This is an appeal by the defendants, by permission of the judge, from an order of Morison J, sitting in the Commercial Court on 15^th November 2002, whereby he remitted to arbitrators for reconsideration two of the issues in their award sentence dated 25^th January 2002 pursuant to section 68 of the Arbitration Act 1996 (“the 1996 Act”) as having been made in excess of the powers given to them. These issues were the currency of the award (and in particular paragraphs 13.17 and 14.4 of the award) and the award of interest (and in particular paragraphs 13.15 and 14.1 of the award). In their reconsideration of their award the arbitrators were directed that the currency or currencies of the award were a matter of the substantive law of the dispute, and were to be decided by reference to the law of the Kingdom of Lesotho (being the law governing the contract) and moreover that the currency or currencies of the award were to be decided in accordance with the terms of the contract. The arbitrators were also directed, in relation to their award of interest, that such an award was a matter of the substantive law of the dispute, and that the award of interest was similarly to be decided by reference to the law of the Kingdom of Lesotho.

The claimants are the Lesotho Highlands Development Authority (“LHDA”), and the dispute arose out of certain works which the seven defendant companies (who were collectively known as the Highlands Water Venture (“HWV”)) performed for LHDA in relation to the construction of the Katse Dam in Lesotho. Of the defendant companies, two came from the United Kingdom, two are South African and the other three came from Italy, Germany and France respectively. The contract works started on 1^st February 1991 and on 26^th February 1998 a Taking Over Certificate was issued in respect of the whole of the works.

The project was successfully completed on time. In 1997 a dispute arose in respect of a claim by HWV for extra labour costs, and they gave notice of their intention to submit this dispute to arbitration. Seven further claims for increased costs were later advanced. In due course the arbitrators made an award in favour of the defendants in relation to their original claim and three of their later claims: they dismissed the other four. Of the successful claims, Claims 12 and 37 were claims for the reimbursement of the increased costs of vehicle hire in Lesotho and the increased cost of local labour. Claims 53/66 and 62 were for new or adjusted prices or rates to be applied to sums due under the contract.

The problem that has arisen, in a nutshell, is that the arbitrators regarded themselves as free to choose the currencies in which their award should be paid and the basis on which and the rate at which LHDA should pay interest. LHDA maintain that both these matters were provided for in the parties’ contract or in the law applicable to the contract, and that the arbitrators exceeded their powers in departing from the contract in the way they did. The judge upheld LHDA’s contentions and held that he was entitled to exercise his powers under section 68 of the 1996 Act to remit these issues for reconsideration. The main issue that arises on this appeal is whether the judge had any power to take this course. The parties had agreed that the arbitrators’ award should be final. There was therefore no right of access for either party to the court on a point of law under section 69 of the 1996 Act.

In order to resolve this appeal it is necessary first to set out the relevant terms of the contract, the relevant provisions of the Rules of the International Chamber of Commerce (“the ICC Rules”) and the terms of reference for the arbitrators that were drawn up under those rules, and the relevant provisions of the 1996 Act.

The contract was an appropriately amended form of the conditions of contract for works of engineering construction published by the Federation Internationale des Ingenieurs-Conseils (Fourth Edition 1987 reprinted 1988 with editorial amendments). Clause 5, which was concerned with the language and law of the contract, provided by Clause 5(b) that the law should be that of the law in force in the Kingdom of Lesotho. Other relevant clauses were:

As a supplement to the Tender the parties agreed what were described as currency requirements. In short they provided that in relation to each contractual payment 58.35% would be payable in Maloti (the unit of currency in Lesotho) or South African rand, 6.96% in German deutschmarks, 13.38% in French francs, 10.97% in Italian lira and 10.34% in pounds sterling. The “Clause 72.1 Exchange Rates” were to be parity for the rand, 0.6571 for the deutschmarks, 2.2206 for the franc, 484.8643 for the lira, and 0.2355 for the pound.

In addition the parties agreed that for the two local currencies the rate of interest applicable to sums due on unpaid interim certificates was to be 1% over prime overdraft rate charged by First National Bank of South Africa. For the other currencies it was to be 2% in excess of the commercial interest reference rate applicable on the due date to the relevant currency.

Clause 67.3 of the contract contained the arbitration clause. So far as is now relevant, any arbitration was to be conducted by three arbitrators under the ICC Rules, and the law to be applied by the arbitrators to the merits of the dispute was to be the law of Lesotho. The award of the arbitrators was to be final and binding between the parties.

