UK Privy Council considers serious irregularity
Under section 90 of the Bahamas Arbitration Act 2009 (“BAA”), which is modelled on, and materially identical to, s.68 of the English Arbitration Act 1996 (“AA”), an arbitral award can be challenged on the grounds of serious irregularity where it is of a particularised kind and has caused, or will cause, substantial injustice. In RAV v Therapy Beach Club  UKPC 8 the Judicial Committee of the Privy Council has considered whether, for that purpose, substantial injustice requires both the applicant, and the court, to expressly deal with the point.
Background to the application
The applicants (“RAV”) leased land to the respondents (“Therapy”) to operate a beach club. The lease was for three years, with the option to extend for a further three years subject to a rent negotiation (although both the existence and exercise of that option was disputed by RAV). During the first three-year term, RAV evicted Therapy and demolished the beach club.
Therapy claimed damages. Pursuant to an ad hoc arbitration agreement (with seat in Bahamas), the arbitral tribunal awarded Therapy $9,670,000 plus interest and costs, which included loss of profits for the entire six-year period.
Grounds for the application
RAV challenged the arbitral award for serious irregularity under s.90 BAA on two grounds.
First, that the period for which the damages for loss of profits had been awarded should not have included the optional three-year extension. RAV complained that the arbitrator failed to address two key points that were raised; that Therapy had failed to exercise its option to extend the lease, and that the option itself was uncertain and unenforceable. This failure, RAV alleged, constituted a failure by the tribunal to deal with an issue put to it (s.90(2)(d)).
Second, RAV argued that amounts of deductions to the damages made by the arbitrator were not supported by documentary evidence, as Therapy’s expert relied on his memory. RAV further alleged that it was not given the opportunity to address the deductions, as the parties only learned of them when the award was made. For this failure, RAV invoked s.90(2)(a) (failure by tribunal to comply with its general duty of fairness).
In either case, for RAV to succeed, not only would it have to show the relevant irregularity was made out, but also that this had caused it substantial injustice. RAV’s application succeeded at first instance, but was rejected on appeal. One of the points relied upon by the Court of Appeal of the Bahamas was that the judge did not expressly, and separately, consider and find that substantial injustice had been established (and similarly that RAV had not specifically pleaded or established the same). So, was doing so a formal requirement of s.90?
The board of the Judicial Committee of the Privy Council (the “Board”) held that expressly dealing with substantial injustice in such a way is not a formal, mandatory, requirement of s.90. So not doing so would not automatically be fatal to a s.90 application; ultimately the substance of the matter was more important than form and “undue formalism should not be required”.
Despite that, however, the Board noted that it would be good practice for an applicant challenging an arbitral award under s.90 separately to allege that the serious irregularity caused or will cause substantial injustice. And, likewise, it will be good practice for the judge determining the application to expressly and separately establish substantial injustice. This is because not doing so might cause a problem depending on the circumstances of a case. On the applicant’s side, assuming proper evidence is brought, the matter would, generally, be properly brought before the court. But, still, there might be cases where failing to go on and particularise might cause prejudice to the other party (albeit that this was not one, in the light of the issues involved).
And, on the court’s side, if this issue is not dealt with expressly, that does not mean that the issue has not been considered and determined, provided that decision can properly be inferred. That, however, will depend on the case; although the present situation was one in which it could be inferred that the judge had so assessed the matter. For instance, in relation to damages for the term extension, the judge had identified this as a “central” issue and, given that the point could potentially halve the award, the case was one where it was “inherently likely” that failure to address it could amount to substantial injustice.
Likewise, in relation to the amount of discount applied to Therapy’s losses without documentary evidence and in reliance solely on Therapy’s expert’s memory. Since RAV had not been able to address the important issue of the deductions, the judge had found that a “serious irregularity” had ensued, and it was self-evident that an arbitrary deduction to the damages could cause a substantial injustice to RAV; had RAV been able to address the deductions, they might have been higher.
While the Privy Council ultimately ruled that express treatment of substantial injustice is not an absolute requirement in a challenge to an arbitral award on the grounds of serious irregularity under s.90 BAA, it will generally remain advisable to include an allegation and demonstration of substantial injustice in future applications. Ultimately, the judge’s decision in this case was upheld because, on the facts, the circumstances of the injustice were particularly clear.
Although decisions of the Privy Council are not technically binding in England, they are (generally) of great weight and persuasive value insofar as they deal with common points of law. Accordingly, this decision is likely to help with the interpretation of s.68 AA 1996 (which applies to arbitrations with seat in England).
Click here for the judgment
Emma Scheuer would like to thank Olivia Suleman for her assistance in the preparation of this article.