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Seriously irregular: High Court orders tribunal to reconsider arbitral award

In a rare successful challenge to an arbitration award under section 68 of the Arbitration Act 1996, the Commercial Court remitted parts of an award for reconsideration by the tribunal.1  The Court found that a computational error in the award - which had been admitted by the tribunal - amounted to a serious irregularity which caused or would cause substantial injustice to the applicant.

 

Background

The case arose out of a dispute between two Russian individuals: Mr Bogatikov, owner of Doglemor Trade Limited ("Doglemor"), the ultimate holding company of a Russian logistics and haulage business called the Business Lines Group (collectively referred to in the judgment as the "Doglemor Parties") and Mr Khabarov, the beneficial owner of Caledor Consulting Limited (referred to as the "Caledor Parties"). 

In 2015, Mr Bogatikov entered into a Call Option Deed conferring a right upon Mr Khabarov to acquire 30% of the shares in DL Management Limited ("DLM"), a company owned by Doglemor, at a price of US$60 million. 

In 2017, the parties had a falling out and Mr Bogatikov repudiated the Call Option Deed. Mr Khabarov accepted the repudiation and commenced arbitration proceedings against the Doglemor Parties under the Call Option Deed, which contained an LCIA arbitration agreement with a London seat.  The Doglemor Parties admitted to breaching the Call Option Deed, so the only substantive issue for the tribunal to decide was the quantum of the Caledor Parties' loss as a result of the breach.

 

The Award

During the arbitration, the parties had been directed to produce an agreed valuation model (the "Agreed Model"), to enable the tribunal, by inputting financial values on a line-by-line basis, to arrive at a valuation of DLM. However, in the course of inputting the values into the Agreed Model, the tribunal made a basic computational error.  In short, the tribunal added, rather than subtracted, a substantial adjustment in relation to the historical tax liabilities of the Business Lines Group. This mistake substantially affected the sum awarded by the tribunal, with it assessing damages at US$58 million. 

Realising that an error had been made, the Doglemor Parties made an application for correction under Rule 27.1 of the LCIA Rules2  to have the correct (negative) tax liability adjustment substituted for the incorrect (positive) adjustment which the tribunal had mistakenly applied.  The Doglemor Parties asserted that, had the mistake not been made, the award of damages would have been just US$4 million. 

While the tribunal admitted that an error had been made, it declined to correct the mistake.  To do so, it said, "would not result in giving effect to our true intentions, as expressed in the Award, of awarding substantial damages to the [Caledor Parties]."  Rather, "[t]he corrected award… would be a radically different award, not one which we intended to make and not one which it could be said we would have intended to make, even if we had spotted and corrected the error … at the time."3

 

High Court Decision 

(1)    Serious Irregularity: Under section 68 of the Arbitration Act 1996 (the "Arbitration Act"), an award may be challenged on the ground of serious irregularity affecting the tribunal, the proceedings or the award, provided that in each case the serious irregularity is one which the court considers has caused or will cause substantial injustice to the applicant. 

The Doglemor Parties' application challenging the award was founded on section 68(2)(i) of the 1996 Act, namely that there had been an "irregularity in the conduct of proceedings or in the award which is admitted by the tribunal" and which had caused them substantial injustice.4 

For their part the Caledor Parties argued that, because the tribunal's mistake was an error of fact, it was outside the court's ambit of review and could not amount to a serious irregularity under the categories set out in section 68(2).  Further, they argued that there was no substantial injustice to the Doglemor Parties because, as the tribunal made clear in its response to the application under Rule 27.1 of the LCIA Rules, it had in any event intended to award substantial damages to the Caledor Parties. 

Sir Ross Cranston (sitting as a High Court Judge) held that the tribunal's mistake was not an error of fact, but rather one which "fell into a different category, an error of implementation, not doing what the Tribunal stated on the face of the Award it intended to do".5  As such, the Court held that the tribunal's admitted mistake fell within the meaning of section 68(2)(i) and constituted a serious irregularity.

