Martin & Ors v Harris

On an appeal from an arbitration award under section 69 of the Arbitration Act 1996, the court may intervene where the arbitrator has misunderstood or incorrectly applied the relevant legal principles. Where contractual terms are agreed sequentially, the court must ascertain objectively what the parties agreed by considering the relevant negotiating documents as a whole. Contractual interpretation excludes evidence of the parties’ subjective intentions. A general release of claims under an agreement may encompass a tax indemnity where the indemnity is closely connected with the subject matter of the settlement and the release is expressed in broad terms. An indemnity against capital gains tax and interest does not ordinarily extend to tax penalties.

The appellants appealed under section 69 of the Arbitration Act 1996 against an award made by a sole arbitrator on 23 May 2018. The arbitration concerned whether a retired partner was entitled to an indemnity for capital gains tax arising from receipt of a compensation sum under a former partnership agreement, and whether the indemnity covered penalties.

The arbitrator held that the indemnity survived a settlement agreement reached through correspondence in April 2013 and included penalties. The central issues were whether the arbitrator had erred in identifying and interpreting the settlement terms, and whether the indemnity extended to penalties.

1. Appeal and errors of law. Appeals from arbitration awards under section 69 of the Arbitration Act 1996 are confined to questions of law. The statutory permission threshold was irrelevant because the parties had agreed to appeals on points of law. An incorrect application of correctly stated legal principles may demonstrate that the arbitrator did not properly understand those principles.
2. Settlement terms. Where contractual negotiations proceed sequentially, the court must determine objectively what was agreed by considering the relevant correspondence as a whole. The 16 April offer, the 22 April counter-offer and the 29 April acceptance were inextricably linked. The 22 April letter did not reject the earlier offer; it accepted its terms apart from the amount proposed for interest and costs. The settlement therefore included the offer’s condition that payment was in full and final settlement of claims under the 1989 Agreement or otherwise.
3. Construction. The arbitrator erred by relying on the parties’ subjective intentions and on the respondent’s personal understanding of his claims. Contractual meaning had to be assessed objectively, having regard to the natural and ordinary meaning, the agreement as a whole, its purpose, the relevant background and commercial common sense. The general release encompassed the claim under the tax indemnity, which was expressly linked to the compensation sum forming the subject of the settlement.
4. Penalties. The indemnity against liability to capital gains tax and interest did not cover penalties. Penalties were a distinct liability and could not reasonably be treated as interest. Nor could liability for penalties be imposed as damages for breach of contract on the reasoning adopted by the arbitrator, particularly where damages had not been claimed and no penalty or loss had been established.
5. Disposition. The appeal was allowed on all three questions of law. The award was set aside under section 69(7), since remitting the matter to the arbitrator would have been inappropriate and wasteful.

• Arbitration: The sole arbitrator’s Final Award Part I dated 23 May 2018 declared the respondent liable to capital gains tax and ordered indemnification for that tax, interest and penalties.
• High Court (Chancery Division): The appeal was allowed and the award was set aside under section 69(7) of the Arbitration Act 1996.