Do arbitral errors on the law governing the merits of a dispute referred to arbitration justify setting aside or non-enforcement of the award?

By Prof Jonathan Hill, Professor of Law (University of Bristol Law School).

© Pedro Ribeiro Simões

Assume that contracting parties (C and R) agree that their contract is governed by English law and that any dispute arising in connection with the contract should be referred to arbitration. A dispute arises which C refers to arbitration. An arbitral tribunal is appointed and, in due course, the tribunal renders an award ordering R to pay damages for breach of contract. R seeks either to have the award set aside (by the courts at the seat of arbitration under the lex arbitri) or to resist enforcement of the award (in another country under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘NYC’)) on the basis either that the tribunal applied French law to the dispute, instead of English law, or that the tribunal decided the dispute ex aequo et bono (ie, by the application of an equitable standard), rather than through the application of legal rules and principles. In such circumstances, does R have a legitimate ground for having the award set aside or for resisting enforcement?

If the seat of arbitration is in a country which has implemented the UNCITRAL Model Law on International Commercial Arbitration (‘Model Law’ or ‘ML’), such as Singapore, Hong Kong, New Zealand, Australia or Canada, this question should receive the same answer whether the context is setting aside or enforcement under the NYC: this is because the grounds for setting aside under article 34 ML are almost identical to the grounds on which recognition and enforcement may be refused under article V NYC. This blog post discusses this issue in depth.

Basic principles

Article 28 ML provides that the tribunal shall apply the ‘rules of law’ (a concept which includes not only the law of a country but also a non-national system of rules, such as Jewish law, Sharia law or the UNIDROIT Principles on International Commercial Contracts (2010)) chosen by the parties (art 28.1); in the absence of choice by the parties, the tribunal shall apply the law determined by the conflict of laws rules which it considers applicable (art 28.2); exceptionally, the arbitral tribunal may decide the dispute ex aequo et bono or as amiable compositeur, but only if expressly authorised by the parties to do so (art 28.3).

Although, through article 28, the Model Law indicates how the tribunal should determine the rules applicable to the substance of the arbitrants‘ dispute, it does not explicitly state what should happen if the tribunal makes a mistake in determining the governing law. Accordingly, the question whether an arbitrant has any means of redress in a case where the tribunal applies French law, notwithstanding the parties’ agreement that English law governs their contract, or decides ex aequo et bono even though not authorised to do so has to be answered by reference to general principles relating to arbitral error.

In cases in which an arbitrant seeks to rely on arbitral error as a means of escaping from the effects of the tribunal’s award on the substance of the dispute, a fundamental distinction has to be drawn between errors of law or fact, on the one hand, and procedural/jurisdictional irregularities, on the other. Neither the Model Law nor the NYC allows for the tribunal’s decision to be questioned on the basis of an error of law: ‘it is trite that mere errors of law or even fact are not sufficient to warrant setting aside an arbitral award’ (CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK [2011] SGCA 3 at [33]). However, an arbitrant may seek to have an award set aside or to resist its enforcement on the basis that ‘the arbitral procedure was not in accordance with the agreement of the parties’ or, in the absence of an agreement on the applicable procedure, was in conflict with the law of the seat (art 34.2.a.iv ML/ art V.1.d NYC). It is also provided that the tribunal exceeding its jurisdiction (‘the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration’) is a ground for setting aside/refusing enforcement (art 34.2.a.iii ML/ art V.1.c NYC).

Some cases under the Model Law

In Quarella SpA v Scelta Marble Australia Pty Ltd [2012] SGHC 166 the parties had agreed to arbitrate their disputes in Singapore under the ICC Arbitration Rules. Clause 25 of the contract provided: ‘This Agreement shall be governed by the Uniform Law for International Sales under the United Nations Convention of April 11, 1980 (Vienna) and where not applicable by Italian law.’

At the start of the arbitration, both arbitrants seemed to have assumed that Italian law governed the merits of their dispute. Subsequently, one of the parties (Q) changed its mind and argued for the application of the CISG; the tribunal decided, however, that Italian law governed. Q then made an application to the Singapore courts to have the award set aside; Q argued that the tribunal, having misinterpreted cl 25 of the contract, failed to apply the law chosen by the parties. The central question was whether the purportedly wrong interpretation of the choice of law clause by the tribunal justified setting aside of the award under article 34.2.a.iii or article 34.2.a.iv ML.

Judith Prakash J decided that the conditions of neither provision of article 34.2.a ML were satisfied. In terms of article 34.2.a.iv, the tribunal had not failed to respect the arbitrants’ choice-of-law clause (cl 25 of the contract). It was clear from the award that the tribunal had considered cl 25 and decided that, properly interpreted, it required the application of the CISG only to the extent that it was applicable according to the CISG’s own internal criteria and that, if it did not apply in part or in whole, then Italian law applied. Essentially, as Q disagreed with the tribunal’s interpretation of cl 25, the most that Q could demonstrate was that the tribunal had made an error of law – which was not enough to engage article 34.2.a.iv ML.

As for article 34.2.a.iii ML, this was not a case where the arbitral tribunal improperly decided matters that had not been submitted to it; the issue of the applicable law had been submitted to the tribunal and the award explicitly addressed this issue. Accordingly, the tribunal had decided matters that had been submitted to it and article 34.2.a.iii was not engaged either.

