Arbitral Jurisdiction


A. Drawing Lines

For pure intellectual challenge, few endeavors match the task of setting principled standards to distinguish an arbitrator’s good faith mistakes from an excess of authority. In bargaining for out-of-court dispute resolution, parties to arbitration agreements commit themselves to respect the result regardless of who wins. The award is intended to be final even if one side thinks that the arbitrator got it wrong.

Arbitration is a consensual process, however, unfolding within an enclosure created by the contract and applicable arbitration law. The litigants accept the risk of arbitrator mistake only for decisions falling within the borders of arbitral authority.

Great practical importance attaches to how lines are drawn between arbitrator mistake and excess of authority. Indeed, the distinction goes to the heart of what arbitration is all about. A simple error is normally not subject to appeal, since the litigants have asked an arbitrator, not a judge, to decide the legal and factual merits of their disputes. By contrast, no court should recognize an award falling beyond the arbitrator’s authority. Thus some measure of judicial scrutiny over arbitral jurisdiction remains a vital safeguard to the integrity of the process, and constitutes an essential corollary to enforcement of legitimate awards.

B. The Lesotho Highlands Decision

Error of law or excess of powers?

The House of Lords decision in Lesotho Highlands v. Impreglio1 serves as a prism through which to separate several of the themes that inhere in the nature of arbitral authority. In rejecting arguments that an error about the currency of an award represented an excess of jurisdiction, their Lordships confirmed a healthy appreciation that arbitrators do not exceed their powers simply by making a mistake.

Construction of a dam in the African nation of Lesotho gave rise to a dispute between the builder and the owner. The dispute was submitted to arbitration by a three-member tribunal sitting in London. The builder claimed amounts which, had they been paid when due, would have been payable largely in Lesotho maloti.

By the time of the award, however, the project was finished, and the contractors had no need of maloti. The arbitrators, therefore, denominated the award entirely in four hard European currencies that the contract had indicated for non-maloti payments, using the historic exchange rates provided in the contract.2 Since the maloti had collapsed between the contract payment date and the award, the owner suffered the downward slide of the maloti.

Understandably disappointed, the owner challenged the award. A frontal attack, however, was not possible. As permitted under the 1996 Arbitration Act,3 the parties had excluded appeal on questions of law by electing to arbitrate under the rules of the International Chamber of Commerce, which provide for the finality of awards.4

The Arbitration Act, however, also permits awards to be set aside for “serious irregularity,” defined to include “the tribunal exceeding its powers.”5 The owner argued that the arbitrators went beyond their powers by the way they fixed the award in European currencies.6

Section 48 of the Arbitration Act permits arbitrators to “order the payment of a sum of money in any currency.” The owner argued that the hard currency award was an improper exercise of this power, and misapplied the contract and applicable law. According to this view, the Arbitration Act simply clarified that awards need not be made in sterling.

Their Lordships decided that the award’s choice of currency did not constitute an excess of powers. In so doing, they looked to the radical nature of recent changes in English arbitration law, evidencing an intent to restrict judicial intervention in the arbitral process. The result was an affirmation that a mere error of law will not amount to an excess of power. In both policy and logic, this result seems correct. Arbitration would not be binding if awards could be vacated simply because arbitrators misinterpreted the contract or imperfectly exercised their powers.7

Prohibition on Bootstrapping

The decision in Lesotho Highlands does not stand for the proposition that arbitrators can create their own jurisdiction. While the principal speech by Lord Steyn suggested that the Arbitration Act gave “unconstrained” power to make an award in any currency,8 his colleagues disagreed.9 Lord Steyn then went on to posit that the power was not unconstrained, and that arbitrators had erred in interpreting either the contract or the Arbitration Act. In either event, he said, the arbitrators would have done no more than commit error of law.10

That a mistake in contract interpretation should not be reviewable seems uncontroversial. The arbitrators’ job is to interpret the parties’ agreement.

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