By: Steve Abraham, Louise Oakley and Amy Wong1Steve Abraham is a partner in Baker & McKenzie’s London office. He is a member of the Firm’s International Arbitration Practice Group. Louise Oakley and Amy Wong are associates in Baker & McKenzie’s London office. Both Louise and Amy act on a broad range of matters, including both international arbitration and commercial litigation. The authors gratefully acknowledge the assistance of Gareth Roberts, Patrick Edwards and Kate Ballantine-Dykes.
A. Legislation, Trends and Tendencies
International arbitration in England and Wales2England and Wales are two of the four countries that make up the United Kingdom. They have a common legal system, whereas the other two countries in the United Kingdom (Scotland and Northern Ireland) have separate systems. For the purposes of the current publication, we intend only to refer to the laws of England and Wales. Any reference to “England” or “English” in this section should also be taken to include “Wales” or “Welsh.” continues to be governed by the Arbitration Act 1996 (the “Arbitration Act”),3See also: the Civil Procedure Rules and Practice Direction, Part 62; the Arbitration Act 1996 (Commencement No. 1) Order 1996 SI 1006/3146; the High Court and County Courts (Allocation of Arbitration Proceedings) Order 1996 SI 1996/3 125; The Unfair Arbitration Agreements (Specified Amount) Order 1996 SI 1996/3211; Arbitration Act 1950, Part II Enforcement of Certain Foreign Awards. to which only minor legislative amendments were made in 2015.4Schedule 4 of the Consumer Rights Act 2015 imposes four minor changes to the Arbitration Act to reflect consequential references to the Consumer Rights Act 2015. The Arbitration and Mediation Services (Equality) Bill, which proposes amendments regarding the application of equality legislation to arbitration and mediation services, remains under Parliamentary consideration. A third reading of the Bill in the House of Lords, at which final amendments to the Bill can be made, has yet to be scheduled.
B. Cases
B.1 Court Removes Arbitrator Due to Lack of Impartiality
The Commercial Court granted an application to remove an arbitrator under Section 24(1)(a) of the Arbitration Act based on a perceived lack of impartiality.5Sierra Fishing Company and other v. Hasan Said Farran and others [2015] EWHC 140 (Comm). The case confirms that the test for such apparent bias is “whether the fair minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased.”6Ibid. at para 51 citing Porter v. Magill [2002] UKHL 67. The Court emphasized that the test only required a “real possibility” of bias, not actual proof of bias on the part of the arbitrator.
The Court considered: (i) the arbitrator’s relationship with the Defendants; (ii) his involvement in drafting the parties’ settlement agreement; and (iii) his conduct once the challenge against him had been made. It found that each of the three grounds was sufficient to raise justifiable doubts as to his impartiality. As such, the Court found that the arbitrator’s conduct showed that he had become “too personally involved” in the dispute and that, as a result, his ability to be objective was doubtful.7Ibid. at para 65. The case demonstrates that in exceptional circumstances, the English court will step in to remove an arbitrator in order to ensure the arbitral process is fair.
B.2 Court Sets Aside Award on the Grounds of Serious Irregularity
The Technology and Construction Court ordered that an award be set aside on the grounds of serious irregularity under Section 68(2)(d) of the Arbitration Act.8The Secretary of State for the Home Department and Raytheon Systems Limited [2015] EWHC 311 (TCC). This decision derives from an earlier hearing9The Secretary of State for the Home Department and Raytheon Systems Limited [2014] EWHC 4375 (TCC). where the court found that the tribunal had failed to consider key parts of the claimant’s case relating to contractual liability and had ignored the claimant’s submissions on quantum. As a result, the respondent had received a significant award, which the claimant argued constituted unjust enrichment, and the court held that the two issues were enough to cause substantial injustice.
