An unachievable threshold? Two recent cases highlight the difficulty of establishing serious irregularity under s. 68 of the English Arbitration Act 1996

The Courts continue to hold applicants seeking to set aside an arbitral award under s. 68 of the English Arbitration Act 1996 (the “Arbitration Act”) to a high threshold. This is demonstrated by two recent decisions - Radisson Hotels APS Denmark v Hayat Otel Işletmeciliği Turizm Yatırım Ve Ticaret Anonim Şirketi [2023] EWHC 892 (Comm), and Cipla Ltd v Salix Pharmaceuticals Inc [2023] EWHC 910 (Comm). In this article we consider the practical implications for parties considering a s. 68 challenge.

Why should I read this?

• England and Wales is a pro-arbitration, pro-enforcement jurisdiction. Accordingly, there is a presumption that an arbitral award is valid, with limited recourse to challenge the award for a party that is dissatisfied with the outcome. Under the Arbitration Act, there are three provisions permitting challenge to an award:

  • Section 67: challenge on the grounds that the tribunal lacked substantive jurisdiction

  • Section 68: challenge on the grounds that there was a serious irregularity that affects the tribunal, the award or the proceeding; and

  • Section 69: appeal on a point of law

• while parties cannot contract out of s. 67 and s. 68, they can and frequently do exclude the application of s. 69. For instance, parties who have agreed to arbitrate under the rules of the LCIA are deemed to have excluded s. 69. Practically speaking, any challenge may therefore need to be brought under either s. 67 or s. 68

• challenges under s. 68 are notoriously difficult to establish. By way of example, in 2016 and 2017, 78 challenges were brought on the grounds of serious irregularity, and none were successful. In 2019, only three percent of challenges were successful

• two 2023 cases highlight the difficulty of establishing a s. 68 challenge: Radisson Hotels APS Denmark v Hayat Otel Işletmeciliği Turizm Yatırım Ve Ticaret Anonim Şirketi (the Radisson case”) and Cipla Ltd v Salix Pharmaceuticals Inc. In the Radisson case, despite prima facie serious misconduct from one member of the Tribunal, the challenge was dismissed because of the applicant’s continued participation in the arbitration after discovering the irregularity. This underscores the need to act quickly in objecting to a perceived irregularity, in order not to lose the right to challenge the Award at a later date

• more generally, both cases serve as a reminder that s. 68 challenges rarely succeed and significant consideration should be given as to the costs

The Radisson case: A s. 68 challenge fails despite ex parte communications between an arbitrator and a party.

Unless agreed otherwise by the parties, and subject to certain narrow exceptions, a party representative should not engage in any unilateral communications with an arbitrator concerning the arbitration, from which the other parties are excluded (also known as ex parte communications)[1]. In the Radisson case, there had been ex parte communications between a member of a Tribunal, referred to in the decision as “CD”, who had been nominated by the Claimant in the arbitration (Hayat) and an expert consultant and lawyer of Hayat. It was not disputed that the information that was discussed between CD and Hayat’s representatives included confidential information directly related to the case, such as the Tribunal’s deliberations. A partial award on liability and causation finding Radisson liable for breach of contract was issued in March 2021.

Allegations that such communications had taken place first came to Radisson’s attention in around September 2021, and its s. 68 challenge to the partial award was brought in January 2022, with a number of steps having been taken in the meantime in relation to the quantum phase of the arbitration.

Hayat argued that Radisson had waived its right to challenge the award, on the basis of s. 73(1) of the Arbitration Act. This provides (to the extent relevant):

• If a party to arbitral proceedings takes part, or continues to take part, in the proceedings without making, either forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this Part, any objection—

  • a.  […]

  • b. that the proceedings have been improperly conducted,

  • c. that there has been a failure to comply with the arbitration agreement or with any provision of this Part, or

  • d.  that there has been any other irregularity affecting the tribunal or the proceedings
    
    he may not raise that objection later, before the tribunal or the court, unless he shows that, at the time he took part or continued to take part in the proceedings, he did not know and could not with reasonable diligence have discovered the grounds for the objection.”

