Arbitration — Costs — Dispute about arbitrator’s order — Arbitration Acts 1950 and 1979 — Arbitrator’s order restored by Court of Appeal after remission by judge — Effect of sealed offer — Although power to set aside or remit under section 23 of the 1950 Act remains unrepealed, it is not exercisable where the only misconduct alleged is an error of fact or law in a reasoned award — As regards costs, the only way to challenge costs stated in a reasoned award is to seek leave to appeal on a question of law under section 1(3) of the 1979 Act — Appeal from remission order allowed — Observations on effects of circumstances subsequent to date of sealed offer
case entirely concerned with an arbitrator’s order for costs and it raised some
questions of principle — It arose out of disputes referred to arbitration
between claimants, subcontractors, and respondents, main contractors, engaged
in work on a site — Claimants had said that £221,000 was owing to them,
respondents said that it was only £7,000, as they had already paid £278,000 out
of £285,000 due — Respondents put in a sealed offer of £77,000 to settle all
claims, including interest, but this offer was not accepted — The arbitrator
made an interim award of £52,958, which worked out at nearly £50,000 when
related back to the date of the offer — This was £27,000 less than the amount
of that offer — The arbitrator’s order for costs was that the claimants were
entitled to their costs down to the date of receipt of the sealed offer and the
respondents to their costs thereafter
application of the claimants to have the award remitted under the 1950 Act,
Judge Hawser QC, sitting on official referee’s business, decided in their
favour — He held that the arbitrator had been guilty of technical misconduct and
remitted the award — His reason was that the arbitrator had disregarded
‘amendments’ which would have reduced the award and which, if known at the time
of the offer, might have induced the claimants to accept it — The respondents
appealed to the Court of Appeal
leave to appeal, Bingham LJ, sitting as the single judge, had observed that ‘it
seems to me doubtful whether a reasoned award on costs can be challenged on
grounds of misdirection or legal error otherwise than by leave under section 1
of the 1979 Act’ — The full Court of Appeal pointed out that section 1 of the
1979 Act provided that the court was not to have jurisdiction to set aside or
remit an award on the ground of errors of fact or law on the face of the award
— There was no difference between an error of law in a reasoned award as to
costs and any other error of law — It was true that section 23 of the 1950 Act
had not been repealed and that the power to set aside or remit for misconduct
survived, but the power did not operate when the only misconduct alleged was an
error of fact or law in a reasoned award — Whatever may have been the position
in the old days, the only course open today, where an arbitrator states his
reasons, is to challenge those reasons by seeking leave to appeal on a question
of law under section 1(3) of the 1979 Act — The claimants here had not taken
that course — The judge below therefore had no jurisdiction to remit the award
and the appeal must be allowed on that ground
sufficient to dispose of the appeal, but as the arbitrator had been found
guilty of technical misconduct the court thought that it was right and fair to
deal with the question of substance — On the face of it the arbitrator was
fully justified in holding that, as the respondents’ sealed offer was for a
higher amount than the claimants ultimately received, the respondents were
entitled to their costs thereafter — The claimants had argued that subsequent
‘amendments’, which reduced the amount that they ultimately received, altered
the position; if they had known of them at the date of the offer they might
well have accepted it — The arbitrator, however, had concluded that it would
have made no difference to their decision — The Court of Appeal could find ‘no
shadow of misconduct’ in the way the arbitrator had dealt with the matter —
Finally, Lloyd LJ made some interesting general observations giving limited
guidance on the point which had been canvassed by the judge, namely what was
the correct question for the arbitrator to have asked himself in the
circumstances — The appeal was allowed, with the result that the order for
remission was quashed and the arbitrator’s order for costs restored
The following
case is referred to in this report.
Cheeseman
v Bowaters United Kingdom Paper Mills Ltd
[1971] 1 WLR 1773; [1971] 3 All ER 513, CA
This was an
appeal by the respondents, G Percy Trentham Ltd, from a decision of Judge
Hawser QC, sitting for the despatch of official referee’s business, in favour
of the claimants, Blexen Ltd, remitting an arbitrator’s award on the ground
that his order for costs was incorrect and constituted technical misconduct.
Anthony
Thornton QC and Miss Stephanie Barwise (instructed by Sandiford & Co, of
Bristol) represented Blexen Ltd; John Dyson QC and John Rylance (instructed by
Taylor Joynson Garrett) appeared for G Percy Trentham Ltd.
