HOUSE OF LORDS
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
Lesotho Highlands Development Authority (Respondents) v. Impregilo SpA and others (Appellants)
[2005] UKHL 43
LORD STEYN
My Lords,
1. This appeal raises issues regarding the jurisdiction of arbitrators under the Arbitration Act 1996 which are of great importance for the effective functioning of the statute.
2. It arises from an award made by three experienced ICC arbitrators, sitting in London as the seat of the arbitration, in disputes under a construction contract governed by the law of Lesotho. The arbitrators exercised or purported to exercise two powers under the Arbitration Act 1996 viz to make an award in any currency in terms of section 48(4) and to grant pre-award interest in terms of section 49(3). The relevant provisions read as follows:
48. (1) The parties are free to agree on the powers exercisable by the arbitral tribunal as regards remedies.
(2) Unless otherwise agreed by the parties, the tribunal has the following powers.
(4) The tribunal may order the payment of a sum of money, in any currency.
49. (1) The parties are free to agree on the powers of the tribunal as regards the award of interest.
(2) Unless otherwise agreed by the parties the following provisions apply.
(3) The tribunal may award simple or compound interest from such dates, at such rates and with such rests as it considers meets the justice of the case -
(a) on the whole or part of any amount awarded by the tribunal, in respect of any period up to the date of the award;
(b) on the whole or part of any amount claimed in the arbitration and outstanding at the commencement of the arbitral proceedings but paid before the award was made, in respect of any period up to the date of payment."
The central issue before the House is whether the arbitrators exceeded their powers under section 68(2)(b) of the Act.
3. Section 69 provides for a right of appeal on "a question of law", which is defined under section 82(1) as "a question of the law of England". The parties are free to exclude this right of appeal by agreement. They did so by ICC Rule 28.6 in the case before the House. Section 68, so far as material, reads as follows:
"(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award . . .
(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant -
(b) the tribunal exceeding its powers (otherwise than by exceeding its substantive jurisdiction: see section 67);"
The question arises how section 68(2)(b) and section 69, so far as the latter excludes a right of appeal on a question of law, are to operate. Specifically, can an alleged error of arbitrators in interpreting the underlying or principal contract be an excess of power under section 68(2)(b), so as to give the court the power to intervene, rather than an error of law, which can only be challenged under section 69 if the right of appeal has not been excluded?
I. The contract
4. In 1991 the Lesotho Highlands Development Authority engaged a consortium of seven companies from the United Kingdom, South Africa, Italy, Germany and France to construct the Katse Dam in Lesotho. Collectively the contracting companies were referred to as the Highlands Water Venture. The contract was made on 15 February 1991 and was concluded on the standard FIDIC Conditions of Contract (4th edition) with terms and additions. The contract was governed by the law of Lesotho.
5. The contract provided that claims and disputes would in the first instance be determined by the engineer appointed by the employer. If the parties were not satisfied with the engineer's decision, they were entitled to resort to arbitration. The arbitration clause provided for arbitration under the rules of the ICC. Those rules provide that all parties agree, so far as they are allowed to do so, to forego any right of appeal to the courts. This is an effective exclusion agreement of the right of appeal on a point of law under section 69.
II. Performance
6. On 1 February 1991 the works commenced. On 26 February 1998 the taking over certificate for the whole of the contract works was issued.
III. Claims
7. In the course of the contract, the contractors made a number of claims for reimbursement of increased costs and for upwards adjustments to prices and rates. These claims included:
(a) a claim for additional costs incurred due to an increase in Lesotho vehicle licence fees (claim 12);
(b) a claim for reimbursement of consequential costs resulting from the employer's instruction to increase labour wage rates (claim 37);
(c) a claim in respect of variations to the contract works (claim 53/66); and
(d) a claim for reimbursement of additional costs incurred as a result of the engineer's instruction to use increased amounts of shotcrete (claim 62).
The claims were rejected by the employer and were referred to the engineer for decision under the agreed dispute resolution procedure. The engineer rejected the claims. The contractors then referred these claims (and other claims) to ICC arbitration as provided in the contract. On 29 October 1999 the arbitration was commenced.
