Chevron Australia Pty Ltd v Cbi Constructors Pty Ltd [2021] WASC 323

 

CHEVRON AUSTRALIA PTY LTD v CBI CONSTRUCTORS PTY LTD [2021] WASC 323
Court: SUPREME COURT OF WESTERN AUSTRALIA
Case No: ARB 8 of 2020; and,

ARB 9 of 2020

 

Appeal from:
Parties BETWEEN :   CHEVRON AUSTRALIA PTY LTD

Plaintiff

 

AND

 

CBI CONSTRUCTORS PTY LTD

First Defendant

 

KENTZ PTY LTD

Second Defendant

JUDGE: KENNETH MARTIN J
DATE OF HEARING: 15 & 16 JUNE 2021
DATE OF JUDGMENT: 28 SEPTEMBER 2021
CASE MAY BE CITED AS: Chevron Australia Pty Ltd v Cbi Constructors Pty Ltd [2021] WASC 323
MEDIUM NEUTRAL CITATION: [2021] WASC 323
Catchwords: Arbitration – Private arbitration – Three arbitrators – Contract dispute – Interim award addressing all issues of liability upon claim and counterclaim – Contract dispute – Attempt to raise new liability entitlement issue subsequent to first interim award – Jurisdictional objections on basis of res judicata, issue estoppel, Anshun estoppel and functus officio – Arbitrators divided on jurisdictional objection – Majority allowed new argument – Dissent by one arbitrator as to functus officio – Second interim award issued – Application by respondent to set aside second interim award
Judgment: ARB 8 of 2020 is dismissed

Application to set aside second interim award upheld in ARB 9 of 2020

 

Cases cited: Alvaro v Temple [2009] WASC 205

AQZ v ARA [2015] SGHC 49

BTN v BTP [2020] SGCA 105

CRW Joint Operation v Pt Perusahaan Gas [2011] SGCA 33

CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK [2011] SGCA 33

CRW Joint Operation v PT Perusahaan Gas Negara [2011] SGCA 33

Dallah Real Estate v Ministry of Religious Affairs, Government of Pakistan [2011] 1 AC 763

Discovery Beach Project Pty Ltd v Northbuild Construction Pty Ltd [2011] QSC 306

Emirates Trading Agency Llc v Sociedade De Formento Industrial Private Ltd [2016] 1 All ER 517

Hebei Jikai Industrial Group Co Ltd v Martin & Ors [2015] FCA 228; (2015) 324 ALR 268

Hui v Esposito Holdings Pty Ltd [2017] FCA 648; (2017) 345 ALR 287

IMC Aviation Solutions Pty Ltd v Altain Khuder LLC (2011) 38 VR 303

Ivankovic v Western Australian Planning Commission [2020] WASC 40

Lin Tiger Plastering Pty Ltd v Platinum Construction (Vic) Pty Ltd [2018] VSC 221; (2018) 56 VR 576

LW Infrastructure Pte Ltd v Lin Chin San Contractors Pte Ltd [2013] SGHC 264

Maersk Crewing Australia Pty Ltd v Construction, Forestry, Maritime, Mining and Energy Union [2020] FCA 595

Michael Wilson v Emmott [2008] EWHC 2684

Price & Anor v Carter (t/a Ian Carter Building Contractors [2010] EWHC 1451

Sino Dragon Trading Pty Ltd v Nobel Resources International Pte Ltd [2016] FCA 1131

Spaseski v Mladenovski (2019) WASC 65

TCL Airconditioner (Zhongshan) Co Ltd v Judges of the Federal Court of Australia (2013) 251 CLR 533

The State of Western Australia v Mineralogy Pty Ltd [2020] WASC 58

Thoday v Thoday [1964] P181

Tomlinson v Ramsey Food Processing Pty Ltd [2015] HCA 28; (2015) 256 CLR 507

Venetian Nominees Pty Ltd v Weatherford Australia Pty Ltd [2021] WASC 137

Texts and articles: N/A
Representation: Counsel:

Plaintiff           :           Mr S Doyle QC & Mr S J Davis

First Defendant :           Mr J Gleeson QC & Mr T N Owen

Second Defendant        :           Mr J Gleeson QC & Mr T N Owen

 

Solicitors:

Plaintiff           :           Norton Rose Fulbright Australia

First Defendant :           Clayton Utz

Second Defendant        :           Clayton Utz

 

REASONS FOR JUDGMENT

 

KENNETH MARTIN J:

Introduction

  1. I am dealing with two applications made to this court pursuant to the Commercial Arbitration Act 2012 (WA) (CAA). Both applications were commenced by the same plaintiff, Chevron Australia Pty Ltd (Chevron) under its originating summonses, each of 2 October 2020 – against the first and second defendant, CBI Constructors Pty Ltd and Kentz Pty Ltd, respectively.  For ease of reference, the two defendants are referred to in aggregate, as CKJV.
  2. The defendants are joint venturer contractors who entered a contractual relationship with Chevron by a written contract of 14 July 2011 (as subsequently amended by two further written agreements – namely DSP 2 and DSP 4 of 12 and 13 December 2013 respectively) (the Contract).
  3. The Contract (see the plaintiff’s Amended Hearing Bundle (AHB), tab 1) concerned CKJV’s provision of construction and other related services in furtherance of Chevron’s Gorgon offshore oil and gas project being undertaken off the north-west coast of Western Australia.  Under the Contract, CKJV were required to provide Craft Labour and Staff to carry out work at the Gorgon Project site on Barrow Island, Henderson, Perth and at various yards in South Korea, China and Indonesia.

Background

  1. Broadly speaking, the current proceedings stem from a contractual dispute between the parties over the true meaning of provisions of the Contract requiring Chevron to reimburse CKJV for their employment of labour.
  2. Chevron’s two applications to this court as ARB 8 and ARB 9 of 2020 seek relief pursuant to different provisions of the CAA. Under ARB 9 of 2020, Chevron seeks relief pursuant to CAA s 34(2)(a)(iii) to have an arbitral award dated 4 September 2020 set aside.  Alternatively, under ARB 8 of 2020, Chevron seeks to have the question of the arbitral tribunal’s jurisdiction determined by this court, pursuant to CAA s 16(9).
  3. I propose to structure these reasons by first setting out the parties’ underlying contractual dispute and then explaining aspects of the arbitral hearings held and subsequent orders made, focussing especially on the first and second interim awards as came to be issued by a three-person arbitral tribunal.  I then analyse and determine Chevron’s ARB 8 of 2020 set-aside application, followed by its ARB 9 of 2020 jurisdictional application.  Within these analyses, I refer extensively to the reasons of the learned arbitrators as expressed in their first and second interim awards published on 14 December 2018 and on 4 September 2020 respectively.

Underlying contractual dispute

  1. The underlying arbitration was commenced by CKJV (as claimant) against Chevron (as respondent) during February 2017, pursuant to dispute resolution provisions in the parties’ Contract (see general contract condition (GTC) 21.2).  Essentially, the parties were in dispute over Chevron’s contention that CKJV had overcharged Chevron, and Chevron had subsequently overpaid CKJV, for amounts beyond what was contractually agreed as regards CKJV’s reimbursement entitlement costs.  CKJV disputed this and argued instead that Chevron owed it more money than it had paid.  Thus, there arose a contractual dispute between Chevron and CKJV concerning CKJV’s contractual reimbursement entitlements for its engagement and employment of labour working in or around Chevron’s Gorgon project.
  2. After the dispute arose, Chevron proceeded to withhold from CKJV some reimbursement monies ultimately in excess of AUD$130 million – on the basis of unresolved audit findings and essentially as direct redress by Chevron to recover its contended overpayments to CKJV.

Arbitration proceedings

  1. The ensuing arbitration in respect of Chevron’s overpayment claims remains uncompleted.  The arbitration was commenced in February 2017.  A three-person arbitral tribunal was constituted in April 2017, comprising of Mr Phillip Greenham, the Honourable Christopher Pullin QC and Sir Robert Akenhead as chair (the Tribunal).  To date, the Tribunal has published two significant interim awards and, in the process, issued over 29 procedural orders to facilitate two major arbitral hearings conducted in Perth so far – first in November 2018 and second during August 2020.

Bifurcation

  1. On 16 March 2018, CKJV applied to the Tribunal for orders to ‘bifurcate’ the arbitration into two separate stages.  The advocated bifurcation (which was rejected upon the first application of CKJV, but later granted on CKJV’s second application of 16 July 2018), sought to split the arbitral hearing – so that issues of liability arising in the parties’ contractual dispute would be dealt with at a first hearing by a first interim award.  Thereafter, quantum and quantification issues would be dealt with at a subsequent hearing.
  2. CKJV’s second application seeking bifurcation orders was supported by an accompanying written submission (see AHB, tab 13).  The submission said:
  3. This is the Claimant’s (second) application to bifurcate the arbitration so that the November 2018 hearing is limited to issues of liability underlying the Claimant’s Claim as more particularly identified in the proposed List of Issues included at Appendix 1 to these submissions.

  1. Whilst the Claimant never accepted that the proper quantification of the Counterclaim would be a simple issue and/or that the parties would be able to agree quantum if the Claimant lost on liability, it is, following the service of the FPCCL [an acronym referring to the respondent’s full particulars of counterclaim] now clear beyond doubt that there are ‘dramatic‘ and/or ‘real‘ issues about the quantum of the Counterclaim.  There is a ‘dramatic‘ and/or ‘real‘ issue because the FPCCL comprises a fundamental change to the basis and methodology of the Respondent’s Counterclaim, meaning that it is no longer a case based on the actual costs that were incurred by the Claimant but is a case advanced by reference to a ‘model’ (or more accurately, a series of models) by which the Respondent has created a complex data set which it uses to ‘model’, i.e. arrive at, its Counterclaim figures.  All of this gives rise to a large number of complex accounting issues

(further explanation added in square brackets).

  1. The second bifurcation application of CKJV was opposed by Chevron.  The further application was heard on 26 July 2018.  On 29 July 2018, the Tribunal issued procedural order (PO) No 14 that was supported by reasons – essentially granting CKJV’s second application to bifurcate at that time (see AHB, tab 17). Due to the importance of PO 14 in the present set aside application, I set out below the terms of orders 1 and 3 as it came to be issued.
  2. By PO 14, the Tribunal ordered on 29 July 2018:
  3. The claimant’s application for bifurcation is granted in the following terms:

(a)          There shall be heard first all issues of liability in respect of the Claimant’s claim and the Respondent’s Counterclaim (the First Hearing).  Such issues, for the avoidance of doubt, shall exclude all quantum and quantification issues arising out of the Respondent’s Counterclaim and the Set-Off issues raised in the Claimant’s Defence to Counterclaim (as set out in Appendices 1 and 2 thereto).

(b)          The First Hearing shall take place between 5 – 23 November 2018 in Perth at the venue already arranged by the Parties.  The 15 working days allowed shall be reviewed at a procedural meeting to take place by way of telephone conference on 2 October 2018.

(c)          A further hearing (the Second Hearing) shall take place on a date to be fixed and shall address all matters outstanding in issue between the Parties including all quantum quantification issues not dealt with in the First Hearing.

  1. The Parties shall confer with a view to agreeing the terms of a formal order to reflect the decisions set out in Paragraph 1 above and to produce to the Tribunal, by close of business (WA time) 2 August 2018, a jointly agreed proposed order for the Tribunal to consider.  If agreement cannot be reached then each party should submit by close of business (WA time) 3 August 2018 the order that it proposes and the Tribunal shall thereafter issue further directions.
  2. By the Tribunal’s reasons accompanying PO 14, they observed at par 4(e):

In essence, and reducing matters to their simplest form, the Respondent and its accounting expert appear to the Tribunal to have taken the rates upon which the Claimant was paid for much if not the whole of the contract period and adjusted those rates, usually downward, to reflect elements of those rates which are said to overestimate actual cost (which, it is argued, would otherwise have been payable under the contract between the parties).  They have therefore not done an assessment working from the bottom up as to what the actual overall costs of and occasioned by employment were but a ‘top down’ analysis.  It seemed to be common ground at least at the telephone hearing that this was not necessarily an inappropriate methodology and it was certainly accepted by Ms Ansell QC for the Claimant that what was disclosed within Mr Meredith’s 20 July 2018 report was significantly ‘better’ than anything which had come before.

  1. Paragraph 4(i) in those PO 14 reasons, added:

That leaves the detailed consideration as to whether or not the November 2018 hearing can be used sensibly.  The Tribunal is, on balance, persuaded that there is and should be some real advantages in hearing and resolving what might be termed all liability and factual issues short of the quantification of the Counterclaim and the Set-Offs.  For instance, if the Claimant succeeds in establishing that there were binding agreements by which it become entitled to payment at the rates at which it was actually apparently paid throughout much of the period of this Contract, there may be little left in the Counterclaim, which is predicated largely, if not entirely, on the basis that there were no such binding agreements and the contractual basis (as argued by the Respondent) of actual cost related recovery justifies (subject to proof) all or part of the Counterclaim.  Accordingly, on that scenario (the rights or wrongs of which necessarily have not been considered yet by the Tribunal), substantial costs, resources and time would be saved.  Similar considerations apply to the estoppel case.  Clarification will be provided also by resolution of the rectification case advanced by the Respondent.  (my emphasis in bold)

Procedural order 17

  1. Following the orders for the bifurcation of the parties’ liability and quantum issues, Chevron foreshadowed that it sought to adduce evidence from the Report of its quantum expert, Mr Meredith.  This report of 20 July 2018 (Meredith Report) contained detailed analysis, modelling and expert opinions in respect of the quantum of CKJV’s entitlement to reimbursement costs for Staff.
  2. On 3 October 2018, the Tribunal issued PO 17, by which it ordered then that the Meredith Report would not be adduced by Chevron ‘at the liability hearing between 5 and 23 November 2018’ (see AHB, tab 29).
  3. In accompanying reasons to PO 17, the Tribunal said (at par 8):

… As the Tribunal has already ordered that all issues of quantum and quantification arising out of the Counterclaim are deferred to the Second Hearing in September 2019, the only way in which this damages for breach of contract claim could be established is by adducing quantum and quantification evidence, set out in detail in Mr Meredith’s 20 July 2018 Report … It is in any event unlikely to be other than of theoretical interest because it is accepted by the Claimant that, if it fails on its case that there were binding agreements arising out of or in relation to DSP 2 and DSP 4 and on its estoppel case, by one legal means or another any overpayment established by reference to the Cost entitlement under the Contract between the Parties will be recoverable.  (my emphasis in bold)

First arbitral hearing

  1. The first arbitral hearing took place before the Tribunal over 12 hearing days during November 2018 in Perth, Western Australia.  The hearing culminated in a first interim award that was issued by the Tribunal on 14 December 2018.

CKJV’s position

  1. CKJV’s contention at the November 2018 liability hearing was that the parties had entered into two additionalbinding (variation) agreements (represented by DSP 2 or DSP 4 or by the letter of agreement (LOA) dated August 2016) which had, in effect, amended and changed the earlier terms of the Contract relating to its reimbursement entitlements for labour costs.  CKJV argued that the terms (as varied) allowed CKJV to recoup from Chevron its labour costs on a ‘Rates’ basis – not on an ‘actual costs incurred’ basis, as the Contract had previously stipulated.
  2. CKJV also advanced a further alternative argument in relation to a contended conventional estoppel – which would prevent Chevron from asserting otherwise as regards a ‘Rates’ regime of reimbursement for Craft Labour and for Staff costs (see PO 17’s accompanying reasons at par 4).

Chevron’s position

  1. On the other hand, Chevron’s opposing position was that there had been no perfected variation agreements amending the original reimbursement terms, as found in the Contract.  Nor was there any estoppel.  Chevron argued that it only had to reimburse CKJV for its incurred expenditures for Staff employees – referred to as CKJV’s ‘actual costs’.
  2. It argued that if CKJV’s position (based on agreed variations or an estoppel) as to a ‘Rates’ regime of reimbursement failed, then there could be no real resistance to Chevron’s argument that CKJV had overcharged Chevron.  The only remaining issue was by how much.

First interim award determination

  1. Following the conclusion of the first hearing, the Tribunal came to deliver its first interim award on 14 December 2018 (AHB, tab 37).  The award essentially resolved the issues around ‘Rates’ and CKJV’s Craft Labour costs – in favour of CKJV.  However, the Tribunal proceeded then to reject all of CKJV’s variation arguments concerning CKJV’s claimed basis for a Rates reimbursement entitlement for Staff (see the first interim award’s ‘summary of findings’ – specifically the findings upon issues 1 and 3).  By a majority, the Tribunal also rejected CKJV’s conventional estoppel arguments raised against Chevron for Staff costs.
  2. Relevantly, the identified issue 5 as it was stated in the first interim award (at page 80) had been:

… whether the Claimant may bring [into] to account, by way of Set-Off or defence, in these proceedings the amounts particularised in Appendix 1 to its defence to counterclaim if there was no agreement to convert the Price of Staff from Cost items to Rate items.

  1. The eventual finding by the Tribunal upon issue 5, was:

By majority, the Claimant may bring [into] to account by way of defence, in these proceedings, the amounts particularised in Appendix 1 to its Defence to Counterclaim … and any other amounts of cost which it seeks to prove have not yet been accounted for in what it has been paid.

  1. Hence, the Tribunal as seen, eventually allowed (by majority) CKJV to hold a fall-back position if it lost (as it did) on its primary conversion to Rates remuneration arguments for Staff costs reimbursement.  That fall‑back would allow CKJV to change track away from Rates, and to invoice Chevron for Staff costs it incurred, but had not yet invoiced Chevron.

Further procedural orders

  1. After the first interim award, further procedural orders came to be issued by the Tribunal addressing the arrangements for the next hearing upon quantum issues.  It is unnecessary to discuss these in detail, except to note that by PO 22 of 24 May 2019, the Tribunal ordered that CKJV was to replead its case (of 7 May 2019) on quantum issues – in a fashion that would (better) respond to Chevron’s further amended statement of defence and pleading counterclaim, and then to Chevron’s further amended full particulars of its counterclaim, both as filed by Chevron on 7 May 2019 (see AHB, tab 39).

CKJV’s amended case on quantum issues

  1. Following PO 22, CKJV submitted a further pleading.  This was its amended case on quantum issues dated 28 May 2019 (AHB, tab 40). Of particular significance is par 3.10.3 therein – at which CKJV provides tabulated information (via contract term references) explaining the basis on which it seeks a reimbursement of its Staff costs from Chevron – in the aftermath of the first interim award.
  2. This CKJV plea became controversial.  Upon its receipt, Chevron did two things.  First, it objected to CKJV’s New Case on a basis that the Tribunal had already determined all conversion to ‘Rates’ arguments for Staff costs – adversely to CKJV.  Secondly, Chevron applied to the Tribunal to have the plea struck out.
  3. Chevron’s formal objection to CKJV’s amended case is found in its written ‘first response to the Claimant’s amended case on quantum issues’ dated 18 June 2019 (AHB, tab 41).
  4. By par 2 of Chevron’s written objection, it then complained:
  5. By this pleading, the Respondent sets out its case as to why:

(a)          the Claimants are prevented from pleading or contending for the case identified as the ‘CKJV Case’ in the expert report of Mr David van Homrigh, dated 7 May 2019:

(i)          by reason of estoppel per rem judicatam and/or issue estoppel arising out of the interim award dated 14 December 2018 (Liability Award); and/or

(ii)         because the Tribunal, having made determinations inconsistent with the ‘CKJV Case’ in the Liability Award, is functus officio with respect to the ‘CKJV Case’ and does not have jurisdiction or authority to determine the ‘CKJV Case’;

(my emphasis in bold)

  1. Other objections were also raised by Chevron, including by reference to so-called Anshun estoppel (see par 2(b) therein).  The Chevron objections factually intersected to a large extent.
  2. Chevron’s core objection was that CKJV, by the new pleading, was seeking to run (at the second arbitral hearing that was only to address quantum issues) what was in substance, a fresh case upon liability concerning CKJV’s reimbursement entitlement for Staff costs.  Chevron argued that such a course was no longer open to CKJV.  The bar arose either on a basis of res judicata (cause of action estoppel), issue estoppel, or by Anshun Furthermore, the Tribunal was, as Chevron put it, then functus officio upon all issues of liability (by PO 14 and at the issuance of the first interim award).

Jurisdictional issue emerging

  1. Chevron’s formal objection to CKJV’s amended case on quantum issues forms the basis underlying its present applications.  Chevron’s key contention is that the Tribunal, having determined by its first interim award allissues of liability on CKJV’s claim as well as upon Chevron’s counterclaim, had then exhausted its authority and its jurisdiction to render any further determinations upon liability issues

 

– even if those issues had not been previously raised at the earlier arbitral hearing.

  1. Put another way, Chevron contends that there was no longer any valid submission by the parties to the arbitral Tribunal for it to hear, consider or determine any further liability issues.  That functus officio contention forms the significant focus of Chevron’s present applications to this Court.

Procedural Order 30 (July 2020)

  1. Faced with Chevron’s objections, the Tribunal fixed a directions hearing in July 2020 (on the papers) to deal with various matters

 

– including Chevron’s objection raised against the Tribunal determining what was proposed by CKJV for Staff costs.  [This issue was referred to as CKJV’s ‘Contract Criteria Case’, or by Chevron’s nomenclature, CKJV’s ‘New Case on liability for Staff costs reimbursement’.  For ease of reference, I will refer to this hereon in as CKJV’s Contract Criteria Case.]  I note that by PO 30, Chevron’s strike out application was, in effect, referred to the second arbitral hearing to be held in August 2020.

Invocation of CAA s 16(8)

  1. Under s 16(8) of the CAA, an arbitral tribunal may make a discrete ruling (on a plea referred to it in s 16(4) and s 16(6)) that it does not have jurisdiction, or is exceeding the scope of its authority

 

– either as a preliminary question or in an award rendered on the merits.  Where an arbitral tribunal does rule upon such an objection as a preliminary question (ie, not by issuing an award) then by CAA s 16(9):

… any party may request, within 30 days after having received notice of that ruling, the Court to decide the matter.

  1. By PO 30, the Tribunal did not rule upon Chevron’s jurisdiction and lack of authority objections as a preliminary question.  Instead, it took the distinct course of resolving to deal with that objection issue in conjunction with its proposed determination of the merits of CKJV’s Contract Criteria Case (if the Chevron objection were to be dismissed

 

– as it eventually was by a majority ruling of the Tribunal) at the second arbitral hearing in August 2020.  In other words, the Tribunal resolved to rule on Chevron’s objection, as s 16(8) permits, within its eventual award on the merits.  The Tribunal’s end determination is found under their second interim award of 4 September 2020, published with 117 pages of accompanying reasons (see AHB, tab 49).

Second interim award determination (August 2020)

  1. I will set out aspects of the reasons provided underlying the second interim award later in these reasons.  At this stage, I merely note that the second interim award accompanying reasons reveal a divided view as between the three arbitrators regarding the evaluation of Chevron’s functus officio objections raised against the authority or jurisdiction of the Tribunal.
  2. The majority arbitrators (Sir Robert Akenhead and Mr Phillip Greenham) came to reject Chevron’s authority and jurisdictional objections – concluding in effect that CKJV was not closed out by the earlier first interim award from running its Contract Criteria Case at the second arbitral hearing
  3. CKJV’s Contract Criteria Case, they reasoned, was a necessary part of working out what was meant by ‘actual costs’ for Staff costs within the parties’ Contract (ie, it was a part of the quantum and quantification exercise):  see par 12.75 of the second interim award reasons.  In the majority’s view, this did not constitute any re-run by CKJV of a fresh conversion to Rates argument upon liability – and hence could be validly pursued and argued.
  4. On the other hand, Arbitrator Pullin in dissenting reasons, concluded in effect, that Chevron was correct – and that all issues of liability under CKJV’s claim and under Chevron’s counterclaim had been the subject of the first interim award.  Arbitrator Pullin assessed that CKJV’s Contract Criteria Case was not just the raising of a quantum issue, but rather, that there was an anterior liability aspect to it – which was, by then, impermissible to run (see second interim award reasons par 16.48).
  5. Arbitrator Pullin would have accepted Chevron’s res judicata, issue estoppel and functus officio arguments (which effectively all dovetailed), thereby closing off any further consideration by the Tribunal at the second hearing of further issues of liability on all sides.
  6. However, this was the minority view.  In light of the majority position effectively finding against functus officio, the Tribunal then proceeded to determine the merits of CKJV’s Contract Criteria Case for Staff costs under the second interim award.  In the end, the Tribunal decided in favour of CKJV.
  7. Having now provided this introductory overview of the parties’ underlying contractual dispute and previous arbitral proceedings, I can turn back to evaluate Chevron’s two applications made to this court.

Chevron’s ARB 8 of 2020 application

  1. Chevron’s ARB 8 of 2020 application is founded on an underlying premise that recourse to this court is open, via CAA s 16(9).
  2. Under s 16(9) of the CAA, a party, after receiving notice of a ruling by an arbitral tribunal as a preliminary question, may request that the Court decide the matter.  However, the Tribunal in these arbitral proceedings did not ever render a ruling against Chevron’s functus officio objection as a preliminary question(as it otherwise might have via CAA s 16(8)).  Instead, the Tribunal took a different path.  It proceeded to resolve the objection along with further issues on the merits under the second interim award.  Consequently, the opportunity for a limited avenue of recourse to a court via CAA s 16(9), was never engaged.
  3. That state of affairs effectively rings an early death knell to the fate of Chevron’s ARB 8 of 2020 application.  Recourse to this court via CAA s 16(9) is not open – absent an affirmative determination by the Tribunal as to jurisdiction as a preliminary question(my emphasis in bold).

Chevron’s position

  1. A CAA s 16(9) gateway was only faintly advanced by Chevron in its first tranche of written submissions dated 1 April 2021, as amended on 9 June 2021 (see folio 30 at pars 210 – 221).  Its written submissions (as amended) render it explicitly clear that Chevron’s primary arguments concerning CAA s 16(9) are advanced in the alternative upon Chevron’s parallel application under ARB 9 of 2020.  I refer especially to par 221 of Chevron’s written submissions, which is jointly agreed between the parties.

