Many arbitrations turn solely, or mainly, on a point of law or contract interpretation. Parties to an English-seated, English law arbitration can save time and costs by asking the English court to determine a point of law. The recent case of Secretary of State for Defence v Turner Estate Solutions Ltd is a good example of how this preliminary reference procedure works. In our view, Section 45 is an unjustly neglected rule which merits a wider audience. If one party’s interpretation is right, that may dispose of the whole case, render a particular factual dispute irrelevant, or reduce substantially the value of the claim. Early determination of a central point of law can facilitate early settlement. The usual option for a party seeking a “quick win” is to ask the tribunal to determine the point of law as a preliminary issue and to issue a partial final award. Section 45 of the Arbitration Act 1996 provides a second option: to ask the court to determine the point.
How it works: Secretary of State for Defence v Turner Estate Solutions Ltd
This recent case is a good example of how the procedure works. The Secretary of State had engaged TES to do some building works. The contract was a Maximum Price Target Cost contract, so the price for the works was on the basis of an agreed target cost, capped at a maximum price. In theory, such contracts work by the parties making adjustments to the target cost and the maximum price along the way, as the works are varied or external events occur. In practice, however, many parties fail to operate the contract properly and are left with a sizeable dispute about the final price. This happened here. The Secretary of State argued that the contract could be read as permitting the target cost to be adjusted after the completion of the works. TES argued that this was impossible, that the failure to operate the contract meant the target cost system had fallen away and it should be paid on the basis of its actual costs.
How did the question come before the court? Under Section 45, an application can arise either by the agreement of the parties, or with the permission of the tribunal. Here TES did not agree to the application, so the Secretary of State had to obtain the tribunal’s permission.
Because there was no agreement, there was a second jurisdictional hurdle. Section 45 requires the Court to be satisfied that the determination of the question is likely to produce “substantial savings in costs”, and that the application was made “without delay”. There was no dispute as to delay, as the application had been made promptly. As to the costs point, Coulson J was satisfied that costs would be saved. First, TES had no alternative case, so if the Secretary of State’s interpretation was right the tribunal would only have to resolve that claim and not TES’ claim. Second, the judge noted that if the question of law was not resolved then both parties would have to prepare for the merits hearing on two alternative bases.
On that basis, Coulson J went on to determine the points of law submitted to him. The answers, and the reasoning, are probably only of interest to construction specialists, and are perhaps worthy of a separate article. But, for the record, the Secretary of State won. Coulson J reasoned that that interpretation gave effect to all parts of the contract, there was no necessary time limit to the adjustment of the target cost, and there was no provision in the contract entitling the contractor to rely on any alternative means of calculating the final price.
Sleeping giants: a wider use for Section 45?
So far, Section 45 has been rather neglected by arbitration practitioners, as compared with its more popular cousin Section 44, which allows parties to obtain orders for preservation or taking of evidence, or even interim injunctions to support the arbitration. We can only speculate as to the reasons for this neglect, but it seems to us to be linked to the staffing of arbitral tribunals. One traditional conception of arbitration was as a means of having disputes resolved not by judges or lawyers, but by individuals with technical expertise or industry experience that could be relied on to arrive at a technically correct or commercially fair solution. That is still a common practice in certain sectors such as commodities (FOSFA springs to mind). In such a case, where the law is only one element in the overall assessment of the dispute, there is obvious value to the procedure: in the words of one old case, it allows the parties to “nip down the road to pick the brains of one of Her Majesty’s judges and, thus enlightened, resume the arbitration.” But when, as now, the vast majority of tribunals are staffed by eminent lawyers, there is less need to have recourse to such a procedure and indeed parties might not wish to offend their tribunal by suggesting it is not able to come to the right answer.
In our view, however, the Section 45 procedure can be of value whatever the composition of the tribunal. The fact is that Her Majesty’s judges often do not charge as much as the top commercial arbitrators and often do not take so long to resolve straightforward points of contract law. In addition, the Act expressly allows the tribunal to carry on with the arbitration while the court application is underway, which permits a “twin-track” approach to make progress on both the legal and factual issues. As the TES case shows, Section 45 can if used in the right way be a tool for saving costs without adding extra delay to the case. For that reason alone, it is an unjustly neglected rule which merits a wider audience.
The more tactically-minded among that audience may also wish to ponder on a potentially wider use of the Section. Some of the old cases suggest it can be used not just for “pure” points of law but also for questions as to the tribunal’s jurisdiction, or his conduct of the proceedings. That worked in the case of The Vasso, but that was a shipping case from 1983, and under the equivalent provision in the old Arbitration Act. While the text of the relevant provision has not substantially changed since then, the prevailing ethos as to the role of courts in the arbitral process has changed somewhat. So a modern judge may be more reluctant to pronounce on such matters for fear of interfering with the arbitral process.