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Australian High Court decision on standard of arbitral reasons in Australian domestic arbitrations
Practical Law UK Legal Update Case Report 3-510-7730 (Approx. 5 pages)
Australian High Court decision on standard of arbitral reasons in Australian domestic arbitrations
by Practical Law
| Published on 03 Nov 2011 • Australia |
Andrew Robertson (Partner), Piper Alderman
In a decision dated 5 October 2011, the Australian High Court handed down its eagerly anticipated decision on the standard of arbitral reasons in Australian domestic arbitrations. While the court adopted a mainstream approach, rejecting the view that equated the standard of arbitral reasons with a common law judicial decision, it did not take the opportunity to discuss issues of broader arbitral practice relevant to international arbitration.
Background
The decision of the Victorian Supreme Court in Oil Basins Ltd v BHP Billiton Ltd [2007] VSCA 255 9 created much controversy in the Australian arbitration community. That decision suggested that, in certain cases, the standard of reasons required in arbitrations, albeit under the domestic legislation, was equivalent to that of a common law judicial decision.
The subsequent decision from the New South Wales Court of Appeal in Gordian Runoff Ltd v Westport Insurance Commission [2010] NSWCA 57 attracted support from arbitration practitioners by not following the Oil Basins approach (see Legal update, Three Australian courts rule on standard of reasons required in awards).
When it was announced that the Gordian Runoff case was going to the Australian High Court (Australia's ultimate appeal court), it was hoped that this was an opportunity for the High Court to make a significant decision in relation to arbitration (see Legal update, Leave to appeal granted in the Gordian Runoff case). (It should be noted that the case itself also deals with significant insurance issues.)
Facts
An arbitral tribunal was asked to determine the extent of cover provided to Gordian in respect of certain policies for professional indemnity insurance, and directors and officers liability by reason of reinsurance treaties with Westport. The pleadings extended to 60 pages and the hearing ran for over a week, with the parties being represented by senior counsel. Oral evidence was led with detailed cross-examination.
The relevant issue in the underlying dispute was the effect of section 18B of the Insurance Act 1902. Section 18B deals with circumstances in which an insurer may not be able to rely on an exclusion to the general indemnity. The arbitral panel held that section 18B applied, so that Westport was obliged to indemnify Gordian, notwithstanding certain provisions in the treaties.
The main issue for the court was whether the reasons expressed by the arbitral tribunal were sufficient, and if not, whether there were grounds permitting the limited rights of appeal available in the then New South Wales domestic arbitration legislation.
Decision
In the High Court there were three separate judgments. The majority allowed the appeal, finding that the tribunal's reasoning was inadequate.
Majority decision
The majority (French CJ, Gunmow, Crennan and Bell JJ) seemed to place particular significance on the scheme of the old Commercial Arbitration Act (old Act). Section 29(1)(c) of the old Act established that, unless otherwise agreed by the parties, the award must include reasons. Further, the old Act provided that an award could be open to an appeal on a question of law, in certain limited circumstances, and subject to leave. The grounds on which leave could be granted referred to the quality of the reasons, in that leave could only be granted where there was a manifest error of law on the face of the award.
Much of the reasoning of the court focused on the test of a manifest error of law, with the court rejecting long standing authority that this required an error that was obvious, so that difficult and complex questions of law would rarely or never be manifest, given the difficultly in reasoning required to determine the outcome.
The majority stated that the term "manifest" referred to the character or quality of the error. Therefore, if it was "manifestly wrong", then it did not matter if reaching that conclusion involved complex reasoning.
As for the standard of reasons required, the court said "that no wholly satisfactory formula can be found to flesh out the requirements in s 29(1)(c)" (the obligation to give reasons).
The court and the parties were prepared to adopt the stance of Donaldson LJ in Bremer Handelsgelschaft mbH v Westzucker Gmbh (No 2) [1981] 2 Lloyd's Rep 130 at 132-3, to the effect that:
"All that is necessary is that the arbitrators should set out what, on their view of the evidence, did or did not happen and should explain succinctly why, in the light of what happened, they have reached their decision and what that decision is. This is all that is meant by a 'reasoned award' [in s 1(6) of the 1979 UK Act]."
The Oil Basins approach of equating arbitral reasons with judicial reasons "placed an unfortunate gloss upon the terms of s 29(1)(c)". The quality and standard of reasons, the court said, was referable to the nature of the dispute and the particular circumstance of the case.