Giving
judgment, LLOYD LJ said: In this case we have been concerned with an
order for costs made by an arbitrator, Mr D T Simmonds, after an arbitration
lasting some 15 days between November 1986 and January 1987. The facts, very
briefly, are that the claimants, Blexen Ltd, were subcontractors appointed by
the main contractors, G Percy Trentham Ltd, to carry out certain works at the
site of the former premises of the Imperial Metal Industries, Kynock, near
Birmingham. The subcontract works were carried out between July and November
1984. Disputes arose as to the amount due from the main contractors to the
subcontractors. Those disputes were referred to arbitration.
On April 22
1986 the claimants served their points of claim, with schedules, in which they
claimed that the amount owing was £221,000. On June 13 1986 the respondents
served their points of defence, consisting of nine short paragraphs and a
schedule dealing with 15 numbered items. They said that the total sum due under
the subcontract was £285,000, of which they had paid £278,000, leaving £7,000
due.
On June 18
1986 the claimants served a very short reply and a schedule dealing with the
same 15 items. That was the state of the pleadings when, on August 4 1986, the
respondents made a sealed offer to settle all claims in the arbitration for the
sum of £77,000 including interest to date. That offer was not accepted.
On February 3
1987 the arbitrator made an interim award in which he awarded the claimants the
sum of £52,958, including interest to the date of the award. The equivalent
with interest to August 4 only, ie the date when the offer was made, was
£49,867, so it was some £27,000 less than the amount of the sealed offer.
There then followed
a full day’s hearing of the appropriate order for costs. The claimants claimed
costs, saying that they were the successful party in the arbitration, having
recovered an award of nearly £53,000. The respondents claimed costs on the
grounds that the claimants had recovered less than they had been offered the
previous August. The respondents therefore said that they should be regarded as
the successful party. The claimants had failed to beat the sealed offer. The
claimants replied that the respondents were successful in that sense only as a
result of certain amendments to the defence subsequent to the offer. If the
claimants had known of the subsequent amendments at the date of the offer they
would have accepted it. In a reasoned award dated October 19 1987 the
arbitrator rejected the claimants’ argument. He held that the claimants were
entitled to their costs down to August 7 1986, the date when they received the
sealed offer, and that the respondents were entitled to their costs thereafter.
There was then
an application by the claimants to remit the award to the arbitrator under
section 22 of the Arbitration Act 1950. It came before His Honour Judge Hawser
QC in the Official Referee’s list on May 30 1989. He held that the arbitrator
had failed to apply the right test. I quote two paragraphs from his judgment at
p 23:
(5) In my judgment if there are amendments made
subsequently, the effect of which is to reduce the award below the offered
figure, normally the court will deal with the question of costs on the basis of
the situation as known to the plaintiffs at the time of the offer and not, as
it subsequently transpired, by reason of the amendment. If on that basis the
plaintiffs would have overtopped the offer normally they would be entitled to
their costs at least up to the date of the amendments. Of course the arbitrator
has a full discretion as to how far the amendments could properly be regarded
as such, how much they amounted to, what effect they had on the arbitration and
how far the arbitrator should properly be influenced by them. I do not think
however that he can simply rule them out and treat them as being quite
irrelevant, as I find he did here.
(6) I do not think that the arbitrator considered
the right question in this case. I accept that the correct question was whether
the plaintiffs acted reasonably in continuing the arbitration after that date.
If that question had been considered the answer might well have been different.
In any event, the arbitrator should have considered the amendments and the
effect which they would have in reducing the award to £49,000 instead of
disregarding them entirely.
Accordingly,
the learned official referee acceded to the plaintiffs’ application. He
remitted the award to the arbitrator on the grounds that the arbitrator had
been guilty of technical misconduct.
There is now
an appeal to this court. In giving leave, Bingham LJ observed:
It seems to
me doubtful whether a reasoned award on costs can be challenged on grounds of
misdirection or legal error otherwise than by leave under s1 of the 1979 Act.
We gave Mr
Dyson, who appears on behalf of the respondents, leave to amend his notice of
appeal so as to put that point in the very forefront of his case. I shall
therefore deal with that point first.
