For arbitration to remain an effective international dispute resolution process

For arbitration to remain an effective international dispute resolution process, it is vital that arbitral awards be respected and provide finality in resolving a dispute. Critically examine the ways in which an arbitration award may be challenged, and how far those bases for challenge are clear and justifiable.

Generally, a losing party before an arbitral tribunal faces an uphill task to convince the Court to set aside or vacate the award on procedural grounds or grounds of arbitrator misconduct or bias.
(1) Ways in which an arbitration award may be challenge
• To annul, set aside or vacate the award
The UNCITRAL Model Law expressly provides that, “the Court at the seat of the Arbitration is the proper seat of the arbitration”. This has been reciprocated in the statutory law (lex arbitri) of over seventy jurisdictions , the court at the situs is considered to have supervisory jurisdiction over the arbitral process.

Margarete Moses emphatically opines that “Parties are unlikely to choose a law different from the curial law of the situs as it would result in unnecessary complication in having a court apply a procedural law different from its own.”

A losing party in an arbitration proceeding can bring an action to set aside an award on procedural or public policy grounds. A Challenge to an award can be brought in the court of the situs and or in the court where the prevailing party is attempting to enforce the award against the assets of the losing party.

For instance, article 828 of the Italian Code makes provision for the annulment of an arbitration award within 90 days from the date on which the party bringing the challenge was notified of the award in accordance with the rules for service of claims in judicial proceedings.

Also, when the seat and the property of the losing party of the arbitration is in for example Sierra Leone, the Court will be in a neutral situs. It would hear both motions of the losing party to vacate and enforce the award. The assets of the parties before the arbitral tribunal, are likely to be in a jurisdiction other than the one where the arbitration is held. The motion to vacate will take place in the courts of the situs, but the motion to enforce will be in the jurisdiction where the relevant assets are located.

The Courts have sometimes confused an action to vacate an arbitration award and an action to enforce an arbitration award. It is possible to institute both actions simultaneously in the same court.

A challenge for the annulment of award may be brought on the following grounds:
a) Procedural violation
b) Error of law
c) Breach of public policy

• Bringing a challenge to another board or arbitration tribunal

The International Center for Settlement of Investment Dispute (ICSID) Convention, a treaty ratified by 153 Contracting states provides that “a party to an award can appeal only to another ICSID arbitral tribunal.” The parties have a right to request another tribunal to render an award if the second panel instituted annuls the original award . This process is cumbersome and against the principles of equity as it only permits an aggrieved party to challenge the award in another ICSID tribunal

In some industries like the Maritime industry and certain trade associations, aggrieved parties can initiate an action in another arbitration panel or to a Board of Appeal. For instance, the Grain and Feed Association (GAFTA), an international trade association with over 1,700 members in 90 countries provides a Board of appeal, consisting of either three or five members of the Association to resolve a dispute which has occurred over an arbitration award. The principle of neutrality is eroded as the arbitrators in the tribunal are a member of the specific industry making it difficult for an aggrieved party to challenge an award.

The European Court of Arbitration has developed a formula in which the initial arbitration is heard by a sole arbitrator, with the possibility of an appeal to a panel of three arbitrators . The aggrieved party is obliged to deposit the amount awarded against it with the registrar or the bank of the arbitral institution as security if the award is not vacated on appeal, the amount of the award can be paid immediately to the prevailing party.

An aggrieved party, after objecting to the arbitral tribunal might be financially incapacitated to foot the cost of the security to challenge the award. This method will prevent the effectiveness of the arbitration tribunal.

(2) How far those bases for challenge are clear and justifiable
Grounds of challenge
An arbitral award can be challenged in most jurisdictions on merit, jurisdictional, procedural and statutory grounds.
a.) Jurisdictional issues
A party to the arbitration can challenge the jurisdiction of the tribunal at the commencement of the process when it would be more efficient than after the parties have expended time and resources to reach the final award. If a party boycotts the proceedings, because permission was not granted by the court to initiate action to challenge the award, costs will be imposed and the award enforced despite the non-participation.
A jurisdictional challenge is usually premised on a claim that the tribunal exceeded its powers in granting an exorbitant quantum as damages in favor of a party . An award may also be challenged if the tribunal fails to consider all the issues presented by the parties or if it decides certain issues only. The court may give judgement in favour of the claimant party challenging the jurisdiction of the arbitral tribunal by ruling that issues improperly decided to be severed leaving the award as to other issues intact.

