UK: Nestor Maritime v Sea Anchor, The "VEMACAPE": A Guide On How To Deal With A "Serious Irregularity" Challenge To An Arbitration Award

Last Updated: 14 June 2012
Article by Miranda Karali, Simon Jackson and Leigh Williams

Like other major industries, the shipping industry is a regular user of arbitration. A recent decision serves as a reminder of how much the English Commercial Court remains committed to ensuring that this avenue of dispute resolution continues to offer a reliable and efficient solution to feuding parties.

The benefits of arbitration

The principal benefits of international arbitration are supposed to be a knowledgeable tribunal, privacy, finality and enforceability. As concerns the first benefit, it is fair to say that the English Commercial Court (and above) has its fair share of judges who were previously leading shipping lawyers and who are very capable of reaching the right commercial result whilst applying the law accurately.

So far as privacy is concerned, the benefit is perhaps overstated. If a dispute is of general public or commercial interest, it is often quite difficult to keep it 'under wraps'. It may be in the interest of one side or the other to give the dispute publicity and that can happen regardless of the duty of confidentiality that attaches to the arbitration. This happens in arbitration disputes across all industries from shipping to reinsurance to telecoms to mining.

Furthermore, the fact that arbitration awards can be and often are challenged in the public forum of the court (e.g. s.68 challenges) means that any privacy that previously attached will be lost.

Accordingly, it is the third supposed benefit that really tends to give arbitration the edge over conventional litigation. Because of the New York Convention and, in particular, the quality of enforceability that it confers upon an arbitration award, it is often a far more potent instrument than a court judgment, enforceability of which often depends on bilateral treaties between the UK and the country of enforcement.

The recent case of Nestor Maritime SA v Sea Anchor Shipping Co Ltd [2012] The "VEMACAPE" EWHC 996 demonstrates once again the English Commercial Court's determination to ensure that the principle of finality and enforceability of arbitration awards in practice is not just an aspiration expressed in a statute.

The facts on "VEMACAPE"

The underlying dispute was not untypical. A Panamax tanker was sold by one party to another. The vessel turned out to be in a lot worse condition than was physically possible according to its Class documentation. The Buyers suspected that its Class documentation, in particular its metal thickness records, had been falsified by the Sellers and so brought a claim in deceit. The vessel sale/purchase agreement contained a standard LMAA arbitration clause. As the arbitration progressed, the evidence of fraud became ever more compelling. It took almost a year for the arbitrators to produce their award but when they published it in May 2011, the tribunal unanimously found the Sellers had committed deceit and found them liable to pay the Buyers millions of dollars in damages.

Main challenges to an English arbitration award

Under English law, specifically the Arbitration Act 1996, there are two principal ways of challenging an English arbitration award. The first is on a point of law (s.69). However, it is necessary to show that the arbitrators got the point seriously wrong or they probably got it wrong and the point is one of general public importance. There is a permission stage which filters most cases out before they reach a full hearing. However, a more general attack on an award can be launched under s.68. On the face of the wording of the statute, this is reserved for cases where the proceedings, the tribunal or the award are affected by a 'serious irregularity'. 'Serious irregularity' includes such things as the tribunal acting unfairly or partially. There is a comprehensive list of irregularities at s.68(2) of the Act.

The Section 68 remedy was intended for exceptional cases where the aggrieved party has suffered or will be caused 'substantial injustice'. However, where a party has lost an arbitration and just does not like the result, the temptation for it to characterise what has happened to it as 'exceptional' and 'unjust' is often (and understandably, given the emotion that can build up in any litigation) quite strong. Accordingly, over the last decade a fair number of s.68 challenges have been brought.

Not surprisingly, most s.68 challenges fail. However, the problem for the winning party is that a pending s.68 challenge can prove a significant impediment to enforcing an award under, for example, a bank guarantee which will often require the award to be unappealable or unchallengeable before it can be enforced. This is because unlike s.69 challenges, a s.68 challenge automatically receives a full court hearing (reflecting the gravity of the irregularity for which it is supposed to be reserved) and that hearing can, in theory, turn into a retrial of the entire case, but this time in a courtroom. Furthermore, it is not an uncommon tactic for a losing party to an arbitration to commence a s.68 challenge in order to generate a basis for 're-negotiating' the Award.

s.68 and s.69 challenges in the "VEMACAPE"

In the present case, the Sellers took objection to the finding that they had behaved dishonestly. Accordingly, they brought a raft of s.68 and s.69 challenges soon after the Award's publication. The s.69 challenge was dismissed, within a matter of a few weeks at the leave stage. This left various s.68 challenges, the essence of which was that the Tribunal's reasoning supporting their fraud conclusion was, on analysis, deficient and that was a 'serious irregularity'. The Sellers pursued these challenges notwithstanding the fate of the substantively identical s.69 challenge.

