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Commercial Court Dismisses Challenge to Set Aside an Arbitral Award (15 May 2012)


In the recent case, Dunnes Stores v Holtglen Ltd [2012] IEHC 93, the Irish Commercial Court dismissed a challenge by Dunnes to set aside an arbitral award. The judgment usefully considers the principles surrounding the construction of a contract, and the jurisdiction and criteria applicable for the remittal or setting aside of an arbitral award. 

The Facts

Dunnes applied to the Commercial Court to set aside an arbitral award made on 7 October 2011. The arbitration arose on foot of a development agreement, concluded on 13 June 2007, which was made between Dunnes, Holtglen and a company called Deerland Construction Limited as surety. 

The agreement was in respect of works to build the Ferrybank Shopping Centre in Kilkenny. Dunnes purchased a site in the shopping centre for the purpose of establishing an anchor store there. The works to be performed under the agreement included the construction of that store. 

Holtglen’s loans with the Bank of Ireland were transferred to the National Asset Management Agency (NAMA) on 28 October 2010. 

Dunnes contended that Holtglen had breached the agreement in a number of ways and had not remedied those breaches. Thus, Dunnes argued that it was entitled to terminate the agreement. Holtglen defended that claim and counterclaimed for monies due to it under the agreement. 

The arbitrator made a determination which upheld in large part Dunnes’ claims concerning Holtglen’s breaches of the agreement. However, he found that the breaches had been remedied and accordingly Dunnes were not entitled to terminate the agreement. That determination of the arbitrator was not challenged in these proceedings. 

The arbitrator then went on to uphold Holtglen’s counterclaim for staged payments which had not been made by Dunnes, finding Dunnes liable to pay Holtglen the sum of €20.2 million.

Dunnes claimed that as Holtglen was now insolvent, it was precluded from claiming the money due. Dunnes also claimed that the arbitrator either misinterpreted or had no regard for the commercial purpose underlying the agreement and flouted business commonsense in his award. 

The Decision

Kelly J. dismissed Dunnes’ application to set aside the arbitrator’s award, and made the following findings:-

  1. The arbitrator had not erred in law in the approach taken by him on the construction of the agreement between Dunnes and Holtglen.
  2. Even if the arbitrator had erred, there is, per O’Donnell J. in Galway City Council v. Samuel Kingston Construction Limited [2010] 3 I.R. 95 (Kingston Construction), a “high tolerance for arbitral error” on the part of the Court and if there was such an error, it was not one so fundamental that the award could not be allowed to stand. 
  3. The transfer of Holtglen’s Bank of Ireland loans to National Asset Loan Management Ltd, (NALM), (a subsidiary of NAMA), meant NALM had stepped into the shoes of Holtglen and its insolvency was now an irrelevance.

Analysis

(1)   Principles of Contractual Construction
Kelly J. stated that, in interpreting a commercial agreement, a court or arbitrator ought to endeavour to give it a commercially sensible construction. This is clear from the views expressed by Lord Steyn in Mannai Investments Limited v. Eagle Star Assurance Company Limited [1997] 3 All E.R. 352.  Lord Steyn’s views have been upheld in this jurisdiction by Clarke J. in BNY Trust Company (Ireland) Limited v. Treasury Holdings [2007] IEHC 271. Kelly J. rejected the criticism made of the arbitrator that he either misinterpreted or had no regard for the commercial purpose underlying the agreement and flouted business commonsense in his award. The agreement provided for termination in the event of the Holtglen’s insolvency, but this did not provide a right to claim damages or to refuse to perform other obligations which arose before that event occurred. Holtglen had completed the anchor store in accordance with the agreement, and so Kelly J. held that Dunnes could not escape making the relevant stage payments because of its subsequent insolvency. 

Kelly J. noted that the question of commercial commonsense has most recently attracted the attention of the UK Supreme Court in Rainy Sky S.A. v. Kookmin Bank [2011] 1 WLR 2900. The Supreme Court held that where parties have used unambiguous language, irrespective of the question of commercial sense, the unambiguous language must be applied. If, however, there is an ambiguity then the court is entitled to construe the contract in the more commercially sensible manner. 

