A v B

This is an arbitration application dated 18^th December 2017 brought by A, an airline, against B which operates as an independent technical solution provider for airlines such as the Claimant.

The parties entered into an Agreement for the Performance of Engine Maintenance Services dated

A’s application is supported by the written evidence of its solicitor for the application (not the arbitration), Mr Wescott. His statements relevant to the application are in the Application Bundle

I have read the statements and the exhibits suggested as pre-reading and the parties’ respective Skeletons and all the documents shown to me during the oral hearing of the application on 28^th June. I have taken the contents of all evidence and documents referred to into account, as I have the parties’ respective written and oral submissions, in reaching my decision. I am grateful to both parties’ Counsel, Mr Vineall QC for A and Mr Harrison for B, for their helpful and succinct submissions.

The parties have agreed that the following issues need to be determined on this application:

The relevant clauses of the Agreement are as follows:

“9.9.

A shall report any discrepancies or disputes in writing to B within thirty (30) days from the date of receipt of the relevant invoice by fax or email. In case an invoice is only disputed in parts, A shall pay the undisputed part of the respective invoice within the period stated in Clause 9.6. Any invoice or part thereof not disputed within thirty (30) days shall be deemed accepted by A and payment shall be made as specified in this Agreement. The Parties shall negotiate in good faith to resolve invoice disputes within thirty (30) days. If such dispute is resolved in favour of B, A shall pay the amount agreed including daily interest at the rate of nine per cent (9%) per annum from the date the payment would have been due.”

“9.11.

Except as provided for in Clause 9.9 or in the case of a credit memo, A is not entitled to withhold, offset or delay any payment or invoice due or issued under this Agreement in connection with any alleged or actual defence, counterclaim or other right against B.”

Clause 12.2 headed “Time Limitation” provides:

“B is only liable to rectify defects as per Clause 12.1 if such defect or failure occurs within seven thousand (7000) operating hours or thirty (30) months after the date of the release note whichever occurs first and which are reported in writing by A to B as soon as practical and in any event within thirty (30) Business Days after A becomes aware of it.”

Clause 19.1 under the heading “Entire Agreement” provides:

“This Agreement (including the Annexes attached hereto, which are incorporated herein by reference) sets forth all of the covenants, promises, agreements, warranties, representations, conditions and other standards between the Parties hereto with respect to the subject matter hereof constitutes and contains the complete, final and exclusive understanding and agreement of the Parties with

respect to the subject matter hereof; and cancels, supersedes and terminates all prior agreements and understandings between the Parties with respect to the subject matter hereof. There are no covenants, promises, agreements, warranties, representations, conditions or undertakings, whether oral or written, between the Parties other than are set forth herein. No subsequent alteration, amendment, change or addition to this Agreement shall be binding upon the Parties hereto unless reduced to writing and signed by the respective authorised officers of the Parties.”

Clause 20.1 provides inter alia that:

“All contractual notices, correspondence and documents given under this Agreement shall be given by courier or registered mail from A addressed to B at

B, Account Management Engines [B’s address] and a copy to: B, Attention General Counsel, [B’s address].”

In addition to the Agreement itself, a side letter with regard to Representatives and Field Assistance was executed by the Parties on the same day as the Agreement [Bundle 3, Pages 602 and 603].

Clauses 9.9, 12.2 and to a lesser extent 19. 1 are central to the issues on this application.

On 27^th May 2015, disputes having arisen between the parties, B made a Request for Arbitration pursuant to Clause 21.2 of the Agreement.

On 3^rd December 2015 the procedural timetable was agreed [Bundle 3, Page 608]. That provided, so far as relevant to this application, for the service of witness evidence with each round of pleadings culminating in A’s Reply to Defence to Counterclaim. Specifically it provided that:

“The Respondent [i.e. A] shall provide its Reply to the Defence to the Counterclaim with witness evidence and documents which are limited to responding to the Defence to Counterclaim and upon which it intends to rely in respect of the Defence to Counterclaim, by 20 June 2016.”

