Despite the dramatic reduction in the frequency of arbitration as a means of dispute resolution since the Housing Grants Act 1996 introduced statutory adjudication in 1998, arbitration is still alive and well and arbitration agreements are often found within construction contracts.  Arbitration is said to have a number of advantages, the principal one being that it is private, unless the court becomes involved for example in hearing an application for appeal.

Where there is an arbitration clause within a contract and the parties have a right to adjudicate then unless the parties otherwise agree, any decision of an adjudicator will be temporarily binding until such time as the matter is finally determined by arbitration.  In such circumstances, if a party does not like the result of an adjudicator’s decision then it then must go to arbitration, provided that it complies with any timescales in the contract for doing so.

A question that may arise is if, having arbitrated, a party does not like or agree with the award, can it go off to court to have the award set aside?  The answer, except in quite limited circumstances, is no.  Arbitration is regulated by the Arbitration Act 1996 (the Act) which consolidated and updated the law relating to arbitration.  Section 58 of the Act provides that an award made in accordance with the Act is final and binding subject to the right to appeal or review the award in accordance with the Act.

So if a party who does not immediately warm to the award of an arbitrator, what can it do in accordance with the Act?  In the first instance it may apply to the arbitrator to correct his award under section 57 which gives the arbitrator the power to remove any clerical mistake or error arising from an accidental slip or omission or clarify or remove any ambiguity in the award.  It can also apply to the arbitrator to make an additional award dealing with any matters that were referred but not dealt with in the award.

If this does not resolve the issue then there are limited grounds for appeal, which must be brought within 28 days of the award, on the grounds either that the arbitrator lacks substantive jurisdiction; that there has been a serious irregularity; or that there is a question of law arising out of the award.  Any such challenge must be made at the time it arises, or the party wishing to rely on it is likely to lose the right to rely on it later.  The result is that after an award has been made the most likely basis for challenging it will be on a question of law.  It has been on this basis that there have been a number of cases over the last few years involving arbitration awards that have been challenged before the court.

The case of Penwith District Council v VP Developments Limited (2007) concerned a contract entered into 20 years ago.  The arbitration was commenced in March 1996 and was not therefore subject to the Act.  It was instead subject to the Arbitration Acts 1950 and 1979, which nevertheless also provided grounds for appealing a decision on a question of law.

Under the contract Penwith DC employed VP Developments to undertake planned maintenance at an estate in Cornwall.  The dispute subsequently referred to arbitration by VP concerned a claim in the net sum of £350,000 in relation to sums due on its final account.

One of the issues decided by the arbitrator was that the claimant was entitled to compound interest as part of the damages awarded to it on the basis that it fell within the second limb of the principle established in the case Hadley v Baxendale (1854),i.e.“such as may reasonably be supposed to have been in the contemplation of both parties, at the time of entering into contract, as the probable result of the breach of it.” The entitlement to claim compound interest has since been established in the recent House of Lords decision in Sempra Metals v Inland Revenue Commissioners (which was the subject of a recent article in this column).

The arbitrator decided on the basis of an exchange of pre-contract correspondence and upon evidence from witnesses that the claimant had had to increase its borrowing from the bank to compensate for the fact that it did not have sufficient credit facilities with its window supplier to place the order for windows.  He therefore decided that interest on underpayments was or ought reasonably to have been in the contemplation of the parties and he awarded interest compounded on a quarterly basis as special damages.

Penwith sought leave to appeal on the basis that the arbitrator had erred in law, holding that Hadley v Baxendale applied on the basis of the exchange of correspondence and the written and oral evidence of the witnesses and that he had erred in law holding that such evidence entitled VP developments to compound interest on any sums.

Mr Justice Aikenhead refused leave to appeal because he found that the arbitrator had made findings of primary fact in relation to the exchange of letters and other evidence, that he drew an inference from the findings, and he then applied the law to those facts and did so clearly and correctly.  The judge concluded by saying that applications for leave to appeal on questions of law must not be dressed up as questions of law when they are, on proper analysis, criticisms of the Arbitrator’s findings of primary or secondary fact.    

- Rob Palles-Clark