The recent decision of the High Court in PBO v DONPRO1 has, once again, put all Tribunals in English-seated arbitrations on notice. The High Court has upheld the principle that each party has to be given an opportunity to address all issues in the case, or the Award issued by the Tribunal may be susceptible to challenge under section 68 of the Arbitration Act 1996 (the Act).

The Applicant, which had been the Respondent in the original arbitration, brought five different challenges against the award before the High Court: three pursuant to section 68 of the Act (permitting challenges to arbitration awards in cases of serious irregularity) and two challenges pursuant to section 67 of the Act (permitting challenges on the grounds of the tribunal not having substantive jurisdiction). The High Court sided with the Applicant and allowed all three applications under section 68, remitting the award to the appellate Tribunal that originally heard the case for re-consideration.

Whilst successful challenges under section 68 of the Act are rare, there have been some significant cases and developments in this arena in the past few years, including DLA Piper’s successful challenge to an LCIA Award in P v D.2 In that sense, Mr Justice Bryan's judgment in PBO v DONPRO is a timely reminder that whilst the English courts will strive to uphold arbitration awards, they will not hesitate to uphold challenges if the Tribunal's conduct of the proceedings is found to amount to a serious irregularity in the arbitration and to give rise to substantial injustice to the applicant.

The dispute

The underlying dispute related to a series of contracts for the sale and purchase of cocoa beans between PBO and DONPRO. DONPRO, which had sold the cocoa beans to PBO, assigned debt under three of those contracts to 2DON, and they jointly brought a claim against PBO for non-payment of three invoices. PBO issued a counter-claim and argued that it became unable to contract with DONPRO as a result of a tax investigation, which led to its bank accounts being frozen. PBO alleged it entered into eleven replacement contracts with a third entity, CODON, which was joined in the arbitration as a third Defendant.

Each of the contracts at stake was governed by English law and incorporated the Federation of Cocoa Commerce Contract Rules for Cocoa Beans (the FCC Contract Rules) which included an arbitration clause requiring the parties to arbitrate any disputes between them under industry specific arbitration rules (the FCC Arbitration and Appeal Rules).

In December 2019, the first instance Tribunal found that sums were due under the three invoices and, having accepted the validity of the assignment between DONPRO and 2DON, ordered PBO to pay sums to both companies. In addition, the Tribunal also found that PBO's contracts with DONPRO remained in force and rejected PBO's counterclaim against the third Defendant, CODON.

PBO appealed against the award under the FCC Arbitration and Appeal Rules, pursuant to which it was able to bring fresh proceedings before a new Tribunal. Shortly before the close of the appeal arbitration, PBO changed its legal representatives and made an application to amend its statement of case, on the basis that its new legal team had identified new grounds of appeal. In May 2020, the Board of Appeal (the Board) refused to allow PBO's request to amend its statement of case, found that it did not have jurisdiction in respect of PBO's losses arising out of the provision of jute bags that were intended for use in relation to the delivery of cocoa beans (the Jute Bag Losses claim), and upheld the original award, ordering PBO to pay EUR214,059 (plus interest) to DONPRO and EUR283,085 (plus interest) to 2DON.

PBO subsequently challenged the award of the Board before the High Court under sections 67 (two challenges) and 68 (three challenges) of the Act.

Challenges under section 68 of the Act

Section 68 of the Act allows a party to challenge an arbitral award if there has been a serious irregularity affecting the Tribunal, the proceedings or the award. In particular, section 68 is concerned with the arbitrators' conduct and failings in the arbitral process, rather than the correctness of the Tribunal's decision.

Section 68(2) provides a list of irregularities that may amount to serious irregularity. It expressly includes “failure by the tribunal to comply with section 33”. Section 33 in turn governs the general duties of the Tribunal, and requires the Tribunal to “act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting his case and dealing with that of his opponent, and adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay or expense, so as to provide a fair means for the resolution of the matters falling to be determined.”

Applications under section 68 are subject to a high hurdle, and successful challenges are very rare. According to the Commercial Court Users Group, there was no successful challenge across the 2018-2019 legal year, and in 2019-2020, there was only one successful challenge, being P v D (referred to above).3 This is reflective of the general reluctance of the courts in England and Wales to interfere with the conduct of arbitration proceedings other than in exceptional cases.

The decision of the High Court

PBO challenged the award of the Board under section 68 on three different grounds:

  • In relation to its counterclaim, PBO argued that Board had departed from the way in which the case was presented by the parties, and did so without warning. In particular, PBO was not afforded a reasonable opportunity to put its case with respect to the Board's finding under the FCC Contract Rule 19.5 (the Rule 19.5 Argument). That Rule allows a party to a contract governed by the FCC Rules to close out that contract if its contractual counterparty “displays an intention not to perform or an inability to perform”. However, the Defendants did not rely on Article 19.5 in their arguments before the Board (Rule 19.5 Argument).
  • In relation to the Board's finding that it had no jurisdiction to hear PBO's Jute Bag Losses claim, PBO argued that the Board once again departed from the way in which the case presented, as there was no jurisdictional challenge and the Board did not allow PBO an opportunity to put its case in respect of the jurisdictional argument (Jute Bag Losses Argument).
  • Finally, in relation to the Board's refusal to allow PBO to amend its statement of case on appeal, PBO argued that this prevented it from advancing a full defence, including arguments that were potentially determinative of the claim. PBO further argued that there would be no or minimal prejudice caused to the Defendants, and that the Board failed to consider the balance of prejudice between the parties.

