Raytheon Systems: e-Borders Arbitration Set Aside for ‘Serious Irregularity’

20 04 2015

See my article  Failure to Deal with the Issues: The e-Borders Award and ‘Serious Irregularity’ under the Arbitration Act 1996. These judgments given by Akenhead J relate to the e-Borders controversy. The e-Borders passenger information system was marketed as a one-stop solution to the UK’s immigration and security problems. Under e-Borders the Home Office sought to create an electronic system to examine everyone entering and exiting the UK by verifying their details against immigration, police and security related watch lists. In Raytheon Systems Ltd [2014] EWHC 4375 (TCC), Akenhead J set aside an arbitral award (in e-Borders contractor Raytheon’s favour) because of “serious irregularity” within the meaning of section 68(2)(d) of the Arbitration Act 1996 (“the 1996 Act”). In December 2014, the court held that the arbitration tribunal failed to deal with all the issues (of fault and responsibility attributable to Raytheon which were highly relevant to quantum) put to it. Subsequently, in Raytheon Systems Ltd [2015] EWHC 311 (TCC), in February 2015, Akenhead J set the arbitration award (£200+ million) aside in its entirety for serious irregularity and ordered a fresh hearing.

The arbitrators’ identities remain undisclosed to the public and the rulings did not intend to reflect on their integrity or general competence. Despite successfully challenging the award in court, the government continued to negotiate and the Home Secretary announced on 27 March 2015 that the settlement with Raytheon was “a full and final payment of £150m.” The earlier judgments, in the Home Office’s favour, were made publicly available in February 2015 and are perhaps the only authoritative documents in the public domain that shed light on the dispute. The award was set aside for serious irregularity because of the arbitrators’ failure to address issues, highly relevant to quantum, of fault and responsibility attributable to Raytheon. Signed in 2007, the e-Borders contract was worth around £750 million in total. The government terminated it in 2010 because of delays and key milestones being missed. Raytheon had been in breach contract since 2009 and, at that time, lengthy negotiations resulted in a dead end. By then the project had cost the taxpayer £259.3 million including £195 million in supplier costs. Arbitration proceedings ensuing the termination resulted in the arbitrators finding in favour of Raytheon.

Context

Not terminating the contract, one with “deep rooted problems”, would have meant spending £97 million over and above the tribunal award. Raytheon – which was contracted to design, develop and deliver very substantial technology systems – contended that the contract was unlawfully terminated and that substantial damages for wrongful termination were recoverable. Theresa May accused the past government of creating a mess, which she inherited, and said that the other options would have been more expensive.

A secret arbitration process resulted in an award in August 2014 which found that the termination was unlawful. Consequently, the Home Office was ordered to pay large sums of money to Raytheon including £49.98 million in damages, £9.6 million for disputed contract change notices, £126 million for assets acquired by the Home Office during the contract (“the transferred assets”), further costs of the arbitration and interest.

Aggrieved by the award, arguing that the tribunal’s failure in connection to the key issues also intersected with those surrounding quantum and liability, the Home Office sought its annulment for serious irregularity and a failure by the tribunal to deal with all the issues that were put to it. Under section 68 of the 1996 Act, an award can be challenged on numerous (nine) grounds of “serious irregularity”. Where one or more of the grounds are engaged, an additional threshold has to be met and the applicant needs to demonstrate that the irregularity has caused or will cause “substantial injustice”.

Raytheon Systems Ltd [2014] EWHC 4375 (TCC)

Akenhead J held in December 2014 that there was a serious irregularity and the tribunal failed to deal with all the issues put to it. The Home Office succeeded in its claim that: the arbitrators failed to assess the nature and seriousness of any defaults of Raytheon in determining whether it was objectively reasonable and proportionate for the Home Office to terminate the contract (liability); and Raytheon should not have been allowed to recover costs for the transferred assets without giving consideration to whether it was itself responsible for those costs because of its own inadequate performance (quantum). Noting that the “likely value of the agreement was a high nine figure sum, if not more”, Akenhead J held at paras 51 and 62 that there had been substantial injustice because of the tribunal’s failure to deal with the liability and quantum issues.

The substantial injustice arose not simply from the issues not clearly being dealt with. The court held that it arose in the context that both parties spent a large amount of time, resources and money in presenting their cases and evidence as to responsibility for the delays, disruption and inefficiencies. Akenhead J reasoned that:

51. … The fact that these issues were not addressed even in the context of compliance with the Process Requirements [contractually specified as acting reasonably, proportionately and with a view to preserving the agreement] might well lead an objective party or informed bystander to consider that the tribunal was simply seeking to avoid getting into the detail. I do not suggest however that, subjectively or consciously, that is what the tribunal was here actually doing.