IV. The terms of reference
8. On 29 September the parties and the arbitrators signed ICC terms of reference. Under paragraph 4 of the terms of reference two issues referred to the tribunal were (1) the currency or currencies of any award and (2) whether any interest should be paid on sums found due. Paragraph 6 of the terms of reference contained the following provision:
". . . The arbitrator shall have full power to open up, review and revise any decision, opinion, instruction, determination, certificate or valuation of the engineer related to the dispute, provided always that the arbitrator shall be bound to issue in writing to each party, including the engineer, fully documented reasons for and derivation of the said final settlement."
The terms of reference further read as follows:
"7.1 As the seat of the arbitration is to be London, the dispute is to be finally settled in accordance with the provisions of the Arbitration Act 1996 (UK) (which will apply in lieu of the Arbitration Act No. 12 of 1980 of Lesotho) and the rules of arbitration of the International Chamber of Commerce in force as from 1 January 1998.
7.2 The law applicable to the substance of the disputes pursuant to clause 5 of the conditions of particular application and the arbitration agreement referred to in paragraph 6.4 is to be that in force in the Kingdom of Lesotho.
8.1 The tribunal shall have the power to make a partial, or interim, award on any issue or matter before making a final award. Any such award or awards shall to the extent to which the tribunal considers to be appropriate, specify a single net amount (if any) to be paid by one party to the other, having regard both to the claimants' claim[s] and the respondent's counter-claim.
V. The award
9. On 25 January 2002 the tribunal issued a partial award. The effect of the award is summarised as follows in the agreed statement of facts and issues:
"In their partial award, the arbitrators (Gordon Jaynes, John Blackburn QC and John Uff QC) found that the following sums, 'expressed in Maloti', were due to the appellants in respect of the claims:
The arbitrators held that the dates on which payment in respect of the claims were due were as follows:
Claim 12 - 1 January 1997
Claim 53/66 - 1 July 1996
The arbitrators decided that the partial award should be expressed in European currencies in the following proportions:
| Currency | % |
| Italian Lira | 26.34 |
| UK Pounds | 24.83 |
| French Francs | 32.12 |
| Deutsche Marks | 16.71 |
| ______ |
| 100 |
The arbitrators (rightly or wrongly) derived these proportions from the supplement to tender schedules A and O, which form part of the contract. The arbitrators said that, 'sums presently stated in Maloti should be converted in the same ratio, inter se, as the four European currencies are stated.' The rates of exchange used by the arbitrators were those set out in clause 72.1 (as amended) and the supplement to tender schedules A and O. European currencies were then converted into Euros where appropriate.
The arbitrators further decided that pre-award simple interest would be awarded on the claims from the dates on which they were due at annual average rates agreed by the parties."
VI The reasons of the tribunal
10. In respect of the currency issue the tribunal relied on section 48(4) of the Act. The tribunal pointed out that the terms of reference expressly provided that the dispute shall be settled in accordance with the provisions of the 1996 Act. They stated [para 13.17]:
". . . section 48 applies 'unless otherwise agreed by the parties'. The respondent contended that the matter of currencies was dealt with under the contract. While this may provide for the currencies in which payment under the contract is to be made, the contract is silent as to the currency in which any arbitral award is to be given. The tribunal is of the opinion that the parties have not 'otherwise agreed' on the powers available to the tribunal, and the tribunal accordingly concludes that it has the power to order payment of any sum of money found to be due in any currency. Accordingly, while the tribunal takes careful note of the contract currencies and their stated proportions, the tribunal will express its awards in such currencies as are considered appropriate in the circumstances."
The detailed provisions in the principal contract regarding currencies do not matter but for completeness' sake they are set out in an appendix to this opinion.
