Substantive grounds for challenge

Introduction

You have agreed to arbitration, selected the arbitrator, argued your case and received the decision. You have lost. You say to yourself: “This decision is wrong. How can I overturn this unfair outcome?”

A party faced with an unfavourable arbitral award may have three options, which will depend on the arbitration agreement, the laws of the seat and the rules of the arbitral institution:

• where permitted, a party can appeal the award on questions of law, questions of fact or mixed questions of fact and law;
• a party can apply to the relevant court – often the arbitral seat – or institution,
• where available, to set aside or annul the award; or
• a party can wait until the successful party moves to have the award recognised and enforced and oppose that application¹.

Generally, only appeals permit a party to challenge the substance of an arbitral decision. However, with respect to international arbitrations, in many jurisdictions, an appeal is not an available option. The losing party can then only seek either to set aside an award or to oppose an enforcement application, in which case directly challenging the merits of the decision is not an available option. Rather, the grounds for challenge relate only to the integrity of the process (i.e., jurisdictional and procedural grounds).

Most jurisdictions show significant deference to the arbitral process. Finality is generally considered to be one of the major advantages of arbitration in comparison to courts. Most arbitration agreements and institutional rules provide that an agreement is to be “final and binding”. As explained in Redfern and Hunter on International Arbitration, these are “not intended to be empty words”. Rather, “by choosing arbitration, the parties choose, in principle, finality. An arbitral award is not intended to be a mere proposal as to how the dispute might be resolved, nor is it intended to be the first step on a ladder of appeals through national courts”².

However, there are policy reasons in favour of allowing a degree of substantive review of arbitral awards. For example, there are risks of both inconsistent decisions and that the credibility of arbitration will be undermined by arbitrators that do not do their work in the manner expected (arbitrators can err, just as anyone else). Indeed, limited appeal rights seem to have deterred companies from using arbitration. A 2011 study of corporate counsel at Fortune 1,000 companies revealed that 52 per cent who did not use arbitration said it was because it is “[d]ifficult to appeal”³.

Most arbitral laws provide for a narrow form of review through set-aside and enforcement proceedings. Unless an appeal right is provided, the grounds for reviewing an international arbitral award in set-aside and enforcement proceedings are narrowly confined to issues of procedure and jurisdiction, and are not meant to encompass substantive grounds. But these narrow grounds for review have not stopped unsatisfied parties from bringing substantive challenges through the guise of jurisdictional or public policy arguments. Although courts have generally dismissed such attempts, that has not been universally true, and some courts have entertained the possibility of review where the misapplication of law is egregious and intentional. Although this approach is not universally accepted, it does illustrate the challenge in delineating substantive and procedural issues in some cases and parties will no doubt continue to try to use such nuances to their advantage and to challenge the substance of arbitral awards.

This chapter discusses the avenues available for challenging the substance of arbitral awards. First, we explain the difference between challenges to arbitral awards on substantive grounds, procedural grounds and jurisdictional grounds.

Second, we analyse the generally limited legal mechanisms available for appealing the merits of an international arbitral award. Third, we discuss the grounds for challenging an international arbitral award in a set-aside or enforcement application. Finally, we analyse how the merits of an international arbitral award have been addressed in set-aside and enforcement proceedings.

How substantive, procedural and jurisdictional grounds differ

There are generally three grounds on which a party may seek to challenge an arbitral award⁴:

• Substantive grounds: These relate to the substance of an arbitrator’s decision: whether the arbitrator committed an error of fact or law (or both) in reaching the decision.
• Jurisdictional grounds: The arbitrator had no jurisdiction as there is no valid and binding arbitration agreement or, if there was jurisdiction, the arbitrator exceeded that jurisdiction in the manner in which the decision was rendered.
• Procedural grounds: These relate to the fairness of the arbitral process: whether the rules of due process were respected by the arbitrator and whether the parties were afforded an equal opportunity to be heard.