In deciding what relief was appropriate to award, the judge acknowledged that there were so few decisions on Section 68(2)(d) that there was no authority that offered guidance on how to measure the seriousness of the tribunal’s irregularities against a suitable relief.10The Secretary of State for the Home Department and Raytheon Systems Limited [2015] EWHC 311 (TCC) at para 5. This is largely because the English courts apply a very high threshold for Section 68 claims.
Section 68(3) states that a court may only set aside an award once it is satisfied that remitting the matter back to the tribunal would be inappropriate. The judge found that this was such a case, since the tribunal may subconsciously be tempted to achieve the same result. The fact that a new tribunal would cost less than remission was also a relevant factor.
B.3 Court Finds Arbitration Clause Trumps Insolvency Rules
The High Court held that an arbitration clause was valid and survived insolvency because it was not “null and void, inoperative or incapable of being performed.”11Philpott and another v. Lycee Francais Charles De Gaulle School [2015] EWHC 1065 (Ch) at para 20. The case concerned an underlying financial dispute between the company (in liquidation) and the debtor, whose relationship was governed by a standard form construction contract containing an arbitration clause. The company’s liquidators sought to bypass the arbitration clause by applying to court for directions and an account for insolvency set-off (pursuant to Rule 4.90 of the Insolvency Rules 1986), with the balance becoming due from the debtor.
Despite displaying a degree of skepticism towards whether arbitration was an economical alternative to litigation, the judge held that the arbitration clause was valid and survived insolvency because it was not caught by the statutory exceptions set out in Section 9(4) of the Arbitration Act. The High Court also confirmed that the submission of a proof of debt form did not prevent the debtor from applying for a stay of legal proceedings (under Section 9(3) of the Arbitration Act).
B.4 Foreign Set-Aside Decision Pending Appeal Treated as Final
The High Court found that, despite a pending appeal in Egypt, it was bound to treat as final and binding a previous decision of the Cairo Court of Appeal to set aside an order enforcing a New York Convention award.12Malicorp Ltd. v. Government of the Arab Republic of Egypt and Ors [2015] EWHC 361(Comm). The judge noted first that the word “may” in Section 103(2) of the Arbitration Act confers a discretion on the court to enforce an award, even though it has been set aside, and second, that “it would not be right to exercise that discretion if, applying general principles of English private international law, the set-aside decision was one which this court would give effect to.”13Ibid. at para 21. In the court’s view, once it was established that a set-aside decision of the supervisory court met the test for recognition, there was no room for any further discretion to enforce the award.
The judge also found that in this case, enforcement should be refused on the grounds that it was “manifestly repugnant to elementary principles of fairness”14Ibid. at para 41. that the proposed award made provision for damages that had not been raised by either party in the Egyptian courts.
B.5 Validity of Clause Specifying “UK Arbitration” and “UK Courts”
The Commercial Court confirmed that dispute resolution provisions referring to “UK courts” and “UK arbitration” are valid and enforceable.15Exmek Pharmaceuticals SAC v. Alkem Laboratories Ltd. [2015] EWHC 3158 (Comm). The arbitration clause in the relevant distribution agreement stated that “arbitration shall be conducted in the UK in accordance with the provisions of the law in the UK in effect at the time of the arbitration.” The agreement also contained a separate clause that provided for submission to the “exclusive jurisdiction of the Courts of the UK and of all Courts having jurisdiction in appeal from the Courts of the UK.”16Ibid. at para 2.
In 2008, a dispute arose, and the claimant obtained a judgment from the Peruvian courts. The defendant subsequently commenced arbitration in London, and the tribunal issued an award confirming its jurisdiction to determine the disputes. The claimant sought to challenge the award under Section 67 of the Arbitration Act. Among its arguments, it contended that there was no valid arbitration agreement. First, the claimant argued that the clauses in question referred to both arbitration and court proceedings and were therefore inconsistent and irreconcilable. The court rejected this argument, stating that the clauses, read together, provided for any disputes to be dealt with by arbitration with UK law as the curial law. Such arbitration was to be supervised by the UK courts exclusively. Second, the defendant argued that UK law and courts did not exist, and that no specific venue had been provided for the arbitration proceedings. The court confirmed that references to “UK” law and courts should be construed as references to English law and the English courts, and confirmed that the venue for arbitration should be London. The application was dismissed.
