01 March 2016
Arbitration: A Case of Procedural Irregularity and Wasted Costs
Guernsey continues to see a steady stream of disputes being referred to arbitration as an alternative method of dispute resolution. Appeals from decisions arising out of these arbitral processes are permitted under The Arbitration (Guernsey) Law 1982, although they do remain few and far between. The Royal Court recently heard an appeal of an arbitration decision in relation to a rent review which a landlord was unable to agree with its tenant, a retailer, in respect of a building it occupies in the centre of St Peter Port. The landlord was aggrieved by the arbitrator’s award for a number of reasons and decided to appeal the finding.
One clear point to emerge from the appeal was the slower paced development of arbitration law in Guernsey compared to that in England and Wales. Although the judge hearing the landlord’s appeal took guidance from the English legislature and case law, he did so with caution, noting that the English law provides the Court with a greater degree of flexibility when considering whether or not an arbitral decision should be set aside.
Guernsey’s Arbitration Law is based on the old United Kingdom Arbitration Acts of 1950 and 1979. These old Acts were updated and replaced by the Arbitration Act 1996. However, to date, Guernsey hasn’t followed suit. As such, Guernsey’s arbitration laws have fallen behind those of England and Wales, with arbitrators and judges increasingly unable to locate useful guidance from the English arbitral institutions and the decisions of the English courts.
For example, whereas the UK’s Arbitration Act 1996 provides for an appeal based on a serious irregularity affecting the process, resulting in a substantial injustice to the appellant, all that must be established for an appeal under Guernsey’s Arbitration Law is that the decision was wrong in law. Indeed, in this case the judge concluded that it was not open to him to consider whether or not there had been any substantial injustice to the appellant adding that “if such a greater element of flexibility is to be afforded to the Court, it is something for legislature to address through amendment to the provisions in the 1982 Law or through adopting legislation based on the 1996 Act rather than its predecessor, the Arbitration Act 1950”.
It followed that the landlord’s first line of argument was that the arbitral decision was simply wrong in law. Its alternative argument was that the arbitrator misconducted himself in the proceedings, the Court noting that the use of the word “misconduct” in Guernsey’s Arbitration Law was not necessarily appropriate, as, somewhat confusingly, it indicates an element of bad faith on the arbitrator, whereas all that is actually required for a finding of misconduct is the existence of a procedural error in arriving at the award. The appeal revolved around the way the arbitrator analysed the parties’ submissions relating to the rent reviews of certain comparable buildings in the locality. Further, the landlord argued that the arbitrator strayed beyond the bounds of what is permissible for an arbitrator when he relied upon his own experience of what is “normal” when considering rent reviews. The use by an arbitrator of his personal knowledge and expertise must be finely balanced; on one hand, the spirit of arbitration requires that an arbitrator use his own expertise in evaluating the evidence before him and addressing the matters in issue between the parties. On the other hand, the arbitrator must ensure that any facts within his own knowledge which he decides to treat as evidence must be revealed to the parties and an opportunity provided to them to address that evidence, in the same way that all other evidence would be treated.
The judge allowed the appeal on the basis of the arbitrator’s finding that the proper approach to the analysis of rent reviews was one within his own knowledge and not one of the approaches submitted to him by the parties in submissions, and that the arbitrator thereafter failed in his duty to put this approach to the parties for further comment. The Court found that this amounted to a procedural error by the arbitrator, and that the error was sufficiently serious to amount to misconduct. Accordingly the arbitration award has been set aside.
Further, in terms of the fresh arbitration process which must now be launched, the Court ordered that the parties appoint a new arbitrator to continue the process in order to avoid a perception that the arbitrator has pre-judged matters.
The parties now find themselves back at square one, simply because of procedural irregularities which were, in all likelihood, avoidable. The arbitral process must begin again.
Practical Points for Consideration - How to Avoid Costs of a Wasted Arbitration Process
One of the attractions of arbitration over litigation is, of course, the likely cost savings. However, the lack of legal input throughout the arbitration process exposes it to the risk of procedural errors. If those procedural errors are not addressed at the relevant time, the ultimate arbitral award is then at risk of being set aside with a consequential increase of costs to all parties. To minimise this risk, seeking legal advice at various stages of the procedure can help to avoid procedural errors.
A note on the Current Arbitration Laws in Guernsey
Although Guernsey arbitration laws have fallen behind those of other jurisdictions, it is expected that Guernsey’s Arbitration Law will shortly be revised to address the gap.
A proposal for a revised law has been made by the States Advisory and Finance Committee, to bring the practice of arbitration in Guernsey into the modern age and much closer to the position in England. The proposed new law is modelled upon the UK Arbitration Act 1996 and certain elements of the UNCITRAL Model Law on International Commercial Arbitration. A Consultation Paper on the new law was published in the July of 2015 and the consultation closed in September 2015 to allow the legislation to be finalised before submission to the States of Deliberation.
Until the new law is in force, however, it is clear that judges will continue to attach a note of caution to any guidance taken from materials used in England and Wales.