The new LCIA rules' consolidation rule - a trap for the unwary

The new 2020 LCIA rules came into force on 1 October 2020 and have been widely welcomed by practitioners and users alike. However, new consolidation provisions may lead to awards obtained in arbitrations consolidated under the LCIA rules being unenforceable.

It is well established that parties must have equality of treatment in relation to the appointment of arbitrators. If a party is deprived of this equality, then they are likely to have grounds to challenge or resist enforcement of any ensuing award. Article V(1)(d) of the New York Convention, for example, stipulates that recognition and enforcement of an arbitral award may be refused where "the composition of the arbitral authority... was not in accordance with the agreement of the parties". There are powerful public policy reasons for this rule, as a lack of equality of treatment in the appointment of arbitrators undermines the consensual and equal nature of the arbitral process.

Such a challenge was successful in the French case of Siemens AG & BKMI Industrienlagen GmbH v Dutco Construction Company, which concerned an arbitration in which two of the three parties to a consortium agreement, Siemens and BKMI, had been required by the ICC to jointly appoint a single arbitrator, which they did only under protest. An interim award of the tribunal was subsequently challenged in the French courts, leading the Cour de Cassation to set aside the interim award on the grounds that the constitution of the tribunal had been against public policy because it had violated the principle of the equality of the parties in the appointment of arbitrators.

It is such challenges that could result from the application of the new consolidation provisions in the LCIA rules. Under Article 22A of the new rules, the tribunal and LCIA Court have been given wider powers to consolidate arbitrations. In particular, the rules now provide that a tribunal that has already been constituted by parties to an arbitration agreement may consolidate the arbitration on which it sits with other arbitrations arising out of the same or related transactions, even where the parties in those arbitrations were not parties to the original arbitration and did not enjoy the opportunity to appoint any of the arbitrators who will determine the consolidated arbitration.

The new rules are intended to target situations where there are multiple contracts between multiple parties, all of which relate to the same underlying transaction or series of transactions. For example, a typical project finance transaction may comprise numerous agreements between a number of different parties concerning different aspects and phases of the project, such as financing, construction, engineering or concession agreements.

Under the previous LCIA rules, in the absence of specific consolidation language in the respective arbitration agreements, such disputes could end up being heard in multiple different arbitrations, by different panels of arbitrators, with each arbitration reaching different, and potentially contradictory, conclusions. The new provisions are designed to reduce this risk.

This risk may have been mitigated by the new rules, but the new rules also give rise to a countervailing risk that the awards in some consolidated arbitrations may be unenforceable. Disputes under more than one agreement in a complex transaction can now, in principle, be consolidated and determined by an arbitral tribunal appointed by parties under one agreement, even where the parties whose dispute is consolidated into that arbitration have not been given the opportunity to appoint any arbitrators. This opens the door to challenges, including at the enforcement stage, based on lack of equality in the appointment of the tribunal deciding the dispute.

To avoid the possibility of a challenge on this basis, new parties to a consolidated arbitration would have to waive their right to challenge the constitution of the existing tribunal. However, the new rules contain no such waiver. Article 8 of the LCIA rules, which concerns multi-party arbitrations, provides a mechanism for the LCIA Court to step in when there are multiple parties at the outset of a dispute, before the first tribunal has been appointed. In these circumstances, where a respondent would not be able to appoint their own arbitrator to the tribunal because there are multiple respondents, all parties lose their ability to appoint an arbitrator at all and equality is maintained between the parties. This would not apply to the consolidation of multiple arbitrations by a tribunal under Article 22A.

Many arbitration agreements and institutional rules already contain waiver provisions stating, in effect, that if a party is joined to existing proceedings, they will not object to the previously-constituted tribunal. This apparent solution still carries risks, as some legal systems will not allow such a waiver to be given in advance of a dispute arising. The HKIAC rules address this issue differently. Article 28 of the HKIAC rules provides that, if the HKIAC exercises its power to consolidate, not only are the parties deemed to have waived their right to designate an arbitrator, but the HKIAC may also revoke any confirmation or appointment of an arbitrator, and appoint a new tribunal without regard to any party's designation.

This solution - revoking all arbitrator appointments such that no party to a consolidated arbitration has a party appointed arbitrator at all - accords with the practice that is now employed in cases with multiple respondents by all major arbitration rules (including Article 8 of the LCIA Rules, discussed above). Problematically, however, this solution may disincentivise arbitrators from deciding to consolidate arbitrations - arbitrators who decide to consolidate an arbitration on which they are appointed under such rules would be doing themselves out of a job; a bit like turkeys voting for Christmas.

At present, there is also no guidance on how tribunals for consolidated arbitrations will be constituted where the LCIA Court orders consolidation under Article 22.8 of the LCIA rules. Detailed consolidation provisions would usually be expected to explain this, and to provide for equality between all parties to the consolidated arbitration.

There is a partial, potential workaround in the new LCIA rules that could mean that the consolidation provisions could in practice have limited application where the fundamental right of parties to enjoy equality in the appointment of arbitrators could be affected. The new Article 22A of the LCIA rules applies only to multiple arbitrations that are under either the same arbitration agreement, or "any compatible arbitration agreement(s)". It is at least arguable that separate arbitration agreements that each provide their respective parties with the right to appoint their own arbitrator would not be "compatible" in circumstances that would require one or more parties to forgo that right, and a fortiori would also be incompatible where other parties to the consolidated arbitration have exercised that right in the appointment of the tribunal that is called upon to order consolidation under Article 22.7 of the LCIA rules.

In trying to solve one problem, the LCIA has created another. Parties and their advisors will need to think creatively about how to address the risk that the awards in arbitrations consolidated under the new LCIA rules could be challenged on the grounds that one or more parties have not been able to exercise their right to choose an arbitrator.

Parties entering into transactions involving numerous related agreements to arbitrate would be well advised to specifically address this risk in their contracts, for example, by including language similar to Article 28.8 of the HKIAC rules, which provides that existing arbitrator appointments cease on consolidation and that replacement tribunals are to be nominated exclusively by the arbitral institution. Where they do not address this issue, ultimately, parties will need to weigh up the benefits of consolidation against the risk of non-enforcement.

This article was first published on the Global Arbitration Review website on 2 October 2020.