Appealing arbitral awards: Haley v Haley [2020] EWCA Civ 1369

Background

A week before the final hearing of their financial remedy proceedings, Kelly Haley (“W”) and Russell Haley (“H”) were told that no judge would be available to hear the case, and that the matter would have to be listed for an unspecified date in the future. Consequently, they agreed to go to arbitration before Howard Shaw QC (“the arbitrator”) instead.

H believed that the arbitrator’s award was unfair, and so made an application to the High Court seeking either to appeal the arbitral award, or, alternatively, seeking an order to be made by which the court would decline to make an order under the Matrimonial Causes Act 1973 (“MCA 1973”) in the terms of the award, and would instead exercise its discretion anew.

H’s application was heard by Deputy High Court Judge Ambrose (“the judge”) on 27 February 2020. A summary of that judgment can be found here. The judge dismissed the appeal, refused the application to interfere with the award, and made an order in the terms of the award. H then appealed the judge’s decision.

Arbitration in family cases

King LJ gave the leading judgment, with which Moylan and Popplewell LJJ were in agreement. She set out some initial principles relating to arbitration in family cases:

• The Family Law Arbitration Financial Scheme operates under the Institute of Family Law Arbitrators (“the IFLA Scheme”). The IFLA Scheme’s authority derives from the Arbitration Act 1996 (“AA 1996”).
• There is a common misconception that the use of arbitration as an alternative to the court process in financial remedy cases is ‘the purview only of the rich who seek privacy away from the courts and the eyes of the media’ [5]. However, ‘[i]f that was ever the position, it is no more’ [5].
• It is of the utmost importance that potential users of the arbitration process are not deterred from using it, either because the outcome is not seen as sufficiently certain, or because arbitration is regarded as providing no adequate remedy in circumstances where one of the parties believes there to have been an unjust outcome.

It was common ground that in the family context, arbitration cannot oust the jurisdiction of the court. Indeed, the arbitration agreement form which parties have to sign (ARB1 FS) says that the court ‘has a discretion as to whether, and in what terms, to make an order’. A consent order made under the MCA 1973, following arbitration, derives its authority from the court, and not from the consent of the parties (in contrast to ordinary civil proceedings). However, the court will be heavily influenced by what the parties have themselves agreed.

The judge’s decision

The judge was concerned with H’s applications for:

• An order setting aside the arbitral award for serious irregularity under s68 AA 1996.
• Permission to appeal under s69 AA 1996.
• An order that the award should not be made into a final order by the court under the MCA 1973.

The judge dismissed the applications under s68 and s69 AA 1996. (Indeed, no further appeal was made by H in relation to s68, and it was common ground that after the judge refused the application under s69, the Court of Appeal had no jurisdiction to grant permission to appeal from that refusal.)

The judge held that the test to be applied in determining whether to refuse, in the exercise of her discretion, to make an order in the terms of the arbitral award was akin to the test under s68 and s69 AA 1996. However, she held that even if she was wrong as to the correct test to be applied, the arbitral award was ‘not wrong’.

The issues on appeal

This appeal was therefore limited to a consideration as to the test to be applied where one party declines to consent to, or challenges, the making of an order under the MCA 1973 in the terms of an arbitral award made following family arbitration under the IFLA Scheme.

The questions the Court of Appeal had to determine were:

• Did the judge apply the wrong test, namely one which was akin to that applied under the AA 1996?
• If so, is the correct test the ‘appeals test’ applicable under the MCA 1973?
• If the appeals test is the appropriate test, then, if properly applied, is there a real prospect that the first instance court would have concluded that the arbitral award was wrong?
• If so, should the matter be remitted to a first instance court, or was the Court of Appeal able to substitute its own order?

Differences between challenges to an arbitral award and a court judgment

The principal routes of challenge to an arbitral award are that:

• The arbitrator ‘lacked substantive jurisdiction’ (s67 AA 1996).
• There was ‘serious irregularity affecting the tribunal, the proceedings or the award’ (s68 AA 1996).
• The award was wrong on a question of law (s69 AA 1996).

The test under s69 is applied on the basis of the facts as found by the arbitrator. The party challenging the award requires leave, and must show that the decision on the question of law was ‘obviously wrong’ (unless the question is one of general public importance, in which case it must be shown to be at least open to serious doubt).

King LJ noted: ‘Fairness as a concept has no place in a challenge to an arbitral award; arbitration being a procedure designed to provide certainty across the international commercial world’ [14].