Only substantive grounds address the merits of a dispute. Both the jurisdictional and procedural grounds are focused on ensuring that the arbitral process itself was fair and within the bounds of the parties’ consent to arbitration: neither look to the correctness or reasonableness of the award itself.

When an appeal of an international arbitration award is permitted

Appeals, where available, are the only meaningful way to challenge the substance of an arbitral award. Parties may appeal the merits of an arbitral award where the applicable law provides for it or, in certain circumstances, where it is provided for in their arbitration agreement. Other than these options, some arbitral institutions have provided for the option of an appeal within the arbitral process. Each of these circumstances is explained further below.

Statutory appeal rights

Whether there is a right of appeal—and the scope of that right—depends on the law at the seat of arbitration. Most jurisdictions do not permit appeals from an international arbitral award, including jurisdictions that have implemented the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and the United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration (Model Law)⁵. Some jurisdictions provide for limited appeals of domestic arbitral awards, but whether that is granted and to what extent varies greatly across jurisdictions. As an example, we compare the laws of Canada, England, Wales and Northern Ireland, and the United States.

Contractual appeal rights

As the above table shows, in some jurisdictions, the governing legislation sets out that the parties can agree to certain appeal rights. What if the legislation does not contain that permissive language? Or the parties’ arbitration agreement provides rights of appeal beyond what is permitted in the legislation (e.g., permits appeals on questions of fact when the legislation allows only for questions of law, like the English Arbitration Act 1996)? If arbitration is a creature of the parties’ consent, then surely that agreement will be enforced. The issue is not that straightforward.

In 2008, the US Supreme Court issued its decision in Hall Street Associates LLC v. Mattel, Inc²⁰, in which the parties’ agreement provided for a right of appeal on issues of law. The Supreme Court held that the US Federal Arbitration Act (FAA) provides the exclusive grounds for challenging an arbitral award and parties cannot agree to expanded grounds of review²¹. The Supreme Court’s findings only related to arbitrations within the scope of the FAA²². States are split on whether parties can agree to appeals or expanded grounds of review under the applicable state legislation. For example, courts in Texas and California have allowed parties to agree to expanded judicial review²³, whereas courts in Florida and Massachusetts have held that parties cannot do so²⁴.

A similar conclusion has been reached in the context of the United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration (Model Law). Like the FAA, the Model Law’s grounds for setting aside an international arbitral award are exclusive. Additionally, Article 5 of the Model Law states that the court cannot intervene except where provided by the Model Law. In obiter dicta, New Zealand’s courts held that because the Model Law sets out the exclusive grounds for setting aside an international arbitral award, “it is not open to the parties to a submission to arbitrator to confer, by contract, a more extensive jurisdiction on the Court, for instance to review for factual error”²⁵.

In Canada, there is case law to the effect that appeal rights from arbitral awards are statutory and appeal rights cannot be provided through the parties’ agreement where not available under statute²⁶. A lower court judgment has held that parties are not free to waive the application of the international commercial arbitration act that adopts and incorporates the Model Law²⁷.

Similarly, England’s courts have indicated, in obiter, that it is doubtful the court has inherent jurisdiction to hear appeals from arbitrators on questions of fact (which is outside the parameters of Section 69 of the Arbitration Act), even if the parties were to agree to such an appeal²⁸.

A foundational principle of arbitration is party autonomy. Respect for the parties’ choices is the very policy argument underlying the reasons for limiting judicial intervention. These decisions appear to conflict with that principle. As explained by Gary Born: “Given the fundamental importance of party autonomy in the arbitral process, it is very difficult to see why, in principle, statutory mechanisms for judicial review should not be interpreted, absent express legislative provisions to the contrary, to allow for agreements regarding heightened judicial review”²⁹.

Institutional appeal rights

Given the limited appeal rights generally available to parties in the courts of the seat of arbitration, even where the parties wish to agree to such rights, some institutions have begun to offer an appeal mechanism within the arbitration itself.

