Lesotho Highlands v. Impregilo
For Lesotho - Ian Glick QC, Neil Kitchener (instructed by Slaughter & May)
For Impregilo - Nicholas Dennys QC, James Howells (instructed by White & Case)
Arbitration: arbitration Act 1996: currency of award: Award of interest: error of law: whether tribunal exceeded it powers: whether serious irregularity under section 68
The House of Lords, hearing its first ever case under the Arbitration Act 1996, reversed the Court of Appeal in deciding that a tribunal’s award (i) in a basket of currencies differing from that provided in the contract and (ii) including pre-award interest did not, in either regard, amount to the tribunal exceeding its powers - s.68(2)(b) of the Act refers – (Phillips MR dissenting on point (i)); the challenge to the award was accordingly dismissed. However, the tribunal had probably committed an error of law but since the parties’ arbitration agreement excluded any right of appeal under s.69, it was not necessary to decide that issue. Further, the view that s.48(4) gave tribunals a wide discretion, beyond that given by English law as applicable in litigation, regarding awarding monies in different currencies was, although not argued to a conclusion, effectively dismissed 4-1
DMC Category Rating: Developed and Reversed
This case note has been prepared byHew Dundas, International Arbitrator, Mediator and Expert Determiner, who is a Contributor to this website
Background, the Award and the Lower Courts
The Authority challenged the Award in the High Court in respect of both currencies and interest, on the dual basis of lack of substantive jurisdiction (s.67) and excess of power (s.68(2)(b)). Morison J ruled that the Tribunal had had substantive jurisdiction but also held that it had exceeded its powers by (a) expressing the award in a basket of currencies differing from that provided in the contract and (b) awarding interest in circumstances not permitted under Lesotho law. Accordingly, the judge remitted the decisions on currency and interest to the Tribunal with directions as to how it ought to carry out its task afresh.
On appeal to the Court of Appeal the Authority ("rightly") abandoned its s.67 challenge and on 31 July 2003 the Court gave judgment, unanimously upholding Morison J on both points. The contractors appealed to the House of Lords.
(1) Had the Tribunal had the power to express the award in the currencies it had pursuant to s.48(4) or was any power that might otherwise have been available under that section excluded or modified by the terms of the principal contract ?
(2) Had the Tribunal had the power to grant pre-award interest pursuant to s.49 or was any power that might otherwise have been available under that section excluded or modified by the terms of the principal contract or by operation of the law of Lesotho being the substantive law of the contract ?
(3) If the decision of the Tribunal on either point had amounted to an error of law, had it constituted an excess of jurisdiction under s.68(2)(b) ?
Judgment in the House of Lords
Conversely, if it was assumed that the Tribunal had committed an error of law, either erring in the interpretation of the underlying contract or in misinterpreting its powers under s.48(4), in either case, the highest the Authority’s case could be put was that the Tribunal had committed an error of law. However, the real issue was whether the Tribunal had "exceeded its powers" within the meaning of s.68(2)(b) which required addressing the question whether (a) the Tribunal had purported to exercise a power which it did not have or (b) whether it had erroneously exercised a power that it did have. If (b), no excess of power under s.68(2)(b) was involved. Once the matter was approached correctly, it was clear that at the highest in the present case, on the currency point, there was no more than an erroneous exercise of the power available under s.48(4). The jurisdictional challenge must therefore fail.
The reasoning of the lower courts, categorising an error of law as an excess of jurisdiction, had overtones of the doctrine in Anisminic Ltd v Foreign Compensation Commission  2 AC 147 applicable in the public law field; however, it was important to emphasise again that the powers of the court in public law and arbitration law are quite different, particularly post- (but also pre-) 1996. For example, Mustill & Boyd (Law & Practice of Commercial Arbitration in England, 2nd edition, 1989, at p 555) state "If . . . [the arbitrator] applies the correct remedy, but does so in an incorrect way - for example by miscalculating the damages which the submission empowers him to award - then there is no excess of jurisdiction. An error, however gross, in the exercise of his powers does not take an arbitrator outside his jurisdiction and this is so whether his decision is on a matter of substance or procedure." Further, the Departmental Advisory Committee on Arbitration Law ("DAC") had observed (§280), in its report on the Arbitration Bill, that s.68 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". The idea that s.68 contemplated an adjudication which arrived at the "right" conclusion would have been wholly out of place in these recommendations. The DAC report was the matrix of the Parliamentary debates [author’s note – and has been held by the Court of Appeal to be authoritative – see Cetelem S.A. v Roust Holdings Ltd ( EWCA Civ 618)]
Lord Steyn made four observations about s.68:
Nowhere in s.68 was there any suggestion that a failure by a tribunal to arrive at a "correct decision" could afford a ground for challenge but the section did have a meaningful role to play, for example, where, in contradiction of an express agreement in writing of the parties under s.37, a tribunal appointed an expert to report to it or where an arbitration agreement expressly permitted only the award of simple interest and a tribunal, in disregard thereof, awarded compound interest. There was a close affinity between ss.68(2)(b) and (e) since the latter dealt with the position where an arbitral institution, vested by the parties with powers in relation to the proceedings or an award, exceeded its powers. For example, the institution would have exceeded its power of appointment by appointing a tribunal of three persons where the arbitration agreement specified a sole arbitrator.