(2)    Substantial Injustice: In deciding whether a serious irregularity has caused or will cause substantial injustice, the court is not required to decide for itself what would have happened in the arbitration had there been no irregularity; instead, the applicant is only required to show that "had [it] had an opportunity to address the point, the tribunal might well have reached a different view and produced a significantly different outcome."6  

The Court held that, despite the tribunal's overriding intention to award substantial damages to the Caledor Parties, if the tribunal had had an opportunity to address its mistake before issuing the award, it may well have produced a significantly different outcome.  It followed that the computational error in the award was a serious irregularity which has caused or will cause substantial injustice to the applicant.

(3)    Remission of the Award to the Tribunal: Both parties accepted that, should the challenge under section 68(2) be successful, the relief granted under section 68(3) should be remission of the award for reconsideration by the tribunal.  The question remained, however, as to which parts of the award should be remitted. 

The Doglemor Parties maintained that remission should be confined only to those sections of the award which were affected by the tribunal's computational mistake.  On the face of the award, the tribunal had decided each of the inputs to the Agreed Model separately by reference to the relevant evidence, and, they asserted, there was therefore no justification for remitting anything other than the admitted error. 

The Caledor Parties disagreed.  Their position was that remission on such a restricted basis would override the tribunal's stated intention to award substantial damages to the Caledor Parties, and that, instead, the Court should remit substantially all of the paragraphs of the award relating to the tribunal's quantum analysis, or at the very last those paragraphs that were instrumental in calculating the damages owed. 

The Court ruled that, as the issues relating to the inputs to the Agreed Model had been conclusively decided by the tribunal, it was not open to the Court to remit those inputs to the tribunal and enable it to adjust them.  Instead, only those sections of the award which concerned the computational error and the EBITDA margin (which the tribunal had not conclusively decided was the correct margin and which may have been affected by the computational error) would be remitted, to enable a recalculation of the damages to be awarded.  In arriving at this decision, Sir Ross Cranston followed the dictum of Lord Sumption in Sans Souci Ltd v VRL Services Ltd, namely that  "An arbitration award is prima facie conclusive. The Court has only limited powers of intervention. … The reopening by the arbitrators of findings which there were no grounds for remitting and which they had already conclusively decided would therefore have been contrary to the scheme of the Arbitration Act."8  In this way, and by ordering only a narrow remission of the award, the Court recognised the prima facie finality of awards as a key principle underlying the Arbitration Act. 

 

Comment 

Challenges under section 68 of the Arbitration Act rarely succeed before the English courts.  This decision is not only a rare instance of a successful challenge being made under section 68, it is a remarkable example of a challenge where the tribunal has clearly admitted – but refused to rectify – its mistake.

However, successful challenges under section 68(2)(i) are likely to remain rare.  Applicants wishing to challenge an award under any part of section 68(2) already must clear a high bar to prove that a serious irregularity has caused or will cause substantial injustice, and the gateway to challenging an award under section 68(2)(i) is especially narrow because the tribunal, which must admit its own mistake, holds the key.

 

1 Doglemor Trade Ltd & Ors v Caledor Consulting Ltd & Anor [2020] EWHC 3342 (Comm).
2 A party may apply to the tribunal under Rule 27.1 to correct any computational, clerical or typographical errors in the award.
3 Doglemor Trade Ltd & Ors v Caledor Consulting Ltd & Anor [2020] EWHC 3342 (Comm), paragraph 41. 
4  Section 68(2)(i), Arbitration Act 1996.
5  Doglemor Trade Ltd & Ors v Caledor Consulting Ltd & Anor [2020] EWHC 3342 (Comm), paragraph 60.
6  Terna Bahrain Holding Co WLL v Al Shamsi [2012] EWHC 3283 (Comm), paragraph 85.
7 Sans Souci Ltd v VRL Services Ltd [2012] UKPC 6.
8 At [17]
.

 

Emma Shields (Professional Support Lawyer, White & Case) also assisted in the development of this publication.

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