Factual and Procedural Background
This opinion concerns an application by Company A ("CBL") to set aside, vary, or remit an arbitration award made by the arbitrator ("Mr Vaughan") on 6 September 2016. The grounds for the application are serious irregularity, specifically that the award was obtained by fraud or procured in a manner contrary to public policy.
The dispute arose from a project involving the design and construction of a composting facility contracted by Company A for a local council ("The Council"). Disputes over payments, loss, expense claims, and liquidated damages led to adjudications and arbitration proceedings.
Company B ("Knowles") was engaged by Company A to provide advice and representation in these adjudications and arbitration. A Deed of Assignment was executed whereby Company A assigned certain rights against The Council to Company B, while reserving enforcement rights for itself. Subsequently, an ad hoc arbitration agreement was entered into by Company A and Company B to resolve disputes including fee claims and indemnities related to the assignments and adjudications.
Company B issued invoices to The Council in respect of adjudication awards, which were unpaid. Disputes arose between Company A and Company B as to the entitlement and quality of services, leading to arbitration. The arbitration was conducted in phases, with initial issues addressing fee caps and payment timing, and later issues concerning entitlement and counterclaims.
During the arbitration, Company B sought declarations that it had complied with terms of the ad hoc arbitration agreement, including withdrawing invoices and providing indemnities to The Council. Company A later discovered correspondence ("March correspondence") between Company B and The Council indicating that Company B had demanded payment from The Council despite prior agreements to extinguish claims, which Company B had not disclosed to the arbitrator.
Company A alleges that this non-disclosure amounted to fraud, misleading the arbitrator and affecting the arbitration award. Company B disputes this, claiming the correspondence was irrelevant or not a claim for payment.
The application to set aside the award was made out of time, prompting a separate application for an extension of time, which is also addressed in the opinion.
Legal Issues Presented
- Whether the arbitration award was obtained by fraud or procured in a manner contrary to public policy within the meaning of section 68(2)(g) of the Arbitration Act 1996.
- Whether the failure by Company B to disclose the March correspondence to the arbitrator constituted a serious irregularity causing substantial injustice to Company A.
- Whether an extension of time should be granted to Company A to make the application to set aside the award.
- The appropriate remedy if the award was found to have been obtained by fraud or serious irregularity.
Arguments of the Parties
Company A's Arguments
- Company B misled the arbitrator by failing to disclose the March correspondence, which showed that Company B had not extinguished its claims against The Council as required by the arbitration agreement.
- The omission was deliberate and amounted to fraud or, alternatively, reckless misrepresentation.
- The March correspondence was directly relevant to the declarations sought by Company B and would have materially affected the arbitrator’s findings.
- Company B’s explanations for non-disclosure and characterization of the correspondence as a mere "information request" or not a "letter of claim" were unsustainable and lacked credibility.
- Company A suffered substantial injustice because the award was based on misleading information and the arbitrator’s decision on compliance with the arbitration agreement was flawed.
- Company A sought an extension of time to bring the application due to the timing of the discovery of the March correspondence and prior attempts to resolve the matter without court intervention.
Company B's Arguments
- The March correspondence was not a claim for payment but a strategy to induce The Council to confirm reliance on the first Deed of Waiver, thus it was irrelevant to the arbitration issues.
- The failure to disclose the correspondence was inadvertent or based on a reasonable judgment of irrelevance, not deliberate or fraudulent.
- Company B did not retract or repudiate the waiver and indemnity agreement and therefore complied with the arbitration agreement.
- The letter of 16 March 2016 was not a "letter of claim" as no invoice preceded it and no actual claim was pursued.