Mr Thornton,
on behalf of the claimants, produced for our assistance a helpful memorandum in
which he traces the historical development of the court’s power to interfere with
an arbitrator’s award as to costs. The basic rule has always been, at least
since 1884, that the arbitrator has a complete discretion as to costs: see now
section 18(1) of the 1950 Act. Originally the court could intervene only if it
could be said that the arbitrator had exceeded his jurisdiction in making his
award as to costs. As a result of an amendment to what is now section 22 of the
1950 Act, introduced by section 15 of the Arbitration Act 1934, it was more
often put on the basis of technical misconduct. Nowadays, the question has to
be considered in the light of section 1 of the 1979 Act. That section provides
that the court shall not have jurisdiction to set aside or remit an award on an
arbitration agreement on the grounds of errors of fact or law on the face of
the award.
Mr Thornton
argues that the wrongful exercise of the arbitrator’s discretion as to costs
does not give rise to any question of law. If it does, it is not a question of
law arising out of an award on an arbitration agreement within the meaning of
section 1(2) of the 1979 Act and therefore section 1(1) does not apply.
I find that
argument difficult to follow. The arbitrator has explained his reasons for
making his order as to costs in great detail in his final award. The award was
made pursuant to an arbitration agreement. If the arbitrator has erred in his
approach the error must be one of fact or law. If it was an error of fact his
finding of fact is conclusive. If it was an error of law then it would be open
to the claimants to apply for leave to appeal on that question of law. I can
see no difference between an error of law in a reasoned award as to costs and
any other error of law.
Then it was
said that even if there was an error of law on the face of the award there is a
parallel jurisdiction to set aside or remit for misconduct which survives the
1979 Act. The claimants can therefore choose their remedy. I do not agree. It
is of course perfectly true that Parliament did not in 1979 repeal section 23
of the 1950 Act. The power to set aside or remit for misconduct survives. But
the question is whether that power exists when the only misconduct alleged is
an error of fact or law in a reasoned award. I am quite clear that it does not.
To hold otherwise would defeat one of the main purposes of the 1979 Act.
Whatever may have been the position as to costs in the old days, the only
course open today, where an arbitrator states his reasons, is to challenge
those reasons by seeking leave to appeal on a question of law under section 1(3)
of the 1979 Act. This the claimants never did.
I say nothing
about what would be the appropriate procedure where an arbitrator states no
reasons for his award as to costs.
On the short
ground that the judge had no jurisdiction to remit this award to the arbitrator,
I would allow this appeal.
But it is
right that we should go on to deal with the question of substance, not least
because, as the judgment stands, the arbitrator has been found guilty of
misconduct. He is entitled to have our views on that question, a question which
has in any event been fully argued.
In his final
award on costs the arbitrator set out the arguments on each side as he
understood them. He rejected the respondents’ argument that the claimants
should be deprived of their costs on the ground that their claim was grossly
exaggerated. He rejected their argument on the grounds that the claimants had
failed on a number of discrete issues. That left only the respondents’ offer of
August 4 1986, which was, as we have seen, for more than the claimants
ultimately recovered. On the face of it, that would entitle the respondents to
their costs thereafter. But the claimants had an answer, namely, to rely on the
subsequent ‘amendments’ to the defence, which had, they say, the effect of
reducing the amount which they ultimately recovered.
The principal
amendment relied upon related to the rates chargeable for dayworks. Throughout
the currency of the contract the claimants had submitted, and the respondents
had paid, invoices for plant based on rates set out in Schedule 3 of the
Federation of Civil Engineering Contractors schedules of dayworks. It was only
on November 20 or 21 1986, just before the arbitration started, that the
respondents realised that they ought to have been charged on a different basis,
namely that set out in para 3 of Schedule 4. The difference amounted to £19,788
in the respondents’ favour. In his interim award, the arbitrator found it
extraordinary that the error had been allowed to pass unnoticed for so long.
But he went on to say that he did not consider that that failure by all
concerned (which would, of course, include the claimants) to detect the error,
thereby created an agreement to supersede the contract conditions and use the
claimants’ claimed plant rates instead.
