If you don’t ask…sometimes you do get!

6 December 2018

It is well established that arbitrators should request parties’ views when introducing a novel point in a dispute (Zermalt Holdings SA v NuLife Upholstery Repairs Ltd[1]).  However this does not always happen…

In RJ & Anor v HB[2], the Respondents in an ICC arbitration challenged a number of awards for serious irregularity under s.68(2)(a) Arbitration Act 1996 (the “Act”). The arbitration arose out of arrangements entered into between HB and RJ for the latter’s expansion of his interest in the banking sector by merging Bank 1 and 2. There was an agreement in principle that RJ would provide US$75m in cash to enable HB to acquire a controlling interest in Bank 2 with a view to RJ receiving a minority interest in Bank 2 following the Bank 1-2 merger.

For regulatory compliance reasons, the agreement in principle could not be implemented. Therefore, a complex transaction structure was implemented in which, inter alia, (i) HB acquired a controlling interest in Bank 2; (ii) HB procured that Bank 2 acquire Bank 1; and (iii) RJ acquired approximately 25% of the post-merger Bank 2 for €55m (then equivalent to US$75m), so far as that was lawful and subject to obtaining any necessary authorisations. HB did (i) and (ii) but (iii) did not occur.

In the arbitration, HB alleged that RJ and his investment vehicle (L Ltd) were in breach of an obligation to obtain, or to seek to obtain, necessary authorisation for the transaction and sought, inter alia, declaratory relief. The awards ultimately granted, however, held, inter alia, that “[RJ] is the beneficial owner of the shares in [Bank 2] purchased with his or [L Ltd’s] US$75 million” notwithstanding the fact that the claims and cross-claims in the arbitration were presented on the basis that the obligation to take a shareholding in Bank 2 had not been performed.

RJ and L Ltd challenged parts of the awards on the basis that the arbitrator granted relief that was never sought by HB and was significantly different to anything which the parties had contemplated. This was done without notice to the parties thereby depriving RJ and L Ltd of any opportunity to address the issue.

Mr Justice Andrew Baker agreed and ordered that various parts of the award should be set aside, together with the related reasoning.

Baker J disagreed with HB’s counsel’s suggestion that RJ and L Ltd had a reasonable opportunity to deal with this new issue because of three brief exchanges during oral closing submissions and the procedure the Arbitrator adopted for the preparation of the Final Award. Baker J was “satisfied that those exchanges did not do enough to put the parties on notice, fairly or at all, that the Arbitrator might be contemplating such a declaration…[the last exchange] would reasonably have seemed just an exploration of the consequences of ordering RJ to take [the Bank 2 shareholding]…[3]

Baker J was also satisfied that the procedural irregularity caused or would cause substantial injustice because RJ has been declared to beneficially own a large minority stake in Bank 2 which he does not wish to own and does not have regulatory approval for, which could expose him to a real risk of financial penalties from the regulator.

The arbitrator was not, however, removed from the arbitration, and it will be of interest to practitioners that Baker J commented that ‘s.68 does not empower the court to remove an arbitral tribunal, that being reserved to s.24, and that a direction purportedly pursuant to s.68, as part of a setting aside an award, in whole or part, that matters thus requiring a fresh determination should go to a new tribunal, would amount to removal of the original tribunal and so would require a s.24 claim”.[4]

[1] [1985] 2 EGLR 14

[2] [2018] EWHC 2833 (Comm)

[3] [31] Ibid

[4]     [20] ibid.