By article 18(1)(g) of the ICC Rules the arbitral tribunal was to draw up, on the basis of documents or in the presence of the parties and in the light of their most recent submissions, a document containing their terms of reference which was to include, among other things, particulars of the applicable procedural rules. Article 28(b) for its part provided that:

The arbitral tribunal in due course drew up and signed their terms of reference pursuant to Article 18(1)(g), to which the parties agreed. For present purposes it is necessary only to refer to paragraphs 6.4 and 6.5, 7.1 and 7.2, and 8.1 and 8.3 of this document. Paragraph 6.4 set out the parties’ contractual arbitration clause in full. It was prefaced by the words:

The other clauses I have mentioned provide:

Since the arbitration was being conducted in London, Part I of the 1996 Act applied: see section 2 of that Act. Section 4 and Schedule 1 contain the familiar provision for mandatory and non-mandatory provisions of the Act. Section 68, in particular, is a mandatory provision, which is to “have effect notwithstanding any agreement to the contrary” (section 4(1)). The non-mandatory provisions of Part I, on the other hand, allow the parties to make their own arrangements by agreement but provide rules which apply in the absence of such agreement (section 4(2)). Section 4(5) provides that:

Sections 48 (Remedies) and 49 (Interest) are non-mandatory, as is made clear in sub-section (1) of each section. Section 48(2) and (4) provide:

Sections 49(2), (3) and (6) provide:

Finally, section 68(1) and (2) provide, so far as is material:

It is convenient to adopt the judge’s description (in paras 19-22 of his judgment) of the relevant features of the arbitrators’ award:

After summarising the submissions of the parties, the judge set out his decision in paragraph 25 of his judgment, which contained ten sub-paragraphs. Neither side has disputed in this appeal his conclusion that section 67 of the 1996 Act has no relevance in this case. This must either be a section 68 case or the application must fail.

The judge observed that the tribunal had approached the currency and interest issues in a manner different from the way that either party had presented the case. He made the mild comment that it might have been more helpful if the method they were minded to adopt had been put to the parties for their comments, while acknowledging that HWV, for their part, had invited the tribunal to exercise its powers under sections 48 and 49 of the Act. He went on to observe that the parties’ oral and written submissions to the tribunal were not as helpful as they might have been. He said that it would appear from their reasons that they regarded both the currency and interest issues as matters of procedural rather than substantive law. He concluded this part of his judgment by saying (at para 27(5)):

He went on to hold that the tribunal’s error amounted to an excess of power (see section 68(2)(b) of the 1996 Act). For the reasons he had given, he did not think the tribunal had the power to make an award in currencies other than those stipulated for in the contract. By purporting to exercise a discretion which they wrongly believed was conferred on them by the Act they were asserting a power which they did not possess. He therefore remitted the matter of the currency of the Award back to the tribunal so that they might produce an Award which accorded with the contractual provisions.

The judge found the question of interest less clear, in the sense that there was still a debate as to whether interest as part of damages was a matter determined by the applicable law or by the lex fori (as the Tribunal thought). He found the answer in the fact that the rate of contractual interest had been agreed between the parties, and the tribunal was acting as though they were performing the engineer’s function under the contract. It appeared to be the case that by the law of Lesotho interest was only payable when LHDA could be said to be in culpable default, and in any event the amount of the interest could not exceed the amount of the principal.

If he was wrong about this, he noted that the right to claim interest by way of damages in a tort case was not a matter of procedure in a private international law sense. It was an issue of tort and thus governed by the appropriate substantive law. He could see no good reason why, if the issue of contract was a matter for the applicable law, it should cease to be so where the claim was for interest damages.

During the course of the hearing in this court Mr Glick QC, who again appeared for HWV, abandoned reliance on the words “Subject to these Terms of Reference” (see para 11 above). These words clearly refer to the procedural changes set out in paragraphs 6.5 and 7.1 of the terms of reference (see para 12 above) and nothing more. He relied strongly, however, on the argument that sections 48(4) and section 49(3) of the 1996 Act (see paras 14 and 15 above) gave the arbitrators an unfettered power to order the payment of a sum of money in any currency or to make what they considered to be an appropriate award of interest. If in the exercise of those powers they got the law wrong (if, for instance, they failed to apply the applicable law of the contract when they should have done) they might have made an error of law challengeable under section 69 of the Act (if available) but they would not have exceeded their powers within the meaning of section 68.