The court explained at para 58 that there was virtually nothing in the 300 page award about who bore the responsibility or was at fault as regards delay, disruption and inefficiency which seems to have occurred (especially in view of the fact that it was common ground that key milestones had not been achieved and had been significantly been delayed by the time of the termination). The key issue related to the transferred assets and if the arbitrators were to go down the cost route approach to evaluate the unjust enrichment said to have occurred as a result the transfer, consideration needed to be given to the extent to which those costs related to any delay, disruption and inefficiency which was the fault or responsibility of the contractor, i.e. Raytheon. It was not disputed that these concerns had been raised but the tribunal did not assess who was to blame for the delay, disruption and inefficiency, and no account was taken of that in the determination that awarded £126 million to the contractor. Akenhead J therefore held:

61. It almost goes without saying that, necessarily, there has been substantial injustice because the arbitrators have not addressed the key issues … This cannot be classified as anything less than substantial injustice because the arbitrators have not applied their minds to the issue at all and any right minded party to arbitration would feel that justice had not been served.

Raytheon Systems Ltd [2015] EWHC 311 (TCC)

Subsequent to deciding that there had been a serious irregularity in the arbitral process causing substantial injustice, in February 2015, Akenhead J held at para 23 that the instant case was one “in which the award should be set aside in total and the matter resolved by a different arbitral tribunal.” The Home Office argued that a fair-minded and informed observer would not have confidence in the arbitrators’ ability to come to a fair and balanced conclusion on the issues if remitted because of their lack of detachment from the subject matter of the dispute. The arbitrators were English and American and the chairman was Canadian. Although he did not name the arbitrators, Akenhead J explained that his judgments did not intend to reflect on their integrity or general competence.

But the court remitted the matter to a fresh tribunal because the grounds were towards the more serious end of the spectrum, much of the factual and expert evidence would be redeployed before the new tribunal, and following Mance J (as he then was) in Lovell Partnerships (Northern) Ltd v AW Construction plc (1996) 81 BLR 83 it would be invidious for the tribunal to be required to re-determine the same issues. Professor Merkin’s Arbitration Law remained the court’s point of departure as regards the situations – serious miscarriages of justice affecting evidence, one or both of the parties justifiably losing confidence in the arbitrators and so forth – in which it was appropriate to quash an arbitration award.

Observing that there are relatively few reported decisions on section 68(2)(d) and no previous authority substantially mirrored the facts of the instant case, Akenhead J clarified that:

  • in deciding whether to remit or set aside the court needed to consider all the circumstances and background facts relating to the dispute, the award, the arbitrators and the overall desirability of remission and setting aside, as well as the ramifications, both in terms of costs, time and justice, of doing either; and
  • the burden of establishing that remission would be inappropriate in effect rested on the party seeking relief other than remission and in respect of any proven serious irregularity it needed to be established that in the particular case it would be inappropriate to remit to the existing arbitral tribunal.

The court made a note of Ascot Commodities NV v Olam International Ltd [2002] CLC 277, where Toulson J (as he then was) set aside an arbitration award made by the GAFTA Board of Appeal (but the rehearing was not by a fresh tribunal), and Van der Giessen-de-Noord Shipbuilding Division NV v Imtech Marine & Offshore BV [2009] 1 Lloyd’s Rep 273, where Christopher Clarke J (as he then was) set aside parts of the award owing to failures of dealing with the issues but ordered the appointment of an umpire. Akenhead J nevertheless went on to hold that he did:

12. … not however consider it appropriate to decide this case on the basis of case statistics. The statute requires that the Court should not set aside an arbitral award unless it would be inappropriate to remit. The question therefore revolves around the inappropriateness of remission.

In light of Lovell and the Court of Appeal’s decision in James Moore Earthmoving v Miller Construction Ltd [2001] BLR 322, Akenhead J reasoned that, after finding serious irregularity, where the court formed the view that a reasonable person would no longer have confidence in the arbitrators’ ability to come to a fair and balanced conclusion on the issues if remitted, that view might well underpin a conclusion that it would not be appropriate to remit.

Applying the decision in Norbrook Laboratories Ltd v Tank [2006] EWHC 1055 (Comm), where an award was set aside because of direct unilateral telephone contacts by the arbitrator, his failure to record what was said or to disclose that record to the parties and his display of overt antagonism, Akenhead J remarked at para 16 that “[t]here are shades of serious irregularity”. Even in the absence of authority suggesting that the relative importance or seriousness of the established irregularities is a factor to be taken into account on the decision to remit or set aside, the court considered that the more serious the irregularity the more likely it is that setting aside may be the appropriate remedy. Moreover, the court said that:

18. The evidence was heard in four 10 day tranches between late October 2012 and mid-February 2013 with the final speeches on 16 and 17 April 2013. The relevant award was issued on 4 August 2014. Although there is no criticism made of the nearly 16 month period which it took the arbitrators to produce this award, the fact remains that, if this matter was to be remitted to the arbitrators now, over two years will have elapsed since the evidence was given. Given the logistics involved with busy international arbitrators, there is, at least, a very real risk that it could not re-convene substantive hearings or otherwise move to a stage at which they could produce an award taking into account the judgments of this court for as much as a further 12 months if not more. If that is right, it will be closer to 3 years since the evidence was given.