Hayat argued that Radisson had known about the contact between CD and Hayat’s representatives for some time and had continued to participate in the arbitration. The Court agreed, and dismissed the s. 68 challenge. Dame Justice Moulder noted that s. 73 is designed to ensure that a party who believes it has grounds for objecting on the basis of serious irregularity should raise that objection as soon as it is aware of it. It is not permitted to allow the proceedings to continue without alerting the Tribunal and the other party to a serious irregularity, which, in its view, renders the whole arbitral process invalid. In other words, a party cannot keep a s. 68 objection “up his sleeve” in order to be used if it does not like the eventual outcome of the proceedings.

This case is a salutary lesson to parties – and the lawyers representing them – that a party to an arbitration must act promptly if it considers that there are grounds on which it could challenge the effectiveness of the proceedings (or could, with reasonable diligence have discovered such grounds). It is noteworthy that despite the seriousness of the alleged irregularity, the Court viewed the decision to preserve those grounds for later strategic deployment as amounting to a waiver of the right to challenge the partial award.

Cipla v Salix

Another 2023 case, Cipla Ltd v Salix Pharmaceuticals Inc., also resulted in a s. 68 challenge being dismissed. In this pharmaceutical patent licence dispute, a question arose as to whether a product made by Salix (the Respondent) attracted royalties under a patent licence granted by Cipla (the Claimant) in respect of a product called amorphous rifaximin. The patent licenses in question related to products containing amorphous rifaximin which showed a particular “halo” structure under x-ray powder diffraction (“XRPD”) analysis, (a method of revealing structural information about compounds). The halo structure was referred to as the “Figure 1 XRPD Pattern” in the judgment.

Cipla adduced expert evidence on the XRPD of the product. The Tribunal excluded late expert evidence on XRPD from Salix, which purported to show that not all amorphous rifaximin produced the Figure 1 XRPD Pattern.

Ultimately, the Tribunal determined that Cipla had shown that Salix’s product contained amorphous rifaximin, but had failed to show that it contained amorphous rifaximin which produced the Figure 1 XRPD Pattern. The patents had therefore not been infringed. Cipla alleged serious irregularity, on the basis that by excluding Salix’s late evidence on the question of whether all amorphous rifaximin produced the Figure 1 XRPD Pattern, the Tribunal had ruled that the question of whether Salix’s product produced that pattern under XRPD analysis was not in issue, and it was therefore unfair for the Tribunal to determine the claim on the basis that Cipla had failed to demonstrate that it did produce the Figure 1 XRPD Pattern. In essence, Cipla argued that the Tribunal had decided the arbitration on a point that was not raised as an issue or argued by the parties.

The Court conclusively dismissed this argument. It found that:

• there was no breach by the Tribunal of its duty to act fairly and impartially and that the Tribunal gave each party a reasonable opportunity of putting its case; and

• the Tribunal does not have to refer to every piece of evidence and the facts of this case did not constitute any exception to that general principle

What else do I need to know about s. 68?

These two cases demonstrate that the English Courts will be resistant to s. 68 challenges in the absence of a clear breach by the Tribunal of its duties. One party being dissatisfied with the outcome or the approach adopted by the Tribunal is far from sufficient to clear the hurdle for a s. 68 challenge.

This high bar is reflected in the authorities. For instance, in Lesotho Highlands Development Authority v Impregilo SpA & Ors, the Court stated that s. 68 was applicable in circumstances: “where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected”.

Potential challengers should also be aware that an unsuccessful challenge under s. 68 may carry adverse costs consequences, as was evident in PT Transportasi Gas Indonesia v ConocoPhillips (Grissik) Ltd [2005] UKHL 43, where a party commencing s. 68 proceedings which were unsuccessful was found to be liable to pay costs to the other party.

Under current proposals, the Law Commission is recommending that no amendments are needed to the provisions of s. 68, and therefore if the Law Commission’s proposals are accepted by Parliament, it is unlikely that there will be any changes to the Court’s stringent application of the high threshold for succeeding under s. 68.

---