MATRIMONIAL FINANCE UPDATE

ARBITRATION – COULD THIS BE THE FUTURE OF FINANCIAL REMEDIES POST-LOCKDOWN?

The backlog of cases in the Family Court is growing and despite the relatively rapid uptake of remote technology for FDAs and FDRs, the delay which clients face in waiting for a Final Hearing can seem disproportionate. The President of the Family Division and Head of Family Justice, Sir Andrew MacFarlane, in his most recent ‘View from the President’s Chambers’ chose to highlight one Court of Appeal case in particular which has opened the door to a different route to final determination of our clients’ applications. On 23^rd October 2020, the Court of Appeal handed down judgment in Haley v Haley [2020] EWCA Civ 1369 and in doing so deliberately removed a barrier to the wider use of Arbitration as an alternative dispute resolution in financial remedy cases.

Litigation background

Mr and Mrs Haley’s final hearing was postponed as a result of judicial unavailability (sound familiar?) and so they agreed to use a family arbitrator instead, who heard their case in private and made an ‘Arbitral Award’. In committing to arbitration, the parties had both signed the appropriate form [ARB1 FS] to acknowledge that they both accepted that: ‘Arbitration is a process whose outcome is generally final. There are very limited bases for raising a challenge or appeal, and it is only in exceptional circumstances that a court will exercise its own discretion in substitution for the award’. Mrs Haley looked to have the terms of the Arbitrator’s award perfected into a consent order, however, Mr Haley was not satisfied with the Arbitrator’s decision and sought to persuade the High Court that the circumstances were exceptional.

Challenging an Arbitral Award

The Family Law Arbitration Financial Scheme operates under the Institute of Family Law Arbitrators (IFLA). The IFLA Scheme’s authority derives from the Arbitration Act, 1996. [for more information on the scheme itself go to their website: ifla.org.uk]

The Arbitration Act (AA) provides the following means to challenge an arbitral award:

The arbitrator ‘lacked substantive jurisdiction’ (s67 AA).

There was ‘serious irregularity affecting the tribunal, the proceedings or the award’ (s68 AA).

The award was wrong on a question of law (s69 AA).

The test under s69 is applied on the basis of the facts as found by the arbitrator. The party challenging the award requires permission, and must show that the decision on the question of law was ‘obviously wrong’.

These limited avenues of challenge reflect the origins of arbitration as a commercial dispute resolution service designed to produce certainty for the companies involved in highly technical contract disputes.

The First Appeal (at the High Court)

Deputy High Court Judge Ambrose who heard Mr Haley’s initial appeal followed previous High Court decisions handed down by Munby P and Mostyn J in finding that, apart from SS67-69 AA, the only potential to challenge an arbitral award was further to an alleged mistake or supervening event. This contrasts sharply to the right of appeal Mr Haley would have had if his Final Hearing had been heard in the Family Court as originally intended by the couple.

Where there has been a contested financial remedy trial heard in court with a Judge’s determination of the issues in dispute and final order handed down, leave to appeal is, of course, required. However, permission will be given if the appeal judge concludes that there is a real (that is realistic not fanciful) prospect that the appellant can satisfy the appeal court that the order made was: (a) wrong, or (b) unjust because of a serious procedural or other irregularity.

This court ‘appeal test’ is a markedly less restrictive one than that traditionally associated with an arbitral award. Mostyn J had stated [in J v B (Family Law Arbitration: Award) [2016] EWHC 324 (Fam)] that “an assertion that the (arbitral) award was “wrong” or “unjust” will almost never get off the ground: in such a case the error must be so blatant and extreme that it leaps off the page.’ The underlying reasoning of the High Court for previously restricting the basis of appeal against an arbitral award to one in which an error ‘leaps off the page’ was that the parties have agreed as a matter of contract between themselves to accept the Arbitrator’s decision and therefore they should be held to that agreement, as if to a consent order.

What did the Court of Appeal say?

The Court of Appeal (which is where Mr Haley went next) did not agree with the High Court’s approach. King LJ giving the leading judgment stating that ‘The agreement to arbitrate is an agreement that a third party will determine the terms. It is not, at the time the agreement is reached, an agreement to any particular terms’.