The High Court upheld all three challenges under section 68.

In relation to PBO's Rule 19.5 Argument, the High Court found that PBO's intention not to perform its contracts with CODON was not in issue before the Board, not only because the Claimants in the original arbitration had not relied on Rule 19.5 in their arguments, but also because such reliance was inconsistent with some of the established facts in the case. As PBO was unaware that it was facing an argument relying on Rule 19.5, it was not given an opportunity to make submissions in response to it. The High Court regarded the Board's failure to comply with section 33 of the Act and provide a fair opportunity to PBO to address Rule 19.5 to be a serious irregularity. Whilst refusing to express any views on the merits of any of the arguments put forward by PBO (Mr Justice Bryan said that he was not concerned with the merits, but with the due process), the High Court held that the Board's conduct caused substantial injustice to PBO as it was unable to argue points that “might well have” resulted in the Board reaching a different decision and produced a significantly different outcome.

As to PBO's Jute Bag Losses Argument, the High Court found that the manner in which the Board reached that decision was in breach of section 33 of the Act. The High Court considered that the Board should have indicated that they were considering, of their own volition, that they had no jurisdiction over the Jute Bag Losses claim, and given PBO an opportunity to respond and address that point. The failure to do so was a serious irregularity which caused substantial injustice to PBO because PBO would have most certainly “taken up the opportunity to raise the points it now wishes to raise”.

Finally, as to PBO's third challenge, the High Court noted that there was a wide range of case management decisions that a Tribunal can make, ranging from timetabling directions to matters that may well be determinative of the outcome of the arbitration itself. While acknowledging that it is highly unlikely that general case management decisions may ever lead to successful challenges under sections 33 and 68 of the Act, the High Court found that the parties may rely on section 68 if a Tribunal makes a decision that was “so unfair” that “no reasonable arbitrator could have reached”. The High Court considered that the Board's decision in refusing permission for an amended statement of claim was “one of those rare cases where the tribunal has failed to apply the applicable principles, failed to grapple with the merits of the application, and reached a decision that no reasonable tribunal would have reached”.

Whilst the High Court found for the applicant on all three grounds under section 68, it did not set the entire Appeal Award aside, on the basis that doing so would (i) be inconsistent with English law public policy of striving to uphold arbitration Awards; (ii) lead to unnecessary costs; and (iii) result in matters that had already been determined being reargued afresh. Instead, the High Court remitted the Appeal Award back to the Board for reconsideration, inviting the Board to consider matters which it had not considered before and to determine all such new points that may arise.

Finally, the High Court considered that, in light of the success of PBO's application under section 68, it was not necessary to consider the remaining two challenges under section 67.

A high-stakes issue

PBO v DONPRO is not the only decision that relates to a challenge made on the ground of serious irregularity that has been issued this year. In April 2021, the Privy Council in RAV Bahamas v Therapy Beach Club4, which is the court of final appeal for the UK overseas territories and Crown dependencies, provided a clarification on the circumstances in which substantial injustice giving rise to serious irregularity would be found in the context of a challenge to an arbitral award under section 90 of the Bahamas Arbitration Act 2009 (the Bahamas Act), a provision which is substantively identical to section 68 of the Act.

The key issue at stake in RAV Bahamas was whether section 90 of the Bahamas Act required a separate and express allegation, consideration and finding of substantial injustice for a serious irregularity to be established.

The Privy Council found that while it was good practice for an applicant challenging an arbitration Award to set out both the serious irregularity relied on and how that irregularity caused, or will cause, substantial injustice, it was not mandatory to do so. It considered that in some cases, substantial injustice may be inferred from the nature of the irregularity where the resulting injustice is so clear that “it almost goes without saying”.

The take-away

The High Court in PBO v DONPRO and the Privy Council in RAV Bahamas repeatedly emphasised that any challenge to an arbitral award made on the ground of serious irregularity would be subject to a very high threshold. That remains the case irrespective of the successful challenges in those cases and the uptick in the number of applications under section 68 of the Act in 2021.

In this sense, the status quo has not changed since we have last reported on the issue of sections 33 and 68 claims following DLA Piper’s successful challenge under section 68 of the Act in P v D. In that case, the Applicant, P, successfully argued that the Tribunal reached its award against it on a case that had not been properly put to P’s witnesses and on the basis of a case that D had not in fact run. These circumstances echo the issue in dispute in PBO v DONPRO, as discussed above.

English-seated Tribunals will be mindful of these decisions both when conducting proceedings and when writing Awards. On one view, they increase the burden on Tribunals to take proactive steps to ensure that parties have had a full and proper opportunity to present their cases on all issues, beyond the party-led approach which typifies many arbitrations in which parties are given latitude as to what they cover in their allotted time, and how. Tribunals should not be inhibited by that and react by being overly cautious; to insist on longer hearings, or additional rounds of submissions as a matter of routine merely to address this risk would be a disproportionate response. However, they should now take further and particular care to ensure that a full opportunity to be heard has been given to each party throughout the arbitral process, including where a Tribunal decides to test a specific argument of its own motion. Failing to do so may expose awards to challenge under section 68 of the Act.