Commercial court affirms its pragmatic approach to the interpretation of arbitral awards

The decision in AZ v BY [2024] EWHC 1847 (Comm) reaffirmed that the court generally will keep intervention to a minimum when interpreting arbitral awards. The court held that the dispositive part of the arbitral award, beginning with “the tribunal hereby DECIDES AND AWARDS as follows …”, forms a comprehensive statement of the remedies available to a party and an indemnity granted within this section was equivalent to a court order. In an endorsement of the concept of party autonomy, the court also found that parties are entitled to agree to revive the jurisdiction of a tribunal even after a final award is issued. The decision reinforces the advantages of arbitration as a flexible and efficient dispute resolution mechanism, particularly for complex, multi-party disputes.

Background

AZ contracted to sell BY cargoes of LNG for delivery in accordance with an agreed delivery programme, which BY then contracted to sell onward to CX and DW. AZ failed to deliver the cargoes, causing BY to breach its agreements with CX and DW. BY referred its claim against AZ to arbitration (the “AZ-BY Arbitration”). CX and DW commenced separate arbitration proceedings against BY (the “BY-CX Arbitration” and the “BY-DW Arbitration” respectively) in respect of BY’s breach of its agreement with each of them. The BY-CX and BY-DW Arbitrations were still in progress when the final award in the AZ-BY Arbitration was made.

The AZ-BY Arbitration

BY succeeded in its claim against AZ for breach of contract. The arbitral tribunal (the “Tribunal”) awarded BY damages and declared that BY was entitled to be indemnified by AZ in respect of its liabilities to CX and DW (the “Award”).

The concluding section of the Award (the “Dispositive Section”) was as follows:

“XVIII. AWARD

For the reasons set out above, the tribunal hereby DECIDES AND AWARDS as follows:

1. [AZ] shall pay [BY] damages in the amount of US$[…]7 (US$ […]8) in respect of its claim for lost profits on the 19 Cargoes […]9.
2. [AZ] shall indemnify [BY] in respect of any amounts awarded to [CX] by way of damages, compensation, interest or similar as well as its legal costs and expenses in relation to Arbitration proceedings brought by [CX] against [BY] on 26 January 2021 (and any further Arbitration proceedings brought by [CX] against [BY] with respect to the same Cargoes). To the extent that any such amount is the subject of an award or order by consent reflecting terms of settlement between [BY] and [CX], such terms shall be approved as reasonable by the arbitral tribunal seised of the proceedings.
3. [AZ] shall indemnify [BY] in respect of any amounts awarded to [DW] by way of damages, compensation, interest or similar as well as its legal costs and expenses in relation to Arbitration proceedings brought by [DW] against [BY] on 31 March 2021. To the extent that any such amount is the subject of an award or order by consent reflecting terms of settlement between [BY] and [DW], such terms shall be approved as reasonable by the arbitral tribunal seised of the proceedings.
4. [AZ] shall indemnify [BY] in respect of its invoiced and paid legal costs and expenses relating to the [CX] and [DW] proceedings respectively and certified by Counsel for [BY].
5. [AZ] shall make payment of any liabilities described in (2, 3 and 4) above within 21 (twenty-one) days of the presentation by [BY] of final award(s) in the [CX] and/or [DW] proceedings or order(s) by consent reflecting terms of settlement approved as reasonable by the arbitral tribunal seised of the proceedings and signed certificate(s) from [BY’s] lawyers confirming [BY’s] costs of defending those proceedings.
6. BY shall forthwith draw the terms of the indemnities ordered at 2 and 3 above to the attention of the tribunals seised of the [BY-CX] and [BY-DW] Arbitrations respectively.”

In another section of the Award sub-headed “Indemnification in respect of other claims”, the Tribunal set out a summary of the sub-sales BY had entered into with CX and DW respectively and addressed AZ’s points disputing the Tribunal’s jurisdiction to grant indemnification by final award. The Tribunal however held that it had jurisdiction to make such an Award and determined that BY was entitled to declaratory relief as set out in the Award. The Award also provided as follows:

“The Tribunal further orders that the terms of this indemnity be drawn forthwith to the attention of the tribunals seised of the [BY-CX] and [BY-DW] arbitrations, and that any eventual enforcement of this indemnity be subject to the endorsement of those tribunals as to its applicability in the context of any award and, in particular, any consent award, made in either of those proceedings.” (the “Endorsement Requirement”)

The BY-CX Arbitration

After the Award was issued, CX was awarded damages against BY in the BY-CX Arbitration (the “CX Award”). When BY presented the CX Award to AZ as required by the Dispositive Section, AZ objected on the basis that the CX Award did not comply with the Endorsement Requirement.