The s.68 challenges were due to be heard by the Commercial Court on 3 February 2012, 8 months after the Award had been published and 20 months after the arbitration had finished. However, a week before that hearing, the Sellers served yet another s.68 challenge. This time the target of its complaint was not the Tribunal but the Buyers whom they accused of fabricating evidence in the arbitration which had led to the Tribunal making its fraud finding - and that was an 'injustice'. The Sellers served a suite of new witness evidence in support of their new case.

Even though the Commercial Court was about to and did duly dismiss the existing s.68 challenges, finality suddenly became a dot on the horizon. It would have taken at least two weeks of Commercial Court time to have dealt with the new challenge in full because it essentially required a re-run of the arbitration and given the Commercial Court's current workload, that was not going to happen for 12-18 months, potentially cocking a snook at the principle of finality and enforceability.

However, the problem for the Sellers was that in order to bring a s.68 challenge as of right, the challenge needed to be brought within 28 days of the publication of the award. This tight deadline again reflects the importance of finality of arbitration awards. Nevertheless the Court can and often does grant an extension of time (even though it usually refuses to accede to the challenge itself) unless it considers the challenge could not with reasonable diligence have been brought earlier. This is because the allegations that tend to be made in s.68 challenges tend to be so serious and the Court finds it difficult, as a practical matter, to shut them out on what may be perceived to be a technicality. In light of this tendency, parties will often agree to have the time extension application heard at the same time as the substantive application to avoid a second trip to court. This means that s.68 challenges are generally serious and expensive court hearings.

However, in this case the challenge was not just brought outside the 28 day time limit. It was brought seven months after publication of the award. Nevertheless, where one party produces a raft of new evidence containing very serious allegations of fraud, the starting point for any court is that the witness statements are telling the truth. Even though the other side may serve a raft of responsive witness evidence denying the allegations, no court is going to be able to resolve the inevitable conflict without hearing the evidence and so will be inclined to grant the extension and allow the full hearing to proceed. Accordingly, if a party proceeds to produce a raft of responsive evidence in the context of a s.68 time extension application, it is going to tend to increase both the chances of a full hearing and the time taken to achieve finality.

Tactical response to the out-of-time s.68 challenge

In this case, despite the voluminous nature of the Sellers' new evidence, it suffered from some fatal flaws which could be demonstrated on the documents alone. Mindful of the need to avoid the Court feeling that it had been presented with conflicting accounts which it could not resolve there and then, the Buyers decided to put in no witness evidence from the individuals who had been accused of fraud at all (despite the temptation to do so being strong).

As mentioned earlier, the one 'concrete' hurdle that a party bringing a s.68 challenge out of time must surmount is that "he did not know and could not with reasonable diligence have discovered the grounds of the objection" earlier (s.73(1)). However, where a party is alleging fraud, it is commonly thought that the principle that 'the perpetrator of a fraud cannot be heard to complain that the victim should have realised that he was being defrauded sooner than he actually realised it' is applicable. What this means in practice is that fraud cases tend to get over this particular hurdle fairly easily. Whether the challenge is let through after that point is a matter of discretion for the judge involving consideration of the factors that one would expect, such as whether the challenger has brought the challenge quickly enough once he has found out the facts and whether the claim is a strong or a weak one. See Kalmneft v Glencore (2002).

The "VEMACAPE" case is noteworthy for a number of reasons. First and most importantly, despite the volume of evidence the Sellers had served in support of their new fraud claim, the Judge was able to reach the conclusion that in light of its inconsistency with the contemporaneous documents, it was "difficult, if not impossible, for the court to give any credence at all to the case now sought to be advanced by the Sellers...". Although previous decisions have emphasised that the strength of the substantive case being advanced is neutral, if the other requirements to achieve an extension of time (not delaying etc) are met (see Thyssen Canada Ltd v Mariana Maritime SA (2005), the practical reality is that if the Court is able to satisfy itself the new case is weak, this is bound to be a significant factor in it deciding whether the other requirements have been met by the challenger so as to justify granting an extension of time.