B.6 Seat or Place of Arbitration and Governing Law
In a charterparty dispute, a fixture note provided for “Arbitration to be held in Hong Kong. English law to be applied.”17Shagang South-Asia (Hong Kong) Trading Co Ltd. v. Daewoo Logistics [2015] EWHC 194. All other terms were based on a 1994 charterparty, the default provisions of which provided for arbitration in London. A dispute arose, and the owner of the vessel commenced arbitration in London. The charterer objected, contending that Hong Kong was the correct seat of arbitration and that any arbitration was subject to Hong Kong procedural law. The arbitrator found that the tribunal had been properly constituted and made an award. The charterer applied to have the award set aside on jurisdictional grounds under Section 67 of the Arbitration Act.
The court found that the statement that arbitration was to take place in Hong Kong would ordinarily carry with it an implied choice of Hong Kong as the seat of arbitration and Hong Kong law as the curial law. The court explained that it would be very uncommon for the law governing the conduct of the arbitration to be different from the law of the place of the arbitration, even though this is legally possible. On this basis, where the agreement refers to the venue of arbitration, clear words or “significant contrary indicia” are necessary to establish some other seat or curial law.18Ibid. at para 38. In this case, neither the reference to English law in the arbitration clause nor the link to the 1994 charterparty was sufficient to constitute “significant contrary indicia.” Instead, arbitration should have been commenced in Hong Kong and governed by Hong Kong law. The reference to English law in the arbitration clause was intended to refer to the substantive law to be applied to the dispute, rather than the procedural law of the arbitration itself. The award was set aside.
B.7 Counterclaim That Had Been the Subject of Failed Arbitration
In this case, a dispute arose regarding alleged breaches of a construction contract. The claimant started proceedings in the English courts to enforce a loan agreement and a guarantee.19Swallowfalls Limited v. Monaco Yachting & Technologies SAM and another [2015] EWHC 2013 (Comm). The defendants raised a counterclaim for set-off, and proceedings were stayed while the counterclaim was referred to arbitration. During the arbitration proceedings, the respondents failed to comply with orders to provide security for costs, and accordingly, the tribunal dismissed their claim under Section 41(6) of the Arbitration Act. Upon court proceedings recommencing, the claimant sought summary judgment. Because the award was not based on the merits of the case, but rather on the respondents’ noncompliance with an order for security for costs, the defendants/respondents requested that the court consider the counterclaim during the court proceedings.
The court confirmed that to consider the counterclaim in this context would be an abuse of process and would not be in the public interest, as it would vex the claimant for the second time in relation to the same allegations. Upon submitting the issues in question to arbitration, the court held that the defendants/respondents had agreed to be governed by the laws of arbitration and any order given. The defendants’ suggestion that the counterclaim should be reconsidered because the arbitration award had not been made on the merits of the claim was dismissed. The finality of the tribunal’s decision to dismiss the defendants’ claims could not be disputed, regardless of the basis on which that decision had been reached. The defendants’ counterclaim was rejected, and summary judgment was awarded to the claimant.
C. Costs in International Arbitration
C.1 Allocation of Costs
Parties to an international arbitration can generally expect to incur the following categories of costs, known as the “costs of the arbitration”:20Section 59 of the Arbitration Act.
• administrative charges of any arbitral institution which is involved;
• fees and expenses of the arbitral tribunal, plus the cost of the hearing room and facilities;21Arbitrators are entitled to withhold the publication of their award (including any award as to costs) until their fees have been paid. This is known as the “arbitrator’s lien”; see Section 56 of the Arbitration Act. and
• fees and expenses of the lawyers, witness expenses, the fees of experts (if any) and any other professionals whose services may be required (e.g., transcribers and interpreters).
