Australia - Two Out Of Three Ain't Bad: Guidance On When An Arbitral Award May Be Set Aside For Misconduct Of The Arbitrators

Legal News & Analysis - Asia Pacific - Australia - Dispute Resolution

14 May, 2019

 

Structural Monitoring Systems Ltd v Tulip Bay Pty Ltd [2019] WASCA 16

 

What you need to know

 

  • A recent decision has shown that the failure by one arbitrator to engage in an arbitration and to independently consider submissions and evidence may not be sufficient to set aside an arbitral award made by the other two members of the arbitral tribunal.
  • The failure to engage in an arbitration and to independently consider submissions and evidence constitutes a breach of the rules of natural justice and misconduct under the superseded Commercial Arbitration Act 1985 (WA).
  • However, a court will not set aside an award made if the misconduct of the arbitrator(s) has not resulted in a substantial miscarriage of justice or caused unjust prejudice to a party. 
  • The decision is instructive for matters decided under the current and nationally uniform Commercial Arbitration Acts, where a denial of natural justice may result in an award being set aside on public policy grounds.

 

Background

 

 

In November 1999, Structural Monitoring Systems Ltd (Structural) entered into an agreement with Tulip Bay Pty Ltd (Tulip) and Kenneth Davey to purchase intellectual property rights in technology invented by Mr Davey and owned by Tulip (Technology Agreement).

 

In June 2012, Structural commenced arbitral proceedings against Tulip alleging, amongst other things, that Tulip repudiated the Technology Agreement.

 

The Technology Agreement provided that all claims arising out of or in connection with agreement were to be settled by arbitration before a single arbitrator if the parties agreed, or by three arbitrators if there was no agreement. 

 

The Technology Agreement also stated that:

 

[W]here there is more than one arbitrator, all decisions and awards shall be made by majority vote of the arbitrators.

 

The parties could not agree on a single arbitrator and three arbitrators were appointed to the arbitral tribunal: 

 

  1. Mr Clifford who was appointed by Structural;
  2. Mr Lord who was appointed by Tulip; and
  3. Mr Hannan who was appointed by the nominated arbitrators and became the presiding arbitrator.  

 

From March 2013 onwards, Mr Lord became disengaged from the arbitration and did not play any part in the determination of any interlocutory applications. 

 

In November 2016, Mr Clifford and Mr Hannan issued their  final reasons and the arbitral award. The reasons for decision was signed by Mr Clifford and Mr Hannan, but not by Mr Lord. 

 

Mr Lord did not have any involvement in drafting the award. Mr Hannan and Mr Clifford relevantly found that no repudiation had occurred and that Structural's claim was not made out. 

 

In December 2016, Structural commenced proceedings in the Supreme Court of Western Australia seeking orders to set aside the award for misconduct on the part of the arbitrators pursuant to the Commercial Arbitration Act 1985 (WA) (1985 Act) on the following bases:

 

  1. it had been denied procedural fairness by the arbitrators because they took into account submissions to which it had no opportunity to respond (First Ground);
  2. there had been an excessive delay in the delivery of the award (Second Ground); and
  3. the matter had been decided by two arbitrators when three had been appointed (Third Ground).   

 

Shortly after the proceedings were commenced, Mr Clifford sent an email to the parties and Mr Hannan attaching a letter from Mr Lord that said: "I wish to advise that I have read the reasons for the decision of Philip Clifford and Peter Hannan in the above matter. Further, I wish to advise that I agree with the said reasons".

 

The primary judge subsequently rejected each of the bases advanced by Structural as grounds to set aside the award. His Honour held that Structural had failed to establish misconduct on the part of the arbitrators that would justify the intervention of the court in setting aside the award and dismissed the application. 

 

Court's power to set aside an award for misconduct

 

The 1985 Act applied to the proceedings because the arbitration was commenced prior to the commencement of the Commercial Arbitration Act 2012 (WA) (CAA). 

Sections 42 and 44 of the 1985 Act give the court the power to set an award aside either wholly or in part or remove an arbitrator where there has been misconduct on the part of an arbitrator or an arbitrator has misconducted the proceedings. 

 

Misconduct is defined in the 1985 Act to include "corruption, fraud, partiality, bias and a breach of the rules of natural justice". 

 

In applying the 1985 Act, the Court of Appeal acknowledged that the common law provides that: "[i]t is generally necessary… to determine whether any 'misconduct' established by the evidence was such as to give rise to a 'substantial miscarriage of justice' or has or may have 'unjustly prejudiced' the party seeking to have the award set aside in a respect material to the outcome of the arbitration": see [66] – [76].  

