Lesotho Highlands v. Impregilo

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Lesotho Highlands Development Authority v. Impregilo SpA and others
English House of Lords: Lords Steyn, Hoffmann, Phillips MR, Scott and Rodger:
[2005] UKHL 43 on appeal from [2003] EWCA Civ 1159, itself on appeal from [2003] 1 All ER (Comm) 22; [2002] EWHC 2435 (Comm)
The full text of the judgment can be located at:


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 by Hew Dundas, International Arbitrator, Mediator and Expert Determiner, who is a Contributor to this website

The Arbitration Act 1996 makes it difficult for parties to appeal to the High Court against arbitration awards (recent jurisprudence shows that the great majority of appeals are dismissed) and makes it much more difficult to appeal to the Court of Appeal; so there are relatively few arbitration cases in the latter court. Perhaps unsurprisingly, no appeal under the Act has, prior to the present case, been heard in the House of Lords, although isolated cases from other jurisdictions (Bay Hotel1 (Turks & Caicos) and AEGIS 2(Bermuda)) have come before the Judicial Committee of the Privy Council. There is, perhaps, a second reason for the Act being a stranger to the House - as demonstrated most clearly by several recent maritime arbitration cases in the High Court – namely, the genuinely high quality of English arbitrators, as a consequence of which the great majority of ss.68/69 challenges are dismissed and several arbitrators have been highly commended by the judiciary.

The Facts
In 1991 the Lesotho Highlands Development Authority engaged a multi-national consortium including Impregilo (the "Highlands Water Venture" or "HWV") to construct a dam in Lesotho under a standard FIDIC ‘Conditions of Contract’ (4th edition), governed by the law of Lesotho; the contract incorporated an arbitration agreement (ICC Rules, London/Arbitration Act 1996, English language). The dam was completed in 1998. HWV made a number of claims for reimbursement of increased costs and for upwards adjustments to prices and rates. Following initial rejection by the Authority, the Engineer also rejected these claims and an arbitration ensued before a very high-calibre Tribunal.

Background, the Award and the Lower Courts
In 2002, the Tribunal made an interim award in favour of HWV in a basket of currencies (Lira, Sterling, French Francs and Deutschmarks) and awarded simple interest from when the monies had effectively become due (1996/97). The Tribunal concluded that it had the relevant powers under s.48(4)* and s.49(3)* respectively. The principal commercial issue affecting the award was that if the amounts awarded had been made under the contract’s currency provisions they would have been paid in Lesotho Maloti, a currency tied to the South African Rand which had depreciated substantially between 1996/97 and 2002. HWV had had no use for Maloti (other than for conversion into hard currency), because the works had long since been completed and it had no continuing outlays in Lesotho. In order to remedy the Authority's failure to make the payments when they would have become due, the Award was made in hard currencies, converted from Maloti at rates prescribed in the contract but which pre-dated the Maloti's collapse. The Authority’s commercial objection related to the rate at which Maloti had been converted; had the conversion been done at the rate current at the time the payments were due (rather than at the rate in the 1991 contract) the amount of hard currency the Authority would have been obliged to find would have been significantly reduced.

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.

The Issues
Lord Steyn summarised the issues before the House as:

(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

Lord Steyn – the Currency issue
Lord Steyn surveyed the history of the Arbitration Act, stressing its "radical nature" in being free both from judicial interference and from pre-1996 case law. He considered that the Court of Appeal had approached the construction of s.48(4) through the lens of pre-1996 case law, citing authorities from 1961, 1974, 1976 and 1979; but for this (wrong) approach, it would have had no reason to disagree with the natural and commercially sensible construction of the wide language of s.48(4) which the Tribunal had adopted; the power under s.48(4) was unconstrained and was available to the Tribunal. On this simple basis he would reverse the Court of Appeal on the currency point.

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 [1969] 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 ([2005] EWCA Civ 618)]

Lord Steyn made four observations about s.68:

  1. intervention thereunder was only permissible after an award has been made;
  2. there must have been a ‘serious irregularity’, to which a high threshold applied;
  3. the irregularity must have caused or will cause substantial injustice to the applicant;
  4. the irregularity must fall within the closed list of categories set out in s.68(2)(a) to (i) [author’s note – emphasise "closed".

