Party that Refuses to Participate in Arbitral Proceedings Forfeits Opportunity to be Heard
Party that Refuses to Participate in Arbitral Proceedings Forfeits Opportunity to be Heard
In Delargy v Hickey and another  IEHC 436, the Irish High Court considered an application to set aside or remit an arbitral award under Article 34(2)(a)(iii) of the UNCITRAL Model Law.
The Irish High Court has refused an application to set aside or remit an arbitral award on the ground that the arbitrator had exceeded his jurisdiction under Article 34(2)(a)(iii) of the UNCITRAL Model Law. In this case, the party had forfeited its right to set aside the award because it had refused to take part in arbitral proceedings. This decision shows that Article 34(2)(a)(iii) is narrowly construed and infrequently accepted by the Irish courts as a ground to set aside an arbitral award. (Delargy v Hickey and another  IEHC 436.)
Section 6 of the Irish Arbitration Act 2010 provides that: "Subject to this Act, the Model Law shall have the force of law in the State and shall apply to arbitrations under arbitration agreements concerning – (a) international commercial arbitrations or (b) Arbitrations which are not international commercial arbitrations".
Article 34 of the UNCITRAL Model Law provides the grounds for the setting aside of an arbitral award. Article 34(2)(iii) provides for the setting aside of an award where the party making the application furnishes proof that: "the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration or contains decisions on matters beyond the scope of the submission to arbitration provided that, if the decisions and matters submitted to arbitration can be separated from those not so submitted only that part of the award which contains decisions and matters not submitted to arbitration may be set aside."
The principal legal authority on the application of Article 34 of the Model Law in Ireland is Laffoy J's judgment in Snoddy & Ors v Mavroudias  IEHC 285. In relation to Article 34(2)(a)(iii), Laffoy J stated that it "is infrequently invoked and it is even less frequently accepted by national courts to set an award aside".
Article 34(2)(a)(iv) further provides that an arbitral award may be set aside where the party making the application furnishes proof that the arbitral procedure was not in accordance with the agreement of the parties.
Article 31(2) requires the arbitrator to "state the reasons upon which [the award] is based unless the parties have agreed that no reasons are to be given or the award is an award on agreed terms under Article 30".
Article 36 sets out the limited grounds upon which recognition or enforcement of an arbitral award may be refused.
On 2 September 2008, the applicant entered into a combined contract for a sale and building agreement (Combined Agreement) with the respondents. Paragraph 11 of the Combined Agreement expressly provided for arbitration in the event of any dispute between the parties.
On 7 August 2009, the parties executed a separate Deed of Indemnity. In the Deed the respondents covenanted to "rectify and make good…all the Major Defects in the building notified to the builder during the Defects Period". However, the indemnity also contained a number of limitations to the respondents' liability. In particular, it provided that the respondents would not be liable for any consequential or incidental loss or damage, whether for loss of profit or otherwise.
Shortly after taking possession of the property in 2009, the applicant alleged there were defects in the property. The subsequent arbitration between the parties concerned a claim for damages arising from the defective construction of the property. On 17 November 2011, it was agreed between the parties at a preliminary meeting that the arbitration would be conducted by way of written submissions, and this was followed by an exchange of pleadings.
On 4 March 2014, the arbitrator struck out the respondents' defence, by reason of their failure to comply with an order for discovery and a refusal to take any further active involvement in the proceedings.
On 15 April 2014, the arbitrator issued an interim award in favour of the applicant for such monies "as may be determined by [the Arbitrator] to be due arising from the matters set out and claimed in the claimant's Statement of Claim." He ordered the applicant's solicitors to submit written submissions as to the amount of monies claimed within four weeks, to enable him to assess the quantum of the award. On 6 October 2014, in the absence of any further engagement by the respondents, the arbitrator made his final award in favour of the applicant in the sum of €101,202.07.
The High Court Proceedings
The applicant sought leave of the High Court to enter judgment in the terms of the award and to enforce the award.
The respondents, in turn, sought to set aside the award, either in part or in full, pursuant to Article 34 of the Model Law, in particular Article 34(2)(a)(iii). The respondents claimed that the arbitrator lacked jurisdiction to award damages in relation to "major defects", on the basis that clause 8 of the Combined Agreement, which addressed the issue of defects, was deleted in the Deed of Indemnity. As a result, they claimed that the arbitration clause in the Combined Agreement could not include a dispute on "major defects" as defined in the Deed of Indemnity. Consequently, no jurisdiction existed under the Combined Agreement to refer a dispute, whose subject was "major defects" to arbitration. In addition, the respondents argued that the arbitrator lacked jurisdiction to award sums in respect of costs and other items of consequential or incidental loss, which were explicitly excluded under the Deed of Indemnity. The respondents also relied on Article 34(2)(iv) for the setting aside of the arbitral award and the provisions of Article 31(2) because the arbitrator did not give reasons for the award.