Where there has been a contested financial remedy trial heard in court, leave is similarly required. However, permission will be given if the judge concludes that there is a real (i.e. a realistic, rather than a fanciful) prospect that the proposed appellant can satisfy the appeal court that the order made was: (a) wrong, or (b) unjust because of a serious procedural or other irregularity in the proceedings in the lower court. Fairness ‘will be central to the court’s determination’ [15].

The judge held that the proper test for a challenge to an IFLA Scheme arbitral award is ‘closely aligned’ to that provided under the ‘stringent terms’ of the AA 1996, save where there has been a supervening event or mistake [16].

King LJ noted that the ARB1 FS form says at the end, immediately above the signatures of the parties (or their legal representatives): ‘Arbitration is a process whose outcome is generally final. There are very limited bases for raising a challenge or appeal, and it is only in exceptional circumstances that a court will exercise its own discretion in substitution for the award’.

Appealing court orders

Where permission to appeal a court order is granted because there is a real prospect of success, the appeal hearing is not an opportunity for a second bite of the cherry. Parties should bear in mind that:

• The appeal is limited to a review of the lower court’s decision, unless a rehearing is permitted for a particular class of appeal, or the court considers it to be in the interests of justice to hold a rehearing.
• An appeal will only be allowed where the decision of the lower court was (a) wrong, or (b) unjust because of a serious procedural or other irregularity in the proceedings in the lower court.
• The test to be applied on appeal is whether the decision of the lower court is ‘wrong’, as opposed to ‘plainly wrong’.

The approach taken by the courts to a review of what may have been an unjust outcome following a court hearing is therefore ‘significantly less restrictive than that following an arbitration’ [50].

Case law

The question of what test the court should apply in cases where the parties have agreed to arbitration, but are then dissatisfied with the award, has been considered to a limited degree in several first instance cases.

In S v S (Arbitral Award: Approval) [2014] EWHC 7 (Fam), Sir James Munby P said at [21]:

‘Where the consent order which the judge is being asked to approve is founded on an arbitral award under the IFLA Scheme or something similar […] the judge’s role will be simple. The judge will not need to play the detective unless something leaps off the page to indicate that something has gone so seriously wrong in the arbitral process as fundamentally to vitiate the arbitral award.’

In J v B (Family Law Arbitration: Award) [2016] EWHC 324 (Fam), Mostyn J said:

‘My conclusion is this. If following an arbitral award evidence emerges which would, if the award had been in an order of the court entitle the court to set aside its order on the grounds of mistake or supervening event, then the court is entitled to refuse to incorporate the arbitral award in its order and instead to make a different order reflecting the new evidence. Outside the heads of correction, challenge or appeal within the 1996 Act these are, in my judgment, the only realistically available grounds of resistance to an incorporating order. An assertion that the award was “wrong” or “unjust” will almost never get off the ground: in such a case the error must be so blatant and extreme that it leaps off the page.’

King LJ commented that the exclusions which Mostyn J had in mind related to ‘matters extraneous to the judicial function as they arise in circumstances where no error of the court is alleged, whether in relation to the evaluation by the judge of the evidence before him or the exercise of the wide discretion afforded to him by s25 MCA 1973’ [62].

In BC v BG (Financial Remedies) [2019] EWFC 7, Deputy High Court Judge Ambrose held that the grounds of challenge are limited to supervening event, mistake, or those found within the AA 1996.

The test has therefore ‘become increasingly strict, and the basis for challenge correspondingly increasingly narrow’ [64]. King LJ noted that Sir James Munby’s comment in S v S that, where parties sought a consent order, the court would interfere only if an error ‘leapt off the page’ has ‘now developed to the extent that the phrase ‘leapt off the page’ has become some sort of a measure […] of how wrong a decision has to be in order to invoke the jurisdiction of the court; not only in cases where a consent order is sought, but equally when one party submits that the arbitral award is unfair’ [64].

Arbitration agreements

King LJ did not agree with the view of Sir James Munby and Mostyn J that ‘an agreement to arbitrate carries even more weight than that given by a court to an agreement reached between the parties themselves’ [67]. She said that rather: ‘The agreement to arbitrate is an agreement that a third party will determine the terms. It is not, at the time the agreement is reached, an agreement to any particular terms’ [67].

Even if King LJ was wrong about that, she pointed out that ‘the fact remains […] that family cases are different from civil cases’, since ‘[t]he enforceable order following family arbitration ultimately derives its authority from the court and not from the arbitration agreement as is recognised on the face of the ARB1 FS’ [68].