(In fact, the dates were extended and A’s Reply to the Defence to Counterclaim was not served until 11^th August 2016. When it was served, it had no witness statements attached to it.) On 12^th January 2016 [Bundle 2, Page 304] agreed terms of Reference were reached which provided that:

“Subject to the provisions of the ICC Rules, the rules of procedure to be followed shall be as determined by the Tribunal in its discretion, after consultation with the parties. In determining such rules, the parties have agreed that the IBA Rules on the Taking of Evidence in International Arbitration (2010) shall serve as guidelines for the Tribunal.”

Although there was some argument before me both in the parties’ respective written arguments and orally as to the effect of the IBA Rules and particularly the requirements for the contents of the witness statements, it did not seem to me to take the matter any further not least because the events which have given rise to this application commenced when the Reply to Defence to Counterclaim was served by A without any witness statement being served with it so there was no issue of compliance with the Guidelines in terms of the contents of a statement. Further, in my view the Guidelines do not add materially to the Terms of Reference.

On 1^st February 2016 B submitted its Statement of Claim, which included two witness statements of fact and an expert report [Bundle 2, Page 307]. It is accepted that Clause 9.9 was expressly referred to in the Statement of Claim as follows under the heading “A’s Claims are Forfeited”:

“86.

Pursuant to Clause 9.9 of the Agreement A shall report any discrepancies or disputes in writing to B within thirty (30) days from the date of receipt of the relevant invoice by fax or e-mail. Any invoice or part thereof not disputed within thirty (30) days shall be deemed accepted by A and payment shall be made as specified in this Agreement.

87.

Before this Arbitration was initiated A has never specifically disputed the quality of the work and services performed by B. A merely made some general remarks about purported deficient services without every specifying which service it meant. Let alone did it refer to a specific invoice.”

Paragraph 101 summarised this defence:

“At any rate, A has forfeited its right to notify defects (Clause 9.9 of the Agreement). B’s invoices are deemed accepted and payable in accordance with the Agreement.”

On 22^nd April 2016 A submitted its Defence and Counterclaim with three witness statements, one from Mr X whose evidence at the oral hearings is the subject of this application. The quality and quantity of the witness statements have been criticised by B as not complying with the IBA Guidelines and more importantly perhaps as not providing an evidential basis for the defence to the claim and in support of the Counterclaims it is said by A were affected by the exclusionary ruling. I have already dealt with the IBA point at paragraph 10 above. The Tribunal did not exclude or refuse to consider Mr X’s witness statement; simply his oral evidence. The witness statement appears at Bundle 3, Pages 530 to 533. It is somewhat lacking in detail but does seek to verify the facts and matters set out in the Defence and Counterclaim. Contractual variation was not expressly pleaded in the Defence and Counterclaim although it was argued at the oral hearings and thereafter.

On 29^th April 2016 the Tribunal issued a further modified timetable for the arbitration.

On 15^th July 2016 B submitted its Reply and Defence to Counterclaim and a supplementary expert’s report [Bundle 3, Page 435 and following].

On 21^st July 2016 the Tribunal issued an Amended Procedural Order [Bundle 3, Pages 617 to 619].

On 11^th August 2016 A served its Reply to Defence to Counterclaim [Bundle 3, Page 499 and following] which, as I have already noted, had no further witness statements attached to it. At the hearing on 28^th June 2018, no explanation was proffered for the lack of a further witness statement from Mr X.

Oral hearings were held in London on 30^th and 31^st August 2016. The Court has been shown transcripts of what occurred at the hearing in relation to the issues of admissibility of evidence given in examination-in-chief by Mr X and it is appropriate to set out the transcript at some length. (The evidence begins at Bundle 4, Page 736, but references will be given to the internal pages of the transcript rather than the bundle pages, there being four pages of transcript on each bundle page.)

Further at Line 19:

“Question: Okay. When was B notified of this issue?

