Just how binding is an arbitration award? R v K  EWHC 841 (Fam)
21st May 2020
The husband sought permission to appeal an arbitration award and an order that the award be set aside. He also asked the court not to approve a consent order in the terms of the award. Clare Ambrose, sitting as a Deputy High Court Judge, considered the general principles that apply to challenging arbitration awards dealing with financial disputes following divorce.
The husband (“H”) and the wife (“W”) had married in 2005 and separated in 2018, and had an 11-year-old son. After a two day final hearing of W’s claim for financial relief was adjourned by Chelmsford Family Court at the last minute, the parties signed an arbitration agreement on the ARB1 FS form provided under the Family Law Arbitration Financial Scheme (“IFLA Scheme”) and named as their arbitrator Howard Shaw QC (“the arbitrator”).
After the arbitration hearing, the arbitrator circulated a draft award. H’s counsel made a two page Request for Clarification/Explanation. The arbitrator declined to provide clarification on the grounds that the request regarding certain aspects of the award went ‘far beyond what is permissible’ (see paragraph 17). In summary, the arbitrator’s conclusions were:
a) It was common ground this was a needs case.
b) The parties’ son spent 50% of his time with each party so it was important there was not a significant disparity between the parties’ homes and standards of living.
c) The parties’ housing needs would be met by a house costing c. £350,000.
d) W would need to receive a disproportionate amount of the net sale proceeds of the family home to meet her liabilities and housing need (£298,000 out of proceeds of c. £319,000).
e) Although W was out of work, she had an earning capacity of £35,000 gross and would within a short period of time be able to find a mortgage of £100,000.
f) H would have no trouble obtaining a substantial mortgage.
g) H was to pay periodical payments of £3500 per month until the parties’ son left tertiary education.
h) Adopting the view of the single joint expert, the simplest way to implement a sharing order for equal pension income was to share 35.94% of H’s Aegon pension with W.
i) H was ordered to pay the arbitrator’s fees, but there was no other order as to costs.
H then challenged that award. He sought permission to appeal under s69 of the Arbitration Act 1996 (“the 1996 Act”) and sought an order that the award be set aside under s68 of the 1996 Act. H also asked the court not to approve a consent order in the terms of the award using its discretion under s25 of the Matrimonial Causes Act 1973 (“the 1973 Act”).
Should permission to appeal be given under s69 of the 1996 Act?
s69 deals with challenging an award on a point of law arising out of the award. It provides that leave to appeal shall only be given if the court is satisfied, among other things, that on the basis of the findings of fact in the award the decision of the tribunal is obviously wrong, or the question is one of general public importance and the decision of the tribunal is at least open to serious doubt.
H set out a long list of where the arbitrator had erred in law, and argued that the arbitrator’s decision was obviously wrong and that its unfairness ‘leaps off the page’. He also argued that the appeal raised a matter of general public importance, because there is uncertainty as to the test to be applied for permission to appeal in the context of IFLA Scheme arbitrations.
Indeed, H submitted that that test should be the same as the test which applies to an appeal from a judge’s decision under Part 30 of the FPR. Clare Ambrose (“the judge”), sitting as a Deputy High Court Judge, rejected this submission on the basis it had little support in the authorities or the wording of the parties’ arbitration agreement or the broader public policy arguments H had put forward. Parties who have chosen to arbitrate have not simply contracted out the hearing to an arbitrator, they are contracting into a different regime, although the same substantive law applies to the allocation of assets. It would create ‘substantial uncertainty’ if a separate or ‘mix and match’ approach was adopted in family cases drawing from both the 1996 Act regime and that applying to appeals under FPR Part 30 (see paragraph 29).
The judge did not accept that the award raised a question of law of general public importance. She was of the view that the decision the arbitrator had to make was a very common one: the fair distribution of finances under s25 where the parties’ needs exceed their assets. The judge said that the complaints raised by H were not novel or complex issues that could be of wider importance; rather, the correct application of s25 to the parties’ specific circumstances was a ‘one-off’ case.
Neither did the judge consider that the arbitrator had erred in law and made a decision that was obviously wrong. Firstly, a decision under s25 is discretionary, and a first instance tribunal has a wide discretion (something H accepted). Furthermore, it is trite law that in approaching an appeal under s69 the court should read the award as a whole ‘in a fair and reasonable way rather than engaging in minute textual analysis in order to find fault with it’ (see paragraph 36).
The arbitrator had correctly identified the principle of law to be applied, namely the s25 factors, and had then gone on to deal with the relevant considerations under headings which were clearly laid out in a 16 page award. It was ‘doubtful that parties want or expect a lengthy investigation of every legal point, or each aspect of the evidence’, which was after all not expected from a judge (see paragraph 37). An arbitrator is not expected to do better and ‘does not have to set out every piece of evidence, argument and legal authority that he takes into account’ (see paragraph 38).