- Company B disputed that recklessness suffices for fraud under the Arbitration Act and maintained that no fraud occurred.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Lesotho Highlands Development Authority v Impreglio SpA [2005] UKHL 43 |
Definition of serious irregularity under s. 68(2) requiring substantial injustice. |
Used to confirm the high threshold for setting aside an arbitration award. |
| Double K Products 1996 Ltd. v Neste Oil OYJ [2009] EWHC 3380 (Comm) |
Requirement for cogent evidence to prove fraud; fraud must be dishonest conduct causing substantial injustice. |
Applied to assess the evidence of fraud and reject inadvertent misrepresentation. |
| Cuflet Chartering v Carousel Shipping Co. Ltd. [2001] 1 All ER (Comm) 398 |
Requirement of cogent evidence for serious impropriety allegations. |
Supported the standard of proof for fraud allegations in arbitration challenges. |
| Profilati Italia Srl v Paine Webber Inc [2001] 1 All ER (Comm) 1065 |
Requirement for dishonesty in fraud claims. |
Referenced in considering the nature of conduct required to establish fraud. |
| Elektrim SA v Vivendi Universal SA [2007] EWHC 11 (Comm) |
Consideration of direct and inferential evidence in fraud allegations. |
Helped guide approach to evidence and inferences in fraud allegations. |
| Gater Assets v Nak Naftogas Ukrainiy (No.2) [2008] EWHC 237 |
Public policy limb of s.68(2)(g) requires reprehensible or unconscionable conduct. |
Clarified the standard of conduct amounting to fraud or public policy breach. |
| Chantiers de L'Atlantique SA v Gaztransport & Technigaz SAS [2011] EWHC 3383 (Comm) |
Higher standard of proof for fraud; fraud must be distinctly pleaded and proved. |
Guided the court's approach to the burden and standard of proof in fraud allegations. |
| Kalmneft v Glencore [2002] 1 Lloyd's Rep 128 |
Factors for considering extension of time applications. |
Applied to assess whether an extension of time should be granted. |
| The Kriti Palm [2006] EWCA Civ 1601 |
Definition of dishonesty in civil fraud context including recklessness. |
Supported the proposition that recklessness can constitute dishonesty for fraud. |
Court's Reasoning and Analysis
The court carefully analysed the factual matrix, including the arbitration agreement provisions, the March correspondence, and the conduct of Company B and its managing director ("Mr Rainsberry"). The court found that the declarations sought by Company B required compliance with specific conditions, notably withdrawing and extinguishing invoices and providing an indemnity to The Council not to pursue payment.
The arbitrator had concluded that Company B had complied by issuing credit notes, equating withdrawal with extinguishment. However, the March correspondence showed that Company B had demanded payment from The Council after issuing credit notes, contradicting the extinguishment and indemnity conditions.
Company B's failure to disclose this correspondence to the arbitrator was found to be deliberate. The court rejected Company B's argument that the correspondence was irrelevant or not a claim for payment, noting that the letters made clear demands and threats of legal proceedings. The court found Company B’s explanations to be unconvincing and inconsistent with the facts.
The court applied the legal principles under section 68(2)(g) of the Arbitration Act 1996, which allows setting aside an award obtained by fraud or contrary to public policy, emphasizing the high threshold requiring cogent evidence of dishonest or reprehensible conduct causing substantial injustice.
The court held that the non-disclosure was fraudulent as it created a misleading impression that Company B had complied with the arbitration agreement when it had not. This fraud was material and likely affected the outcome of the arbitration, causing substantial injustice to Company A.
Regarding recklessness as a form of dishonesty, the court noted the legal uncertainty but found it unnecessary to decide the point given the deliberate nature of the non-disclosure.
On the extension of time, the court found the delay to be short and reasonable, caused by the timing of Company A’s discovery of the correspondence and attempts to resolve the matter without court intervention. There was no prejudice to Company B, and the application was strong, justifying an extension.
The court concluded that the appropriate remedy was to remit the challenged parts of the award to the arbitrator for reconsideration in light of the full facts, including the March correspondence.
Holding and Implications
The court GRANTED Company A’s application to set aside the relevant parts of the arbitration award on the grounds that it was obtained by fraud, specifically due to the deliberate withholding of material evidence by Company B.
The court also granted an extension of time for the application to be made, recognizing the circumstances of the late discovery of the relevant correspondence.
The award was remitted to the arbitrator for reconsideration with the full factual background disclosed.
The direct effect is that the arbitration award cannot be enforced in its current form and must be reconsidered. No new legal precedent was established beyond the application of established principles concerning fraud in arbitration and extension of time applications.