Answer:	Okay, so the moment we found that there is a missing clamp, our power plant team, our engineering team, found out this engine was serviced at B and then further on, further development, we found that this was missing clamp from the B shop. On the same day, we informed B’s representative, Mr Z, verbally, via my team.
Question:	And why was Mr Z advised verbally?
Answer:	So he was co-located with us and this was the working relationship we had: the moment we noticed anything, we need something from B, we used to go to Mr Z and directly get involved and he used to get us answers also.
Question:	So this is how A normally notified B of issues with its workmanship?
Answer:	That’s right. This is the first level of notification.
Question:	Why no e-mail in this situation?
Answer:	So we had a good working relationship with Mr Z there and he used to take up our issues and later on he used to escalate through [inaudible].
Question:	When this particular engine was sent to B by A was it missing the clamp?
Answer:	Yes.
Question:	Are you aware that B contends that A should have tagged the engine to identify that the engine was missing the clamp when it was sent in for its shop visit?
Answer:	Yes, I am aware.
Question:	What is your response to that contention?
Answer:	So we have seen in the past that that is what has been notified by my team as well, that when you tag the engines, during the shipping process, the tag goes missing. In the process someone just puts them in the wrong places so it can be a misleading fact to the engine shop. So later on we developed a method of --in consultation with B, we used to not tag them and told them verbally, are removed.
Question:	Thank you. Let’s change gears and discuss turnaround time.”

In answer to the issue of turnaround time at Page 151, Line 15 Mr Naegeli again stated:

The position was noted in the Tribunal’s Final Award at Paragraph 137 [Bundle 2, Page 161] as follows:

“[Mr X] who had been the Respondent’s Vice-President - Engineering and Maintenance - since 18 March 2014, provides a statement dated 12 April 2016. He gave direct evidence which the Tribunal observed should have been included in a witness statement with the Respondent’s Reply to the Defence to Counterclaim. Counsel for the Claimant objected to this evidence and the Tribunal allowed the evidence to be adduced subject to the Tribunal’s ruling on its admissibility.”

It is of some significance in my judgment that the oral evidence of Mr X which was excluded related solely to issues arising out of A’s counterclaims and did not address the giving of any notice in respect of B’s invoice claim. It follows clearly, therefore, that no such evidence was excluded because it was not given and A’s evidence in answer to the invoice claims was that contained in the statements it had served with its Statements of Case.

Thereafter the parties exchanged voluminous written Closing Submissions. The objection to the admissibility of the oral evidence of Mr X was renewed and set out clearly and at length at Paragraphs 103 to 124 [Bundle 5, Pages 976 to 981]. At Paragraph 120 of the Submissions was an express request for the Tribunal to strike “the following statements made by Mr X from the record and not consider them as evidence: Transcript 2, Page 147/Line 9 to Page 151/Line 7, Bundle 5, Page 979 and in addition Transcript 2, Page 151/Line 8 to Page 158/Line 13, see Bundle 5, Page 980.” At paragraphs 123 and 124 of the closing argument, B identify the respects in which they claim that admission of Mr X’s oral evidence would be unfair to them. In his oral submissions Mr Vineall QC for A sought to characterise those paragraphs as “potential prejudice” but it seems to me that the paragraphs raise issues which at the very least required an answer from A at the hearing and in any event rather than being “potential prejudice” they amount absent an answer, to actual prejudice to B for the reasons they raised with the Tribunal. That objection was pursued in the oral closing submissions which were conducted by Skype in early December 2016. So at internal Pages 48 and 49, Line 25 and following [Bundle 4, Pages 810 to 811] an oral submission was made as follows:

“Accordingly, the testimony of the respondent’s witnesses has to be discounted to the extent they raised new allegations. This is all the more required, as Claimant had no possibility to cross-examine [the] Respondent’s witnesses on these new allegations that the respondent was not obliged to take into consideration.

A had, of course, the opportunity to respond to B’s written and oral objections to the admissibility

At Page 10 a slightly different tack was taken. That tack was continued at Line 2:

“What Mr X did was no different than what Mr V did. He elaborated only on

exhibits and facts that were part of A’s original pleading to which he had attested in his witness statement and further attested to at trial without objection.” No other challenge to the complaints raised by B was made by A.