11. In respect of pre-award interest the tribunal referred to the provision in the terms of reference that the dispute shall be settled in accordance with the provisions of the Arbitration Act 1996. The tribunal concluded [para 13.16]:
"The tribunal therefore concludes, prima facie, that the power under section 49(3) to award simple or compound interest is available. The respondent, however, contended that the provisions dealing with interest under the contract constitute an agreement 'otherwise' which excludes the tribunal's powers under section 49(3). In the tribunal's opinion, section 60(10) of the contract cannot be read as covering the claimants' entitlement to interest upon an award given in these proceeding. The section expressly covers payments following certification. Necessarily, these proceedings are concerned with sums which have not been certified. The contention that section 60(10) effectively deprives the claimants of any interest on sums ultimately held to be due in arbitration proceedings in so far at variance with any normal commercial practice, that the tribunal could not reach such a conclusion without clear words. No such clear words are to be found in the contract and the tribunal is satisfied that it was not 'otherwise agreed' by the parties for the purpose of section 49(2). Accordingly, the tribunal concludes that the power to award interest under section 49(3) is available."
Section 60(10) of the principal contract is also contained in the Appendix to this opinion.
VII. The commercial context
12. The commercial context in which the award was made is as follows. The tribunal found that the employer had failed to pay to the contractors various sums that had been due under the contract on dates between 1 July 1996 and 1 July 1997. If these payments had been made when they ought to have been made, the employer would have made them in the contractual currencies of payment, largely Lesothan Maloti (a currency tied to the South African Rand). Between 1 July 1997, when the last of the payments should have been made, and the date of the award in January 2002, the value of the Rand, and thus of the Maloti, fell heavily. The case of the contractors was that they had no use for Maloti (other than for conversion into hard currency), because the works had long since been completed. In order to remedy the employer's failure to make the payments when they were due, the tribunal made their award in hard currencies, converted from Maloti at a rate prescribed in the contract which pre-dated the Maloti's collapse. In the result the complaint of the employer against the award relates not to the currencies in which the award is expressed but rather against the rate at which Maloti had been converted into those hard currencies.
13. The tribunal awarded interest on the payments from the times that they were due until the date of the award.
VIII. The decision of Morison J
14. On 22 February 2002 the employer challenged the decisions of the tribunal relating to the currencies of the award and pre-award interest. The challenge was made on the dual basis of lack of substantive jurisdiction under section 67 of the Act and excess of power under section 68(2)(b). Morison J ruled that the tribunal did have substantive jurisdiction. He held, however, that they had exceeded their powers by (a) expressing the award in currencies other than those stipulated for in the contract; and (b) awarding interest in circumstances not permitted under Lesotho law. Accordingly, the judge remitted the decisions on currency and interest to the tribunal with directions as to how they ought to carry out their task afresh: Lesotho Highlands Development Authority v Impregilo SpA [2003] 1 All ER (Comm) 22.
IX. The judgment of the Court of Appeal
15. On appeal to the Court of Appeal the employer rightly abandoned its challenge under section 67 to the substantive jurisdiction of the arbitrators. The Court of Appeal, therefore, had to consider whether the decisions of the tribunal on currency and interest were made in excess of power under section 68(2)(b). On 31 July 2003 the Court of Appeal gave its unanimous judgment upholding the decision at first instance on both points. Brooke LJ (with whom Latham LJ and Holman J agreed) concluded on the currency point:
"[30] It follows that where there is a contract which identifies the currency of account and the currency of payment and specifies the proportions of any debt due under the contract which must be apportioned in different currencies to the different members of an international consortium, section 48(4) of the 1996 Act merely repeats in codified form what had already been established by this court in the Jugoslavenska Oceanska case, namely that English procedural law did not require London arbitrators to convert this substantive debt in a foreign currency into English currency for the purpose of making their award. The parties' agreement was clear on the face of their contract, and the arbitrators, standing in the shoes of the engineer, were bound to give effect to it. Section 48(4) does not create a free-standing power to choose whatever currency arbitrators might think appropriate when the terms of a contract are clear.
[34] In my judgment the arbitrators ought therefore to have interpreted the parties' contract in accordance with the applicable law (and there was no suggestion that the law of the Kingdom of Lesotho was in any material respect different from English law in this regard) and made an award in the currencies which the parties had agreed upon. Section 48(4) of the 1996 Act merely restated what must be taken (in the absence of evidence to the contrary) to be the effect of the substantive law of the Kingdom of Lesotho which the arbitrators were bound to apply. I therefore agree with the judge that the arbitrators exceeded their powers when they thought that section 48(4) of the 1996 Act gave them any power to depart from what the parties had agreed. I would therefore dismiss the appeal on the currency point."
