Serious irregularity: English High Court reaffirms high bar for challenging an arbitral award

The English High Court has considered the scope of challenges to awards for serious irregularity on the ground that the arbitral tribunal failed in its duty to act fairly. The Court held that there was no serious irregularity where an arbitral tribunal made an award based on an issue in respect of which certain evidence had been ruled inadmissible. The Court also confirmed that a contention that an arbitral tribunal has failed to have regard to evidence relied on by a party does not constitute a serious irregularity.

The judgment in Cipla Limited v Salix Pharmaceuticals, Inc [2023] EWHC 910 (Comm) reaffirms the high bar that a party must meet to challenge an award for serious irregularity, and underscores that the English courts only very rarely intervene in arbitral proceedings to overturn awards. It also demonstrates that arbitration is a reliable and effective means of dispute resolution for complex pharmaceutical cases.

Background

The dispute arose out of an agreement between Cipla Limited (“Cipla”) and Salix Pharmaceuticals, Inc (“Salix”) under which Cipla licensed the use of patent claims in respect of a compound known as amorphous rifaximin to Salix in exchange for royalties on the sale of Salix products that would otherwise infringe Cipla’s amorphous rifaximin patents (the “2009 Agreement”).

Cipla claimed in LCIA arbitration proceedings against Salix that Salix’s antibiotic drug XIFAXAN® contained amorphous rifaximin and that it was therefore due royalties under the 2009 Agreement.

The arbitral tribunal (the “Tribunal”) decided in favour of Salix in its award dated 3 May 2022 (the “Award”). Although Cipla had shown that XIFAXAN® contained amorphous rifaximin, the Tribunal agreed with Salix that Cipla’s patent claims were limited to amorphous rifaximin which produced a distinct “Figure 1 XPRD pattern” under x-ray powder diffraction (“XPRD”) analysis. Cipla had only shown that the amorphous rifaximin as claimed in its patents produced a Figure 1 XPRD pattern, but not that the amorphous rifaximin present in XIFAXAN® produced the Figure 1 XRPD pattern. Moreover, there was no evidence to suggest that all amorphous rifaximin showed the Figure 1 XPRD pattern.

Cipla argued that the Award was unfair, as the Tribunal had based it on a finding which contradicted its own earlier ruling (the “Ruling”). The Ruling arose from a question by the Tribunal during the course of the merits hearing as to whether there might be different forms of amorphous rifaximin that could produce XPRD patterns other than the Figure 1 XPRD pattern (the “Polyamorphism Issue”). On this basis, Salix sought to introduce new evidence to Cipla’s expert witness, to which Cipla objected.  The Tribunal ruled that Salix’s evidence on the Polyamorphism Issue should be excluded, on the basis that it was too late; that the relevant point could and should have been raised at any time previously during the arbitration; and that to raise it during the cross-examination of expert witnesses during the merits hearing would be unfair.  In its Ruling, the Tribunal also noted that whether there was more than one XPRD pattern for amorphous rifaximin “does not arise” and that “some of the evidence suggests that there is only one XRPD pattern for amorphous rifaximin”.

Cipla sought an order to remit the Award for reconsideration on the ground that the Tribunal had failed in its duty to act fairly under section 33 of the Arbitration Act 1996 (“AA 1996”), which was a serious irregularity affecting the Award under section 68(2)(a) of the AA 1996.

Relevant provisions of the AA 1996 and Cipla’s challenge

Section 68 of the AA 1996 enables a party to an arbitration to apply to the court to challenge an award on the ground of serious irregularity affecting the arbitral tribunal, the proceedings or the award. “Serious irregularity” is defined in section 68(2) of the AA 1996, which provides a non-exhaustive list of the types of irregularity in which the court considers has caused or will cause substantial injustice to a party.

This includes a failure by the arbitral tribunal to comply with section 33 of the AA 1996, which outlines the general duty of the tribunal to act fairly and to adopt procedures suitable to the circumstances of the particular case. Cipla asserted that the Tribunal had not complied with section 33(1)(a) of the AA 1996, which requires the tribunal to “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”.

Cipla had two opportunities to address the Polyamorphism Issue after the merits hearing, in its written closing submissions and in its subsequent oral argument on the closing submissions before the Tribunal.

In order to bring its claim within the scope of section 33(1)(a) of the AA 1996, Cipla argued that the opportunity to serve submissions did not adequately address the issue of unfairness, as it had conducted its case on the basis that the Polyamorphism Issue was no longer live, given what the Tribunal had said in its Ruling (relying on Royal & Sun Alliance Insurance Ltd v Tughans (A Firm) [2022] EWHC 2589 (Comm)). Cipla submitted that the injustice it suffered was in how the case was conducted, rather than how it was pleaded. But for the Ruling, Cipla would have pursued the Polyamorphism Issue further.

Decision

The Court disagreed with Cipla that the Tribunal had decided the arbitration on a point that was not raised as an issue or argued. The Court noted that Cipla had, in fact, raised the issue of whether it was inherent that amorphous rifaximin had the Figure 1 XPRD pattern in oral closings and gave no indication that the Polyamorphism Issue was no longer live (contrary to the position it was adopting in its challenge to the Award). Further, the Tribunal had provided express clarification to Cipla during oral closings that the Ruling was only that Salix could not adduce evidence on the Polyamorphism Issue, and that Cipla still needed to show that the amorphous rifaximin in its patent produced the Figure 1 XPRD pattern.

The Ruling was not a decision as to what issues were live in the arbitration proceedings. The onus remained on Cipla to discharge the burden of proof on the Polymorphism Issue (and it had not done so). The Tribunal had not breached its section 33 duty to act fairly and impartially as between the parties as the parties had each been given a reasonable opportunity of putting its case.

The Court also rejected Cipla’s assertion that the Tribunal had breached its section 33 duty by accepting certain evidence in the Ruling on the one hand and then contradicting that evidence, or at the very least overlooking that evidence, in the Award. The Tribunal did not have to refer in its reasons to every piece of evidence in the arbitral proceedings, and the assessment and evaluation of that evidence is a matter exclusively for the tribunal (and not the Court). It was an established principle that an arbitral tribunal ignoring or failing to have regard to an aspect of the evidence in its award could not be the subject of an allegation of serious irregularity under section 68 of the AA 1996 (upholding UMS Holdings v Great Station Properties [2018] Bus LR 650). The facts of this case did not warrant an exception from this general rule.

Comment

The decision not only shines a light on the rigorous process that the Tribunal put in place to decide on complex technical matters, but also underscores the high threshold that a party seeking to successfully challenge an arbitral award for serious irregularity must meet. Parties should consider at every available opportunity in the arbitral proceedings how best to put forward their case and should not make any assumptions that particular issues can be excluded, unless expressly directed by the tribunal. If in any doubt, parties should consider seeking clarification from the tribunal as soon as possible and ensure that all relevant issues are addressed. The English courts will not give parties a second bite at the cherry by re-opening the issue for consideration in subsequent litigation.