English arbitrations are generally certain, final and enforceable. They can be appealed in only limited circumstances, principally if the panel has erred as to its jurisdiction or on some point of English law or, and more rarely, if there has been some “serious irregularity affecting the tribunal, the proceedings or the award” (Arbitration Act 1996 s.68(1)).

Compania Sud-Americana de Vapores SA -v- Nippon Yusen Kaisha [2009] EWHC 1606 (Comm) is a rare instance of such an “irregularity” appeal coming before the courts.

Facts

Briefly, in September 2002 Compania Sud-Americana de Vapores SA (CSAV) and Nippon Yusen Kaisha (NYK) entered into an agreement (the SGEX agreement) for a joint trans-Pacific container service agreement with Kien Hung Ltd (KHL). Unhappy with KHL’s performance, on 7 April 2003 both CSAV and NYK served termination notices on Kien Hung, NYK relying on clauses 2.1 (90 days notice) and 11 (insolvency or change of control) and CSAV on clause 11 alone. The SGEX agreement itself ostensibly remained in place, and meetings ensued between CSAV and NYK over the next few months to explore the possibilities for replacing KHL. In the end, only NYK went ahead, with new partner Hamburg Sud.

Disputes then arose between CSAV and NYK, including in particular as to whether and when valid notice had been given terminating the SGEX agreement itself (rather than simply KHL’s involvement in it). The disputes were arbitrated in London. NYK claimed that it had given valid notice to terminate when it served notice on KHL, on 7 April 2003, and that the SGEX Agreement terminated 90 days later, on 6 July. CSAV denied this and counterclaimed damages for repudiatory breach.

The arbitration

NYK’s pleaded case included an allegation that the parties had jointly agreed to terminate the SGEX agreement during a meeting on 5 June 2003. Yet thereafter NYK gave every indication that the point was not being pursued: first, its chief witness averred in his statement that that pleading was mistaken (because it was based on incorrect facts); in opening oral submissions it did not rely upon or even refer to that point; and finally, when CSAV suggested that the point ought to be taken as abandoned, it made no response at all and certainly did not assert to the contrary.

However, on the fifth day of the arbitration and after its own witnesses had been dealt with, NYK itself raised the point in cross-examination of CSAV’s witnesses and was allowed to proceed despite objections from CSAV.

The arbitrators dismissed all of NYK’s defences to the counterclaim except that based on the 5 June agreement, and on a 2-to-1 margin ruled in favour of NYK on that basis.

The appeal

CSAV challenged the award under section 68 of the Arbitration Act 1996 on the ground that the arbitrators had relied upon a matter which CSAV had been given no chance to rebut and had thus acted contrary to the natural justice requirement in section 33 of the 1996 Act.

The relevant part of s.68 reads as follows:

“(1) A party to arbitral proceedings may…apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award.

…

(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant

(a) failure by the tribunal to comply with section 33 (general duty of tribunal);

…”

Section 33 of the Act basically provides that the tribunal shall act fairly and impartially and allow each side reasonable opportunity to present its case, adopting the correct procedures.

The hurdle is high in such cases and s.68 “is really designed as a long stop only available in extreme cases where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected” (para. 280 of the report of the Departmental Advisory Committee). The court had to decide, first, if there had been an irregularity and, second, if there had been, whether that “affected” the award.

The decision

The court found that there had been an irregularity. NYK argued that there had been no express abandonment of the case and cited the “Marie H” [2001] Lloyd’s Rep 707, 710 case in which the judge held that it is doubtful whether “anything short of unconscionable conduct would justify the court in setting aside the Award“. This was an unfortunate line for NYK to pursue because the court here expressly found that CSAV had made its understanding of the issue–and its importance to the case–so clear “that a reasonable person present would have concluded that the silence by NYK’s lawyers after the comments made by CSAV at the hearing in their presence and in the presence of the tribunal meant that NYK was not pursuing the argument based on an agreement on 4/5 June“. In other words, NYK and its lawyers can have been under no misapprehension that CSAV thought the point had been abandoned yet took no steps to disabuse them or the tribunal of that incorrect notion.

However, Beatson J went on to find that, notwithstanding the irregularity, the award would not be set aside because there was no substantial injustice to CSAV – the arbitrators had been entitled to conclude that they would have reached the same decision on the other evidence that the SGEX agreement had been terminated on 5 June 2003. The question here was this: Could what CSAV had been deprived of have made a difference to the final outcome? In the peculiar circumstances involved here, the answer was no.

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On November 9, an en banc opinion of the Fifth Circuit Court of Appeals ruled that arbitration provisions in international reinsurance contracts are enforceable despite a Louisiana statute prohibiting arbitration agreements in insurance contracts.

In Safety Nat’l Cas. Ass’n v. Certain Underwriters at Lloyd’s the Underwriters provided reinsurance for excess policies issued to a workers compensation self-insurance fund. After Underwriters refused to recognize as an assignment of the fund’s rights to Safety National, the fund brought suit in a Louisiana federal court. Underwriters moved to compel arbitration. The court ultimately denied the motion, finding that the McCarran-Ferguson Act allowed a Louisiana statute forbidding arbitration provisions in insurance contracts to “reverse-preempt” the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and its implementing legislation, the Convention Act. The McCarran-Ferguson Act provides that no act of Congress is to be construed to invalidate, impair or supersede a state insurance law unless the act of Congress specifically relates to the business of insurance.

The Fifth Circuit reversed, holding that the term “act of Congress” as used in the McCarran-Ferguson Act did not encompass international treaties such as the Convention regardless of whether the treaty was self-executing or required implementing legislation. The court specifically disagreed with the Second Circuit opinion in Stephens v. American Int’l Ins. Co., 66 F.3d 41 (2d Cir. 1995), which had held that the implementing statute, rather than the Convention itself, was the relevant consideration and that state law could invalidate an arbitration provision in an international agreement.

The conflict between the circuits sets the stage for a possible resolution of the issue by the U.S. Supreme Court. Until this resolution occurs, the Safety National opinion constitutes the law of the land in Louisiana, Texas and Mississippi and provides substantial ammunition for non-U.S. insurers and reinsurers to obtain enforcement of arbitration provisions in the face of hostile state law.

The case is Safety Nat’l Cas. Ass’n v. Certain Underwriters at Lloyds’, London No. 06-303262 (5th Cir. Nov. 9, 2009).

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