The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 ("NYC") and the UNCITRAL Model Law of International Commercial Arbitration Art. 34 were part-parents of s.68 and Lord Steyn considered it likely that the inspiration for the words "the tribunal exceeding its powers (otherwise than by exceeding its substantive jurisdiction)" in s.68 were the terms of NYC Art.V(1)(c) (and related jurisprudence) which dealt with cases of excess of power or authority of the arbitrator. It was well established that Art.V(1)(c) had to be construed narrowly and should never lead to a re-examination of the merits of the award. The erroneous exercise of an available power could not by itself amount to an excess of power and a mere error of law would not amount to an excess of power under s.68(2)(b). For these reasons the Court of Appeal had erred in concluding that the Tribunal had exceeded its powers on the currency point; if the Tribunal had erred in any way, it was an error within its power.
In Lord Steyn’s view, S.68(2)(b) applies where the tribunal has acted within its substantive jurisdiction but has exceeded its powers under one or more of the arbitration agreement, the terms of reference or the Act but that section does not permit a challenge on the ground that the tribunal had arrived at a wrong conclusion as a matter of law or fact. For example, a mistake in interpreting the contract is the paradigm of a "question of law" which may be appealed under s.69. In cases where the s.69 right of appeal has by agreement been excluded (as here), Lord Steyn considered that it would be ‘curious’ to allow a s.68(2)(b) challenge based on a mistaken interpretation of the contract and that, where there was no exclusion agreement, it would be ‘strange’ to allow parallel challenges under ss.68(2)(b) and 69.
Lord Steyn concluded:
The Interest Point
In any event, the Authority faced other formidable difficulties regarding pre-award interest: the Tribunal had held that the power under s.49(3) was at first sight available - this conclusion was inescapable and the only remaining question was as to whether the provisions of cl.60(10) of the contract could amount to an agreement to the contrary. The Tribunal had noted that that clause related only to certified payments whereas the arbitration proceedings were concerned with sums which had not been certified: there was therefore no ‘agreement to the contrary’ (s.49(1)). Morison J had appeared to take the view that the law of Lesotho might be relevant but only an agreement in writing, as defined in the Act, can qualify as an ‘agreement to the contrary’ and the law of Lesotho was not an agreement to the contrary in writing. The power to award simple or compound interest as "meets the justice of the case" had been available to the Tribunal but, in any event, for the reasons given above, if it was assumed for the sake of argument that the Tribunal had awarded interest which ought, as a matter of Lesotho law, not to have been awarded, it might have made an error of law but it certainly had not acted in excess of power within the meaning of s.68(2)(b).
Lord Steyn therefore allowed the appeal with costs.
Lord Phillips agreed with Lord Steyn as regards the award of interest but not as regards the currencies. The pre-1996 jurisprudence (which Lord Steyn had dismissed) dealt with the principles that governed the power of the court or an arbitrator (and no distinction was drawn between the two) in relation to making an award in a foreign currency and the rates at which foreign currency obligations should be converted, when conversion was appropriate. Lord Steyn had considered that s.48(4) had replaced this body of substantive law, leaving it open to tribunals to approach the currency of their awards, and any questions of currency conversion, in accordance with their discretion as to what is appropriate in all the circumstances; this is what the Tribunal had done in the present case.
