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Court intervenes to set aside Arbitral Award on grounds of fairness

Court intervenes to set aside Arbitral Award on grounds of fairness | BDM Blog | BDM Law

We do not often see successful applications to overturn Arbitral Awards. This recent case(1) , however, is an example of a successful application to set aside part of an Award under section 68 of the Arbitration Act 1996 on the grounds that the sole arbitrator did not act fairly.

These cases also remind us of some of the downsides of LMAA Small Claims Arbitration, which you can revisit by clicking here. Although we do not know the ins and outs of this case, our experience of the Small Claims Procedure (“SCP”) is that it is often rushed as the fees chargeable for reaching a decision often outweigh the time involved in properly reaching that decision. This case also reminds us that the rules limiting appeals in the SCP do not prevent an application under section 68.

Without going into the facts, it is fair to say that this was a case where the arbitrator made a glaringly obvious error and compounded that by failing to correct it under the slip rule.

The Owners’ claim was relatively small and was essentially for unpaid hire and damages for inadequate hull cleaning. In total, it came to US$37,831.83. The Charterers denied liability and sought to set off US$15,070 for the vessel’s alleged underperformance by way of counterclaim.

The arbitrator decided that all of the Owners’ claims succeeded with the exception of the hull cleaning claim and he dismissed the counterclaim. He should have awarded the Owners US$28,277.91, which represented the sum claimed by the Owners (US$37,831.83) less the unsuccessful hull cleaning claim (US$9,553.92). However, the arbitrator erroneously added the Charterers’ unsuccessful counterclaim of US$15,070 to the Owners’ total claim of US$37,831.83. Consequently, he awarded the Owners about a third more than they were entitled to receive.

The Charterers made two applications to the arbitrator to correct the Award under the slip rule but the arbitrator declined both applications. They then applied to the Court to have part of the Award set aside on the basis that there had been a serious irregularity causing them substantial injustice within the meaning of section 68(2)(a).

Butcher J granted the Charterers’ application and accordingly set aside part of the award in the sum of US$9,553.92. His reasoning was as follows:

  1. It had been common ground between the parties that the Owners’ claim amounted to US$37,831.83 and that the underperformance claim was the Charterers’ counterclaim. There was an irregularity in that the arbitrator failed to adhere to that common ground, in deciding how much was owed on a basis which had not been argued by either party, without giving the parties an opportunity to comment on it. This represented a failure to comply with the duty of fairness under section 33.
  2. Whilst illogicality or irrationality on the part of the tribunal did not by itself bring the case within section 68(2), a gross and obvious accounting mistake, or an arithmetical mistake of the 2 + 2 = 5 variety made in the award, might well represent a failure to conduct the proceedings fairly because it constituted a departure from the cases put by both sides, without allowing the parties an opportunity to address it.
  3. There was substantial injustice in that by reason of the arbitrator’s error, the Charterers were ordered to pay about a third more than was due by way of principal and were also ordered to pay interest on their own unsuccessful counterclaim. That went beyond what could reasonably be expected as an ordinary incident of arbitration, even LMAA SCP arbitration.

The full case report is available online by clicking here. One can only imagine the legal costs involved in sorting out the mess that ensued from this which is another reason to take care when dealing with claims under the SCP.

(1) Ducat Maritime Limited v. Lavendar Shipmanagement Incorporated [2022] EWHC 766 (Comm).

Nick Burgess - author profile
Nick Burgess
Partner
Benita Cheung - author profile
Benita Cheung
Managing Associate
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