In the court’s analysis, whether justice could be seen to be done remains a major criterion in the consideration of appropriateness of remission; this entailed whether the court or either party was satisfied that the arbitrators in question could be trusted to deliver justice for the parties if the matter was remitted to them. In the present case, it was apposite to set aside the whole award and remit the case to a different arbitral tribunal because of the following fivefold rationale:

  • the section 68(2)(d) grounds were towards the more serious end of the spectrum of seriousness in terms of irregularity – speculation by the court was unnecessary as to why the tribunal felt that it did not need to address the issues concerned; on the other hand, the fact that the tribunal took some 16 months after final oral submissions to produce their award might lead a fair-minded and informed observer to wonder (rightly or wrongly) at least whether (sub-consciously) the tribunal was seeking some sort of shortcut;
  • applying Mance J’s approach in Lovell it would be invidious for the tribunal to be required to try to free itself of all previous ideas and to re-determine the same issues and even a conscientious tribunal, re-determining issues the exercise could create “its own undesirable tensions and pressures”;
  • it was unlikely that either the Home Office or Raytheon would seek to re-argue issues on which they had lost in the original arbitration, for fear of a costs sanction and “only a foolhardy party who, without obviously good reason, seeks to do so” – however, in any event, much of the arbitration will have to be reopened given the scope of the issues not addressed;
  • much of the factual and expert evidence would be redeployed before the new tribunal and little, if any, further disclosure would be required; and
  • given that there was likely to be a time lapse of roughly three years between the original arbitration and the new hearing, the costs implications were unlikely to be much different than if the new tribunal had had to research the same evidence again.

The court decided that because the Home Office substantially succeeded in the application, Raytheon was ordered to pay 80 per cent of its costs with the remainder reflecting costs incurred by Raytheon in dealing with issues either lost or abandoned by the government.

Comment

The torn up e-Borders contract delivered extremely poor value for money to UK taxpayers and despite its ostensible victory the government has very little to celebrate as a result of these cases. No end to the vicious cycle of arbitration and litigation, and the mounting costs associated with these processes, seemed to be in sight until the settlement of 27 March 2015 in which Theresa May recognised “no admission of liability on the part of the government.”

Paradoxically, the rather expensive (£150 million) settlement symbolises overall capitulation on the part of the Home Office despite its successful challenge to tribunal’s award. If anything, the deal clearly demonstrates the Home Office’s lack of confidence and resolve against the US defence contractor because, despite serious problems between the parties, Raytheon:

continues to be a valued supplier to the British Government on key defence and commercial pursuits.

Although it can be criticised for being ambiguous, on identical factual and legal issues, about the parties’ ability to seek their costs in the first arbitration proceedings in a subsequent arbitration, Akenhead J’s approach does add to the learning on section 68(2)(d) – a provision on which scant authority exists. (In that regard, in light of the settlement, it is not a complete waste of time.) It sends a clear signal to arbitral tribunals to provide consideration to all the issues, and not simply cherry pick the issues they fancy. Similarly, these rulings also shed much needed light on the evidential tests a party will need to meet in mounting a successful challenge to have an arbitration award set aside.

The court held that in instances where one or both of the parties had justifiably lost confidence in the arbitrators owing to the manner in which the arbitration had been conducted, in line with the decision in the Court of Appeal in Hagop Ardahalian v Unifert International SA (the Elissar), the (objective) question to be asked is whether grounds exist on which a reasonable person would think that there was a real likelihood that the arbitrator would not determine the issues according to the evidence?

Thus, had the arbitrators in the case properly considered the issues at stake, there was a real likelihood that they would have arrived at a different conclusion. In the aftermath of the tribunal’s decision, the Home Affairs Select Committee, which dubbed the decision a “catastrophic result”, said that the dilemma was that the Home Office did not know what it wanted from the e-Borders programme. Equally, Raytheon reiterated that it had delivered substantial capabilities to the Home Office, which had wrongfully repudiated the contract in return.

