Introduction
Last week’s English Commercial Court decision in Goodwood Investments Holdings Inc v Thyssenkrupp Industrial Solutions AG (M/Y “Palladium”) was a rare sighting of an application under section 45 of the Arbitration Act 1996 (AA 1996). Section 45 provides a route whereby the court may determine any question of law arising in the course of arbitration proceedings, provided certain requirements are met.
There are only three reported decisions under this provision since the AA 1996 was implemented, but in each the judiciary has been keen to point out both how seldom the procedure is used, and also how useful it can be. This blog looks at the M/Y “Palladium” case and considers the further situations in which parties could consider making an application under section 45.
The M/Y Palladium
The underlying arbitration proceedings concern the super yacht M/S Palladium (alas, the judgment fails to clarify if the vessel is named after the long running British TV show, Saturday Night at the Palladium, but it is thought more likely to refer to the solid metal, given the Russian owner of the vessel’s background in the metals industry). The question was whether an arbitration claim under a shipbuilding contract had been settled in without prejudice correspondence between the parties’ solicitors, which took place at the outset of a four week arbitration hearing and led to the adjournment of the hearing.
The advantages of the section 45 procedure in this situation can readily be seen. If the arbitrators had considered the without prejudice correspondence, and concluded that there was no settlement, they would be required to either continue on with the arbitration, excising from their minds the correspondence they had read and adjudicated on, or step aside, requiring the parties to appoint another tribunal, losing the current tribunal’s knowledge of the case and incurring additional cost.
As such, the arbitrators had agreed that the application under section 45 may be made to the English Commercial Court, and, subject to some wrangling over the precise wording of the issue, the parties also consented. Males J was able to consider the submissions and correspondence in detail in a hearing on a Thursday and (without publishing more of the detail of the parties’ correspondence than was necessary) concluded, in a judgment published two working days later, that there had been no settlement.
Further uses of section 45
Males J’s observations that section 45 is “relatively little used” but has a “useful role to play” echo the remark of Coulson J (as he then was) in the previous reported case on section 45, Secretary of State for Defence v Turner Estate Solutions, that there are “surprisingly few authorities” relating to the provision. It raises the question of whether parties should be making greater use of the provision, or whether the hurdles are simply too daunting. In Turner, Coulson J summarised five requirements:
(i) A question of law;
(ii) Which substantially affects the rights of the parties;
(iii) Which is being referred to the court either with the agreement of the parties or with the permission of the tribunal; and (if the latter):
(iv) The determination of the question is likely to produce substantial savings in costs; and
(v) The application is made without delay.
The first requirement requires identifying and drafting an appropriate question of law. In order to succeed, the application should not involve the court in any determination of any factual consideration (save perhaps on the basis of assumed facts), though undisputed facts may of course be relevant to issues of contractual interpretation.
The second requirement is important: the question of law has substantially to affect the parties’ rights. Thus a question of contractual interpretation which goes to the heart of the dispute between the parties, in that it would knock out all or substantial amounts of a claim, has been held to be appropriate to address under the section 45 procedure (Taylor Woodrow Holdings Ltd v Barnes & Elliott Ltd).
The third requirement is perhaps the most difficult. The parties have agreed in their contract that the dispute shall be resolved in arbitration, and it may be difficult to achieve consensus that a point in dispute should go to court (not least because of the risk confidentiality will be lost). The quality of international arbitration panels is generally high and so the days when it was seen as necessary to “nip down the road to pick the brains of one of her Majesty’s judges” (Donaldson LJ in Babanaft International Co SA v Avant Petroleum Inc) are largely gone. In many cases, the tribunal itself will be unwilling to have its jurisdiction usurped. However, there are circumstances in which agreement (either between both parties, or between one party and the tribunal) can be reached. These may include:
Where the tribunal does not include a specialist lawyer, or a specialist common lawyer and an important point of law arises.
Where the tribunal has availability issues which mean it could not convene without significant delay, and the issue can be more quickly dealt with by application to the court.
Where there is agreement that it is quicker for a question of law to be dealt with directly by the court, rather than the tribunal itself hearing the point first as a preliminary issue, and one party subsequently appeals the same issue under section 69.
Where, in concurrent or serial arbitrations where the same point of law arises, the parties seek a binding and public determination of the point which can then be referred to and followed in the other arbitrations.
Where the issue involves consideration of without prejudice or privileged material which the parties do not want the tribunal to see (or the tribunal itself does not want to risk seeing).
The fourth and fifth requirements only arise if there is no agreement between the parties. The fourth requirement is likely to be linked to the second: if the question resolves all or part of the claim then there is likely to be a substantial costs saving. Interestingly, it seems that the costs saving is of hearing the issue at all (paragraphs 17 to 19, Turner), and not by a comparison of the cost of hearing the issue in court versus in the arbitration (which would create a very substantial hurdle). However, the potential saving in not waiting to the end of the arbitration, following which there may be an appeal to the court on the issue anyway, is a relevant consideration (paragraph 20, Turner).
The fifth requirement means that parties should be alive to potential points of law which could resolve the dispute, and how to deal with them most efficiently, from at least the point at which the pleadings close.
Conclusion
As the debate over the balance between arbitration and litigation continues, and the perceived risk that “too much” arbitration stymies the development of the common law, this case is a timely reminder of a little-used tool at parties’ disposal to have points of law determined quickly by the English High Court. Although the hurdles can seem daunting, and agreement is necessary either between the parties themselves, or between one party and the tribunal, it is notable that in each of the three reported cases, the court has gone on to decide the point of law. It remains to be seen whether the reminder in the M/Y “Palladium” of the usefulness of this procedure will generate further applications.
This was originally posted by the Practical Law Arbitration Blog.