A case illustrating excess of power by an arbitral tribunal is General Organisation of Commerce and Industrialisation of Cereals of the Arab Republic of Syria v SPA Simer, Italy, Corte di Apello Trento – a case which involves a request for the enforcement of an award rendered in Syria based on an agreement providing for arbitration in Syria for non-technical disputes and arbitration under the ICC Rules of Arbitration for technical matters.

The court in Trento, Italy, applied the following yardstick: given that Syrian arbitrators had decided technical as well as non-technical matters and that only their decisions in respect of non-technical’ matters were to be enforced, the court held that “before a certain date the disputes were of a non-technical nature and that thereafter they were technical”.

It is clear from the above that a challenge premised on jurisdictional issue are unsuccessful the claimants are usually unable to prove that the arbitral tribunal ultra vires it authority.

Procedural challenge

The lex abitri in most jurisdictions provide that certain standards of due process must be met . The United Nations Convention on International Trade Law (UNCITRAL) Model Law a party can challenge an arbitral tribunal on four grounds:
a) “A party must not be under any incapacity, and the agreement must be valid”.
b) “A party must have been given proper notice of both the appointment of the arbitrator and the scheduling of the proceedings, and must have been able to present its case”
c) “The subject matter must be within the scope of the arbitration agreement”
d) “The Arbitral tribunal must be constituted in accordance with the agreement of the parties”.

The claimant party challenging the award of the arbitration bears the burden of proof that the subject matter is arbitrable and the award conflicts with the public policy of the state. In most jurisdictions, an award would be vacated if it was in consistent with the fundamental principles of equity and natural justice.

An award which is compromised with corruption, fraud or lack of integrity is considered as a violation of public policy and an aggrieved party may challenge it efficacy, requesting the Court to annul the award. This public policy has received legislative backing in the United States of America where the Federal Arbitration Act(FAA) expressly provides specific grounds for vacating an award. These grounds include:
1. “the award was procured by corruption, fraud or undue means”
2. “there was evident partiality or corruption in the arbitrators”
3. “the arbitrators were guilty of misconduct… or… other misbehavior by which the rights of another party have been prejudiced.”

Similarly, the English Arbitration Act provides that “a party may challenge an award based on serious irregularity affecting the tribunal, the proceedings or the award.” The Swedish Arbitration Act permits parties to “challenge an irregularity which influences the outcome of the case”.

However, some courts recognize public policy as a potential ground to set aside an award on this ground usually fail. For instance, in Reliance Industries Ltd v. Enron Oil ; Gas India Ltd – the Court refused to enforce an award because the issues related to Indian Law, not the English Law. The High Court in this case concluded that “in the event, the award is sought to be enforced outside India, it would leave the Indian party remediless is without any basis, as the parties had consensually provided that the arbitration agreement will be governed by the English Law. The Court will consider the issue by applying Indian Law viz the principle of public policy as it prevails in Indian Law.”

Attempt to set aside an award on the grounds of public policy usually fails. In Seymour v Blue Cross/ Blue Shield – the Claimants appeal to vacate the arbitration award was denied by the Court because the defendants were not responsible for covering the health insurance benefits for the appellants. The Court held that “the Claimants did not establish a public policy violation sufficient to overturn the arbitrator’s award. The arbitrator’s decision in favour of Blue Cross/Blue Shield does not violate a clearly expressed law.”

For a vacatur to succeed on the grounds of public policy, it must prove that the arbitrator understood the law but deliberately disregarded it . The Courts in some jurisdictions are unable to meet this standard. In Hall Street Association v Mattel – the Court eliminated manifest disregard as a ground for vacatur.

