ABOUT THE AUTHOR: Yuri Pedroza Leite, FCIArb is a dual-qualified lawyer
The judgment of the Judicial Committee of the Privy Council of the United Kingdom (the “Privy Council”) in Therapy Beach Club v. RAV Bahamas and Bimini Bay Resort has been heralded as a landmark judgment considering challenges to arbitral awards on grounds of serious irregularity. In this case, RAV Bahamas Ltd and Bimini Bay Resort Management Limited (jointly “RAV”) argued that the sole arbitrator’s decision to award damages to Therapy Beach Club Incorporated (“Therapy”) was flawed by procedural irregularities relating to the arbitrator’s failure to address issues put to her. The key issue addressed by the Privy Council, in this case, was whether section 90 of the Bahamas Arbitration Act 2009 (the “Bahamas Arbitration Act”) requires “a separate and express allegation, consideration and finding of substantial injustice for a serious irregularity to be established.” Section 90 of the Bahamas Arbitration Act is materially identical to section 68 of the English Arbitration Act 1996 (the “English Arbitration Act”)
On 31 December 2011, Therapy and RAV entered into a lease agreement pursuant to which Therapy leased a plot of land in Bimini Island from RAV. It was envisaged that Therapy would use the land to construct and operate a hospitality complex named Sakara Beach Club. The lease term was three years, with an option for Therapy to give a six months’ notice to RAV to renew the lease for a further three years.
In 2013, RAV alleged that the lease agreement was void. RAV then demolished the Sakara Beach Club and evicted Therapy from the land. Therapy initiated arbitration proceedings against RAV under the lease agreement, claiming that: (i) both the demolition of the Sakara Beach Club and eviction from the leased land had been in breach of the lease agreement; (ii) the lease agreement had been varied to include a nearby restaurant known as Atlantic Seafood; and (iii) it renewed the lease agreement for a further three-year period.
In the final award of 21 August 2017, the sole arbitrator, Cheryl Albury, ruled in favour of Therapy, determining, amongst others, that Therapy was entitled to damages for consequential loss of profits in the amount of USD 6,800,000. In arriving at this figure, the arbitrator adopted the valuation model put forward by Therapy’s quantum expert (even though the arbitrator made certain discounts to the figure of USD 12,000,000 presented in the expert report). Crucially, the expert conducted their calculations on the basis of Therapy’s case that the Atlantic Seafood restaurant was part of the lease, and that it had properly renewed the lease for a further three years.
RAV challenged the award in the Supreme Court of the Bahamas on grounds of serious irregularity under section 90 of the Bahamas Arbitration Act. Central to the challenge was the sole arbitrator’s deference to the quantum report presented by Therapy’s expert when determining the loss of profits suffered by Therapy. RAV contested the approach adopted by the arbitrator, stating it was not offered an opportunity to properly address quantum before the issuance of the award. Specifically, RAV relied on two key grounds in its challenge.
The first ground (reflected in paragraphs 5 to 8 of the final award) related to the failure of the arbitrator to deal with important issues that were put to her, a requirement under section 90(2)(d) of the Bahamas Arbitration Act (equivalent to section 68(2)(d) of the English Arbitration Act). These issues related to the arbitrator’s inclusion of the lease renewal period in the quantum assessment, without including a proper analysis and reasoning in the award, even though RAV argued that Therapy had never rightfully opted for the renewal. RAV alleged (i) no notice had been given by Therapy in accordance with the lease agreement’s terms, and (ii) the renewal clause was in any event uncertain, illusory and unenforceable.
The second ground (reflected in paragraph 10 of the final award) related to the arbitrator’s failure to give RAV a fair opportunity to address her calculation of damages, contrary to section 90(2)(a) and section 44(1)(a) of the Bahamas Arbitration Act (equivalent to section 68(2)(a) and section 33(1)(a) of the English Arbitration Act respectively). In particular, RAV complained that the arbitrator relied on the expert valuation, which failed to disaggregate losses in respect to the Sakara Beach Club and Atlantic Seafood. The final figure in the quantum ruling resulted from the arbitrator’s decision to discount: (i) the expert report’s assessment by one third, as the lease variation claim to include Atlantic Seafood in the lease was rejected, and (ii) a further 15% to reflect the fact that the expert’s figures were supported by his own memory and not by evidence. However, none of the parties made or were invited to make any submissions on whether and how the quantum assessment (including the discounts applied by the arbitrator) should be assessed.
Winder J of the Bahamas court of first instance made a finding of serious irregularity in his judgment of 24 January 2018 and remitted the matter to the arbitrator for reconsideration of the damages. On the first ground, Winder J held that “the award did not deal with the issue put to the arbitrator of whether Therapy was legally entitled to the recovery of losses for the renewal period.” On the second ground, Winder J held that “the arbitrator acted unfairly in not affording RAV the opportunity to make representations prior to her [decision] to make a one-third deduction, and a further 15% deduction, for, respectively, the profits attributable to Atlantic Seafood . . . and the inaccurate recall of [the expert].”
Therapy appealed from Winder J’s judgment to the Bahamas Court of Appeal, which, by a majority judgment dated 16 August 2018, decided in favour of Therapy. The Court of Appeal found that Winder J’s judgment “did not expressly and separately consider and find that substantial injustice had been caused to [RAV] by the irregularity he had found; similarly [RAV] ha[ve] failed expressly and separately to plead and establish any such substantial injustice.” RAV then appealed to the Privy Council to reverse the Court of Appeal’s judgment.
