K v S [2019] EWHC 2386 (Comm) – Section 68, due process and the exclusion of expert evidence

Clyde & Co successfully defended a challenge brought by the Applicant ("K") under section 68 of the Arbitration Act 1996 (the "Act"), which had the potential to expose the Defendant ("S") to a claim for EUR 1.3 billion in the underlying arbitration. In this recently published Commercial Court decision, Sir Jeremy Cooke (sitting as a Judge of the High Court) confirmed that section 68 is concerned solely with due process and it represents an exhaustive list of what constitutes "serious irregularit

Background

The underlying LCIA arbitration arose out of a dispute between the parties concerning the termination of an EPC subcontract in the Middle East, in respect of which S commenced arbitration proceedings against K.

A few months before the evidentiary hearing was set to commence, K sought to introduce a new loss of profit claim against S by way of an expert report from a forensic accountant, Mr N. Through this report K alleged that S was responsible for the decline of K's construction activity from 2014 and the collapse of K's business in 2016 (the "Business Collapse Claim"). Mr N's report assessed K's losses at KWD 459 million (equivalent to approx. EUR 1.3 billion).

S objected to the introduction of Mr N's report in the proceedings on the basis that the Business Collapse Claim was new to the arbitration and involved wholly new and unpleaded facts. S argued that K had no permission to introduce that report in the proceedings, and that there was insufficient time for the report to be properly addressed in advance of the evidentiary hearing.

In response to K's refusal to withdrawn the report, S applied to the Tribunal to have the report struck out from the record. K provided written submissions in response, arguing that the Business Collapse Claim had been pleaded in its statement of defence and counterclaim and in its schedule of loss, and that it was within the scope of the list of topics for expert determination. Further written submissions were then filed by each party, after which a hearing was held before the Tribunal to determine the application.

The Tribunal decided "not to admit Mr N's report in [the arbitration] proceedings" and this decision was recorded in the Tribunal's Procedural Order No. 5. K challenged the Tribunal's decision by way of an application to the Commercial Court pursuant to section 68 of the Act.

Grounds of K's application

Section 68 of the Act states:

"(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award. […]

(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant—

(a) failure by the Tribunal to comply with section 33 (general duty of tribunal);

…"

K alleged serious irregularity pursuant to section 68(2)(a) of the Act. K claimed that the Tribunal's decision to exclude Mr N's report was wrong and that it was "an improper exclusion of material evidence", contrary to the general duty of the Tribunal under section 33 of the Act. However, K did not allege any failure of due process in the way the Tribunal had reached its decision to exclude the report. Instead, K argued that there had been a failure of due process because the effect of the Tribunal's decision was to deprive K of the opportunity to present its loss of profit case. K contended that there is an exception to the grounds for "serious irregularity" set out in section 68 to the effect that, where a decision concerns the admissibility of evidence, the Court should enquire into whether that decision was right or wrong.

Further, K argued that the Tribunal had erred by reaching its decision, at least in part, on the basis of the quantum of K's alleged loss of profit claim, as assessed in Mr N's report.

K sought an order that the relevant paragraphs of Procedural Order No. 5 be set aside, or remitted to the Tribunal for reconsideration with directions from the Court to the Tribunal to the effect that: (i) the Tribunal should not exclude material evidence; and (ii) the Tribunal should not determine admissibility of evidence by reference to the quantum of the claim.

Decision

The judge held that K's reliance on authorities such as Williams v Wallis & Cox [1914] 2 KB 478 and Trayfoot v Lock [1957] 1 WLR 351 was "misplaced" and that section 68 had replaced the old law of misconduct, so that "section 68 is exhaustive as to what constitutes “serious irregularity affecting the ... proceedings or the award”".

In applying the requirements of section 68 to K's application, the judge found that K's case fell at each hurdle:

1. The Tribunal's decision in Procedural Order No. 5 was a decision on procedural matters, falling within the Tribunal's case management powers under section 34 of the Act;

2. There had been no failure of due process in the way the Tribunal had reached its decision - K had been given every opportunity to put its case as to why it should be allowed to rely on Mr N's evidence;

3. Importantly, "[t]here is no exception to the rule that section 68 is concerned only with due process and the court cannot take it upon itself to assess whether the Tribunal reached a correct decision in the exercise of its arbitral functions";

4. The exclusion of evidence was clearly within the arbitrators' case management powers;

5. The factor to be accorded the most weight when considering what constitutes an "award" for the purposes of section 68 is "whether or not there was a final determination on the merits of a substantive point in the arbitration". Procedural Order No. 5 made no final determination or finding on the recoverability of the losses claimed by K and, as such, it was not an "award".

   In relation to K's argument that the Tribunal had erred by considering the quantum of the claim in reaching its decision, the judge considered that the Tribunal had made no such error. Whilst the quantum of a claim is not relevant to its admissibility per se, the size of a claim does bear on the degree of particularisation required for such claim. As such, the Tribunal was entitled to take that matter into account when considering the adequacy or inadequacy of the issues pleaded by K.

   In conclusion, the judge held that it could not be said that there had been any irregularity, let alone a serious irregularity. It also could not be said that this was "an extreme case" where the Tribunal's decision was so far removed from what could reasonably be expected that the Court should step in. There was no reason for the Court to interfere with the Tribunal's decision, nor to comment on whether such decision was right or wrong.

   Commentary

   The judgment confirms, in no uncertain terms, that the list of grounds for "serious irregularity" in section 68 of the Act is "exhaustive" and that there is no exception to the rule that section 68 is concerned only with due process. It is not for the Court to take it upon itself to assess whether a correct decision was reached by a tribunal.

   Far too often section 68 challenges are brought by parties who are simply dissatisfied with a tribunal's decision, but this judgment provides yet another clear warning to all potential applicants in such arbitration claims that "applications under section 68 are not the place for appeals on points of law or fact, nor is there any room for appeals against procedural or case management decisions where there has been no procedural unfairness in reaching those decisions. Nor is there any scope for a challenge under the section to anything other than an award."

   Applicants should think carefully before bringing an arbitration claim under section 68, or they are likely to risk finding themselves in indemnity costs territory.

    

   The full judgment is available via the following link: https://www.bailii.org/ew/cases/EWHC/Comm/2019/2386.html