King LJ noted that a court can decline to make an order in the terms of an agreement negotiated by parties in circumstances where there are ‘good and substantial grounds for concluding that an injustice will be done by holding the parties to the terms of their agreement’, or where ‘it would not be fair to hold them to their agreement’ (per Lord Phillips in Radmacher v Granatino). Given this, she said at [69] that:

‘It must, in my view, equally follow that where the agreement, albeit contractual, is for a third party to decide the terms that are in dispute, the court can decline to make the order where there are good and substantial grounds for concluding that an injustice will be done if an order is made in the terms of the arbitral award.’

Consequently, she did not agree with the approach of Sir James Munby or Mostyn J, ‘whose respective approaches limit challenges to an arbitral award in family cases to the statutory challenges found under the AA 1996 or mistake or supervening event’ [70].

Furthermore, given that the orders determining the enforceable legal rights of the parties following divorce are made under the MCA 1973, and not under the AA 1996, ‘there is no requirement for the discontented party first to make an application under s.57, s.68 or s. 69 AA 1996 before asking the Family Court to decline to make an order under the MCA 1973 in the terms of the arbitral award’ [71].

The correct approach

Instead, ‘the logical approach by which to determine whether the court should decline to make an order in the terms of the award, is by reference to the appeal procedure and the approach found in the FPR 2010’ [73].

The court should, at an initial stage, ‘triage’ the case, and the reluctant party should have to show cause on paper why an order should not be made in the terms of the arbitral award. If the judge is of the view that there is a real prospect of the objecting party succeeding in demonstrating that the arbitral award is wrong, the matter can be set down for a hearing. That hearing will be confined to a review and will not be a rehearing (subject to any case management directions the judge may make).

If, however, the court at the triage stage takes the view that the objection made to the award would not pass the permission to appeal test, then ‘it can make an order in the terms of the arbitral award without more ado and penalise the reluctant party in costs’ [96].

The court will only substitute its own order ‘if the judge decides that the arbitrator’s award was wrong; not seriously, or obviously wrong, or so wrong that it leaps off the page, but just wrong’ [74].

The wording at the foot of the ARB1 FS form is therefore wrong, and goes too far in saying that ‘it is only in exceptional circumstances that a court will exercise its own discretion in substitution for the award’ [75].

Nonetheless, King LJ said that ‘I would emphasise that I do not wish it to be thought that I am in any way undermining the arbitration process or the fact that the parties have signed the ARB1 FS. On the contrary, parties must go into arbitration with their eyes open with the understanding that, all other things being equal, the award made at the end of the process will thereafter be incorporated into a consent order’ [72].

In terms of procedure, King LJ did not think it was necessary for such cases to be put before High Court judges as a matter of course. Rather, ‘they will be allocated to either the specialist circuit judges who hear financial remedy appeals from the district judges sitting in the financial remedies court or to the High Court, whichever is appropriate on the facts of the case’ [97].

The outcome of the appeal

Although the judge had referred to a test of ‘wrong’, she ‘in fact imbued the word with adverbs which served to heighten the test to “seriously wrong” or “obviously wrong” or as being a decision where the error “leaps off the page”’ [82]. She therefore identified a similarly high bar before a court should be permitted to exercise its s25 jurisdiction where one party is dissatisfied with an arbitration award, as that which applies in relation to applications made under s68 or s69 AA 1996.

Consequently, King LJ thought that the judge had applied the wrong test, because the proper test is the appeals test.

In applying the appeals test, King LJ was satisfied that H would have a real prospect of succeeding in an appeal against the award made. This was contrary to the decision of the judge, who held that even if the appeals test had been the proper approach, there was no basis for the court to interfere with the award. King LJ said that ‘the inevitable consequence of my view is that the matter must now be remitted to a circuit judge’ [101].

Comment

The appeals test is a considerably lower bar for parties to have to pass than what King LJ referred to as the ‘stringent terms of the AA 1996’ [95]. Rather than satisfying the court that an arbitral award is seriously or obviously wrong, so that it leaps off the page, parties only have to persuade a court that the award is ‘just wrong’.

This judgment therefore widens the scope for parties to appeal arbitral awards they disagree with, and means that parties have to satisfy the same test whether they are challenging an arbitral award or a court judgment.

It remains to be seen whether this lower bar will lead to more parties going to arbitration, given that now if they do not like the arbitrator’s award, they will more easily be able to appeal it. Given the lengthy delays in the court system at the moment, it is certainly to be hoped that this decision will encourage parties to arbitrate.

Henrietta Boyle, Barrister at 1 Hare Court