CKJV’s position

  1. Accepting that a preliminary question ascertainment exercise should be viewed as a matter of substance and not form (see Michael Wilson v Emmott[2008] EWHC 2684 at [18]), CKJV’s written submissions of 17 May 2021 (as amended on 9 June 2021) support the rejection of any recourse to CAA s 16(9).
  2. At par 114 of CKJV’s written submissions as amended (folio 29), reference is made to an UNCITRAL explanatory note that accompanied some 2006 amendments to the Model Law (by reference to the analogue Article 16 of the Model Law which, in turn, is akin to the text of CAA s 16(9)).  For clarity sake, the explanatory note is authored by the UNCITRAL Secretariat on the 1985 Model Law on International Commercial Arbitration, as amended in 2006.  No objection was raised at the hearing as to this court being referred to such extrinsic material for the purpose of considering the possible ramifications of CAA s 16(9).
  3. The UNCITRAL explanatory note, as found extracted in CKJV’s written submissions (at par 95) provides:

Where the arbitral tribunal rules as a preliminary question that it has jurisdiction, Article [16(9)] allows for immediate court control in order to avoid waste of time and money … In those cases where the arbitral tribunal decides to combine its decision on jurisdiction with an award on the merits, judicial review on the question of jurisdiction is available in setting aside proceedings under Article 34 or in enforcement proceedings under Article 36. (footnotes omitted)

Evaluation

  1. I agree with the view as it is seen expressed in the UNCITRAL explanatory note ‑ that where a jurisdictional ruling by a tribunal has been combined with a merits award, a curial recourse is only available via Article 34 or Article 36 of the Model Law (and analogues CAA s 34 and s 36).
  2. That view, as CKJV’s written submissions explain, is well supported both internationally and locally by observations such as in the Singapore High Court in AQZ v ARA[2015] SGHC 49, and as well by Wigney J in Hebei Jikai Industrial Group Co Ltd v Martin & Ors [2015] FCA 228; (2015) 324 ALR 268 at [106] – [107]. I contrast that position with the facts of Lin Tiger Plastering Pty Ltd v Platinum Construction (Vic) Pty Ltd [2018] VSC 221; (2018) 56 VR 576, where Croft J found there that the particular arbitrator had indeed rendered an affirmative preliminary decision concerning his jurisdiction – which was then capable of being, and was, duly reviewed by his Honour.
  3. Nevertheless, I must conclude that there was, in substance, never a preliminary question resolved by the Tribunal – so as to possibly engage affirmatively with CAA s 16(9) and to open the gateway to this Court.  Consequently, Chevron’s ARB 8 of 2020 must be dismissed as itself jurisdictionally misdirected within this court.

Chevron’s ARB 9 of 2020 application

  1. I move then to deal with Chevron’s ‘primary application’ advanced as ARB 9 of 2020.  This application seeks that the Tribunal’s second interim award of 4 September 2020 be ‘set aside’, on the basis of Chevron’s explicit invocation and reliance on s 34(2)(a)(iii) of the CAA.

Terms of CAA s 34(2)(a)(iii)

  1. It is helpful to see the terms of s 34 of the CAA (the local analogue to Article 34 of the Model Law), which provides in the following terms:

(1)          Recourse to the Court against an arbitral award may be made only by an application for setting aside in accordance with subsections (2) and (3) or by an appeal under s 34A.

  1. CAA s 34 then continues, relevantly:

(2)          An arbitral award may be set aside by the Court only if –

(a)          the party making the application furnishes proof that –

(i)          …; or

(ii)         …; or

(iii)        the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration or contains decisions on matters beyond the scope of the submission to arbitration …; or

(iv)         …

(my emphasis in bold)

  1. Chevron directs a particular emphasis to the words within s 34(2)(a)(iii), namely ‘not falling within the terms of the submission to arbitration’, and then, to the following phrase ‘decisions on matters beyond the scope of the submission to arbitration’.
  2. Upon the present application by ARB 9 of 2020, Chevron fully accepts there is no available appeal or a ‘merits review’ (of any kind) to this court to be taken against the Tribunal’s second interim award of 4 September 2020.
  3. Instead, Chevron’s s 34(2)(a)(iii) application to set aside the second interim award is fundamentally grounded on the functus officio arguments – that would have been accepted under the dissenting reasons of Arbitrator Pullin – but were ultimately rejected by the majority Arbitrators (Sir Robert Akenhead and Mr Greenham) under the majority reasons accompanying the second interim award.
  4. For Chevron’s set aside application, it is noteworthy that par 196 of its written submissions (of 1 April 2021, as amended on 9 June 2021) render what is a significant concession.  There Chevron acknowledges that where an arbitral tribunal has (erroneously) concluded a party is not precluded from advancing certain claims by reason of a cause of action (ie, res judicata) estoppel, an issue estoppel or an Anshunestoppel) that such an error will be an error of law.  But significantly, Chevron accepts that any such error of law ultimately will notbear against the jurisdictional authority of the arbitral tribunal.  To that end, see the authoritative observations of Diplock LJ in Thoday v Thoday [1964] P 181 at 197 and later to the same effect by French CJ, Bell, Gageler and Keane JJ in Tomlinson v Ramsey Food Processing Pty Ltd [2015] HCA 28; (2015) 256 CLR 507 at [22]. See also BTN v BTP [2020] SGCA 105 at [71].
  5. Consequently, it is accepted that such errors of law, even if established, will not assist Chevron upon a set aside application under CAA s 34(2).  That leaves only one potential argument.  Hence, the overwhelming focus of both its first written submissions (as amended) and of its responsive submissions and then, under the verbal submissions of senior counsel for Chevron, was directed at its argument that the Tribunal (by reason of PO 14 and then by the issue of the first interim award) became functus officio – upon all issues of liability in the arbitration, both under CKJV’s claim and as well, under Chevron’s counterclaim.
  6. Unlike for mere errors of law, the functus officio condition, if established, is contended to fully engage with the very limited ‘set aside’ parameters of s 34(2)(a)(iii) of the CAA.  More specifically, Chevron argues that a functus officio condition is an arbitral condition that would go against the ‘terms of the parties’ submission to the arbitration’, or would be a dealing that is ‘beyond the scope of the parties’ submission’ to the arbitration itself (see again the terms of CAA s 34(2)(a)(iii)).
  7. As articulated by Mr Doyle QC, senior counsel for Chevron at the commencement of the hearing in this court (ts 38), the functus officio condition engages with the set aside criteria of s 34(2)(a)(iii), as follows:

… that language accommodates a contention the tribunal is functus officio, because there is no relevant submission to this tribunal a second time of issues of liability.  The authority to decide the questions of liability came to an end, if we’re right about the contention of it being functus, when it delivered the first award, and there was no submission to it of a second bite of the cherry.  There remains, of course, issues of quantum or quantification, but that is the scope of the surviving submission to arbitration.

  1. For the purposes of the present set aside application, I hold the significant benefit of having the detailed, considered and very comprehensive reasons of the Tribunal members underlying the second interim award – supporting their respective rival positions upon what I will refer to as the ‘functus officio issue’.  At the time of the second interim award, the legal challenges had then, of course been wider before the Tribunal by Chevron – embracing its res judicata, issue estoppel and Anshunestoppel arguments.  But in this court the focus has been necessarily narrowed to only functus officio arguments.  I do however, note that aspects of the underlying basis for those other legal challenges to some extent conceptually intersect and display an overlapping foundation with the functus arguments.
  2. If Chevron’s functus officio grievance is open for this court to evaluate under s 34(2)(a)(iii) then, as respectful as this court is towards all of the expressed views of the learned arbitrators, this court must reach its own conclusion de novo (ie, afresh) regarding the exhaustion of jurisdiction challenge which is directed against the Tribunal by Chevron.  I turn now to examine and evaluate this functus officio issue in greater depth.

Three key issues for determination

  1. The court’s essential task in conducting a s 34(2)(a)(iii) set aside evaluation exercise, ultimately distils to the three key issues raised against the second interim award (as conveniently synthesized by Mr Doyle QC in his opening for Chevron at the hearing in this court (see ts 38)).
  2. The three core issues are:

(a)          Whether Chevron’s functus officio arguments can, as a matter of principle, properly fit within the criteria of CAA s 34(2)(a)(iii).  For CKJV, Mr Gleeson QC’s verbal submissions at the hearing in this court seemed to be to the contrary, drawing my attention to a suggested lack of any direct case authority upon the present point.

(b)          Secondly, if Chevron’s functus officio set aside arguments can fit under the parameters of s 34(2)(a)(iii), there then arises the substantive question of whether Chevron’s functus officio challenge can be made good on its merits, or not.  Chevron’s position, of course, is that Arbitrator Pullin’s dissenting reasons underlying the second interim award (essentially accepting Chevron’s functus officio arguments) are (largely) the preferred analysis and conclusion – subject to some relatively minor corrections or inconsequential qualifications.  Conversely, CKJV submits that the majority approach, reasoning and conclusion of Arbitrators Akenhead and Greenham was both open and correct upon the substance of the functus officio issue.  CKJV focusses especially on the majority’s conclusion that if CKJV’s Contract Criteria Case did fall under the umbrella of an argument upon quantum or quantification, then there could be no exhaustion of the Tribunal’s jurisdiction – and Chevron’s functus officio arguments and present set aside application must fail.

(c)          Even if issues (a) and (b) above were ultimately determined in Chevron’s favour, there still presents a residual issue of discretion for this court as to relief, grounded in the words of CAA s 34(2) – by its use of the word ‘may’.  That text indicates a residual discretion in this court concerning any grant of setting aside relief (in alignment with the Article 34 of the underlying analogue Model Law).  Therefore, a last question concerns if and how that discretion of the court should be exercised as regards setting aside the second interim award – in the event that Chevron is successful upon its functus officio arguments in this court.

  1. In summary, those are the three main issues for determination.  More generally, CKJV also points to s 5 of the CAA, and to the often noticed admonition emanating from the Model Law towards minimum curial intervention.  That, of course, is a concept aligned to another recognised principle, for courts to confer, a level of deference towards arbitral determinations.
  2. On the other hand, Chevron contends that where some underlying issue presents, convincingly indicating a lack of jurisdiction or authority in an arbitral tribunal to determine what are already decided issues – then by CAA s 34, a court is obliged to intervene and to set aside an award that is curially assessed as so blighted.  That curial intervention, Chevron contends, is the required result of a deliberately constructed legislative regime which specifically envisages some residual scope for a curial intervention under extraordinary circumstances – limited as they will necessarily be.
  3. I turn next to afford some greater levels of consideration towards each of the three as identified key issues upon the present set aside application of Chevron.

First issue:  can Chevron pursue a set aside recourse against the second interim award to this Court via s 34(2)(a)(iii)?

  1. As seen, the first question concerns whether Chevron’s contention as to the Tribunal being functus officio upon all issues of liability (after its first interim award) concerning CKJV’s claim and on Chevron’s counterclaim, is capable of engaging with the statutory criteria under CAA s 34(2)(a)(iii).  As I will seek to explain below, that question must in the end be answered in the affirmative.
  2. There is little need to discuss at any length the condition of functus officio as the condition may be encountered by a court or a tribunal.  It is a condition that arises as a matter of law, not by reason of the parties’ agreement: see generally my recent observations in The State of Western Australia v Mineralogy Pty Ltd [2020] WASC 58 at [76].
  3. There is no doubt that the condition of functus officio is capable of being engaged (as regards an arbitral tribunal) not only by reason of the legal effect of a final arbitral award, but also as the consequences of an interim award.  To that point, see for instance Murphy J’s (as his Honour then was) observations in Alvaro v Temple [2009] WASC 205 at [67] – [68] where his Honour observed:

Once an arbitrator has published the award he or she is functus officio, subject to the operation of the ‘slip rule’ … and the extent to which the arbitrator’s jurisdiction is revived by court order: … If the award is an interim award, the arbitrator still, however, has authority to deal with the matters left over, although he or she is functus officio as regards matters dealt with in the interim award … (my emphasis in bold)

  1. To the same end, see observations by Applegarth J in Discovery Beach Project Pty Ltd v Northbuild Construction Pty Ltd [2011] QSC 306 at [68]. There his Honour had observed:

An arbitral award finally resolves the dispute referred to the arbitrator by the parties.  This applies both for an interim award and a final award.

  1. Internationally, the impacts of an ascertained condition of functus officio (engaged under Model Law analogues) have been equivalently recognised, albeit under divergent terminologies employed by judges in different jurisdictions.  For instance, in the Singapore High Court in LW Infrastructure Pte Ltd v Lin Chin San Contractors Pte Ltd [2013] SGHC 264, Justice Belinda Ang Saw Ean used the expressions ‘complete its mandate’ and ‘capacity to act’, to describe that arbitral tribunal’s lack of authority – once it had rendered a final award. Her Honour also observed (at [29]) that where a tribunal:

… became ‘functus officio‘ – it had completed its mandate by making an award with res judicata effect.  The functus officio doctrine is a time‑honoured one, and is one of the methods by which the law gives practical effect to the principle of finality.

  1. Similarly, in Emirates Trading Agency Llc v Sociedade De Formento Industrial Private Ltd[2016] 1 All ER 517, Popplewell J (at [26]) observed there, by reference to the concepts of ‘power’ and ‘authority’, that:

… There is a longstanding rule of common law that when an arbitrator makes a valid award, his authority as an arbitrator comes to an end and, with it, his powers and duties in the reference:  he is then said to be functus officio … Otherwise the tribunal has no authority or power …

  1. I refer also to a leading text now edited by Sutton D, Gill J and Gearing M, Russell On Arbitration(24th ed, 2015) at par 6‑166.  There the authors observe on the position of an arbitral tribunal’s jurisdiction and its authority to act after a final award is made.  They note that such authority:

… ceases and the reference terminates.  At this point therefore the tribunal has exhausted or concluded all that it had jurisdiction to deal with so far as the matters covered by the award are concerned.  (footnotes omitted).

  1. Likewise, the editors Mustill and Boyd address a situation of functus officio for an arbitral tribunal by describing the arbitrator’s authority as coming to an end:  see Mustill M J and Boyd SC, The Law and Practice of Commercial Arbitration in England(2nd ed, 1989) at pages 404 – 405, which says:

When an arbitrator makes a valid award, his authority as an arbitrator comes to an end and, with it his powers and duties in the reference:  he is then said to be functus officio.  This at least, is the general rule, although it needs qualification in two respects:

First, if the award is merely an interim award, the arbitrator still has authority to deal with matters left over, although he is functus officio as regards matters dealt with in the award.

Second, if the award is remitted to the arbitrator by the Court for reconsideration he has authority to deal with the matters on which the award has been remitted and to make a fresh award.  (footnotes omitted).

  1. I refer also to Blackaby et al, Redfern and Hunter on International Arbitration(6th ed, 2015) at par [9.18], where the editors invoke the terminology of a cessation, as regards ‘any furtherjurisdiction’.
  2. As now may be seen from multiple sources, local and international, there is no real doubt, both for final and for interim arbitral awards, that the condition of functus officio will deliver a significant halting impact to a tribunal’s authority.  That termination impact is variously discussed by reference to a termination of the arbitral tribunal’s ‘authority’, ‘mandate’, ‘capacity to act’, ‘authority or power’, ‘further jurisdiction’ or ‘no jurisdiction’:  see also Price & Anor v Carter (t/a Ian Carter Building Contractors [2010] EWHC 1451 at [61].
  3. The present question is whether this court (in a role tasked to it to set aside arbitral awards under CAA s 34(2)(a)(iii)) may intervene where it identifies the condition of functus officio – in circumstances where that arbitral tribunal has notwithstanding, proceeded on – to enter, resolve or determine further issues on their merits.
  4. Addressing that question, two sub-issues emerge.  The first is whether the condition of functus officio engages with the text of s 34(2)(a)(iii) – specifically, with the phrases ‘not falling within the terms of the submission to arbitration’, or ‘decisions on matters beyond the scope of the submission to arbitration’.  Assuming sub-issue one is answered in the affirmative, then a second sub-issue arising is whether the court itself renders the functus officio assessment, or whether it ought to ‘defer’ to the views of the Tribunal.  I turn to address each of these sub‑issues in turn.

Sub‑issue 1: does the functus officio condition engage s 34 (2)(a)(ii)?

  1. As to the first sub‑issue, the parties’ comprehensively framed written submissions had looked at first blush to be almost aligned in a mutual acceptance of the potential engagement of the functus officio condition with s 34(2)(a)(iii).  I draw particular attention to what had looked on this topic to be CKJV’s acceptance of Chevron’s written submission (of 17 May 2021) at pars 88 – 93 and 97, which I will set out below.
  2. CKJV’s written submissions (of 9 June 2021, as amended) upon this issue said:
  3. Whether an award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration turns on the terms and scope of the submission.  There is a difference between an excess of jurisdiction and a challenge really going to the merits of legal and factual question, but superficially characterised and cloaked as an excess of jurisdiction question [referring by footnote 89 to Mango Boulevard Pty Ltd v Mio Art Pty Ltd [2018] 1 Qd R 245; [2017] QSC 87 at [52] per Jackson J and citing Sino Dragon Trading Ltd v Noble Resources International Pte Ltd [2016] FCA 1131 per Jonathon Beach J at [6].
  4. The Singapore Court of Appeal set out the principles underlying the application of s 34(2)(a)(iii) in CRW Joint Operations v PT Perusahaan Gas [2011] SGCA 33 at [30] – [33]. There, the Court observed (inter alia) that the section ‘is not concerned with the situation where an arbitral tribunal did not have jurisdiction to deal with the dispute which it purported to determine. Rather, it applies where the arbitral tribunal improperly decided matters that had not been submitted to it … ‘ and that it ‘addresses the situation where the arbitral tribunal exceeded … the authority the parties granted to it … ‘ (at [31]).
  5. CRW Joint Operation v Pt Perusahaan Gas [2011] SGCA 33 at [30] to [33] concerning an arbitral tribunal exceeding its ‘authority’ is, in my view, a significant and influential authority towards supporting the potential for a s 34(2)(a)(iii) engagement under functus officio encountered circumstances.
  6. Returning to CKJV’s written submissions on this issue, they advanced to contend:
  7. Born [referring to Born G, International Commercial Arbitration) (3rd ed, 2021) vol 3, ch 25 at 3575 – 3582] discusses the operation of article 34(2)(a)(iii) Model Law, including some international authorities where tribunals have purported to publish awards which (relevantly) contain ‘decisions on matters beyond the scope of the arbitration’.  The common examples cited by Born from the international authorities include:

(a)          where a tribunal grants relief which neither party has sought; or

(b)          where an award is purportedly made against a non‑party to the arbitration; or

(c)          where awards deal with issues or disputes which the parties have not submitted to the arbitral tribunal, or have not sought to press therein.  (footnotes omitted).

  1. CKJV’s (as amended) written submissions, by reference again to the Born text, then contend towards what looks to be the very point at issue (at par 97):

Born also suggests that a tribunal may relevantly exceed its authority where it makes an award [after] becoming functus officio.  [Footnote 93 referring to Born, vol 3, ch 25 at 3582.]

  1. It is helpful to see that complete citation from the Born text which reads (at par 3582):

An arbitral tribunal may also exceed its authority if it makes an award after becoming functus officio.  Thus, a few courts have held that the arbitral tribunal exceeded its mandate where, after issuing a final award, it reopened the case and issued another award (recalling or revising its earlier award).  As discussed above, however, many national arbitration statutes and institutional arbitration rules authorise corrections, interpretations, or supplementations of arbitral awards (thereby removing most questions regarding the arbitrators’ authority to take particular post award actions).  Where such a mechanism does not exist, or is not applicable, however, a tribunal’s actions (and awards) after it has become functus officio will constitute an excess of authority.  (my emphasis in bold) (footnotes omitted)

  1. CKJV’s written submissions then continued (at par 98):

Moreover, in the section concerning set aside applications under s. 34(2)(a)(iii), UNCITRAL Digest (2012), states the following proposition: ‘if the arbitral tribunal, after issuing another award, reopened the case by issuing another award, the effect of which was to recall or revise the earlier award, the latter award should be set aside since the mandate of the arbitral tribunal was terminated on the issuance of the final award.’ [citing at footnote 94, Introduction to the UNICITRAL 2012 Digest of Case Law on The Model Law on International Commercial Arbitration (1985, with amendments as adopted in 2006), at [91] p.153.]

  1. By my reading, the position as articulated under CKJV’s written submissions accepted at least conceptually, that s 34(2)(a)(iii) could be engaged for the purpose of a court addressing a lack of authority issue vis-à-vis a functus officio condition – arising from a final or interim award of an arbitral tribunal.
  2. Chevron’s reply written submissions of 8 June 2021 (folio 26) it seems took the same view – as to at least a conceptual concession upon this issue.  See especially par 6 in which Chevron said relevantly:

Chevron’s application challenges an award for being made when the tribunal was functus officio, and it is not controversial that this is a matter of the tribunal’s authority, i.e. jurisdiction (see the CKJV submissions at [88] – [93] and [97).

  1. Nevertheless, under the verbal submissions of senior counsel for CKJV at the hearing on 15 and 16 June 2020, it appeared to me that CKJV was attempting to resile somewhat from the conceptual concession position under its written submissions.  This was particularly so, by an emphasised verbal contention of Mr Gleeson QC that a court ought to ‘defer’ to the Tribunal’s stance where it had been expressed upon its alleged functus officio contention (see ts 160 – 162).
  2. Nevertheless, upon my ultimate view, a set aside application seeking to have a court address an authority or jurisdictional obstacle arising out of an asserted condition of functus officio, does engage the CAA s 34(2)(a)(iii) statutory parameters.  Essentially, I agree with the view as is seen expressed by the Born text cited in the defendant’s written submissions, as well as the view expressed in CRW Joint Operation v PT Perusahaan Gas Negara [2011] SGCA 33 at [30] – [33] as to the legal consequences of a tribunal’s authority being exceeded.
  3. I would independently conclude as well, that a decision taken by an arbitral tribunal may be viewed as beyond the terms of the parties’ submission to arbitration – under circumstances where the authority of the tribunal to resolve the parties’ dispute, or an aspect of the dispute, had come to an earlier end.  That situation would engage with the words of s 34(2)(a)(iii), namely ‘beyond the scope of the submission to arbitration’.  I accept that objectively viewed, reasonable commercial parties to an arbitral agreement may hardly be taken to have agreed to their chosen arbitral tribunal acting beyond the scope of its authority by varying or revisiting a final determination that was already the subject of an earlier published award.  Such a ‘multiple bites at the cherry’ approach cannot be accepted.  That would violate a cardinal policy of finality, recognised as essential to a coherent process of arbitral and, indeed, to curial decision making.

Sub‑issue 2: who decides upon functus officio?

  1. With the condition of functus officio accepted as falling within the textual scope of CAA s 34(2)(a)(iii), the second sub‑issue is whether it is the court who renders the determination upon a functus officio evaluation as against a tribunal – or whether such a decision ought be the subject of deference by the court to the views of the tribunal?
  2. Ultimately, my assessment is that this question must always be for the court itself to render its own objective determination on the issue.
  3. Supporting that conclusion, I mention first the observations of French CJ and Gageler J as rendered in TCL Airconditioner (Zhongshan) Co Ltd v Judges of the Federal Court of Australia(2013) 251 CLR 533 (TLC Airconditioner) at [12]. I do note that those observations were made in the slightly different context of whether a court should refuse to enforce (pursuant to CAA s 36) an award under the International Arbitration Act 1974 (Cth). However, there is very close observable and acknowledged textual symmetry as between Model Law Article 34 and 36, reflected in the text of CAA s 34(2) and s 36(2) when compared. Accordingly, the observations in TLC Airconditioner by analogy, remain of force and as authority upon this issue.
  4. In TLC Airconditioner, French CJ and Gageler J had observed:

Whether one or more of those grounds is established is an objective question to be determined by the competent court on the evidence and submissions before it, unaffected by the competence of an arbitral tribunal to rule on its own jurisdiction under Art 16 of the Model Law.  Arbitration in this way remains ‘the manifestation of parties’ choice to submit present or future issues between them to arbitration’, in that, without ‘specific authority’ to do so, arbitrators ‘cannot by their own decision … create or extend the authority conferred upon them’.  (my emphasis in bold) (footnotes omitted),

  1. Reaching that view, French CJ and Gageler J were guided by the earlier observations of the Supreme Court of England and Wales in Dallah Real Estate v Ministry of Religious Affairs, Government of Pakistan[2011] 1 AC 763 (Dallah) at [24], [25], [26] and [30].
  2. In Dallah,Lord Mance JSC (with whom Lords Hope, Saville and Clarke, agreed) had observed at [30]:

The tribunal’s own view of its jurisdiction has no legal or evidential value, when the issue is whether the tribunal had any legitimate authority in relation to the Government at all.  This is so however full was the evidence before it and how carefully deliberated was its conclusion.  (my emphasis in bold)

  1. And towards the same end view for the State of Victoria, see IMC Aviation Solutions Pty Ltd v Altain Khuder LLC(2011) 38 VR 303. There, Hansen JA and Kyrou AJA essentially applied the same observations by Lord Mance and Lord Saville in Dallah:  see [270], [288] and [301].
  2. Likewise for the Federal Court of Australia, I note to a kindred approach, the observations by Colvin J in Maersk Crewing Australia Pty Ltd v Construction, Forestry, Maritime, Mining and Energy Union[2020] FCA 595. Applying TLC Airconditioner and Dallah, his Honour observed (at [28]):

Where an issue is raised about the extent of the arbitral authority conferred upon an arbitrator then it is appropriate for the arbitrator to form a view as to the extent of such authority.  However, that view is not final and binding because arbitrators cannot by their own decisions create and extend their own authority. … It is an approach that reflects the fact that it is unlikely that parties submitting matters for arbitration will clothe an arbitrator with an unqualified mandate to determine whatever the arbitrator considers should be determined.  (my emphasis in bold)

  1. See also to the same end, views expressed by Beach J in Hui v Esposito Holdings Pty Ltd [2017] FCA 648; (2017) 345 ALR 287 [87] and more generally, in the text Blackaby et al, Redfern and Hunter on International Arbitration(6th ed, 2015) at pars 5.104 and 10.42.
  2. Evaluating all those authorities, I conclude that it is open to Chevron on its present s 34(2)(a)(iii) ‘set aside application’ to seek to have this court examine afresh its arguments made as to functus officio concerning the Tribunal – arising out of the suggested force and effect of PO 14 and the first interim award of December 2018, as regards all issues of liability being closed off thereafter.  If that is correct, then subsequent to the December 2018 first interim award, all further liability issues were outside the authority of the Tribunal – including at the time of the Tribunal’s second interim award at September 2020.
  3. With those issues concerning the engagement of CAA s 34(2)(a)(iii) now answered in the affirmative, I can turn to the second substantive and perhaps the most complex question – namely, this court’s required evaluation as to whether Chevron’s functus officio submission can be accepted.  Of course, this same issue was fully argued before the Tribunal, but ultimately was rejected by majority Arbitrators Akenhead and Greenham.  It was nevertheless accepted by Arbitrator Pullin under his dissenting reasons provided accompanying the second interim award.

Second issue:  can Chevron’s functus officio challenge be upheld?