 

Was there misconduct by the arbitrator(s)?

 

Structural appealed the primary judge's rejection of each of the First Ground, Second Ground and Third Ground. The Court of Appeal rejected the First Ground and Second Ground. However, it accepted the Third Ground. 

 

The primary judge identified that the critical question in relation to the Third Ground was a question of fact, namely whether Mr Lord "heard and determined" the arbitration as required by clause 17.2 of the Technology Agreement. 

 

The Court of Appeal found that there was mishandling of the arbitration, which constituted misconduct under the 1985 Act. This was because Mr Lord had failed to meaningfully engage in the arbitration and to independently consider the submissions and evidence submitted by the parties. This included because Mr Lord probably became disengaged from the arbitration well prior to November 2016 (when the award was made), and because "the clear inference is that the concurrence of Mr Lord with the reasons for decision was the product of an attempt by him, after the event, to rectify his failure to have engaged in the arbitration process prior to that time".

 

The Court of Appeal said at [117]: 

 

In a properly conducted multi-member arbitration, it should be apparent that each arbitrator has engaged with and given serious consideration to the evidence and the submissions. How that may appear will vary from case to case, and may be inferred from the publication of reasons attributed to each of them. 

 

Mr Lord's failure to engage in the arbitration, the Court held, constituted a "breach of the rules of natural justice, which the definition of ‘misconduct’ expressly includes".

 

Discretion to set aside the award

 

Despite finding that there had been misconduct on the part of an arbitrator, the Court did not exercise its discretion to set aside the award. This was because the Court found that, having regard to the circumstances of the case, there had not been a substantial miscarriage of justice and/or Structural had not been unjustly prejudiced. 

 

In coming to this conclusion, the Court had regard to the fact that: 

 

  1. there was no misconduct on the part of the other arbitrators;
  2. only one of the three arbitrators did not fulfil the function of hearing and determining the mater; 
  3. the Technology Agreement provided that any decision in the proceedings may be made by a majority of arbitrators (and the terms of the award were agreed by a majority of arbitrators); and
  4. the reasons of the majority did not include any obvious errors. 

 

The Court concluded that the impugned misconduct could have no effect on the outcome of the case in the above circumstances. However, the court observed at [130]:

 

[A]s a general proposition the fact that the decision was made by two (and thereby a majority of) arbitrators will not, by itself, lead to the conclusion that there has not been a substantial miscarriage of justice in all cases. The provision for majority decisions cannot, and should not, be regarded as a licence to disregard the involvement of a minority of the arbitrators.

 

Analysis

 

As the CAA does not contain provisions equivalent to sections 42 and 44 of the 1985 Act, misconduct is no longer a stand-alone ground for setting aside an arbitral award. 

Under sub-section 34(2)(iii) of the 2012 Act, however, a court has the power to set aside an award where it "is in conflict with the public policy of this State". 

 

Section 19 of the International Arbitration Act 1974 (Cth) provides that an interim measure or award is in conflict with, or is contrary to, the public policy of Australia if: 

 

  1. the making of the interim measure or award was induced or affected by fraud or corruption; or
  2. a breach of the rules of natural justice occurred in connection with the making of the interim measure or award.

 

Although the nationally uniform Commercial Arbitration Acts do not contain an equivalent provision to section 19 of the International Arbitration Act, the courts applied these criteria in determining whether awards made in domestic arbitrations were contrary to public policy. 

 

Accordingly, where an arbitrator or arbitrators engage in misconduct or misconducts the proceedings, so that it results in a breach of natural justice or involves fraud or corruption, the courts are still likely to retain the ability to set aside an arbitral award.  

 

Further, when considering the power to set aside an award for a breach of the rules of natural justice, the Full Federal Court has indicated that this requires a demonstrated real unfairness or real practical injustice. 

 

It follows that, although it was decided under the 1985 Act, the decision in Structural Monitoring Systems Ltd is instructive for matters decided under the current and nationally uniform Commercial Arbitration Acts and the International Arbitration Act 1974 (Cth). 

 

The decision provides guidance as to when the Court will be willing to set aside an award in circumstances where an arbitrator has failed to engage in the arbitral process; namely, where that failure results in a substantial miscarriage of justice and/or causes substantial prejudice to the other side. In doing so, it also emphasises the importance in a multi-member arbitral tribunal for each member to meaningfully engage in the arbitration and to independently consider the submissions and evidence of the parties. 

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For further information, please contact:

 

Adam Firth, Partner, Ashurst

adam.firth@ashurst.com