Section 68 Challenge to Arbitral Award Succeeds Over Implied Term

The Circuit Commercial Court has allowed a challenge to an arbitral award under section 68 of the Arbitration Act 1996 (the “Act”) finding that there was a serious irregularity where a sole arbitrator did not provide adequate opportunity for a party to respond to an implied term argument which neither party had raised.

In this Legal Update, we take a closer look at the decision of Stonegate Farmers Ltd v. Chucks Farm Ltd, which provides important guidance for commercial parties and arbitrators in relation to section 68 applications, as well as an arbitrator’s duty of fairness under section 33.

Background

The parties entered into an egg supply agreement, under which Chucks Farm supplied eggs to Stonegate (the “Agreement”). The Agreement obliged Chucks Farm to comply with the British Egg Industry Council's Code of Practice for Lion Eggs, under which a Lion Code registration number for Chucks Farm was held by Stonegate as the registered subscriber. A dispute arose over whether the Agreement had been extended beyond January 2024; Chucks Farm denied any extension and ceased supply.

In arbitral proceedings, Chucks Farm alleged that Stonegate had breached the Agreement by failing to release the Lion Code, but did not identify any express term—or formulate an implied term—in support of that obligation. At the substantive hearing, Stonegate's counsel submitted that Chucks Farm had failed to identify any contractual obligation that had been breached, and that remedies could not be granted "for breach of non-existent terms".

Despite this, in his award, the sole arbitrator found the existence of an implied term requiring release of the Lion Code upon the contract's expiry (to give the Agreement business efficacy), and accordingly awarded damages for losses incurred in not being able to enter more expensive contracts with the benefit of Lion Code assurance.

After receiving the award, Stonegate made an application under section 57 of the Act for the arbitrator to explain and clarify the implied term. Chucks Farms in turn produced a response. The arbitrator then gave Stonegate only one clear working day to address the law of implied terms—a deadline its counsel could not meet due to other commitments—and issued his section 57 decision without Stonegate's submissions.  The arbitrator explained that this decision could not be allowed to “drift” due to counsel unavailability, whilst mentioning his own imminent three-week holiday, and given Stonegate had not confirmed they had paid damages already accrued under the award. The arbitrator rejected the section 57 application on the basis that there was no error requiring correction or clarification.

The Challenge

Stonegate challenged the award under section 68 of the Act, alleging serious procedural irregularity on the basis that the arbitrator had breached his general duty under section 33(1)(a) by deciding the case on a point—the implied term—that neither party had pleaded or argued before the award was issued. (Stonegate also sought, alternatively, leave to appeal under section 69 but the application fell away with the success of the section 68 challenge).

Chucks Farm resisted the section 68 challenge, contending that the implied term had been sufficiently "in play" in the arbitration so that there was no breach of the section 33(1)(a) duty; alternatively, if there was a breach, it did not give rise to a substantial injustice.

Legal Principles

HHJ Russen KC extracted the following key legal principles from case law:

• There is a distinction between a new point triggering the need (under section 33(1)(a)) for each party to be given a “reasonable opportunity” to address it and a point which was “in play” in the arbitration (which will usually provide the parties with sufficient opportunity of that nature).
• A point can be in play even if it has not been precisely articulated in a pleading or in argument. Reliance Industries confirms that points of unargued law and construction are within the scope of the overriding duty of fairness imposed by section 33. But whether there has been a reasonable opportunity to present or meet a case is a question of fairness—and always fact specific.
• As a matter of natural justice, if an arbitrator thinks the parties have “missed the real point,” the arbitrator is obliged to put the point to them so that they have an opportunity to deal with it.
• If a term is to be implied on the basis of business efficacy, it must be reasonable and equitable, capable of being expressed with clarity and precision, required in order to give commercial or practical coherence to the contract, so obvious that it goes without the need for the parties to express it, and not inconsistent with any express term (Candey Ltd v Boseh).
• A general breach of section 33 won’t suffice for section 68 purposes. The applicant also needs to show that the breach has (or will) cause them substantial injustice.
• Any resulting “substantial injustice” must be based on the applicant’s case being reasonably arguable. There is no requirement to show that the arbitrator(s) would have been persuaded to the contrary by the submissions the applicant would have made, had they not been deprived of a reasonable opportunity to make them.

Court’s Decision

HHJ Russen KC’s review of the factual record showed that the implied term was not “in play” in submissions or oral argument prior to the award and “came out of the blue” in that award.

Unlike the arbitrator, HHJ Russen KC did not consider that the implied term was so obvious that there could be no reasonable argument about it. He said that, before making the award, the “arbitrator should have raised the point with the parties … so that they had the chance to comment on the reflection of his legal analysis behind the Implied Term” (per Reliance Industries).

Applying the legal principles above to the facts, he said it was reasonably arguable that Stonegate were entitled to have the dispute over the termination date determined “without paying the price imposed by the Implied Term”.

He concluded that Stonegate were denied a reasonable opportunity of putting their case against the implied term to the arbitrator (one working day being generally insufficient; given their counsel unavailability they, in fact, had no opportunity at all to address the point), that this was a breach of section 33 and that this was a breach that resulted in substantial injustice being faced by Stonegate. He remitted the award back to the arbitrator for reconsideration pursuant to section 68(3) of the Act.

The arbitrator will now need to reconsider the implied term, Chucks Farm’s damages claim and the issue of costs after hearing the parties’ full argument on the implied term point.

Our Observations

• The case is a useful reminder that arbitrators in English-seated arbitrations must continuously be mindful of their duty of fairness and the need to provide parties with adequate time to respond to a case against them (such time will depend on the relevant circumstances), otherwise their awards risk being challenged.
• Balancing efficiency with fairness in arbitration is not always an easy task, and it remains true that only egregious breaches of due process will lead to judicial intervention. This is evidenced by the 2024-2025 Commercial Court Report which shows that, despite an increasing number of section 68 applications (48 during 2024-2025, a 23% increase from 2023-2024), their success rate remains low. HHJ Russen KC characterised this decision as a “relatively rare” example of where the English court acts upon the “longstop” in section 68 because “the tribunal has gone so far in its conduct of the arbitration that justice calls out for it to be corrected.”
• As a final observation, the arbitrator’s decision under section 57 of the Act provided the judge with “considerable insight” into the arbitrator’s analysis of the implied term without having had the benefit of those arguments. This shows that section 57 decisions may be helpful evidence for parties to adduce in challenge applications to increase their prospects of success.