Challengers beware: arbitral tribunals enjoy broad discretion over procedure, evidence and costs (England and Wales)

The finality of arbitral awards – with limited options to set aside or resist enforcement under national laws – makes international arbitration attractive for many clients choosing how best to resolve their disputes. The English courts are well known for their robust, pro-arbitration approach to determining party applications challenging or appealing arbitral awards, particularly where procedural irregularity affecting the underlying arbitration or award is alleged. In particular, the English courts recognise that arbitral tribunals typically have wide discretion over procedural, evidential and costs matters under arbitration rules and the Arbitration Act 1996 (the Act). Only extreme cases will justify the court’s intervention.

Such matters were recently considered by the English Commercial Court in BPY v MXV [2023] EWHC 82 (Comm), where Mr Justice Butcher dismissed challenges brought under section 68 of the Act in respect of two LCIA arbitration awards. The challenges concerned allegations of: (i) a breach of the rule that a party must challenge witness evidence in cross-examination if it intends to suggest that a witness is not speaking the truth on a particular point (Browne v Dunn (1893) 6 R 67); (ii) arbitrator bias; (iii) the improper admission of illegally obtained evidence; and (iv) the existence of inconsistencies between two awards.

The decision highlights the wide discretion afforded to arbitral tribunals and the importance of raising objections and seeking clarifications from the tribunal as and when issues arise.

What were the underlying facts?

The dispute concerned the extent to which BPY and MXV (whose ultimate beneficial owners were Mr A and Ms B respectively) had made three binding sale and purchase agreements (SPAs).

BPY’s case was that the SPAs were valid and binding agreements under which MXV had failed to pay sums which were due and owing to BPY. BPY relied on: (i) payments received from MXV in February 2013 which it said were made to discharge a debt under the first of the SPAs (February Payments); and (ii) two letters signed by MXV’s sole director, Mr D, acknowledging the payment obligations, one of which was initialled, dated and marked as received by Mr C, BPY’s director (DALs).

MXV defended the claim on two main grounds:

• the claims were statute barred; and
• the SPAs were sham transactions which had not intended to give rise to any payment obligations.

What happened in the arbitration?

In November 2018, BPY referred the matter to arbitration seated in London under the LCIA Arbitration Rules 2014. A sole arbitrator was appointed.

Preliminary Issue Award

Limitation was addressed as a preliminary issue and the arbitrator decided that the February Payments and the DALs constituted an acknowledgment of the debt or part payment for the purpose of section 29(5) of the Limitation Act 1980 (Preliminary Issue Award). MXV’s limitation defence was therefore dismissed.

Merits and Costs Awards

The arbitrator dismissed BPY’s claims and concluded that the SPAs were “entered into for a purpose other than creating payment obligations between [BPY] and [MXV], including, but not limited to, the intention to deceive third parties; and not, as alleged by [BPY], for the purpose of creating legal relations, in particular for Ms B to obtain collateral against which she could raise funds for [a separate business]” (Merits Award).

The arbitrator also issued a costs award which, in addition to dealing with the treatment of the costs associated with the Merits Award, awarded MXV 50% of its legal costs and 75% of its arbitration costs for the Preliminary Issue Award (Costs Award) on the basis that “the Preliminary Issue stemmed from [BPY’s] claim, which was ultimately dismissed on the merits”.

What were the grounds of challenge before the Commercial Court?

BPY challenged both the Merits Award and the Costs Award on the grounds of serious irregularity causing substantial injustice under section 68 of the Act.

Grounds relied upon by BPY

BPY relied on the following four grounds in support of its challenge:

• Ground 1 (section 68(2)(a) (failure to comply with section 33 general duties)): the arbitrator had made a finding of dishonesty in the making of the SPAs without that case having been put to the witnesses accused of fabricating the SPAs in breach of the rule in Browne v Dunn. The arbitrator had also made a finding of fraud and conspiracy to commit fraud which was a case that had not been pleaded or put to the witnesses.

• Ground 2 (section 68(2)(a)): there was a real possibility that the arbitrator was biased given the breach of the rule in Browne v Dunn by making findings on MXV’s deceit in the absence of cross-examination of BPY’s witnesses and in respect of her decision on costs.

• Ground 3 (section 62(2)(b) (excess of powers)): the arbitrator had exceeded her powers by making findings in the Merits Award which were irreconcilable and inconsistent with her findings in the Preliminary Issue Award.