  1. As discussed, the context for this private arbitration was, at root, a contractual dispute as between the parties over money claimed on both sides.  Chevron (the respondent and counterclaimant at the arbitration) had contended that it had been overcharged by CKJV and so, had overpaid to CKJV in respect of two categories of labour that had been engaged by CKJV to provide their services around Chevron’s Gorgon project.  The first was the so‑called Craft Labour.  The second was ‘Staff’ (as defined).  Subsequently, Chevron had withheld funds otherwise payable to CKJV – so as to recover its alleged overpayments, effectively as a self help measure.
  2. CKJV’s position was that Chevron had been correctly charged for all such amounts and therefore had held no legal justification at all for withholding any funds from it – which were otherwise reimbursable to CKJV for Craft Labour or for Staff costs.
  3. Broadly speaking, that was the disputed position leading to the commencement of the arbitration and then to a number of the procedural orders issued by the Tribunal prior to the commencement of the first hearing and subsequently, to publication of the first and second interim awards of 14 December 2018 and 4 September 2020.
  4. I shall proceed from this point to evaluate the merits of Chevron’s functus officio arguments concerning the lack of jurisdiction in the Tribunal on  further liability issues post 14 December 2018 – by first discussing the functus officio condition itself, and then, moving to summarise the position reached by the majority arbitrators.  I will as well offer my own preliminary observations.  As part of a de novo determination by this court as to Chevron’s functus officio contention, I will need to set out and examine some lengthy extracts from the Tribunal’s first and second interim award reasons.  For ease of reference, the extracts from the first interim award will be incorporated as a schedule to these reasons.
  5. At an early stage, I noted that the Tribunal was split (2:1) on Chevron’s functus officio objections – and I will set out aspects of the divergent reasons to highlight the different perspectives that emerged at the second arbitral hearing.  In the end, however, this issue of functus officio is for the court itself to determine.
  6. As now discussed, if substantively engaged, the condition of functus officio carries with it a deficiency in the scope of authority or jurisdiction of an arbitral tribunal.  I would observe in this phase of my reasons that, as emerges from some of my previous reasons rendered within this court’s Arbitration List – namely Spaseski v Mladenovski (2019) WASC 65, Ivankovic v Western Australian Planning Commission [2020] WASC 40, The State of Western Australia v Mineralogy Pty Ltd [2020] WASC 58 and Venetian Nominees Pty Ltd v Weatherford Australia Pty Ltd [2021] WASC 137 – that this court is fully alive to, and thoroughly supportive of, the principle of minimum curial intervention, as regards the force of arbitral awards delivered in both international and domestic arbitrations.
  7. Furthermore, by reference to CAA s 34 and its Model Law analogues in other jurisdictions, the court is fully cognisant that the recourse permitted to this court is not at all in the character of any appeal against the arbitral award:  To that end see my reasons in Venetian Nominees Pty Ltd v Weatherford Australia Pty Ltd[2021] WASC 137 at [39] – [40].
  8. Accordingly, as demonstrated in the decisions just mentioned, arguments ‘manufactured’ so as to be presented as suggested infringements against natural justice or procedural fairness principles need to be scrutinised with a high level of cautionary oversight.  That is required to prevent what is a legislatively mandated ‘hands off’ policy objective underlying arbitrations being too easily undermined by a disgruntled arbitration participant resorting to confected efforts to manoeuvre around the finality of an adverse award, or to halt or slow down progress towards enforcement so as to thwart the legislative objects for a speedy and effective arbitral regime of dispute resolution.
  9. To that cautionary end for courts, I respectfully embrace the observations of Jonathan Beach J in the Federal Court of Australia in Sino Dragon Trading Pty Ltd v Nobel Resources International Pte Ltd [2016] FCA 1131 (Sino Dragon) at [117]. There his Honour said:

Moreover, Sino Dragon’s arguments before me are little more than a confected attempt to run a merits challenge of the arbitral tribunal’s legal and factual analysis concerning the Pang email under the guise of an article 34(2)(a)(iii) challenge.  Sino Dragon also, surprisingly, sought to invoke article 34(2)(b)(i), but its invocation fails for similar reasons …

  1. But by contrast to the factual circumstances presented in Sino Dragon, the present arguments of Chevron under its s 34(2)(a)(iii) set aside application are not grounded on procedural fairness or natural justice blemish grievances.  Instead, they are of a jurisdictional or quasi jurisdictional character. They raise essentially legal arguments concerning the suggested affirmative engagement of this arbitral tribunal with the condition of functus officio – by reason of PO 14, coupled to the issuance of the first interim award and its accompanying reasons.
  2. In short, I assess that there is presently a legitimate potential engagement of s 34(2)(a)(iii) by Chevron over its functus officio contentions.  Uniquely, this court holds the benefit of the considered reasons and rival views provided by each of the members of the Tribunal underlying the second interim award.  As mentioned, this issue arose to be resolved by the Tribunal within the allied and intersecting context of wider legal arguments concerning as well res judicata, issue estoppel and Anshun estoppel considerations that are no longer live before this court.
  3. In summary the exchanged written submissions of the parties to this court upon the set aside application can be seen as Chevron seeking to vindicate what were dissenting views by Arbitrator Pullin found under the second interim award reasons.  But the position of CKJV seeks, in effect, to vindicate the majority status quo position against any functus officio condition, as determined under the reasons of Arbitrators Akenhead and Greenham.

Summary of the Tribunal’s majority’s views rejecting functus officio

  1. Emphasising that my ensuing observations are only by way of an attempted synthesis (and are no substitute for what is found in the reasons as a whole), the essence of the majorities’ differing view upon functus officio and so, to the consequential preparedness of the Tribunal at the second arbitral hearing to allow CKJV to run its so‑called Contract Criteria Case, looks to have been reached because:

(a)          Chevron’s attempted ‘characterisation’ of what had been determined under the first interim award as regards all issues of liability arising under the claim and under the counterclaim, was viewed as unduly ‘narrow’;

(b)          the first interim award had essentially been focused upon resolving an in principle clash as between CKJV’s arguments seeking to establish an agreed Rates basis for its labour costs reimbursement ‑ put against Chevron’s resistance contention that CKJV was only entitled to be reimbursed under the Contract for CKJV’s actual costs.  Accordingly, a late emerged CKJV issue over its argued true meaning of the term ‘actual cost’ in the Contract had never actually been considered or decided upon under the first interim award.  Instead, the parties had simply picked up and repeated the contractual language of the Contract itself – without then giving further consideration to wider arguments over a conversion to a Rates basis of remuneration for CKJV.

(c)          there was no bright line of clear demarcation point, as between liability and quantum issues in this dispute.  The differentiation as between these issues was not as clear cut on liability issues as Chevron was contending;

(d)          a residual quantum and quantification exercise as was always envisaged under the Tribunal’s bifurcation orders (commencing with PO 14) – was not inconsistent with the quantum phase determining CKJV’s freshly raised arguments upon the true meaning of ‘actual costs’ in the Contract, as advanced on CKJV’s Contract Criteria Case;

(e)          even though CKJV’s Contract Criteria Case had not been earlier articulated, it was ‘commercially unrealistic’ for the arbitral parties to raise ‘every point that might conceivably be made by them, whether they were in practice or in fact germane to the outcome’ (see second interim award reasons at par 6.8) at the first hearing and before the first interim award;

(f)          it was not ‘unreasonable’ for CKJV not to have raised what later had emerged as its Contract Criteria Case, before the first interim award was issued (see the majority’s reasons in par 6.10 concerning its rejection of any engagement with principles of Anshun estoppel); and

(g)          there was a level of complexity in the parties’ underlying Contract as to the true meaning of the term ‘actual cost’, as used at attachment C to the Contract.  This complexity carried ‘pointers’ to an adoption of various loadings concerning CKJV’s reimbursement of its staff costs for weekly hours and hourly uplifts, relevant to the exercise of ascertaining ‘actual cost’ as regards Staff (second interim reasons par 6.10).  It had not been necessary to resolve such issues earlier.

  1. For essentially those reasons as provided by the majority arbitrators, an exercise in interpreting the true meaning of ‘actual costs’ as a basis of CKJV’s Staff cost reimbursement remained legitimately ‘on the table’ in the subsequent quantum and quantification phase of this arbitration (ie, at the second arbitral hearing).  This majority view prevailed as the basis for rejecting Chevron’s functus officio arguments.
  2. For the reasons that follow, I respectfully disagree with that conclusion.

The First Interim Award

  1. The first interim award of 14 December 2018 is found at AHB, tab 38 (at page 81 therein).
  2. The first interim award issued and was published in the following terms:

Award

We, Phillip Greenham, the Hon Chris Pullin and Sir Robert Akenhead, the duly appointed Arbitrators in this arbitration, do hereby declare, decide and award as follows:

  1. There was no binding agreement made between the parties whereby any Rates were agreed in relation to Staff and Supervision costs.
  2. By a majority of the arbitrators, there was no estoppel, in fact or in law, whereby the parties are to be treated as if any Rates were agreed in relation to Staff and Supervision Costs.
  3. By a majority of the arbitrators, the LOA did not evidence or contain any agreement between the parties to convert the Price for Staff and Supervision from Cost items to Rate items.
  4. In relation to Craft Labour there was a common mistake, as pleaded by the Respondent (DCC [88-91] and EPCCL [24-28]) but there was no common mistake in relation to how any rates relating to such mistake should be or should have been calculated.
  5. Rectification shall not be ordered in relation to the common mistake found to have occurred and as pleaded by the Respondent (DCC [88 – 91] and FPCCL [24 – 28]).
  6. In relation to Craft Labour and to the RDO-EBA issue running from September 2015 onwards arising out of Audit Inquiry 7, there was no breach of contract on the part of the Claimant, as pleaded by the Respondent (DCC [95] and FPCCL [27]).
  7. In relation to Craft Labour in relation to jury service, compassionate leave and stand down arising out of Audit Inquiry 9,  there was no breach of contract on the part of the Claimant, as pleaded by the Respondent (DCC [120] and FPCCL [39]).
  8. In relation to Craft Labour, by a majority of the arbitrators, Rates were agreed between the parties for Craft Labour as from July 2021 onwards, which are not now impeachable or challengeable in these proceedings.
  9. In relation to Craft Labour, the Parties agreed Rates in relation to jury service, compassionate leave and stand down which are not now impeachable or challengeable in these proceedings.
  10. By a majority of the arbitrators, the Claimant may bring into to account by way of defence, in these proceedings, the amounts particularized in Appendix 1 to its Defence to Counterclaim (MSC.010.007.0001) and any other amounts of costs which it seeks to prove have not yet been accounted for in what it has been paid to it.

Observations upon the first interim award

  1. All issues as determined by the Tribunal concerning Craft Labour, are no longer controversial.
  2. The residual controversy prior to the second interim award had concerned only CKJV’s reimbursement for its actual costs incurred in engaging Staff.  Consequently, the Craft Labour determinations as they are seen under award items 4 through 9, are only incorporated as matters of context.
  3. In relation to the success of Chevron in rebutting CKJV’s arguments concerning a conversion to a Rates basis of reimbursement for Staff costs and further, a non‑existence of any binding or perfected (variation) agreements and a failure by CKJV to make out a (conventional) estoppel, I refer to pars 1 – 3 of the first interim award (above).  See especially the concluding reference ‘from Cost Items to Rate items’ at par 3.
  4. A capitalised reference to ‘Cost Items’ is of significance to the expressed view by the majority arbitrators – that terms were used in the award on a basis that they simply carried across from the parties’ (2011) Contract.
  5. For convenience, I have extracted parts of the reasons as were provided by the Tribunal underlying the first interim award at a schedule to these reasons.  Along with these extracts, I have also provided at places some passing observations.  Presently, it is only necessary to set out what was the ‘Summary of findings’ provided by the Tribunal at the conclusion of its reasons (see page 79) underlying the first interim award.  They read:

Summary of findings

We, Phillip Greenham, the Hon Chris Pullin and Sir Robert Akenhead, the duly appointed Arbitrators in this arbitration, make the following findings (in relation to the issues set out at paragraph 38 above);

(i)          Issue 1:    Whether or not there was any binding agreement entered into between the parties by 2 September 2014 to convert the Price for Staff and Supervision from Cost items to Rate items.

Finding:   There was no agreement entered into between the parties by 2 September 2014 to convert the Price for Staff from Cost items to Rate items.

(ii)         Issue 2     Whether or not the Respondent is estopped from denying that there was such an agreement.

Finding    The Respondent is not estopped from denying that there was such an agreement (by way of majority finding).

(iii)        Issue 3     Whether or not the LOA evidenced, or itself contained, any agreement between the parties to convert the Price for Staff from Cost items to Rate items.

Finding:   The LOA did not evidence or contain any agreement between the parties to convert the Price for Staff from Cost items to Rate items (by way of majority finding).

(iv)         

(v)          …

(vi)         …

(vii)        …

(viii)       Further Findings:
Within the findings relating to Issues 4(i) – (iv), the Tribunal have also made findings that [sic] in respect of the agreement of Rates as follows:

(a)          By way of majority finding, Rates were agreed between the parties for Craft Labour as from July 2012 onwards, which are not now impeachable or challengeable in these proceedings.

(b)          The parties agreed Rates in relation to jury service/compassionate leave/stand down, which are not now impeachable or challengeable in these proceedings.

(ix)         Issue 5     Whether the Claimant may bring into to account by way of Set-Off or defence, in these proceedings the amounts particularised in Appendix 1 (MSC.010.007.0001) to its Defence to Counterclaim if there was no agreement to convert the Price of Staff from Cost items to Rate items.

Finding:   By majority, the Claimant may bring into to account by way of defence, in these proceedings, the amounts particularized in Appendix 1 to its Defence to Counterclaim (MSC.010.007.0001) and any other amounts of cost which it seeks to prove have not yet been accounted for in what it has been paid.

Two earlier procedural matters

  1. Having now laid out the terms of the first interim award, I can revert briefly to two aspects of the parties’ arbitral pleadings and to some earlier procedural orders – which provide context and are of relevance to the present functus officio and set-aside arguments of Chevron.

PO 17

  1. On 21 September 2018, CKJV had filed submissions objecting to Chevron’s proposed expert evidence from Mr Meredith for the first arbitral hearing (see AHB, tab 27).
  2. At the time, CKJV’s written objection submission was expressed in terms (with some additional clarification provided in square brackets):
  3. Paragraphs 6 to 17 of the Respondent’s Statement all go to the same point:  that most of the Meredith Report will be adduced by the Respondent to prove that the Claimant invoiced sums in excess of the ‘actual cost’ it incurred in relation to certain components of Staff payroll costs.
  4. Each of these paragraphs 6 to 17:

23.1         proceeds on the assumption that [Chevron] makes out its case that [CKJV] was only entitled to be paid the actual costs it incurred, as opposed to [CKJV’s] case that it was entitled to be paid on the basis of agreed Rates;

23.2         ignores that these underlying issues of liability must be determined (in [Chevron’s] favour) before the calculations in the Meredith Report become relevant.  The calculations leading to the conclusion that [CKJV] charged in excess of its actual costs are not matters of liability or entitlement;

23.3         are outside the scope of PO15A, paragraph 9 because they relate to the quantum or quantification or calculation of the Respondent’s Counterclaim;

(c)          this is the case in relation to each and every issue identified in paragraphs 6 to 17 of [Chevron’s] statement.  They all concern Mr Meredith’s opinion on how certain Staff costs were calculated and how he considers they should be calculated if (and only if) [Chevron] makes out its case on entitlement/liability.  In other words, they are all matters of quantum and excluded from the scope of the First Hearing;

(my emphasis in bold)

  1. Subsequently on 3 October 2018, the Tribunal issued its PO 17 (AHB, tab 29).  By order 1, the Tribunal ruled:

The evidence of Mr Meredith shall not and need not be adduced at the liability hearing between 5 and 23 November 2018.

  1. The Tribunal provided brief reasons accompanying PO 17.  That was just prior to the first arbitral hearing in November 2018.
  2. Importantly, par 4 of the accompanying reasons of the Tribunal had said this:

Essentially, there are three prime areas of liability issues between the parties which might be properly summarised as follows: (i)whether or not there were binding agreements between the parties as represented by or in DSP2 and DSP4; (ii)if not, was there effective estoppel acting to prevent the Respondent from asserting otherwise, and (iii)whether there was any material mistake as pleaded in Paragraph 88 of the Respondent’s Defence.

Segment #4

Segment #5

Segment #6

Segment #7

My observations

  1. The preceding reasons of the Tribunal, and those which follow concerning the LOA, illustrate that the focus of the first arbitral hearing was directed to the parties’ then fundamental disagreement.  Specifically, the focus was directed at CKJV’s contention that either variation agreements or a conventional estoppel had emerged after the parties’ Contract – so as to allow CKJV (as regards its engagement of both Staff and Craft labour) to be reimbursed by Chevron on the basis of ‘Rates’, rather than by its ‘actual costs’.
  2. The resolution of this issue would, by that distillation, resolve all issues of liability, both under CKJV’s claim and on Chevron’s counterclaim (whether explicitly raised to be dealt with, or not).
  3. Essentially, the divide then was between CKJV’s attempt to move away from the stipulated Contract basis of its reimbursement for actual costs

 

– to an agreed variation basis (or get the same results on an estoppel basis), namely, that CKJV be reimbursed upon a basis of Rates charging to Chevron.  ‘Rates’ reimbursement for CKJV may not equate to or be in alignment with the actual costs as incurred by CKJV towards the Staff it engaged and paid.

Paragraphs 78 to 89

  1. Next, I proceed to expose observations by the Tribunal towards a letter of agreement (the LOA) of 2016:

78          This part of this Award is concerned with whether the LOA itself constitutes an agreement to convert Cost items to Rate items.

79          The context of the LOA was that the parties were seeking to settle numerous issues which had arisen between themselves, primarily in relation to the period up to 31 December 2015 and with certain exceptions to settle all claims up to that date, even if ‘unknown’, that each may have against the other arising out of events or circumstances occurring before that date.

80          That can be seen in Paragraph B of the LOA in  which CKJV’s  Claims up to that date are settled (Paragraphs B.1) and B.3)) as are most of Chevron’s Claims (Paragraph B.2)a) and B.2)b)).

81          By its Amended SOC CKJV pleads as follows (ASOC [70B]):

70B        Further and/or alternatively, by the LOA the Parties expressly agreed that:

(a)          CKJV was and is entitled to be reimbursed for Staff for the period prior to 2 January 2016 at the Rates calculated by the “current DSP-0002/4 Master Billing Sheet[s] “;

(b)          CKJV was and is entitled to be reimbursed for Staff for the period from 2 January 2016 at the Rates calculated by the “current DSP‑0002/4 Master Billing Sheet[s]” as adjusted by the actual salaries applicable from that date; and

(c)          the Pricing Schedule 2 and 3 annual reconciliations for the periods (i) from 1 January 2014 to 31 December 2015; and (ii) from 2 January 2016 onwards, would be conducted in a manner consistent with the annual reconciliations for previous years, i.e. on the basis of the adjusted DSP-0002/4 Master Billing Sheet Rates.

82          Although Paragraph 70B does not expressly plead that the LOA itself contained a mutual agreement (as contemplated by Article 1.2.8 of the Pricing  Schedule)  to  convert Cost items to Rate items in relation to Staff, it was asserted on behalf of the Claimant in Closing Submission that it was to be understood in that way. The Respondent understood it to be such a plea.

83          The Claimant’s closing written and oral submission made it clear that the mutual agreement was to be found in paragraph B.1)a) of the LOA. That paragraph read as follows:

“B.          SETTLEMENTS AND AMENDMENTS TO THE AGREEMENT

This LOA shall apply with effect from the date this LOA is executed by Company and Owner and Contractor, and shall be applied as set out below:

1)           Settlement of Claims. In full and final settlement of the issues listed in Attachment 1, Owner will pay Contractor the Settlement Amounts in accordance with the payment schedule in Attachment 1.

  1. a)Item 3 – Salaries:

The Settlement Amount for Salaries is full and final settlement of any Claim for effects to 31 December 2015 of unapproved salary increases and related salary issues.

(i)          No additional salary or salary related increases are to be granted without prior Owner consent, provided that Contractor shall be entitled to be reimbursed from 2 January 2016 onwards at the current DSP 2/4 Master Billing Sheet Rates as adjusted by the actual salaries applicable as at 2 January 2016. An annual reconciliation will be conducted in a manner consistent with the annual reconciliations for previous years for the period from 02 January 2016.

84          The Members of the Tribunal differ on this issue. The majority view is set out first, followed by the dissenting view.

Majority View – Arbitrators Pullin and Greenham

85          The view of the majority of the Tribunal is that the LOA cannot be read as meaning   that the parties agreed to mutually agree to convert the Price for Staff from Cost items to Rate items.

86          The reasons for the decision of the majority of the Tribunal on this issue are as follows:

(a)          The LOA read as a whole is a document replete with expressions which require a knowledge of the background circumstance to give meaning to it.  Thus Paragraph B.1)a) of the LOA contains two important words and an important phrase which when understood informs the clause and allows it to be properly construed.  The words and phrase are as follows:

(i)          the word ‘reimbursement‘.

In the context of Staff that word carried its ordinary meaning namely “to make repayment to for expense … incurred” (Macquarie Dictionary 2018);

 

(ii)         ‘DSP 2/4 Master Billing Sheet Rates’

This was a phrase referring to what had been agreed in the process established to overcome the difficulties with the PAF process and mobilisation of Staff and without in any way restricting Chevron’s  right to inspect CKJV’s salary records and to audit them (a process reduced to writing in DSP-0002 and DSP-0004 and a process the Tribunal has found to exist when deciding issue 1)  (See paragraph 71(n) and paragraph 74 above);

(iii)        ‘reconciliation’

This word when used in the phrase ‘annual reconciliation’ referred to the process, in relation to Staff, of reconciling cash call payments to actual cost incurred.

 

87          Therefore with those words and phrases so understood Paragraph B.1)a) of the LOA should be construed as a written confirmation of the process which the parties had put in place and which was in place at the moment the LOA was signed.  That process was a process which involved Chevron paying CKJV in cash call invoices and monthly and annual reconciliation invoices at the DSP-0002/4 Billing Sheet Rates without any change to Chevron’s right to inspect CKJV’s salary records and to audit them.

88          In closing submissions counsel for CKJV placed great reliance on the presence of the word ‘Rates’ in the compound phrase ‘DSP-0002/4 Master Billing Sheet Rates’. Counsel acknowledged that if the capital ‘R’ had been a lower case ‘r’ the whole argument that there had been a conversion of Cost items to Rate items would go (TRA.500.012.0089 [20]. To concentrate on the word ‘Rates’ in the compound phrase ‘DSP-0002/4 Master Billing Sheet Rates’ and not bear in mind the other important words and the meaning of the whole phrase in which the word appears offends the rule that a contract should be read as a whole and the rule that a contract should be read in  the way in which commercial persons in  the position of the parties would understand it.

89           The conclusion of the majority of the Tribunal is that the LOA cannot be read as meaning that the parties agreed to mutually agree to convert the Price for Staff from Cost items to Rate items. CKJV’s claim in para 70B of the ASOC is therefore dismissed.

My observations

  1. Clearly, there was a divide as between the three arbitrators at the first arbitral hearing, over the effect of what the parties had agreed upon by the 2016 LOA.
  2. The majority view expressed by Arbitrators Pullin and Greenham prevailed over a dissenting view of the presiding arbitrator (Arbitrator Akenhead).

Paragraphs 106 to 128

  1. The arbitrators then grappled with what they had identified as issue two, concerning conventional estoppel and Staff costs reimbursement to CKJV.

Staff:  Estoppel

106         This section of the award deals with the issue of whether the Claimant’s claim in relation to estoppel has been made out.

107         In Chevron’s defence (DCC [61 – 64]) it is pleaded that DSP‑0002 and DSP-0004 did not create any rate or convert any cost-item into a rate item.  In the SR CKJV pleaded that Chevron was “estopped” from making “those assertions” (SR [45 – 49]).  This plea of estoppel was fleshed out in the Claimant’s Substituted Reply (SR [35 – 39]  and [73 – 77]).

108         In SR [73], CKJV pleaded:

“in the alternative, even if the Claimant is wrong on the above points  of interpretation (which is expressly denied), the Respondent is estopped from resiling from the agreed and common understanding between the parties regarding the assumed meaning and effect of DSPs 2 and 4.”

109         In SR [74(a)], CKJV pleaded:

“… the Parties mutually accepted and assumed that the DSPs converted Cost based items to Rate based items and the agreed DSP-0002/4 Billing Rates would be invoiced and paid without reconciliation to the actual costs incurred by the claimant “

110         In SR [76], CKJV pleaded:

“… the Claimant has relied to its detriment on the common understanding and approach that the Billing Rates do not have to be reconciled against actual costs incurred in implementing the Contract.  If the Respondent were permitted to resile from this common understanding and approach then the claimant would suffer a detriment in the form of significant financial loss and damage.”

111         Chevron sought particulars of detriment suffered by CKJV and CKJV provided particulars which stated that:

“(CKJV) entered into the LOA in reliance on … the common assumption, promise and/or representation …”.

112         The Substituted Reply related the history of the difficulties with the PAF process, the exchanges between the parties about those difficulties, the 2012 audit and the entry into DSP-0002 and DSP-0004 (SR [35 – 39].  CKJV pleaded the letters and emails from Chevron to CKJV dated 25 March 2014, 8 July 2014 and 19 May 2014 referred to above (SR [73 – 77]).

113         In CKJV’s opening written submissions the principles applying to estoppel by convention and promissory estoppel were set out.  However, there was no plea by CKJV of any material fact amounting to a representation by Chevron which would support the case of promissory estoppel.  The pleading by CKJV that the parties ” …  mutually accepted and assumed … ” that the ” … DSP’s converted Cost based items to Rate based items …” (SR [74(a)(i)]), had a ” … common understanding … ” (SR [75]) and a “common understanding and approach …” (SR [76]) is supportive only of reliance on the case of estoppel by convention[.]

114         The critical issue in the estoppel case is CKJV’s contention that there was a ” … common understanding … ” or a ‘… mutual acceptance” that DSP-0002 and DSP-0004 ” … converted Cost based items to Rate based items … “(SR [74(a)]).

115         The Members of the Tribunal differ on this issue.  The majority view is set out first, followed by the dissenting view.

Majority View – Arbitrators Pullin and Greenham

116         Based on the testimony given by CKJV witnesses, there is no doubt that before the LOA was executed a view had formed within CKJV that there had been a conversion of Cost items to Rate items in relation to staff.  The senior people who negotiated the LOA and instructed lawyers to document it (Mr Wigney and Mr Lichon) testified that they thought so.  Mr. Wigney testified that he thought this was so not because anyone from Chevron told him but because CKJV told him that this was the situation (TRA.500.004.00170 [19] [Wigney] and following).

117         On the other hand, the relevant Chevron witnesses testified that they did not hold any view that there had been a conversion of Cost to Rates in relation to staff.

118         What both parties thought does not establish the existence of an assumed state of facts to ground an estoppel.  What is necessary is that each party has, to the knowledge of the other, expressly or by implication accepted an assumption as being true for the purposes of their dealings and that the proponent has acted upon the assumption to its detriment (Con-Stan Industries of Australia Pty Ltd v Norwich (1986) 160 CLR 226 at 224).  In other words, the acceptance by both parties of a common assumption must manifest itself in some way.

119         It is important to keep in mind that the Contract was well understood by the Contract teams within Chevron and within CKJV.  It was well understood by them that, if a Rate was established as the basis for payment for CKJV’s employees, then the actual salary paid to such employees would not be examinable by Chevron, in the reconciliation process, or in any inspection or audit process.

120         For any Price that was Rate based the parties both understood that all that Chevron would be entitled to do in the reconciliation process, inspection process or audit process would be to check time sheets and check that the correct Rate was charged in relation to the person whose time sheet was being examined.  Payroll information would be of no relevance and could not be examined by Chevron.

121         The undisputed testimony is that, in all of the audits carried out, before the LOA was signed, payroll data was called for by Chevron and provided without protest by CKJV.  In addition, in the first audit after the LOA was signed Chevron called for and, without protest, CKJV gave access to staff payroll information.  Although the audit after the LOA was signed was an event occurring after the LOA, it shows continuing conduct inconsistent with any earlier assumption that staff were to be reimbursed on a Rates basis.

122         This conduct, that is the call for payroll data by Chevrons [sic] audit team and the provision of such information by CKJV, is entirely inconsistent with any mutually accepted assumption by the parties that there had been a conversion of Cost items to Rate items in relation to Staff.

