When is an error a serious irregularity? The English court demonstrates its approach to correcting arbitration awards
A tribunal's admission of a simple computational error, and its refusal to correct it, was a serious irregularity that had caused substantial injustice.
On the basis of this, the English court remitted an arbitration award to the tribunal for correction so that the tribunal would have the room to carry outs its stated intention to award substantial damages to one of the parties.
In February 2015, Mikhail Khabarov and Alexander Bogatikov entered into a Call Option Deed that granted Mr Khabarov the option to buy 30% of Mr Bogatikov's company, DL Management Limited for $60 million. Following a disagreement, Mr Khabarov started arbitration proceedings under the LCIA Rules. It was common ground that Mr Bogatikov had repudiated the Call Option Deed, so the only substantive issue was the value of DLM at the relevant time in order to establish Mr Khabarov's loss caused by being denied the opportunity to purchase the shares.
The parties drew up an 'agreed model' for calculating the value of DLM on the relevant date. Though they and their experts differed (sometimes drastically) as to the values of the various inputs and adjustments to the Agreed Model, they did agree on the mechanics of the calculation; this included, amongst other things, the generation and application of an EBITDA profit/revenue ratio and the subtraction of historic tax liabilities from the overall valuation.
In its final award, the tribunal awarded $58 million to Mr Khabarov as compensation for his loss by using the Agreed Model. Doubt was expressed over the reliability of the EBITDA generated by the Model; in that it may have undervalued DLM (and therefore undercompensated Mr Khabarov). However, the tribunal did not feel justified in substituting its own higher EBITDA figure because the final output of the Agreed Model was not, in its view, wildly wrong. Importantly, the tribunal also mistakenly added the value of DLM's historic tax liabilities rather than subtracting it. On its face, this mistake led to Mr Khabarov being overcompensated by $54 million.
Mr Bogatikov's request to correct the mistake was refused by the tribunal. In its response to the request, the tribunal admitted that adding rather than subtracting the tax liabilities was an error but said it had not applied the Agreed Model in a mechanistic manner and had reached the final loss figure via an iterative process.
Mr Bogatikov subsequently challenged the award in the English Court on the basis of "serious irregularity" (section 68 of the Arbitration Act 1996).
The judge remitted the award back to the tribunal for correction. The tribunal's response to Mr Bogatikov's application to correct the award could be used as evidence of its admission of the mistake and therefore there had been a serious irregularity within the meaning of s 68(2)(i) of the Act. Mr Bogatikov had overcome the high hurdle of demonstrating that the serious irregularity had caused (or will cause) substantial injustice to him; the judge simply statied that it could not be permitted for an award which is enforceable in other jurisdictions to contain a computational error, which may lead to a significant difference in the damages payable, to go uncorrected.
The judge remitted those parts of the award that dealt with the historic tax liabilities (in order that the computational error be corrected) but also, importantly, the parts dealing with the EBITDA value. It did so due to the tribunal's concerns that the EBITDA may have undervalued DLM and because the tribunal had failed to fully interrogate those concerns only because the overall outcome provided by the Agreed Model seemed a fair one. In essence, this provided a route for the tribunal to issue a new award that would reflect its intention to award substantial damages to Mr Khabarov but by means of a corrected calculation.
This is an interesting and unusual case. It is quite rare for section 68 challenges to be successful and even rarer for an English court judge to find that there has been a serious irregularity that caused or will cause substantial injustice in such a straightforward manner. This is undoubtedly because of the very unusual circumstances in which a tribunal had admitted an error in its award but refused to correct it.
The judge's approach demonstrates the tightrope that the English court must walk when dealing with these challenges: it must uphold the integrity of the arbitral process by not allowing serious mistakes to go uncorrected but it must do so by intervening as lightly as possible in order to maintain that process's independence from the court. It may be for this reason that the judge refrained from remitting the award for the simple correction of the identified error (which would, in the tribunal's own view, have cut across its intentions) but re-opened just enough of the award to allow the tribunal to correct the error while maintaining control of the ultimate outcome. This is therefore a good example of the court's nuanced role in maintaining the integrity and independence of arbitration in England.