Statutory Challenge

Generally, there is no possibility of appeal to the English Court on questions of fact. The Arbitration Act recognizes the doctrine of “KompetenzKompetenz” through the domestication of the Model Law which allows the court to rule on its own substantive jurisdiction

An aggrieved party in an Arbitration process can challenge an award under statutory law. For instance, where the seat of the arbitration is within England and Wales, the Arbitration Act 1996(AA 1996) provides three routes in sections 67, 68 and 69 under which an arbitration award can be challenged in the English courts. Sections 67 and 68 are mandatory provisions which cannot be contracted out by parties. The threshold for challenging an arbitral award is of a high standing and the courts will only intervene in arbitration award where the merit of the case deserves it.

Under Section 67, a party can challenge an arbitral award on the substantive jurisdiction of the tribunal. The essential elements for substantive jurisdiction include
a) “A valid arbitration agreement”
b) “Constitution of a proper tribunal”
c) “matter must be submitted to arbitration in accordance with arbitration agreement”

The regime of section 67 is only operational as a last resort where the claimant has already pursued other options for challenging the jurisdiction of the tribunal such as section 31 which deals with the tribunal’s substantive jurisdiction at the outset of the proceedings. Section 32 which makes provision for the determination of preliminary point of jurisdiction. Section 72 which deals with the rights of a person who is alleged to be a party but takes no part in the proceedings.

The Act prevent vexatious litigants from using the Courts as a delaying mechanism to prevent the other party from yielding the fruits of justice. A vacatur is expected to conduct his case in a reasonable time, whilst the arbitration continues.

In Ruby Roz Agricol LLP v The Republic of Kazakhstan – it was held that “the tribunal which had made an award did not have jurisdiction to hear substantive dispute because there was no valid arbitration agreement between the parties under the relevant investment contract.”

Section 68 makes provision for a party in an arbitral proceeding to challenge an arbitral award on the grounds of serious irregularity affecting the tribunal, proceedings or award. Section 68(2) sets out nine grounds of serious irregularity which must result in substantial injustice to the applicant. If the applicant is successful the court may remit the award to the tribunal in whole or in part for reconsideration, set the award aside in whole or in part, or declare the award to be of no effect in whole or in part.

In Symbion Power LLC v Venco Imtiaz Construction Company -the Court considered an application under section 68(2) (d) of the Arbitration Act of 1996. The Claimant alleges serious irregularity in the award of an arbitral tribunal because the tribunal failed to deal with all issues that were put before it.

The Court held that “there is a strong public interest in the publication of judgements concerning arbitrations because of the public interest in securing the appropriate standards in the conduct of arbitrations to be weighed against the party’s legitimate expectations that arbitrations are confidential.”

Another case in point illustrating substantial irregularity is Van der Giessen De-Noord v Imtech – a case concerning an electrical contract in which the arbitration hearing was highly complex hearing and substantial plea of evidence. The Court held that “the claimant had suffered substantial injustice because of the high interest rate which did not include a waiver, estoppel or defence.”

A vacatur can appeal an award on a question of law arising out of section 67 and 68 of the Act, or the provision in the arbitration agreement or by adopting a set of rules of the International Court of Arbitration or the London Court of International Arbitration which explicitly exclude any right of appeal.

Section 69 guarantees the right to appeal on a point of law. The applicant must obtain the agreement of the other parties to the appeal or alternatively, the leave of the court. Parties will be advised to obtain the agreement of the other parties and to apply to the court for permission when there is difficulty.

For instance, in Enterprise Insurance Company Plc v U-Drive Solutions (Gibraltar) Limited-the parties agreed to certain matters being referred to the court under section 69. Justice Mouler held that “the consent of the parties to a section 69 appeal did not mean that the court was precluded from examining if the requirements of a section 69 were established. She expressed doubts on section 69 that it allows parties to confer jurisdiction where none would otherwise exist.”

In the United States of America, the grounds on which a court may vacate an arbitration award under the Federal Arbitration Act 1925 and the Uniform Arbitration Act 1955. Section 10 of the Federal Arbitration Act makes provision for the court to vacate an arbitration award on the grounds of fraud, corruption, undue influence and misconduct.

In the locus classicus case of Commonwealth Coatings Corporation v Continental Causality Co. It was held by the Supreme Court that “the failure of an arbitrator and a party to the arbitration to disclose a substantial business relationship required that the arbitration award be vacated on the grounds of undue influence or evident partiality.”

