On 19 April 2021, the Judicial Committee of the Privy Council (“Privy Council”) rendered its decision in RAV Bahamas and another v Therapy Beach Club Incorporated (Bahamas)¹ (available here) on the requirement under Section 90 of the Bahamas Arbitration Act 2009 (“Bahamas Act”) for a party to separately and expressly plead, and for a court to separately and expressly find, “substantial injustice” where an award is challenged on the basis of a serious irregularity that affects the tribunal, the proceedings or the award. Section 90, which is materially identical to Section 68 of the English Arbitration Act 1996 (“English Act”), provides that a party may challenge an award on the basis of one or more enumerated kinds of irregularities which “the court considers has caused or will cause substantial injustice to the applicant.”

In summary, the Privy Council found the following:

• As established in prior case law, challenges to awards on the basis of serious irregularity impose a “high threshold” or “high hurdle” on the applicant. The focus of the court’s inquiry in such a challenge is whether a party has been afforded due process, not whether a correct decision was reached.
• Although it is good practice, it is not a “mandatory requirement” for a party to separately and expressly plead, or for a court to separately and expressly consider and find, that a party has or will suffer substantial injustice due to the serious irregularity.
• In assessing the substantial injustice requirement, “undue formalism” must be eschewed. It only matters whether, as a matter of substance, substantial injustice has been considered and found, notwithstanding the language used.

The decision marks the first time in over 15 years that the “substantial injustice” requirement has been considered by a highest appellate court since the decision of the UK House of Lords in Lesotho Highlands Development Authority v Impregilo SpA² (available here). The Privy Council is comprised of Justices of the UK Supreme Court and serves as the court of final appeal for the UK overseas territories and Crown dependencies. Given the similarities between Section 90 of the Bahamas Act and Section 68 of the English Act, the decision will form an important part of the jurisprudence surrounding challenges to awards in English-seated arbitrations on grounds of serious irregularity. The reasoning of the Court will likely also be considered by courts of other jurisdictions that are called upon to address pleading requirements in challenges to awards.

The following sections set out the background to the dispute and summarise the findings of the Supreme Court and Court of Appeal of the Bahamas, before discussing the decision of the Privy Council. The final section considers the implications of the decision.

I. BACKGROUND

The applicants (“RAV”) leased land to the respondent (“Therapy”) for the building and operations of a restaurant and beach club in the Bahamas called Sakara Beach Club (“Sakara”). The lease agreement contained an option to renew the lease for a further 5-year term that could be exercised on 6-months’ notice and was subject to the “parties agreeing to rents” for the renewal term.

The dispute arose out of delays in the development of the restaurant and the eventual eviction of Therapy from and demolition of Sakara by RAV. Therapy claimed that it had been wrongfully evicted and sought lost profits for the duration of the lease and the renewal term, which spanned a total of 6 years. Therapy also sought lost profits in relation to a separate restaurant in the vicinity, Atlantic Seafood, on the basis that it formed part of the lease following a variation of the agreement by the parties. RAV denied all the claims.

The dispute was submitted to an ad hoc arbitration where the sole arbitrator found the following after a 6-day hearing: (i) Therapy had been wrongfully evicted form Sakara; (ii) the lease had not been varied by the parties to include Atlantic Seafood; and (iii) Therapy was entitled to its lost profits in relation to Sakara for the entire 6-year period. In assessing Therapy’s damages, the arbitrator relied on the evidence of Therapy’s quantum expert but discounted the damages in two ways to exclude any losses flowing from the claim in relation to Atlantic Seafood and to account for the fact that the expert’s analysis was not based on documentary evidence. The parties had not made specific submissions on any discounts to be applied to Therapy’s damages, including in the event Therapy lost any part of its claims. Therapy was awarded a total of $ 9.67 million, plus interest.

RAV challenged the award under Section 90 of the Bahamas Act on two grounds:

• Ground 1: The arbitrator failed to consider all the issues that were put by the parties under Section 90(2)(d). In particular, the award did not address whether the lease had been validly renewed for a further 3-year term, which RAV disputed on two bases: (i) Therapy had not issued an option to renew the lease; and (ii) the option was void for uncertainty, unenforceable and illusory because the rent for the renewal term was subject to party agreement.
• Ground 2: The arbitrator did not afford RAV an opportunity to make representations on the appropriate discount to be applied to Therapy’s damages, contrary to Sections 44 and 90(2)(a).