It is important to remember the potential for internal costs, which can be substantial, both in themselves and when compared with the amounts in dispute.
As a starting point, parties to arbitration in England can agree between them how costs are to be borne. However, an agreement that one party is to pay the whole or part of the costs of the arbitration is only valid if it is made after the dispute has arisen.22Section 60 of the Arbitration Act. In the absence of any express agreement, the default position is set out in Section 61 of the Arbitration Act, which states that the tribunal can make an award allocating the costs between the parties and in doing so will follow the general principle that costs should follow the event (i.e., the unsuccessful party pays the successful party’s costs),23This is also reflected in Article 28.4 of the LCIA Rules 2014. except where it appears to the tribunal that, in the circumstances, this is not appropriate. For example, the tribunal may depart from this general rule where a party has grossly exaggerated their claim, engaged in unsatisfactory conduct during the arbitral process, or failed on a point that was particularly time-consuming, or where a well-crafted Calderbank offer has been made (see Section C.3). The tribunal enjoys a very wide discretion as to how to deal with the costs of the arbitration.24See, for example, Article 28.1 of the LCIA Rules 2014. Liability for tribunal costs is joint and several between the parties.25Section 28 of the Arbitration Act.
It is not typical for a detailed assessment procedure to be followed by an arbitral tribunal, although separate submissions on costs are usually prepared by the parties. Under English law, bifurcation is not uncommon, and this allows for two awards of the tribunal, one partial (but final) substantive award, and a subsequent final award on costs, before the tribunal becomes functus officio. Such bifurcation is all the more common where Calderbank offers have been used (see section C.3), as the parties will commonly then allow for a period in which costs may be settled by agreement following the tribunal’s award on the merits.
C.2 Security for Costs
Security for costs allows a party (typically a respondent) to obtain security for their own costs in the event that they are ultimately successful in an arbitration and the claimant is unable, or fails, to pay the costs ordered.
Section 38 of the Arbitration Act gives the arbitral tribunal the power to order a claimant to provide security for costs, unless the parties agree otherwise. Although Section 38 does not specify the grounds upon which such an order may be made, in practice, the grounds usually relate to the claimant’s impecuniosity or likely refusal to pay. Enforcement difficulties can also be relevant. Furthermore, Section 38(3) specifies that the power to order security for costs may not be exercised solely on the grounds that the claimant is resident outside the jurisdiction.
Article 25.2 of the LCIA Rules (both 1998 and 2014) confers upon an arbitral tribunal the power to order a claimant or counterclaimant to provide security for legal costs and arbitration costs by way of deposit or bank guarantee or in any other manner and upon such terms as the tribunal considers appropriate. Further, the LCIA Rules grant the tribunal power to order a party to provide security for all or part of the amount in dispute (2014 Rules, Article 25.1(i); 1998 Rules, Article 25.1(a)).
An order for costs can be made at any time. In exercising its discretion to make an order for security for costs, the arbitral tribunal is not bound by the strict rules of the court. It is likely, however, that English arbitrators will be guided by the provisions of Part 25 of the English Civil Procedure Rules, which govern security for costs in English court proceedings.
The Arbitration Act and certain institutional rules, such as the LCIA Rules, give the arbitral tribunal a very broad discretion to award security. However, in practice, arbitrators appear generally reluctant to grant orders for security for costs. This reluctance may be due to a concern that they do not want to appear to be prejudging the merits of the case, as well as an awareness of the fact that security for costs can be used with the financial motivation to deter or render impossible the pursuit of meritorious claims by a claimant in a precarious financial position. The test that has developed in international commercial arbitration requires the applicant seeking security to show that the financial situation of the claimant has materially and unforeseeably changed since the conclusion of the arbitration agreement (for reasons other than the dispute that is the subject of the arbitration). This is a very high threshold, such that in the vast majority of cases, it has been deemed by the arbitral tribunal not to have been met.
