Proposed amendments to the Arbitration Act 1996 — where are we now?

In October 2022, the judgment in Royal & Sun Alliance Insurance Ltd v Tughans (A Firm) [2022] 3WHC 2589 (Comm) made legal headlines. An unusual case, it involved a ‘triple crown’ arbitral challenge under Sections 67, 68 and 69 of the Arbitration Act 1996 (AA 1996), in respect of an award by an arbitrator who declared that RSA, a professional indemnity insurer, was obliged to indemnify its insured, Tughans, in respect of a success fee that it had to repay. The judgment was well-timed, being delivered during the consultation by the Law Commission of England and Wales (“the Law Commission”) on proposed changes to the AA 1996 (“the Consultation”). The Consultation is now closed, with the Commission aiming to publish final recommendations by mid-2023. This article explores the current bases for challenging an arbitral decision under AA 1996, how they operated in the Tughans case and the proposals for reform.

Why does the Consultation matter to solicitors’ PI insurers?

Arbitration is prescribed for dealing with disputes between insurers in the SRA Participating Insurers’ Agreement and signposted for resolving issues with insureds in the SRA’s Minimum Terms and Conditions of Professional Indemnity Insurance. Therefore, insurers in the solicitors’ PI market have a real interest in the outcome of the Consultation.

The present position

AA 1996 permits challenges to an arbitral decision on the following grounds:

• appeal as to substantive jurisdiction (Section 67);
• appeal in respect of serious irregularity (Section 68); and
• appeal on a point of law (Section 69).

Where an arbitral party has participated in the arbitral proceedings and makes an application to the court under Section 67, that application can, at present, take the form of a full rehearing. Whilst the wording of the Section is not explicit, in Dallah v Pakistan the Supreme Court said that the court in such cases will make an independent assessment of the matter. Therefore, the decision of the arbitral tribunal carries no weight. This is particularly frustrating for insurers trying to get claims off their books, as it has the potential to cause delay and increase costs through repetition.

The Tughans case

The Tughans case was a rare example of a ‘triple crown’ arbitral challenge. According to the Commercial Court Report 2020-2021, there were only 15 Section 67 applications and 35 Section 69 applications in 2020-21.

A bank, established by the Northern Irish Government in 2009 to manage impaired loans during the financial crisis, was selling its property loan book and a partner of the law firm Tughans contacted English law firm BRUK to facilitate the sale. BRUK and Tughans entered a formal engagement letter that stated BRUK would receive £15 million plus VAT if the transaction was successful, with 50% of this being shared with Tughans. In their letter of engagement, Tughans represented and warranted that none of their, “….partners, directors, officers, employees or agents has made or will make, directly or indirectly, any payment, loan or gift (or any offer, promise or authorisation of any such payment, loan or gift), of any money or anything of value to or for the use of any Government Official”.

The transaction completed and BRUK had paid Tughans £7.5 million plus VAT in reliance on Tughans’ representations. Five months later, it emerged that the partner at Tughans had transferred part of Tughans’ success fee into an account for his own benefit and that he had intended to transfer part of it to a third party, in breach of the warranties and representations.

The funds were returned to Tughans, who reported the partner’s conduct to the Law Society of Northern Ireland and undertook not to deal with the funds, without 14 days’ prior notice to LSNI and the National Crime Agency, save in respect of taxes due. Tughans also notified a circumstance to RSA.

BRUK issued proceedings against Tughans in March 2014, alleging fraudulent and/or negligent misrepresentations, misstatement and/or deceit.

The Dispute

RSA declined cover. Tughans then commenced arbitration against RSA, claiming an entitlement to an indemnity for its legal costs in defending BRUK’s claim and any loss established by that claim. The Notice of Arbitration emphasised that Tughans was not seeking an indemnity for the success fee as follows, “..save for any liability on its part to return any fees which it has received from [BRUK], the [RSA was] obliged to indemnify it for…any liability arising from the claims made in the proceedings.” (“the NOA Statement”). Somewhat surprisingly, the arbitrator declared that the insurer was liable to indemnify the firm in respect of any claim to repay its share of the success fee (“the Fee Damages Claim”).

RSA challenged the decision on three bases:

• Pursuant to Section 67 of AA 1996, RSA submitted that the arbitrator lacked the jurisdiction to determine the Fee Damages Claim, as the question had never been referred to him.

The judgment makes clear, when considering the Section 67 challenge, that the scope of an arbitrator’s jurisdiction is not exclusively defined by the Notice of Arbitration but can be expanded by the subsequent agreement of the parties or the permission of the arbitrator. Therefore, the jurisdictional challenge failed.