The Court of Appeal considered that the ‘increasingly strict’ test with the ‘correspondingly increasingly narrow’ basis of challenge after taking a case to family arbitration was incorrect. The judgment in Haley provides a significant shift in the law. King LJ found that ‘family cases are different from civil cases’, as any ‘enforceable order following family arbitration ultimately derives its authority from the court and not from the arbitration agreement’

King LJ pointed to the fact that the family court can decline to make an order in the terms of an agreement negotiated by parties in circumstances where there are ‘good and substantial grounds for concluding that an injustice will be done by holding the parties to the terms of their agreement’, or where ‘it would not be fair to hold them to their agreement’ (per Lord Phillips in Radmacher v Granatino [2010] UKSC 42). Given this, she said that:

‘It must, in my view, equally follow that where the agreement, albeit contractual, is for a third party to decide the terms that are in dispute, the court can decline to make the order where there are good and substantial grounds for concluding that an injustice will be done if an order is made in the terms of the arbitral award.’

Therefore, the approach adopted by Sir James Munby and Mostyn J, who had sought to limit challenges to an arbitral award in family cases was criticised.

The Court of Appeal went further, stating that as the orders determining the enforceable legal rights of the parties following divorce, are made under the Matrimonial Causes Act, 1973 (MCA), and not under the AA, there should be no procedural requirement for the potential appellant to first to make an application under the AA, before asking the Family Court to decline to make an order under the MCA 1973 in the terms of the arbitral award.

The new approach

King LJ set out that ‘the logical approach by which to determine whether the court should decline to make an order in the terms of the award, is by reference to the appeal procedure and the approach found in the FPR 2010’.

The first step would be for the prospective appellant to show cause on paper why an order should not be made in the terms of the arbitral award. If the judge considering the matter forms the view that there is a real prospect of them succeeding in demonstrating that the arbitral award is wrong, the matter should be listed for a review hearing. If, however, the court takes the view that the objection made to the award would not pass the permission to appeal test, then ‘it can make an order in the terms of the arbitral award without more ado and penalise the reluctant party in costs’.

The correct test

The court will only go on to substitute its own order ‘if the judge decides that the arbitrator’s award was wrong; not seriously, or obviously wrong, or so wrong that it leaps off the page, but just wrong’.

The way forward

Within this judgment the Court of Appeal has given some very significant signposting to matrimonial finance practitioners in these unprecedented times. The following quotations for the Judgment are worth considering in detail:

“There is a common misconception that the use of arbitration as an alternative to the court process in financial remedy cases is the purview only of the rich who seek privacy away from the courts and the eyes of the media. If that was ever the position, it is no more.”

“It is of the utmost importance that potential users of the arbitration process are not deterred from using it, either because the outcome is not seen as sufficiently certain, or because arbitration is regarded as providing no adequate remedy in circumstances where one of the parties believes there to have been an unjust outcome.”

“Parties must go into arbitration with their eyes open with the understanding that, all other things being equal, the award made at the end of the process will thereafter be incorporated into a consent order.”

“It is not necessary for these rare cases (of an appeal against an arbitral award) to be put before a High Court judge as a matter of course. They will be allocated to either the specialist circuit judges who hear financial remedy appeals from the district judges sitting in the financial remedies court or to the High Court, whichever is appropriate on the facts of the case.

Conclusion

At one fell swoop, the Court of Appeal in Haley has removed the major disadvantage of the Arbitration process. Before Haley it was only possible to contemplate an ‘appeal’ against an arbitral award if it was ‘so wrong it leapt off the page’. When that was added to the notoriously broad discretion inherent in the application of S25 MCA, to Financial Remedy cases, it was enough to deter many clients from considering Arbitration.

Now that the higher bar to appeal has been removed, it may be that many more clients will consider Arbitration. The pointed comments of the President immediately after this Judgment was handed down indicates that we are being encouraged to have this conversation with our clients. Although the Arbitrator’s fee must be paid by the parties, there is only one ‘Hearing’ not (potentially) three, and therefore it is not necessarily a more expensive option overall. More information can be found, including the profiles of Arbitrators who work locally, at ifla.org.uk.

To discuss how the issues raised within this article could impact on your client’s case please contact the family clerks to make an appointment for a Conference with one of our matrimonial finance team.