123         This is because at the risk of repetition both parties knew that under the contract if a price was Rate based then Chevron had to right to call for that information.

124         In addition, Mr Wigney, the most senior CBI & I person involved in the negotiations leading to the LOA, well knew that although staff of CKJV told him that the Staff were compensated on a Rates basis, Chevron did not accept that.

125         The transcript of his cross examination reads as follows (TRAS.500.004.0170 [5 – 17] [Wigney]):

  1. But, in fact, from the materials available to hand there was every suggestion from Chevron, wasn’t there, that your understanding of the Rates base scheme was incorrect?
  2. Not in my view.
  3. Q.        They had asserted it on two occasions prior to you signing the LOA?
  4. and we rejected that, so–
  5. Yes.
  6. and that was the view of the – – that I was getting from the project team was that this was rates based.
  7. So you relied on the project team, is that what you are saying?
  8. to a large extent.  My view was that the Rates based nature of the contract was intact.

126         Finally, when the LOA was in its final stages the lawyer for Chevron proposed that there should be added to the draft LOA a provision stating that for the avoidance of doubt DSP-0002 and DSP-0004 billing rates were not Rates.

127         Mr Willoughby, the lawyer for CKJV, opposed the inclusion of this provision and it was withdrawn.  CKJV’s counsel submitted that this was evidence supporting the estoppel claim.  On the contrary it reveals the difference that each party had about the price for staff.  The resolution of the dispute about the inclusion of this clause by withdrawing it cannot be viewed as an acceptance by Chevron that staff were to be compensated on a Rate basis.  The withdrawal of the proposed clause in the LOA merely meant that CKJV would not concede what Chevron considered the position to be namely that CKJV was paid for staff on a Cost basis.

128         As a result, the majority of the Tribunal conclude that the estoppel claim by CKJV must be dismissed.

My observations

  1. Paragraphs 117 and 124 as regards the ‘Cost to Rates’ divide indicate the position was an ‘either/or’ outcome concerning CKJV’s alternate plea of conventional estoppel.
  2. I note that Chevron by the carrying out of audits, had obtained resort to the payroll information of CKJV.  This was significant to the Tribunal’s rejection of the conventional estoppel argument.  Ultimately, it was assessed by the majority as being inconsistent with Staff being reimbursed on a Rates basis (see first interim award reasons at par 121).
  3. That data as pressed for by Chevron highlighted the conceptual clash as between the moneys outlaid by CKJV towards Staff, as opposed to a different basis of reimbursement for CKJV, based on an agreed rate (which was not dependent upon whether the Staff person had actually been remunerated according to the level of the rate by CKJV).
  4. Commencing at par 133, the Tribunal addressed Craft Labour issues as they had identified previously at par 38 – in respect of the as identified issue 4.  The position in respect of Craft Labour in contrast to Staff is no longer relevant.  Accordingly, I omit further reference to them in this extract, with no disrespect intended.

Paragraphs 192 to 250

  1. Within this section, I set out the Tribunal’s conclusions concerning the parties divide over ‘Rates’ by reference to various aspects of Attachment C to the Contract.
  2. I refer to article 1.2.8 of the parties’ Contract, which defined ‘Rate’ on the basis of an ‘agreed unit price payable for a good or service which may not be the actual cost’ (see first interim award reasons at par 193).
  3. The following section provides a useful discussion of the Attachment C provisions of the Contract, as well as GTC provisions concerning Direct Costs in the context of Audit Inquiries 7 and 9:

Rates – Could the amounts the subject of Audit Inquiry 7 and Audit Inquiry 9 be ‘Rates’?

192         The Claimant asserts that the payments made in relation to the matters the subject of Audit Inquiry 7 and Audit Inquiry 9 were ‘Rates’.  This assertion is made in SOC [100] in relation to Audit Inquiry 7 and in SOC [116] in relation to Audit Inquiry 9.

193         The expression ‘Rate’ is defined in the Contract at Article 1.2.8 of Attachment C.  The expression is defined as follows:

“Rate means an agreed unit price payable for a good or service and may not be the actual cost.”

194         Given the definition of the expression ‘Rate’, it is possible for a ‘Rate’ to be agreed throughout the currency of the Contract.

195         The agreement of a ‘Rate’ is not an amendment of the Contract but rather the outcome of the utilisation of an administrative process provided for in the Contract.  Given this, Article 2.1.1 of the GTC of Contract does not apply to such an agreement.  It is not necessary for the relevant agreement to satisfy any formal requirements.  All that is required is for it to be established that the parties have agreed to a ‘Rate’.

196         The Tribunal finds that an agreement as to the establishment of a ‘Rate’ could arise from the exchange of spreadsheets and other documents between the parties or through the administration of the Contract.  It could even be agreed orally or by email, although reliable evidence would be required.  Agreement can be inferred where the parties have acted on a basis which objectively demonstrates that they have agreed upon a ‘Rate’.

Rates – Does an ‘error’ prevent the crystallisation of a ‘Rate’?

197         The Respondent submits that an amount cannot be a ‘Rate’ if it has been incorrectly calculated (SR [29] and ROS [124] in respect of the EBA issue and ROS [111] in respect of the Pre September 2015 Issue).

198         The Respondent does not assert that there has been any fraud or  misrepresentation as to the development or presentation of any of the amounts which the Claimant asserts have become ‘Rates’.

199         the Contract makes particular provision in relation to how ‘Rates’ are to be treated by the Contract.  The Contract provides as follows:

GTC Article 3.9.4

… provided that the obligation to maintain and share cost information shall not extend to cost associated with … agreed Rates …

Attachment C Article 1.2.2

… Where a price is described as a Rate in this Attachment C – Pricing Schedule it shall be and is deemed to be, fully inclusive of all costs applicable to the item, matter, thing or activity it represents and fully inclusive of all costs and expenses to be incurred by Contractor in complying with its obligations under the Contract and shall constitute full and complete compensation due to the Contractor for that item, matter, thing or activity.

Attachment C Article 1.2.3

Unless otherwise stated in this Agreement Rates shall be applicable regardless of the extent, quantity, nature, difficulty, complexity or duration of the Work for which they are employed.

Attachment C Article 1.2.8

In this Attachment C – Pricing Schedules, unless otherwise stated:

Rule means an agreed with price payable for a good or service and may not be the actual cost.  Where Contractor seeks to change an agreed Rate, until such change is agreed, the Rate shall cease to be an agreed Rate for the purposes of Article 3.9.4 of the General Terms and Conditions.

200         The Tribunal finds that, in the absence of fraud or misrepresentation, an amount may be a ‘Rate’ notwithstanding an error in the calculation of the ‘Rate’.  Accordingly, the Respondent’s submission in this respect is not accepted.  This finding is the finding of the Tribunal but subject to Arbitrator Pullin’s conclusion that the common mistake about hours meant that there was no agreed Rate for the period specified in paragraph 216 below.

Breach of Contract

201         The Respondent submits that the Claimant is in breach of the Contract by reason of or reference to the errors said to be embodied in each of the relevant rates the subject of Audit Inquiry 7 and Audit Inquiry 9. In relation to Audit Inquiry 7 this is pleaded at FPCCL [30]. In relation to Audit Inquiry 9 this is pleaded at FPCCL [39].

202         The provisions of the Contract which it is submitted have been breached by the Claimant are GTC 4.2.3, Attachment C Article 1.1.7, Attachment C Article 1.2.4 and Attachment C Article 2.3.4.  The provisions are as follows:

GTC 4.2.3

The Direct Costs to be paid by Owner to Contractor shall be only those necessary to perform the work in accordance with this Agreement including Article 10.1.1.  Except to the extent provided in Attachment C – Pricing Schedule relating to Contractor’s variable overhead costs payable as Direct Costs, Contractor warrants that the rates, costs and amounts set out in Attachment C – Pricing Schedule applicable to the Direct Costs do not contain any element of, or component for, corporate overhead profit, risk or contingency for the Contractor, or any members of the Contractor Group (including any Affiliate engaged to perform any Work) and the Fixed Fee for Overhead, Profit and Risk contain any and all such amounts.  The Direct Costs will be reduced by the amount of any credits, refunds or other reductions or savings Contractor receives in relation to VAT, goods and services tax, fuel tax credits, duties or other taxes or levies.  For the avoidance of doubt, if Contractor recovers contrary to this Article.

Attachment C Article 1.1.7

Contractor represents and warrants that the rates and costs set out in this Attachment C – Pricing Schedules applicable to Direct Costs do not contain any element of, or component for, overhead risk or profit and that the mark-up for Variable Overhead and the Fixed Fees for Overhead, Risk and Profit contain any and all such amounts.

Attachment c Article 1.2.4

Contractor shall at all times use reasonable endeavours to minimise any amounts which Company shall be liable to pay Contractor for Work.

Attachment C Article 2.3.4

These Prices exclude any profit and overhead components, which are covered under Pricing Schedule 13 – inclusive as outlined in section 2.4 of this Attachment C – Pricing Schedule.

203         It is necessary to consider these provisions in the context of the entire Contract.  Other provisions of the Contract which are relevant to the consideration of the provisions relied upon by the Respondent are as follows:

Attachment C Article 1.2.3

Unless otherwise stated in this Agreement Rates shall be applicable regardless of the extent, quantity, nature, difficulty, complexity or duration of the Work for which they are employed.

Attachment C Article 1.2.8

In this Attachment C – Pricing Schedules, unless otherwise stated:

Rate means an agreed unit price payable for a good or service and may not be the actual cost.  Where Contractor seeks to change an agreed Rate, until such change is agreed, the Rate shall cease to be an agreed Rate for the purposes of Article 3.9.4 of the General Terms and Conditions.

204         The Respondent submits that the warranty contained in Article 1.1.7 of Attachment C was a continuing warranty which applied to Rates which might have been agreed after the Contract as well as the Rates set out  in Attachment c at the time of execution (RCS [166(b)]).

205         The warranty has the potential to create tension with other provisions of the Contract in relation to ‘Rates’ (for example, the definition of ‘Rates’ in Article 1.2.8 of Attachment C).  This tension does not arise if the warranty is confined to the Rates which appear in Attachment C as at the time of execution of the Contract.

206         The Respondent accepts that a ‘Rate’ should not be ” … re-opened … “ (RCS [239]) and that the Claimant is not limited to being ” … paid their actual costs for the provision of Craft Labour in circumstances where the parties have agreed a Rate for that labour … ” (RCS [240]).

207         Further, the Respondent rightly makes the following concession (RCS [241]):

” … if the Claimants’ [sic] actual costs are less than what it is compensated for by the Respondent because the actual cost hour is less than the Rate per hour, then, absent any actionable mistake in the build-up of that Rate, the Respondent accepts that it is not entitled to revisit or re-examine the Rate and claw back the difference between what it paid the Claimants’ (sic) and what their actual costs are … “

208         The Tribunal finds, that, on the plain wording of Article 1.1.7, the warranty only extended to the Rates in Attachment C at the time of the execution of the Contract.  This finding is supported by the context in which Article 1.1.7 is found.  It does not apply to changes to Craft labour rates agreed by the parties after the Contract was entered into.

209         In relation to the other provisions relied upon by the Respondent the Tribunal finds as follows:

(a)          Article 1.2.3 of Attachment C does not entitle the Respondent to look behind a ‘Rate’ and the Claimant remains entitled to be paid on the basis of a ‘Rate’ notwithstanding that there may have been the opportunity for the relevant work to be undertaken at a lower cost; furthermore, no evidence of breach of this has been provided to show that CKJV failed to use reasonable endeavours to minimise amounts otherwise payable for Work; if, as the arbitrators have found, the relevant Rates were agreed, the Claimant was entitled to be paid at those Rates.  In those circumstances the minimisation would primarily go to avoiding time being wasted or personnel being unnecessarily deployed, none of which has formed the basis of complaint.

(b)          The warranties provided for in GTC 4.2.3 and Article 1.1.7 of Attachment C apply to the rates and costs set out in Attachment C and do not apply to any ‘Rates’ which may be agreed after the entering into of the Contract;

(c)          the statement in Article 2.3.4 of Attachment C:

(i)          only applies to Prices in respect of Staff and Supervisory Personnel (the reference to ‘Prices’ in Article 2.3.4 which is a reference back to ‘Prices’ in Article 2.3.3 and Article 2.3.3 deals with payment for Staff; and

(ii)         does not entitle the Respondent or arbitrators to look behind a ‘Rate’;

(d)          the Claimant is not, in relation to the relevant rates, in breach of the Contract as alleged by the Respondent.

210         Accordingly, the claims by the Respondent in relation to breach of Contract in respect of Audit Inquiry 7 and Audit Inquiry 9 are dismissed.

Rates – Were the payments the subject of AI7 and A19 the subject of a ‘Rate’ or an agreement relating thereto?

211         The circumstances giving rise to the disputes in connection with Audit Inquiry 7 and Audit Inquiry 9 are discussed in this award as follows:

(a)          regarding the treatment of RDOs prior to September 2015, at Paragraphs 143 to 154 above, SOC [55 – 59] and FPPCL [20 – 25];

(b)          regarding the treatment of RDOs after September 2015 is discussed at Paragraph 172 to 185 above; and

(c)          regarding the treatment of stand down time, compassionate leave and jury duty is discussed at Paragraphs 186 to 191 above.

212         Given the matters identified in Paragraph 211 above, the utilisation of the relevant spreadsheets and the RFI procedure described in Paragraph 144(a) above by the Respondent for the purposes of the financial administration of the Contract, the Tribunal finds that:

(a)          there was a binding agreement in relation to ‘Rates’ as alleged in Paragraph 58 of the SOC and that binding agreement continued after September 2015 (on the basis of relevant amended ‘Rates’), such agreement being evidenced within the Craft Labour Billing Matrices submitted and approved in October 2015 as referred to above; and

(b)          there was a binding agreement in relation to ‘Rates’ as alleged in Paragraph 115 of the SOC, relating to standby hours, compassionate leave and jury duty.

Majority View – Presiding Arbitrator Akenhead and Arbitrator Greenham

213         There is disagreement between the arbitrators as to whether or not there were agreed Rates in relation to the Labour Matrices which are the subject matter of the Respondent’s mistake claim.

214         Given the matters identified at Paragraph 211 above and the other factual findings, the utilisation of the relevant spreadsheets and the RFI procedure described in Paragraph 144(a) above by the Respondent for the purposes of the financial administration of the Contract a majority of the Tribunal finds that there was an agreement in relation to ‘Rates’ as alleged in Paragraph 58 of the SOC.

Dissenting View – Arbitrator Pullin

215         I have previously noted as follows:

(a)          following the publication of a new EBA in March 2012 and CKJV seeking to change the Craft Rates, there were no Craft Rates until an agreement was reached about the new Rates (Paragraph 164 above); and

(b)          no new Rate has been agreed (Paragraph 169 above).

216         I agree with the reasoning in paragraphs 217 and 229 below and the finding in paragraph 230 subject to my view that the waiver and release in Paragraph B.2)a) of the LOA does not bar Chevron from auditing and recovering overpayment (if any) until there is an ‘agreed Rate’ for the period commencing with the date when CKJV sought to change Rates in 2012 up until new Rates were agreed as a result of the publication of the September 2015 EBA.  That Rate can be and should be agreed.  If there were any dispute about the data to be input then that could be resolved using the dispute resolution clause.  That is no different from a dispute which may have arisen any time there was a new EBA and the need to agree new input data.  No such dispute has been referred to this arbitral panel.

Claimant’s Set-Offs – Liability

231         This part of this Award is concerned with the ‘Set-Off’ pleaded by CKJV in its Defence to Counterclaim against the sums counterclaimed by Chevron.

232         The Set-Offs are expressly predicated upon the basis that, if and to the extent that the Counterclaim succeeds, then CKJV is entitled to set off certain ‘unbilled amounts’ in respect of Staff and Supervision Costs (estimated at AU$49.828 million)  and  in  relation to Craft Labour Costs (estimated at AU$96.187 million).

233         The Set-Offs are pleaded as follows:

“3.2          Without prejudice to its primary case as set out therein, in the alternative, the Claimant is entitled to set-off the following amounts against any sums counterclaimed by the Respondent:

Staff and Supervision Costs

3.2.1        In the alternative, and in the event that the Staff costs are to be ascertained in accordance with the Respondent’s case as to the meaning and effect of DSP-0002/4 and the subsequent Staff Billing Sheet Rates and the LOA, then the Claimant has not invoiced sufficiently (or at all) for a number of items that it would otherwise be entitled to invoice and seek payment of in accordance with, on the Respondent’s case, the un-varied Contract.

3.2.2        These items were omitted on the basis that the Billing Sheet Rates comprised the Claimant’s all inclusive entitlement to final compensation (regardless of any errors and omissions in their constituent formulae), as indicated in the Respondent’s letter KJV- 1524 and evidenced by the parties’ conduct prior to the 2016 audit.  The unbilled amounts were omitted from the build-up of the Rates invoiced during the Project on the basis identified above;

3.2.3        The Claimant is entitled to set-off these unbilled  amount  against the sums claimed by the Respondent in its counterclaim, in the estimated sum of $49,828,000 for such unbilled Staff costs; and

3.2.4        Further details of the unbilled Staff Costs are set out in Appendix 1 hereto.

Craft Labour Costs

3.2.5        In the alternative, and in  the event that the Respondent’s is correct in its case that the Craft Labour Rates invoiced and paid during the Project were not agreed Rates as defined by the Contract as alleged at paragraphs 90 to 98 of the Respondent’s Defence and Counterclaim, then the Claimant says:

(a)          an agreed Rate as defined by the Contract should entitle the Claimant to invoice and be paid for elements / items that were not included in the build-up of the allegedly  incorrect Rates.  These items were omitted on the basis that the latter comprised the Claimant’s all-inclusive entitlement to compensation (regardless of any errors and omissions in their constituent formulae); and

(b)          any agreed Rate as defined by the Contract should correct all of the omissions and errors in the constituent formulae of the allegedly incorrect rates.  This would include not only the alleged errors identified by the Respondent (which would operate to adjust a  Rate  in the Respondent’s favour), but also the matters / items which would operate in the Claimant’s favour, but were omitted  from  the  build- up of the Rates invoiced during the Project on the basis identified above.

3.2.6        The Claimant is entitled to set-off such sums against the amounts claimed by the Respondent in its counterclaim, in the estimated sum of $96,187,000; and

3.2.7        Further details of the Craft labour omissions are set out in Appendix 2 hereto.”

234         Appendices 1 and 2 contained respectively 5 specific items of ‘Unbilled Cost’, each quantified and 16 items of ‘Unbilled Cost’ and ‘Rate Adjustments’.  At Paragraph 4 of the Defence to Counterclaim the Claimant says the following:

“4 … the Claimant claims

4.2           The Claimant seeks a declaration that in accordance with the Claimant’s alternative case set out above, the Claimant is entitled to set-off the sum of $146,015,000 or such other sum as the Tribunal considers appropriate, against any amount owed by the Claimant to the Respondent’.

235         The Amended Reply to Defence to Counterclaim served on 7 September 2018 pleaded by way of amendment the following at Paragraph 5:

‘As to paragraphs 3 and 4.2 and Appendices 1 and 2 to the Defence  to  Counterclaim, the Respondent (without admitting that there is any merit in the Claimants’ set off claims pleaded in paragraph 3 thereof and Appendices 1 and 2 thereto (the Claimants’ Set Off Claim), or that the Claimants have incurred  any of the “unbilled costs” referred to therein} says that:

(a)          pursuant to Article B.3) of the Letter of Agreement dated 10 August 2016 (LOA), the Claimants have fully and finally waived and released the Respondent from any and all Claims, of every nature or kind, whether known or unknown, claimed or unclaimed arising from or in connection with any events or circumstances occurring on or before  31 December 2015 related  to, inter alia, Direct Costs (except those referred to in Article B.3)(c)(i) and (ii) and (d)(i), (ii) and (iii));

(b)          the Claimants’ Set Off Claims relate to Direct Costs allegedly incurred by the Claimants;

(c)          in the premises pleaded in paragraph 5(a) above, the Claimants have  fully and finally waived and released the Respondent from and are barred from claiming in the arbitration or at all, the Claimants’ Set Off Claims to the  extent that they relate to Direct Costs:

(i)          allegedly incurred on or before 31 December 2015; and

(ii)         not falling within the exceptions referred to in Article B.3)(c)(i) and(ii) and (d)(i), (ii) and (iii) of the LOA.”

236         Although there is a general traversal of the Set-Offs, there has been no pleading as to detail and no investigation or evidence about them in the First Hearing.

237         Accordingly, the only issue for this Award is whether or not, and if so, to what extent Article B.3(c) and (d) of the LOA excludes or limits in principle any entitlements to the Set-offs as pleaded.

238         Article B.3) of the LOA states as follows:

‘3)          Release by Contractor.  Contractor hereby fully and finally waives and releases Company and Owner from any and all Claims, of ever nature or kind, whether known or unknown, claimed or unclaimed arising from or in connection with any events or circumstances occurring on or before 31 December 2015 related to any of:

  1. c)Direct Costs which have not been claimed as of the date of the LOA, except:

(i)           Direct Costs of Subcontractors for Work performed on or before December 31, 2015 but which is claimed or invoiced by Subcontractor to Contractor after December 31, 2015; and

(ii)         Direct Costs of Subcontractors associated with the disputed claims or invoices of Subcontractors set forth in Attachment 5;

  1. d)Direct Costs except those:

(i)          identified as push back items and uncertified billing items as specified in Attachment 3 or 4, both of which will be resolved in the ordinary course; and trustees; and

(ii)          specified in paragraph 3(c) above; or

(iii)        identified as findings in the Pricing Schedule 2 and 3 annual reconciliation for the period from 1 January 2014 to 31 December 2015, which will be conducted in a manner consistent with the annual reconciliations for previous years; or … ‘

239         The relevant Contract definitions referred to in Article B.3) of the LOA are:

Contract Conditions

‘1.11        “Claim” shall mean any claim, liability, loss, demand, damages, Lien, cause of action of any kind, obligation, costs, royalty, fees, assessments, penalties, fines, judgement, interest and award … whether arising by law, contract, tort, voluntary settlement or otherwise.

‘1,25A      ‘Direct Costs’ as defined in Attachment C – Pricing Schedule’

Attachment C

1.2.1        Direct Costs of the costs incurred by Contractor on resources used in performing the Work as detailed in this Attachment C – Pricing Schedule, Schedules 2 to 12′

1.2.2        Unless otherwise stated in this Agreement where a price is described as a Cost the Contractor shall be reimbursed for the cost of the item.  Where a price is described as a Rate in this Attachment C – Pricing Schedule it shall be and is deemed to be, fully inclusive of all costs applicable to the item, matter, thing or activity it represents an [sic] fully inclusive of all costs and expenses to be incurred by Contractor in complying with its obligations under the Contract and shall constitute full and complete compensation due to the Contractor for that item, matter, thing or activity.’

240         Pricing Schedules 2 and 3 related to Staff and Supervisory Personnel was Pricing Schedule 4 related to Craft Labour.

241         The Claimant’s Senior Counsel argued in her final oral submissions (TRA.500.012.0125 and following) that essentially Chevron’s claims and counterclaims, particularly in relation to Staff, could be identified as a claim by Chevron that it had paid more than the true cost, as defined in the Contract, albeit that it had sought to particularise its Counterclaim by reference to selected elements of the overall sums claimed.  She argued, in effect, that, properly analysed, CKJV was not claiming anything itself but simply defending itself against a claim by Chevron and the words of the LOA were insufficient to deny CKJV or excluded from putting forward any properly defence, including any defence which sought to assert that there was, overall, no or less overpayment against cost as a whole.  The Claimant’s Senior Counsel conceded in her oral closing submissions (TRA.500.012.0132 to TRA.500.012.0133) that, if the Claimant was to succeed on the substantive Craft Labour issues, the Set‑Off  in relation to Craft Labour would not arise.

242         The Respondent’s Senior Counsel argued that the wording of Article B.3) of the LOA was sufficiently wide to exclude, first of all, the Set-Offs as claimed and, secondly, to prevent CKJV from putting forward as a defence any assertion that the cost was greater than anything which it had claimed as the project proceeded.  He pointed to the width of the definition of the word “Claim” and the breadth of the wording of Article B3.

243         Given the concession made by the Claimant’s Senior Counsel in relation to the Craft Labour Set-Off, and given that the Tribunal is deciding in favour of the Claimant in relation to Craft Labour issues, it is unnecessary to make any theoretical ruling on the Craft Labour Set-Off.

244         There are essentially two issues arising.  They are:

(a)          whether the Staff and Supervision Costs Set Off (Paragraph 3.2.1-3.2.4 and Appendix 1 to the Defence to Counterclaim) as pleaded can be pursued in principle; and

(b)          whether and to what extent it is open to the Claimant as a defence to the Respondent’s Counterclaim matters going to show what the overall cost of the provision of Staff and Supervision actually was.

245         In relation to the first issue, the Tribunal considers that, on the basis pleaded in those paragraphs of the Defence to Counterclaim, the Claimant’s claim to Set-Off as pleaded cannot succeed.  In simple terms the reason is that Clause B(3) and in particular sub-sub-clauses (c) and (d) thereto.  The Set-Off, as pleaded, in particular at Paragraph 4.2 of the Defence to Counterclaim is pleaded and put forward expressly as a ‘claim’.  The term “Claim” is defined very broadly (see above) and the Claimant is in this context purporting to make a Claim in respect of certain unbilled cost.

246         However, the second issue is a broader issue because, on any sensible analysis of the Respondent’s Defence and Counterclaim, as finally particularised in its Amended Full Particulars of Counterclaim dated 25 July 2018, what the Respondent is itself claiming and asserting is that, on the assumption that no Rates were agreed in relation to Staff and Supervision costs, it has paid out to the Claimant (substantially) more than cost as defined in the Contract.  Put another way, the Respondent is saying that, because the Claimant’s actual cost is (substantially) less than it has been paid for Staff and Supervision, it is entitled to be paid back by the Claimant the overpayment.  The second issue therefore involves determining, whether as a matter of construction of the LOA, the Claimant is prevented or constrained from running any defence to this claim by the Respondent to the effect that the total cost for Staff and Supervision is not as low as the Respondent is asserting.

247         The matter is confused by the fact that, latterly in the pleading process, in particular by way of the Amended Full Particulars of Counterclaim, the Respondent has put its case by reference to a report prepared by its accounting expert, Mr Meredith, which has identified only a limited number of elements of the total cost which, by way of his auditing process, suggest, the Respondent asserts, that demonstrably the Claimant’s cost has been less than has been paid to it.  This approach is one which proceeds on the assumption that all the other elements which go to make up the total overall Staff and Supervision cost were accurate.

248         Although the Claimant has not yet submitted a detailed response to this latest particularisation of the Counterclaim and has not finalised any accounting expert’s evidence on this, it would seek to assert that, in reality, its total cost, particularly looking at other elements of the Cost other than those examined by Mr Meredith and put forward by way of Counterclaim by the Respondent, is more than the Respondent is now suggesting.

249         In substance, this second issue revolves around whether or not such a defence to the Respondent’s Counterclaim is available or has been excluded or limited by the LOA.

250         Members of the Tribunal differ on this issue.  The majority view is set first, followed by the dissenting view.

