The Effect of "No Effect"

Perhaps one of your readers will be able to shed some light on the practical effect of a novel provision of the 1996 Arbitration Act, which appears to have escaped comment up to now, the new power available to the court of declaring an award to be of no effect rather than merely setting it aside.

Although the Act does not make clear what the new provision means, it seems likely that it is equivalent to an award being declared void ab initio.

The commentaries on the 1996 Act I have read suggest that this new power will be appropriate only in cases where an award is successfully challenged on grounds of lack of substantive jurisdiction. However, this overlooks the fact that the remedy of "declaring to be of no effect" is expressly excluded from the list of those available under s.67(3). In fact, it is available only in cases of "serious irregularity" as defined in s.68. Having read the closed list of grounds for "serious irregularity" listed in s.68(2)(a) to (i), I can think of no instance where "setting aside" would not be an effective and sufficient remedy.

Perhaps someone can enlighten me on when they might expect this sanction to be applied.

DN Jones Rochester

Editorial Comment

Setting Aside and of No Effect

DN Jones’ letter certainly raises some interesting points, which one always hopes will be entirely irrelevant to all our members, but until there is some law on the matter, it is interesting to speculate. Perhaps readers may also comment on why the court should have a power to vary the award under s.67 when the only matter before it is a challenge to the substantive jurisdiction of the tribunal.

We suggest that the commentaries to which Mr Jones refers are based on the application under s.67(1)(b), for an order declaring the award to be of no effect but for which the remedy, under s.67(3) would be an order setting aside the award. What, if anything, is the difference between setting the award aside and declaring the award to be of no effect? There must be a difference otherwise Parliament would not have included the alternative remedies. Although said slightly tongue in cheek, at some time the judiciary will have to address the matter in that way and try to identify the difference which Parliament intended. We can look to previous decisions to try and identify the effect of setting aside however consideration must also be given to the 1996 Act in its entirity as part of its purpose is to improve the law (see the long title). If there was any presumption by the court that setting aside the award would have the effect of removing the Arbitrator but leaving the arbitration agreement intact then we submit that such presumption is no longer valid.

It has been suggested that ss.30 to 32 exclusively deal with matters of the validity of the arbitration agreement and the proper constitution of the tribunal and the right of objection or challenge on these grounds would be lost by the time an award was made (unless the objection under s.31 had validly been raised but the Arbitrator had nevertheless proceeded to make his award). Subject to that proviso, the challenge under s.67 should be restricted to the subject matter of the award (further subject to s.73). It seems therefore that a successful challenge under s.67 would only affect the subject matter of the reference or award and the Arbitrator’s authority remains unless (following appli cation) the court also removes the Arbitrator under s.24.

Setting Aside v Of No Effect Francis Miller

In his letter (this issue, p.14) DN Jones has raised an interesting question about the practical effect of a court’s power to declare an award to be of no effect and the exclusion of that power from section 67(3). In addition, he seeks some examples of situations, arising under sub-sections 68(2)(a) to (i), where setting aside, as opposed to declaring an award to be of no effect, would not be a sufficient remedy. I hope that these remarks will be helpful to the readers. However, I am conscious that my observations are not definitive, and I look forward to further discussion upon this important topic which has been raised by Mr Jones.

Relevant Sections of the 1996 Act:

The expressions, "set aside" and "to be of no effect" occur in various places in Parts I to IV of the Arbitration Act 1996.

"set aside" is in sections 13(2)(a) & (b), 17(3), 18(1), 67(3)(c), 68(3) & (3)(b), 69(7) & (7)(d), 71(4), 81(2), 103(2)(f);

"to be of no effect" is in sections 13(2)(a), 67(1)(b), (68)(3) & (3)(c), 71(4) What do these expressions mean?

If the expression "set aside" means to put to one side, to dismiss from one’s mind, to reject or throw over as being of no value, to annul, to quash, to render void or nugatory, etc., then the expression is seemingly all encompassing. With such a wide-ranging power, one may be tempted to say that the need for a declaration that something is of no effect is an unnecessary addition to the court’s powers. So, why does the Arbitration Act include both powers which are, in some instances, to be seen side by side as alternatives in the same section, eg s.68(3)?

The answer is simply a matter of function. In order to set something aside one must set "that something" aside from something else which remains. Thus, if an award is set aside in part then that which is not set aside remains intact. If an award is wholly set aside then that which remains is still, at the very least, the arbitration agreement. Whereas, to refer to something as having "no effect" one is declaring that there is no cause; one is simply declaring that there is no cause to bring about "this effect." For example, a purported award is of "no effect" when there is no valid arbitration agreement to cause the outcome of an award. Thus, Mr Jones has already answered his own query by stating that the expression, "declared to be of no effect," is likely to be the equivalent of something being declared void ab initio. How does this square up with the implications which Mr Jones draws from his observations?

