Arbitrators do make mistakes

Nick Gould celebrated the House of Lords ruling in Lesotho Highlands Development Authority vs Impregilo Spa & Others in an article in this magazine (“Praise the Lords”, 22 July). His reason for celebrating it was because he agreed with its ruling that the challenge to the arbitrators’ award should fail. He argued that recent court interventions in the arbitration process were undermining London’s reputation as the centre of international arbitration and that this decision restored the “confidence in the international community that the English courts will not interfere with an arbitration award made in London”.

As lawyers who represented Lesotho Highlands Development Authority in the case, we beg to differ. Parties using arbitration need to have confidence that the arbitrators will get it right and that there will be some fallback if, being human, they go wrong. If finality is the only criterion for successful arbitration, any decision preventing challenge would be welcome.

That, presumably, is why the International Chamber of Commerce has a mechanism for scrutinising awards, and sometimes sends them back to the arbitrators. That takes time and has a cost, but it is what the parties choose when they opt for ICC dispute resolution. It is why, for example, JCT Design and Build 2005 preserves the agreement of the parties “that either party may … appeal to the courts on any question of law arising out of an award made in an arbitration under this arbitration agreement”. It is also why the Arbitration Act permits parties to apply to the court to challenge awards.

Going back to the Lesotho case, did the arbitrators go wrong when they decided an award should be made in European currencies? The majority of the Law Lords appear to have thought so. Lord Hoffmann remarked: “I think it is very likely that the arbitrators did make an error of law in calculating the sums awarded in the way in which they did.” Lord Scott and Lord Rodger thought so, too. Lord Phillips was sure that “the arbitrators have adopted an approach to currencies that departs from English law”.

Let’s suppose that the Lesotho case had been under a different set of international arbitration rules, such as UNCITRAL, where a challenge to an error of law is not excluded. Those findings would have been enough to uphold the challenge. The challenge would have been allowed under the Arbitration Act and the matters sent back to the arbitrators to have another go. So a different set of rules or a JCT arbitration clause would have led to a different result. None of this undermines confidence in arbitration.

So how did the arbitrators’ award survive? This was a difficult and technical legal point. Most of the Law Lords thought that the arbitrators had made at most an error of law. This would not be challengeable under ICC Rules. An excess of power would.

Of the nine judges who heard the case in the commercial court, Court of Appeal and House of Lords, five thought it was an excess of power and four thought it was not – but the four had the final say. If there had been an excess of power, as Mr Justice Morison, the (unanimous) Court of Appeal and the new lord chief justice thought, the contractors’ appeal would have failed.

So what the case actually decides is that some errors by arbitrators are protected under the ICC rules. They cannot be put right by the courts.

The English courts will, however, continue to “interfere” where arbitrators exceed their powers and, where the arbitral regime permits, where they make errors of law.

Whether there will be much impact on international arbitration is questionable. It is almost exactly two years since the Court of Appeal allowed the challenge of the award in the Lesotho case. Those parties that wanted the ICC regime have continued to opt for it, although only ICC can say whether its review would normally pick up this kind of error. Equally, there are plenty of parties all over the world that opt for the possibility of having errors of law corrected by the courts, like the signatories of JCT contracts. They want a balance of finality and scrutiny. For both these groups, after the Lesotho decision, it will be business as usual.