My observations

  1. Particular attention should be directed to par 246, which contains a helpful synthesis of the position at the time of the reasons underlying the first interim award.  I reiterate the relevant portion as follows:

Put another way, the Respondent [Chevron] is saying that, because [CKJV’s] actual cost is (substantially) less than it had been paid for Staff and Supervision, it is entitled to be paid back by the Claimant the overpayment.

  1. I also highlight that a phrase used vis-à-vis CKJV (at par 248) that ‘it would seek to assert that, in reality, its total cost, particularly looking at other elements of the Cost … is more than [Chevron] is now suggesting’.

Paragraphs 251 to 260

Majority View – Presiding Arbitrator Akenhead and Arbitrator Greenham

251         The majority of the Tribunal is of the view that what has not been excluded by the LOA is any proper defence which can be mounted by the Claimant to what the overall cost of the Staff and Supervision has been.  It is not limited simply to defending what the Respondent says are relevant elements of the total cost.  The reasons are as follows:

(a)          The ‘Settlements and Amendments to the Agreement’ section of the LOA specifically addresses, first, settlement of Claims by CKJV (paragraph B.1), secondly, waiver and release of Claims by Chevron (paragraph B.2) and waiver and release of CKJV Claims (Paragraph B.3)).

(b)          Primarily, the Respondent relies on Paragraph B.3 to argue that the Claimant cannot raise any arguments about the total cost of Staff and Supervision other than those which specifically go to the elements of cost relied upon by the Respondent to prove that the total cost was less than has been paid.

(c)          However, although the definition of ‘Claims’ is broad (see above), what Paragraph B.3) is concerned with is Claims by the Contractor.  There is nothing in Paragraph B.3) which involves any waiver or release of any proper or substantive defence (as opposed to Claim) which the Claimant may have against any Claim which the Respondent is permitted by the LOA to pursue.

(d)          As a matter of commercial common sense as well as the matter of ordinary construction, clear wording would be required in the circumstances to exclude rights of defence to the Respondent’s Claims (to the extent that they can be pursued by the Respondent).  There is no such clear wording or indeed any wording which suggests that any defences as to the Respondent’s Claims for overpayment of cost of Staff and Supervision are excluded or limited.

(e)          A good example is the expressly reserved entitlement on the part of Chevron to recover amounts ” … arising out of or in connection with … “ the findings of Audit Inquiries 6 and 10 (amongst others), at paragraph B.2)c)(ii) of the LOA.  The material background to the LOA in this context is that these Inquiries had not been resolved at the date of the LOA and it would be an extraordinary state of affairs if in the next contractual breath all rights on the part of CKJV to defend itself against any Claims to be made by Chevron again [sic] it were being excluded.

(f)          It cannot have been within the contemplation of the parties at the time of the LOA that, in effect, Chevron could secure, simply by the way that it decided ultimately in later proceedings to limit its area of challenge to a relatively few elements of the overall cost, that the only defence available to CKJV to a Claim by it for overpayment in relation to cost could be by way of mounting challenges only to the few elements selected by Chevron.  This would also, counter-intuitively, mean that CKJV could not challenge the underlying presumption in Chevron’s Counterclaim that, apart from those elements of cost which it had selected for review and challenge, the substantial remainder of the total cost paid was accurate and binding.

252         The majority of the Tribunal therefore finds that the Claimant may in principle bring into account by way of defence, in these proceedings, the amounts particularised in Appendix 1 to its Defence to Counterclaim (MSC.010.007.0001) and indeed any other amounts of cost which it seeks to prove have not yet been accounted for in what it has been paid.

  1. That view may be contrasted with a dissenting view of Arbitrator Pullin  upon what was, in effect, issue 5 as stated by the Tribunal under the first interim award.

Dissenting view – Arbitrator Pullin

253         Unquestionably, absent Paragraph B.3) of the LOA, the exercise to be carried out in a reconciliation or in an audit would be for Chevron to determine what had been paid by Chevron and to compare that with what had been spent by CKJV on salaries.

254         In that process, if it were revealed that CKJV had overlooked claiming some Staff salary expense actually incurred it could claim for what had been overlooked.

255         There was an example of this given in the evidence to the tribunal.  This occurred when an audit revealed that CKJV had overlooked $1.6 million of expenses.  Chevron invited CKJV to make such a claim by raising an invoice, which it did.

256         However, Paragraph B.3) of the LOA now prevents that from happening.  If at the date of the LOA CKJV could have, but had not claimed or invoiced for some item of expense (Direct Cost) than it had lost the right to do so.  It ‘waived and released’ Chevron from any such claim.  If the claims in Appendix 1 to the SOC (MSC.010.007.0001) arose out of circumstances before the LOA was signed then they have been waived and cannot be now raised in any audit conducted after the date of LoA [sic].

257         That result can be tested in this way.  If CKJV had, on the day after the LOA was signed, produced an invoice claiming the $49 million it claims as a set off in Appendix 1 to the DCC (MSC.010.007.0001) CKJV’s waiver in the LOA could have been successfully set up as a defence to such claim.  That is surely unarguable.  It is therefore impossible to sustain CKJV’s assertion which is, in effect, that just because Chevron has decided to carry out an audit that the waived claim springs back to life and can be raised as a claim to defeat a part of the amount Chevron claims as an overpayment.

Counterclaims – Liability

258         In the Respondent’s Amended Defence and Counterclaim it alleges a number of errors or overpayments in relation to Staff.  These are said to be described in a series of reconciliations (ADCC [149]).

259         Given the findings and dismissal of the Tribunal in relation to the absence of an agreement to convert Cost items to Rate items and in relation to the absence of an estoppel (refer to Paragraphs 61. 76, 77 and 89 above) in the context of Staff and Supervision, there is no impediment, by reason of such an agreement or estoppel, to the Respondent pursuing the claims set out in the ADCC.

260         The claims the subject of the ADCC, the quantification of those claims (and the ability of the Claimant to challenge the quantification of those claims, having regard to the finding in Paragraph 252) will be the subject of the second hearing.

 

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

 

RC

Associate to the Honourable Justice Martin

 

28 SEPTEMBER 2021

 

Industrius D.O.O v IDS Industry Service and Plant Construction South Africa (Pty) Ltd (2020/15862) [2021] ZAGPJHC 350

 

Industrius D.O.O v IDS Industry Service and Plant Construction South Africa (Pty) Ltd (2020/15862) [2021] ZAGPJHC 350

IN THE HIGH COURT OF SOUTH AFRICA

Court: HIGH COURT OF SOUTH AFRICA
Case No: 2020/15862
Parties INDUSTRIUS D.O.O.                                                                             Applicant

 

and

 

IDS INDUSTRY SERVICE AND PLANT

CONSTRUCTION SOUTH AFRICA (PTY) LTD Respondent

DIVISION: GAUTENG LOCAL DIVISION, JOHANNESBURG
JUDGE: SENYATSI J
DATE OF HEARING: 28 April 2021
DATE OF JUDGMENT: 20 August 2021
CASE MAY BE CITED AS: Industrius D.O.O v IDS Industry Service and Plant Construction South Africa (Pty) Ltd (2020/15862) [2021] ZAGPJHC 350
MEDIUM NEUTRAL CITATION: [2021] ZAGPJHC 350
Representation: Applicant’s Counsel: Adv S  Du Toit

Adv I Currie

Instructed by:  Knowles Husain Lindsay Inc.

Respondent’s Counsel: Adv HJ Fischer

Instructed by: Spellas Lengert Kuebler Braun Inc.

 

JUDGMENT

 

Delivered: By transmission to the parties via email and uploading onto Case Lines the Judgment is deemed to be delivered. The date for hand-down is deemed to be 20 August 2021

 

SENYATSI J:

 

[1]        This is an opposed application that the arbitral award given on 9 June 2020 in the arbitration proceedings between the applicant (“Industrius”) and the respondent (“IDS”) be made an order of court. Industrious seeks an order that  IDS pay its costs in the main arbitration and counterclaim.

 

[2]        Industrius D. O. O.  is a foreign company registered in terms of the laws of the Republic of Croatia as “Drustvo s orgrani-cemon odgovornoscu” that is a limited liability company, with its place of business and registered address at H[….],241 O[….] S[….], B[….] 11, Croatia.

 

[3]        IDS Industry Service and Plant Construction South Africa (Pty) Ltd (“IDS”) is a private company registered in terms of the laws of the Republic of South Africa with its registered address at 7 L[….] Park, 83 A[….] Road, D[….], Boksburg.

 

[4]        A dispute arose between the parties during 2017. Consequently, the parties decided to refer the dispute to arbitration and concluded an arbitration agreement. They agreed that the arbitration tribunal would be constituted by a single arbitrator, Mr KJ Trisk SC and that the arbitration would be conducted under the rules of the Association of Arbitrators (“AOA Rules”).

 

[5]        The agreement itself is an arbitration agreement as defined in article 7 of the International Commercial Arbitration (“Model Laws”) as incorporated by the International Arbitration Act 15 of 2017 (“the Act”) for enforcement of an international arbitral award and this is common cause between the parties. In terms of the agreement, which was in writing, the parties agreed to submit certain disputes which had arisen in respect of the parties’ contractual relationship. It is also common cause between the parties that the arbitration was contemplated by article 1(3) of the Model Law because at the time of the conclusion of the arbitration agreement the parties had their places of business in different countries. The seat of arbitration in terms of article 20 of the Model Law was South Africa.

 

[6]        The disputes referred to arbitration consisted of a contractual claim by Industrious who was the claimant in the arbitration and a counterclaim by IDS, the defendant in the arbitration.

 

[7]        IDS participated in the arbitration proceedings. These proceedings included several interlocutory applications which were conducted during 2018 and 2019. The arbitration was scheduled to commence on 25 May 2020. IDS ceased participation in the proceedings during January 2020. This was due to a dispute that arose, apparently, between itself and its former attorneys regarding payment of fees. The arbitrator invited IDS to bring an application for postponement of the hearing and the invitation was ignored by IDS. The latter also failed to properly appoint attorneys to represent it.[1]

 

[8]        On 25 May 2020, and in the absence of IDS, the arbitration hearings proceeded. The arbitrator gave his final award in the arbitration on 9 June 2020[2] in terms of which he upheld the Industrius’ claim and dismissed IDS’s counter-claim. Industrius claimed payment on various unpaid invoices in the sum of € 2,75 million plus interest and costs of suit.

 

[9]        It is the award set out in [8] above that Industrius seeks to be made an order of court which IDS opposes. IDS does not dispute that the award is binding on it.[3] Furthermore, IDS has not challenged the award or applied to have it reviewed and set it aside in terms of Model Law, which is the exclusive recourse to a court against an arbitral award.

 

[10]      IDS’s defence to the application for enforcement of the arbitral award is based on a separate action that it has instituted in the High Court under case number 15812/2020 seeking the same relief it bought in its counter-claim in the finalised arbitration, alternatively an interim interdict to the same effect. IDS prays that the enforcement of the arbitral award be stayed pending the finalisation of the action it has instituted against Industrius.

 

[11]      IDS contends that the counterclaim was dismissed by default and avers that the purported dealing with the merits of its counter-claim by the arbitrator, in the absence of IDS is of no force and effect. It contends therefore that the issue of the counter-claim has not been determined at all and that it is free to pursue its counterclaims in the courts of South Africa.[4]

 

[12]      IDS also contends that because the counterclaim was dismissed by default, the arbitrator’s award in that regard is not final and that the doctrine of res judicata does not apply and that this is a trite principle.

 

[13]      IDS furthermore contends that having dismissed the counterclaim for non-appearance, the arbitrator was precluded from deciding the counter-claim on its merits[5] as this was an error.[6]

 

[14]      In addition, it was IDS’s submission that its claims in case no 15862/2020 have been set off and the prospects of success at trial are good[7] and relies on article 36(1)(a)(ii) of the Model Law as the source of the Court’s power to grant the stay of the arbitral award.

 

[15]      The issues that require determination are whether the grounds contended by IDS are good in law to suspend the enforcement of the arbitral award. To deal with each ground raised, I shall restate the legal principles governing the arbitral award in terms of the Model Law as set out below.

 

[16]      International commercial dispute resolutions are governed by the Model Law, that is United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration which was adopted into South African law in terms of the International Arbitration Act, No15 of 2017 (“ the Act”). Accordingly, this dispute is regulated in terms thereof.

 

[17]      The preamble of the Act provides as follows:

 

“To provide for the incorporation of the Model Law on International Commercial Arbitration, as adopted by the United Nations Commission on International Trade Law, into South African law; to provide anew for the recognition and enforcement of foreign arbitral awards; to repeal the Recognition and Enforcement of Foreign Arbitral Awards Act, 1977; to amend the Protection of Businesses Act, 1978, so as to delete an expression; and to provide for matters connected therewith.”

 

[18]      In terms of s3 of the Act, the objects thereof are to[8]

 

“(a) facilitate the use of arbitration as a method of resolving international commercial disputes;

 

(b) adopt the Model Law for use in international commercial disputes;

 

(c) facilitate the recognition and enforcement of certain arbitration agreements and arbitral awards; and

 

(d) give effect to the obligations of the Republic under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), the text of which is set out in Schedule 3 to this Act, subject to the provisions of the Constitution.”

 

[19]      It is without doubt therefore that the Model Law has been incorporated in our law and applies in the Republic subject to the provisions of the Act.[9] The parties to an international commercial dispute may refer such dispute to arbitration in terms of an arbitration agreement.

 

[20]      The arbitration is an international arbitration as contemplated by Article 1(3) of the Model Law because, as already stated, at the time of conclusion of the arbitration agreement the parties’ business locations were in different countries, namely Croatia and South Africa.

 

[21]      The arbitral award made in terms of the Model Law can only become impermissible to enforce under certain conditions contained in s18 of the Act, such as:

 

“(a) If the court finds that-

 

(i)            a reference to arbitration of the subject matter of the dispute is not permissible under the law of the Republic; or

 

(ii)          the recognition or enforcement of the award is contrary to the public policy of the Republic; or

 

(b) the party against whom the award is invoked, proves to the satisfaction of the court that—

 

(i) a party to the arbitration agreement had no capacity to contract under the law applicable to that party;

 

(ii) the arbitration agreement is invalid under the law to which the parties have subjected it, or where the parties have not subjected it to any law, the arbitration agreement is invalid under the law of the country in which the award was made;

 

(iii) that he or she did not receive the required notice regarding the appointment of the arbitrator or of the arbitration proceedings or was otherwise not able to present his or her case;

 

(iv) the award deals with a dispute not contemplated by, or not falling within the terms of the reference to arbitration, or contains decisions on matters beyond the scope of the reference to arbitration, subject to the provisions of subsection (2);

 

(v) the constitution of the arbitration tribunal or the arbitration procedure was not in accordance with the relevant arbitration agreement or, if the agreement does not provide for such matters, with the law of the country in which the arbitration took place; or

 

(vi) the award is not yet binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, the award was made.”

 

The onus is on the party seeking the resistance of the enforcement of the arbitral award to allege and prove any of the grounds set out in s18 of the Act and the Model Law. There is no record of the averment and proof of any of the grounds as set out in s18 of the Act that is before me to prove and to persuade me that the refusal to make the arbitral award an order of this court would be justified. That alone must be the reason for the IDS’s defence to fail. I will demonstrate later why the defence as averred by IDS finds no support on the facts and the law.

 

[22]      IDS has relied on the fact that it has issued a counterclaim as the basis that this court should consider refusal of the enforcement of the arbitral award. After proper inspection of the counterclaim, it is clear that it deals with the same cause of action which was before the arbitrator. The counterclaim was properly considered by the arbitrator when he made an arbitral award on 9 June 2020.

 

[23]      This is evident from the award itself[10] because on its face, the arbitrator held as follows:

 

“It will be apparent from the aforegoing that I dismiss the defendant’s Counterclaim not only on the basis of there having been no appearance on behalf of the Defendant at the hearing before me on 25 May 2020 but also on the basis that the version advanced by the Defendant in its Counterclaim given the evidence which was adduced before me, it seems to me, is so improbable as to warrant rejection.”

 

Based on this finding by the arbitrator, I find that the contention by IDS that the counterclaim was not dealt with on merits is without any factual basis as the arbitrator clearly dealt with the merits of that counterclaim. The arbitrator was required to deal with all the disputes of the parties and in my respectful view, he did precisely that.

 

[24]      If IDS was aggrieved by the arbitral award, it ought to have taken steps to challenge it and this was not done. It follows that the enforcement of the arbitral award cannot be delayed as doing that would cause an injustice to Industrius.

 

[25]      On the issue whether the counterclaim can be considered to have been decided on merits the Court in United Enterprise Corporation v STX Pan Ocean Company Ltd[11] held that a dismissal of an application can give rise to the successful raising of the exception rei judicata where regard being had to the judgment of the court which dismissed the application, the import of the order [was] clearly that on issues raised the Court found against the party which in this case is IDS in the previous proceedings and in favour of Industrius in the counterclaim arbitration proceedings. The Court furthermore held it is not the form of the order granted but the substantive question (did it deceive on the merits or merely grant absolution?)  that is decisive in our law and that what is required for the defence to succeed is a decision on the merits.[12]

 

[26]      Furthermore, IDS also contends as already stated that the arbitrator erred when he made a finding on the counterclaim in the arbitral award. In Phalabora Copper (Pty) Ltd v Motlokwa Transport & Construction (Pty) Ltd[13] the court held as follows:

 

“The party alleging the gross irregularity (of the arbitrator) must establish it. Where an arbitrator engages in the correct enquiry but errs either on the facts or the law, that is not an irregularity and is not a basis for setting aside an award. If parties choose arbitration, courts endeavour to uphold their choice and do not lightly disturb it. The attack on the award must be measured against these standards.”

 

I am of the respectful view that contending simply that the arbitrator has erred in dealing with the counterclaim on merits in the absence of IDS is not a valid ground to refuse enforcement of an arbitral award.

 

[27]      From the evidence adduced by IDS in the instant application based on the subcontracts that are used in support of the counterclaim in the pending High Court action, case number 15862/2020, the subcontracts have been found by the arbitrator to be a fiction. The defence of the res judicata in those proceedings is likely to succeed against IDS.

 

[28]      In dealing with the arbitrator’s ability to hear evidence as part of the process of resolving the dispute between the parties the Court in Wilton v Gatonby[14] held as follows:

 

“…tribunal should not simply issue an award as though entering judgment under the Rules of Court but rather should proceed to hear such evidence as may be tendered. Short of an express agreement between the parties, any award resolving the dispute between the parties should be made only on the available evidence. The arbitrator’s decision to hear no evidence at all resulted in an award being made simply as a procedural consequence of the respondent’s wilful absence from the arbitration and without the arbitrator bringing his mind to bear upon the issues between the parties as defined in the pleadings.”

 

The same conclusion cannot be made in the present case because as already stated, the arbitrator clearly articulated and dealt with all the issues before him. It can be inferred from the IDS’s inability to attack the award, that procedurally, the arbitrator cannot be faulted in the instant case.

 

[29]      Over and above the grounds that IDS can raise in terms of section 18 of the Act, to ask the Court to refuse to make an award the order of this court, IDS also has recourse in terms of article 36 of the Model Law which is a mirror of section 18 of the Act.

 

[30]      Under Article 36 (2) the Court may adjourn a decision on enforcement under the Model Law only where an application for setting aside or suspension of an award has been made to another court in terms of Article 36(1)(a)(v). There is no evidence on record that such application has been made or is pending.[15]

 

[31]      It is evident from the authorities quoted above that the basic principle articulated in the Act is that the Model Law is pro-enforcement of arbitral awards. The academic literature surveying judicial policy regarding arbitration in Australia and Asian-Pacific[16] regions extrapolate this pro-enforcement approach as follows:

 

“In a Federal Court of Australia decision, ESCO Corporation v Brandken Resources (Pty) Ltd, Foster J interpreted these provisions in accordance with international norms:

 

“… a foreign arbitral award is to be enforced in Australia unless one of the grounds in s8(5) of the [International Arbitration Act] is made out by the party against whom the award is sought to be enforced or unless the public policy of Australia requires that the award not be enforced. The pro-enforcement bias of the [New York] Convention and its domestic surrogate, the IAA, requires that this Court weigh very carefully all relevant factors when considering whether to adjourn a proceeding pursuant to s8(8) of the IAA. The discretion must be exercised against the obligation of the Court to pay due regard to the objects of the IAA and the spirit and intendment of the Convention.

 

The pro-arbitration approach has been highlighted by a number of judges speaking and writing extra-curially. For example, Chief Justice Marilyn Warren of the Supreme Court of Victoria has said:

 

‘In arbitration, the directive role of the Court needs to be minimised. The focus instead, turn to ways in which the Court can support the arbitration process and enforce arbitral awards in a timely and cost effective manner.’

 

Additionally, Justice James Allsop observed at CIArbs Asia Pacific Conference in 2011:

 

‘The clear trend in judicial decision-making about arbitration in Australia [has transformed] from suspicion, to respect and support…In terms of intervention [by the judiciary], restraint is essential. Arbitration depends for its success on the informed and sympathetic attitude of the court.’

 

[32]      In Australia Courts have held that in accordance with this pro-enforcement of international arbitral award in terms of the Model Law, recognition and enforcement of an arbitral award could only be denied in limited circumstances which are clearly spelt out in article 36 (1) of the Model Law:

 

“…which provides for the only grounds on which recognition or enforcement of an award may be refused by a competent court. The grounds are primarily, but not exclusively, concerned with independence and impartiality of the arbitrator and the fairness of the arbitral process…They do, however, include a competent court finding that the recognition or enforcement of the award would be contrary to the public policy of [Australia]

 

For avoidance of doubt, s19 of the IA Act states that an award is contrary to the public policy of Australia if its making was induced or affected by fraud or corruption or a breach of the rules of natural justice occurred in connection with the making of the …award. Article 5 limits the power of the court to Intervene in matters governed by the Model Law to those categories of curial intervention provided for in the Model Law.

 

Article 34 (1) relied upon by ICL in its separate proceedings in the Federal Court to set aside the awards, provides that recourse to a court against an arbitral award may be made only by an application for setting aside the award and only on the grounds set out in Art 34 (2), which substantially mirror those in Art 36 (1) limiting the grounds upon which a court may refuse to recognise or enforce a foreign award.”

 

I am of the view that our courts should have a similar approach when seized with an application for enforcement of foreign arbitral award as the Model Law is part of the laws of the Republic.

 

[33]      It follows therefore, in my view, that the Act and the Model Law do not provide for the court to refuse or delay to enforcement of the award on the basis that a party has instituted other proceedings that are not related to the arbitral award or have no bearing on the finality or enforceability of the arbitral award. Equally not applicable, is an attempt by a party to set off a proven debt in terms of the arbitral award against its unproven claim in the unrelated proceedings. Staying the enforcement of an international arbitral ward under those circumstances would not accord with the spirit of the Model Law in our Republic.

 

[34]      Allowing the delaying tactics in the enforcement of the arbitral award under these circumstances would be counter-productive and create an imbalance in international trade.

 

[35]      Although IDS had conceded that the arbitrator was entitled to dismiss its counterclaim by default, I find it difficult to understand the basis upon which it contends that the same action which failed at the arbitration hearing can properly be pursued through action proceedings. The parties agreed to an arbitration process and once an arbitral award was made, that brought the arbitration to an end unless and until the arbitral award is set aside.

 

[36]     Rule 39 (3) of the Uniform Rules provides that:

 

“If, when a trial is called, the defendant appears and the plaintiff does not appear, the defendant shall be entitled to an order granting absolution from the instance with costs but may lead evidence with a view to satisfying the court that the final judgment should be granted in his favour and the court, if so satisfied, may grant such judgment.”

 

This rule has no application to arbitrations. There is no provision under the AOL Rules permitting the arbitrator to grant absolution from the instance and in the instant case, he rightfully did not grant or purport to grant absolution from the instance and concluded the arbitration to finally resolve the parties’ disputes.

 

[37]      The arbitrator was enjoined with the duty to resolve the disputes between the parties before him. In Termico (Pty) Ltd v SPX Technologies (Pty) Ltd[17] it was held that all issues submitted to the arbitrator must be resolved in a manner that achieves finality and certainty. The award may not reserve a decision on an issue before the arbitrator or expert for another or for the court to resolve. It follows therefore that to bring a failed counterclaim before court by way of action proceedings is a proverbial flogging of a dead horse and cannot as already stated, be used as a ground to delay the enforcement of the arbitral award.

 

[38]      In Telcordia Technologies Inc v Telkom SA Ltd[18], the court held, in considering whether an error on the side of the arbitrator in his award can be used as a ground to oppose the enforcement of the award, that:

 

“The fact that the arbitrator may have either misinterpreted the agreement, failed to apply South African law correctly, or had regard to inadmissible evidence does not mean that he misconceived the nature of the inquiry or his duties in connection therewith. It only means that he erred in the performance of his duties. An arbitrator ‘has the right to be wrong’ on the merits of the case, and it is a perversion of language and logic to label mistakes of this kind as a misconception of the nature of the inquiry – they may be misconceptions about meaning, law or the admissibility of evidence but that is a far cry from saying that they constitute a misconception of the nature of the inquiry.”

 

The dismissal of IDS’s counterclaim has been brought to finality and whether or not the arbitrator was correct in doing that should not and cannot be used as a ground to challenge the enforcement of the arbitral award.

 

[39]      Another point that has been raised by IDS is that Industrius must provide security for costs before the award can be enforced. This submission must fail because it runs against the provisions of article 5 of the Model Law which provides as follows:

 

“In matters governed by this Law, no court shall intervene except where so provided in this Law.”

 

I have already dealt with instances where the court can intervene and none of those grounds find application in the matter before me.

 

[40]      Based on the reasons already stated, I hold the view that Industrius has made out a case for the enforcement of the arbitral award.

 

ORDER

 

[41]      Having read the documents filed of record and having heard the submissions made by Counsel and considered the matter:

 

It is ordered that:

 

  1. The arbitral award given on 9 June 2020 in the arbitration proceedings between Industrious and IDS is made an order of court. As a consequence thereof:

 

1.1.       IDS must pay the Industrius the amount of € 2 775 853.08;

 

1.2.       IDS must pay Industrius interest on the amount in paragraph 1.1 above calculated in accordance with the following table with effect from the dates reflected in the column immediately adjacent to the amount in question and at the rate allocated in regard thereto, until date of payment:

 

 

Amount                                  Due date                                Rate of Interest

€ 2 100.00                             31 July 2016                         10.5%

€ 3 648.00                             31 July 2016                         10.5%

€ 91 210.00                           31 October 2016                  10.5%

€ 23 104.00                           31 January 2017                  10.5%

€ 66 395.00                           31 May 2017                         10.5%

€ 297 785.30                         30 June 2017                        10.5%

€ 683 395.40                         30 June 2017                        10.5%

€ 604 319.17                         31 July 2017                         10.5%

€ 261 407.95                         31 July 2017                         10.5%

€ 629 641.90                         31 August 2017                    10.5%

€ 247 920.61                         31 August 2017                    10.5%

€ 258 794.50                         30 September 2017             10.25%

€ 101 955.25                       30 September 2017             10.25%

 

1.3. IDS must pay Industrius’s costs in the counterclaim instituted in the arbitration proceedings between Industrius and IDS.