It followed that inadequate reasons may be a manifest error of law and the court held that was the case here.
The majority made reference to the submissions of the Commonwealth Solicitor-General, who appeared as amicus curiae for the Commonwealth Attorney-General. These submissions had been directed to the proposed application of the International Arbitration Act, and therefore the UNCITRAL Model Law, and the difference between that legislative regime and the old Act. However, the majority would not be drawn, simply noting that the "[t]he provisions' of the federal scheme may be put to one side in constructing" the domestic arbitration legislation.
It should also be noted that the new Commercial Arbitration Act has no automatic right of appeal (parties can agree to create a right of appeal) and the test for the granting of leave (which is still required even if parties have agreed to appeal rights) is not whether there is a "manifest error", but if the award is "obviously wrong".
Dissenting decision
In a separate judgment, Heydon J dissented and dismissed the appeal. Heydon J did not focus as much on the arbitral issues, although in the course of his reasoning he did discuss the possible significance of the parties agreeing that the arbitrators could apply general justice and fairness to the resolution of the dispute. It was argued that general justice and fairness effectively precluded a party from raising an argument based on the construction of an agreement. Heydon J rejected this argument and held that it did not preclude a party from raising for consideration an argument on the question of the construction of an agreement.
Heydon J agreed with the construction of the document that was advanced by the respondent and therefore dismissed the appeal without dealing with the finer arbitration points. However, at the conclusion of the reasons, he said the following regarding the merits of arbitration:
"The arbitration proceedings began on 15 October 2004 when Gordian served points of claim. This appeal comes to a close seven years later. The attractions of arbitration are said to lie in speed, cheapness, expertise and secrecy. It is not intended to make any criticisms in these respects of the arbitrators, of Einstein J, or of the Court of Appeal, for on the material in the appeal books none are fairly open. But it must be said that speed and cheapness are not manifest in the process to which the parties agreed. A commercial trial judge would have ensured more speed and less expense. On the construction point it is unlikely that the arbitrators had any greater relevant expertise than a commercial trial judge. Secrecy was lost once the reinsurers exercised their right to seek leave to appeal. The proceedings reveal no other point of superiority over conventional litigation. One point of inferiority they reveal is that there have been four tiers of adjudication, not three. Comment on these melancholy facts would be superfluous."
These comments do not reflect a positive assessment of domestic arbitration in Australia.
Kiefel J opinion
In a separate judgment, Kiefel J agreed with the majority that there was a manifest error of law on the face of the award. Kiefel J also relied on section 29(1)(c) and noted that it was important to understand the reasoning requirements. The old Act's structure meant that the award had both a public and a private context. However, Kiefel J held that there was nothing in the language of section 29(1)(c), or in the nature of arbitrations subject to the old Act, which suggested that reasons needed to be of a judicial standard.
Kiefel J agreed with the majority that the required standard of reasons depended on the circumstances of the case, and that in this case the reasons were deficient. She concluded that the deficiency was an error of law.
However, the focus of Kiefel J's opinion was on non-arbitral issues that arose in the case.
Comment
While the Oil Basins approach did not find favour with the High Court, the significance of the decision is muted as the court did not take the opportunity to discuss fundamental arbitration principles. Rather, the decision rests heavily on the old Act, which is no longer current law in New South Wales (the State from which the decision originates), and is in the process of being replaced throughout Australia (see Legal update, Australian domestic arbitral legislation: October 2011). Further, the structure of the decision does call into question its relevance for international arbitrations, as the court did not take up the request to discuss reasons in the context of the Model Law.
Any decision by the High Court on arbitration is of significance for the Australian arbitral community, however, the reliance on the court of reasoning closely bound to the text of the now replaced (in New South Wales and occurring elsewhere) old Act does create a real and significant question as to the longer term significance of the decision.
The approach of the court could not be characterised as either anti-arbitration or pro-arbitration. The court did approach the Commercial Arbitration Act in a technical manner, but the old Act, unlike the new, gives the court no guidance as to how to deal with arbitral matters.
The new Act includes a clear statement as to its paramount objective (section 1C) to facilitate fair and final resolution of commercial disputes, by impartial arbitral tribunals without unnecessary delay or expense. Further, section 2A of the new Act requires the Act to be interpreted by reference to the international origin of the Model Law, upon which it is based, and the observance of good faith.
It remains to be seen what impact the new legislative structure will have on the courts in their approach to arbitration.