England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
IN THE MATTER OF THE ARBITRATION ACT 1996
AND IN THE MATTER OF AN ARBITRATION APPLICATION

		Royal Courts of Justice Strand, London, WC2A 2LL
		1 July 2010

The Hon. Mr Justice Tomlinson :

1. This hearing of a preliminary issue concerns the ambit of a permissible challenge to the validity of an arbitration award, under sections 67 and 68 of the Arbitration Act 1996, "the Act", where the lack of jurisdiction or serious irregularity is alleged to have arisen in consequence of the arbitral tribunal having failed to decide the dispute in accordance with the law chosen by the parties as applicable to the substance of the dispute, as required by section 46 of the Act.
2. It is common ground that if the challenge is potentially maintainable under section 67, a full re-hearing would be required in order to determine whether the challenge succeeds – see the decision of Rix J in Azov Shipping v Baltic Shipping [1999] 1 Lloyds Rep 68, followed on numerous occasions by judges of the Commercial Court and regarded by Langley J in Peterson Farms v. C & M Farming Limited [2004] 1 Lloyd's Rep 603 as "now clearly established". It was at one time thought that a full re-hearing of this issue would require a hearing of five days duration, with oral evidence as to Spanish law, here the chosen proper law. In the light of that, and since it was recognised that the challenge might be ruled not maintainable without the need for a re-hearing, the parties sensibly strove to identify a preliminary issue which might form the vehicle for an examination of the permissible ambit of a challenge of this unusual nature. In the event the preliminary issue which emerged after a contested hearing had given the opportunity for the matter to be argued and further refined is:

"Does the material relied upon by the Claimant disclose a case with a realistic prospect of success for the challenge of the Final Award of the majority of the arbitrators in ICC Arbitration No. 13912/EC/ND under section 67 and/or 68 of the Arbitration Act 1996?"

It is this issue which I directed to be determined and which I must now determine.

3. The underlying facts which gave rise to the dispute may be shortly stated. A, B and C are all Spanish companies. B owned all of the share capital of C. B is a manufacturing company. C was involved in the development, manufacture and marketing of equipment for computer-aided design and computer-aided manufacturing in the industry with which B is concerned. The group of companies of which A is a part is in the same business as C.
4. On 2 April 2004 A as buyer and B as seller entered into a Share Purchase Agreement, the "SPA", for the purchase and sale of 100% of the share capital in C and the debt owed by C to B. The SPA is written in English but is governed by Spanish law. It provides for disputes to be referred to arbitration under the Rules of Arbitration of the International Chamber of Commerce, "the ICC". The place ("seat") of the arbitration was to be London and the language of the arbitration was to be English. The obligations of A were guaranteed by its French parent company X but this is of no relevance save in so far as it serves to emphasise that neither the parties nor the dispute had any connection with either England or English law.
5. Pursuant to the SPA A agreed to pay B €46 million, plus one million shares in A, plus or minus certain contractually stipulated adjustments. The precise value of the total purchase price was the subject of expert analysis and debate in the arbitration but approximated to €52 million.
6. After the purchase A discovered that over 10% of C's turnover came from transactions involving over-billing and other improper and illegal billing practices. Much of the over-billing took place in connection with European Union and local government grant programmes. In other instances, C assisted its distributors and customers to commit tax evasion both through over-billing and a scheme of fictitious invoices, and paid kickbacks to obtain sales. C also participated in customs and import tax fraud by understating the real value of goods by including fake invoices in shipments of goods to countries such as Brazil. The relevant factual findings are to be found in section Q of the Award at paragraphs 40, 48, 53, 54, 67, 69 and 72.
7. A's concerns and complaints were first made known in November and December 2004. B rejected them out of hand as false, malicious and libellous.
8. On 30 June 2005 A commenced the arbitration. The claim was for sums exceeding €54 million, therefore exceeding the purchase price and giving rise to the riposte of B in the arbitration that A could not seriously be contending that the company which they had bought had no value. The claims were based on allegations of "dolo" (fraud), and breach of express representations and warranties in the SPA.
9. Three arbitrators were appointed. They were:

i) Mr Thomas H. Webster, a Canadian lawyer in practice since 1979, now practising in Paris but also admitted to the Bar in New York, as an English solicitor and as an avocat in France, with wide experience of international arbitration.

ii) Mrs Teresa Zueco Pena, a Spanish lawyer, also admitted to the Bar in Brussels and, at the time of her appointment as arbitrator, shortly to sit for admission in New York. She has practised since 2000 in Madrid, Brussels and New York. The materials before me do not disclose the extent of her previous experience either of sitting as arbitrator or of conducting international arbitration.

iii) As Chairman, Mr Van Vechten Veeder QC, an English barrister with very wide experience of international arbitration.

