'Serious Irregularity' In Bank Merger Matter Triggers English Commercial Court's Award Set-Aside

In Short

The Situation : A bank owner and an investor entered into an agreement in which the investor would provide the funds necessary for a merger of two banking entities in return for a minority interest in the acquired bank.

The Issue: Upon completion of the merger, the investor did not take the minority interest, presenting what the bank owner saw as a breach of contract. Arbitration followed, resulting in declaratory relief.

Looking Ahead: The English Commercial Court ruled that the declaratory relief ruling constituted a serious irregularity, shedding light on the circumstances under which the court will intervene in arbitral decisions.

On 26 October 2018, the English Commercial Court handed down its decision in RJ, L Ltd v HB [2018] EWHC 2833, setting aside parts of an arbitral award which were found to be affected by a serious irregularity, on the basis that those parts addressed matters outside the scope of the parties' submissions. Cases where awards are successfully set aside in the English courts are few and far between. This decision is significant because it shows that despite their pro-arbitration stance, English courts will examine the conduct of arbitral proceedings and intervene where there is a serious procedural irregularity.

Summary of Facts

The dispute involves two individuals, HB, the owner of a bank ("Bank 1") and RJ, an investor that agreed to provide US$75 million through an investment vehicle, L Ltd, to enable HB to acquire a controlling interest in a separate bank ("Bank 2"). In return, RJ was to acquire a minority interest in Bank 2 upon completion of the merger. Due to regulatory limitations on the use of borrowing to fund the acquisition of Bank 2, the parties entered into a number of agreements pursuant to which HB would procure that Bank 2 acquire Bank 1 (so far as was lawful and upon obtaining necessary authorizations) and RJ would subsequently acquire a minority interest in Bank 2.

The agreements provided for different outcomes in case the final stage of the transaction could not be completed as expected. One possible outcome was an entitlement by L Ltd to be repaid US$75 million plus interest. The circumstances in which that outcome would result formed part of the dispute between the parties.

In the course of the transaction, RJ provided the US$75 million and the merger of Bank 1 and Bank 2 was completed, but RJ did not take the minority interest. HB commenced arbitration under the Rules of Arbitration...