreement (GTA) dated 12 February 2001 and governed by Indonesian law. The claimant, PT Transportasi Gas Indonesia (TGI), owned and operated the Grissik-Singapore pipeline which ran from Grissik, Indonesia to the Indonesian-Singapore border. The defendant, ConocoPhillips, was a shipper of gas and utilised the pipeline to transfer gas from the gas fields it operated in Indonesia to the Singaporean market. A change in Indonesian law had resulted in a higher tariff: the original tariff of USD 0.69/mscf (the contract tariff) had been replaced by a new, increased tariff of USD 0.74/mscf (the regulated tariff).
The change in Indonesian law
In November 2001 - nine months after the GTA was signed - a new law came into effect in Indonesia providing, amongst other things, that BPH Migas (BPH) was to regulate and stipulate the tariff payable for the transportation of gas through gas pipelines in Indonesia.
The first regulated tariff regulations applicable to the GTA were made in 2005. However, at that time, the tariff corresponded with the original contract tariff and consequently no claim was made. In February 2009 TGI made an application to BPH for the contract tariff to be increased on the grounds of additional operating, maintenance and capital costs. Subsequently BPH issued decree 217 increasing the tariff to USD 0.74/mscf in August 2010.
The arbitration award
In May 2014, ConocoPhillips commenced UNCITRAL arbitration proceedings against TGI, claiming that TGI had breached the GTA by imposing a higher tariff than had been agreed. Although the oral hearing took place in Singapore, the actual seat of the arbitration – the jurisdiction - was London, and therefore the provisions of the Act applied.
In the award, the Tribunal held that the regulated tariff was applicable and TGI had therefore not breached the tariff provisions of the GTA. However, the Tribunal went on to find that TGI was in breach of a number of representations, warranties and undertakings under the GTA, as well as being in breach of its duty to perform its obligations in good faith. As a result, damages of US$74 million were awarded to ConocoPhillips. The damages were expressly calculated so that its effect was to put ConocoPhillips into the same position as if the contract tariff applied, thereby reversing the tariff increase. The Tribunal granted this relief notwithstanding its finding that the regulated tariff was valid.
Grounds of appeal
TGI appealed against the decision under s.68 of the Act on the following four separate grounds:
- the Tribunal had failed to comply with the s.33 general duty of fairness in determining the dispute on an issue that neither party had raised nor had any opportunity to address – s.68(2)(a)
- the Tribunal had exceeded its powers by issuing an award which was contrary to Indonesian law – s.68(2)(b)
- the Tribunal had failed to deal with an issue put to it by failing to deal with the so-called ‘inconsistency defence’ – s.68(2)(d)
- the award was contrary to public policy – s.68(2)(g)
TGI alleged that the Tribunal had committed a serious irregularity by deciding a key issue on a basis for which neither party had made submissions, namely public policy. As a consequence, TGI alleged it had had no reasonable opportunity to state its case as required by s.33. Mr Justice Cooke found this aspect of the appeal to be untenable as TGI’s statement of defence had in fact put forward alternative arguments based on public order or public policy under the Indonesian Civil Code.
That ground was also dismissed as being untenable. Mr Justice Cooke held that the relevant question was whether the Tribunal purported to exercise a power that it did not have or whether it erroneously exercised a power that it did have.
TGI had alleged that the Tribunal had exceeded its power under s.46(1) of the Act. This required that a tribunal should decide the dispute ‘in accordance with the law chosen by the parties as applicable to the substance of the dispute.’ TGI argued that the Tribunal had effectively circumvented Indonesian law: it had awarded damages for a breach of promissory warranty despite the fact that it had simultaneously held that the increased regulated tariff was legally applicable to the contract.
The Court disagreed. The Tribunal had held that the result flowed from the contractual promissory warranties, as a matter of the law of Indonesia, which it sought to apply. The tribunal was therefore not exceeding any of its powers but simply applying Indonesian law.
TGI submitted in the arbitration that the Tribunal was bound to apply the mandatory rules of the law chosen by the parties to govern the dispute, namely, Indonesian law. As Indonesian legislation made in respect of the Grissik-Singapore pipeline was a mandatory part of Indonesian law, TGI further submitted that none of the representations or warranties or other terms of the GTA could be enforceable against TGI to the extent that they were inconsistent with or negated the effect of mandatory Indonesian law. This was known as the ‘inconsistency defence’. In the appeal, TGI argued that the Tribunal had failed to address the inconsistency defence in the award.
Mr Justice Cooke again disagreed. The Court held that it was not necessary for a tribunal to set out each step by which it reached its conclusions or to deal with every point made by a party in arbitration. Further, the alleged ‘illogicality in the reasoning of the award’- in that the Tribunal found the regulated tariff had to be given effect but also awarded damages which reversed the impact of the tariff – was not illogical at all: the parties had simply agreed to shift the risk of a change in the Regulations to the TGI.
The final ground advanced by TGI was that the award was contrary to public policy. This was prefaced on the assumption that payment of damages was effectively circumventing Indonesian legislation and an English court would not enforce an English law contract in which two parties agreed to infringe Indonesian mandatory law in Indonesia.
Mr Justice Cooke held this was not the case. The decision did not engage English public policy and, even if it did, it would not be contrary to English public policy to uphold the award of arbitrators who had considered the question of Indonesian public policy and concluded that no basis had been put forward which could establish the unenforceability of the promissory warranties.
This case highlights the difficulties inherent within a s.68 arbitration appeal and the rigorous standard which must be met for a successful challenge. It is only in very rare circumstances that the court will overturn an award on grounds of serious irregularity and therefore, in view of the significant costs associated with an unsuccessful application, potential arbitration appellants should consider carefully whether to proceed with a s.68 challenge.