Arbitration award overturned following 'misleading and deliberate' failure to disclose correspondence

Celtic Bioenergy Ltd successfully challenged the award to Knowles Ltd under section 68 of the Arbitration Act, on the grounds of Knowles' fraud. Section 68 allows a party to challenge an arbitral award in the courts in cases of "serious irregularity", but a court will generally only allow such a challenge if not doing so would cause the party substantial injustice.

Arbitration expert Nicola King of Pinsent Masons, the law firm behind Out-Law.com, said that successful section 68 challenges were extremely rare.

"The threshold for making a challenge under s68 remains high and, where fraud is alleged, cogent evidence of some form of dishonest of unconscionable conduct is required," she said. "It is also necessary, in any s68 challenge, to establish that there has been a substantial injustice which would have affected the outcome of the arbitration in a significant way."

"In this case, Mrs Justice Jefford considered that the correspondence withheld by Knowles was contrary to its case. Failing to refer to it in the arbitration had been misleading and deliberate which had, ultimately, resulted in the wrong result in the arbitration. Just as in court proceedings, parties mislead an arbitration tribunal at their peril. They need to be mindful of not withholding key information relating to a significant issue in the case, including - or perhaps especially - documentation that may adversely affect their case," she said.

Although Celtic Bioenergy's application had been successful, King said that the court's decision was "consistent with the principle that the English courts will not interfere with an arbitration award unless there is an extremely clear basis for doing so".

"The misconduct in this case was so egregious that the test was easily satisfied," she said.

The facts of the case were, in the words of the judge, "complex and convoluted". Briefly, Celtic Bioenergy had been hired by Devon County Council to design and build a new composting facility. Disputes arose between the two parties about payment, including claims for loss and expense and liquidated damages provisions. Some of those disputes were dealt with via adjudication, while others were referred to arbitration.

Separately, Celtic Bioenergy hired Knowles to provide it with advice and to represent it in the adjudications and arbitration. As part of this agreement, Celtic assigned its rights against the council to Knowles, while at the same time reserving the right to enforce payment and claim damages. An additional 'side letter' provided that sums obtained by Knowles would be held in a client account for Celtic's benefit, less any fees due to Knowles.

In February 2014, Knowles invoiced the council for money awarded to it on Celtic's behalf following one of the adjudications. These invoices were not paid. In the meantime, a dispute arose between Celtic and Knowles in relation to Knowles' services and entitlement to payment in three separate adjudications, including the one for which Knowles had invoiced the council. Celtic and Knowles agreed to enter into an ad hoc arbitration agreement to settle their disputes, as part of which Knowles agreed to give up any direct claims against the council.

In March 2016, Knowles wrote to the council demanding payment of the February 2014 invoices, in breach of its agreement with Celtic. Again, the council refused to pay, and further correspondence followed. Knowles did not bring any of this correspondence to the attention of the arbitrator handling its dispute with Celtic. The arbitrator made a partial award in favour of Knowles, but this did not take into account that Knowles had separately demanded payment of the same amounts from the council.

"The omission of any reference to [this] correspondence by Knowles was ... utterly misleading," Mrs Justice Jefford concluded.

In her judgment, the judge admitted that the threshold for a successful s68 challenge was "high". It was "not sufficient to show that one party inadvertently misled the other, however carelessly"; rather, "there must be some form of dishonest, reprehensible or unconscionable conduct that has contributed in a substantial way to obtaining the award", she said.

However, taking all of the facts into account, the judge said that she had "no hesitation in concluding that the failure to draw [the] correspondence to the attention of the arbitrator was deliberate" in this case.

"The failure to disclose the March correspondence created a wholly misleading impression," she said.

"I find, therefore, that the award was obtained by fraud in that matters that were completely inconsistent with key issues in Knowles' case were deliberately withheld from the arbitrator," she said.

Editor's note 30/03/17: This story previously said that the partial award went to Celtic when in fact it went to Knowles. We apologise for the error.