JAMS, the American Arbitration Association (AAA) and the International Centre for Dispute Resolution all offer optional appellate arbitral procedures. Typically, under these procedures, a panel of three appellate arbitrators will be appointed. The exact scope of review allowed depends on which institution is used. For example, under the JAMS procedure, the appeal panel will apply the same standard of review as the first-level appellate court in the jurisdiction at the seat of arbitration would apply to an appeal from the trial court decision³⁰. Under the AAA rules, an award may be reversed if it was based on an error of law that is material and prejudicial or there are determinations of fact that are clearly erroneous³¹.

Therefore, if parties are looking to have substantive rights of appeal in an international arbitration, these institutional appellate options may be the best (if not the only) available option.

Substantive grounds for setting aside or opposing an arbitral award

In most circumstances, there will be no right of appeal from an international arbitral award. Therefore, the only options to challenge that award will be either through an application to set aside an arbitral award or in response to an application to recognise and enforce that award:

• Set-aside: This is a step taken by the losing party to annul the award. It is brought in the courts at the arbitral seat³². If an award is set aside by that court, it will usually (but not always) be treated as invalid and unenforceable by all courts³³.
• Recognition and enforcement: This can happen in any jurisdiction in which the winning party seeks to enforce an award. The losing party can then oppose that application. The court’s power on such applications is to decide whether to recognise and enforce the award in its own jurisdiction, and cannot extend to setting aside the award³⁴.

The grounds for such applications are found in the national legislation of the relevant jurisdiction. In most jurisdictions, the legislation adopts the grounds set out in the New York Convention and the Model Law, which are the most significant legal instruments governing international arbitral awards. More than 118 jurisdictions have adopted legislation based on the Model Law, including Australia, Canada, Germany, Hong Kong, India, Ireland, New Zealand and Singapore³⁵.

Grounds under New York Convention and Model Law

Article V of the New York Convention sets out the grounds on which the court may refuse to enforce an arbitral award. The grounds to refuse to enforce an arbitral award under Article 36 of the Model Law are virtually identical to Article V of the New York Convention. Article 34 of the Model Law sets out the grounds on which the award may be set aside, and they also mirror the grounds in Article V of the Convention. The grounds are:

• validity of the arbitration agreement;
• due process or procedural fairness;
• excess of jurisdiction by the tribunal in rendering the award;
• irregular procedure or irregular constitution of the tribunal;
• non-arbitrability of the subject-matter of the dispute; and
• violation of the forum state’s public policy.

International arbitral awards are presumptively valid. The grounds listed in the New York Convention and the Model Law are exclusive and exhaustive. An award may be set aside, or recognition and enforcement may be refused, only if one of those grounds is established. Second, the grounds are discretionary. Even if one of them is established, the court is not obliged to set aside the award and may still recognise and enforce the award.

None of the six grounds permits a substantive review of the international arbitral award. They can be characterised as either procedural or jurisdictional grounds. They do not ask if the decision was substantively correct or reasonable, but instead look to whether there were issues with the arbitral process itself³⁶. Was the arbitration conducted in accordance with due process before an independent and impartial tribunal within the boundaries of the arbitration agreement? If so, the inquiry ends there³⁷.

As explained by the Court of Appeal for Ontario in Mexico v. Cargill: “None of the grounds allows a reviewing court to review the merits of a tribunal’s decision”³⁸. There is no review for errors of fact or law. This is universally accepted by Model Law jurisdictions³⁹. One Singaporean court held that this principle is “trite law”⁴⁰. As explained by the Singapore Court of Appeal:

There is no right of appeal from arbitral awards … [T]he parties to an arbitration do not have a right to a “correct” decision from the arbitral tribunal that can be vindicated by the courts. Instead, they only have a right to a decision that is within the ambit of their consent to have their dispute arbitrated, and that is arrived at following a fair process⁴¹.