Because of the importance and the value of the issues in the case being aired in the Court of Appeal, Akenhead J granted permission in relation to both judgments. Although these judgments divulge some of the contractual machinery between the parties and expose parts of the arbitrators’ confidential award, the actual arbitration clause, which would determine the parties’ ability to recover their costs in the first arbitration in a second arbitration on the same matter, still remains a jealously guarded secret. Equally problematically, despite the warning that for fear of costs “only a foolhardy party” would try to re-argue issues on which they had lost previously, it is only inevitable that the findings of the overturned award will be examined by the fresh tribunal. In cases where the facts and issues are complex, a gap between essential issues and substantial injustice is likely to exist by default because not every point raised will qualify as vital – but fortunately some rules (such as those of the International Chamber of Commerce) require the parties to agree beforehand the issues which require determination.

Like the contract with Raytheon, plagued by problems from the outset, e-Borders was itself ultimately terminated for being a “shambles”.

Parts of John Vine’s report on the fiasco were redacted or deleted by the Home Secretary for reasons of national security. But her censorship could not conceal the extent of failure in relation to “exporting” the UK borders in order to safeguard its security and John Vine’s report found that e-Borders failed “to deliver many of the anticipated benefits originally set out in 2007.”

More homework and diligence by the Home Office would have been handy for the UK because effective counter-terrorism and better border controls are the need of the hour.

On the other hand, the e-Borders system, which was supposed to be functional before the 2015 General Election but was instead terminated last year, or another analogous system will invariably fall into conflict with the Citizens’ Directive and the vast case law that accompanies it. Problematically for the Home Office, the public policy, public security and public health exceptions are quite slender in their scope whereas the right of free movement is fundamental and broad in scope. Indeed, even three-and-a-half decades ago, as far back as C-157/79 Stanislas Pieck ECLI:EU:C:1980:179, the CJEU made it clear that these exclusions cannot:

justify administrative measures requiring in a general way formalities at the frontier other than simple the production of a valid identity card or passport.


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12 05 2015
mkp

Failure to Deal with the Issues: The e-Borders Award and ‘Serious Irregularity’ under the Arbitration Act 1996

http://ssrn.com/abstract=2604612

Abstract: Raytheon is a renowned American defence contractor of epic proportions. It is the world’s largest producer of guided missiles and also concentrates on manufacturing military and commercial electronics. The jurisprudence analysed in this article arose out of the e-Borders contract between the UK Home Office and Raytheon. Signed in 2007, the agreement was worth around £750 million in total. The government terminated it in 2010 because of delays and key milestones being missed. Raytheon had been in breach contract since 2009 and, at that time, lengthy negotiations resulted in a cul-de-sac. By then the project had cost the taxpayer £259.3 million including £195 million in supplier costs. Arbitration proceedings ensuing the termination resulted in the arbitrators finding in Raytheon’s favour. Despite successfully challenging the award in court in the cases discussed in this article – reported as Raytheon Systems Ltd [2014] EWHC 4375 (TCC) and Raytheon Systems Ltd [2015] EWHC 311 (TCC) – the government continued to negotiate and Mrs Theresa May (the Home Secretary) announced on 27 March 2015 that the settlement with Raytheon was “a full and final payment of £150m.” According to her, Raytheon continues to be a valued supplier to the British Government on key defence and commercial pursuits. Under section 68 of the Arbitration Act 1996 Act, an award can be challenged on numerous (nine) grounds of “serious irregularity”. Where one or more of the grounds are engaged, an additional threshold has to be met and the applicant needs to demonstrate that the irregularity has caused or will cause “substantial injustice”. Although it can be criticised for being ambiguous, on identical factual and legal issues, about the parties’ ability to seek their costs in the first arbitration proceedings in a subsequent arbitration, Mr Justice Akenhead’s approach nonetheless adds to the learning on section 68(2)(d) – a provision, regarding failure by the tribunal to deal with the issues, on which scant authority exists. Against that contextual backdrop, despite the settlement, the court’s analysis was valuable because it sent a clear signal to arbitral tribunals to provide consideration to all the issues, and not simply cherry pick the issues they fancy. Similarly, these rulings also shed much needed light on the evidential tests a party will need to meet in mounting a successful challenge to have an arbitration award set aside. Moreover, Professor William Park’s dénouement that the 1996 Act “succeeds admirably in balancing the rival aspirations of finality and fairness in arbitration” is arguably fortified by these judgments. Notably, despite the above problems with e-Borders, in April 2015, the UK introduced passport exit checks on all travelers leaving by commercial air, sea and rail transport. The scheme, which relies on commercial agents (such as staff in airlines, rail and ferry operators) relaying passenger data to the Home Office, shall be fully functional by June 2015.

Keywords: Arbitration Act 1996, e-Borders, Citizens’ Directive, Costs, Contract, Counter-Terrorism, Home Office, Immigration, Raytheon, Serious Irregularity, Substantial Injustice, Technology and Construction Court (TCC), Exit Checks

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