Judith Prakash J’s reasoning on article 34.2.a.iii ML was recently followed by Chua Lee Ming J in Quanzhou Sanhong Trading Limited Liability Co Ltd v ADM Asia-Pacific Trading Pte Ltd [2017] SGHC 199 in the context of an application to enforce a Chinese award in Singapore. Although the circumstances were such that the party seeking to resist enforcement of the award might have argued that the tribunal’s error was a complete failure to apply the law expressly chosen by the parties to govern the contract, the judge identified the key question to be whether an arbitral tribunal exceeds its jurisdiction if it makes an error as to the governing law of the contract. This question was answered in the negative. In the judge’s words (at para [11]):

If an issue is firmly within the scope of submission to arbitration, it cannot be taken outside the scope of submission to arbitration simply because the arbitral tribunal came to a wrong, or even manifestly wrong, conclusion on it.

The complaint in the Canadian case of SMART Technologies ULC v Electroboard Solutions Pty Ltd [2017] ABQB 559 was somewhat different. The arbitrants (S and E) had entered into a distributorship contract which included an arbitration clause providing for arbitration in Alberta under the AAA rules. The arbitrants agreed to a two-tier process according to which the initial decision of a sole arbitrator could be appealed to a three-person tribunal. Disputes that arose were referred to arbitration and the sole arbitrator rendered an award in favour of S. E appealed and the three-person tribunal (by a majority) reversed the initial decision. S then applied to have the award of the appeal tribunal set aside by the Alberta courts. It was S’s case that the appeal tribunal had exceeded its jurisdiction: instead of applying the appropriate legal principles, it had decided the dispute ex aequo et bono (without having been authorised to do so). S’s contention was that the appeal tribunal decided matters beyond the submission to arbitration, thereby justifying setting aside on the basis of article 34.2.a.iii ML.

McCarthy J emphasised the importance of the principle that the setting aside process cannot be used as a mechanism for reversing alleged errors of law or fact and, following United Mexican States v Cargill Inc [2011] ONCA 622, noted that article 34.2.a.iii ML is designed to deal with ‘true jurisdictional errors’. In the context of article 34.2.a.iii the focus of the enquiry is whether the tribunal dealt with a matter beyond the submission to arbitration, not how the tribunal decided issues within its jurisdiction. The judge’s conclusion was that the appeal tribunal had jurisdiction to hear and decide the matter that it decided, and that any issues as to how the tribunal came to that decision were not covered by article 34.2.a.iii. McCarthy J also considered that the appeal tribunal had not, in fact, decided the dispute ex aequo et bono. It seems, however, that, had the appeal tribunal acted as alleged by S, the court might well have been prepared to aside the award – following an Egyptian decision dating from 2000. The judgment does not indicate which provision of the Model Law would have covered such a case.

Conclusion

It seems that the important distinction is between failing to apply the chosen law at all and applying the chosen law, but applying it incorrectly. If, for example, the parties agree that English law governs their contract and the tribunal determines the arbitrants’ dispute through the application of English law, there is no irregularity – whether the tribunal applies English law correctly or incorrectly. This principle is illustrated by the English case of B v A [2010] EWHC 1626 (Comm) in which it was argued that the tribunal had misunderstood the chosen law (Spanish law) so gravely that the tribunal had failed in its obligation to apply the law chosen by the arbitrants. Tomlinson J rejected the application to set aside the award; even assuming that the tribunal had made the error alleged by the applicant, in the absence of a conscious disregard of the provisions of Spanish law, the tribunal had made no more than a non-reviewable error of law. Any attempt to characterise the alleged error as an excess of jurisdiction or a failure to follow the correct procedure was doomed to failure.

If, however, the tribunal, having ignored the chosen law entirely, decides the dispute by reference to another law (or some other standard – such as equity), the tribunal has failed in its mandate. Although the cases show that failing to apply the chosen law will not normally be treated as a jurisdictional defect within the scope of article 34.2.a.iii ML/article V.1.c NYC, such a failure is, in principle, a procedural error on the basis of which the award may be set aside or refused enforcement (article 34.2.a.iv ML/article V.1.d NYC).

Having said that, the setting aside/non-enforcement of an award on the basis that the tribunal completely ignored the chosen law (or decided ex aequo et bono without having been authorised to do so) appears to exist largely in the realms of theory. There are few reported decisions setting aside (under the Model Law) or refusing enforcement (under the NYC) on the ground that the tribunal failed to apply the chosen law (whether by applying the law of another country or a non-legal standard). More often than not, the real complaint is not that the tribunal ignored the applicable law, but that the tribunal misunderstood or misapplied it. In one German case, however, the court set aside an award under the German equivalent of article 34.2.a.iv ML because the tribunal decided ex aequo et bono without having been explicitly authorized to do so: Oberlandesgericht München, Germany, 34 Sch 10/05, 22 June 2005. Given the professional standards which arbitrators are expected to attain, the current state of affairs is not unexpected. Indeed, it would be more surprising if there were more instances of arbitrators failing to apply (at all) the substantive law chosen by the parties.

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