10. In the usual way there was an exchange of requests for arbitration, answer, reply and execution of terms of reference. There was then exchange of memorial and counter memorial followed by a procedural hearing and a further round of reply memorial and counter memorial. The first main evidential hearings took place from 23 April to 5 May 2007 and from 28 May to 2 June 2007. A was represented at these hearings by Messrs Latham & Watkins, Paris. B was represented by English Counsel instructed by Messrs Herbert Smith and by Messrs Buffete Ramon Hermosilla of Madrid. Written submissions were made in August 2007. A final hearing took place on 28 and 29 November 2007. Further written submissions were made in January 2008. The Final Award was issued on 21 October 2009 and notified to the parties on 28 October 2009.
11. The Award was made by a majority comprising Mr Webster and Mr Veeder. The Tribunal ordered B to indemnify A pursuant to an express indemnity provision in the SPA, Article 10.1. The indemnity, in respect of multiple breaches of the express warranties given and representations made in the SPA, was in the sums of €15 million and €90,495. In addition the Tribunal awarded both pre-award and post-award interest, €6.5 million towards A's costs and US$440,000 in respect of the ICC's costs. It is a fully reasoned award running to 348 pages.
12. It is common ground that by agreement to the ICC Rules of Arbitration the parties waived their right to any form of recourse in so far as such waiver can be validly made – see Article 28.6 of the Rules. An application for leave to appeal under section 69 of the Act is therefore unavailable to B, although this is academic because by virtue of section 82 a question of law, to which alone an application under section 69 can relate, means for this purpose a question of the law of England and Wales. Under Article 10.6 of the SPA the amounts awarded should have been paid within ten days after publication of the Award. They have not been paid. However recourse under sections 67 and 68 remains available. The relief available under those sections of the Act does not yield to the agreement of the parties to exclude it.
13. The dissenting arbitrator issued a Dissenting Opinion of some 19 pages. It is expressed in unusually trenchant terms. Indeed Mr Vernon Flynn QC for A described it as intemperate. The dissenting arbitrator was highly critical of her colleagues. They had, she said, decided to ignore the parties' agreement to submit the SPA to Spanish law and had in an arbitrary fashion proceeded to decide the dispute "ex aequo et bono". They had she said done so for two reasons. Firstly, coming from a common law system, they did not feel comfortable with Spanish law and preferred "to grant an indemnity under Article 10.1 of the SPA as if such clause would be self-governing, and not limited by Spanish law". Secondly, they had felt it necessary to punish reprehensible conduct, ignoring the question whether such conduct caused any actual economic damage to A and imposing punitive and multiple damages in a manner which was not permitted under Spanish law and thus ignored the remedies available within the limits of the law of the contract. The majority had "hidden" behind a broad interpretation of Article 10.1 of the SPA and, despite their effort to camouflage it, wrongly granted punitive and multiple damages to punish the existence of the over-billing practices, "disguising" such a penalty as enormous contractual damages for breach of warranties and representations. The majority had ignored or exempted A from the burden of proof of the economic consequences of the over-billing conduct, accepting a damages calculation based on the existence of dolo notwithstanding that A's claims for dolo were dismissed. The Award was in consequence, she said, illegal, as a matter of public order, under Spanish law. The dissenting arbitrator concluded her Opinion with this paragraph:

"67. Finally, I would like to add that the Award sends a wrong sign to the market and, in my modest opinion, undermines the credibility of commercial arbitration. After reviewing the written and oral testimony in the proceedings and then, reading the Award one could conclude that an easy way to 'buy cheap' is to find a reprehensible conduct in the Target (that nevertheless does not affect the assets or the clients), go ahead with the transaction without renegotiating the price, and then initiate an arbitration so as the Buyer gets the moneys of the penalty imposed to the Target as a punishment for the reprehensible conduct even if the reprehensible conduct has not caused any economic loss to the Buyer. I sincerely believe that commercial arbitration should not permit such kind of business."

14. As is apparent from the Dissenting Opinion and as adumbrated above, Article 10.1 of the SPA lay at the heart of the conclusion of the majority. It provides:

"10.1 Indemnification

Except as otherwise provided in this Article 10, from and after the date hereof, the Seller hereby agrees to indemnify, defend and hold harmless the Purchaser or, at the Purchaser's sole option, the Companies (collectively, the 'Indemnified Parties') against and in respect of any reduction or shortfall in assets, or any increase or surplus in liabilities whatsoever, and any prejudice, damage, loss, or costs that are suffered directly by the Purchaser or any of the Companies (including penalties), and were not expressly disclosed in this Agreement or its Schedules ('Loss' or 'Losses'), resulting from or incident to:

(a) any breach or inaccuracy of any representation or warranty made by the Seller in this Agreement or in any certificate or other document delivered in connection herewith;

(b) any claim having its cause or origin prior to December 31, 2003;

(c) any inaccuracy or omission of the 2003 Audited Financial Statements in light of the Accounting Principles."