In respect of interest Brooke LJ concluded:
"[48] Where the law of a different jurisdiction, like the law of the Kingdom of Lesotho, confers a substantive right to interest ex mora, there is no room for any discretionary procedural power. The unpaid party to a contract is entitled as of substantive right to interest from the time when payment is contractually due. There was no need for the parties to agree the express exclusion of section 49(3) of the 1996 Act, because of the saving provision in section 49(6): '(6) The above provisions do not affect any other power of the tribunal to award interest.'
[49] By article 7.2 of their terms of reference the arbitrators were bound to apply the law of the Kingdom of Lesotho to the substance of the dispute. That law was the law of the contract, and by that law the contractors were entitled as of substantive right to interest on sums which they ought to have been paid, subject to the 'duplum' cap. Section 49(6) of the 1996 Act made provision for the power of the tribunal to award interest in these circumstances as a matter of substantive right. The arbitrators therefore exceeded their powers when they had recourse to what would have been their discretionary powers in section 49(3) to resolve a matter to which they should have applied the substantive law of the contract. The opening words of article 10(1)(c) of the Rome Convention, which refer to the limits of the powers conferred on the court by its procedural law, plainly have nothing to do with the situation with which we are concerned.
[50] So far as the rate of interest is concerned, in the absence of express agreement this is a matter for the arbitrators to decide as a matter of the lex fori (see Dicey and Morris para 33-387: I would adopt the editors' reasoning), although they will no doubt be slow to depart from the rates of interest the parties agreed to be appropriate in relation to the non-payment of interim certificates . . ."
X. The Issues
16. The following issues arise:
(1)(a) Did the tribunal have the power to express the award in the currencies they did pursuant to section 48(4) of the Act or was any power that might otherwise have been available under that section excluded or modified by the terms of the principal contract?
(b) If the decision of the tribunal on the currency point amounted to an error of law, did it constitute an excess of jurisdiction under section 68(2)(b)?
(2)(a) Did the tribunal have the power to grant pre-award interest pursuant to section 49 of the Act or was any power that might otherwise have been available under that section excluded or modified by the terms of the principal contract or by operation of Lesotho law as the substantive law of the contract?
(b) If the decision of the tribunal on the interest point amounted to an error of law, did it constitute an excess of jurisdiction under section 68(2)(b)?"
Before I can examine these issues it is necessary to explain several contextual matters.
XI. The Ethos of the 1996 Act
17. It is important to take into account the radical nature of the changes brought about by the Arbitration Act 1996. Lord Mustill and Stewart Boyd QC Commercial Arbitration (2001 Companion Volume to the Second Edition, preface) stated:
"The Act has however given English arbitration law an entirely new face, a new policy, and new foundations. The English judicial authorities . . . have been replaced by the statute as the principal source of law. The influence of foreign and international methods and concepts is apparent in the text and structure of the Act, and has been openly acknowledged as such. Finally, the Act embodies a new balancing of the relationships between parties, advocates, arbitrators and courts which is not only designed to achieve a policy proclaimed within Parliament and outside, but may also have changed their juristic nature."
These general propositions are correct but do not fully explain the important changes which are relevant to the present case.
18. Lord Wilberforce played a large role in securing the enactment of the Arbitration Bill. During the second reading of the Bill in the House of Lords he explained the essence of the new philosophy enshrined in it: Hansard, col 778, 18 January 1996. He said:
"I would like to dwell for a moment on one point to which I personally attach some importance. That is the relation between arbitration and the courts. I have never taken the view that arbitration is a kind of annex, appendix or poor relation to court proceedings. I have always wished to see arbitration, as far as possible, and subject to statutory guidelines no doubt, regarded as a freestanding system, free to settle its own procedure and free to develop its own substantive law - yes, its substantive law. I have always hoped to see arbitration law moving in that direction. That is not the position generally which has been taken by English law, which adopts a broadly supervisory attitude, giving substantial powers to the court of correction and otherwise, and not really defining with any exactitude the relative positions of the arbitrators and the courts.
