Goodwood Investments Holdings v Thyssenkrupp Industrial Solutions  EWHC 1056 (Comm).
A recent decision of the Commercial Court provides a useful reminder of a little used tool in the arbitration toolbox – the ability to apply under section 45 of the Arbitration Act 1996 to refer questions of law to the English court for determination.
This article examines the recent decision of Goodwood Investments Holdings v Thyssenkrupp Industrial Solutions which saw the Court determine an extremely rare application under section 45 (s. 45) of the Arbitration Act 1996 (1996 Act).
The preliminary reference procedure provided by s. 45 can save time and costs by having the English Court determine a point of law and yet it has only been used a couple of times over the last 20 years. It is arguably an unjustly neglected rule deserving both a wider audience and application.
Since 1996, the prevailing ethos as to the proper role of courts in the arbitral process has waxed and waned. Traditionally, English courts have been known for respecting the autonomy and independence of arbitrators to determine claims without interference by the courts. However more recently, we have seen comments from senior members of the English judiciary reiterating the need for a complementary and collaborative relationship between the two disciplines. It therefore seems likely that if parties to an arbitration can identify a suitable issue to refer to the English court under s. 45 then the prevailing wind of judicial sentiment suggests they would be willing to hear it.
Given the rarity of s. 45 applications, this article commences with a reminder of the relevant provisions before turning to discuss previous examples of s. 45 applications, as well as the decision in Goodwood Investments Holdings. The article concludes by seeking to highlight the potentially wider use of this procedure.
Our conclusion is that, although the instances for a s. 45 application may remain relatively infrequent, users of arbitration should keep it in mind as it could be a very powerful tool to deploy in the right case.
Section 45 of the 1996 Act – how does it work?
Section 45 of the 1996 Act provides, so far as relevant (emphasis added):
(1) Unless otherwise agreed by the parties, the court may on the application of a party to arbitral proceedings (upon notice to the other parties) determine any question of law arising in the course of the proceedings which the court is satisfied substantially affects the rights of one or more of the parties.
An agreement to dispense with reasons for the tribunal's award shall be considered an agreement to exclude the court's jurisdiction under this section.
(2) An application under this section shall not be considered unless—
(a) it is made with the agreement of all the other parties to the proceedings, or
(b) it is made with the permission of the tribunal and the court is satisfied—
(i) that the determination of the question is likely to produce substantial savings in costs, and
(ii) that the application was made without delay.
(3) The application shall identify the question of law to be determined and, unless made with the agreement of all the other parties to the proceedings, shall state the grounds on which it is said that the question should be decided by the court.
(4) Unless otherwise agreed by the parties, the arbitral tribunal may continue the arbitral proceedings and make an award while an application to the court under this section is pending.
(5) Unless the court gives leave, no appeal lies from a decision of the court whether the conditions specified in subsection (2) are met.
(6) The decision of the court on the question of law shall be treated as a judgment of the court for the purposes of an appeal.
But no appeal lies without the leave of the court which shall not be given unless the court considers that the question is one of general importance, or is one which for some other special reason should be considered by the Court of Appeal.
Previous applications under s. 45 of the 1996 Act
Aside from the recent decision in Goodwood Investments Holdings, our searches have identified only three other reported decisions arising from applications under s. 45 of the 1996 Act. Two decisions originate from the Technology and Construction Court (TCC) dating from 2006 and 2015, whilst the third is a decision of the Chancery Court dating from 2006.
The 2006 TCC decision in Taylor Woodrow Holdings Ltd v. Barnes & Elliott Ltd  EWHC 1693 is the leading case in this area. The parties agreed to refer to the Court a question of law arising in the course of an arbitration brought by the respondent contractor against the applicant employer for the costs associated with dealing with unforeseen structural works required in the conversion of a former hospital into residential dwellings. The specific issue was whether the applicant employer had retained the costs risk associated with the unforeseen works or if such risk fell on the respondent contractor. Ultimately the Court found that the applicant employer had not retained the risk of the unforeseen risks. However, in coming to its decision it considered the jurisdictional requirements to found a s. 45 application and held that all of the threshold conditions were met. Nevertheless, of note, the Court stated that it was not bound to determine any question of law posed simply because the threshold conditions were met but rather the Court had a discretion as indicated by the word "may" in s.45(1). In this case the Court decided to exercise its discretion taking into account that the parties had agreed in the contract conditions that any question of law arising could be referred to the Court; all of the factual evidence was before the Court and was not disputed and there was likely to be a saving of costs if the legal basis of the contractor's claims was established before the parties spent substantial sums of money preparing their cases.
In the 2015 TCC decision in Secretary of State for Defence v. Turner Estate Solutions Limited  EWHC 1150 (TCC), the s. 45 application was brought by the Secretary of State for Defence (SSD), with the permission of the tribunal. The s.45 application was in connection with an arbitration claim brought by Turner Estate Solutions (TES) against SSD for payment under a contract for design and construction works. The contract in question was what is known as a maximum price target cost contract – where TES's remuneration would be based on their actual costs, plus profit, although the final price payable would be calculated by a comparison of the actual costs versus the target costs in order for the parties to share in any costs over-runs or under runs. In addition, and importantly, the contract stipulated a maximum price which could not be exceeded. In fact, TES had greatly exceeded the maximum price and was claiming £68 million in its arbitration against SSD. The Court was therefore charged with determining, first whether s. 45 was engaged and secondly, if so, the answers to the preliminary questions of law which related to whether the target cost figure could be adjusted in the circumstances and if not, how the fixed price was to be determined under the contract. The Court held that s. 45 was engaged on the basis that the preliminary issues before the Court also comprised the central issue in the arbitration claim, the sums at stake were substantial and their determination would conclude the entirety of the respondent (TES's) claim against SSD, leaving only SSD's counter-claim for the tribunal to hear. All in all, the Court was satisfied that determination of the s. 45 application either way would substantially affect the rights of both parties and would produce costs savings. The Court also went on to determine the preliminary issues in favour of the applicant, SSD.
