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Issue No:	33
Published:	Summer 2006
Article No:	3
Author:	Richard Swan
Title:	The Jurisdiction of the Arbitrator - Part 2

London is a leading centre for arbitration and parties internationally often decide to have their disputes decided following the procedural law enacted by The Arbitration Act 1996 (‘the Act’), which has been in force since 31 January 1997. Richard Swan considers a significant issue which too often arises in the arbitration process, namely whether the arbitrator actually has authority, or jurisdiction, to hear and make an award relating to a dispute.

This is the second in a two part article. In the first part, published in Digest Issue 33, the following issues were considered:

• The basis of the arbitrator's fundamental statutory duty
• The source of the arbitrator's jurisdiction
• The arbitrator ruling on his own jurisdiction

This second part will cover:

• Restrictions on challenges made to an arbitrator’s ruling on substantive jurisdiction
• Rulings of the court and restrictions upon the court's jurisdiction
• Further challenges to substantive jurisdiction

Reminder of the Issues considered in Part One

The purpose of permitting the arbitrator to rule upon his own jurisdiction is foremost to permit the arbitrator to abide by his fundamental statutory duty, i.e. that of acting fairly and impartially and with a degree of control in avoiding unnecessary delay and expense. The Act therefore provides those powers and duties and these can be expanded on by the provision of institutional rules. Coupled with this, the arbitrator has extensive powers to rule upon his own jurisdiction under Clause 30 of the Act. Those powers include ruling on whether there is a valid arbitration, whether the arbitrator or tribunal has been properly appointed and constituted and which of the submitted matters have been submitted in accordance with the arbitration agreement. Having considered the jurisdictional issues, the arbitrator will rule either as a separate award or within the award on the substantive issues. The arbitrator is free to choose which is the most appropriate, but he will be mindful of basing his decision on whichever is the most appropriate for minimising delay and costs.

Restrictions upon Challenging an Arbitrator's Ruling on Substantive Jurisdiction

The Act, under s.30(1)(a), wants the arbitrator, and not the court, to decide whether the arbitrator has substantive jurisdiction or not. However, certain restrictions are imposed upon a party's right to challenge the arbitrator's substantive jurisdiction.

The Act makes a distinction between an objection as to substantive jurisdiction which is raised at the start of proceedings and an objection raised during proceedings:

a) Objection at the Start

If it is alleged either that there is no applicable arbitration agreement or that the arbitrator has not been properly appointed, s.31(1) of the Act applies. This states that:

'An objection that the arbitral tribunal lacks substantive jurisdiction at the outset of the proceedings must be raised by a party not later than the time he takes the first step in the proceedings to contest the merits of any matter in relation to which he challenges the tribunal's jurisdiction.'

Section 31(1) continues:

'A party is not precluded from raising such an objection by the fact that he has appointed or participated in the appointment of an arbitrator.'

Therefore, although a party may have appointed or participated in the appointment of an arbitrator, he can still allege that, for example, the appointment was flawed because the dispute lies outside the terms of the arbitration agreement. Case precedence illustrating these issues of challenges to the arbitrator's substantive jurisdiction can be seen in Athletic Union of Constantinople v National Basketball Association [2002].

b) Objection During the Proceedings Section 31(2) of the Act states:

'Any objection during the course of the arbitral proceedings that the arbitral tribunal is exceeding its substantive jurisdiction must be made as soon as possible after the matter alleged to be beyond its jurisdiction is raised.'

Therefore, if a claimant amends his statement of case and the respondent objects that the amendment falls outside the terms of the arbitration agreement, the objection must be made 'as soon as possible' with both the arbitrator and the other parties being informed of the objection. Note that this is a mandatory provision of the Act and cannot be varied by the parties.

Loss of Right to Object

These jurisdictional rules therefore specify a very clear timeframe over which an objection on jurisdictional grounds can be made, and one may draw the conclusion that there will be instances where parties lose their right to object. This is the general case, but there is a provision under s.31(3) which allows the arbitrator to admit an objection later than the time specified elsewhere within s.31. This provides a degree of flexibility on the arbitrator's part to perform his duty of 'managing' the arbitral process by admitting a later objection if he deems the delay to be justified. This is also complemented by s.73(1) which states that a delay in objecting is not permitted unless there is justifiable reason. Specifically, the party making the objection must:

'show that, at the time he took part or continued to take part in the proceeding, he did not know and could not with reasonable diligence have discovered the grounds for the objection.'