The arbitrator
returned to the same point in his final award. Rightly or wrongly, he seems to
have understood the claimants to have been submitting that they, the claimants,
were entitled to the costs, or at any rate were not liable for the costs,
because the contract had been amended by the conduct of the parties. The
arbitrator rejected that argument. It is not suggested that he was wrong to
have done so or that in doing so he misconducted himself in any way. If he
misunderstood the claimants’ submission, which I would not suppose that he had
done, but if he did, and if he confused amendment of the contract with
amendment of the defendants’ points of defence, then that misunderstanding and
that confusion were entirely immaterial.
As for the
amendment to the points of defence, the argument, as the arbitrator understood
it, was that if the claimants had known of the subsequent amendment at the time
of the offer, it would have put the offer ‘in an entirely different light’: see
p 9 of the final award on costs. At p 13 the arbitrator records the claimants
as having argued that the offer would, in those circumstances, have been
accepted. Mr Thornton contended that no such argument was ever in fact
advanced. It is nowhere reflected in the affidavit of Mr Keary [a director of
Blexen Ltd]. But that submission I find hard to reconcile with the clear
finding by the arbitrator as to the way that the case was put by Mr Neville
[the solicitor for G Percy Trentham Ltd] in oral submissions on behalf of the
claimants. And I note that in para 38 of Mr Neville’s affidavit he says that he
had always been well aware that the claimants would have accepted £77,000 if
they had known at the time of the offer of the subsequent amendment. So it
would not have been surprising if Mr Neville had advanced that as an argument
at the hearing before the arbitrator.
How, then, did
the arbitrator deal with that argument?
I quote three paragraphs from p 13 of the final award, as follows:
I have come to
the conclusion that Mr Keary would still have rejected the offer. The
Claimant’s contention was that its own ‘schedule’ of Daywork Rates (as used
during the currency of the Contract) was the correct one not the FCEC Schedule
so it would not have mattered which Section of the latter the Respondent had
elected to use in its calculations, it would still have been wrong in the eyes
of Mr Keary.
If the
Claimant had priced its Dayworks in accordance with the FCEC Schedule Section 4
its total daywork claim (Items 14-J) would have been some £34,000 [sic]
less reducing the overall claim from £210,420 to £186,246 and I do not think
such reduction would have affected Mr Keary’s decision to reject the offer of
£77,000. Clearly the Claimant had high expectations of obtaining substantial
amounts against the other items of the Claim, and it was, I consider, the
overall prospect which governed Mr Keary’s decision to reject rather than an
anticipated award with respect to any one item.
I conclude
therefore that knowledge at August 4 1986 of the subsequent amendment to the
Defence as regards Daywork Items 14-J would not have resulted in the Claimant
coming to a different decision in considering the Respondent’s offer than it
did.
That is, as I
read it, a clear finding of fact that the subsequent amendments made no
difference. The claimants would have rejected the offer in any event even if
the defence had already been amended when the offer was made. I do not see how,
in the light of those three paragraphs, it could be correct to say, as the
judge said, that the arbitrator had disregarded the amendments altogether. He
did not disregard the amendments. He took account of the amendments, but held
that they would not have affected the claimants’ decision to go ahead.
Then it was
said, in the passage I have quoted from the judge’s judgment, that the
arbitrator asked himself the wrong question. He should have asked himself
whether the claimants acted reasonably in deciding to go ahead with the
arbitration after they had received the respondents’ offer. But as I read the
final award, that is precisely the question which the arbitrator did ask
himself. At the foot of p 11 he says:
There remains
the question, was the Claimant justified in refusing the offer on the material
it had at the time?
By inference he
answered that question in the negative. The arbitrator cannot fairly be
criticised if, in the course of answering that question, he dealt with the
further question whether the claimants would have accepted the offer if they
had known of the subsequent amendments, when that was the very question which
the claimants themselves asked the arbitrator to consider.
So, with great
respect to the judge, I can find no shadow of misconduct on the part of the
arbitrator in the way he dealt with costs, not even misconduct of the most
technical kind. So, even if we had jurisdiction to remit this award on grounds
of misconduct, which we have not, I would have declined to exercise that
jurisdiction on the facts of the present case. That being so, it becomes
unnecessary to deal with the further question, which logically comes first,
whether there was in truth any relevant amendment to the pleadings at all.