In the first instance, the Supreme Court of the Bahamas upheld the challenge on both grounds and remitted the award to the arbitrator for further consideration. The Court found that Therapy’s losses for the renewal term depended on whether the lease had been validly renewed. The award indicated that the arbitrator had not considered this issue that was important to Therapy’s entitlement to damages. The Court also found that the arbitrator had not given the parties an opportunity to address the method of adjusting Therapy’s damages, which was only brought to the parties’ attention in the award itself. The Court did not, however, make any express or separate finding that the serious irregularities caused RAV substantial injustice.

By a majority, the Court of Appeal of the Bahamas set aside the first instance decision and upheld the award. Relying on the House of Lords decision in Lesotho, the Court held that a serious irregularity challenge required a showing, as a precondition, that there had been substantial injustice. Here, the Court found that (i) RAV did not expressly and separately plead and establish that it had suffered or would suffer substantial injustice as a result of the irregularities; and (ii) the Supreme Court failed to make an express and separate finding on the issue of substantial injustice. The Court considered that the real complaint made by RAV was that the arbitrator had made errors of law.

II. PRIVY COUNCIL DECISION

The main issue of interpretation before the Privy Council, as expressed by the Court, was “whether section 90 requires there to be a separate and express allegation, consideration and finding of substantial injustice for a serious irregularity to be established.”³ As discussed below, the Privy Council answered that question in the negative and remitted the award to the arbitrator on terms largely consistent with findings of the Supreme Court.

A. Separate and Express Allegation and Finding of “Substantial Injustice”

The Privy Council began its discussion of the “substantial injustice” requirement by stressing the narrow scope of application of Section 90 to challenge awards. Recalling well-established case law, the Privy Council emphasised that the English Act, which its Bahamian counterpart is based on, was designed to significantly reduce the extent of judicial intervention in arbitral proceedings. Section 68 of the English Act (like Section 90 of the Bahamas Act) forms an integral part of that design by permitting challenges to awards where (i) there is a “serious irregularity,” as identified in the closed list of irregularities in Section 90; and (ii) that has caused or will cause the applicant “substantial injustice.”⁴ The burden of proof rests on the applicant challenging the award.⁵

Reiterating the explanatory notes of the Department Advisory Committee in drafting the English Act and the House of Lords decision in Lesotho, the Privy Council stressed the “high threshold” and “high hurdle” imposed by the serious irregularity limb of Section 68,⁶ which was only available in “extreme cases where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected.”⁷ The purpose of Section 68 was to ensure due process in the arbitral proceedings, not that a correct decision had been reached.⁸

The “substantial injustice” requirement in Section 68 provides a further hurdle to a challenge. As aptly described by the House of Lords in Lesotho, it is designed to weed out “technical and unmeritorious challenges.”⁹ The Privy Council noted that there will be substantial injustice where it is established that, had the irregularity not occurred, the outcome of the arbitration might have been different.¹⁰ Importantly, the Privy Council recognised that some irregularities may be so serious that substantial injustice is “inherently likely” to result¹¹ and an inference of substantial injustice “almost goes without saying.”¹²

Turning to the issue before it, the Privy Council considered that it is good practice for an applicant raising a Section 90 challenge (or Section 68 under the English Act) to set out in its pleadings the listed irregularity in Section 90 that it relied upon, its grounds for asserting the existence of the irregularity in its case and that the irregularity has caused or will cause it substantial injustice.¹³ It would equally be good practice for a court to specifically consider each of these issues. However, that good practice did not amount to a “mandatory requirement,”¹⁴ a failure of which would itself defeat an application.¹⁵ The Privy Council cautioned against undue formalism where, on the facts, substantial injustice is apparent.¹⁶

B. Failure to Address Issues Put To The Arbitrator

The Privy Council agreed with the Supreme Court, upholding the challenge to the award on Ground 1 on the basis that the arbitrator failed to consider whether the lease had been validly renewed.