Ruling of the Court and Restrictions Upon the Court's Jurisdiction

Instead of the parties leaving the question to the arbitrator of whether he (the arbitrator) has substantive jurisdiction, they can, by agreement, apply to the court for the court to rule upon the arbitrator's substantive jurisdiction under provisions in s.32 of the Act. However, it should be noted that by s.32(4), unless otherwise agreed by the parties, the arbitrator may continue with proceedings and make an award while an application to the court is pending.

Applications under this section are considered to be exceptional as the intention of the Act is to give sufficient powers to the arbitrator to rule on his own jurisdiction rather than delaying proceedings. There are, therefore, some criteria which a court will need to be satisfied have been followed before it will consider an application. Section 32(1) of the Act states:

'The court may, on the application of a party to arbitral proceedings (upon notice to the other parties), determine any question as to the substantive jurisdiction of the tribunal.'

The criteria under Section 32(2) are:

1. (the application) is made with the agreement in writing of all the other parties to the proceedings, or
2. (the application) is made with the permission of the tribunal and the court is satisfied:
   1. that the determination of the question is likely to produce substantial savings in costs,
   2. that the application was made without delay, and
   3. that there is good reason why the matter should be decided by the court.

The first of the three requirements imposed by the court is that there is likely to be a substantial saving in costs. The important word here is 'substantial', which implies that the issues to be decided by the arbitrator are likely to be numerous and/or of a sufficiently complex nature so as to demand a lengthy process. The costs of this lengthy case, and then subsequently finding out that the arbitrator had no jurisdiction to hear it, are the substantial costs being referred to, rather than the costs of actual determining whether the arbitrator had jurisdiction or not. If the court holds that the arbitrator does not have jurisdiction following a s.32 application, there will clearly be huge saving in both time and costs as evidenced in Azov Shipping Co v Baltic Shipping Co [1999]. If the reverse is held, there will be no saving in costs, substantial or otherwise.

The second requirement i.e. that the application must be made without delay, repeats s.31(1) that the challenge of the arbitrator's jurisdiction must be made in 'the first step in contesting the merits of the case'.

The third requirement, that of good reason, is perhaps the most difficult to justify. The parties may continue to believe that the arbitrator is still insufficiently skilled in the law to be able to determine the correct answer as to jurisdiction; the parties may have a greater degree of confidence in applying directly to the court. However, this strategy will be closely examined by the court and it will require some skilful explanation to persuade the court to accept a lack of confidence in the arbitrator's legal skills as a valid and 'good' reason!

If the above three requirements have not been satisfied, the court will not hear the application. The parties will then be left with no means of deciding the issue of the arbitrator's jurisdiction unless they revoke the agreement to remove from the arbitrator his statutory power to decide. One can easily see that removing an arbitrator's jurisdiction, then applying to court and being refused, and then reinstating the arbitrator's power to rule on his own jurisdiction is a costly and unnecessary process!

Further Challenges to Substantial Jurisdiction

The arbitrator's ruling on a challenge to his substantive jurisdiction is made in an award as to jurisdiction or in the arbitrator's award on the merits i.e., a partial award in the final award. Being awards, any of these can be challenged by an application made under s.66, s.67, or by an appeal to the court under s.68 alleging serious irregularity, or (but much less likely) under s.69 for an appeal on a point of law. Sections 66 and 67 are particularly relevant to substantive jurisdiction.

Challenge under s.66

Under s.66, an arbitrator's award, in order to be enforced, has to be turned into a judgment of the court (see s.66(1) and (2)). Section 66(3) goes on to say:

'Leave to enforce an award shall not be given where, or to the extent that, the person against whom it is sought to be enforced shows that the tribunal lacked substantive jurisdiction to make the award.'

This is the last possible opportunity that a party possesses to challenge an award on the grounds that the arbitrator did not have substantive jurisdiction. However, the conditions under which an application to challenge an award for lack of substantial jurisdiction at this stage are considered onerous.

First, one must be mindful of s.31(1), that an objection at the outset must have been raised by a party not later than the time he takes the first step in the proceedings to contest the merits of any matter in relation to which he challenges the tribunal's jurisdiction. Second, if the challenging party did not make a request to the arbitrator for a ruling on his substantive jurisdiction under s.30(1), this will have to be explained by that party. Third, if the party did make such a request and the arbitrator made his ruling either in an award as to jurisdiction or in an award on the merits, the award must have been challenged within 28 days (see s.70(3)). Finally, if the party obtained a ruling by the court under s.32, the court will not re-hear the application as the decision of the court as to jurisdiction is treated as a judgment of the court at the time of the application under s.32 (see s.32(6)).

