Substantive Grounds For Challenge

• Published date: 13 June 2023
• Subject Matter: Litigation, Mediation & Arbitration, Arbitration & Dispute Resolution, Trials & Appeals & Compensation
• Law Firm: Torys LLP
• Author: Mr John Terry, Emily Sherkey, T. Ryan Lax and Chris Kinnear Hunter

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.

Jurisdiction	Description of appeal right
Canada	With respect to international arbitral awards, there is no right of appeal from an international arbitral award6.; Each province has legislation regulating domestic commercial arbitrations. Under all the domestic acts, unless the arbitration agreement so provides, there is no appeal on a question of fact or mixed fact and law7. In British Colombia, there is no appeal whatsoever on questions of fact or mixed fact and law8. Where the arbitration agreement is silent on appeal rights, in most provinces9, a party may appeal on a question of law with leave of the court. The interpretation of a contract is considered a question of mixed fact and law10. Therefore, appeals in issues regarding contract interpretation will be in the rare circumstances where there is an extricable error of law. Where there is such an extricable error, to obtain leave of the court, the party must show that the issue is sufficiently important and will significantly affect the parties' rights11.
England, Wales and Northern Ireland	The Arbitration Act 1996 governs where the seat of the arbitration is in England and Wales or Northern Ireland, regardless of whether it is a domestic or international arbitration12.; A party may appeal to the court on a question of law on agreement or with leave of the court13. There is no appeal of questions of fact or mixed fact and law, and the right of appeal can be excluded by contract. An important restriction is that this appeal right only exists where the law applied by the arbitrator is the law of England and Wales14. English courts will not entertain appeals in relation to foreign law, ruling out the possibility of an appeal for many international arbitrations.; In practice, few appeals get over the leave requirement, which was designed to catch all but the most meritorious appeals15. Leave shall be granted only if the question will substantially affect the rights of the parties, and the decision on the question is obviously wrong or the question is one of general public importance and...