England’s High Court, in Ducat Maritime Ltd v Lavendar Shipmanagment Inc  EWHC 766 (Comm), recently set aside an arbitral award under section 68(2) of the Arbitration Act 1996 (essentially equivalent to s.4 of Schedule 2 of Hong Kong’s Arbitration Ordinance, Cap 609 (Arbitration Ordinance)) on the basis of serious irregularity, in that the arbitrator had made an obvious accounting mistake, causing substantial injustice, thereby breaching the arbitral tribunal’s duty to act fairly and impartially between the parties under s.33 of the Arbitration Act 1996 (which is similar to s.46 of the Arbitration Ordinance).
The arbitral award in question arose from a dispute between the Owners and Charterers, under a charterparty in respect of a vessel. The charterparty contained an arbitration clause, requiring the parties to submit any disputes to arbitration under the LMAA Small Claims Procedure 2017.
The Owners were the claimants in the arbitration, and sought US$37,831.83 by way of unpaid hire. The Charterers sought to deduct US$15,070 for the vessel’s underperformance, by way of set-off and counterclaim, and consequently counterclaimed for overpaid hire, which was said to amount to US$6,258.35.
Based on the arbitrator’s findings in respect of liability, the owners should have been awarded US$28,277.91. However, due to a calculation error, the arbitrator mistakenly valued the owners’ claim at US$53,692.66, which was more than the US$37,831.83 that the Owners had in fact claimed. The arbitrator determined that they could not award the owners a sum which exceeded the amount actually claimed and awarded them US$37,831.83.
The Charterers applied twice to the arbitrator under s.57(3) of the Arbitration Act 1996 (similar to s.69 (1) (a) of the Arbitration Ordinance), seeking a correction of the award on the basis that there had been a clerical mistake or error arising from an accidental slip or omission, but the arbitrator declined the applications, stating that there was “no error or mistake in the calculations”.
The Charterers then applied to the High Court to set aside part of the award under s. 68(2)(a) of the Arbitration Act 1996.
Sections 68 and 33 of the Arbitration Act 1996
“(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the grounds of serious irregularity affecting the tribunal, the proceedings, or the award…
(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant–
(a) failure by the tribunal to comply with section 33 (general duty of tribunal);…”
Section 33 of the Arbitration Act provides:
“(1) The tribunal shall-
a) act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting his case and dealing with that of his opponent, and
b) adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay or expense, so as to provide a fair means for the resolution of the matters falling to be determined.
(2) The tribunal shall comply with that general duty in conducting the arbitral proceedings, in its decisions on matters of procedure and evidence in the exercise of all other powers conferred on it.”
The court referred to the fact that for a s.68 challenge to succeed, the Charterers had to show an irregularity that fell within the exhaustive list of categories set out in s.68(2) of the Arbitration Act, and that the irregularity had caused or would cause substantial injustice to the applicant. The court also noted that an applicant, under s.68 has to surmount a “high hurdle” or high threshold and bears a heavy burden and that the section was “really designed as a long stop, only available in extreme cases, where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected“.
Charterers’ case on irregularity
The Charterers’ argued that the arbitrator had gone so wrong that justice called out for it to be corrected and that there was an irregularity falling within s.68(2)(a) on two bases:
- The arbitrator had failed to comply with s.33 of the Arbitration Act because he reached a conclusion that was contrary to the common position of the parties, and for which neither party contended, without providing an opportunity for the parties to address him on the issue.
- He had made an obvious accounting mistake.
The Charterers contended that this irregularity had caused them substantial injustice.
Court’s decision on irregularity
The Court held that there was an irregularity, constituted by the arbitrator’s failing to adhere to the common ground between the parties, in deciding how much was owed on a basis which had not been argued by either party, without giving them the opportunity to comment on it. This represented a failure to comply with the s.33 duty. The common ground was that the Owners’ total claims added up to US$37,831.83, and that the underperformance claim was the Charterers’ counterclaim, not the Owners’ claim. The arbitrator had departed from that common ground and had failed to give the Charterers an opportunity of addressing him on two key aspects of his decision, namely: (i) that the Owners’ claims, in fact, added up to US$53,692.66; and (ii) that the underperformance claim was a part of the Owners’ claim.