A's primary claim was advanced under this Article, but a claim was also advanced by reference to the Spanish Civil Code and in particular Articles 11.01, 11.06, 11.07, 11.24, 14.84, 14.85, 14.86 and 14.90.

15. At the arbitration the Tribunal heard evidence as to the content and application of Spanish law from two expert witnesses, Professor Gomez for A and Professor Fernandez-Armesto for B. That evidence is discussed at Part F of the Award, which contains what is on the face of it a learned and informed analysis of the relevant principles. The Tribunal's conclusions under this head were:

"F-51. As already noted, the Parties' respective submissions on this part of the case were complex. However, given its decisions elsewhere in this Award, it is possible to state the Tribunal's conclusions in summary form, as follows:

F-52. First, A cannot and, in fact does not now, advance its claim as an action for price reduction under Article 1486 of the Civil Code. Such a claim would fail on the facts of this case, in limine, given the expiry of the limitation period; and A never claimed rescission, for obvious practical and commercial reasons, making rescission impossible.

F-53. Second, on the facts, the Tribunal decides the Parties' dispute in the present case, in this Award, without attributing any dolo to B in the negotiations and execution of the SPA; and the Tribunal rejects the contrary case advanced by A.

F-54. Third, the substantive burden of alleging any dolo against a party rests on the aggrieved party making that allegation under the Civil Code. The Tribunal concludes that B has not discharged this burden of proof in regard to its allegation of dolo incidental against A in the negotiations and execution of the SPA; and accordingly the Tribunal rejects that part of B's case alleging the contrary.

F-55. Lastly, as noted at the outset of this Part F of the Award, A's primary claim is advanced under Article 10 of the SPA, as an express contractual indemnity for B's breaches of contractual warranties and representations under Article 9 of the SPA. That claims does not depend on dolo by B; it does not depend upon any statutory remedy granted under the Spanish Civil Code, including Articles 1101 and 1486 CC; and, as self-contained contractual remedy providing for an indemnity, it is not incompatible with the Spanish Civil Code. A's claim for an indemnity under Article 10 of the SPA depends only upon the scope and effect of Articles 9 and 10 of the SPA, as a lex specialis agreed between the Parties to be interpreted under the relevant Spanish rules of contractual interpretation (together with the ICC Rules). These matters are considered in the next Part G of this Award."

16. At Part G of the Award the Tribunal turned to the interpretation and application of Article 10.1. I must set out certain passages from this Part of the Award:

"G-23. Other factors: The Tribunal also notes that under Article 17(2) of the ICC Rules and (to the extent relevant) English law, as the lex loci arbitri under Article 14.7 [5] of the SPA (cited above in Paragraph A-10), a term of an otherwise valid contract is generally to be regarded as valid unless it infringes a mandatory provision of an applicable law. Under Spanish law, here the substantive law applicable to Article 10 of the SPA, the term of a contract is likewise valid unless it infringes a mandatory rule of Spanish law (Article 1278 CC). In the present case, no Party has alleged that Article 10 of the SPA infringes any mandatory rule of Spanish law or other rule of Spanish public policy. Nor did any Party assert that there was any Spanish custom or trade usage that would be relevant to, let alone modify, the interpretation of Article 10 of the SPA. Indeed, it was common ground that the language of Article 10 was based on Anglo-Saxon model wording and not on Spanish practices in this field of legal professional activity, to which the Tribunal has already referred elsewhere in this Award.

…

G-27. Accordingly, the Tribunal decides to approach the Parties' respective cases by reference to the unequivocal wording of Article 10 of the SPA. As already indicated, the Tribunal is here required to apply and does apply the Parties' express consensual wording, to be applied as a matter of English language and in accordance with Spanish legal rules of contractual interpretation. It does so hereafter in this Award, by reference to the actual words used in Article 10.1 of the SPA, as interpreted above. Those words provide the contractual remedy in the form of an indemnity, without any further limitation as to the nature of that remedy or the methodology applicable to calculate that remedy imposed on a claim for damages under the Spanish Civil Code. Where the Parties have expressly agreed, being free to do so under Spanish law, their own consensual remedy with a very broad scope, the Tribunal can see no reason why that contractual bargain should be affected by provisions of the Spanish Civil Code providing different non-consensual remedies in different circumstances. The Tribunal's approach, therefore, makes the issues arising under the Spanish Civil Code (considered in Part F above) ultimately of no consequence to this Award, given also the Tribunal's decisions on dolo.