The arbitrator was criticised for not giving sufficient consideration to various aspects of s25, but it was not necessary to set out every sub-paragraph or the ‘statutory steer’ in s25A and address it separately, or to provide a balance sheet or calculate the percentage split of the capital assets or do a cross-check of fairness. H emphasised the fact that W had received 98% of the main capital asset, while he had only received 2%. However, this was a needs case where there was a very limited pool of available assets and a marked disparity of income. The arbitrator had expressly stated that W would need a disproportionate share of the equity, and that ‘in a needs case it would be necessary to depart from equality’ (see paragraph 39).
The judge also rejected criticism from H that the arbitrator had erred in law in failing to give consideration to H’s age, the nature of H’s income, the precariousness of H’s employment, W’s future earning capacity, and H’s housing needs. The various criticisms of the arbitrator were ‘unfounded as errors of law arising out of the award and the points raised were inappropriate attempts to re-open the facts’ (see paragraph 53).
Overall, the judge found the arbitrator’s exercise of his discretion under s25 was within the range of that which a reasonable arbitrator could make. The arbitrator had identified the right legal test, and his exercise of discretion was not obviously wrong and not even open to serious doubt.
Should the award be set aside for serious irregularity under s68 of the 1996 Act?
H complained that there had been serious irregularity firstly because the arbitrator had failed to give consideration to various matters set out in s25 and to take into account key aspects of the evidence, secondly because the arbitrator had decided the pension share in a manner which neither party sought and failed to give the parties an opportunity to make representations in respect of that decision, and thirdly because he failed to give reasons not only in relation to those two matters but also in relation to how non-matrimonial assets had been taken into account and why H had been ordered to pay the costs of the arbitration.
H’s criticisms about the arbitrator’s failure to give consideration to matters under s25 were closely linked to the criticisms made in support of his application to appeal under s69. The complaints largely went to the arbitrator’s findings of fact, but as pointed out by the judge, s68 relates to the process and is not designed to address whether the tribunal reached the right result. Secondly, powers under s68 are only to be exercised as a longstop where ‘the tribunal has gone so wrong in its conduct that justice calls out for it to be corrected’ (see paragraph 60). Having considered the case law on whether failure to take proper consideration of evidence actually engages s68, the judge said she did not need to decide the point but that even if it did the arbitrator’s approach to the evidence did not give rise to a serious irregularity. It was not shown that the arbitrator ignored or overlooked the evidence or failed to give it proper consideration.
In relation to the pension, H complained that that the arbitrator had awarded W 35.94% of his Aegon pension, when W had only asked for 33.75%. The judge pointed out that an arbitrator is not bound by a technical rule that he must always ask both parties before he accepts evidence that is not precisely within one party’s case. There is also an element of proportionality: ‘a relatively small new point may not require further submissions’ (see paragraph 65). W had asked for an order to achieve equality and the arbitrator’s conclusion was based on the single joint expert’s view as to what would best achieve equality in pension income. H knew the expert report was the central evidence and so could not complain he never had a chance to deal with it or was unfairly taken by surprise if the arbitrator accepted it. Since the amount at stake was around £13,000, the judge did not consider there was any serious irregularity in the arbitrator not having sought a further round of submissions before adopting the expert’s preferred assessment.
H had made complaints under s69 about the arbitrator’s failure to give reasons, but the judge was willing to consider them under s68 as they had been put forward as largely straddling both applications and complaints about lack of reasons are best voiced by applications to the court under s68 or s70(4), or to the tribunal under s57 of the 1996 Act. The judge rejected the argument that the arbitrator had failed to give adequate consideration to H’s non-matrimonial property or to consider H’s non-matrimonial contribution to real property. The arbitrator had expressly explained that because the case was ‘very much a needs case’ there should be no separate treatment of H’s pension that had accrued prior to the marriage, or of the family home (see paragraphs 68 and 69).
The judge did say that H’s criticism of the arbitrator for failing to give reasons as to why he ordered that H should pay all the costs of the arbitration was fair, as the ARB 1FS form provides that under the Scheme rules, each party will generally bear an equal share of the arbitrator’s fees. The arbitrator may have concluded that as H had lost on most issues, he should pay the fees, but this was not implicit or obvious. However, given that the amount at stake was £2500 (the total fees were £5000), ‘this was not a serious irregularity that justified the court intervening’ (see paragraph 70).
At the hearing H suggested that the arbitrator was biased, and questioned whether an arbitrator should sit where one of the parties is represented by counsel from the arbitrator’s chambers. The judge considered that this point had no merit, not least because H’s experienced legal advisors would have been well aware of the connection and should have raised the point immediately if there was any concern.