He contrasted the present case with a case in which the parties had agreed to disapply section 48 and 49 and to direct the tribunal to award sums in the currency identified in the contract, convertible at the rate of exchange identified in the contract, and to award interest according to the applicable law of the contract. In such a case the tribunal would indeed be acting in excess of their powers if they ignored these directions. Similarly, if the terms of reference had empowered the tribunal to award interest at an appropriate rate from the date on which they considered sums were payable to HWV and they had awarded interest from some earlier date, the tribunal would have exceeded their powers in this regard. In this case, however, the tribunal had acted within their powers even if, which he did not concede, they had misapplied the law.

Longstanding principles of English procedural law were restated by the House of Lords in In re United Railways of Havana and Regla Warehouses Ltd[1961] AC 1007. A sum was held to be due from that company in US dollars under a lease and another agreement which were both governed by the law of Pennsylvania. The House of Lords held that the sum provable in the liquidation of the company was to be converted at the rates of exchange prevailing at the respective dates when the several sums arising by the company to the creditor fell due and payable. In other words, although the substantive debt was a US dollar debt, English procedural law dictated (a) that it must be converted into English pounds for the purposes of converting it into a debt provable in an English liquidation and (b) the date at which each debt should be converted into English currency.

Jugoslavenska Oceanske Plovidba v Castle Investment Co Inc [1974] QB 292 showed a shift from this position, so far as arbitrators were concerned. London arbitrators had made an award for unpaid hire in US dollars, being the currency of the hire contract. An issue arose whether an English court could give leave under section 26 of the Arbitration Act 1950 to enforce the award in the same manner as a judgment to the same effect. This court held that English arbitrators had jurisdiction to make their awards in a foreign currency where that currency was the currency of the contract, and that such an award could be enforced with the leave of the court by converting the award into sterling at the rate of exchange ruling at the date of the award. Lord Denning MR said at pp 298-9:

Roskill LJ, for his part, said at p 305:

It followed that in most contract cases it would be relatively easy for arbitrators to detect the currency of account and the currency of payment and to make their award in that currency, being the proper currency of the parties’ contract. In difficult cases the arbitrators might have to use more imagination to arrive at a just result. Roskill LJ, for his part, suggested a route which arbitrators might take as a matter of discretion so long as they were not prevented from going down that route by the parties’ agreement. English procedural law provided the rules to apply if an award made in a foreign currency had to be converted into sterling for the purpose of enforcement in England.

In Miliangos v George Frank (Textiles) Ltd[1976] AC 443 the House of Lords declined to follow the United Railways of Havana decision so far as judgments in court proceedings were concerned. The instability of the pound sterling in international markets had brought about this change of policy. Lord Wilberforce distinguished clearly between the substance of the debtor’s obligations and the effect of English procedural law when a debt in a foreign currency came to be enforced in England. Two short passages from his speech make the distinction clear:

It follows that where there is a contract which identifies the currency of account and the currency of payment and specifies the proportions of any debt due under the contract which must be apportioned in different currencies to the different members of an international consortium, section 48(4) of the 1996 Act merely repeats in codified form what had already been established by this court in the Jugoslavenska Oceanska case, namely that English procedural law did not require London arbitrators to convert this substantive debt in a foreign currency into English currency for the purpose of making their award. The parties’ agreement was clear on the face of their contract, and the arbitrators, standing in the shoes of the engineer, were bound to give effect to it. Section 48(4) does not create a freestanding power to choose whatever currency arbitrators might think appropriate when the terms of a contract are clear.

Mr Glick drew our attention to a provision of the arbitration clause which gave the arbitrators, by agreement, powers which the engineer did not possess:

This submission formed part of a more general submission to the effect that the judge was wrong to find that the function of the arbitrators was to carry out the function previously held by the Engineer, which was to ascertain what sums were due and owing under the contract. So far as that submission is concerned, the arbitrators had to interpret the contract in performing their function, even if this provision gave them an additional power which was not open to the Engineer.

As to the terms of the provision itself, it is understandable that the parties should have wished to alter the general contractual provisions about currency apportionment in order to cater for a case in which one of the contractors had to buy in goods or services from an overseas country to remedy a problem that had arisen, but there is no suggestion that this provision had any relevance to the arbitration award with which we are concerned. It appears to represent an endeavour to make express provision for the type of situation which the House of Lords had to resolve in the absence of any such provision in the case of the Folias (see The Despina R[1979] AC 685, 697-699).

