Breaking new ground in a game-changing technology dispute
In 2014 Pinsent Masons advised the Secretary of State for the Home Department on a successful application to the High Court to set aside a £200m+ arbitration award made by an international arbitral tribunal in August 2014.
The case was remarkable for two reasons. First, the litigation was one of the most high-profile and politically charged in the UK for some time.
Secondly, it broke new ground in clarifying the basis upon which the Courts of England & Wales can and will intervene in an arbitration process – a matter upon which there was previously very little case law.
The true legal innovation lay in identifying and successfully evidencing the basis for the High Court proceedings – a course of action that ultimately led to the Award being set aside and an order that the matter be re-determined by a new tribunal.
The origins of the challenge lie in an arbitration linked to the ‘e-Borders’ programme. US defence company Raytheon Systems Limited (“RSL”) was engaged by the Home Office in 2007 to design, develop and deliver the £750 million e-Borders technology system, in order to reform UK border controls by putting in place an electronic system to vet travelers leaving and entering the UK by checking their details against various watchlists. By 2010, key milestones had been missed and parts of the programme were running at least one year late, leading to its termination by the Home Office in July 2010.
RSL claimed that the termination was unlawful and that it was entitled to recover substantial damages for wrongful termination. A confidential arbitration process was then commenced by the Home Office in September 2010.
The full lifecycle of this dispute has involved innovation at every stage. The arbitration was one of the largest IT cases ever seen in international arbitration globally.
After a very lengthy hearing, the Arbitration Award was issued in August 2014 and held that the termination was unlawful. It directed the Home Office to pay substantial sums to RSL, comprising £49.98 million for damages; £9.6 million for disputed contract change notices; £126 million for assets acquired by the Home Office during the contract (the “Transferred Assets”) and substantial sums in respect of interest and RSL’s costs of the arbitration.
In most cases that would have been the end of the story. Speaking to The Times newspaper in August a partner from one Magic Circle firm said, said: “The home secretary’s suggestion that she might appeal the tribunal’s award looks very peculiar….Challenges to arbitration awards very rarely succeed.”
However, Pinsent Masons broke new legal ground in successfully bringing a challenge on behalf of its client.
The judiciary is generally reluctant to intervene in arbitration proceedings for fear of undermining one of the primary perceived benefits of the process – freedom from interference by ‘local’ courts.
For that reason, compelling, robust and technically astute arguments were required for the Home Office’s challenge to succeed. Indeed, it was noted in the judgment that there is no previous authority which substantially mirrors the facts of the current case.
Notwithstanding that, in September 2014 the Home Office challenged the Award in the High Court in London under s68(1) and s68(2)(d) of the Arbitration Act 1996, seeking to have the Award set aside and declared to be of no effect on grounds of “serious irregularity” affecting the tribunal or the award on the basis of a “failure by the tribunal to deal with all the issues that were put to it”.
The Pinsent Masons team broke new ground by developing arguments in a largely untested area of law.
They brought forward arguments that the tribunal had failed to deal with issues before it that were critical to the determination of the arbitration, and which affected both liability and quantum.
In two judgments dated 19 December 2014 and 17 February 2015, both made public on 17 February 2015, Mr Justice Akenhead, sitting in the Technology and Construction Court, upheld the challenge and determined that: first, the Award had been tainted by serious irregularity so as to cause substantial injustice within the meaning of the Arbitration Act; and secondly that the consequence was that the Award must be set aside in total and reheard by a new Tribunal.
The learned Judge found that the Tribunal’s failure to address the issues had caused substantial injustice. The Judge found that this arose, not only from the fact that the issues were not clearly dealt with, but also that both parties had spent a large amount of time and resources in presenting their cases on these points. Had the tribunal considered the issues there was a real likelihood that it would have had to reconsider some of its key findings, which may have led to a different outcome. The fact that the tribunal failed to address issues as to responsibility for incurred costs necessarily caused substantial injustice, given the large sum awarded (£126 million) in respect of the Transferred Assets.
Akenhead J found that the Award should be set aside in total and the matter determined by a new tribunal. The matter subsequently settled, securing a nine-figure saving for the government and in turn the taxpayer.
It is not overstating matters to say that the case also has significant ramifications for arbitration in the UK. It is now the leading case on a number of issues concerning the circumstances in which the English Court will exercise its discretion to intervene in arbitral awards where serious irregularity is alleged (noting that the Court’s starting point is that it will only intervene in extreme situations).
In short, it has broken the mold on successfully challenging arbitral awards in England & Wales. We wait to see the impact on the arbitration community and whether there will be a rise in the number of challenges against arbitral awards made in England and Wales.