Mr Thornton
relies on various references to ‘the amended pleadings’ in the arbitrator’s
final award. But what do such references amount to? The claimants’ various daywork claims were
included in items 14 and 15. In the schedule to the points of defence the
respondents say, with regard to both those items, that they required further
information before commenting on them. So, on the pleadings as they stood at
the time of the respondents’ offer, the respondents were putting forward no
positive case at all on the daywork items. They were holding their fire. The
fact that the respondents had not challenged the basis on which the claimants
had submitted invoices during the currency of the contract, and had indeed
themselves submitted invoices under the head contract on the same basis, is
wholly irrelevant. Once the parties were in dispute the respondents were fully
entitled to put the claimants to proof of their claim. This is what they did. I
do not see how they could have made it clearer than they did in their defence
that the daywork items were in issue. When, therefore, the arbitrator refers to
the amended pleadings he must, I think, have been referring to the particulars
which were furnished for the first time only on October 21, and subsequently
revised on November 17 and December 2. Such revised particulars would not have
required any amendment to the points of defence. They were doing no more than
filling in a gap in the original schedule, a gap which had necessarily been
left open until further particulars had been furnished by the claimants.
Mr Thornton
argued that, strictly, the respondents ought to have reduced the sum of
£285,000 for which they accepted liability in para 3 of the points of defence,
but that would hardly have been the sort of amendment which would have
justified the arbitrator in departing from the ordinary rule as to costs where
there has been a sealed offer or payment into court. So Mr Dyson was right when
he submitted that, so far as dayworks were concerned, there never was any
relevant amendment to the defence as it stood at the time of the offer.
The same is
also true (perhaps more true) of the two payments by the respondents amounting
to £11,600, which it was agreed at a very late stage should be credited against
the claimants’ claim. I regret that I was quite unable to understand how that
involved any amendment at all to any pleading, not even to the figure of
£278,000 in para 3 of the points of defence, since it was accepted by Mr
Thornton, as I understood him, that the £11,600 was included in that figure. I
need not mention the third amendment, which had the effect of reducing the
amount awarded by only about £5,000.
At the
conclusion of his argument, Mr Thornton invited us to consider giving him leave
to appeal on a question of law under section 1(3) of the 1979 Act should we be
against him on the jurisdiction question but in his favour on the point of
substance. Ordinarily such an application for leave would have had to be made
to the High Court, not to us. But since I am against him on both points the
question does not arise.
Finally, I
should return to the point canvassed by the judge, namely what was the correct
question for the arbitrator to have asked himself. I do not find it possible to
answer that question in a way which will provide much, or perhaps any, useful
guidance for the future. The only case in which a similar question has been
considered by this court was the case of Cheeseman v Bowaters United
Kingdom Paper Mills Ltd [1971] 1 WLR 1773. That was a personal injury case
in which the plaintiff recovered £749 on the case as pleaded at the
commencement of the trial. There was then a sum of £750 in court. In the course
of the trial the plaintiff amended to plead a completely new case, as a result
of which he recovered more than the sum in court. It was held by the Court of
Appeal, reversing the judge, that the defendants ought to have their costs
subsequent to the payment in.
It is not easy
to apply that principle directly when it is the defendant who amends to plead a
new defence rather than a plaintiff who amends to plead a new claim. But Mr
Dyson conceded, correctly in my judgment, that the general rule should apply
where the defendant amends to plead a new defence on which the burden rests on
him; for example, a plea of limitation for liability or of some relevant
contractual exception. In such a case, if the effect of the amendment is to
reduce what would otherwise have been awarded below the sum paid in, it would
usually be just to give the plaintiff his costs. In addition, it is normally
preferable for the judge or an arbitrator to consider what would have been the
result but for the amendment, rather than the simple question whether the
plaintiff acted reasonably in continuing with the arbitration or the action on
the pleadings as they stood, or the more elusive question, whether the
plaintiff would or would not have accepted the offer had he known of the future
amendments.
Further than
that I do not find it necessary or desirable to go. Each case, as is so often
said, must be considered in the light of its own particular facts. Where an
unfettered discretion has been granted by Parliament it is never desirable to
hedge it about with too much guidance, in case the guidance comes to be
regarded as an inflexible rule of law or practice. It can be no such thing.
For the
reasons given earlier, I would allow this appeal and quash the order for
remission. The arbitrator’s award as to costs will stand.
McCOWAN LJ and SIR JOHN MEGAW agreed and did not add anything.
The appeal
was allowed with costs.