BY and CX then jointly sought an additional award from the BY-CX arbitral tribunal so as to satisfy the Endorsement Requirement (the “Additional Award”), without prejudice to BY’s primary position that no additional award or express endorsement was required to the effect that the AZ indemnity applies to the CX Award.

The Issues and the Parties’ Positions

The court had to decide two issues:

1. Whether, as a matter of construction, the Award required that the final awards in the BY-CX Arbitration and the BY-DW Arbitration should contain an express declaration that the sums awarded came within the scope of the indemnity declaration in the Award; and
2. If so, whether the Additional Award fulfilled that requirement.

AZ’s position was that Endorsement Requirement comprised the dispositive part of the Award. Therefore, the tribunals in the BY-CX and BY-DW Arbitrations needed to declare that the sums awarded came within the scope of the indemnity declaration contained in the Award.

On the Additional Award, AZ submitted that once an arbitral tribunal becomes functus officio (i.e. an arbitrator lacks any power to re-examine a decision regarding the issues submitted after that decision is rendered), it cannot be revived even by agreement of all the parties. Therefore, given that the CX Award did not declare the sums awarded to CX against BY came within the scope of the indemnity declaration in the Award, the sums awarded to CX in the CX Award could not be recovered by BY from AZ. It was not open to the parties and tribunal in the BY-CX Arbitration to seek to do so by way of the Additional Award.

In response, BY took the position that the Dispositive Section is equivalent to a court order in English proceedings. As such, there was no requirement for an express declaration that the sums awarded in the BY-CX Arbitration fall within the scope of the indemnity declaration. BY’s alternative position was that the Additional Award contained the necessary declaration. If and to the extent that the tribunal in the BY-CX Arbitration might be considered to have become functus officio, the parties could by agreement re-open the arbitration reference with the tribunal’s consent.

Decision

The court agreed with BY that no additional endorsement of the declaratory indemnity was required further to the Award.

Given the format of the Award, it was clear that the Tribunal intended to set out in the Dispositive Section the sums awarded and other remedies granted as a result of the conclusions that it had reached. This part of the Award was likely to, and to have been intended by the Tribunal to, contain a comprehensive statement of what would appear in the order following a trial in court proceedings. There was nothing in the Award to suggest the Tribunal intended that Endorsement Requirement should augment this statement of the remedies. A reasonable person with all the knowledge reasonably available to the parties would have arrived at the same understanding. This is also more likely to have been what was intended when English law is the curial law and at least a majority of the arbitrators are English lawyers.

On this construction, the tribunal in the BY-CX Arbitration only needed to decide whether its award came within the scope of the declaratory indemnity in the Award if it was an award by consent (which did not apply in these circumstances).

AZ’s challenge to the jurisdiction of the tribunal in the BY-CX Arbitration reconvened for the purpose of issuing the Additional Award also failed. Although the court did not need to decide on the validity of the Additional Award given its findings on the scope of the declaratory indemnity, it confirmed that the parties may re-open an arbitration after the final award is issued with the tribunal’s consent. This is consistent with the principle that the parties should be free to agree how their disputes are resolved.

Conclusion

This judgment illustrates the English courts’ respect for the finality and integrity of arbitral awards. In particular, the court helpfully emphasised that the starting point is there will be no substantial fault in arbitral awards and that the arbitral tribunal intended to make a coherent decision. Based on this understanding, the court will read the arbitral award in a reasonable, commercial way, considering the relevant context and using every effort to interpret the award’s provisions in a consistent manner. Therefore, it will not generally be appropriate to allow language used in the narrative reasoning section of an award to contradict the language in the part of the award that is intended to be its final order.

The court also provided reassurance that the interpretation of arbitral awards will not be subject to unnecessary court applications by stating that an application for the enforcement of an award does not allow for challenges as to any ambiguity or uncertainty. Such challenges must instead be raised on the limited grounds available of jurisdiction or serious irregularity or an appeal on a point of law.