G-28. It may be noted that the Tribunal's approach conforms strictly with Article 1091 of the CC, which provides: Las obligaciones que nacen de los contratos tienen fuerza de ley entre las partes contratantes, y deben cumplirse al tenor de los mismos. ('Obligations arising out of contracts are binding in law among the contracting parties and have to be complied with according to their terms'). As to this provision of the Spanish Civil Code, Professor Fernández-Armesto testified, in his first expert report (Paragraph 23), that: 'This action, which is frequently referred to as "actio ex contractu", derives from Art. 1091 CC and its purpose is to force the counterparty to comply with the contractual obligations it has accepted. A frequent remedy sought in an actio ex contractu is to obtain damages – damages as defined in the contract, or, if no definition of damages has been agreed, as defined in the Civil Code. In our case, this is the option chosen by Claimants: A is alleging a breach by B of its representations and warranties in clause 9 of the SPA, and requesting damages as defined under clause 10.' He likewise testified that contracting parties may agree, under Spanish law, their own consensual remedy in lieu of applying provisions of the Spanish Civil Code [ibid paragraph 72]. Whilst Professor Fernández-Armesto developed his own disputed interpretation of Article 10.1 of the SPA in support of B's case, it is significant that he supported the approach described above, as a general principle of Spanish law.

G-29. It may also be noted that the Tribunal's approach is not incompatible with Article 1107 CC, as regards damages 'foreseen or foreseeable' (cited in Paragraph F-4 above). First, the Tribunal is here addressing compensation for a contractual indemnity and not damages under the Spanish Civil Code. Second, the scope of that contractual indemnity agreed by B is recorded in the widest terms by the Parties' themselves, sufficient to include all claims determined below in favour of A in this Award.

G-30. Lastly, it should be noted that the Tribunal's approach, whilst disputed between the Parties as a matter of contractual interpretation, did not give rise to any argument by the Parties based on public policy or 'ordre public', whether Spanish or English, at any stage of these arbitration proceedings. It would of course violate fundamental principles of fairness in an international arbitration under the ICC Rules for any tribunal in its final award to address such un-made arguments based on un-alleged facts and un-cited law; and this Tribunal will not do so in this Award – save to conclude that it is far from manifest how the Tribunal's contractual interpretation of Article 10 of the SPA, even if erroneous, can possibly give rise to any violation of Spanish 'ordre public'."

17. The parties were agreed that it is a fair inference from the content of paragraph G30 that the majority arbitrators intended it as a riposte to what they knew the dissenting arbitrator had said or intended to say in her Dissenting Opinion. The same is true of paragraph Q97 which I reproduce below.
18. Part Q of the Award related to quantum issues. For present purposes I am content to adopt the analysis of Mr Michael Black QC for B of the approach adopted by the Tribunal.

i) It calculated the Total Consideration – paragraphs Q11 to Q16;

ii) It generated an Implicit Revenue Multiple by dividing the consideration by the revenue reported in C's Financial Statements – paragraphs Q17 to Q25;

iii) The Tribunal reduced the revenue figure by the amounts it had found to be overstated in breach of the representations and warranties to produce an Adjusted Revenue figure. It then multiplied the Adjusted Revenue by the Implicit Revenue Multiple to produce a Revised Price. It then deducted the Revised Price from the Total Consideration. This exercise produced a figure of €8.14 million which it described as "Compensation before risk adjustment" – paragraphs Q26 to Q60;

iv) The Tribunal then seemingly abandoned this figure and embarked upon a new calculation under which it again deducted the amounts it found to be overstated in breach of the representations and warranties from the Revenue as Reported in C's financial statements, but this time applied a Risk Adjustment to Implicit Multiple of 25% to represent the risk factor that a purchaser of C would factor into his price had he known of the matters constituting the breaches of the representations and warranties. This included the possibility of unproved, unknown and unquantifiable risks – paragraphs Q61 to Q78;

v) The 25% risk factor was then applied to the Implicit Revenue Multiple which was in turn applied to the Adjusted Revenue Base to yield a further discounted price, Estimate of actual Value Received. That further discounted price was then deducted from the price paid to produce Compensation after Risk Adjustment of €19.15 million – paragraph Q79;

vi) The Tribunal then reduced that figure to €15 million on the basis of its view as to what price A might have been willing to pay for C in all the circumstances "as now known". The Tribunal also stated that that figure included compensation in respect of the matters discussed earlier in the award where no specific compensation had been awarded – paragraphs Q81 to Q96;

vii) To this figure, was added the sum of €90,495.00 in respect of the costs of the services of a Mr A.