The third decision in Johnson v Jolly  EWHC 3002 (Ch) relates to a claim over an option to purchase property and the valuation of such property. In this case, the s. 45 application was a peripheral issue, with the parties having agreed the specific questions of law (which were matters of construction) and that determination of such issues would substantially affect the rights of the parties. Accordingly, this decision does not provide any additional useful commentary to that already mentioned.
A closer look at Goodwood Investments Holdings
In Goodwood Investments Holdings, the Court was asked by the parties to determine whether the arbitration claim under a shipbuilding contract had been settled in without prejudice correspondence between the parties' solicitors. The claimant purchaser contended that it had been settled, the defendant builder that it had not. In this case, both parties (with the consent of the arbitrators) had referred the question to the English Court as both parties and arbitrators were uncomfortable in the arbitrators considering the 'without prejudice' correspondence only to determine that no settlement had been concluded. In this scenario, the parties and tribunal faced the risk of either the existing tribunal having to resume hearing the parties' underlying dispute with knowledge of the parties' dealings (that it would be better the tribunal did not have) or being replaced with a new and untainted tribunal with the ensuing time and costs implications. In this case, the Court held that there had been no settlement of the parties' arbitration dispute. Accordingly, the s. 45 application was well brought as it avoided the aforementioned risks and the existing tribunal is now able to hear the arbitration, untainted by having seen the contents of the without prejudice correspondence.
Analysis of an application s. 45
As noted above, a s.45 application may only be brought by a party to an arbitration and the court will only consider it either if the application is made by all parties to the arbitration (scenario 1) or by one party with the permission of the tribunal (scenario 2).
In both scenario 1 and 2, the court must be satisfied that the question of law substantially affects the rights of one or more of the parties. Given the limited decisions to date, there is not a great deal of judicial guidance on this threshold requirement, however based on Taylor Woodrow Holdings Ltd we know that where more than half of a party's pleaded case turns on the determination of the application then this condition will be met.
In scenario 1, the parties' agreement to bring a s.45 application can be reached either at the time the dispute arises or in advance in the arbitration agreement.
In scenario 2, the party making the application must also satisfy the court that:
(i) the application was made without delay, so if the application is to succeed then it should be made as soon as practicable and any delay will need to be justified; and
(ii) determining the question of law which is the subject of the application is likely to produce substantial savings, which will usually be satisfied if a decision one way will determine the result altogether or at least shorten the hearing.
However, as is clear from the drafting of section 45(1) and the decision in Taylor Woodrow Holdings Ltd., the fact that the threshold conditions for a s.45 application are met does not mean that the court is bound to hear the application but rather the court retains a discretion whether to hear the application or not.
If you are considering a s. 45 application, it is important to keep in mind that the court's power under s. 45 is limited to determining questions of law (and not fact). A question of law is defined in section 82(2) of the 1996 Act but it is not always straightforward to distinguish between issues of law and fact. The most straightforward example are questions of construction of a contract or statute. It is also clear that questions of foreign law, questions relating to the appointment of arbitrator and questions relating to the jurisdiction of the tribunal cannot be considered by a court under the s. 45 procedure. Questions of procedure may be able to be considered by a court under s.45 but a distinction must be drawn between (i) questions about whether the tribunal has the power or duty to make (or refuse to make) a particular procedural order or direction which requires construing the 1996 Act and the arbitration agreement which may be considered by a court under s. 45 and (ii) questions concerning the exercise by the tribunal of a discretion to make (or not to make) an order or direction which are not generally questions of law.
It is important to note that s.45 is not a mandatory provision under the 1996 Act and therefore the parties may agree to exclude this clause. In fact, the limited use of the s.45 procedure may be down to the fact that s.45 may be excluded by virtue of adopting institutional or other arbitration rules and/or if parties agree to dispense with reasons for any arbitral awards. It is unclear if parties when drafting agreement clauses are aware of this and therefore are taking deliberate decisions to exclude the ability to bring a s.45 application or if its exclusion is accidental.
When might a s. 45 application be useful?
As the cases show, the s. 45 application can be a very effective tool. We recommend the procedure is considered where:
- The arbitration turns solely, or mainly, on a point of law or contract interpretation such that determination of this issue would lead to a quick win or early settlement. In this scenario, the parties might want to consider a s. 45 application as an alternative to requesting the tribunal determine the issue as a preliminary issue.
- If it is apparent that the case will turn on an issue of law and whichever way the point is determined the losing party is likely to seek to appeal against the award then a s.45 application at the outset could save a great deal of time and costs.
- A discrete question of law arises in the course of the arbitration that would be better determined by a neutral third party decision maker – for example, examining if certain material is covered by legal professional privileged or if certain without prejudice documents evidence a settlement or not (as in Goodwood Investments Holdings).
In our view the decision in Goodwood Investments Holdings is a timely reminder of the s. 45 application procedure. In this article, we have sought to publicise not only the requirements and procedure for a s. 45 application but also to shine a light on the potential uses of this preliminary reference procedure.
Without a doubt – as Mr Justice Males commented in Goodwood Investments Holdings - "... this section is relatively little used but, as this application shows, it has a useful role to play."