 

1.4. IDS must pay Industrius’s costs in the arbitration proceedings between Industrius and IDS including:

 

1.4.1. The costs associated Industrius’s preparation of its defence to the counterclaim insofar as such costs are not covered by the Award set out in subparagraph 1.3 above; and

 

1.4.2.  the costs of the arbitration; and

 

1.4.3. the costs incurred by Industrius in consequence of the employment of two counsel.

 

  1. IDS must pay the costs of this application.

 

 

SENYATSI ML

Judge of the High Court of South Africa

Gauteng Local Division, Johannesburg

 

 

 

 

[1] See power of attorney which was provided to the attorneys in this application only on 24 June 2020, p009-82, para 41-2 of Caseline.

[2] See FA2, 001-21 on the Caseline

[3] See FA p001-11, para 15; IDS AA, p009-6, papa10

[4] See AA, P007-7, para 21-2

[5] See IDS RA, p010-11, para16

[6] See IDS RA, P010-10, para9

[7] See AA, p009-10, para 40

[8] See s3 of the Act

[9]  s3(d) of the Act

[10] Para 47 of the arbitral award

[11] [2008] ZASCA 21[2008] 3 All SA 111 (SCA) at para [9]

[12] Same para [9]

[13] 2008(3) SA 585 (SCA) para [8]

[14] 1994 (4) SA 1690 (W) at 166H-167B

[15] See Admart AG v Stephen and Mary Birch Foundation Inc. US Court of Appeals for the 2nd circuit, 8 August 2006 where request for adjournment pending outcome of an arbitration in Switzerland was refused because the arbitration was not an attempt to set aside or suspend the Award.

[16] See Also, Justice James- Judicial Support or arbitration (FCA) [2014] FedJSchol

[17] 2020 (2) SA 295 (SCA) [13]

[18] [2006] ZASCA 1122007 (3) SA 266 (SCA) at [85]

 

 

 

Manchester City Football Club Ltd v Football Association Premier League Ltd and others [2021] EWCA Civ 1110

 

 

Manchester City Football Club Ltd v Football Association Premier League Ltd and others [2021] EWCA Civ 1110

 

Judge(s): SIR GEOFFREY VOS

THE MASTER OF THE ROLLS

– and –

SIR JULIAN FLAUX

THE CHANCELLOR OF THE HIGH COURT

– and –

LORD JUSTICE MALES

Case Number: A4/2021/0615 & A4/2021/0617
Case Name: Manchester City Football Club Ltd v Football Association Premier League Ltd and others [2021] EWCA Civ 1110
Medium Neutral Citation: [2021] EWCA Civ 1110
Date of Order: 20 July 2021
Date of Hearing: 30 June 2021
Court: Court Of Appeal (Civil Division) [ENGLAND]
Division: Civil
Registry: Royal Courts of Justice

Strand, London, WC2A 2LL

Parties: MANCHESTER CITY FOOTBALL CLUB LTD

Appellant

 

– and –

 

THE FOOTBALL ASSOCIATION PREMIER LEAGUE LTD & OTHERS

Respondent

Representation: Lord Pannick QC, Paul Harris QC and David Gregory (instructed by Clifford Chance LLP) for the Appellant

&

Adam Lewis QC and Andrew Hunter QC (instructed by Bird & Bird LLP) for the Respondents (by written submissions only)

Appealed From: [2021] EWHC 711 (Comm)

 

JUDGMENT

Sir Julian Flaux C:

Introduction

  1. Manchester City Football Club Limited (“the Club”) appeals, with the permission of Males LJ granted on 14 April 2021, against the Order of Moulder J dated 23 March 2021 that her Merits Judgment and Publication Judgment (as defined hereafter) should be published other than to the parties. The appeal concerns the circumstances in which judgments of the Court on applications under sections 67 and 68 of the Arbitration Act 1996 (“the Arbitration Act”) should be published or should remain private, applying the principles set out by this Court in City of Moscow v Bankers Trust[2004] EWCA Civ 314; [2005] QB 207 (hereafter “City of Moscow”). There is also a preliminary question as to whether, given the terms of the relevant provisions of the Arbitration Act, this Court has jurisdiction to hear the present appeal, permission to appeal against the Order of 23 March 2021 having been refused by the judge.

Factual background

  1. The Football Association Premier League Limited (“the PL”) is a company in which the shareholders are the clubs playing in the Premier League in a particular season (“the member clubs”). The relationship between the PL and the member clubs is governed by the articles of association and the Rules of the PL (“the Rules”).
  2. In December 2018, the PL commenced a disciplinary investigation into the Club after allegations about the Club appeared in various European media reports which disclosed details of confidential documents obtained from a hack of the Club’s email servers. The PL contends that the media reports contain information suggesting breaches of the Rules by the Club. During the course of its investigation, the PL requested information and documents from the Club (including copies of various documents identified in those media reports) under Rule W.1. The Club objected to disclosure of that material.
  3. The allegations in the media reports led to The Union of European Football Associations (“UEFA”) commencing on 7 March 2019 a formal investigation into the Club over alleged breaches of UEFA’s financial fair play (“FFP”) regulations.
  4. The following day, 8 March 2019, the PL announced that it had also commenced an investigation into the same allegations, releasing the following statement:

“The Premier League has previously contacted Manchester City to request information regarding recent allegations and is in ongoing dialogue with the club. The league has detailed financial regulations and strong rules in the areas of academy player recruitment and third-party ownership. We are investigating and will allow Manchester City every opportunity to explain the context and detail surrounding them.”

  1. Subsequent developments in the UEFA investigation have been widely reported in the media and have been publicly commented on by both the Club and the PL. That investigation initially led to the Club being banned from UEFA’s European club competitions for two years as well as being fined €30 million, but the ban was overturned and the fine reduced to €10 million by a tribunal in the Court of Arbitration for Sport (“CAS”) in July 2020. It has been reported that, whilst the CAS tribunal held that the most serious allegations against the Club could either not be proved or were time barred, the reduced fine was upheld on the basis that the Club had breached UEFA’s regulations by failing to co-operate with the investigation.
  2. Apart from the PL’s statement on 8 March 2019, neither the PL nor the Club has publicly commented on the PL’s investigation. By a letter dated 18 July 2019 to the Club’s then solicitors, the PL’s solicitors confirmed that the investigation process was confidential and both parties had made strenuous efforts to ensure that this was so, for example by the use of secure file transfer technology.
  3. On 21 August 2019, the PL issued a disciplinary complaint against the Club under Section W seeking disclosure of certain documents and information. A Commission was appointed pursuant to Rule W.21, but its composition and the disciplinary system were challenged by the Club as not sufficiently independent or impartial. Although the PL proposed an ad hoc procedure for the appointment of a new Commission, the Club objected.
  4. By a request dated 22 October 2019, the PL then commenced an arbitration against the Club under Section X of the Rules seeking a declaration and/or determination that the Club was obliged to provide the PL with requested documents and information and an order for specific performance of the Club’s contractual obligation to deliver up documents and information which were being withheld. Under Rule X.8 then in force, the PL provided a list of people who were on a panel from which arbitrators were to be appointed (“the Panel”). The Club appointed John Machell QC from the Panel and the PL Daniel Alexander QC, and, in accordance with the Rules, the two arbitrators then appointed a chairman, Philip Havers QC.
  5. The Club challenged the jurisdiction of the arbitrators, submitting to the tribunal that, on a proper construction of the Rules, the PL had no power to institute a Section X arbitration in respect of its information claim. Accordingly it was submitted that the tribunal lacked substantive jurisdiction and the arbitration could not proceed. It was also submitted that the tribunal did not have the appearance of impartiality.
  6. On 6 February 2020, the Rules relating to the disciplinary and dispute resolution procedures were amended at a meeting of the shareholders.
  7. By its Award dated 2 June 2020, the arbitration tribunal rejected the Club’s challenge to its jurisdiction and impartiality and held that it had substantive jurisdiction to hear the PL’s claim and that it did not lack the appearance of impartiality.
  8. On 26 June 2020, the Club then issued an application by an Arbitration Claim in the Commercial Court contending that:

(1) the tribunal lacked jurisdiction because, on the true construction of the Rules, the PL did not have the power to institute the arbitration under Section X (“the Section 67 Challenge”);

(2) the tribunal was tainted with apparent bias due to the process for appointment and reappointment to the Panel from which arbitrators could be appointed to tribunals for arbitrations instituted under Section X (“the Section 68 Challenge”); and

(3) the arbitrators should accordingly be removed under section 24 of the Arbitration Act.

  1. Before that application was heard, the arbitration continued. On 24 July 2020, the tribunal rejected the Club’s arguments resisting the PL’s case that it was under an obligation to provide certain documents and information to the PL. Accordingly, on 2 November 2020, the tribunal ordered the Club to provide certain documents and information to the PL and to make enquiries of third parties. That order was stayed pending the hearing of the Club’s application to the Commercial Court.
  2. The hearing of the Club’s application before the judge on 1 and 2 March 2021 was in private pursuant to CPR 62.10. In her judgment dated 17 March 2021 (“the Merits Judgment”) the judge dismissed the application. In relation to the Section 67 Challenge, she concluded that the language of Rule X.2 which permitted “all disputes” to be referred to arbitration is not limited by Section W of the Rules (which concern the powers of the PL to deal with suspected or alleged breaches of the Rules). In relation to the Section 68 Challenge she concluded that applying the decision of the Supreme Court in Halliburton Company v Chubb Bermuda Insurance Ltd [2020] UKSC 48 (hereafter “Halliburton”), the matters relied on by the Club (the remuneration of the arbitrators from being on the Panel, the process by which they were appointed to the Panel under the Rules and the control by the PL over reappointment, so the arbitrators lacked security of tenure) did not satisfy the test that a fair minded and informed observer would conclude that there was a real possibility that the arbitrators were biased. Accordingly the section 24 application was also dismissed.
  3. By her Order dated 17 March 2021, the judge dismissed the Arbitration Claim and refused permission to appeal to the Court of Appeal, giving as her reasons: (i) that the construction issue was decided on the basis of the application of the principles in Wood v Capita Insurance Services Ltd [2017] UKSC 24; (ii) that there was no other compelling reason for an appeal as the implications for other clubs was limited since as members of the PL they collectively had power to change the Rules and (iii) that the issue of apparent bias had been decided applying the test of general application approved and having regard to the features of arbitration identified by the Supreme Court in Halliburton.

The judgment under appeal

  1. When the judge sent out the draft of the Merits Judgment to the parties to provide typographical corrections, the covering email indicated that she was minded to publish that judgment. Both parties provided written submissions on the issue of publication and indicated that they were content for the judge to deal with the issue on the papers without the need for a further hearing. Both parties opposed publication, albeit the PL did so subject to an important caveat or condition to which I will return.
  2. By the Publication Judgment dated 24 March 2021, the judge rejected those submissions opposing publication and determined that the Merits Judgment should be published. Having set out the parties’ submissions, at [11] she summarised the key principles relevant to the case before her derived from the judgment of Mance LJ (as he then was) in City of Moscow. It was not suggested by Lord Pannick QC on behalf of the Club that this summary of the principles by the judge was inaccurate:
  3. i) “Whatever the starting point or actual position during a hearing [in other words even if the hearing is in private under CPR 62.10], it is, although clearly relevant, not determinative of the correct approach to publication of the resulting judgment” (at [37]).
  4. ii) “Further, even though the hearing may have been in private, the court should, when preparing and giving judgment, bear in mind that any judgment should be given in public, where this can be done without disclosing significant confidential information. The public interest in ensuring appropriate standards of fairness in the conduct of arbitrations militates in favour of a public judgment in respect of judgments given on applications under s.68. The desirability of public scrutiny as a means by which confidence in the courts can be maintained and the administration of justice made transparent applies here as in other areas of court activity under the principles of Scott v. Scottand article 6. Arbitration is an important feature of international, commercial and financial life, and there is legitimate interest in its operation and practice…” (at [39] emphasis added [by the judge]).

iii) “The factors militating in favour of publicity have to be weighed together with the desirability of preserving the confidentiality of the original arbitration and its subject-matter” (at [40]).

  1. iv) A party inviting the court to protect evidently confidential information about a dispute must not necessarily prove positive detriment, beyond the undermining of its expectation that the subject-matter would be confidential (at [46]).
  2. In the Discussion section of her judgment the judge then considered whether publication would lead to disclosure of “significant confidential information”. She noted that the first such piece of confidential information identified by the Club was the existence of a dispute concerning the PL’s request for documents and information. The judge considered this could not be considered “significant” confidential information for two reasons. First, as a result of the PL’s public statement in March 2019 (as quoted in [5] above), the existence of the investigation had been in the public domain for some time. Whilst it was not in the public domain that the PL had requested documents and information and that the Club had resisted the request, the judge considered that any reasonable reader of the public statement would be likely to infer that the investigation might involve the production of documents and information so that she considered that it was difficult to see how it could be viewed as “significant” confidential information.
  3. Second, she considered that the Merits Judgment did not contain any significant details relating to the disclosure dispute: the judgment does not state the nature of the documents and information requested or the significance of those documents and information to the wider investigation and it does not state the outcome of the arbitration other than on procedural matters.
  4. The judge said at [14] that the only confidential information that would be disclosed is the existence of the dispute and the arbitration. Where it was already public knowledge that the underlying investigation was taking place, she did not regard that confidential information as significant. At [15] she noted: “the desirability of preserving the confidentiality of the original arbitration and its subject-matter” referred to at [40] of City of Moscow, but said that there was nothing about the details of the underlying dispute in the Merits Judgment. At [16], she said that, whilst the expectation of the parties of confidentiality in arbitration was a factor to be taken into account, it was not determinative, even where both parties are opposed to publication.
  5. The judge went on to consider whether publication would result in real prejudice or significant detriment to the Club, whilst accepting that it was not necessary for the Club to prove detriment. She considered that, given that the investigation into the alleged breach of the Rules was already public knowledge, although publication of the Merits Judgment might attract media interest it was difficult to see any detriment. She took into account the Club’s legitimate interest in ensuring that a fair procedure was followed and noted that, whilst the Merits Judgment made reference to the PL’s submission that the Club’s challenge was tactical, it also set out the Club’s submissions in response and that neither the tribunal nor the Merits Judgment made such a finding. Whilst the Club may wish to avoid further media attention regarding the investigation, it was difficult to see any real prejudice from disclosure of the existence of the dispute as to production of documents and information.
  6. The Club had also submitted that public comment and press speculation would prejudice the future investigation. The judge said it was difficult to see how that could arise when the investigation was carried out by the PL, which was already privy to the information said to be confidential and should a Commission or Appeal Board be appointed under the Rules as now amended those appointments were made by a senior judicial figure. If the matter went to arbitration, the arbitrators had each to be a “Suitably Qualified Person”, that is a barrister or solicitor of 10 years standing and “independent of the party appointing him and able to render an impartial decision” (Rule X.10). The judge could not see how public comment or press speculation would undermine the independence of these individuals and prejudice the future investigation.
  7. In conclusion at [19], the judge said it was desirable for any judgment to be made public in order to ensure public scrutiny and the transparent administration of justice providing “this can be done without disclosing significant confidential information”. The confidential nature of arbitration had to be weighed against the public interest in ensuring appropriate standards of fairness in the conduct of arbitrations. She concluded at [20]-[21] that the desirability of public scrutiny and the transparent administration of justice outweighed the competing considerations against publication so that the Merits Judgment ought to be published.
  8. On 26 March 2021, the judge refused permission to appeal against the Publication Judgment. She held that she had applied the principles in City of Moscowand neither taken account of irrelevant matters nor failed to take account of relevant matters. She said at [14] that in her view the Club had a right to make an application for permission to appeal against the Publication Judgment to the Court of Appeal, because it was neither an appeal under section 67 nor section 68 of the Arbitration Act which would be precluded by the terms of respectively section 67(4) and section 68(4). The policy considerations of finality of arbitration did not appear relevant to the separate issue of publication of a judgment and the appeal would not be concerned with the substantive issue dealt with in the Merits Judgment. There was some support for this conclusion from the authorities relied upon by the Club.
  9. The judge granted a stay for seven days so that the Club could make an application for permission to appeal to the Court of Appeal.

The grounds of appeal

  1. The Club puts forward two grounds of appeal:
  2. i) First, the Judge erred by ordering the publication of the Judgments.
  3. ii) Second, in the alternative, the Judge erred by failing to stay publication of the Judgments pending the conclusion of the PL’s investigation.
  4. On 20 April 2021, Males LJ granted permission to appeal on both grounds on the assumption that the Court of Appeal had jurisdiction to do so, saying that whether the Court of Appeal had such jurisdiction was a point of general importance which it was appropriate for this Court to consider. He also ordered that the appeal should be heard in private, that the papers in the appeal should be confidential and not made available to anyone other than the parties and he continued the stay on publication granted by the judge until the conclusion of the appeal.
  5. In the circumstances, I will consider first the issue of jurisdiction. Before doing so, I should refer to the fact that, on the eve of the hearing of the appeal, Associated Newspapers Limited (publishers of the Mail on Sunday) made an application for one of their journalists, Mr Dan Matthews, to be present at the hearing and to be provided with copies of the judgments of Moulder J and the parties’ skeleton arguments, to enable them to understand and to scrutinise the process of the Court. Lord Pannick QC resisted this application on the basis that the hearing was in private and the subject-matter was confidential. However, we acceded to the application, upon Associated Newspapers Limited and Mr Mathews giving undertakings (which they were willing to give) not to publish or disclose the judgments or the skeleton arguments without further Order of the Court and on the basis that the hearing of the appeal remained private.

Jurisdiction

  1. The consequence of the judge’s refusal of permission to appeal against the Merits Judgment in her Order of 17 March 2021 was that this Court has no jurisdiction to entertain an appeal against the Merits Judgment. This is the effect of sections 67(4), 68(4) and 24(6) of the Arbitration Act, each of which provides: “The leave of the court is required for any appeal from a decision of the court under this section.” Lord Phillips MR, giving the leading judgment of the Court of Appeal in Athletic Union of Constantinople v National Basketball Association (No 2)[2002] EWCA Civ 830; [2002] 1 WLR 2863, held at [12] that “the court” in the sections means the Commercial Court (which was the court that made the decision in that case) saying:

“(4) Sections 67, 68 and 69 demonstrate a consistent legislative policy that no appeal shall be made against the decision of a court without the permission of that court. In this respect, there is no logical reason for distinguishing between the effects of sections 67(4) and 68(4) on the one hand, and the effect of section 69(8) on the other hand.

(5) In reserved judgments, this court has recently unanimously held that, on the true construction of section 69(8), a party who wishes to appeal from the decision of the High Court or the county court on appeal from an arbitration award requires the permission of the High Court or the county court, as the case may be, and that the Court of Appeal has no jurisdiction either to grant permission itself or to review a refusal of the High Court or county court to grant permission: (see Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd [2001] 1 QB 308). Much of the reasoning of Waller LJ, who gave the leading judgment in that case, can be applied to section 67(4).”

  1. Lord Pannick QC accepted that the jurisdiction of the Court of Appeal to hear an appeal from a decision under one of those sections was restricted to cases where the Court at first instance had granted permission to appeal, but submitted that the separate issue of an appeal against an Order for publication of the Merits Judgment was not within that restriction for three reasons.
  2. First, as a matter of language of the statutory provisions, taking section 67(4) as the example, what was being referred to was an appeal from a decision as to the substantive jurisdiction of the arbitration tribunal under section 67. An appeal against a decision to publish a decision under section 67 was not itself a decision under section 67. Second, this conclusion was supported by the policy reason for the restrictions in each of these sections, which was to limit further appeals because they would lead to delay in the resolution of a dispute decided by arbitration. This policy reason was explained cogently by May LJ in Amec Civil Engineering Ltd v Secretary of State for Transport[2005] EWCA Civ 291; [2005] 1 WLR 2339 at [9]:

“Mr Robert Akenhead QC was appointed arbitrator. He is a specialist leading counsel with wide experience of construction contract matters. He rejected Amec’s contentions that he had no jurisdiction because the notice of arbitration was ineffective. He also rejected their contention as to the limited scope of the arbitration. Amec appealed against this decision under section 67 of the 1996 Act. On 11th October 2004, Jackson J, sitting in the Technology and Construction Court, dismissed Amec’s appeal in a persuasive judgment. He gave Amec leave to appeal to this court, his leave being a necessary precondition of such an appeal under section 67(4) of the 1996 Act. I am not convinced that he was right to do so. The policy of the 1996 Act does not encourage such further appeals which in general delay the resolution of disputes by the contractual machinery of arbitration. The judge and Mr Akenhead had reached the same conclusion for substantially the same reasons. Their combined experience and authority was, I think, sufficient to conclude the matter without an expensive second appeal.”

  1. Lord Pannick QC submitted that to recognise that this Court has jurisdiction in respect of the appeal against the Publication Judgment would not impede that policy objective. The appeal would not delay the ongoing arbitration process which would continue to take place in private. It was not suggested by the PL that the appeal against the Publication Judgment would impede the investigation.
  2. Third, Lord Pannick QC submitted that the conclusion that the Court did have jurisdiction to hear this appeal was supported by previous judicial decisions. He relied primarily on the analysis of section 18(1)(g) of the Senior Courts Act 1981 by the House of Lords in Inco Europe Ltd v First Choice Distribution[2000] 1 WLR 586. Section 18(1)(g) provides: “No appeal shall lie to the Court of Appeal: …(g) except as provided by Part I of the Arbitration Act 1996 [Part I includes sections 24 and 67 to 69], from any decision of the High Court under that Part.”
  3. In that case, the defendants applied to stay an action under section 9 of the Arbitration Act on the basis that the parties had agreed to refer the relevant dispute to arbitration. The judge at first instance held that the arbitration agreement was null and void and refused a stay. He also refused leave to appeal on the ground that, under section 18(1)(g) of the Senior Courts Act 1981, the Court of Appeal did not have jurisdiction to entertain an appeal against the grant or refusal of a stay in favour of arbitration. The Court of Appeal granted permission to appeal and allowed the appeal on the basis that the judge should have granted a stay. The House of Lords refused a further appeal, holding that the Court of Appeal had jurisdiction to hear the appeal. Lord Pannick QC referred in particular to what Lord Nicholls of Birkenhead said at 592A-C:

“I am left in no doubt that, for once, the draftsman slipped up. The sole object of paragraph 37(2) in Schedule 3 was to amend section 18(1)(g) by substituting a new paragraph (g) that would serve the same purpose regarding the Act of 1996 as the original paragraph (g) had served regarding the Act of 1979. The language used was not apt to achieve this result. Given that the intended object of paragraph 37(2) is so plain, the paragraph should be read in a manner which gives effect to the parliamentary intention. Thus the new section 18(1)(g), substituted by paragraph 37(2), should be read as confined to decisions of the High Court under sections of Part I which make provision regarding an appeal from such decisions. In other words, ‘from any decision of the High Court under that Part’ is to be read as meaning ‘from any decision of the High Court under a section in that Part which provides for an appeal from such decision’.”

  1. Lord Pannick QC also relied on the decision of the Court of Appeal in Virdee v Virdi[2003] EWCA Civ 41. In that case, this Court held that it had no jurisdiction in relation to the appointment of arbitrators by the Court under section 18 of the Arbitration Act (subsection (5) of which contains the same limitation on the right of appeal as the sections relied upon here) where the judge had refused permission to appeal. However, it held that it did have jurisdiction in respect of other orders the judge had made as to whether legal representation was allowed and as to costs between the parties, since the relief sought did not fall within any of the sections of the Arbitration Act.
  2. Lord Pannick QC recognised that Virdeewas of little if any precedential value, since only one party was present at the hearing and he was not legally represented. Brooke LJ said at [4]:

“Given that we have not had the benefit of counsel’s arguments on both sides, although we have had access to the material to which I have referred, this case should not be regarded as binding precedent in the sense that, if the matter comes before the court again, the court should not have the opportunity of considering it and hearing full argument on it free from the shackles of precedent. In all the circumstances, however, we must, of course, deal with the point now on the material which is in front of us.”

  1. Lord Pannick QC also relied upon the decision of the Court of Appeal in Peel v Coln Park LLP[2010] EWCA Civ 1602, which was an application for permission to appeal against a refusal by the judge at first instance to extend the 28-day period for challenging an award under section 70(3) of the Arbitration Act. Again that case is of little precedential value since counsel for the respondents conceded that there was jurisdiction to grant permission to appeal, although Longmore LJ thought this must be right saying at [13]:

“that must be right since section 80(5) of the 1996 Arbitration Act requires that rules of court relating to extending periods of time apply in relation to any time requirement, and so we have the slightly paradoxical situation that, whereas the refusal of the judge at first instance on a matter of substance under section 68 or section 69 cannot be reconsidered by this court, an application of a preliminary nature for extension of time is apparently a matter which can be reconsidered by this court.”

  1. Citation of those cases provoked a debate between counsel and the Court as to where the line was to be drawn between decisions which would be caught by the limitation on the right of appeal in the relevant section of the Arbitration Act and decisions which would not. Lord Justice Males posited the example of a case management decision about how a section 68 application should be dealt with. As I said at the time, that would seem to be an example of something which is part of the process of reaching a decision under section 68, so would be caught by the limitation on the right of appeal. The Master of the Rolls suggested to Lord Pannick QC that a consequential decision on a section 68 application, for example as to costs, would also be caught by the limitation.
  2. Lord Pannick QC made it clear that he was not inviting this Court to lay down any general principles applicable in every case, but only to determine that this Court had jurisdiction to hear the appeal from the Publication Judgment. I agree that it is not necessary for present purposes to determine the more difficult question whether case management decisions either side of the substantive decision under, say, section 67 or 68, for example as to how a hearing is to be conducted or as to costs, would be caught by the limitation in sub-section (4) of each section. Whilst such case management decisions may be said to be part of the process of reaching the substantive decision, the question whether the substantive decision should be published is a distinct question separate from the decision itself. In the present case, the judge’s decision that the Merits Judgment and the Publication Judgment should be published was an application of common law principles as set out in the decision of this Court in City of Moscow. It was not a decision of the Court under sections 24, 67 or 68 and was, therefore, not caught by the limitation on the right of appeal. In those circumstances, I am satisfied that this Court has jurisdiction to hear this appeal under section 16 of the Senior Courts Act 1981 and that the restriction in section 18(1)(g) of that Act is not applicable.

The parties’ submissions on the appeal

  1. In addition to the passages in the judgment of Mance LJ in City of Moscowto which the judge referred, Lord Pannick QC referred the Court to [28], [30]-[32] and [34]. For present purposes it is only necessary to set out [32] and [34]:

“32. The rule makers clearly deduced from the principles of the Arbitration Act 1996 that any court hearing should take place, so far as possible, without undermining the reasons of inter alia privacy and confidentiality for which parties choose to arbitrate in England. Their conclusion in this regard has not been challenged. It may be justified on the simple basis that arbitration represents a special case, in relation to which there has been very considerable development during recent years. An alternative and overlapping consideration is that parties may be deterred from arbitrating or at any rate from invoking the court’s supervisory role in relation to arbitration if their understanding regarding arbitral confidentiality and privacy is ignored. I would personally doubt whether it can be said without any positive evidence that the publication that has in the past frequently followed applications to set aside arbitration awards, e.g. for misconduct, has itself been likely to be detrimental to parties’ keenness or otherwise to agree to arbitrate in London. But I find it easier to accept that, having arbitrated unsuccessfully here, a party could well be deterred from making an arbitration claim in court if there was a risk that by doing so really confidential matters might be disclosed.

