Praise the Lords

It is not unusual in international schemes for the place or the “seat” of an arbitration to be in a different country to the one where the project was built. For example, a process engineering plant might be built in Indonesia by a joint venture German and Italian contractor for an employer based in Singapore, with funding provided by an American bank. And it may be that the contract provides that any disputes be resolved by arbitration in London. And indeed, London is considered to be one of the best places in the world to hold an international arbitration.

The seat of the arbitration is fundamental. Parties need to know that the place where the arbitration is to be held has a local legal system that will support the arbitration process, and a court system that will enforce it. So, in London the provisions of the Arbitration Act 1996 apply and the parties have recourse to the court to provide the back-up and integrity required by the international community.

The economic benefits to London are substantial: parties in dispute not only need lawyers and UK-based international experts to put forward their case, they also need hotels to stay in and a venue for the arbitration.

However, the English courts have been criticised for intervening in the arbitration process by substituting their own decisions for those of the arbitrators when judges consider that arbitrators have made some error. On the one hand there is the need for the correct application of the law to the dispute. On the other is the argument that the parties have chosen arbitration rather than litigation in order to resolve the dispute. And if the parties have chosen arbitration, then they do not want the court to interfere.

The aim of the Arbitration Act 1996 was to substantially reduce the ability of the court to intervene in the arbitration process, thus to restore London as the preferred choice of venue for international arbitrations.

But in 2003 this expectation was dealt a blow by the Court of Appeal in Lesotho Highland Development Authority vs Impregilo Spa & Others. In that case the joint venture contractors constructed a dam in Lesotho. Disputes had arisen in respect of extra costs, and the arbitrators had decided that the award would be given in European currencies, and that the contractor should be awarded interest from the date on which the claims became due.

By a majority, the House of Lords concluded that the arbitrators might have made an error of law by selecting European currencies

The employer argued that the arbitrators had made an error of law, because the contract set out which currencies were applicable (the Lesotho maloti), and Lesotho law did not recognise a claim for pre-award interest. The seat of the arbitration was London, so the employer argued that the arbitrators had acted in “excess of their jurisdiction” under the Arbitration Act and that the arbitrators could not award interest prior to the arbitration. The Court of Appeal agreed with the employer.

Although there may have been some force in the argument that the arbitrators should have applied contractual currency to their award, the message sent to the international community was that the English courts were still keen to intervene in international arbitration awards.

However, the joint venture contractors appealed to the House of Lords, and the decision was issued on 30 June. By a majority, the House of Lords concluded that the arbitrators might have made an error of law by selecting European currencies. The Arbitration Act did not allow them to disregard the Lesotho law applicable to the contract. Neither should they have awarded interest, which ignored applicable Lesotho law.

Nonetheless, the House of Lords went on to hold that a “mere error of law” did not amount to an excess of jurisdiction under the Arbitration Act, and so the appeal was allowed.

The House of Lords considered that the act had to be interpreted in a business-like manner in order to assist the arbitral process. Many will be hoping that the decision will reinforce London as a prime location for international arbitrations, restoring confidence in the international community that the English courts will not interfere with an arbitration award made in London.