In my judgment the arbitrators ought therefore to have interpreted the parties’ contract in accordance with the applicable law (and there was no suggestion that the law of the Kingdom of Lesotho was in any material respect different from English law in this regard) and made an award in the currencies which the parties had agreed upon. Section 48(4) of the 1996 Act merely restated what must be taken (in the absence of evidence to the contrary) to be the effect of the substantive law of the Kingdom of Lesotho which the arbitrators were bound to apply. I therefore agree with the judge that the arbitrators exceeded their powers when they thought that section 48(4) of the 1996 Act gave them any power to depart from what the parties had agreed. I would therefore dismiss the appeal on the currency point.

The common law and the civil law followed different paths in relation to awards of interest. So far as the common law is concerned, in Page v Newman (1829) 9 B&C 378, 381 Lord Tenterden CJ referred to:

In London, Chatham and Dover Railway Co v South Eastern Railway Co[1893] AC 429 and in President of India v La Pintada Compagnia Navigacia SA (“La Pintada”) [1985] AC 104 the House of Lords made it clear that it had no power to alter this common law rule. Parliament, however, intervened from time to time to mitigate the unfairness of the rule, most notably in section 28 of the Civil Procedure Act 1833 (Lord Tenterden’s Act) and in section 3 of the Law Reform (Miscellaneous Provisions) Act 1934.

The civil law viewed the matter from a different standpoint. If money was wrongfully withheld, then the courts had power to award interest during the period of delay between the time the money was legally and ascertainably due and the time when the court ordered that it should be paid. This was known as the ex mora rule. As Lord Denning MR observed in Jefford v Gee [1970] 2 QB 130, 144, the courts of Scotland followed the civil law. He gave examples of the way in which they applied the ex mora rule when calculating the interest payable in a judgment.

The courts of the Kingdom of Lesotho also apply the civil law rule. The law of that kingdom is derived from Roman-Dutch law. In addition to the ex mora rule, there is a further rule there called the duplum rule. This provides that the total award of interest cannot exceed the amount on which interest is payable.

It is unnecessary for the purposes of this judgment to delve too deeply into the history relating to awards of interest by English arbitrators. Since 1950 the situation has been governed by the decision of this court in Chandris v Isbrandtsen-Moller Co Inc[1951] KB 240. In La Pintada Lord Brandon summarised the effect of that decision in these words:

In 1982 express reference was made for the first time in an Act of Parliament in relation to English arbitrators’ powers to award interest as part of their award.

The Arbitration Act 1950 (“the 1950 Act”), for instance, had made no reference to interest other than interest from the date of the award (see section 20). The Arbitration Act 1979 was similarly silent. Part IV of Schedule 1 of the Administration of Justice Act 1982 (“the 1982 Act”), however, inserted a new section 19A into the 1950 Act. This gave an arbitrator or umpire an express power, unless a contrary intention was expressed, to award simple interest in the circumstances set out in section 19A(1). Section 19A(2), however, preserved arbitrators’ existing powers to award interest:

In the Trade Fortitude [1986] 2 Lloyd’s Rep 209, 213RHC Dillon LJ observed that the purpose of section 19A was to make explicit powers to award interest which had previously rested on implication, as Lord Brandon had pointed out in La Pintada (see the citation in para 36 above). In other words, when Parliament enlarged the courts’ powers to award interest by section 15 of the 1982 Act (which inserted a new section 35A into the Supreme Court Act 1981) English arbitrators would have had the same power by implication, even if the new section 19A had never been introduced into the 1950 Act. It is noteworthy that for the same reason in its 1978 Report on Interest (Law Com No 88) the Law Commission considered (at para 175) that there was no need to make special provision for arbitrators when it was recommending changes to the statutory provisions as to interest, some of which found their way into the 1982 Act.

In the present case we are concerned with a contract governed by the law of the Kingdom of Lesotho, a jurisdiction in which there was no need to introduce statutory add-ons, in the form of discretionary powers, to award interest, because interest was payable ex mora from the time when a debt was due and payable (subject to the duplum rule). In their contract the parties made express provision for the rate at which interest was payable on unpaid interim certificates (see para 8 above). They made no similar express provision in relation to the rate of interest payable on final certificates.