Non-Model Law jurisdictions

The grounds for set-aside in jurisdictions that have not adopted the Model Law are virtually identical and, in some cases, even more restrictive.

There are a few jurisdictions that have reportedly adopted less deferential approaches to international arbitral awards and where judicial review can be made on the same ground as court appeals, but these are unusual departures⁴⁶.

ICSID Convention

The International Centre for Settlement of Investment Disputes (ICSID) is a permanent intergovernmental institution established by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 1965 (the ICSID Convention), which is a multilateral treaty that has been signed by 165 states⁴⁷. It provides a procedural framework for arbitration and conciliation in investment disputes between states and foreign investors.

The ICSID Convention provides for its own self-contained system of review for ICSID awards. ICSID awards cannot be challenged in any domestic court. Under the ICSID procedure for review, an annulment committee consisting of three persons is established. The grounds for annulment are listed exhaustively in Article 52 of the Convention. Like the Model Law, they relate only to the arbitral process (procedural and jurisdictional grounds) and do not include substantive review of the merits⁴⁸. The grounds are that:

• the tribunal was not properly constituted;
• the tribunal has manifestly exceeded its powers;
• there was corruption on the part of a member of the tribunal;
• there has been a serious departure from a fundamental rule of procedure; or
• the award has failed to state the reasons on which it was based.

How arbitration merits are addressed in proceedings

The main policy reason for curtailing judicial review of arbitral awards is to respect party autonomy and the finality of the arbitral process. Parties have opted out of the courts and have selected a process that is to be “final and binding”. As set out in the introduction to this chapter, those words are to be given meaning. This policy rationale was explained by the Singapore Court of Appeal in AKN v. ALC:

A critical foundational principle in arbitration is that the parties choose their adjudicators. Central to this is the notion of party autonomy. Just as the parties enjoy many of the benefits of party autonomy, so too must they accept the consequences of the choices they have made. The courts do not and must not interfere in the merits of an arbitral award and, in the process, bail out parties who have made choices that they might come to regret, or offer them a second chance to canvass the merits of their respective cases. This important proscription is reflected in the policy of minimal curial intervention in arbitral proceedings, a mainstay of the Model Law⁴⁹.

On the other hand, there are also sound reasons for allowing some form of limited substantive review; for example, in cases of extreme misapplication of the law or where the arbitrator completely rewrites the applicable legal principles. It is hard to imagine that the parties consented to such a situation. Redfern and Hunter explains that there are “obvious risks” in having a legal system that leaves arbitral awards entirely free from judicial review, including the risk of inconsistent decisions and that the tribunal may not do its work as competently as it should unless subject to scrutiny⁵⁰. In his seminal text on international arbitration, Gary Born advocates for some limited right of substantive judicial review where the tribunal departed entirely from the parties’ agreement and applicable law, and instead arrogate to their own substantive preferences for the disposition of the parties’ rights⁵¹. As Born explains, except where parties have expressly waived any judicial review or otherwise agreed, “this is not what commercial parties bargain for nor what developed legal regimes should provide”⁵².

These policy-based rationales can be debated. However, from a practical perspective, a party facing what it believes to be an unfair decision will look to challenge that decision and fit it into the existing framework. That is exactly what continues to happen even though the grounds for challenge do not purport to allow merits-based issues.

Two primary grounds have been used by parties seeking to raise substantive arguments: (1) excess of jurisdiction; and (2) violation of public policy.

Merits-based arguments characterised as an excess of jurisdiction

Courts in numerous jurisdictions have held that substantive mistakes regarding law or facts are not excesses of authority, even where there are very serious errors⁵³. Despite this, parties will often argue that the arbitrator exceeded their jurisdiction in rendering a decision that is not compliant with the applicable law of the contract⁵⁴.

There is a fine line between the failure to apply the applicable law of the contract and the erroneous application of that law. The former is a jurisdictional issue and the latter is not. As explained by Lord Denning, “the distinction between an error which entails absence of jurisdiction—and an error made within jurisdiction—is very fine. So fine indeed that it is rapidly being eroded”⁵⁵.