W had argued that H’s applications under ss68 and 69 were barred because H had failed to make an application under s57 of the 1996 Act (“the slip rule”), under which an award can be corrected, and a party is expected to use this power in order to avoid a court challenge. s70 of the 1996 Act provides that an appeal/application cannot be brought if the appellant/applicant has not first exhausted any available recourse under s57. H said that his counsel had made a Request for Clarification and that this was within s57 and had given the arbitrator an opportunity to self-correct and avoid a challenge under ss68 and 69.
However, the judge held that the Request for Clarification appeared to ask the arbitrator to re-open his decision-making and start re-drafting. Any attempt to use a Request for Clarification or s57 for that purpose is inappropriate and can be declined. In any event, the judge considered that the complaints raised by H did not clearly fall within s57 so it was not necessary for H to seek a correction under it, and W’s argument was rejected. As a general rule, if corrections to a draft award are not made as requested, and a party considers that an award still requires correction, it is safer to make a further request after the award has been made and it is preferable to make clear that the corrections are within s57.
H’s application under s68 therefore failed.
The application that the award not be made an order of the court
H argued that the parties’ arbitration agreement did not oust the court’s jurisdiction under Part II of the 1973 Act and that the court retained a duty to consider the parties’ circumstances. H said that because of the overall unfairness of the award, it was not one which the court could approve within a consent order pursuant to its duty under s25 and that the test to be applied is that used by a judge in deciding whether to give effect to a settlement or pre-nuptial agreement.
The judge held that the court retains its overriding discretion to make (or decline to make) orders under s25 even where parties have agreed to arbitrate financial disputes, and the court’s discretion is not governed by the 1996 Act. However, the exercise of the court’s discretion must take account of the award, the parties’ agreement to arbitrate, and the scope of the court’s grounds for setting aside under the 1996 Act. The test for not making an order giving effect to the award has been set high, and it has been repeatedly emphasised that the court would only intervene in rare and extreme cases where something has gone so seriously wrong that it ‘leaps off the page’ (see paragraph 86).
Although there is some analogy with the court’s exercise of discretion in giving effect to a settlement agreement or pre-nuptial agreement, the same test does not apply since in assessing an award the court must take account of the fact that the parties have agreed to refer their dispute to a neutral and independent arbitrator, with detailed statutory safeguards including the right to challenge any award on clearly defined grounds. An award is given binding effect not only by consent, but also by statute and international treaty, and ‘it would be incorrect to equate its binding effect with that of a settlement or pre-nuptial agreement’ (see paragraph 88). Further, the discretion to decline to make the award into an order is a blunt form of relief, leaving uncertainty as to the status of the arbitration. The court cannot set aside the award, remove the arbitrator, declare the award to be of no effect, vary it, or remit it back to the arbitrator, as such relief is only available under the 1996 Act.
The judge also warned that the court’s discretion under s25 is not intended to allow parties to re-run their case and ask the court to be a new tribunal of fact after an arbitration has already taken place, and the ‘requirement that the flaw in the award ‘leaps off the page’ or be ‘so blatant and extreme’ reflects this’. Arbitration ‘is not a dress rehearsal enabling a dissatisfied party to re-open and improve their evidence on appeal in the High Court, before going back and arguing the case before the Family Court’ (see paragraph 89). This would be unfair and contrary to both the 1996 and 1973 Acts. Ultimately, ‘the court’s discretion can operate as a safety net for exceptional cases but it is unlikely to be exercised to deprive an award of binding effect unless the matter is extreme or the complaint is outside the scope of the 1996 Act’ (see paragraph 91).
Having considered whether the arbitrator’s decision would be consistent with the court’s discretion under s25, the judge was satisfied that the award was not wrong and reflected a fair allocation of assets taking account of the relevant considerations. It was firmly within the range of right outcomes. The judge was therefore satisfied that she should approve the order attached to the award.
This judgment further emphasises that it is only in truly exceptional cases that a court will give permission to appeal an arbitration award, set such an award aside or refuse to make a consent order in the terms of the award. It should serve as a warning to any party hoping to appeal or set aside an award on the grounds that they feel it is ‘unfair’, as there is an extremely high bar that must be passed. Further, unless there is a glaring omission, it is difficult to criticise an arbitrator for failing to give reasons when arbitrators do not need to set out every piece of evidence, argument or legal authority relied upon in their judgment.
It is clear that in most cases the court will respect the binding nature of arbitration awards and refuse to intervene. Parties in financial remedy proceedings should be under no illusions that if they choose to arbitrate rather than have a court-based final hearing, the arbitrator’s decision will most likely be final and unappealable.