It is noteworthy that the claim and the defence made explicit reference to both the Combined Agreement and the Deed of Indemnity, hence bringing both contractual documents within the jurisdiction of the arbitration. In addition, explicit reference was made to the arbitration clauses in both documents, and no issue was taken in this regard by the respondents. Further, the applicant clearly set out a claim in damages for consequential and incidental loss arising from the defects (including the costs of investigation on the remedial work and such other losses that may arise), despite the Deed of Indemnity expressly excluding liability for such loss. The respondents, in their defence, denied all the losses claimed by the applicant, but did not set out any concern in relation to those losses being outside the jurisdiction of the arbitrator.
The respondents contended that an award of costs had also been made by the arbitrator, in the sum of €45,718.67, without notice to the respondents, and without an opportunity for the respondents to address the arbitrator on the issue.
The reasons advanced by the respondents for failing to participate in the arbitral process was that, as property developers they were badly hit by the recession and a number of properties and sites in their ownership became invested in AIB and the Irish National Asset Management Agency (NAMA). In those circumstances, the respondents had inadvertently overlooked the discovery order, which in turn led the arbitrator to strike out their defence.
The applicants submitted that by refusing to participate in the arbitration, the respondents had forfeited the opportunity to set aside the award under Article 34 on the premise of procedural or substantive unfairness, if any, on the part of the arbitral tribunal.
The High Court refused to set aside or remit the award back to the arbitrator for further consideration. Gilligan J held, in the exercise of his discretion, that as a result of the respondents' refusal to take part in the arbitral proceedings, they lost the right to raise a challenge to the findings of the arbitrator. The judge observed that if the respondents had contested the claim within the scope of the arbitration, beyond merely putting in points of defence, they would have been entitled to raise all of the issues which they were now raising before the High Court. Instead, after delivering their points of defence, they took no further part in the arbitration and it was not until this application that they raised a variety of issues, which they alleged resulted in decisions on matters beyond the scope of the arbitration.
Discretionary nature of Articles 34 and 36
The court noted that the grounds to set aside and/or resist enforcement under Article 34 and 36 of the Model Law respectively are discretionary in nature. Therefore, a court may annul an award if one or more of the Article 34(2) grounds are satisfied, but it is not mandatory for it to do so.
The court further referred to Re Corporacion Transnacional de Inversiones, S.A. de C.V. et al. v STET International, S.p.A. et al (22 September 1999), in which the court held that a party waives its right to apply to set aside an award under the Model Law where it refused to take part in arbitral proceedings.
No ambiguity in award requiring its remittal
Gilligan J observed that under Article 34(4) of the Model Law, when asked to set aside an award, the court may, where appropriate and so requested by a party, suspend the setting aside of proceedings and give the arbitrator an opportunity to resume the proceedings or to take other action to eliminate the grounds for setting aside the award. He referred to the case of CIE v Spencer Dock Development Company Ltd  IEHC 185, where Laffoy J stated (at paragraph 5.2) that in circumstances where the parties believed there to be a lack of clarity in an award "the logical and sensible course for the parties to adopt would be to avail of the [arbitral tribunal's] invitation to make further submissions to [it]." However, Gilligan J concluded that this was not the situation in this case. There was no ambiguity in the current award, and no clarification of the award was necessary.
Gilligan J held that the discretionary nature of Articles 34 and 36 allows the court to take all material facts into account when deciding whether to set aside an award in full or to remit part of an award back to the arbitrator in order to cure alleged defects.
Forfeiture of right to apply to set aside award
The court held that the arbitrator, having made an order for discovery against the respondents, was perfectly entitled, when his order was not complied with, to strike out the respondents' points of defence. In the interim award, the arbitrator made his proposed path of action quite clear, that is, that he was proceeding to assess the quantum of damages to which the applicant was entitled. Again at this point in time, the respondents failed to take any further action or to co-operate in any way with the arbitral process. Therefore, Gilligan J found that it was not necessary for the arbitrator to continue to involve the respondents when they had clearly walked away, were non-compliant, and were on notice of the course of action which the arbitrator proposed to follow, without any objection from them.
Accordingly, the fact that the arbitrator did not provide the respondents with continuing documentation, and in particular, the applicant's submissions on quantum, did not provide a ground on which the final award should be set aside or referred back to the arbitrator. By walking away from the arbitral proceedings, the respondents forfeited their right to raise any objections after the final award had been delivered.
Reasons for award
The court accepted that the arbitrator could have expanded on the reasons for his award, but the factual reality of the situation was that the respondents' defence was struck out, and judgment was entered in favour of the applicant in circumstances that would not be dissimilar to the reasons which might be given in a default judgment being handed down by the court. It held that if the respondents were dissatisfied with the reasons given in the interim award of 15 April 2014, then that was the time to raise the appropriate objections or to make further submissions.
This decision serves as a warning to parties that if they have any objections to an error in the arbitration procedure, they should raise them during the arbitration, and before the making of the final award. It shows that a failure by a party to object to an error during the arbitration, or a refusal to take part in the arbitral proceedings, may result in the party waiving its right to apply to set aside the award.
It also demonstrates the discretion of the courts to refuse to set aside or resist enforcement of an arbitral award under Article 34 and 36, even where one or more of the grounds in Article 34(2) or 36(1) are satisfied.