The court said that the position was 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. That issue was not in the arena.
Furthermore, while he did not realise that he had made a mistake, the arbitrator did realise that there seemed to be a problem. In the award, he recognised that the total of the amounts which he was treating as being due to the Owners was greater than the amount they had claimed. Without asking for an explanation, the solution he imposed was, as he saw it, to confine the Owners to their claim, and award them the amount of US$37,831.84.
The court said that when the arbitrator realised that the amount he thought was due to the Owners was more than the amount they had claimed, and that this was unexplained, he should not have proceeded to resolve the problem as he did, without giving the parties the opportunity of commenting on it. Had he done so, the error would have come to light. That, the court said, was a sufficient basis to conclude that there was an irregularity within s.68(2)(a).
In respect of the arbitrator having made an accounting error, the court said that the focus of the s.68 enquiry is whether there has been a failure of due process, and not whether the tribunal has got the answer right, to be unquestionably correct. Illogicality or irrationality on the part of the tribunal does not, itself, bring the case within one of the heads of s.68(2). However, the court said that a gross and obvious accounting mistake, or an arithmetical mistake of the 2 + 2 = 5 variety made in the award, 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 put by both sides, without the parties having had an opportunity of addressing it. In such a case, neither party’s case is likely to have included the mistake as a basis for the result arrived at, and, in making the error, the tribunal is likely to have departed from common ground between the parties as to how arithmetical processes work, or whether items in an account are credits or debits, and to have done so without giving the parties an opportunity of addressing the justifiability of the departure. If a “glaringly obvious error” in the award can be said to arise in this way, s.68 can probably be regarded as applicable, without subverting its focus on process.
Charterers’ case on substantial injustice
The remaining question was whether the Charterers could show that the irregularity found by the court to have occurred, caused them substantial injustice. The court held that there was substantial injustice. It had no doubt that if the Charterers been given the opportunity before the award was made, to comment on the way in which the arbitrator was proposing to deal with its failed counterclaim and whether the Owners’ total claim should have been regarded as US$53,692.66, the arbitrator might well have reached a different view, and that the result might have been significantly different. The court regarded it as substantially unjust that a party should, by reason of an error such as that made by the arbitrator here, be ordered to pay about 33% more than was due by way of principal, and be ordered to pay interest on its own unsuccessful counterclaim. This, the court said, went well beyond what could reasonably be expected as an ordinary incident of arbitration, even small claims procedure arbitration.
Having found a serious irregularity which affected the award, the court considered it inappropriate to remit the award to the arbitrator, given that there had already been two unsuccessful applications to him to correct the award, and also given that it would involve unnecessary costs. The court therefore set aside part of the award, namely the sum of US$9,553.92.
The wording of sections 68 and 33 of the Arbitration Act 1996 is similar to section 4 of Schedule 2 (applicable if opted in by the parties) and section 46 of the Arbitration Ordinance in Hong Kong respectively. Whilst the Arbitration Act and Arbitration Ordinance have provision for correction of any errors in computation, any clerical or typographical errors or any errors of a similar nature, they do not provide for the Court to correct such errors if the tribunal refuses to do so. The aggrieved party has to resort to section 68 of the Arbitration Act or section 4 of Schedule 2 of the Arbitration Ordinance, as the case may be, for the correction. That is probably why the English Court has to stress that illogicality or irrationality on the part of the tribunal does not, itself, bring the case within one of the heads of s.68(2) but it may amount to a failure to give the parties an opportunity of addressing the tribunal’s departure from the common grounds of the parties in breach of section 33(1)(a) of the Arbitration Act 1996.
For further information, please contact:
Kwok Kit (KK) Cheung, Partner, Deacons