• Ground 4 (section 62(2(d) (failure to deal with all issues put) and (g) (award obtained by fraud of procured in a way that was contrary to public policy): the arbitrator did not address whether documents referred to as the DBI Documents were inadmissible on the basis that they had been unlawfully obtained under Ukrainian law. Further, the admission of the DBI Documents meant that the award was procured contrary to public policy.

What did the court decide?

The judge dismissed the challenge on all four grounds:

• Ground 1: This ground failed on a number of different levels, including:

• • the arbitrator proceeded on the basis that a document may be a sham even if it did not seek to deceive others but was one that gave the appearance of having created different legal rights to those actually created. Had the arbitrator made incorrect statements of law, which the judge did not suggest, such errors would not constitute serious irregularities within section 68 of the Act and a point of law appeal would need to be made under section 69 of the Act;

• • BPY had failed to establish that the arbitrator was in breach of section 33 of the Act in the way in which she dealt with the fundamental issue between the parties, being whether the SPAs were intended to have legal effect such that MXV had an obligation to pay under them;

• • the rule in Browne v Dunn was not an inflexible one:

• • • the procedures adopted in litigation may mean that a party and the relevant witnesses have had ample opportunity to comment on the other side’s case;

• • • a tribunal in arbitral proceedings is likely to have a wide discretion as to how to conduct proceedings and the LCIA Rules provided for this. Subject to compliance with the general duties in section 33 of the Act, the tribunal may adopt a procedure which does not involve oral cross-examination on a point or at all (including in cases where it is said a witness is not telling the truth, although in some cases fairness will require cross-examination);

• • • during the proceedings, BPY sought a specific ruling from the arbitrator requesting that only the key matters in dispute need be challenged. The arbitrator issued a direction that she did “not expect all points of witness evidence to be expressly challenged in cross-examination” and that it “remained for [her] to decide what weight to accord to the evidence before [her], regardless of whether it has been expressly dealt with in cross-examination” (Direction). BPY did not seek further clarification as to what evidence the arbitrator could give weight to without cross-examination;

• • • the arbitrator did not contravene her general duties under section 33 of the Act in the way in which she proceeded as to what was and what was not ‘put’ to witnesses in cross-examination or in respect of the Direction; and

• • • the witnesses were given adequate opportunity to address the thrust of the case against them and there was no serious irregularity in the witnesses not being asked more than they were about the motives for executing the SPAs; and

• • the suggestion that the arbitrator had made certain findings of fraud and conspiracy to commit fraud which was a case that had not been pleaded or put to the witnesses was unfounded and the particular finding was not an essential building block of the Merits Award.

• Ground 2: In respect of the first part of the allegation of bias, the judge referred to his decision in respect of ground 1 and repeated that there was no sustainable case that the arbitrator failed to comply with section 33 of the Act. He also did not consider that there was an appearance of bias in that respect. As to the second matter, the judge found that the arbitrator’s reasoning on costs was rational and well-reasoned, and one within the discretion afforded to her under rule 28.4 of the LCIA Rules.

• Ground 3: The Merits Award did not contradict the Preliminary Issue Award. The arbitrator had not prejudged the questions of validity and enforceability in the Preliminary Issue Award and had reserved those matters for subsequent consideration.

• Ground 4: BPY did not ask the arbitrator to exclude the documents on the grounds that they had been unlawfully obtained, retained, or deployed and so had lost any right to object on that basis pursuant to section 73 of the Act. In addition: (i) documents which have been illegally obtained are not automatically inadmissible in an arbitration on the grounds of public policy; and (ii) BPY had failed to show that any substantial injustice had been caused by the admission of the DBI Documents.

Practical takeaways

Parties and practitioners should take caution to:

1. ensure any issues which may be considered procedural irregularities are canvassed with the tribunal in full when they arise to avoid losing the opportunity to do so before the English courts;
2. consider whether it is appropriate to refer such issue(s) back to the tribunal for further attention or clarification once the tribunal has issued a direction; and
3. when pursuing challenge proceedings before the English courts, establish that the purported serious irregularities have caused or will cause substantial injustice to the challenging party.

Reform on the horizon?

The Law Commission of England and Wales is considering whether reforms to substantive jurisdiction challenges under section 67 and point of law appeals under section 69 may be required as part of that body’s ongoing review of the Act. However, it is not anticipated that the Law Commission will recommend any substantive reform of serious irregularity challenges under section 68, perhaps reflecting a view that the section is broadly fit for purpose. To read our analysis of the Law Commission’s September 2022 consultation paper see here.

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