The judgment discusses the leading authorities concerning the appropriate principles of contractual construction, including Analog Devices v. Zurich Insurance [2005] 1 I.R. 274, in which Geoghegan J. quoted with approval the principles set out by Lord Hoffmann in Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896.  In brief, those principles are:

  1. Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
  2. The background includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
  3. The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification.
  4. The meaning which a document would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of the document is what the parties using those words against the relevant background would reasonably have understood it to mean.
  5. The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had.

These principles were upheld by the Supreme Court in Emo Oil Limited v. Sun Alliance & London Insurance Plc. [2009] IESC 2. 

Kelly J. found that the principles enunciated above are the ones which the arbitrator was obliged to, and did, apply in making his award. 

(2)   Jurisdiction to Remit or Set Aside an Arbitral Award 
The judgment highlights the high threshold required for the remittal of an arbitral award, and shows the court’s preference for minimal interference with arbitral awards. 

Kelly J. noted that section 36 of the Arbitration Act 1954 provides a mechanism for the remittal by the High Court of an arbitral award for reconsideration by the arbitrator. However, it does not specify the grounds upon which an arbitration award may be remitted. The grounds for doing so are to be found in common law. Apart from the statutory provisions, Kelly J. confirmed that there is also a common law jurisdiction to remit or set aside an award if there is an error of law on its face. 

Kelly J. noted that “in recent years, the task of convincing a court that it ought to intervene and remit or set aside an arbitrator’s award has become quite onerous”. He relied on the standard applied in Keenan v Shield Insurance Company Limited [1988] I.R. 89, Limerick City Council v Uniform Construction Limited [2007] 1 I.R. 30, and in Kingston Construction1. 

These cases show that an arbitral award will not be set aside on the basis of an error made by the arbitrator unless it is so serious or fundamental that it smacks of injustice and so the court cannot permit it to remain unchallenged. 

(3)   The NAMA Transfer
Kelly J. noted that on 13 February 2012, NALM served a notice of substitution, seeking to exercise all rights and powers of the funder of Holtglen. As a result, NALM had stepped into the shoes of Holtglen and its insolvency was now an irrelevance. It also meant that any concerns which Dunnes may have had in relation to future obligations not being honoured had evaporated. However Kelly J. said that he had decided the case on its merits and without reference to this event which occurred subsequent to the arbitral award being published. 

Commentary

This challenge was brought partly under the Arbitration Act 1954 (the 1954 Act), in respect of an agreement entered into in 2007. The 1954 Act was replaced by the Arbitration Act 2010 (the 2010 Act), which applies to arbitrations commencing after its operative date of 8 June 2010. While the 2010 Act introduces the UN Model Law on International Commercial Arbitration into Irish law, article 34 of which deals with challenges to arbitral awards, it is noteworthy that the 2010 Act does not expressly remove the common law jurisdiction to set aside an arbitral award on the grounds of a fundamental error of law on the face of the award. It is also possible that parties contesting an arbitration award, due to an alleged fundamental error of law, may attempt to persuade the court to set aside the award on public policy grounds pursuant to article 34. The concept of public policy in article 34 of the Model Law is not defined. However the case of Broström Tankers AB v Factorias Vulcano SA (2004) 2 IR 191 shows the narrow scope of the public policy ground for challenging an arbitral award2. It is likely therefore that the courts will construe the public policy ground for challenging an arbitral award in article 34 restrictively. 

We await with interest to see whether the courts will continue to exercise their common law jurisdiction to set aside an arbitral award on the ground that there has been a fundamental error of law on the face of the award. In any case, the decision in Dunnes Stores v Holtglen Ltd shows that the courts will require a very high threshold to be reached before it will set aside an arbitral award on such a ground, and highlights the court’s preference for minimal interference with arbitral awards. 

Please click here for the judgment. 

For further information on this article please contact Davinia Brennan at dbrennan@algoodbody.com or your usual contact at A&L Goodbody.

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1 See also the recent cases of Campus & Stadium Ireland Development Limited [2010] IESC 25, and Corrigan v Durkan & Anor [2010] IEHC 477, which show this high threshold being applied.
2 In Broström, Kelly J held that the public policy defence to an application to enforce a foreign arbitral award, pursuant to the New York Convention, could only be invoked where there was some element of illegality, or where enforcement of the award would clearly be injurious to the public good, or where it would be wholly offensive to the ordinary responsible and fully informed members of the public.


Date published: 15 May 2012