19. Before me B relied on the report of a further expert in Spanish law, Professor Dr Rodrigo Bercovitz Rodriguez Cano, Professor of Civil Law at the Autonomous University of Madrid. I understand why B wished for the purposes of this application to rely upon a further expert, independent of Professor Fernandez-Armesto who gave evidence on their behalf at the arbitration, although I have some reservations about the implications if this is generally to be permitted.
20. I have already pointed out that the dissenting arbitrator was deeply critical of the approach of the majority. I do not propose to summarise her criticism here any further than I have already done since it is not fully adopted by Professor Bercovitz. Professor Bercovitz does however confirm that the interpretation of the SPA, including Article 10.1, must be made according to Spanish law hermeneutic, i.e. interpretative, rules.
21. At this point I should say a word about the status of the Dissenting Opinion. It is not in my view formally part of the Award of the Tribunal. I was helpfully referred to the Final Report on Dissenting and Separate Opinions prepared by a Working Party of the ICC Commission on International Arbitration chaired by Mr Martin Hunter. The Report was adopted by the Commission on 21 April 1988. I am comforted to find that a large majority of the members of the working Party reached that same conclusion. A dissenting opinion might be admissible as evidence in relation to procedural matters, as where for example it is alleged that some aspect of the procedures adopted in the arbitration worked unfairly to the disadvantage of one party – see per Coulson J in F Limited v M Limited [2009] 1 Lloyd's Rep 537 at 543. So too where the proper law of the dispute is English law and there is an appeal on point of law, I can see that the views of a dissenting arbitrator might well inform the decision of the court. In the present case however I find it difficult to ascribe any formal status to the Dissenting Opinion. In so far as it expresses conclusions of Spanish law which go beyond any evidence as to the content of that law given at the arbitration, I do not see how I can have regard to it.
22. Professor Bercovitz does not in his very substantial report support the argument of the dissenting arbitrator to the effect that the award rendered by the Tribunal is illegal or invalid as being contrary to Spanish ordre public. When I combine this with the Tribunal's observations in Paragraphs G23 and G30 to the effect that it was not suggested at the arbitration that the Tribunal's approach gave rise to any violation of public order principles, it seems to me that I must simply disregard what the dissenting arbitrator says on that score. Furthermore Mr Black in his oral submissions rowed back from any suggestion that the majority arbitrators had consciously disregarded the applicable provisions of Spanish law, and he did not pursue the suggestion that the majority arbitrators had simply decided the dispute "ex aequo et bono". In these circumstances the views of the dissenting arbitrator are of little relevance to the application. They amount at best to inadmissible opinion evidence as to the process of reasoning adopted by the majority arbitrators and I doubt if I can properly have regard to them, let alone accord them any weight.
23. Reverting to the award of the Tribunal, I should finally set out certain paragraphs from Part Q, the title to which is "The Quantum Issues". The first five paragraphs of the Introduction to this Part of the Award are as follows:

"Q-1. As decided earlier in this Award, the Tribunal has dismissed any claim for dolo by A and every substantive claim by X; but the Tribunal has found that there were several breaches of the contractual representations and warranties made by B in Article 9 of the SPA agreed with A.

Q-2. The Tribunal has also decided that the appropriate measure of compensation for A with respect to those breaches is the contractual standard expressly agreed by the Parties in Article 10.1 of the SPA, namely the broad indemnity 'against and in respect of any reduction or shortfall in assets, or any increase or surplus in liabilities whatsoever, and any prejudice, damage, loss or costs…'. (This provision is cited in full above in Paragraph G-2 of this Award)

Q-3. As already indicated in this Award, the Tribunal here applies this specific contractual language agreed between and signed by the Parties, rather than the general provisions in the Spanish Civil Code as to damages for breach of contract (applying in the absence of the Parties' special agreement). As decided in Parts F and G of this Award, the Tribunal sees no inconsistency in this approach with other statutory remedies under the Spanish Civil Code; and the Tribunal's approach under Article 10 of the SPA is not to be equated with those statutory remedies (including damages or price reduction under Articles 1101 and 1486 CC).

Q-4. In particular, as discussed above in Part F of this Award, there was considerable debate between the Parties' legal experts over the use of different methodologies for A's claims under the Spanish Civil Code, including damages and price reduction. In interpreting Article 10 of the SPA, the exercise required of the Tribunal is materially different, as it is must reflect the agreement of the Parties on a contractual indemnity. The fact that the calculation of such an indemnity under Article 10.1 of the SPA may result in an amount or even a methodology that could be compared to a damages or price reduction calculation under Articles 1106 or 1486 of the Spanish Civil Code is irrelevant. The Parties here agreed, expressly, on the consensual remedy in the form of an indemnity in Article 10 of the SPA: and that indemnity could well overlap with damages calculated according to other remedies without signifying that the Tribunal has applied those other remedies and not Article 10.