I note that A do not rely on these points in this application.

In their Final Award the Tribunal dealt at Paragraphs 122 and following under the heading “Notice Period and Course of Dealings” with the issues raised in respect of Clauses 9.9 and 12.2 and the side letter. They set out the parties’ respective pleaded cases and then identified what occurred at the hearing and at Paragraph 137 set out the matters set out above including parts of the transcript.

At Paragraph 146 the Tribunal stated:

“In applying these principles to the issue of a variation by a course of dealing which arises in this arbitration the Tribunal has considered the entirety of both the documentary and oral evidence before it, in addition to the related submissions made by the Parties and finds that the evidence does not establish that there was on the balance of probabilities a variation in the obligations which are set out in Clauses 9.9, 12.2 and 19.01 of the Agreement and which relate to notification of disputes by the Respondent to the Claimant and to the alteration to the Agreement.”

At Paragraphs 154 to 157 the Tribunal found that the Claimant’s invoice claims were made out due to the operation of Clause 9.9 of the Agreement and the lack of a dispute of any specific invoices.

In respect of two of the Respondent’s counterclaims, the counterclaim in respect of the missing clamp to Engine ESN89420 which was in the sum of over US $1.5 million (although approximately US$189,000 of that claim is accepted to be excluded by Clause 12.3 of the Agreement) was dismissed at Paragraph 358:

“The Tribunal determines that the Respondent has not adduced evidence to support a finding that the Claimant was requested to install the clamp to the engine in the required manner, that is by way of notification by tagging, nor that it provided a notification of the defect to the Claimant in time and in writing as required by Clause 12.2 of the Agreement. Therefore the Tribunal finds that the Claimant is not in breach of contract and that the claim for the replacement thrust reverser cowl in the engine and the claim for lost revenue are both dismissed noting that the claim for lost revenue would have been excluded in any event under Clause 12.3 of the Agreement.”

As to another counterclaim, the classification of shop visits claimed in the sum of over US $1.3 million, the Tribunal found at Paragraph 461 [Bundle 2/Page 270]:

“that the Respondent did not raise any dispute in respect of Invoice No. M90211987 of 15 November 2013 within 30 days of receipt and did pay that invoice and that that the Respondent has not adduced evidence to establish that the shop visits were wrongly classified.”

A contends that the exclusion of Mr X’s oral evidence was a serious irregularity affecting A’s ability to defend a number of the invoice claims against it (invoices C 7 and 15-22, approximately a quarter of those claimed by value) and to pursue its counterclaims in respect of the missing engine clamp and the classification of shop visits.

The applicable law is not disputed. The statutory framework is set out in Section 68(1) and (2) of the Arbitration Act as follows:

“A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal the proceedings or the award…”

Section 68(2) provides:

“(2)

Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant:

(a)

failure by the tribunal to comply with Section 33 (general duty of tribunal) …

(c)

failure by the tribunal to conduct the proceedings in accordance with the procedure agreed by the parties;

(d)

failure by the tribunal to deal with all of the issues that were put to it.”

Section 33(1) of the Act provides:

“The tribunal shall:

(a)

act fairly and impartially as between the parties giving each party a reasonable opportunity of putting his case and dealing with that of his opponent; and

(b)

adopt procedures suitable to the circumstances of the particular case avoiding unnecessary delay or expense so as to provide a fair means of a resolution of the matters falling to be determined.

(2)

The tribunal shall comply with that general duty in conducting the arbitral proceedings and its decisions on matters of procedure and evidence and in the exercise of all other powers conferred on it.”

Section 68(3) concerns the relief which the Courts can grant to remedy procedural irregularities as follows:

“(3)

If there is shown to be serious irregularity affecting the tribunal, the proceedings or the award, the court may:

(a)

remit the award to the tribunal in whole or in part for reconsideration,

(b)

set the award aside in whole or in part, or

(c)

declare the award to be of no effect in whole or in part.

The court shall not exercise its powers to set aside or to declare an award to be of no effect in whole or in part unless it is satisfied that it would be inappropriate to remit the matters in question to the tribunal for reconsideration.”

