Why choose arbitration over litigation or other forms of ADR? For many parties it is the confidentiality, commerciality and finality of arbitration that appeal.  However, the Arbitration Act 1996 (the Act) does contain various means by which a dissatisfied party can challenge an award.  While it is fair to say that the courts will be slow to interfere with an arbitral award, case law suggests that this does not stop parties from applying and, in some cases, succeeding.

In this article we focus on s67, which allows an arbitration award to be challenged in the courts on the grounds that the arbitral tribunal lacked substantive jurisdiction.  

CHALLENGING JURISDICTION

Section 67 can be used to challenge an award made by an arbitral tribunal as to its own substantive jurisdiction, or to seek an order that an award made on the merits of the claim itself is of no effect, whether in whole or in part.  It differs from challenges to substantive jurisdiction brought under s31 (at the outset of the proceedings) or s32 (as a preliminary point) in that s67 operates after an award has been made.  It is a mandatory provision that parties cannot contract out of in the arbitration agreement.

However, a party must have exhausted any process of appeal or review under the arbitration rules, the arbitration agreement or any recourse available under s57 (correction of an award or additional award).  The application must also be made within 28 days of the date of the award or the date on which the applicant was notified of the outcome of any arbitral appeal/review.

ENFORCEMENT OF CLAUSE REQUIRING ‘FRIENDLY DISCUSSION’

In Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2104 (Comm)the dispute resolution clause required the parties to seek to resolve disputes by way of 'friendly discussion' after which, if the dispute had not been resolved within four continuous weeks, the non-defaulting party could submit the dispute to arbitration.  Following failed settlement discussions, the defendant duly referred the dispute to arbitration.  The arbitral tribunal found that it had jurisdiction to hear the claim on the basis that the obligation to enter into friendly discussions was unenforceable, but even if it were enforceable, it had been complied with in any event.

The claimant challenged the tribunal’s award under s67, alleging that the 'friendly discussions' requirement was a condition precedent 'to engage in time limited negotiations' that had not been complied with, meaning that the tribunal did not have jurisdiction to hear the matter.  The defendant argued that the suggested condition precedent was unenforceable.

Teare J considered English, Australian, Singaporean and ICSID authorities and reached a conclusion that represents a marked departure from much of the previous English case law on the enforceability of agreements to negotiate.  In finding that the requirement to first engage in friendly discussions was enforceable and distinguishing previous authorities to the contrary, Teare J placed key importance on the fact that the obligation to do so in this case was time limited.  That meant that the obligation was sufficiently complete and certain to be enforceable, without requiring any essential terms to be implied into it.  He also found that enforcement of such agreements is in the public interest because commercial parties expect the court to enforce obligations and because the purpose of the obligation is to seek to avoid expensive and time consuming arbitration (and litigation).

Although Teare J found the requirement to hold friendly discussions to be an enforceable condition precedent, he also found that it had already been satisfied in this case because friendly discussions had indeed taken place in accordance with the clause.  For that reason, he held that the tribunal had jurisdiction to decide the substantive dispute, and dismissed the claimant’s s67 application.

It remains to be seen whether this decision marks the beginning of a new approach to the enforceability of such clauses in the English courts, following the approach already seen in other jurisdictions such as Australia.  In the meantime, parties seeking to rely on such clauses should ensure that they are clearly worded, time limited and unambiguous in scope, in order to increase the likelihood of the clause being enforceable.  Further, although this is another instance of a challenge under s67 failing, it appears from the reasoning that the challenge might well have succeeded had the defendant not been able to demonstrate that friendly discussions had indeed taken place.

'EXHAUSTING' ANY AVAILABLE ARBITRAL PROCESS

In A Ltd v B Ltd [2014] EWHC 1870 (Comm), the commercial court considered whether the appeal process in an arbitration under the International Cotton Association (ICA) rules had been exhausted.  The claimants had sought to appeal the award to the ICA’s second-tier tribunal, the Technical Appeal Committee (TAC), but had failed to deposit the requisite sums with the ICA as required by the ICA rules, resulting in the ICA dismissing the appeal.  The ICA refused the claimants’ retrospective application for an extension of time to pay. 

The claimants then applied to the court for an order that the award be set aside under s67 and/or s68.  The questions before the court were (1) was there an 'available arbitral process of appeal or review' and (2) if so, had the claimants exhausted that process, so as to comply with s70(2)?

