Commercial Court sets aside part of an award for breach of the Tribunal’s duty of fairness

In an article covering Section 68 of the Arbitration Act 1996, Joseph Gourgey of Quadrant Chambers has reported on the case of Ducat Maritime Ltd v Lavender Shipmanagement Incorporated [2022] EWHC 766 (Comm).

Butcher J in the Commercial Court set aside part of an award made by an arbitrator in an LMAA arbitration under section 68 of the Arbitration Act 1996 on the grounds that the Arbitrator had breached its general duty of fairness.

Gourgey said that the decision provided “useful authority on the recourse a party has under section 68 where an arbitrator has made an obvious mistake but declines to make a correction under the slip rule”.

The Award in question arose from a dispute between the Owners (Lavender Shipmanagement) and Charterers (Ducat Maritime) under a time charterparty in respect of the MV Majesty.

The Owners commenced arbitration under the LMAA Small Claims Procedure and claimed $37,831 by way of unpaid hire on the basis of their Final Hire Statement (FHS).

The Charterers denied that the outstanding sums listed on the FHS were due and owing – save that they admitted bank charges and additional war premiums were due – and further sought to deduct $15,070 for the Vessel’s underperformance by way of set-off and counterclaim.

If the Owners were successful on every issue, they would have been entitled to $37,831. If the Charterers had succeeded on all of their defences, and succeeded on their underperformance counterclaim, they would have been entitled to $6,258 (i.e., the underperformance counterclaim, less the admitted sums).

The Arbitrator found that the Owners’ claim succeeded, save that one item, $9,553 for damages for inadequate hull cleaning, was not due and owing. He also found that Charterers’ underperformance counterclaim failed.

It was common ground that what the Arbitrator should have done was award the Owners $28,277.91. This represented the claimed sum ($37,831.83) less the unsuccessful hull cleaning claim ($9,553.92).

Instead, the Arbitrator added the Charterers’ unsuccessful counterclaim of $15,070 to Owner’s total claim of $37,831.83, rather than simply not deducting this sum from the total claim. As a result, he awarded Owners approximately 33% more than they were entitled to.

The Charterers applied twice under section 57(3) of the 1996 Act to the Arbitrator to correct the Award on the basis of a clerical mistake or error. The Owners opposed the application, and the Arbitrator declined to correct the Award.

It was against this background that Charterers sought to have part of the Award set aside under section 68 of the 1996 Act.

This section  provides that the applicant must show:

  • an irregularity falling within one of the exhaustive limbs of section 68(2); and
  • that this irregularity caused substantial injustice.

The Charterers submitted that there was an irregularity falling within section 68(2)(a) – failure of the tribunal to comply with section 33 of the 1996 Act (general duty of the tribunal) – on two alternative bases:

  • The Arbitrator reached a conclusion that was contrary to the common position of the parties, without providing an opportunity for the parties to address him on the issue;
  • He had made an obvious accounting mistake.

On the first ground, Butcher J held that there was such an irregularity, citing  a well-known passage in Russell on Arbitration, 24th Edition.:

Burcher J held that the parties had been in agreement that the Charterers’ counterclaim did not form part of the Owners’ claim. They had not made submissions on that point because there was no need to.

Butcher J also thought it significant that, although the Arbitrator did not realize he made a mistake, he realized that there seemed to be a problem, in that he had calculated the Owners’ claim to be significantly more than was stated in their Claim Submissions.

Gourgey  wrote that “the second ground, whilst strictly obiter, is of more interest”. The Charterers submitted that where an arbitrator makes an “obvious accounting mistake”, this itself will amount to a serious irregularity. The Charterers relied upon the case of Danae Air Transport ASA v Air Canada [2000] 1 WLR 395 – a case decided under the Arbitration Act 1950.

Butcher J found that a gross and obvious accounting/arithmetical mistake may well represent a failure to conduct the proceedings fairly, “not because it represents an extreme illogicality but because it constitutes a departure from the cases of both sides, without the parties having had an opportunity of addressing it”.

The parties had shared a common ground as to how arithmetical processes work and to depart from this may be a procedural irregularity. The judge therefore concluded that “if a ‘glaringly obvious error’ in the award, to use Merkin and Flannery’s phrase, can be said to arise in this way, section 68 can probably be regarded as applicable, without subverting its focus on process”.

Having found that there was an irregularity falling within section 68(2)(a), Butcher J had no issues with finding that there was “substantial injustice” and accordingly set aside part of the Award.

In his conclusion, Gourgey said that the decision provided “much needed clarity on the recourse a party has under section 68 when faced with an award containing a “glaringly obvious error” which the tribunal refuses to correct”.

He noted that the ruling meant that a decision could be challenged, not on the basis that the tribunal was irrational or illogical in its reasoning, but on the basis that it has departed from the common ground parties implicitly shared.

Joseph Gourgey of Quadrant Chambers, acting for the Charterers, was instructed by Menelaos Nicolaou and Maria Bali of Preston Turnbull LLP.