Counsel drew our attention to an ongoing difference of opinion between the editors of Dicey & Morris on the one hand and two commercial judges in unreported decisions at first instance on the other on the question whether awards of interest are governed by the lex fori or the lex causae: for this difference of opinion see Dicey & Morris on the Conflict of Laws (13^th Edition), Vol 2, pp 1459-1461, and Second Cumulative Supplement to the 13^th Edition, paras 33-385. In Midland International Trade Services v Sudairy (11^th April 1990) Hobhouse J held that he had power to order the payment of interest on a judgment of a court in Saudi Arabia even though a Saudi court would have applied Sharia law. That law follows the teaching in the Koran forbidding the payment or receipt of interest. In Kuwait Oil Tanker Co SAK v Al Bader (16^th November 1998) Moore-Bick J found Hobhouse J’s reasons for regarding the court’s power to award interest under section 35A as procedural to be compelling, and he therefore decided to award interest on an award of damages for conspiracy whatever might be the position under Kuwaiti law (the lex causae). On the appeal in that case this court did not find it necessary to resolve the difference of opinion to which I have referred (see the judgment of Nourse LJ reported in [2000] 2 All ER Comm 271 at paras 206-208).

On the present occasion it is unnecessary for us to resolve that dispute. In the Sudairy case Hobhouse J recognised that interest payable under a contract was a question of substantive law. In the Al Bader case Moore-Bick J said in terms that in the case of obligations he could see the force of the argument that the existence of a right to recover interest was governed by the proper law of the contract. And by Article 10(1)(c) of the Rome Convention, implemented in this country by Contracts (Applicable Law) Act 1990, the consequences of a breach of contract, which must surely include questions relating to the entitlement to interest if sums are wrongfully withheld by a party in breach, are to be determined by the applicable law of the contract.

Mr Glick sought to avoid this conclusion by the following route. He said that the parties had agreed to submit their dispute to an arbitration in London governed by the Arbitration Act 1996 so that English law was the lex fori. Section 49(3) of the 1996 Act gives the arbitrators complete power to award interest as they think fit (see para 15 above), and a general choice of the law of the substance of the dispute does not constitute an agreement within the meaning of section 4 of that Act (see para 13 above) to choose a law other than the law of England and Wales or Northern Ireland as the applicable law in respect of the matter provided for by the non-mandatory provision in section 49(3).

The trouble with this argument is that it is because English substantive law was different from the substantive law of a civil law country that Parliament had to give English courts and arbitrators the power as a matter of procedure to make awards of interest in the exercise of their discretion on sums which were legally due and payable according to the principles, if any, set out in the statutes which gave them their procedural power. This was the reason why Hobhouse J decided the Sudairy case in the way he did. He said:

Where the law of a different jurisdiction, like the law of the Kingdom of Lesotho, confers a substantive right to interest ex mora, there is no room for any discretionary procedural power. The unpaid party to a contract is entitled as of substantive right to interest from the time when payment is contractually due. There was no need for the parties to agree the express exclusion of section 49(3) of the 1996 Act, because of the saving provision in section 49(6) (see para 40 above):

By Article 7.2 of their Terms of Reference (see para 12 above) the arbitrators were bound to apply the law of the Kingdom of Lesotho to the substance of the dispute. That law was the law of the contract (see para 6 above), and by that law HWV were entitled as of substantive right to interest on sums which they ought to have been paid, subject to the “duplum” cap. Section 49(6) of the 1996 Act made provision for the power of the tribunal to award interest in these circumstances as a matter of substantive right. The arbitrators therefore exceeded their powers when they had recourse to what would have been their discretionary powers in section 49(3) to resolve a matter to which they should have applied the substantive law of the contract. The opening words of Article 10 (1)(c) of the Rome Convention, which refer to the limits of the powers conferred on the court by its procedural law, plainly have nothing to do with the situation with which we are concerned.

So far as the rate of interest is concerned, in the absence of express agreement this is a matter for the arbitrators to decide as a matter of the lex fori (see Dicey & Morris (13^th Edition) para 33-387: I would adopt the editors’ reasoning), although they will no doubt be slow to depart from the rates of interest the parties agreed to be appropriate in relation to the non-payment of interim certificates (see para 8 above).

I would therefore dismiss the appeal on the interest point as well.

I agree.

I also agree.