It is submitted by Mr Vineall QC on behalf of A and accepted by Mr Harrison on behalf of B that the focus of Section 68 is firmly on the process adopted by the Tribunal, to which I would add and its effect on the Award.

Mr Harrison submits and Mr Vineall QC does not argue to the contrary that the authorities strongly favour a non-interventionist approach to arbitration awards. Indeed, both parties referred me to the statement of Lord Steyn in Lesotho Highlands Development Authority v Impregilo SpA [2006] AC 221 at para.27 citing Paragraph 280 of the report of the Departmental Advisory Committee on

As to whether an irregularity causes or will cause substantial injustice, I accept that the test is fact and context dependent. I also accept - and again it was not argued to the contrary - that the substantial injustice requirement will be satisfied if it is reasonably arguable that the outcome might have been favourable to the applicant if there had been no irregularity in the arbitral proceedings. I note Paragraph 90 of the Decision of Coleman J in Vee Networks Ltd v. Econet Wireless Special Ltd [2004] EWHC 2909:

“Where there has been an irregularity of procedure it is enough if it is shown that it caused the arbitrator to reach a conclusion unfavourable to the applicant which but for the irregularity it might well never have reached provided always that the opposite conclusion is at least reasonably arguable.”

In the TCC, Ramsey J in London Underground Ltd v. Citylink Telecommunications Ltd [2007] EWHC 1749 (TCC) stated at Paragraph 47:

“The test for a substantial injustice focuses on the issue of whether the arbitrator has come by inappropriate means to one conclusion whereas had appropriate means been adopted he might realistically have reached a conclusion favourable to the applicant. It does not require the court to try the issue so as to determine, based on the outcome, whether substantial injustice had been caused.”

It is accepted that a wrongful refusal to admit evidence can constitute serious irregularity, as to which I was referred to Arbitration Law (Service Issue No.78), Professor Robert Merkin QC at para. 20.17:

“It is settled … that a wrongful refusal to admit evidence can constitute serious irregularity.”

The core issue is whether the decision to exclude the evidence Mr X gave in examination-in-chief was a wrongful decision or an exercise in case management by experienced Arbitrators in accordance with their own procedural directions.

At Paragraph 68 of his written Submissions, Mr Vineall QC for A summarises his case as follows: “Standing back this is a case where the Tribunal has clearly exercised their discretion in the wrong way - simply barring evidence because it came later rather than addressing the discretion appropriately.”

I note that the criticism is of the exercise of a discretion and clearly where discretion is involved the Court must be alive to the wide latitude given to the Tribunal as to how it exercises its powers. It is not enough, as Mr Vineall QC property accepted during the hearing on 28^th June, for the Tribunal to have exercised its discretion in a “harsh” way. The decision must be effectively outside the bounds of what can be characterised as an exercise of discretion at all. (See in the same vein Lord Steyn in Lesotho and Lawrence Collins LJ in Bandwidth as quoted at Paragraph 29 above).

The complaint of irregularity proceeds on the basis that the objection to Mr X’s oral evidence as a whole should have been taken by B at the hearing in August but was not so taken. It is accepted that any failure to take an objection is not the Tribunal’s fault, but said that that failure cannot count against A.

I do not accept that wholesale objection to Mr X’s oral evidence was not made at the oral hearing. It seems to me on a fair reading of the transcript that the objection grows incrementally and that by the end of Mr X’s oral evidence the Tribunal had made it clear and A’s then Counsel understood that all issues of admissibility would be dealt with in closing submissions (see the transcript quoted at Paragraph 17 above and paragraph 137 of the Final Award).

Even if that is wrong, there was no irregularity of the process by the Tribunal at that stage, nor is one alleged.

