Secretary of State for Defence v Turner Estate Solutions Ltd

Factual and Procedural Background

The Claimant initiated arbitration proceedings under s.68 of the Arbitration Act 1996 concerning a second part award dated 29 July 2013 issued by the arbitral tribunal ("the Tribunal"). The arbitration arose from a bespoke contract dated 31 March 2003 ("the Contract") between the Claimant and the Defendant, under which the Defendant was engaged to design and construct a substantial regeneration project involving Core Works. The Contract employed a Maximum Price Target Cost ("MPTC") pricing mechanism with detailed provisions for assessing the Final Price Payable and interim payments, as well as mechanisms for changes and delay notices.

Disputes emerged in July 2008 when interim payments approached the Maximum Price cap, with the Claimant asserting that the Maximum Price capped interim payments, a position denied by the Defendant. Subsequent adjudication awarded the Defendant substantial sums, leading to further disputes and arbitration.

The parties engaged in extensive procedural steps, including multiple hearings, applications, and directions concerning the scope of disputes, particularly regarding Change Proposals ("CPs") and their relevance to interim payments and the adjustment of the MPTC.

The Tribunal issued a First Part Award on 31 May 2012 holding that the Defendant was not precluded from receiving interim payments exceeding the Maximum Price and recognizing certain CP claims in principle. The parties then sought clarification on the procedure for resolving CP liability and quantum, culminating in the Second Part Award on 29 July 2013, which addressed whether the Tribunal should proceed to determine CP liability and value.

The Claimant subsequently brought this application under s.68 challenging aspects of the Second Part Award, particularly the Tribunal's approach to determining the CP issues.

Legal Issues Presented

1. Whether the Tribunal was bound by an agreement between the parties that it ought to determine the liability and quantum of Change Proposals in the arbitration regardless of their relevance to interim payments.
2. Whether the Tribunal's decision in the Second Part Award not to proceed with determining the CPs until their relevance to interim payments was established constituted a serious irregularity under s.68 of the Arbitration Act 1996.
3. Whether the Tribunal failed to comply with its general duty under s.33 of the Arbitration Act 1996 to adopt procedures suitable to the circumstances, avoiding unnecessary delay or expense.
4. Whether the Tribunal failed to deal with all issues put before it as required by s.68(2)(d) of the Act.
5. Whether any alleged irregularity caused or will cause substantial injustice to the Claimant.

Arguments of the Parties

Claimant's Arguments

• The parties agreed at a hearing on 23 January 2012 that the Tribunal ought to deal with CP liability and quantum as a standalone issue, independent of their relevance to interim payments, and this agreement is binding on the Tribunal and parties.
• The Tribunal's decision in the Second Part Award to defer determination of CPs until their relevance to interim payments is established contravenes this agreement and constitutes a serious irregularity under s.68(2)(c).
• The Tribunal failed to comply with its duty under s.33 by adopting procedures that cause unnecessary delay and expense, given the significant time and costs already incurred on CP issues.
• The Tribunal's approach effectively denies the Claimant the right to have CP liability and quantum determined in this arbitration, causing serious injustice.
• The Second Part Award should be set aside or remitted to the Tribunal to comply with the parties’ agreement and proper procedural standards.

Defendant's Arguments

• The Tribunal did not refuse to determine CPs but correctly exercised its discretion to first consider their relevance to interim payments before deciding whether to proceed.
• There was no unconditional agreement on 23 January 2012 obliging the Tribunal to determine CPs regardless of circumstances; the Defendant's withdrawal of reservation left the matter in the Tribunal’s discretion.
• The agreement contended by the Claimant was insufficiently specific to be binding and did not remove the Tribunal’s procedural discretion.
• The Tribunal retains unfettered power under the Contract’s dispute resolution procedure to decide procedural matters, including whether and how to determine CPs.
• No serious irregularity or substantial injustice arises from the Tribunal’s approach in the Second Part Award.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR 14	Courts should uphold arbitration awards and not seek to overturn them except for substantial faults.	The court emphasized the policy of minimal interference with arbitration awards, reading them reasonably and commercially.
Petroships Pte Ltd v Petec Trading and Investment Corporation (The Petro Ranger) [2001] 2 Lloyd's Rep 348	Explanation of s.68: serious irregularity must cause substantial injustice; court intervention is a last resort.	The court applied the principles that s.68 is a longstop remedy only for extreme cases of tribunal misconduct.
Lesotho Highlands Development Authority v Impreglio SpA [2006] 1 AC 221	Clarification of s.68: high threshold for intervention; irregularity must cause substantial injustice; no challenge for mere wrong decisions.	The court confirmed the limited scope of court intervention under s.68 and reinforced respect for arbitration autonomy.
Vee Networks Ltd v Econet Wireless International Ltd [2005] 1 LLR 192	Definition of substantial injustice under s.68: procedural irregularity causing an adverse conclusion that might not have been reached otherwise.	The court applied the test that substantial injustice arises if irregularity caused the tribunal to reach an unfavorable conclusion that was reasonably arguable otherwise.

Court's Reasoning and Analysis

The court examined the nature and effect of the parties' agreement that the Tribunal "ought to deal with the matter of CPs in this arbitration." It found that this agreement was a binding finding of fact and law by the Tribunal, unchallenged and conclusive on the parties. However, the court distinguished that this agreement was not properly characterized as a procedural agreement but rather as an agreement on the issues the Tribunal should determine.

The court held that while the parties agreed the Tribunal should exercise its discretion to determine CPs, such an agreement does not fetter the Tribunal’s procedural discretion, especially in light of changed circumstances. The Tribunal retained the discretion to decide whether to proceed with determining CPs, particularly if the CPs were not necessary to resolve the pleaded disputes.

The court further noted that the Tribunal’s decision to first consider the relevance of CPs to interim payments before determining liability and quantum was a reasonable exercise of discretion. The Tribunal took into account the significant time and costs already expended and balanced these against the potential benefits of further determination.

Regarding the alleged procedural irregularities under s.68(2)(a), (c), and (d), the court found no failure by the Tribunal to comply with its general duty under s.33 or the procedural agreement, and no failure to deal with all issues. The Tribunal’s approach was consistent with its duties and powers under the Arbitration Act and the Contract’s dispute resolution procedure.

On the issue of substantial injustice, the court acknowledged that if a serious irregularity had occurred, limiting the Claimant’s right to have CPs determined could amount to substantial injustice. However, since no serious irregularity was found, this consideration did not assist the Claimant.

Holding and Implications

The court DISMISSED the Claimant’s application under s.68 to challenge the Second Part Award.

The direct effect of this decision is that the Tribunal’s discretion to determine whether and how to address the liability and quantum of Change Proposals remains intact and unchallenged. The parties are bound by the Tribunal’s findings regarding their agreement and procedural discretion. The ruling does not establish new precedent altering the established principles of arbitration law but reaffirms the limited scope of court intervention under s.68 and the autonomy of arbitral tribunals to manage procedure in light of changing circumstances.