Q-5. The Parties' respective cases on quantum in regard to Article 10.1 of the SPA produced starkly different results. The Parties relied principally upon the expert testimony of their respective expert witnesses, particularly Ms Ryan for A and Mr Haberman for B. The Tribunal found the testimony of Ms Ryan and Mr Haberman particularly helpful; and both were impressive and independent experts, intent on assisting the Tribunal in a complicated and difficult case for non-experts in forensic accountancy. However, as noted below, Mr Haberman's instructions from B significantly limited his expert evidence (as compared to Ms Ryan); and overall the Tribunal found Mr Haberman's testimony, as a result, materially less helpful than Ms Ryan's testimony."

I should interpose that Ms Ryan and Mr Harberman were both forensic accountants. At paragraph Q72 there is a pithy reflection of the extent of the malpractice by C which the evidence had revealed:

"Q-72. The risk allocation agreed by the Parties in the SPA was such that B was to bear the risk of any representations and warranties. It is difficult to imagine how financial statements could conceivably reflect even approximately the affairs of C given the level of tainted transactions. Not only was there a significant degree of risk; but there was also a clear contractual understanding that B was to bear this kind of risk as a material part of the Parties' commercial bargain, as recorded in the SPA. This risk was not assumed by A under the SPA."

The arbitrators' final conclusion is expressed as follows:

"Q-86. … as already indicated, the total consideration paid by A under the SPA was the compromised result of the Parties' negotiations and not the joint result of Ms Ryan's methodologies.

Q-87. As regards B, whatever the private thinking of A, B did not base its negotiating price directly on CX 6 or any other valuation sheet; and B also made it clear to A that in order to acquire C, A would have to pay a minimum price plus a premium, including the repayment of B's long-term loan to C of €37.7 million. Otherwise B would not have sold C to A, as A clearly understood and accepted during the negotiations.

Q-88. As regards A (with X), A was not an investment fund intending to pay a market price to acquire a certain stream of revenues for a given year in order to recover annually a certain percentage of its investment.

Q-89. In this case, A was ready to pay a premium over a market valuation in order to remove permanently one of its principal competitors from the world market, to increase A's market share and to prevent Y (as another competitor) from itself acquiring C; and all that was achieved by A under the SPA.

Q-90. To such extent, A's expectations in terms of annual revenues and return were therefore not the only and perhaps not even the primary consideration in acquiring the Company. Moreover, A's expectation as to a stream of revenue was not limited to 2003 as a particular year, which is the basis for Ms Ryan's approach.

Q-91. Moreover, there is a factor much emphasized by B: A's claims should not produce a result where the Company was worth nothing or almost nothing: see its case summarized in Part B above. The question arises as to what the overall price for the Company should have been in all the circumstances, as now known, assuming that A would have agreed to buy the Company and B would have agreed to sell it. The Tribunal has difficulty in finding that the overall price would have been €19.15 million lower than that paid under the SPA; but it is satisfied that such a price would have been at least €15 million lower than this contractual price.

Q-92. Accordingly, the Tribunal decides that, in all these circumstances, Ms Ryan's methodologies, however adjusted, cannot dictate any precise figure as the answer to the question facing the Tribunal as regards the Quantum Issues in this Award.

Q-93. Final Conclusion: Bearing all these further factors in mind, in particular that set out in Paragraph Q-91 above, the Tribunal decides to select a lesser figure required by Article 10 of the SPA to indemnify A, calculated as at 2 April 2004.

Q-94. Accordingly, the Tribunal reduces its initial figure of €19.15 million under Ms Ryan's methodologies and determines the amount of the contractual indemnity under Article 10 of the SPA at €15 million, payable by B to A. It would, of course, be possible to select a different figure; but the Tribunal is concerned that any higher figure would introduce an unacceptable element of subjective judgment inconsistent with the intent expressed in Article 10 and could therefore risk an injustice to B.

Q-95. On the other hand, the Tribunal considers that it is not possible to select any lower figure consistent with all the evidence, including the expert testimony, adduced in these proceedings; and that any such lower figure would risk in turn an injustice to A. The Tribunal is satisfied that the harm caused by B to A was substantial; and it considers that the compensation must likewise be substantial to provide the corresponding indemnity required under Article 10 of the SPA. The difficulties in assessing the precise amount of that indemnity do not mean that a lesser indemnity should be awarded, still less no indemnity at all.

Q-96. It should be noted that the Tribunal has also borne much in mind the claims awarded to A earlier in this Award where no specific compensation has been assessed in respect of such claims, on the basis, that the same can legitimately be taken into account in calculating this indemnity under Article 10 of the SPA as a whole: namely A's Claims 2, 4, 6B1 and 6B2 addressed above in Parts L, M and O of this Award. The Tribunal considers that Ms Ryan's methodology is sufficient, as here applied by the Tribunal, to compensate A without any further specific compensation, given the broad scope of the indemnity provided by Article 10.