  1. The consideration that parties have elected to arbitrate confidentially and privately cannot dictate the position in respect of arbitration claims brought to court under CPR 62.10. CPR 62.10 therefore only represents a starting point. Such proceedings are no longer consensual. The possibility of pursuing them exists in the public interest. The courts, when called upon to exercise the supervisory role assigned to them under the Arbitration Act 1996, are acting as a branch of the state, not as a mere extension of the consensual arbitral process. Nevertheless, they are acting in the public interest to facilitate the fairness and well-being of a consensual method of dispute resolution, and both the Rule Committee and the courts can still take into account the parties’ expectations regarding privacy and confidentiality when agreeing to arbitrate.”
  2. Lord Pannick QC accepted that the judgment of Mance LJ demonstrates that, in each case, in considering whether a judgment should be published, it is a question of weighing confidentiality and any detriment to the parties from publication against the public interest in publication, particularly where the judgment raises matters of some general importance.
  3. He submitted that the circumstances in which an appellate court can interfere with an evaluative judgment by a lower court are accurately set out by Lord Carnwath JSC in R (AR) v Chief Constable of Greater Manchester police[2018] UKSC 47; [2018] 1 WLR 4079 at [64]:

“In conclusion, the references cited above show clearly in my view that to limit intervention to a “significant error of principle” is too narrow an approach, at least if it is taken as implying that the appellate court has to point to a specific principle – whether of law, policy or practice – which has been infringed by the judgment of the court below. The decision may be wrong, not because of some specific error of principle in that narrow sense, but because of an identifiable flaw in the judge’s reasoning, such as a gap in logic, a lack of consistency, or a failure to take account of some material factor, which undermines the cogency of the conclusion. However, it is equally clear that, for the decision to be “wrong” under CPR 52.11(3), it is not enough that the appellate court might have arrived at a different evaluation. As Elias LJ said (R (C) v Secretary of State for Work and Pensions [2016] EWCA Civ 47; [2016] PTSR 1344, para 34):

“… the appeal court does not second guess the first instance judge. It does not carry out the balancing task afresh as though it were rehearing the case but must adopt a traditional function of review, asking whether the decision of the judge below was wrong.””

  1. Lord Pannick QC submitted that there had been errors of principle by the judge in her evaluation. As she had indicated in refusing permission to appeal the Merits Judgment, she had applied the principles in Halliburtonand there was no novelty in her decision, so there was no question of the judgment requiring publication.
  2. In [5] of his Reasons for granting permission to appeal, Males LJ had said that it was arguable that the question dealt with in the Merits Judgment whether, at least until the Rules changed in February 2020, the system for appointing arbitrators in disputes involving the Premier League was structurally biased, was itself a matter of some public interest telling in favour of publication. Lord Pannick QC sought to counter this by submitting that the judge had decided the issue by applying the principles in Halliburtonand, in any event, this would only be of historical interest because the Rules had changed and appointment of arbitrators was now made by an independent chair. The Club’s complaint had been specific to its case.
  3. In relation to her determination that publication would not involve disclosure of significant confidential information, the judge had referred to the public statement by the PL as reported in the Times on 8 March 2019. For completeness, it was pointed out that there had been a recent article in the New York Times on 4 May 2021 about the dispute. This said, inter alia:

“City [the Club] has spent millions of dollars defending itself since the allegations first emerged. Its lawyers are fighting against the [PL]’s arbitration process, arguing that the club will not get a fair hearing, according to documents. The [PL] did not reply to a request for comment.”

Essentially the same story was reported in the Mail Online the same day.

  1. Lord Pannick QC submitted that, notwithstanding the publication of these three articles, publication of the Merits Judgment would disclose that there was a decision in the arbitration at an early stage, when the parties had a reasonable expectation of confidentiality being maintained. What was not publicly known was that the Club had argued that there was no power to arbitrate the particular dispute under the Rules and that there was apparent bias. All of that was confidential and publication would tell the world what was going on and why, in circumstances where the arbitration was not concluded. Lord Pannick accepted the point made by the judge at [13(ii)] of her judgment, summarised at [20] above, that the Merits Judgment does not contain any significant details of the substance of the disclosure dispute.
  2. However he submitted that the judge had not recognised that, contrary to her conclusions at [17] and [18], publication of the Merits Judgment will inevitably lead to extensive press comment and speculation in relation to a matter which had been confidential to date and which the parties were entitled to expect to remain confidential. The press would report whatever they could arising from the judgment and this would be prejudicial to the Club. It was contended that press comment and speculation could be prejudicial to the Club, for example in its dealings with commercial partners. The Club’s skeleton argument served on 6 May 2021 referred to it being in advanced negotiations regarding a potential deal, but Lord Pannick QC informed the Court on instructions that this was no longer the case. Such publicity and press speculation could also potentially disrupt the orderly conduct of the investigation by the PL.
  3. Lord Pannick QC submitted that the judge had erred in finding that publication would not involve disclosure of significant confidential information and in concluding that the Club would suffer no real detriment from publication. She had placed undue weight on the desirability of public scrutiny and therefore had erred in the performance of the relevant balancing exercise, so that it was open to this Court to interfere.
  4. If the Court were against the Club on the first ground of appeal, Lord Pannick QC pursued the second ground, which was that any publication should be stayed until the end of the disciplinary process, which would ensure that any wider public benefit from the publication of the Merits Judgment would accrue, but only at a time when it would not cause the Club and the PL harm in the context of the ongoing proceedings. Contrary to what Males LJ had said at [4] of his Reasons for granting permission to appeal, this alternative argument had been relied upon by the Club before the judge.
  5. The Club also relied upon the fact that its appeal is supported by the PL. The PL put in written submissions from Mr Adam Lewis QC and Mr Andrew Hunter QC, but they did not attend the hearing. They contended that the privacy of Section X arbitrations under the Rules was significant and in need of protection, although they recognised that this argument had been run unsuccessfully in the Commercial Court in Newcastle United Football Club Ltd v The Football Association Premier League [2021] EWHC 450 (Comm). The PL’s argument was that the substantive judgment of HHJ Pelling QC rejecting that club’s bias application should not be published, because the arbitration was pending and was confidential and there was no countervailing public interest justifying publication of the judgment, which raised no new point of law or practice. That argument was rejected by HHJ Pelling QC who ordered publication.
  6. The PL’s support for the Club’s position was conditional, however, on the Club’s agreement that any order as to privacy should be subject to an exception, that the PL should be entitled to rely upon the Merits Judgment in other relevant proceedings between it and other member clubs and to disclose it to such other member clubs as a clear confirmation by the Commercial Court that the PL is entitled to bring specific performance proceedings against member clubs under Section X of the Rules. The Club had agreed to this condition both before the judge and before this Court.

Discussion

  1. In my judgment, the judge made the correct evaluative assessment in ordering that the Merits Judgment and the Publication Judgment should be published, for a series of inter-related reasons.
  2. First, I agree with the judge that publication will not lead to disclosure of significant confidential information. What will be disclosed is the existence of the dispute and the arbitration in circumstances where it is already public knowledge that the underlying investigation by the PL is taking place and, as the judge said, the reasonable reader of the Times article would assume that the investigation would involve the production by the Club of documents and information. Furthermore, since the judge’s judgments, the existence of a dispute and of the arbitration is now in the public domain, as a consequence of the articles in the New York Times and the Mail Online. Specifically it is known that there is an arbitration in progress and that the Club is arguing that it cannot have a fair hearing (which would seem to be a non-lawyer’s interpretation of the allegation of apparent bias). Given what is now in the public domain, it is unreal to suggest that what will be disclosed by the publication of the Merits Judgment, namely the challenge to the jurisdiction of the arbitrators and the unsuccessful allegation of apparent bias, is in any sense significant confidential information. What will not be disclosed by the publication is any details of the substance of the underlying disclosure dispute.
  3. Second, I was not impressed with Lord Pannick QC’s argument that publication was not in the public interest because the Club’s complaint was specific to the Club’s case and, in any event, the judge had simply applied the principles recently confirmed by the Supreme Court in Halliburton. I consider that there is a legitimate public interest in how disputes between the PL and member clubs are resolved and, in particular, in the allegation of structural bias made by the Club which appears to have led to a change in the Rules. As HHJ Pelling QC said at [21] of his judgment in the Newcastle United case, there is a public interest in the publication of a judgment determining an application under section 24 of the Arbitration Act (in other words a judgment dealing with an allegation of apparent bias), because there is a public interest in maintaining appropriate standards of fairness in the conduct of arbitrations. This is so even if the judges determining such applications are applying the principles confirmed by Halliburtonrather than making new law. I also consider that there is a public interest in there being some explanation for the delay in the present case, where the investigation was made public as long ago as March 2019 but has hardly advanced since.
  4. Third, the fact that the PL supports the Club’s appeal so that both parties to the arbitration are opposed to publication is of some weight, but should lead to the Court being careful not simply to accept the parties’ wishes without scrutiny. As Sir Christopher Staughton said in Ex parte P (1998) (unreported) (as cited with approval by Lord Woolf MR giving the judgment of this Court in R v Legal Aid Board ex parte Kaim Todner [1999] QB 966 at 977, in turn cited by Mance LJ at [20] of City of Moscow): “When both sides agreed that information should be kept from the public, that was when the court had to be most vigilant”.
  5. Fourth, in so far as the Merits Judgment confirms the entitlement of the PL to claim specific performance against member clubs, it is of public interest and significance. This point is confirmed by the condition which the PL has imposed on its support of the appeal, that it should be free to rely on and disclose the Merits Judgment in other arbitration proceedings against other member clubs. This demonstrates that whatever interest the parties have in confidentiality is far outweighed by the public interest in the publication of an important judgment on the scope of Section X of the Rules. This point about the importance of the judgment is put clearly in the PL’s own skeleton argument for this appeal at [2]:

“It is correct that the Merits Judgment turned on the application of the normal rules of construction [of] a contract and the application of the undisputed bias test in Halliburton to the uncontested facts. However the specific and clear confirmation in it by the Commercial Court that the PL is entitled to bring specific performance proceedings against a member club under Section X of [the PL Rules] for enforcement of its contractual right to documents (and by parity of reasoning for enforcement of other contractual rights in the PL Rules), is of great significance in the future for the PL, for all member clubs and for practitioners. The PL was concerned before Moulder J, and remains concerned, that absent publication, this important Commercial Court guidance would not be available to those whom it might affect.”

  1. Whilst the desire of the PL to have the best of both worlds is commercially understandable, it is difficult to envisage a more eloquent demonstration as to why publication of the Merits Judgment is in the public interest.
  2. Fifth, I consider that the judge was right to view the Club’s case that publication would cause it prejudice or detriment with considerable scepticism. Given what is already in the public domain, disclosure of the existence of the dispute as to production of documents and information could hardly give rise to any prejudice or detriment to the Club. The suggestion that press interest and speculation might disrupt the investigation or the arbitration, where both are being conducted by experienced professionals is entirely fanciful. Likewise the suggestion that press comment and speculation following publication might damage the Club’s relations with commercial partners was unconvincing. As Lord Justice Males said during the course of argument, any potential commercial partner with whom the Club might enter a contract would be bound to conduct due diligence, which would reveal the existence of the investigation and the dispute.
  3. In all the circumstances, I consider that the judge was entirely correct to order publication of the Merits Judgment so that the first ground of appeal fails. Likewise, given that the public interest in publication outweighed any confidentiality, there was no good reason for deferring publication until after the conclusion of the disciplinary process so that the second ground of appeal also fails. This appeal must be dismissed.

Lord Justice Males:

  1. I agree that this appeal must be dismissed for the reasons given by the Chancellor. I add a few comments in view of the interest and importance of this case in ensuring the correct balance between the confidentiality of arbitration proceedings and the principle of open justice for court proceedings.
  2. As explained in City of Moscow, when considering whether a judgment on an arbitration claim should be published, with or without anonymisation, the court must weigh the factors militating in favour of publicity against the desirability of preserving the confidentiality of the original arbitration and its subject matter. In general, the imperative of open justice, involving as it does the possibility of public scrutiny as a means by which confidence in the courts can be maintained and the administration of justice can be made transparent, will require publication where this can be done without disclosing significant confidential information.
  3. In the present case Moulder J weighed the various considerations appropriately. Her conclusion that her judgment should be published was one which she was entitled to reach. It was not, in my view, a marginal decision. On the contrary, bearing in mind the careful way in which the judge expressed herself in the Merits Judgment in order to avoid revealing information about the underlying dispute, the balance here was clearly in favour of publication.
  4. That would be so even without the condition imposed by the Premier League that it should be free to rely on and disclose the Merits Judgment in other arbitration proceedings (see [57] above), a condition which the judge did not need to mention in the Publication Judgment (and of which I was not aware when granting permission to appeal). But in my judgment the imposition of that condition is fatal to this appeal. The compromise negotiated between the Club and the Premier League whereby the judgment would not be published, but would be available to the Premier League in the event of disputes with other clubs, is unacceptable. If the judgment is to be available as a potentially important precedent, it must be available to all.
  5. More generally, it seems to me that public scrutiny of the way in which the court exercises its jurisdiction to set aside or remit awards for substantial irregularity under section 68 of the 1996 Act is itself in the public interest. In City of MoscowMance LJ addressed a concern that publication of judgments would upset the confidence of the business community in English arbitration. He was sceptical about the extent to which, if at all, this would be so. I share his scepticism, for two reasons. First, the business community will see that, just as in this case, Commercial Court judges can be trusted to ensure that genuinely confidential information is not published. Second, publication of such judgments will confirm the pro-arbitration stance consistently taken by the English courts and thus will enhance the confidence of the business community in English arbitration. It will demonstrate that the section 68 gateway is a very narrow one, not only in theory but in practice, and that it is only in cases of real injustice that arbitral awards can be successfully challenged in the English courts.
  6. Finally, the Club has been anxious to emphasise before us that “the arbitral proceedings relate to an ongoing and confidential investigatory and disciplinary process which is still in its early stages”, and that it may be that no charges will ever be brought against it. While that may be true, it seems to me that this is, if anything, a factor which tells in favour of publication. This is an investigation which commenced in December 2018. It is surprising, and a matter of legitimate public concern, that so little progress has been made after two and a half years — during which, it may be noted, the Club has twice been crowned as Premier League champions.

The Master of the Rolls:

  1. I agree with both judgments.

 

 

TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd [2014] FCAFC 83

 

TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd [2014] FCAFC 83
Court: FEDERAL COURT OF AUSTRALIA
Case No: VID 1042 of 2012

VID 1043 of 2012

VID 1044 of 2012

Appeal from: Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd (No 2) [2012] FCA 1214
Parties TCL AIR CONDITIONER (ZHONGSHAN) CO LTD

v

CASTEL ELECTRONICS PTY LTD

DIVISION: GENERAL DIVISION
List:
JUDGE: ALLSOP CJ, MIDDLETON J & FOSTER J
WHERE HELD: Melbourne
DATE OF HEARING: 26 November 2013
DATE OF JUDGMENT: 16 July 2014
CASE MAY BE CITED AS: TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd [2014] FCAFC 83
MEDIUM NEUTRAL CITATION: [2014] FCAFC 83
Catchwords: ARBITRATION – international commercial arbitration – where appellant sought the setting-aside and non-enforcement of an arbitral award under Arts 34 and 36 of the UNCITRAL Model Law on the ground that there had been a breach of the rules of natural justice and hence that the award was contrary to the public policy of Australia under s 19 of the International Arbitration Act 1974 (Cth) – where the alleged breach of natural justice was a supposed absence of probative evidence for the arbitrators’ factual findings – consideration of whether and when such an absence would constitute a breach of natural justice in an international arbitral context – interpretation of “public policy” and “natural justice” in this context – discussion of unfairness as the basic prerequisite for the setting-aside or non-enforcement of international arbitral awards – discussion of the operation of the discretion in Arts 34 and 36.

 

STATUTORY INTERPRETATION – where UNCITRAL Model Law was the product of international negotiations under the auspices of the United Nations – whether legislation implementing the Model Law in Australia should be construed in light of reasoned foreign decisions dealing with the Model Law – discussion of the importance of uniformity of approach.

Judgment: THE COURT ORDERS THAT:

1.           The appeal be dismissed with costs.

2.           Monies paid into Court to provide security for costs, pursuant to the orders of Tracey J of 26 February 2013, be released to the respondent.

Cases cited: AJU v AJT [2011] SGCA 41; [2011] 4 SLR 739
Amaltal Corporation Ltd v Maruha (NZ) Corporation Ltd [2004] 2 NZLR 614
Applicant M164/2002 v Minister for Immigration and Multicultural and Indigenous Affairs [2006] FCAFC 16
Armah v Government of Ghana [1968] AC 192
Atkinson v Hastings Deering (Queensland) Pty Ltd (1985) 71 ALR 93
Attorney General of Canada v S D Myers Inc [2004] 3 FCR 368
Attorney-General v Ryan [1980] AC 718
Australian Broadcasting Tribunal v Bond [1990] HCA 33; 170 CLR 321
Australian Gas Light Co v Valuer-General (1940) 40 SR (NSW) 126
Azzopardi v Tasman UEB Industries Ltd (1985) 4 NSWLR 139
Biggin & Co Ltd v Permanite Ltd [1951] 1 KB 422
Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969
Boardwalk Regency Corp v Maalouf (1992) 6 OR (3d) 737
Bushell v Secretary of State for the Environment [1981] AC 75
Callaghan v Williams C Lynch Pty Ltd [1962] NSWR 871
Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd [2012] FCA 21; 287 ALR 297
Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd (No 2) [2012] FCA 1214
Collins v Minister for Immigration and Ethnic Affairs (1981) 58 FLR 407
Comandate Marine Corp v Pan Australia Shipping Pty Ltd [2006] FCAFC 192: 157 FCR 45
Corvetina Technology Ltd v Clough Engineering Ltd [2004] NSWSC 700; 183 FLR 317
CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK [2011] SGCA 33; [2011] 4 SLR 305
Cullen v Welsbach Light Co [1907] HCA 3; 4 CLR 990
Deutsche Schachtbau-und Tiefbohrgesellschaft mbH v Shell International Petroleum Co Ltd [1990] 1 AC 295
Downer-Hill Joint Venture v Government of Fiji [2005] 1 NZLR 554
Dranichnikov v Minister for Immigration and Multicultural Affairs [2003] HCA 26; 197 ALR 389
Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations [2011] FCAFC 88; 195 FCR 318
Emerald Grain Australia Pty Ltd v Agrocorp International Pte Ltd [2014] FCA 414
Enzed Holdings Ltd v Wynthea Pty Ltd (1984) 57 ALR 167
F Hoffman-La Roche & Co AG v Secretary of State for Trade and Industry [1975] AC 295
Ferguson v Cole [2002] FCA 1411; 121 FCR 402
Fox v PG Wellfair Ltd [1981] 2 Lloyd’s Rep 514
FTZK v Minister for Immigration and Border Protection [2014] HCA 26
Gallaway Cook Allan v Carr [2013] 1 NZLR 826
Gas & Fuel Corporation of Victoria v Wood Hall Ltd & Anor [1978] VR 365
Great China Metal Industries Co Ltd v Malaysian International Shipping Corporation Berhad [1998] HCA 65; 196 CLR 161
Green v The Queen [2011] HCA 49; 244 CLR 462
Gujarat NRE Coke Ltd v Coeclerici Asia (Pte) Ltd [2013] FCAFC 109; 304 ALR 468
Haider v JP Morgan Holdings Australia Ltd [2007] NSWCA 158
Hampton Court Ltd v Crooks [1957] HCA 28; 97 CLR 367
Hebei Import & Export Corp v Polytek Engineering Co Ltd [1999] 2 HKC 205
Interbulk Ltd v Aiden Shipping Co Ltd (The Vimeira) [1984] 2 Lloyd’s Rep 66
Jarratt v Commissioner for Police for NSW [2005] HCA 50; 224 CLR 44
JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237
John Holland Pty Ltd (fka John Holland Construction & Engineering Pty Ltd) v Toyo Engineering Corp (Japan) [2001] 2 SLR 262
Kempinski Hotels SA v PT Prima International Development [2011] SGHC 171; [2011] 4 SLR 633
Kioa v West [1985] HCA 81; 159 CLR 55
Kostas v HIA Insurance Services Pty Ltd [2010] HCA 32; 241 CLR 390
LW Infrastructure Pte Ltd v Lim Chin San Contractors Pte Ltd [2012] SGCA 57; [2013] 1 SLR 125
Mahon v Air New Zealand [1984] AC 808
McPhee v S Bennett Ltd (1934) 52 WN (NSW) 8
Mediterranean & Eastern Export Co Ltd v Fortress Fabrics (Manchester) Ltd [1948] 2 All ER 186
Methanex Motunui Ltd v Spellman [2004] 1 NZLR 95
MGM Productions Group Inc v Aeroflot Russian Airlines 91 Fed Appx 716 (2d Cir 2004)
Minister for Immigration and Citizenship v Li [2013] HCA 18; 249 CLR 332
Minister for Immigration and Ethnic Affairs v Pochi (1980) 31 ALR 666
Minister for Immigration and Multicultural Affairs v Rajamanikkam [2002] HCA 32; 210 CLR 222
Mobil Oil Australia Pty Ltd v Federal Commissioner of Taxation [1963] HCA 41; 113 CLR 475
Motrix Supplies Pty Ltd v Bonds and Kirby (Victoria Avenue) Pty Ltd (Sup Ct of NSW Commercial Division, 12 September 1990, Giles J, BC9002025)
Pacific Recreation Pte Ltd v SY Technology Inc [2008] SGCA 1; [2008] 2 SLR(R) 491
Parker v Paton (1941) 41 SR (NSW) 237
Parsons Whittemore Overseas Co Inc v Société Générale de l’Industrie du Papier (RAKTA) 508 F 2d 969 (2d Cir 1974)
Povey v Qantas Airways Ltd [2005] HCA 33; 223 CLR 189
Premium Nafta Products Ltd v Fili Shipping Co Ltd [2007] UKHL 40
PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2006] SGCA 41; [2007] 1 SLR 597
PT First Media TBK v Astro Nusantara International BV [2013] SGCA 57
Pupuke Service Station Ltd v Caltex Oil (NZ) Ltd [2000] 3 NZLR 338n
Quintette Coal Ltd v Nippon Steel Corporation (1990) 50 BCLR (2d) 207
R v Corporation of the Town of Glenelg; Ex parte Pier House Pty Ltd [1968] SASR 246
R v Deputy Industrial Injuries Commissioner, Ex parte Moore [1965] 1 QB 456
R v District Council of Berri; Ex parte Eudunda Farmers Cooperative Society Ltd (1982) 31 SASR 342
R v Ludlow; Ex parte Barnsley Corporation [1947] KB 634
R v Nat Bell Liquors Ltd [1922] 2 AC 128
Ramsay v Watson [1961] HCA 65; 108 CLR 642
Re Alexander; Ex parte Ferguson (1944) 45 SR (NSW) 64
Re Minister for Immigration and Multicultural Affairs; Ex parte Applicant S20/2002 [2003] HCA 30; 198 ALR 59
Re Minister for Immigration and Multicultural Affairs; Ex parte Miah [2001] HCA 22; 206 CLR 57
Re Minister for Immigration and Multicultural and Indigenous Affairs; Ex parte Lam [2003] HCA 6; 214 CLR 1
Re Resort Condominiums International Inc [1995] 1 Qd R 406
RF Brown & Co Limited v T & J Harrison (1927) 137 LT 549
Riverstone Meat Co Pty Ltd v Lancashire Shipping Co Ltd [1961] AC 807
Salemi v MacKellar (No 2) [1977] HCA 26; 137 CLR 396
Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275
Shipping Corporation of India Ltd v Gamlen Chemical Co Australasia Pty Ltd [1980] HCA 51; 147 CLR 142
Siemens Ltd v Schenker International (Australia) Pty Ltd [2004] HCA 11; 216 CLR 418
Soh Beng Tee & Co Pte Ltd v Fairmont Development Pte Ltd [2007] SGCA 28; [2007] 3 SLR(R) 86
Soleimany v Soleimany [1999] QB 785
Spackman v Plumstead District Board of Works (1885) 10 App Cas 229
Starkey v State of South Australia [2011] SASC 34
Sui Southern Gas Co Ltd v Habibullah Coastal Power Co (Pte) Ltd [2010] SGHC 62; [2010] 3 SLR 1
TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5; 295 ALR 596
Ted Brown Quarries Pty Ltd v General Quarries (Gilston) Pty Ltd (1977) 16 ALR 23
Telstra Corporation Ltd v Australian Competition and Consumer Commission [2009] FCA 757; 179 FCR 437
Thurston v Todd (1966) 84 WN (Pt 1) (NSW) 231
TMM Division Maritima SA de CV v Pacific Richfield Marine Pte Ltd [2013] SGHC 186
Traxys Europe SA v Balaji Coke Industry Pvt Ltd (No 2) [2012] FCA 276; 201 FCR 535
Trustees of Rotoaira Forest Trust v Attorney-General [1999] 2 NZLR 452
Uganda Telecom Ltd v Hi-Tech Telecom Pty Ltd [2011] FCA 131; 277 ALR 415
Vetter v Lake Macquarie City Council [2001] HCA 12; 202 CLR 439
Westacre Investments Inc v Jugoimport-SPDR Holding Co Ltd [2000] QB 288
Wiseman v Borneman [1971] AC 297
Wright v Howson (1888) 4 TLR 386
Texts and articles: M Aronson and M Groves, Judicial Review of Administrative Action (5th ed)
N Blackaby and C Partasides with A Redfern and M Hunter, Redfern and Hunter on International Arbitration (5th ed)
Commonwealth Administrative Review Committee, Prerogative Writ Procedures: Report of Committee of Review (Cth Parliament 1973)
Department of Justice (Hong Kong), Consultation Paper: Reform of the Law of Arbitration in Hong Kong and Draft Arbitration Bill (December 2007)
Department of Justice (Hong Kong), Summary of Submissions and Comments on the Consultation Paper on Reform of the Law of Arbitration in Hong Kong and Draft Arbitration Bill (2009)
Department of Trade and Industry (UK), “A New Arbitration Act? The Response of the Departmental Advisory Committee to the UNCITRAL Model Law on International Commercial Arbitration” [1989] 4 Arbitration Materials 5
J M Evans, de Smith’s Judicial Review of Administrative Action (4th ed)
H M Holtzmann and J E Neuhaus, A Guide to the UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary (Kluwer Law and Taxation Publishers)
Hong Kong Institute of Arbitrators, Report of Committee on Hong Kong Arbitration Law (30 April 2003)
Hong Kong International Arbitration Centre Committee on Arbitration Law, Hong Kong International Arbitration Centre Committee on Arbitration Law (1996)
Law Commission (NZ), Arbitration (Report No 20, 1991)
Law Reform Commission of Hong Kong, Report on the Adoption of the UNCITRAL Model Law of Arbitration (September 1987)
Law Reform Committee (Singapore), Sub-Committee on Review of Arbitration Laws: Report (1993)
M Mustill and S Boyd, The Law and Practice of Commercial Arbitration in England (1982)
A J van den Berg, The New York Arbitration Convention of 1958: Towards a Uniform Judicial Interpretation (Kluwer)
HWR Wade, Administrative Law (2nd, 3rd, 5th and 10th eds)
Representation: Counsel for the Appellant:        PB Murdoch QC with AP Trichardt