Challenge under s.67

Section 67 governs the conditions for applying to the court to challenge an award as to jurisdiction, whether it be an award specifically on jurisdiction or an award on the merits. Specifically s.67(1) states:

'A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court-

• challenging any award of the arbitral tribunal as to its substantive jurisdiction; or
• for an order declaring an award made by the tribunal on the merits to be of no effect in whole or in part, because the tribunal did not have substantive jurisdiction.'

It should be noted that the arbitral proceedings may continue and that the arbitrator is able to make further awards pending a decision by the court on a challenge of the award as to jurisdiction (s.67(2)). This specifically allows the proceedings to proceed with due diligence and conforms with the general principle of arbitration continuing without unnecessary delay and prevents the occurrence of delaying tactics sometimes used by parties prior to the enactment of the Act.

The purpose of s.67 is to permit challenges to the arbitrator's ruling that he does have jurisdiction to deal with the matters referred. This is distinguished from a challenge as to the method the arbitrator undertakes in making his award (either on jurisdiction or on the merits). Therefore, any s.67 challenge can only arise after the arbitrator has made his ruling that he does or does not have jurisdiction, and where the applicant believes the arbitrator's ruling was wrong. The court has no powers to set aside a ruling based on the sole fact that the arbitrator could have drawn a better conclusion as to jurisdiction had he heard evidence at the hearing. The ruling is considered either right or wrong by the court; there is also no power to consider the extent of whether it could have been a better award as to jurisdiction - See Aoot Kalmneft v Glencore International AG [2001].

Scope and Restrictions of the Challenge under s.67

The conditions for challenge under s.67 are also often considered onerous and are subject to provisions contained within s.70.

Amongst those provisions is an issue concerning the timing of the challenge. Where the arbitrator makes a ruling as to his jurisdiction, any challenge must be made within the time allowed by party agreement or, in default of this, within 28 days of the relevant award (see s.70(3)). If the party does not raise a challenge within the time allowed, he will lose the right to object (under s.73(2)) to the arbitrator's substantive jurisdiction on any ground which was the subject of the ruling. This is subject to an additional power of the court to extend time limits under s.79. This is a wide power which can be invoked at any time by the court, unless the parties agree otherwise, but the court will need to be satisfied that a substantial injustice would have occurred had it not extended time limits (s.79(3) refers).

In addition, all available arbitral processes of appeal must have been exhausted prior to any challenge application under ss. 67, 68 and 69 (see s.70(2)); this includes any available recourse under s.57 which covers the powers (by party agreement) given to the arbitrator to correct or supplement any award.

Despite the court taking full cognisance of these provisions, its powers are limited when dealing with an application concerning jurisdiction made in an arbitrator's award (see s.67(3)). The court is allowed to confirm the award, vary it or set it aside in whole or in part, but it does not have powers to remit the award back to the arbitrator for reconsideration, notwithstanding s.71(1)(3) which covers remission of the award for tribunal reconsideration. This reconsideration power applies to s.68 (Serious Irregularity) and not to challenging the award on grounds of substantive jurisdiction.

It is also important to note that a s.67 application will fail if the parties agree that the arbitrator has the relevant jurisdiction or agree that the arbitrator has the power to make a final and binding decision as to his substantive jurisdiction.

Conclusion

It is, therefore, clear that the issues to be considered by both parties and the arbitrator are complex and that all parties need to be aware from where the arbitrator's jurisdiction stems and how it can be controlled and managed. Due to the change in the provisions of the Act, particularly with regards to the arbitrator having power to rule on his own jurisdiction, the due process of ensuring that delay and undue expense is avoided has been significantly improved. Arbitrators do, however, need to keep a very careful eye on what they can and cannot do in order to avoid challenges as to jurisdiction, and parties need to be mindful of the process and timeframes which they must follow in order to be successful with any challenge they may feel it is appropriate to make. What is certain is that the incidence of challenges on substantive jurisdiction issues in the court has fallen markedly under the Arbitration Act 1996 as compared with previous legislation, thus demonstrating that arbitrators are not afraid to rule on their own jurisdiction and parties are prepared to accept those arbitrator rulings.