A three- part test to determine whether an arbitration award was procured by fraud was established in Bonar v Dean Witter Reynolds Inc – it was held that

Even though this decision has been adopted in numerous decisions claimants are rarely successful. For example, in Lafarge Conseils et Etudes, S.A v Kaiser Cement & Gypsum Corp – it was held that “the Claimant should be precluded from challenging the award because it failed to subpoena an officer of electrical contractor who it believed had committed fraud.”

Further, to challenge an award on statutory grounds the vacatur must show proof of evident partiality. The General rule is that an arbitrator is obliged to disclose substantial business relationship with a party before the arbitration tribunal. Failure to make disclosure may result in vacating the order by the court.

In More Lite Construction Corporation v New York City District Council where it was held that “evidential partiality will be found where a reasonable person would have to conclude that an arbitrator was partial to one party, the court vacated the award in favour of the local union because the father of the arbitrator was vice-president of international union to which local union belonged.”

A general principle apparent in claims is arbitrator bias or partiality. A party must object on the record as soon as it acquires knowledge of facts supporting such a claim. A party may be deemed to have waived the right to object if he fails to disclose such findings.

For instance, in York Research Corporation v Landgarten – a party waived the right to object to the appointment of an arbitrator and made objections after the commencement of the proceedings. It was held that objections raised after facts presented in the proceedings cannot be used to vacate the award.

In Health Services vs Management Corporation – it was held that “a losing party in arbitration waived its right to object to an arbitrator based on prior business relationships with the prevailing party because the losing party did not object until the third day of hearing, more than two months after first learning of the relationship.”

A dissatisfied party can challenge an award because the arbitrator failed to postpone a hearing. In Tempo Shain Corporation v Bertek Inc – the court found that “it was improper to refuse to continue the hearings when a witness became temporarily unavailable to testify after his wife was diagnosed recurrence of cancer.”

In Tube & Steel Corporation v Chicago Carbon Steel Products – The Court vacated an award in which arbitrators refused a party’s request for a one- week postponement and held the hearing in the part’s absence. The court found that the arbitrators refused a party’s request for a one-week postponement. The court held that “the arbitrators placed their personal convenience over the reasonable availability and convenience of the parties.”

The discretion to postpone a hearing is on the arbitrator. The Court will not vacate an award where the arbitrator provides reasonable excuse. In Berlacher v Pain Webber Inc – It was held that “where the condition of the vacatur was not life threatening the award will not be vacated.”

Article 827-831 of the Italian Code of Civil Procedure (the CCP) makes provision for challenging an award in an arbitration proceeding within an Italian seat. These provisions set three grounds for challenging an award. These include interalia:
a) “a challenge for the annulment of an award (Articles 828-830)”
b) “a challenge for the revocation of an award (Articles 831, first and second paragraph)”
c) “a third-party challenge of an award (Article 831, third paragraph)”

Although, International and domestic conventions have provided avenues to ensure that arbitration awards are respected and provide finality in the resolution of dispute
Procedural violation, breach of public policy, jurisdictional issues and error in the law has presented challenges for parties seeking neutrality and equity from the process.

Further, these challenges though clear and justifiable present uphill task for parties to prove corruption, fraud, undue influence and misconduct of arbitrator they are obliged to show evident partiality or bias in substantial business dealings.

Finally, in some jurisdictions parties must show substantial irregularity in the arbitration proceedings which has resulted in injustice. This might result in delay and expenses as the primary reason why the parties resorted to arbitration is to resolve their disputes within reasonable time. In Conclusion I submit that arbitration remains ineffective in international dispute resolution process as parties are unable to get justice

BIBLOGRAPHY

1. The UNCITRAL model law
2. The Italian Code of Civil Procedure
3. The Federal Arbitration Act 1925
4. The Uniform Arbitration 1955
5. The International Center for Settlement of Investment Dispute Convention
6. Moses, Magrete. L. The Principles and practice of International Commercial Arbitration Cambridge University Press
7. Rees, Peter J. International Commercial Litigation; London Iss.23, (October 1997): 36-38
8. David A. Senter; Andrew L. Chapin, Statutory Grounds for Challenging Arbitration Awards,19 Construction Law 30 (1999)
9. Ferdinando Emmanuel Recent development in the challenge of international arbitration awards Arbitration newsletter 2013