Q-97. Lastly, the Tribunal expresses its self-confidence, in full, that its approach above does not grant any double-remedy to A for the same contractual harm, still less any punitive damages. A did not seek punitive damages. Nor does B allege that there has been any claim for punitive damages by A. Nor does Mr Haberman maintain in the Experts' Joint Report that Ms Ryan's calculations in any way involve a claim for punitive damages. As regards double remedies, A did assert remedies in the alternative. However, the discussion in this part of the Award is not about the amount of alternative remedies but relates to the amount of the indemnity claimed under Article 10 of the SPA as a result of serious breaches of Article 9 of the SPA. The facts of this case and the terms of this Award speak for themselves."

24. The essence of the challenge to the award is that the majority arbitrators failed to apply the chosen law, contrary to their obligation under section 46 of the Act which, so far as relevant, provides:

"46(1) The arbitral tribunal shall decide the dispute—

(a) in accordance with the law chosen by the parties as applicable to the substance of the dispute, or

(b) if the parties so agree, in accordance with such other considerations as are agreed by them or determined by the Tribunal."

Although as I have already indicated Mr Black in his final reply pulled back from the breadth of some of his earlier submissions, he nonetheless submitted that the dichotomy between disregard of the law and mistaken application of it is too blunt an instrument to be useful. He accepted that arbitrators could without breach of section 46(1) make an error in application of the law but suggested that the dividing line is where the mistake is so serious as to amount to a departure from the chosen law. Such a departure he suggested amounts to an excess of jurisdiction which may be challenged under section 67 of the Act, alternatively in a proper case it can be addressed under section 68(2)(b) – serious irregularity consisting in the tribunal exceeding its powers otherwise than by exceeding its substantive jurisdiction.

25. I cannot accept the integrity, utility or practicality of the suggested dividing line dependent upon the gravity of the error in application of the law. In my judgment Mr Vernon Flynn QC for A is right to contend that for a challenge of this sort to have any prospect of success, a conscious disregard of the provisions of the chosen law is a necessary but not a sufficient requirement. I should add for the avoidance of doubt that any suggestion of conscious disregard here is simply unsustainable. The arbitrators carefully considered the provisions of Spanish law. They concluded, at paragraphs G27 to G30, that Spanish law provides no impediment to the parties agreeing their own consensual remedy in lieu of applying provisions of the Spanish Civil Code. Professor Fernandez-Armesto did not dispute this proposition. Nor as I understand him does Professor Bercovitz. Paragraphs 59 to 61 of his report read:

"2. Proof of the contractual damages and the burden thereof according to Spanish Law

59. In principle, in Spanish Law, breach of contract does not by itself generate the obligation to pay compensation. For a compensatory action for breach of contract to be successful, the creditor must, as a general rule, prove not only the breach, but also that that breach has caused him damage. Only if effective damages have derived for the creditor has he the right to demand indemnification. This has been repeatedly stated by the Spanish Supreme Court, in what is a doctrine that is absolutely consolidated.

60. This general rule fails to apply only when the parties agree otherwise in the contract. So, for example, when they agree a conventional penalty, whereby the debtor undertakes to pay an amount predetermined in the contract in the event that it fails to comply with any of the obligations established therein.

61. Art. 10 of the SPA does not suppose any exception to the general rule whereby the breach only gives rise to the obligation to pay compensation if it causes damage to the creditor. On the contrary, it establishes the obligation for B to repay the losses suffered directly by A or C as a result of a breach of contract, without presuming or predetermining (quantifying) the indemnifiable loss. By default, art. 10 of the SPA is subject to the general rules regarding proof of damages according to Spanish Law which, as has already been said and as I explain later on, fill in the gaps in the contract. In other words, given the silence of Art. 10 of the SPA on how to quantify the compensation, the rules established by Spanish law on how compensation should be quantified and who is to prove the facts relevant to this effect, must be applied."

I note also paragraph 99:

"99. Nothing, however, impedes the parties to a contract from agreeing that, in case of non-compliance, the mere risk of damages must be compensated for; however this is not common contractual practice in Spain. In any case, if this is not indicated in the contract, and by comprehensive application of art. 1106 CC, the mere risk of damages does not give the creditor the right to exact compensation."

At footnote 62 to this passage Professor Bercovitz notes:

"In the same way that the parties can agree upon a conventional penalty apart from the reality of the damages caused by non compliance, they can agree that the mere risk of damages will be compensated for. Logically, in such a case, no additional damages can be required if the risk becomes definite, because then there would be a double compensation. Unless, again, it was expressly agreed that if the risk were to become definite, not only real damages and harms would be compensated for, but also those to which such risk referred. In this case, there is no doubt that the moderating power of the courts could operate if the lack of compliance were not damaging."

