Factual and Procedural Background
The dispute arises from a contract ("the Agreement") between Company A ("Y") and Company B ("Z") under which Z was employed to design, develop, and deliver substantial technology systems, with the contract valued in the high nine-figure range. The Agreement was purportedly terminated by Y in July 2010, leading to arbitration proceedings. The arbitration panel, comprising English, American, and Canadian arbitrators, issued a Partial Final Award in August 2014, corrected in subsequent memorandums. The Award found that Y had unlawfully terminated the Agreement and repudiated the contract, a repudiation accepted by Z. Damages awarded to Z included approximately £126 million for a claim related to the transfer of assets (Claim A4) and other sums totaling nearly £60 million plus interest.
Y applied to set aside the Partial Award under Section 68(2)(d) of the Arbitration Act 1996, alleging serious irregularity due to the tribunal's failure to deal with all issues put to it, specifically regarding liability and quantum related to Claim A4. The arbitration involved extensive documentation, witness statements, expert reports, and lengthy hearings over 42 working days. The court was tasked with reviewing the application while maintaining confidentiality of the parties, initially anonymized as Y and Z.
Legal Issues Presented
- Whether the arbitration tribunal committed a serious irregularity by failing to deal with all issues put to it concerning the contractual liability of Z and the reasonableness and proportionality of Y's termination.
- Whether the tribunal failed to address important quantum issues related to the valuation of the transferred assets claim (Claim A4), including the proper method of compensation and the effect of Z's own breaches on cost recovery.
- Whether the failures alleged caused or will cause substantial injustice to Y, justifying setting aside or declaring the award to be of no effect under Section 68(2)(d) of the Arbitration Act 1996.
Arguments of the Parties
Appellant's (Company A's) Arguments
- The tribunal failed to address the legal consequences of Z's alleged non-compliance with contractual notice provisions (Clauses 23 and 25), which Y contends made Z solely responsible for missed milestones (Liability Ground 1).
- The tribunal did not assess the nature and seriousness of any defaults by Z to determine if termination was objectively reasonable and proportionate (Liability Ground 2).
- Regarding quantum, the tribunal ignored that compensation should follow the contractually agreed method and not exceed amounts recoverable under the Agreement (Quantum Grounds 1 and 2).
- The tribunal failed to consider whether Z's recovery on a global cost basis improperly included costs attributable to Z's own breaches (Quantum Ground 3).
Respondent's (Company B's) Arguments
- The tribunal correctly found the Process Requirements in Clause 69.1.2 were conditions precedent to termination and that Y failed to comply with them, rendering it unnecessary to determine the extent of Z's defaults (Liability Grounds).
- The challenges to liability essentially dispute the correctness of the tribunal's findings rather than raise serious irregularity.
- Regarding quantum, Z argued that the tribunal did address the relevant issues in paragraphs 718-719 and 724 of the Award, and that some points raised by Y were not properly issues put to the tribunal.
- Z contended that the global cost argument was only raised in relation to Claim A1, not Claim A4.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Lesotho Highlands Development Authority v Impregilo SpA [2005] UKHL 43 |
Clarifies the high threshold for serious irregularity under Section 68; court can correct serious failures of due process in arbitration. |
Used to emphasize that relief under Section 68 is only appropriate where justice requires correction of serious procedural failure. |
| ABB v Hochtief Airport [2006] 2 Lloyd's Rep 1 |
Section 68 test not applied by reference to hypothetical litigation outcomes. |
Supported the principle that the court’s inquiry is limited to due process, not substantive correctness. |
| Sonatrach v Statoil Natural Gas [2014] 2 Lloyd's Rep 252 |
Focus on due process, not correctness of tribunal's decision. |
Reinforced that Section 68 challenges address procedural irregularities rather than errors of law or fact. |
| Ascot Commodities NV v Olam International Ltd [2002] CLC 277 |
Tribunal should deal at least concisely with all essential issues; fair and commercial reading of award required. |
Supported the approach to assess whether tribunal failed to deal with essential issues under Section 68(2)(d). |
| Petrochemical Industries v Dow [2012] 2 Lloyd's Rep 691 |
Clarifies what constitutes an "issue" under Section 68(2)(d) and maintains high threshold for serious irregularity. |
Used to analyze whether tribunal failed to deal with issues put to it. |
| Primera v Jiangsu [2014] 1 Lloyd's Rep 255 |
Failure to deal with an issue arises only if tribunal did not address it at all; dealing with it poorly is insufficient. |
Applied to reject challenges based on dissatisfaction with tribunal's reasoning rather than non-consideration. |
| Robert Taylor v Motability Finance Ltd [2004] EWHC 2619 (Comm) |
Restitutionary recovery should not exceed contract limits; contract guides valuation of services for quantum meruit. |
Referenced in argument regarding valuation of transferred assets under restitutionary claim but tribunal’s approach was upheld. |
Court's Reasoning and Analysis
The court carefully examined the arbitration award and the grounds of challenge under Section 68(2)(d) of the Arbitration Act 1996, which permits setting aside or declaring an award of no effect if the tribunal fails to deal with all issues put to it, causing substantial injustice.
Regarding liability, the court found that while the tribunal correctly identified that the Process Requirements in Clause 69.1.2 of the Agreement were conditions precedent to lawful termination, the tribunal failed to address a critical issue: whether Y's case that Z was solely responsible for all delays was properly considered within the process. The tribunal focused on whether Y complied with the procedural steps (Process Requirements) but did not grapple with the scenario that Z might have been fully responsible for the delays. This omission constituted a failure to deal with an essential issue put to the tribunal and caused substantial injustice, as the outcome of the termination decision hinged on this.
On quantum, the court dismissed the first two challenges. The tribunal’s approach to valuation of the transferred assets claim (Claim A4) as a restitutionary remedy following repudiation was a legitimate exercise of discretion and addressed the issues sufficiently under Section 68(2)(d).
However, the court found the third quantum challenge meritorious. The tribunal failed to address whether the valuation of the transferred assets should exclude costs attributable to Z’s own breaches causing delay, disruption, and inefficiency. Given that both parties disputed responsibility for delays and that the valuation was on a global cost basis, the tribunal’s omission to consider this issue was a failure to deal with an essential issue put to it, resulting in substantial injustice. This failure was significant given the large sum awarded under Claim A4.
The court emphasized that mere errors of law or fact do not constitute failure to deal with an issue under Section 68(2)(d), but the tribunal’s omission here was more fundamental.
Holding and Implications
The court held that there was a serious irregularity under Section 68(2)(d) of the Arbitration Act 1996 due to the tribunal’s failure to deal with all issues put to it in respect of Liability Ground 2 and Quantum Ground 3. This failure caused substantial injustice to the applicant (Company A).
The court dismissed the other grounds of challenge. The question of appropriate relief, including whether the award should be set aside or remitted, was left open for further hearings. The decision does not set new legal precedent but directly affects the parties by requiring reconsideration of the identified issues by the tribunal or appropriate relief from the court.