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:
"I am glad to have arrived at this conclusion. It is consistent with the legislative purpose of the 1996 Act, which is intended to promote one-stop [decision-making]. If the contrary view of the Court of Appeal had prevailed, it would have opened up many opportunities for challenging awards on the basis that the tribunal [had] exceeded its powers in ruling on the currency of the award. Such decisions are an everyday occurrence in the arbitral world. If the view of the Court of Appeal had been upheld, a very serious defect in the machinery of the 1996 Act would have been revealed. The fact that this case has been before courts at three levels and that enforcement of the award has been delayed for more than three years reinforces the importance of the point."

The Interest Point
The Authority had submitted that the Tribunal had exceeded its power by awarding pre-award interest pursuant to s.49(3) but had to show that that decision had caused or would cause substantial injustice. To do so, the Authority needed to compare the results of the tribunal’s decision with the position that would have prevailed under the underlying contract or under Lesotho law. As the Tribunal had noted, however, the present proceedings were concerned with sums that had not been certified under cl.60(10) of the contract so any comparison therewith was irrelevant. The only other possibility was to have regard to the law of Lesotho insofar as it applied but there had been no finding about the law of Lesotho in the judgments of either Morison J or the Court of Appeal. The precondition of substantial injustice had, therefore, not been established and, on that ground alone, the Authority’s challenge regarding interest should fail.

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.

Other Speeches
Lord Hoffman agreed in allowing the appeal but he thought it very likely, for the reasons given by Lord Phillips, that the Tribunal had made an error of law as regards the currencies; however, he preferred to express no opinion on the point - for the reasons given by Lord Steyn, this had been at worst an error of law and not an excess of power.

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.

In one regard (in which he was in a minority of one), Lord Steyn’s judgment reinforces Judge Thornton’s proposition (on a different issue) in Fencegate v.NEL Construction3 that the Arbitration Act 1996 enable arbitrators to throw away the shackles binding judges on many issues. Given the effective 4-1 majority against Lord Steyn (although the point was not fully argued), that proposition is open to ‘serious doubt’- which is unfortunate since it leaves the issue hanging and undecided. However, Lord Steyn’s meticulous analysis of the underlying principles of the Arbitration Act, particularly the s.68(2)(b)/s.69 interface, was not dissented from and can now be taken as authoritative.

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 [2005] EWCA Civ 618.

* Relevant sections of the Arbitration Act 1996

    48. -(1) The parties are free to agree on the powers exercisable by the arbitral tribunal as regards remedies.

    (2) Unless otherwise agreed by the parties, the tribunal has the following powers.

    (3) The tribunal may make a declaration as to any matter to be determined in the proceedings.

    (4) The tribunal may order the payment of a sum of money, in any currency.

    (5) The tribunal has the same powers as the court-

(a) to order a party to do or refrain from doing anything;

(b) to order specific performance of a contract(other than a contract relating to land);

(c) to order the rectification, setting aside or cancellation of a deed or other document.

    49. -(1) The parties are free to agree on the powers of the tribunal as regards the award of interest.

    (2) Unless otherwise agreed by the parties the following provisions apply.

    (3) The tribunal may award simple or compound interest from such dates, at such rates and with such rests as it considers meets the justice of the case-

(a) on the whole or part of any amount awarded by the tribunal, in respect of any period up to the date of the award;

(b) on the whole or part of any amount claimed in the arbitration and outstanding at the commencement of the arbitral proceedings but paid before the award was made, in respect of any period up to the date of payment.

    68. -(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 ground of serious irregularity affecting the tribunal, the proceedings or the award.

    A party may lose the right to object(see section 73) and the right to apply is subject to the restrictions in section 70(2) and(3).

    (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);

(b) the tribunal exceeding its powers (otherwise than by exceeding its substantive jurisdiction: see section 67);

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) [2001] UKPC 34 (16th July, 2001)

2. Associated Electric and Gas Insurance Services Inc v European Reinsurance Company of Zurich [2001] UKPC 93

3. Fencegate Ltd v NEL Construction Ltd (Case HT01/000088)

4. Bouygues Ltd v Dahl Jensen Ltd [2000] BLR522


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