Smith J found that an appeal to a second-tier tribunal such as the TAC did constitute an available arbitral process of appeal or review and the claimants had exhausted that process when their application for an extension of time for payment was refused.  He noted that “…the important connotation of the verb ‘exhaust’ is that the process must be used up completely” and “what matters is that the process is fully spent, not how it became spent”. 

Accordingly, despite the TAC appeal process being precluded as a result of the claimants’ failure to pay the sums due, the salient point was that the appeal process had been used up – not how it had been used up.  The process had been exhausted within the meaning of s70(2).

EXTENT OF TRIBUNAL’S JURISDICTION

In Interprods Limited v De La Rue International Limited [2014] EWHC 68 (Comm) the commercial court dismissed challenges to an award brought under s67 and s68.  The arbitral tribunal had made an award finding (1) that the claimant’s representative had told the defendant that the claimant needed the defendant to pay commission so that the claimant could use that commission to pay bribes, and (2) the defendant was consequently entitled to terminate its agreement with the claimant and was not obliged to pay the outstanding commissions.

Focusing on the s67 challenge, Interprods argued that the arbitration agreement should not be construed as extending to cover allegations of criminal conduct.  Teare J disagreed and found that the parties, as 'rational business men', were likely to have intended that any dispute arising out of the relationship into which they had entered was to be decided by the same tribunal, unless the wording of the clause made it clear that certain questions were to be excluded from the tribunal’s jurisdiction.  He noted that “illegality in the performance of a contractual obligation is often alleged to be a reason why a contract cannot be enforced” and that it would seriously restrict the ambit of arbitration clauses if allegations of criminal conduct were “sufficient to deprive the arbitral tribunal of jurisdiction to determine the contractual rights and obligations in the light of that criminal conduct.”

Teare J dismissed the s67 challenge.  An arbitration clause should be construed widely as covering all disputes arising out of the particular relationship or agreement, including those where allegations of illegality are raised, unless the clause contains specific wording to expressly exclude certain questions from the jurisdiction of the arbitral tribunal.

JURISDICTION AND COSTS

In Sun United Maritime Ltd v Kasteli Marine Inc [2014] EWHC 1476 (Comm), following the rendering of an award on the substantive dispute, the parties’ solicitors tried to reach agreement on costs.  A dispute arose as to whether an oral agreement on costs had been reached.  The defendant referred the question of costs back to the arbitrators.  However, the claimant then sought an order that the arbitrators had no jurisdiction to deal with costs, on the basis that an agreement on costs had already been reached and the tribunal was therefore functus officio. The claimant contended that the application fell within s67 because the issue as to whether the tribunal had jurisdiction to decide the costs of the action was a dispute about whether 'matters have been submitted to arbitration in accordance with the arbitration agreement' (s30(1)(c)).

Hambleton J agreed with the defendant that the application did not fall within the scope of s67, because the question before the court was not one of whether the tribunal lacked substantive jurisdiction as defined in the Act.  Where there is a dispute as to whether a claim referred to arbitration has settled, that will generally fall within the reference to the arbitral tribunal because the alleged fact of settlement will be a defence to the continuing claim, and a defence like any other that the tribunal will need to determine.  The same follows where the only outstanding claim is one for costs.  He therefore found that the issue between the parties was not "whether matters have been submitted to arbitration in accordance with the arbitration agreement" (so as to bring the matter under s67), but in fact "whether matters which have been so submitted have been resolved by agreement."

Kasteli clarifies that any ancillary dispute arising out of related settlement discussions or negotiations on costs should be considered as falling within the ambit of the arbitral tribunal’s general jurisdiction over the claim submitted to it.

CONCLUSIONS

The latest decisions on applications challenging jurisdiction show that s67 remains a tricky, although not impossible, gateway to navigate.  Decisions turn on the specific facts of each case, and the courts remain inclined to uphold the finality of an arbitration award.

When considering  a challenge on the basis of substantive jurisdiction, potential applicants should bear in mind that the tribunal can continue the proceedings while the application is pending (s67(2)), which can cause further unnecessary costs to be run up).  A successful s67 challenge can often result in a full rehearing which can be very costly and result in further delay.

Parties would therefore be well advised to view s67 as a last resort and consider challenging substantive jurisdiction earlier if possible under s31 or s32, or  alternatively to abstain from taking part in the arbitration and seek to challenge jurisdiction under s72.