C.3 Recovery of Costs
Parties are free to agree what costs are recoverable,26Section 63 of the Arbitration Act. and the tribunal has the power to cap the recoverable costs of the proceedings, or any part, to a certain amount.27Section 65(1) of the Arbitration Act. Of course, if such a cap is imposed (which is uncommon), this only limits the recoverability of such costs and does not constrain a party as to how much it can spend during the arbitration. The provision seeks to protect parties in a weaker financial position from being intimidated by their wealthier opponents, who might otherwise seek to impose a costs order that the other party could not meet.
Counsel’s fees are considered to be recoverable under English law. In-house counsel, or other nonlegal management time, is more difficult to quantify and apportion to the dispute, especially if in-house counsel do not typically record their time in the same way as do private practice lawyers. When claiming costs, there is no formal requirement to evidence a costs schedule with invoices and receipts, but parties should be prepared to do so if required to justify the claimed costs, and it is good practice to be prepared in this way. Third party funding is regularly used in international arbitration and the UK has a large specialist third party funding market. Neither English law nor the relevant rules of the leading arbitral institutions require a party to disclose whether it is being funded.
Calderbank offers (also known as “sealed offers”) derive their name from the English Court of Appeal decision in Calderbank v. Calderbank,28[1975] 3 All ER 333 (EWCA). which approved the practice of making offers of compromise expressed to be “without prejudice” but reserving a right to refer to the offer on the question of costs. Such offers can be used to great tactical advantage both in limiting a party’s costs exposure and encouraging sensible settlement discussions. An offer must be in writing, clear and expressed to be “Confidential and Without Prejudice Save as to Costs.” The existence, or amount, of any Calderbank offer is not to be revealed to the tribunal until such time as a decision on the substantive merits has been reached, so as to avoid any risk of actual or perceived bias on the part of the tribunal. This mechanism imposes costs penalties (from the date of the offer) on those who choose to continue with the proceedings in the face of a reasonable offer to settle. The question is essentially whether the offeree achieves a better financial result in the tribunal’s award than it would have achieved by accepting the offeror’s offer. On this basis, if the offeree refuses the offer but fails to “beat the offer” in the tribunal’s award, it can be held to have been unreasonable to have refused the offer and thus be held liable for the offeror’s costs from the date of the offer. Depending on the facts, this can reverse the “costs follow the event” principle from that time onwards – it is possible for an offeree to substantially win the arbitration and yet still be liable for the offeror’s costs. As a result, the timing and terms of Calderbank offers has to be considered very carefully by offerors, as does the response to any such offer by offerees. Most typically, it is the respondent to a claim or counterclaim that makes such an offer (i.e., an offer to pay a sum). Less commonly, such offers (sometimes known as reverse Calderbank offers) can also be made by claimants (i.e., an offer to accept a sum).
The cost consequences of Calderbank offers are largely a matter of logic and common sense. They go to the reasonableness of the conduct of the party who declines the offer. There are no set guidelines in the Arbitration Act in respect of Calderbank offers, and therefore, an English tribunal will commonly be guided by the Civil Procedure Rules when exercising its discretion as to costs where such an offer has been made. A Calderbank offer can therefore provide invaluable assistance to a party who has no choice but to defend exaggerated, unmeritorious or unduly inflated claims brought against them. However, tribunals do not have to take Calderbank offers into account, although their use is well established in England.
The Arbitration Act provides three grounds upon which a costs award may be challenged. These are the same as the bases upon which a substantive award can be challenged, namely: lack of substantive jurisdiction,29Section 67 of the Arbitration Act. serious irregularity of the tribunal,30Section 68 of the Arbitration Act. or an appeal on a point of law.31Section 69 of the Arbitration Act. This latter ground has been particularly narrowly construed by the courts and can be excluded by agreement (including by adopting institutional rules that contain wording to the effect that the award is final and binding and not open to challenge, such as the LCIA and ICC Rules). Finally, it is worth noting that mere clerical errors can be corrected by the tribunal without a formal challenge.32Section 57(3) of the Arbitration Act.