Celtic Bioenergy Ltd v Knowles Ltd

Under Arbitration Act 1996, s 68(2)(g), a challenge based on fraud requires cogent evidence of dishonest, reprehensible or unconscionable conduct that materially contributed to obtaining the award. Inadvertent or merely careless misleading conduct is insufficient. The court may infer fraud from the evidence; an admission is unnecessary.

The applicant must also establish substantial injustice, usually by showing that the undisclosed material probably affected the arbitration’s outcome. Where the withheld material contradicts the successful party’s case on an issue determined by the arbitrator, that requirement may be satisfied. A short delay in applying to court may justify an extension of time where the applicant acted reasonably, the application is strong and no irremediable prejudice is caused.

Celtic Bioenergy Limited applied to set aside, vary or remit an arbitrator’s award under Arbitration Act 1996, s 68(2)(g). The award declared that Knowles Limited had complied with provisions of an ad hoc arbitration agreement requiring it to withdraw and extinguish invoices served on Devon County Council and to provide an indemnity while not pursuing the council for sums owed to Celtic.

After the award, Celtic discovered correspondence in which Knowles had demanded payment from the council for the same sums and threatened court proceedings. Celtic alleged that Knowles had deliberately withheld this correspondence from the arbitrator, thereby obtaining the award by fraud. The application was made out of time, so Celtic also sought an extension.

1. Fraud and serious irregularity. Section 68 establishes a high threshold. The irregularity must fall within the closed list in s 68(2), and must have caused or be likely to cause substantial injustice. Under s 68(2)(g), careless or inadvertent misleading conduct is insufficient. The conduct must be dishonest, reprehensible or unconscionable and must contribute substantially to obtaining the award.
2. Cogent evidence. Cogent evidence is required, but fraud may be established by inference from the whole body of evidence. The civil standard remains the balance of probabilities, with appropriate caution because human error is generally more likely than dishonesty. The question whether recklessness alone can amount to fraud under s 68(2)(g) was left undecided.
3. Application to declaration 1. The requirement to extinguish invoices meant extinguishing the underlying claims. Credit notes could satisfy that requirement only on the assumption that the claims would not be revived. Knowles’s subsequent demands for the same sums showed that the claims remained extant.
4. Application to declaration 2. Knowles’s demands were inconsistent with the validity of the waiver and with the obligation not to pursue Devon County Council. The deliberate withholding of the March correspondence created a wholly misleading impression and amounted to fraud.
5. Substantial injustice. The correspondence was highly material because it contradicted Knowles’s case on compliance with both contractual requirements and was likely to have affected the outcome, including the costs order.
6. Extension and remedy. The court granted the necessary extension of time. It remitted the challenged parts of the award to the arbitrator for reconsideration in possession of the full facts.

First-instance application under Arbitration Act 1996, s 68(2)(g). The challenged parts of the arbitrator’s award dated 6 September 2016 were remitted to the arbitrator.