In some situations, that line is easier to draw; for example, where the arbitrator applies German law instead of English law, the latter being the law of the contract, and makes no reference to English law. However, in most cases, it is not; for example, where the arbitrator purports to identify the correct law and then introduces legal principles previously unknown to that law. Whether that is a jurisdictional issue must be analysed on the facts of each case. Many courts have voiced serious doubt that such issues amount to a failure to apply the applicable law⁵⁶. However, some courts have indicated a willingness to get involved when an arbitrator has intentionally misapplied the law to get to a result that would otherwise not be permitted, as in the following examples:

• The Québec Court of Appeal has stated:

Intentionally inaccurate interpretation is without question an excess of jurisdiction, as is interpretation devoid of any reasonable foundation. Hence, an arbitrator cannot pretend to determine the true intentions of the parties while, as a matter of fact, modifying their rights by adding to or removing from the agreement obligations which are the result of the meeting of the parties’ minds⁵⁷.

• In England, the Commercial Court held that for a challenge to the application of the law to succeed, “a conscious disregard of the provisions of the chosen law is a necessary but not sufficient requirement”⁵⁸.
• In the United States, some courts have found an excess of jurisdiction where there is a “manifest disregard of the law”. This requires more than a serious error of law: it requires the arbitrator to be aware of the law and deliberately choose to disregard it⁵⁹. However, the application of this doctrine is controversial. In Hall v. Mattell, the US Supreme Court expressed serious doubts about the viability of this doctrine. Following this, US lower courts have reached divergent conclusions about the continued vitality of this doctrine⁶⁰.
• In ICSID annulment cases, ad hoc committees agree that a tribunal’s complete failure to apply the proper law could constitute a manifest excess of powers. However, they have taken different approaches as to whether an error in the application of the proper law may effectively amount to a non-application of that law: “Some ad hoc Committees have held that gross or egregious misapplication or misinterpretation of the law may lead to annulment, while others have found that such an approach is too close to an appeal”⁶¹.

This topic, and these cases, are not without controversy. However, the ambiguity in the distinction between a failure to apply the law (which is reviewable) and misapplication of the law (which is not) means that these arguments cannot always be dismissed out of hand. As a result, we expect that parties faced with what they perceive to be an unfair or substantively wrong decision will continue to use the excess of jurisdiction ground as a means of challenging the substance of an arbitral decision.

Merits-based arguments as an issue of public policy

An arbitral award may be set aside, or not recognised and enforced, if it violates fundamental public policies of the domestic jurisdiction in which recognition is sought. This ground is frequently invoked as a basis for annulling arbitral awards.

The public policy ground has been narrowly construed. Courts have found that it should only be applied if (1) a fundamental principle of law, morality or justice was violated; (2) the award fundamentally offended the most basic and explicit principles of justice and fairness, or showed intolerable ignorance or corruption on the part of the tribunal; or (3) the award was in conflict with a principle concerned with the very foundations of public and economic life⁶². The ground is applicable in cases of corruption, bribery, fraud and illegal contracts⁶³.

Public policy is not applied to correct “wrong” decisions. However, some courts have recognised that public policy can apply when a decision violates or seriously misapplies a fundamental rule of mandatory law⁶⁴. For example, in September 2022, a German court held that a misapplication of competition law would be a violation of public policy, and this justified an unlimited factual and legal review of the merits of this issue⁶⁵. In contrast, other courts have held that the court’s role is more limited, and only clear and serious misapplications of the mandatory law will result in annulment⁶⁶.

Therefore, as a general matter, trying to raise merits-based issues under this ground will not be successful. However, given the possibility for interference for violations of mandatory laws, the possibility for some form of substantive review is not beyond question. Despite the narrow interpretation of the public policy ground, we expect to continue to see parties use this ground as a means to challenge what they believe is an unjust and intolerably ignorant decision.