There were two possible ways of interpreting s.48(4): (i) it did no more than make it plain that tribunals had the procedural power to make an award in any currency, that is, the sub-clause reproduced in statutory form the position that already prevailed under English law; or (ii) the alternative interpretation, that of the Tribunal and of Lord Steyn, was it had made a radical change to English substantive law. However, no decided case was cited to the House in support of either interpretation but Merkin on The Arbitration Act 1996 had said that it was unclear from the Act whether s.48(4) gave a tribunal an absolute discretion and Mustill & Boyd and Russell on Arbitration followed the traditional approach, namely that s.48(4) reflected the existing law. Consequently, Lord Phillips did not accept that s.48(4) had had the radical effect argued by Lord Steyn, finding the difference in language between ss.48(4) and 49 significant: had the draftsmen intended to have given tribunals the power to deal with foreign currency obligations according to a broad discretion, this should have been made plain by the use of language such as the phrase "as it considers meets the justice of the case" found in s.49.
The Tribunal had adopted an approach to currencies that had departed from English law which, it is normally assumed in the absence of evidence to the contrary, was the same as the law of Lesotho. Had this been simply an error of law, excluded from court review by s.69, or had it been an example of a tribunal "exceeding its powers (otherwise than by exceeding its substantive jurisdiction)", so as to be capable of amounting to a "serious irregularity" under s.68? The latter was the true position: the concept of an excess of power that was not an excess of jurisdiction was not an easy one, but it applied to the Tribunal’s conduct in this case. It had expressly, but wrongly, stated that s.48(4) had given it a discretionary power and it had then purported to exercise that power. It followed that the Tribunal had been guilty of a serious irregularity under s.68(2) provided that its conduct had resulted in "substantial injustice" to the Authority. That conclusion required consideration of the effect of the Tribunal’s approach to currencies to determine whether it had given rise to "substantial injustice" However, as Lord Phillips was in a minority of one on the serious irregularity point, this question did not arise and both limbs of the appeal would be allowed.
Lord Scott agreed with Lord Steyn that the appeal should be allowed with costs but he disagreed on the currency issue, considering that the Tribunal might have committed an error of law. Even so, selection of the wrong exchange rates did not constitute an excess of jurisdiction under s.68(2)(b).
Lord Rodger agreed with Lord Steyn save as regards the currency issue.
While the author’s personal views largely coincide with those of Lord Steyn, preliminary discussion with distinguished colleagues has revealed a body of opinion which believes the House of Lords’ decisions in this case to be wrong and that the Court of Appeal had been correct; be that as it may, the present decision is final until the House revisits those issues.So far as the contentious decision regarding currencies is concerned, it is reassuring that Lord Steyn saw fit to emphasise that the powers of the court in public law and in arbitration law are quite different, mirroring other differences in the English courts regarding the handling of arbitration applications as opposed to litigation; Civil Procedure Rules Part 62 provides its own regime for arbitration applications and it should never be assumed that any other part of CPR applies at all in an arbitration case.
On a more basic level, it is evident from their Lordships' speeches that a mere monetary difference does not of itself qualify as a ‘substantial injustice', as in the present case where the award effectively saddled the Authority with the consequences of the collapse of the Maloti between 1996 and 2002; this is consistent with the leading adjudication case Bouygues v Dahl Jensen4 where the adjudicator miscalculated monies due but his decision was upheld in the Court of Appeal since he had decided the right issue be it computationally wrongly. This is undoubtedly correct as a general principle and it is reassuring to have it confirmed by the House of Lords.
Postscript: a series of recent English court judgments in arbitration cases have elevated "Arbitration Law" by Professor Robert Merkin and his annotated "Arbitration Act 1996" in the hierarchy of the authorities, now sitting only just below the DAC Report, itself given strong Court of Appeal endorsement in Cetelem S.A. v Roust Holdings Ltd  EWCA Civ 618.
* Relevant sections of the Arbitration Act 1996
1. Bay Hotel and Resort Limited and Zurich Indemnity Company of Canada v. Cavalier Construction Co. Ltd.
and Cavalier Construction Co. Ltd (Turks And Caicos Islands)  UKPC 34 (16th July, 2001)
2. Associated Electric and Gas Insurance Services Inc v European Reinsurance Company of Zurich  UKPC 93
3. Fencegate Ltd v NEL Construction Ltd (Case HT01/000088)
4. Bouygues Ltd v Dahl Jensen Ltd  BLR522
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