Global Vantage: US$126 million arbitration award set aside due to error of law on the face of the award
March 2023The High Court of Trinidad and Tobago has delivered its judgment in National Infrastructure Development Company Limited v Construtora OAS S.A. (Claim No. CV2022-01832), setting aside a US$126 million arbitration award on the basis of an error of law.
National Infrastructure Development Company Limited (“NIDCO”) and Construtora OAS S.A. (“OAS”) were parties to a modified FIDIC Yellow Book Contract for the design and construction of an extension of the Sir Solomon Hochoy Highway to Point Fortin, on the island of Trinidad, in Trinidad and Tobago. The construction of the project had been a difficult one, with a number of disputes arising between the parties. On 6 July 2016, NIDCO terminated the contract on the basis that OAS had abandoned the works and did not have capacity to continue to meet its obligations. NIDCO subsequently drew down on performance securities under the contract.
Following this termination, OAS commenced an arbitration seeking a determination that NIDCO had unlawfully terminated the contract in reliance on the following contract clauses:
‘15.2 Termination by Employer
The Employer shall be entitled to terminate the Contract if the Contractor:
…
(b) abandons the Works or otherwise plainly demonstrates the intention not to continue performance of his obligations under the Contract
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(e) becomes bankrupt or insolvent, goes into liquidation, has a receiving or administration order made against him, compounds with his creditors, or carries on business under a receiver, trustee or manager for the benefit of his creditors, or if any act is done or event occurs which (under applicable Laws) has a similar effect to any of these acts or events.’
On 16 April 2022, the Tribunal in the Arbitration released an award finding in favour of OAS, agreeing that the termination was invalid and ordering NIDCO to pay OAS approximately US$126 million.
NIDCO subsequently commenced the proceedings in the High Court of Trinidad and Tobago, seeking to have the arbitral award set aside under section 19(2) of the Arbitration Act Chap. 5:01, namely that:
‘Where an arbitrator or umpire has misconducted himself or the proceedings, or an arbitration or award has been improperly procured, the Court may set the award aside.’
As part of NIDCO’s claim in the proceedings, it submitted that the Tribunal’s award:
- was based on an erroneous interpretation of the contract and constituted an error of law that was manifest on the face of the award; and
- was unsupportable based on the material before the Tribunal and represented a finding that no reasonable arbitrator who properly applied the law and evaluated the evidence could have reached.
The High Court of Trinidad and Tobago first dealt with a threshold question, being whether NIDCO was entitled to institute the proceedings. Following a finding that it was, the Court then agreed with NIDCO’s claim that the Tribunal’s award was made in error and set it aside.
Reasoning in the judgment
Threshold question
Clause 20.10 of the contract contained a ‘No Appeals Provision’, stating that awards of the Tribunal were final and binding and not subject to appeal.
In reliance on Czarnikow v Roth, Schmidt and Company [1922] 2 KB 478 (a decision of the English Court of Appeal), the Court held that if the effect of clause 20.10 was to preclude the supervisory power of the Court then this would be contrary to public policy. The Court found that:
‘The Court as the guardian of the Constitution must always protect the public interest and uphold the rule of law. Consequently, this Court will not arbitrarily divest itself of its jurisdiction and shall methodically exercise its discretion so as to ascertain whether or not the Award should be set aside.’
Having found that NIDCO was entitled to bring its claim, the Court then turned to consider the validity of the arbitral award by the Tribunal.
Error of law on the face of the award and finding of no reasonable arbitrator
Part of the Tribunal’s arbitral award in favour of OAS related to a claim by OAS that NIDCO had failed to pay an interim payment certificate (IPC 55) made by the Engineer, certifying an amount of approximately negative US$22 million. OAS alleged that this was a payment breach and subsequently, purported to exercise its right to reduce its rate of work. NIDCO relied on this as its basis for OAS not meeting its contractual obligations and abandoning the works.
The Court provided the following background before making the following findings on this point:
‘The Claimant submitted that there is no challenge to the aforesaid findings in so far as they relate to any prospective opening up, review or revision of IPC 55 pursuant to Clause 20.1 of the Contract however the nub of its complaint is that the Tribunal went beyond those findings when it held that IPC 55 was void ab initio. As a consequence of this ruling, the Tribunal found that the Claimant defaulted in its payments as at January 2016 and that the Defendant’s reduction of the rate of work was justified. In essence, the voiding of IPC 55 negated the Claimant’s Claim for termination pursuant to Clause 15.2 (b) of the Contract.
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It appears based on the aforesaid extract that the Tribunal did not find that the Engineer acted without jurisdiction.
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In the absence of any evidence which established that the Engineer acted outside the delegated area of judgment as authorised by the Contract, mistakes made in the discharge of his duties, as a matter of law, should not invalidate the decisions made. In like manner, an error as to the construction of the Contract is not a circumstance which could be used to invalidate the generated certificate.
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The Tribunal’s position to declare IPC 55 as being void ab initio is one which seemingly is not anchored in law and notably no authority was cited and/or analysed in support of its decision to retrospectively invalidate IPC 55.’
In addition to findings regarding IPC 55, the Court also found that the Tribunal was wrong to determine that OAS was entitled to abandon the works, but rather was required to remain able to mobilise to site and maintain sufficient resources to complete the works following payment by NIDCO. The Tribunal’s findings in this respect were based on a misconstruction of the contract and therefore, led to the Tribunal’s award containing an error on the face of the record.
Further, the Court also found that the Tribunal ‘did not adequately evaluate the evidence adduced by NIDCO’ that OAS had not remained able to mobilise to site and maintain sufficient resources, as the arbitral award ‘did not reflect a measured assessment of the said evidence and no reasoned explanation was proffered as to why same was rejected’. In light of this failing, the Court found that ‘the position adopted by the Tribunal was fundamentally flawed’ and set aside the award as it was ‘premised upon findings which were unsupportable on the evidence, inconsistent with the law and are decisions which no reasonable arbitrator could have arrived at’.
Practical implications
It can be difficult for an arbitral award to be set aside due to the high threshold issues a party seeking to do so has to overcome, in the United Kingdom being under sections 67 to 69 of the Arbitration Act 1996 (UK). However, the decision in NIDCO v OAS proves that it is not impossible.
Key take aways from the decision include that:
- A final dispute clause (‘no appeals’) in a contract referring a dispute to arbitration cannot oust the jurisdiction of the court.
- An arbitral determination that contains a misinterpretation of the relevant contract can lead to a finding that the determination contains an error of law on the face of the award.
- In failing to properly consider evidence relevant to the issues being determined and that were clearly brought to the attention of a tribunal, that tribunal can be considered to have fallen below a reasonable standard for arbitration leading to the award being open to be set aside.
For further reading, a full copy of the decision can be found here.
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