Privy Council rules on ‘serious irregularity’ challenge in international arbitration

Out-Law News | 29 Apr 2021 | 9:24 am | 4 min. read

A recent decision by the Judicial Committee of the Privy Council (Privy Council) provides authoritative guidance on what is required in order to uphold a challenge to an arbitral award on the grounds of serious irregularity.

In their judgment, Lord Hamblen and Lord Burrows held that a serious irregularity challenge does not require a separate and express allegation of substantial injustice by the applicant and a separate consideration and finding of substantial injustice by the court, in order to be successful.

The decision, on a referral by the Court of Appeal of the Commonwealth of the Bahamas, is the first by a highest appellate court to consider the requirement of ‘irregularity causing substantial injustice’ since the 2006 House of Lords judgment in Lesotho Highlands Development Authority v Impregilo SpA. In addition, the judges reviewed a number of significant authorities on challenges to arbitral awards for failures to deal with issues put to the tribunal and failures to give the parties a fair opportunity to present their case.

Hambury Jason

Jason Hambury

Partner, Co-head of International Arbitration

Although a separate and express allegation of substantial injustice is not a legal requirement, it is good practice and should be encouraged

International arbitration expert Jason Hambury of Pinsent Masons, the law firm behind Out-Law, said that the decision would have significant implications for English arbitration practitioners. Although the case arose under section 90 of the 2009 Bahamas Arbitration Act, that provision is materially identical to section 68 of the 1996 Arbitration Act (AA 1996) in England, as well as similar provisions in other jurisdictions with arbitration legislation modelled on the AA 1996.

Decisions of the Privy Council are not binding on English courts but are of persuasive authority, not least because the Board of the Privy Council is made up of leading UK Supreme Court judges.

“The judgment of the Privy Council confirms that substance is more important than form when challenging an arbitral award for serious irregularity,” said Hambury. “However, practitioners preparing challenges to arbitral awards based on serious irregularity would be well advised to heed the advice of Lord Hamblen and Lord Burrows: although a separate and express allegation of substantial injustice is not a legal requirement, it is good practice and should be encouraged. At the very least, it will avoid many of the difficulties encountered in this case.”

“In arriving at their conclusion, Lord Hamblen and Lord Burrows reviewed a number of the key authorities on challenges to arbitral awards for failures to deal with issues put to the tribunal and failures to give the parties a fair opportunity to present their case. In an area of the law where appellate decisions are rare due to the need for leave of the court to appeal under AA 1996 section 68(4), the judgment of the Privy Council is likely to become the leading statement of the relevant legal principles going forwards, and provides authoritative guidance,” he said.

RAV Bahamas Ltd and its wholly owned subsidiary, Bimini Bay Resort Management Ltd (RAV) leased land on the Bahamian island of Bimini to Therapy Beach Club Incorporated (Therapy), a Florida-based company, where it planned to build and operate a restaurant and beach club. The club was to be constructed by RAV to certain timescales, and Therapy alleged it had not properly done so. RAV later successfully sought a declaration that the lease was void, but not before demolishing the club and evicting Therapy from the land.

The parties’ dispute over the demolition and eviction was referred to arbitration, where the arbitrator held that Therapy had been wrongfully evicted from the land in breach of contract. She awarded Therapy substantial damages plus interest and costs.

RAV successfully applied to the Supreme Court of the Bahamas to challenge the award on grounds of serious irregularity. The judge agreed with RAV that the arbitrator had failed to deal with important issues put to her concerning the period for which damages could be awarded; and that she had failed to give RAV a fair opportunity to address certain adjustments that she had made to the way in which Therapy had calculated the total damages. However, this was overturned by the Court of Appeal, on the basis that RAV had failed separately to allege, and the judge had failed separately to find, that the irregularities complained of had caused substantial injustice to RAV.

The question for the Privy Council was whether, in every case involving a challenge to an arbitral award for serious irregularity, there must be a separate and express allegation of substantial injustice by the applicant, and a separate and express consideration and finding by the court that the irregularity complained of has or will cause substantial injustice.

The Privy Council first considered the purpose of the serious irregularity test, as introduced by the AA 1996 – that is, to limit the courts’ intervention in arbitrators’ decisions to those ‘extreme’ cases “where it could be said that ‘the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected’”. Courts in previous cases on this point have recognised the test as imposing a ‘high hurdle’ to court intervention, limiting it to cases where the irregularity has caused or will cause substantial injustice.

However, where substantial injustice has been “both established and found” as a matter of substance, the Privy Council went on to state that it “should not, and does not” make any difference whether there was an express and separate allegation, consideration and finding of substantial injustice. “Undue formalism”, although good practice, is not a requirement, it said.

“It is implicit in any section 90 application that substantial injustice is being alleged and, provided that there is, when required, the necessary evidential material to support that allegation, it will generally be an issue which is properly before the court,” the judges said in their judgment. “That there is no express and separate consideration and finding of substantial injustice in a judgment does not mean that the issue has not been considered and determined, as the present case illustrates.”