The fatal flaws in the "VEMACAPE"arbitration challenge

In this case, the Sellers' new evidence was that a UTM technician (a person who uses ultra-sound to measure the thickness of a vessel's structure) was asked by the Buyers to fabricate metal thickness readings in respect of the vessel they had just bought, presumably to manufacture a claim against the Sellers. The UTM technician gave evidence to the effect that he was asked by the Buyers to mark for replacement steel that actually did not need to be replaced, to falsify thickness readings for that steel to justify its replacement, but that his usual practice was not to record the thickness measurements of any steel that was replaced. To top it all, he said he threw away all his rough notes before the end of the job so it was not going to be possible to assess whether this new story was true or not without hearing oral evidence from him and everybody else. However, this new story suffered from one fatal flaw. What this witness, the Sellers and their legal team had failed to appreciate was that there was a lever arch file of this UTM technician's rough notes that had been disclosed in the arbitration and, indeed, was a dedicated trial bundle in the arbitration hearing itself. However, like so many documents that get disclosed in litigation (including those which make it into the trial bundle), it barely saw the light of day. When this bundle of rough notes was drawn to the Sellers' attention by the Buyers' solicitors, as well as the fact that they contained thickness readings for all the steel measured, replaced or not, this elicited a wholesale revision of the UTM technician's story which, to quote the Judge (who quoted the Buyers' counsel) set "new standards for invention".

Furthermore, at the arbitration, although the Sellers had not accused the Buyers of falsifying the UTM readings outright, they had alleged the readings had not been taken properly. The Judge observed that given that the Sellers were very close to alleging a fraud in relation to the UTM readings in the arbitration, this 'new' story was something that they could and should have properly investigated (and discovered, if true) at the time of the arbitration, not 18 months later. Accordingly, when it came to addressing the statutory hurdle of s.73(1) which, strictly speaking, was the first thing that the Judge ought to have considered, it was not difficult for him to conclude that "if there had been the fraud which is now alleged, it could have been discovered with reasonable diligence" before or during the arbitration. One suspects the inherent weakness of the case played a major role in this finding.

By itself the failure to overcome this hurdle was sufficient to dispose of the time extension application.

However, the Judge went on to consider the 'discretionary' factors (per the Kalmneft case).

The Sellers had taken eight weeks from making their alleged new fraud discovery to bringing the s.68 challenge, even though they had 'corroborated' their story within four weeks. The Sellers blamed the Christmas and New Year holidays for the balance of the delay. The Judge said that in the circumstances that was not good enough.

So far as the merits of the new case were concerned, the Judge considered that the new story was, putting it neutrally, not coherent. However, that aside, another problem with the Sellers' new case was that the essential complaint was that the Sellers' witnesses gave false evidence in the arbitration - they allegedly concealed the fact that they had instructed the UTM technician to fabricate the thickness readings. However, in the earlier case of Elektrim v Vivendi (2005) (a s.68 challenge case in which the Buyers' legal team had also been involved), the Court had made it clear that it was not enough for s.68 to apply for a witness to have given false evidence. The party to the arbitration itself, which in practice means the controlling mind of the company, needs to have given false evidence. Since there was no basis for any such suggestion, the challenge was "doomed to failure" on that ground as well.

The English Court stands firm on challenges to arbitration awards

So drawing together the threads, what the "VEMACAPE" case demonstrates is that the English Commercial Court is absolutely committed to protecting arbitration awards. Section 68 challenges really are meant for those exceptional cases where something has gone gravely wrong in the arbitration process, not just that one party does not like the result (which is almost always going to be the case). However, if you are on the wrong end of an arbitration award and feel seriously aggrieved about it, do not assume that you can take a relaxed approach to bringing the challenge in terms of timing. You need to get your skates on otherwise you may well be shut out before you have a chance to develop your case properly. If, on the other hand, you are facing a s.68 challenge you should carefully consider whether you actually need to do a 'tit for tat' evidential response which may just result in an unresolvable swearing match, or whether there is one or two killer points that render such a swearing match irrelevant. In the final analysis, English Commercial Court judges start from the position that they need very powerful reasons to be persuaded to interfere in an arbitration award and one can count on a single hand the number of successful s.68 challenges there have been in the last 15 years since the Arbitration Act came into force.

Miranda Karali and Leigh Williams are partners and Simon Jackson is a legal director at Clyde & Co which represented the successful Buyers in the "VEMACAPE" case. Leigh Williams was also junior counsel to Timothy Hill QC both in the arbitration and in the Commercial Court. Simon and Leigh also acted for Elektrim SA in the Elektrim v Vivendi case cited by Eder J in the "VEMACAPE" case (a €5bn dispute over ownership of Poland's then largest mobile phone company, PTC).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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