The Privy Council had to consider “whether section 90 [of the Bahamas Arbitration Act] requires there to be a separate and express allegation, consideration and finding of substantial injustice for a serious irregularity to be established”, as found by the majority in the Court of Appeal.
In its decision, the Privy Council first offered certain observations regarding challenges for a serious irregularity under section 90 of the Bahamas Arbitration Act:
- Threshold: the Privy Council confirmed that the test for serious irregularity imposes a high threshold, one which “focus[es] on due process, and not on correctness of the decision reached,” and through which a substantial injustice was or will be caused;
- Substantial injustice: the test for substantial injustice is one where, had the irregularity not occurred, the outcome of the arbitration might well have been different (conversely, there will be no substantial injustice if it can be shown that the outcome of the arbitration would have been the same regardless of the irregularity);
- Irregularity: an irregularity occurs when a tribunal fails to make a determination on an issue that was put before it;
- Issue: an issue must be “essential or crucial to the determination of a claim or defence upon which the resolution of the dispute or disputes depends;”
- Put before it: an issue has been put before a tribunal if, during the proceedings, the tribunal’s attention had been sufficiently clearly drawn to it;
- Failure (to deal with an issue): a failure to deal with an issue does not mean: (i) that the issue was dealt with badly by the tribunal; nor (ii) that the tribunal has provided no (or insufficient) reasons for the decision. However, there will be a failure to deal with an issue when its determination is essential to uphold the decision reached in the award.
An irregularity also occurs where the tribunal fails to act fairly and impartially as between the parties (section 44(1)(a) of Bahamas Arbitration Act).
Turning to the first ground relied upon by RAV relating to the term of the lease agreement, the Privy Council found that the valuation presented by the expert considered a disputed time period – an issue that was put to the arbitrator and one that she failed to address. The arbitrator had thus wrongly awarded the damages by including the renewal period. The appeal on the first ground was therefore allowed in its entirety.
Firstly, the Privy Council found that the arbitrator’s failure to determine whether the renewal period applied would likely cause substantial injustice. It further held that this issue (i.e. renewal period) self-evidently constituted a central issue put to the arbitrator. The arbitrator’s failure to deal with the issue affected the proper determination of Therapy’s entitlement to damages and could have affected the quantum of the award.
Secondly, the Privy Council held that Winder J had found, in substance, that such substantial injustice had occurred, even though he did not expressly use those words in his judgment. In that regard, the Privy Council noted that an irregularity that had caused or would cause substantial injustice amounts to a serious irregularity for the purposes of section 90 of the Bahamas Arbitration Act. Accordingly, the Privy Council held that, by finding that there was a serious irregularity, Winder J necessarily found there was serious injustice, regardless of him not expressly saying so.
The Privy Council allowed the appeal on the second ground in part. On one hand, the Privy Council agreed with RAV that the arbitrator’s one-third discount excluding Atlantic Seafood from the determination of damages constituted a serious irregularity. The irregularity has arisen from the arbitrator’s failure to give the parties an opportunity to make submissions and put forward disaggregated valuation of the Sakara Beach Club, excluding the restaurant. The parties only learned of the arbitrator’s chosen method to make the reductions in the final award. The Privy Council considered that in this case, “[i]t goes without saying and is self-evident that an arbitrary deduction of damages by a third (when it might be a much higher deduction) is seriously prejudicial to [RAV].” Further, it held that “[a]lthough it would have been good practice to do so, there was no mandatory requirement for Winder J to set out, expressly and separately, why substantial injustice was here made out.”
On the other hand, the Privy Council found that the expert’s reliance on his memory was not a serious irregularity: the expert’s reliance was evident from the report and could have been fairly challenged by RAV during the proceedings.
The Privy Council is the judicial body responsible for determining appeals from 23 Commonwealth countries and other territories. Importantly, members of the Privy Council sit as justices of the Supreme Court of the United Kingdom. Consequently, the Privy Council is an important authority in the common law system whose decisions are highly persuasive. Its decision on section 90 of the Bahamas Arbitration Act is therefore likely to prove highly relevant in the context of challenges to arbitral awards advanced on the basis of section 68 of the English Arbitration Act (as both provisions are materially the same).
Procedurally, the judgment expressly reminds counsel (and judges) to list separate and express allegations and findings of substantial injustice. To that effect, the Privy Council found that it is “good practice” for those making applications under section 90 of the Bahamas Arbitration Act to expressly list the irregularity relied upon and to state how such irregularity has caused or will cause substantial injustice. The judgment equally states that a judge faced with a section 90 challenge should attempt to deal, expressly and separately, with each of these elements.
Ultimately, however, the judgment serves as a reminder that when dealing with serious injustice, “substance is more important than form” and that “[u]ndue formalism should not be required” to make a finding of a serious irregularity. In other words, the substance and the facts must prevail over formalistic requirements when dealing with challenges to arbitration awards on the grounds of serious irregularity.
Yuri Pedroza Leite, FCIArb is a dual-qualified lawyer (Brazil and England & Wales), he can be contacted at firstname.lastname@example.org.