• According to RSA, the arbitrator’s decision to make a declaration in respect of the Fee Damages Claim involved a serious irregularity. It averred that it had been denied its opportunity to present its case or answer Tughans’ case for the purpose of Section 68(2)(a) of AA 1996, given that Tughans had expressly disclaimed the Fee Damages Claim in the NOA Statement and the merits hearing had been conducted on that basis. Furthermore, there had been a failure to conduct the proceedings in accordance with the procedure agreed between the parties. 

Foxton J agreed with RSA and remitted the award back to the arbitrator, solely for the determination of whether it should be open to Tughans to pursue its claim in relation to the success fee on an unqualified basis and whether any relief should be granted in respect of the Fee Damages Claim.

• Thirdly, RSA challenged the award under Section 69 of AA 1996, asserting that the finding that the policy provided an indemnity in respect of Tughans’ liability in damages in the amount of the success fee was wrong in law. It is this aspect of the judgment that caused the most consternation amongst solicitors’ PI insurers when the judgment was published. 

RSA argued that having to return a sum of money, to which the insured was not legally entitled, was not an indemnifiable loss under a professional indemnity policy in the absence of clear language to that effect. They made the point that the conditions in the letter of engagement were not satisfied if Tughans provided false representations. However, the court held that the truth of Tughans’ representations and warranties was not a pre-condition to payment of the success fee. The contractual rights arising under the letter of engagement remained, as BRUK had not purported to rescind it. Therefore, the Fee Damages Claim was a claim to which Tughans had acquired a contractual right and constituted a loss for which the firm was entitled to an indemnity from the insurer.

What is proposed by the Law Commission?

The Consultation centred around a shortlist of possible areas for reform, including immunity of arbitrators, confidentiality and the summary disposal of issues which lack merit. In terms of potential challenges to arbitral awards, Section 68 of AA 1996 was not shortlisted for consideration for reform by the Law Commission but they did consider whether appeals on questions of law, under Section 69 of AA 1996, ought to be reformed.

In order to enhance the finality of arbitral awards, some commentators feel strongly that Section 69 should be repealed and that no appeals should be allowed. Others take the opposite view and advocate for Section 69 to be more permissive, enabling the court to give permission to appeal simply where there is a good arguable case that the decision of the tribunal is wrong (as opposed to obviously wrong or open to serious doubt). The Law Commission, ultimately, came to the provisional conclusion that the current Section 69 strikes the right balance, particularly given that parties are able to opt out of it.

The most significant proposal made by the Law Commission, in the context of challenges to awards, relates to Section 67.

As mentioned above, where an arbitral party has participated in the arbitral proceedings and makes an application to the court under Section 67, that application currently can take the form of a full rehearing. The Law Commission has provisionally proposed that, in these circumstances, any subsequent challenge under Section 67 should, by default, be by way of an appeal and not a rehearing (“the Appeal Proposal”). Therefore, the court would be limited to a review of the decision of the tribunal and the court would not, ordinarily, receive new evidence which was not before the tribunal. An application under Section 67 would, therefore, mirror an appeal in court proceedings.

Some clarification is also proposed, to make clear the remedies available to the court and to confirm that a tribunal can issue a costs order, even when ruling that it has no jurisdiction.

The principal objections to the Appeal Proposal are based upon the notion that, “Clearly the tribunal cannot be the final arbiter of a question of jurisdiction.” However, the Law Commission observed that “..if the hearing before the court is an appeal and not a rehearing, the court nevertheless remains the “final arbiter” on the question of jurisdiction.”

If implemented, the Appeal Proposal is likely to benefit PI insurers. The current system of rehearings has the potential to cause delay and increase costs through repetition. It is also bedevilled by concerns about fairness. At its worst, the system of de novo hearings before the court renders the arbitration itself a dress rehearsal. At present, a party can raise a jurisdictional challenge and then obtain an award, which identifies the weaknesses in the evidence and arguments. The losing party can then use the detail of the arbitral award to hone their arguments and obtain new evidence. As the Law Commission observes,

“In those circumstances, it is not an impossible consequence that the court might come to a decision on the evidence as to jurisdiction which is diametrically opposed to the original decision of the arbitral tribunal.” 

Take away points

The Tughans case is a salutary reminder that arbitrations can and sometimes do go badly wrong for PI insurers. It is also often the case that insureds who lose at arbitration and in respect of any arbitral challenge cannot afford to satisfy any costs order made against them, so even a ‘winning’ insurer can end up significantly out of pocket.

Parties agreeing to arbitrate ought to give careful consideration to whether finality of the arbitral award justifies opting out of Section 69 of AA 1996, which looks destined to stay on the statute books.