The thrust of the evidence of Professor Bercovitz as I read it is that he disagrees with the interpretation of Article 10.1 adopted by the majority arbitrators. If he were to convince the court that he is right the arbitrators would at most be shown to have made an error of law.

26. It was decided by the House of Lords in Lesotho Highlands Development Authority v Impregilo SPA and others [2006] 1 AC 221 that an error of law does not involve an excess of power under section 68(2)(b) of the Act. Mr Black submitted that Lord Steyn in that case was not addressing the misapplication of foreign law. I do not consider that the conclusion can be any different whether the law under consideration is English law or a foreign law. Making an error as to the application of the applicable law can involve no excess of power under section 68(2)(b) since, as Lord Steyn explained, the concept of a failure by the tribunal to reach the "correct decision" as affording a ground for challenge under section 68 is wholly inimical to the scheme and purpose of the Act. However as it happens Lord Steyn makes clear at paragraph 23 of his speech that he was approaching the matter on the basis that the tribunal might have made an error in either form: a misinterpretation of the underlying contract, which was governed by the law of Lesotho, or a misinterpretation of its powers under section 48(4) of the 1996 Act, an error of English law.
27. I would add that it would be odd indeed if an error in the application of foreign law could give rise to the possibility of an unconstrained challenge under section 68 bearing in mind that a challenge based upon an alleged error in the application of English law is subject to the filter requirement imposed by section 69 that, save with the agreement of the parties, no such challenge may be pursued without the leave of the court. Furthermore leave will only be granted if the statutory criteria spelled out in section 69 are satisfied.
28. Mr Black relies also upon section 67. Reliance upon section 67 was abandoned in the Court of Appeal in the Lesotho case and only the challenge under section 68 was pursued in the House of Lords. However that may be, it is plain that section 67 cannot here be invoked. Section 67 is concerned with challenges based on substantive jurisdiction. Section 82 of the Act provides that:

" 'Substantive jurisdiction', in relation to an arbitral tribunal, refers to the matter specified in section 30(1)(a) to (c), and references to the tribunal exceeding its substantive jurisdiction shall be construed accordingly."

Section 30(1) provides:

"Unless otherwise agreed by the parties, the arbitral tribunal may rule on its own substantive jurisdiction, that is, as to—

(a) whether there is a valid arbitration agreement,

(b) whether the tribunal is properly constituted, and

(c) what matters have been submitted to arbitration in accordance with the arbitration agreement."

It is plain that an error in the application of the chosen law does not involve a lack of substantive jurisdiction as it is defined in the Act. If demonstrated, which here it is not, a breach of section 46 can as I see it be addressed only under section 68(2)(b).

29. I regard these conclusions as entirely consistent with the decision of Langley J in Peterson Farms Inc v C&M Farming Limited [2004] 1 Lloyd's Rep 603. There the challenge was made under section 67 alone. As recorded in paragraph 7 of Langley J's judgment, the essence of Peterson's case was that the tribunal had no jurisdiction to entertain claims by entities which were not named as parties to the agreement. The challenge succeeded on that basis – see in particular paragraphs 67 and 68 of the judgment. Mr Black submitted that Peterson should properly be analysed as a case involving section 46. It is true that Langley J discussed at paragraph 46 whether the tribunal's approach was in accord with section 46, and concluded that it was not. However because the tribunal so plainly had no jurisdiction to entertain claims by entities who were not party to the arbitration agreement, Langley J had no need to consider whether a breach of section 46 is remediable under section 67. I have already concluded that it is not. In so far as Professor Merkin at paragraph 7.31 of his work Arbitration Law, 2009, suggests to the contrary, I respectfully disagree. Langley J also observed at paragraph 43 of his judgment that the identification of the parties to an agreement is a question of substantive law. He did not need to discuss the implications of the failure to apply the correct law having arisen from an erroneous interpretation of the underlying agreement.
30. For all these reasons I have concluded that the material relied upon by B does not disclose a case with a realistic prospect of success for the challenge of the Award under section 67 and/or section 68 of the Act. I would go further. In my judgment once it is accepted, as Mr Black did in his reply on B's behalf, that no allegation of impropriety is made against the arbitrators, then the challenge to the Award is simply hopeless. An allegation of conscious disregard of the governing law is an allegation of impropriety and Mr Black was right to eschew it. The essence however of B's case is that the Tribunal erred in its construction of Article 10.1 under the relevant Spanish rules of contractual interpretation. That cannot possibly be a valid ground of challenge. I would venture to suggest that this challenge would not have been made had not the dissenting arbitrator put forward (i) the allegation of impropriety which B eschews, and (ii) the suggestion that the Award is illegal, as a matter of public order under Spanish law, which Professor Bercovitz does not support.
31. The preliminary issue must accordingly be answered "no".