In accordance with its ruling at the oral hearing and its general duty under Section 33 of the Arbitration Act 1996 the Tribunal gave both parties the opportunity to make submissions as to the admissibility of Mr X’s oral evidence and B took full advantage of that as noted at Paragraphs 20 and 21 above. In my judgment, there can be no criticism of the opportunity given to A to argue in favour of admitting Mr X’s oral evidence. The way in which A chose to so argue was of course a

In his oral submissions, Mr Vineall QC pointed out that in the exclusionary ruling at p 143 [Bundle

In any event, I do not accept that even if the balancing act carried out by the Tribunal did not (contrary to my views at paragraph 39 above) in terms address the question of prejudice that as a matter of law the Tribunal was bound to consider the issue of prejudice to one or both parties when determining whether and how to apply its own rulings as to the admissibility of evidence. The arbitration process is not the same as the litigation process and the process adopted in this arbitration was for the vast majority of evidence to be given in writing with a very short timetable for any oral evidence, particularly supplementary oral evidence. Whilst it may be the case that a Court would be obliged to consider and to note that it had considered the issue of prejudice in considering the admissibility of evidence, I have been shown no authority for the proposition that an arbitral tribunal is always obliged to consider and say it has considered prejudice. Nor does it seem to me that as a general proposition that can be correct.

Criticism was made of the Tribunal for their interpretation of Paragraph 8.3 of the amended Procedural Order (see Paragraph 15 above). I agree with Mr Harrison’s submissions that the ruling can only properly be construed as meaning that a party cannot seek to put in evidence which should have been in a witness statement but was not. In addition, the lack of a witness statement served with A’s Reply to Defence to Counterclaim is unexplained and itself would provide grounds for excluding Mr X’s oral evidence.

In my judgment, in light of the above, the Tribunal made a ruling that it was wholly entitled to make, having given both sides more than fair opportunities to address the issue of admissibility of/reliance upon Mr X’s oral evidence. It carried out a balancing exercise which, even if it were characterised as harsh - and I do not so characterise it myself - was clearly well within the bounds of its wide discretion.

I do not accept that the Tribunal failed to act in accordance with Section 33 or with its own procedure.

In addition, the oral evidence of Mr X clearly did not address the Clause 9.9 issue, so it cannot be an irregularity affecting the invoice claims even if, contrary to my view, it is an irregularity at all.

The issue of substantial injustice does not strictly arise, since I have found that there was not an irregularity at all. However, in case this matter should go any further and because it was fully argued, I set out my views briefly as follows.

The test for substantial injustice is as set out at Paragraphs 30 and 31 above. It is entirely fact and context dependent. I have already noted that the defence to the invoices claims were not the subject of any oral evidence from Mr X and so even if there were an irregularity there could be no prospect at all of that affecting the decision to award the invoices claimed to B.

As to the counterclaims said to be affected by the ruling, first as to counterclaim C, the missing engine clamp claim, I agree with Mr Harrison’s submissions that Mr X’s evidence as given really did not go to establish that a request was made for this clamp to be fitted, and even if the evidence had been admitted then the result would be wholly unaffected. The opposite conclusion is unarguable.

As to counterclaim I, the classification of shop visits, I am satisfied that the Tribunal found at Paragraph 461 [Bundle 2/ Page 270] as a separate ground of defence to their counterclaim, that A had not addressed evidence to establish that the shop visits were wrongly classified, which Mr X’s oral evidence did not address.

It follows that substantial injustice cannot be established.

I do not need to deal with, nor do I express any view on, the effect of the Supreme Court’s decision in the MWB case and whether the Court should deal with the prospects of a different conclusion being drawn by the Tribunal because the law has now changed. It seems to me that the effect, if any, of a subsequent change in law (or restatement following Appeal) is an interesting point which should be left for a matter where its determination is required, unlike this application where in light of my finding that there is no irregularity it does not strictly arise.

The issue of remedies does not arise and I express no views on that other than to note that the issues to be remitted were largely agreed.

In light of my findings above, the agreed issues are answered as follows:

Since this Judgment was handed down in draft the parties have agreed an Order as to costs and consequential directions as to any possible application for permission to Appeal which the Court has approved. To the extent necessary time for making such an application to me and/or the Court of Appeal is extended until 7^th September 2018.