Other countries adopt a different attitude and so does the UNCITRAL model law. The difference between our system and that of others has been and is, I believe, quite a substantial deterrent to people to sending arbitrations here. …
How then does this Bill stand in that respect? After reading the debates and the various drafts that have been moving from one point to another, I find that on the whole, although not going quite as far as I should personally like, it has moved very substantially in this direction. It has given to the court only those essential powers which I believe the court should have; that is, rendering assistance when the arbitrators cannot act in the way of enforcement or procedural steps, or, alternatively, in the direction of correcting very fundamental errors."
(My emphasis)
Characteristically, Lord Wilberforce did not express his understanding of the new Arbitration Bill in absolute terms. But the general tendency of his observations, and what Parliament was being asked to sanction, is clear. It reflects the ethos of the 1996 Act.
XII. Approach to the interpretation of the 1996 Act
19. It is also necessary to consider how the 1996 Act should be interpreted. In his speech already cited Lord Wilberforce pointed out that "Many laymen have to participate in arbitrations and many arbitrations are conducted by people who are not lawyers" (col 777). Can they realistically be asked to interpret the 1996 Act in the light of pre-existing case law? Clearly not. In Seabridge Shipping AB v AC Orssleff's EFtF's A/S [1999] 2 Lloyd's Rep 685, 690 Thomas J (now Thomas LJ), a judge with enormous experience in this field, made valuable observations on which I cannot improve. He said, at p 690:
"One of the major purposes of the Arbitration Act 1996 was to set out most of the important principles of the law of arbitration of England and Wales in a logical order and expressed in a language sufficiently clear and free from technicalities to be readily comprehensible to the layman. It was to be 'in user friendly language'. (See the Report on the Bill and the Act made by the Departmental Advisory Committee, published in Arbitration International, vol 13, at p 275.)
As this has been the actual achievement of the Act, it would in my view be a retrograde step if when a point arose reference had to be made to pre-Act cases. Reference to such cases should only generally be necessary in cases where the Act does not cover a point - as, for example, in relation to confidentiality or where for some other reason it is necessary to refer to the earlier cases. A court should, in general, comply with the guidance given by the Court of Appeal and rely on the language of the Act. International users of London arbitration should, in my view, be able to rely on the clear "user-friendly language" of the Act and should not have to be put to the trouble or expense of having regard to the pre-1996 Act law on issues where the provisions of the Act set out the law. If international users of London arbitration are not able to act in that knowledge, then one of the main objectives of the reform will have been defeated."
The reference to an earlier decision of the Court of Appeal is to Patel v Patel [2000] QB 551. I would respectfully endorse the observation in Seabridge.
XIII. The seat of the arbitration
20. The Act is engaged where the "seat" of the arbitration is in England and Wales or Northern Ireland: sections 2(1). This is a reference to "the juridical seat" of the arbitration designated, inter alia, by the parties to the arbitration agreement: section 2. The determination of the juridical seat of the arbitration as England (as was done in the present case) is the gateway to the powers of the tribunal spelled out in many provisions of the Act. In setting out the powers of a tribunal the 1996 Act often uses the permissive expression "the parties are free to agree". Subject agreements to the contrary, the relevant powers in the present case are section 48(4) (currency) and section 49(3) (pre-award interest.)
XIV. The independence of the arbitration agreement
21. It is part of the very alphabet of arbitration law, as explained in Harbour Assurance Co (UK) Ltd v Kansa General International Insurance Co Ltd [1993] QB 701, 724-725, per Hoffmann LJ (now Lord Hoffmann) and spelled out in section 7 of the Act, that the arbitration agreement is a distinct and separable agreement from the underlying or principal contract. It is in the arbitration agreement, read with the curial law, in this case the Arbitration Act 1996, that the powers of the tribunal are to be found and not in the underlying contract. In the present case one is dealing with an ICC arbitration agreement. In such a case the terms of reference which under article 18 of the ICC rules are invariably settled may, of course, amend or supplement the terms of the arbitration agreement. The terms of reference too are a source of the powers of the arbitrator. This is the context in which the terms of reference in the present case expressly provided for the dispute to be settled in accordance with the provisions of the 1996 Act.
XV. The currency point
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