Section 67

In the first place, I believe Mr Jones is erroneous in his reading of section 67, Challenging the award: substantive jurisdiction. He says that "declaring to be of no effect" is expressly excluded from section 67(3); presumably implying that it should have been included in a similar manner as it is in section 68(1). I can understand the confusion, because section 67 is not, in my opinion, drafted with adequate clarity; nevertheless, the section is precise in its intention.

The first point to note is that section 67 consists of two parts, namely:

(a) a tribunal’s award on its own substantive jurisdiction, ie, an award by the tribunal arising out of section 30(1); and

(b) a tribunal’s award on the merits of the dispute.

These two parts are sections 67(1)(a) and (b), respectively. To make the intention of this section clear, rearrange the order of the relevant sub-sections. I believe that the whole section would have been better if sub-section 67(3) had been included as sub-section 67(1)(a)(ii). The other sub-sections and qualifications of section 67, which are all quite clear, would not be materially affected by this rearrangement.

The effect would be:

(a) confirm the award,

Thus, it can be seen that where the tribunal has been given the power to rule on its own jurisdiction [s. 30(1)], and does so by way of an award, a party to the proceedings may challenge the award [s. 30(2)]. The remedy available is for the court to confirm, vary or set aside the award. If the court sets aside the award there still remains in existence the arbitration agreement, including the agreement giving the tribunal the power to rule on its own jurisdiction.

The new second part would be totally self-contained and read as:

This contains the expression "declaring an award to be of no effect", which Mr Jones, and others, had expected to see in sub-section 67(3).

If the challenge is that the tribunal did not have the jurisdiction to make an award on the merits, and that claim is proved, then the remedy is the court’s declaration that the award, in whole or in part, is of no effect. Therefore, section 67 does contain both remedies, if not quite side by side, as does section 68.

Section 68 and the Sanctions:

Mr Jones has also raised a question about the merits of the relative sanctions in respect of serious irregularity under section 68, namely: whether an award should be set aside or declared to be of no effect.

There is a great danger in looking at the expression, "serious irregularity," in isolation, because it is defined within section 68. It means one, or more, of the factors specified in s.68(2)(a) to (i), which has caused or will cause substantial injustice to the party who applied to the court for the remedies set out in section 68(3). It means nothing more nor less.

As to whether or not an award should be set aside or declared to be of no effect, there is bound to be some uncertainty in the context of section 68. The Departmental Advisory Committee noted the perceived problems associated with sections 67 and 68 and, in its Report of February 1996, p.58, it stated,

"that cases may arise in which it might be difficult to decide into which category a particular set of circumstances should be placed but, since the time limits, etc ["etc" meaning remedies, no doubt] for both . . . 67 and 68 are the same, this should cause no procedural difficulties."

In spite of those comforting words by the DAC, one must keep in mind the need to prove "serious irregularity" with any challenge under section 68. That is, no doubt, why there is a reminder about the existence of section 67 included in section 68(2)(b) (the tribunal exceeding it powers).

The important factor about a declaration of "no effect" is that it is simply not relevant to consider degrees of irregularity when dealing with matters of jurisdiction; either the tribunal has the power, (in accordance with the arbitration agreement and/or subsequent agreements of the parties) to decide matters, or it doesn’t. If the tribunal does have the power to deal with an issue, then the nature of any irregularity, and its degree of seriousness, is extremely important.

Unlike section 67, section 68 is more finely tuned to an arbitration where the tribunal is likely to have substantive jurisdiction. Nevertheless, the remedy of a declaration of "no effect" is still an essential requirement, just in case of need.

Consider section 68(2)(c): a failure to conduct the proceedings in accordance with the procedure agreed by the parties. If such conduct failed to comply with the original arbitration agreement, it may be that the remedy of declaring the award, in whole or in part, to be of no effect would be more appropriate. Whereas, if the failure arose out of subsequent agreements between the parties, it may be that remission or setting aside part of the award, may be adequate.

Proof of serious irregularity is essential, and is always a matter of fact. However, for another example, imagine an application made under section 68(2)(g), where the award was obtained by fraud. Can one determine the appropriate remedy for "just a little bit of fraud" leading only to "injustice," but not "serious injustice"? Well! that is the difficult nature of section 68. But, as the DAC have indicated, such perceptions are, for practical purposes, groundless.

It is always possible to dream up hypothetical examples, based on extreme cases, to demonstrate a particular point. In reality, one faces the obscure question, the dilemma, the trilemma and worse. At least, by meaningful discussion in the newsletter, we can hope to avoid our own actual mistakes being used as the basis for other’s extreme hypothetical examples.