After reviewing the record, including the pleadings and transcripts of the hearing before the arbitrator, the Court found that the issue of whether the lease had been validly renewed had been put before, and sufficiently drawn to the attention of, the arbitrator. This was an issue that the arbitrator ought to have dealt with because it was “essential or crucial” to the determination of the parties’ claims and defences.¹⁷ Put simply, the arbitrator could not have concluded that Therapy was entitled to damages for the renewal term without first determining whether the lease had been validly renewed, giving Therapy a right to use the premises for that period. The question was whether the issue had, in fact, been dealt with by the arbitrator.

In undertaking that analysis, the Court cautioned against adopting a “hypercritical or excessively syntactical reading” and instead urged the use of a “fair, commercial and commonsense reading.”¹⁸ The courts must give arbitrators a wide margin of deference to determine how to address an issue, which they can do in any way. On reviewing the award, however, the Court found that the arbitrator made no reference to or ruling on the lease renewal. Importantly, the Court also found that it could not infer that the arbitrator had implicitly rejected the point because the award did not refer to it at all.¹⁹

While RAV’s application challenging the award did not made specific reference to the “substantial injustice” caused by this omission, the Court found that this was apparent because the failure was described in the pleadings as “critical” and as affecting a “large portion of the award.”²⁰ In upholding the challenge, the Supreme Court used similar language, which in effect amounted to a finding of substantial injustice.²¹ The Court found that the nature of the irregularity and failure of due process in the present case meant substantial injustice was inherently likely.²²

C. Failure to Provide Opportunity To Make Representations

The Privy Council partially agreed with the Supreme Court to uphold the challenge to the award on Ground 2 on the basis that the arbitrator failed to give RAV an opportunity to address the appropriate discount to be applied to Therapy’s damages.

The Court recalled that natural justice requires parties to have an opportunity to address arbitrators on specific matters that an award is based on and, conversely, parties should not learn of adverse points for the first time in the award itself.²³ As with a failure to address issues, the Court urged a careful approach in determining whether a party had been deprived of a right to present its case.²⁴

On the facts, the Court found that there was no irregularity in the arbitrator’s approach of applying a 15% discount to the quantification of damages by Therapy’s expert. The Court considered that it should have been obvious that there were weaknesses in Therapy’s expert evidence because it was not supported by documentary evidence.²⁵

On the one-third deduction in damages for the Atlantic Seafood claim, however, the Court found that RAV had not been given an opportunity to address the arbitrator. In reaching that conclusion, the Court disagreed with the finding of the Court of Appeal that it was sufficient that the parties knew that consequential damages were in issue and that the parties could make “whatever representation” they considered appropriate.²⁶ On “substantial injustice,” and as with Ground 1, the Court held that it “goes without saying and is self-evident” that an “arbitrary deduction of damages” is seriously prejudicial.²⁷ RAV’s failure to expressly plead the point, and the lack of an express finding by the Supreme Court, were not fatal.

III. IMPLICATIONS

As a judgment of the Privy Council on a provision that is materially identical to Section 68 of the English Act, the RAV decision forms part of an important body of law on challenges to awards in English-seated arbitrations.

The decision marks a pragmatic approach of the English courts to pleading requirements for “substantial injustice,” which is a welcome clarification on the application of Section 68. Given the strong persuasive effect of English judgments on courts of other Commonwealth jurisdictions, the RAV decision will also provide a useful starting point for analysis when similar issues arise in the context of other arbitral laws. While the Court eschewed a formalistic approach, to avoid protracted litigation on whether the requirements of Section 68 have been properly established, parties would be well advised to clearly plead the specific irregularity under Section 68 on which they rely to challenge an award and to explain why that irregularity has caused or will cause the party substantial injustice.

While the Privy Council upheld the challenge on the facts of the case, it bears emphasis, that the irregularities in question in the RAV decision were significant and could have had a material impact on the outcome of the award. The Privy Council was careful to reiterate prior case law and emphasise that challenges under Section 90 (and Section 68 of the English Act) would not easily succeed. The Court’s pragmatism in the RAV decision should not, therefore, be mistaken as a harbinger for a more interventionist approach by the English courts.