 

Solicitor for the Appellant:        Norton Rose Australia

 

Counsel for the Respondent:      JWS Peters SC with D Bailey

 

Solicitor for the Respondent:     Hunt & Hunt

 

REASONS FOR JUDGMENT

THE COURT

  1. On 26 November 2013, after the oral argument on the appeal, the Court made orders dismissing each of the appeals with costs.  These are the reasons for making those orders.
  2. The appellant (“TCL”), a company organised under the laws of the People’s Republic of China, and the respondent (“Castel”), an Australian company, were parties to an agreement for the distribution in Australia of air conditioning units manufactured by TCL in China.  Castel was the exclusive Australian distributor.  The agreement provided for arbitration in the event of any dispute that could not be resolved by mutual agreement.  The arbitration agreement was one to which the International Arbitration Act 1974 (Cth) (“the IAA”) applied.
  3. Disagreements arose between the parties.  The dispute between the parties was submitted to arbitration for resolution.  On 23 December 2010, after a ten-day hearing, the arbitral panel (Dr Gavan Griffith AO, the Hon Alan Goldberg AO and Mr Peter Riordan SC) delivered an award in Castel’s favour in the sum of $2,874,870.  On 27 January 2011, the arbitrators handed down a further award of $732,500 in costs.
  4. The foundation of the award was the selling by TCL in Australia between 2004 and 2008, in breach of its promise to Castel of exclusivity of rights of distribution of TCL products, of air conditioning units manufactured by TCL, but not bearing the TCL brand.  These units were referred to as Other Equipment Manufacture products (“OEM products”).  The quantum of the award was reached by making an assessment of the financial impact of the importations of OEM products upon Castel’s sales.
  5. TCL sought to set aside the award under Art 34 of the UNCITRAL Model Law on International Commercial Arbitration (As adopted by the United Nations Commission on International Trade Law on 21 June 1985, and as amended by the United Nations Commission on International Trade Law on 7 July 2006) (“the Model Law”), which has the force of law in Australia by s 16 of the IAA. Castel sought to enforce the award under Art 35 of the Model Law. TCL resisted enforcement under Art 36 of the Model Law.
  6. The grounds for TCL’s two claims (the setting aside of the award under Art 34 and the resistance of enforcement under Art 36) were identical: the asserted failure by the arbitrators to accord TCL procedural fairness such that there had been a breach of the rules of natural justice in connection with the making of the award, and so, it was asserted, the award was in conflict with, or contrary to, the public policy of Australia: see Arts 34(2)(b)(ii) and 36(1)(b)(ii) and ss 16 and 19 of the IAA.
  7. The asserted breaches of the rules of natural justice arose from the making by the arbitrators of three central findings of fact.  The three findings, referred to by the primary judge as the “14% Starting Point Finding”, the “Uplift Finding” and the “Lost Sales Finding” (each of which is explained later) were said to have been made in the absence of probative evidence, and were findings upon which TCL was said to have been denied an opportunity to present evidence and argument.
  8. In advancing its argument before the primary judge (and its appeal) TCL submitted that the proper approach was to examine the facts of the case afresh and revisit in full the questions which were before the arbitrators in order to evaluate whether or not probative material supported the factual conclusion.
  9. TCL had also argued that the Federal Court had no jurisdiction to entertain the applications before it.  In an earlier judgment (Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd[2012] FCA 21; 287 ALR 297) the primary judge rejected this argument. TCL then applied in the original jurisdiction of the High Court to prohibit the Federal Court from dealing with the matter on grounds involving lack of jurisdiction and constitutional invalidity of the conferral of jurisdiction on the Court. That application was dismissed: TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5; 295 ALR 596. The resolution of this question led to the abandonment of the grounds of appeal from the primary judge’s earlier decision upon jurisdiction.
  10. In a full and careful judgment published on 2 November 2012 (Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd (No 2) [2012] FCA 1214), the primary judge rejected TCL’s contention as to how the application should be approached; nevertheless, he examined the structure and foundations of the award, the evidence before the arbitrators and the factual findings therein; and rejected TCL’s resistance to enforcement of the award. On 19 November 2012, the primary judge published a judgment on costs and made orders enforcing the award and dismissing TCL’s application to set it aside. His Honour was correct to make the orders he did.
  11. The appeal raised matters of some importance for the operation of the IAA in Australia, and in particular the content of the “rules of natural justice” for the purpose of s 19 of the IAA (and necessarily also for s 8(7A)), and the method of approach to applications of the kind made here by TCL.

The approach of the primary judge

The discussion of the statute and legal principles by the primary judge

  1. After introducing the matter and setting out the legislative framework, the primary judge discussed at J[19]-[64] the principles relating to public policy in the IAA, dividing this discussion among the following subjects: whether “public policy” relates to procedural as well as substantive issues: J[19]; whether “public policy” has a similar meaning in the IAA in relation to setting aside an award and in relation to enforcement: J[20]-[28]; the nature of the seriousness of the breach of the rules of natural justice for an award to be in conflict with public policy: J[29]-[33]; the nature of any discretion to set aside or enforce the award, involving questions of the use of decisions of courts in Convention countries and the meaning of “public policy” in the IAA and the Model Law: J[34]-[51]; the extent of the review required of the Court when an award is challenged for breach of the rules of natural justice: J[52]-[61]; and whether there was a distinction between the requirement for natural justice in connection with the making of the award as against the reasons underpinning it: J[62]-[64].
  2. The primary judge’s essential conclusions in respect of these issues were:

(a)          “Public policy” includes procedural questions as well as substantive law: J[19].

(b) The notion of “public policy” in Arts 34 and 36 is the same: J[23]-[28].

(c)          The drafting of s 19(b) of the IAA and its plain words required a conclusion that any breach of the rules of natural justice, even minor and unimportant, was sufficient to lead to the conclusion that the award was in conflict with, or contrary to, Australian public policy. His Honour saw some tension in this conclusion with authorities of Convention states’ courts that public policy refers to fundamental notions of justice and fairness. Nevertheless, the primary judge saw the words of the IAA as requiring this conclusion. He saw the place of any offence to those fundamental notions as within the operation of the discretion to set aside or enforce: J[29]-[33].

(d)          The asserted breach of the rules of natural justice must be of a sufficiently serious character to offend fundamental notions of fairness and justice before the relevant discretion under either Art 34 or Art 36 would be exercised: J[50].

(e)          The review by the Court did not involve examining the case afresh and revisiting in full all questions before the arbitrator. Rather, the extent of the enquiry depended on the circumstances in question. In the undertaking of the review, the primary judge chose to conduct a close examination of the facts, and expressed some concern that he may have undertaken too deep and detailed an enquiry: J[58]-[61].

(f)          The primary judge rejected the submission of Castel that s 19(b) (and thus s 8(7A)(b)) was confined to a breach of the rules in connection with the (actual) making of the award, in contra-distinction to the reasons: J[63].

  1. Subject to the reasons that follow, we generally agree with his Honour’s conclusions, but we would not express the matter as the primary judge did in relation to [13(c)] and [13(d)] above.  In particular, care needs to be taken in referring to so-called minor or unimportant breaches of the rules of natural justice.  (See also Emerald Grain Australia Pty Ltd v Agrocorp International Pte Ltd[2014] FCA 414 (Pagone J).)

The dealing with the substantive applications by the primary judge

  1. It is convenient to outline the approach of the arbitrators through a discussion of how the primary judge dealt with the award.  Reference will continue to be made to the primary judge’s reasons in the manner above; reasons of the arbitrators will be prefaced by “A”, eg “A[1]”.
  2. The primary judge first described the arbitration.  Relevant to his review and to the argument of the appeal were the following considerations.
  3. Both sides were represented at all times by competent and experienced solicitors, junior counsel and senior counsel.  During the ten-day hearing, full cross-examination of witnesses, including expert witnesses, took place.
  4. There was no complaint before the primary judge about the arbitrators’ conclusion that the sales of all OEM products from 1 January 2004 to 31 December 2008 were made in breach of the relevant agreement and that Castel was entitled to damages.  The complaints related to the factual findings central to the assessment of Castel’s loss and therefore the damages to which it was entitled.
  5. There was no complaint before the primary judge about the arbitrators’ general approach to the assessment of Castel’s loss: (a) the volume of lost sales of TCL-branded products by Castel had TCL not breached the agreement by selling OEM products in Australia; multiplied by (b) the prices at which those additional sales would have been made; less (c) any additional costs that would have been associated with the higher volume of sales.  The complaints concerned the calculation of the first of those elements: TCL’s lost sales.
  6. In support of the claim of lost sales, Castel called three witnesses:

(a)       an expert, Mr Peter Acton (a financial and management consultant);

(b)       its managing director, Mr Michael Kwong; and

(c)       its Queensland manager, Mr Trevor Francis.

  1. TCL called three witnesses relevant to the issue of lost sales:

(a)       an expert economist, Mr Phillip Williams;

(b)       its General Manager, Overseas Business Division, Mr Shi Weiyi; and

(c)       its Sales Director, Mr Frank Wang.

  1. Important to the question of lost sales was the assessment of the extent to which OEM products were competitive with, or substitutable for, TCL-branded products.  Mr Williams, who was not directly familiar with the business of selling air conditioners or with the business of TCL and Castel, gave evidence about this question of substitutability, and horizontal and vertical differentiation of products: J[77].
  2. Mr Acton claimed no expertise in substitutability.  Relying upon what was said by Messrs Kwong and Francis, he concluded that every OEM product sold represented a loss of a sale to TCL: a 100% substitution ratio.  The arbitrators, having reviewed his evidence, placed no weight upon it as expert evidence, but considered that it remained of some assistance as to framework and methodology.
  3. It was uncontentious that the relevant market for air conditioners was at 5 levels, the TCL-branded and OEM products occupying space at the bottom of the market.  A central part of the controversy was how close to the bottom were the two classes of product and how close were they to each other, and thus how closely mutually substitutable they were.
  4. Mr Williams, who was cross-examined at length, accepted that there was little data to quantify the degree of substitutability, but expressed the view that the two types of products were unlikely to be competing with each other.  This view was based significantly on an assumption that TCL-branded products were in level 4 and OEM products in level 5, and, importantly, the assumed behaviour of a rational profit-making enterprise in the position of TCL not to position lower profit versions of product (OEM) to be close substitutes for higher profit versions of product (TCL-branded).  He saw after-sales service of level 4 Castel TCL-branded products (no after-sales service being offered by TCL or Castel for OEM products) as important for the differentiation between the products.
  5. Against this, the arbitrators (at A[196]-[198], recited by the primary judge at J[88]) referred to the evidence of Messrs Kwong and Francis of their inspection of OEM products, their often exact equivalence, examples of actual loss of business accounts, and advertising to the effect that OEM products were manufactured by TCL.
  6. The arbitrators addressed substitutability and product differentiation at A[205]-[214] (relevantly set out by the primary judge at J[89]).  It is to be recalled that while Mr Williams was a well-qualified, indeed eminent, market economist, one of the arbitrators was a former President of the Competition Tribunal.
  7. At A[206], the arbitrators referred to Castel’s claim and Mr Francis’ evidence.  At A[208], the arbitrators referred to TCL’s key evidence.  At A[209], the arbitrators referred to evidence of Professor Williams on this evidence.  At A[210]-[211], the arbitrators referred to further evidence of Professor Williams on substitutability and differentiation.  The arbitrators then made the following findings on this evidence at A[212]-[214]:

212      Having considered all of the evidence the Tribunal does not propose, and nor was it invited, to consider model by model whether there was direct substitutability between TCL-branded products and OEM products. It accepts the evidence of Mr Francis as to his observations and the perceptions of customers as conveyed to him. It accepts that for sections of Castel’s actual and potential customer base the OEM products were regarded as just as good and led those customers to choose the OEM products instead of the TCL-branded products.

213      At the lower end of the market where the TCL brand and the OEM brands were competing it appears that functionality rather than form was the important issue. The TCL-branded products and the OEM branded products served in the similar part of the market and offered the same types of units.

214      The Tribunal cannot find as a fact that every OEM unit sold was directly substitutable for a designated TCL-branded unit. However for the purposes of estimating the loss of sales to Castel brought about by the presence of TCL OEM products we proceed on the basis that the OEM products were sufficiently similar to be a direct competitor of, and replacement for, a line of TCL-branded products, at least insofar as they were perceived in that way by the customer base. It is important to note that Castel did not sell directly to end-users but rather to retailers who bought in bulk and who were well informed about the market and about the available brands.

  1. The arbitrators then turned to Mr Williams’ expressed view that sales of OEM products were drawn equally from sales of all other level 4 and 5 products, using the relevant market share of each: see J[90]-[91]. The arbitrators then analysed the basis for Mr Williams’ view that Castel could have expected to pick up a maximum of 7.4% of the OEM sales as extra sales of TCL-branded products: see J[92]-[99].
  2. The complaints of TCL focus upon the method and findings of the arbitrators in coming to the view that Castel’s lost sales were not 7.4% of the OEM sales, but 22.5%.

The “no evidence rule”

  1. At J[104]-[109], the primary judge set out the so-called “no evidence rule” as a part of the rules of natural justice by reference to R v Deputy Industrial Injuries Commissioner, Ex parte Moore [1965] 1 QB 456 (“Moore”) at 487-488 (where Diplock LJ expressed the rules of natural justice as encompassing first the bias rule; secondly, that the decision must be based on evidence; and thirdly, that the contentions should be fairly listened to; the question of “evidence” being expressed by his Lordship as the requirement, not for the application of the rules of evidence, but for “material which tends logically to show the existence or non-existence” of relevant facts); Mahon v Air New Zealand [1984] AC 808 at 820-821 (where Lord Diplock, writing for the Judicial Committee, applied Moore and restated the principle therefrom); Downer-Hill Joint Venture v Government of Fiji [2005] 1 NZLR 554 at 570 [83] (where Wild and Durie JJ, sitting in the High Court, applied Mahonin the context of natural justice in the part of the New Zealand legislation equivalent to ss 19(b) and 8(7A)(b) of the IAA); Collins v Minister for Immigration and Ethnic Affairs (1981) 58 FLR 407 at 411 (where Fox, Deane and Morling JJ were dealing with whether there was an error of law for the purposes of the Administrative Appeals Tribunal Act 1975 (Cth), s 44); Telstra Corporation Ltd v Australian Competition and Consumer Commission [2009] FCA 757; 179 FCR 437 at 503-504 [339] (where Lindgren J was dealing with whether there was an error of law for the purposes of the common law and the Administrative Decisions (Judicial Review) Act 1977 (Cth), s 5(1)(f)); and Haider v JP Morgan Holdings Australia Ltd [2007] NSWCA 158 at [33] (where Basten JA was dealing with a question of law as the basis for a review of a decision under workers compensation legislation).
  2. We will say something about this categorisation in due course.  It is sufficient to note at this point that Castel did not argue, either before the primary judge or on appeal, that if the arbitrators found relevant facts without the support of probative material, that was not, nor could have been, a breach of the rules of natural justice.

The application of the principle to the three impugned findings

The 14% Starting Point Finding

  1. At J[110]-[124], the primary judge considered the attack on the arbitrators’ use of 14% as a starting point for their assessment of Castel’s lost sales.  Having rejected Mr Acton’s 100% figure, they commenced with an analysis of Mr Williams’ 7.4%.
  2. The crucial paragraphs in the award concerning the finding of 22.5% (the 14% Starting Point Finding and the Uplift Finding) were A[231]-[237]. The reasoning of the arbitrators for the 14% Starting Point Finding was contained at A[231]-[234], as follows:

231      What the evidence does establish is that there would have been some lost sales and brand damage from OEM sales through competing retailers, but that while some factors would suggest a significant loss of sales, others would indicate only a minimal effect.

232      Factors which would suggest a minimal effect are:

(a)          the TCL brand and the OEM brands were sold in different retailers and in different stores;

(b)          if a competing store to one selling TCL products had not sold OEM products it would have stocked TCL products;

(c)          TCL was not such an established brand at this lower level of the market that it was at all likely that another retailer would have stocked the TCL brand had it not an OEM brand available;

(d)          there was no real brand loyalty to TCL at the end-user level, and accordingly a potential TCL customer in a retail outlet was likely to have bought a non-TCL brand if it was available in one retailer and not have instead sought out the TCL brand stocked by TCL’s retailers; and;

(e)          there was a high degree of substitutability between the TCL brand and OEM brands on one hand and competing non-TCL and OEM brands on the other, meaning that those who were potential TCL-branded products buyers had a wide selection of Level 4 and Level 5 models to choose from.

233      As against those facts, there is some evidence which would suggest the impact, though not approaching the 1:1 approach of Mr Acton, was much higher than the 7.4% approach of Mr Williams:

(a)          Castel sold not directly to end users but to retailers, and accordingly it is the impact of OEM products on retailers rather than the impact on those retailers’ customers which must be considered.

(b)          Mr Francis gave evidence of a number of occasions on which he was told by former Castel customers that they would be purchasing OEM products which were TCL made, rather than TCL-branded products or that they were observing their own customers making the switch. The Tribunal accepts this evidence to the extent that some purchasers of TCL-manufactured OEM products were making those purchases because they were TCL made, so that in their absence a higher percentage of buyers might have bought the TCL-branded products.

(c)          Mr Francis also gave evidence, which we accept, of anger from some Castel customers that they were being under cut by other sellers who had TCL-manufactured OEM units for sale at lower prices than the TCL-branded goods, and that Castel had lost some sales where it could not meet the lower prices.

(d)          Mr Kwong gave evidence that Castel’s dealership network was being directly targeted by those for whom TCL had manufactured OEM products, such that the impact of TCL-manufactured OEMs fell disproportionately on Castel and its TCL-branded products.

234      None of those factors are sufficiently reflected in Mr William’s evidence, which was that in the absence of the TCL OEM products Castel could have expected to gain 7.4% of the market share which those TCL OEM products had. He gave this as his best estimate on the basis that those who did not buy a TCL OEM would have bought another brand from Level 4 or level 5. In cross examination he agreed that if TCL manufactured OEM products were only competing with level 5 brands then Castel’s share would be doubled to around 14%. Mr Kwong’s evidence was that the TCL brand was at the bottom of the Level 4 market and that the TCL-made OEM products were in Level 5. We consider the 14% a better starting point for those reasons.

  1. The primary judge (at J[113]) said it was clear that TCL could not establish a no evidence ground on this body of evidence.  The primary judge then (at J[114]-[123]) dealt with TCL’s arguments as to the asserted misunderstanding of Mr Williams’ evidence, the asserted incorrect interpretation of facts and wrong reasoning, and the incorrect reliance on Mr Francis’ evidence.

The Uplift Finding

  1. The reasoning of the arbitrators for the Uplift Finding is to be found in A[235]-[237], as follows:

235      The Tribunal also notes that:

(a)       Mr Williams made his assessment on the basis that all other manufacturers in the relevant level would share equally in the redistributed share of the TCL OEM products. He agreed this might not be how things worked. We have noted and accepted the evidence of Mr Francis that at least in some instances large purchasers of TCL branded products decided to switch to what they knew to be a TCL-made OEM product. It is appropriate to allow an increase on Mr Williams’s calculations on the basis that the presence in the market of OEM products that were known to be TCL-made had a disproportionate effect on Castel as against sellers of other brands.

(b)       Mr Williams based his calculations on data which represented just over 50% of the air conditioner market and which for the most part did not refer to TCL as a brand by name. He made assumptions that TCL is contained in the “Tradebrands” category but could not get an assurance of that from GfK. This affects the reliability of his calculations.

(c)       Mr Williams also assumed that the 50% sample in the GfK data is representative of the overall sample as he had no means to do otherwise.

(d)       Mr Williams agreed the GfK data was inconsistent with other evidence like the BIS Shrapnel report which would have suggested different rankings for air conditioners than those contained in the GfK data.

(e)       The GfK data on which Mr Williams relied was for major retailers only and for that reason may fail to include some OEM brands which were sold through smaller channels.

(f)       Mr Williams agreed that there could be additional TCL OEMs which he had not extracted from the Tradebrands category and which were not being redistributed on his formula.

236      All of these points affect the accuracy of the material on which Williams relied and therefore the reliability of his conclusions. Each of them warrants, in the Tribunal’s view, an uplift from the figure of 14% that he agreed was the base level if OEM products were largely competing with Level 5 products.

237      On the entirety of the evidence, including the finding that the matter of no competing OEM sales was seen by Castel at of such commercial importance in its GDA and the Variation Agreement with TCL as to mandate a no-competition without consent clause, the Tribunal concludes that the least proportion of the sales assessed to be lost by Castel attributable to the OEM sales made in to the Australian marketplace is 22.5% of total TCL OEM sales.

  1. At J[127]-[132], the primary judge examined the evidence of Mr Williams and at J[129] expressed the view that the deficiencies in the information available to Mr Williams compromised the validity of his opinion in a number of respects, set out at J[129(a)-(d)].  The primary judge then (at J[130]) analysed why it was reasonable for the arbitrators to uplift the starting point, before identifying (at J[131]) further evidence of Mr Kwong and Mr Francis which supported the uplift.  The primary judge was, by that process of examining the evidence, satisfied that there was rationally probative evidence supporting the Uplift Finding.

The Lost Sales Finding

  1. The conclusion of the arbitrators as to the Lost Sales Finding is in A[237], set out above.
  2. At J[134]-[156], the primary judge dealt with this overall assessment by the arbitrators.  Critical to the argument of TCL, which was rejected by the primary judge, was the proposition that assessment of loss necessarily required expert evidence and that with the rejection of Mr Acton’s evidence, only Mr Williams’ evidence remained and the arbitrators were not at liberty to substitute their own assessment of Castel’s lost sales.  This was rejected by the primary judge who found that in circumstances where it was common ground before the arbitrators that the calculation of Castel’s lost sales was not capable of precise calculation, and where it was clear that some damage had been suffered, the approach of the arbitrators to make a best estimate in a practical way, having regard to all the evidence (A[229]), was correct and supported by authority, referring to Biggin & Co Ltd v Permanite Ltd [1951] 1 KB 422 at 438 (Devlin J); Callaghan v Williams C Lynch Pty Ltd [1962] NSWR 871 at 877 (Full Court: Evatt CJ, Herron and Sugerman JJ); Enzed Holdings Ltd v Wynthea Pty Ltd (1984) 57 ALR 167 at 183 (Sheppard, Morling and Wilcox JJ); JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237 at 241-246 (Brooking J); and noting Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275 at 319 (Pincus J); Atkinson v Hastings Deering (Queensland) Pty Ltd (1985) 71 ALR 93 at 103-104 (Pincus J); and Ted Brown Quarries Pty Ltd v General Quarries (Gilston) Pty Ltd (1977) 16 ALR 23 at 37 (Gibbs J) and 38 (Aickin J), but cf 26 (Barwick CJ).
  3. At J[144]-[150], informed by the authorities to which he had referred, especially the decision of Brooking J in JLW (Vic), the primary judge examined the award and the evidence to conclude that the arbitrators had not engaged in speculation or guesswork.
  4. At J[151]-[156], the primary judge rejected the legal contention that the arbitrators, having rejected Mr Acton’s evidence, were bound to apply Mr Williams’ evidence, referring to various cases, including Thurston v Todd (1966) 84 WN (Pt 1) (NSW) 231 at 246, and Ramsay v Watson [1961] HCA 65; 108 CLR 642 at 645.

The hearing rule

  1. At J[157]-[168], the primary judge made reference to a number of cases in identifying the hearing rule, in particular in the context of arbitral hearings: Mobil Oil Australia Pty Ltd v Federal Commissioner of Taxation [1963] HCA 41; 113 CLR 475 at 503; Kioa v West[1985] HCA 81; 159 CLR 550 at 584; Fox v PG Wellfair Ltd [1981] 2 Lloyd’s Rep 514 at 521-522; Interbulk Ltd v Aiden Shipping Co Ltd (The Vimeira) [1984] 2 Lloyd’s Rep 66 at 74-75; Mahon v Air New Zealand [1984] AC at 821; F Hoffman-La Roche & Co AG v Secretary of State for Trade and Industry [1975] AC 295 at 369; Trustees of Rotoaira Forest Trust v Attorney-General [1999] 2 NZLR 452 at 461-463; Methanex Motunui Ltd v Spellman [2004] 1 NZLR 95 at 136; and Starkey v State of South Australia [2011] SASC 34 at [74]-[75].
  2. Applying these authorities, the primary judge said at J[169] that:

TCL must establish that in the particular circumstances of this arbitration a reasonable litigant in its shoes would not have foreseen the possibility of reasoning of the type that led to the 14% Starting Point Finding, the Uplift Finding and the Lost Sales Finding or a corollary of it, and that it therefore lost the opportunity to present evidence and argument in anticipation of it.

  1. At J[170]-[176], the primary judge reviewed the conduct of the arbitration and concluded that the type of reasoning in the three findings was part of the debate at the arbitration.

Enforcement of the award

  1. In the light of these conclusions the primary judge was prepared to enforce the award, rejecting various subsidiary arguments of TCL.

The Notices of Appeal

  1. There are three notices of appeal.  Appeal VID 1042 of 2012 concerned the costs judgment delivered on 19 November 2012.  The grounds of appeal assumed the success of appeal VID 1043 of 2012, being the appeal from the dismissal of the application to set aside the award.  Appeal VID 1044 of 2012 substantially concerned the attack on the Court’s jurisdiction that was the subject of the High Court challenge and was not pressed.
  2. The appeal was therefore in substance concerned with the assessment of the grounds of appeal in VID 1043 of 2012, which are discussed below.

Grounds of legal principle and approach

  1. The first ground of appeal challenged the primary judge’s conclusion that the word “may” in Arts 34 and 36 gave the Court a discretion to set aside or not enforce the award if the award is found to be in conflict with, or contrary to, the public policy of Australia.  This ground was not pressed in the light of the recent decision of the Singapore Court of Appeal in L W Infrastructure Pte Ltd v Lim Chin San Contractors Pte Ltd [2013] 1 SLR 125. It was submitted, however, that the discretion should have been exercised by his Honour to set aside and refuse enforcement of the award.
  2. Ground 2 challenged the finding referred to at [13(d)] above that the Model Law required a demonstrated offence to fundamental notions of fairness and justice before the relevant discretion in Art 34 or Art 36 could be exercised.
  3. Ground 3 challenged the primary judge’s reference to the need to balance the efficacy of enforcing international arbitral awards and the public policy of Australia, and stated that the primary judge should have held that any breach of the rules of natural justice as understood in Australian domestic law required the setting aside or refusal of enforcement of an award.
  4. Ground 8 was similar to ground 3.  It challenged the primary judge’s reliance upon the importance of uniformity of decisions with those of other jurisdictions in dealing with public policy, in circumstances where the legislature had delineated (and constrained) the concept of public policy by reference to the rules of natural justice in Australia.

Grounds concerning the application of the rules of natural justice to the facts here

  1. Grounds 4 to 7 took up five pages of the notice of appeal.  In effect, these paragraphs were a comprehensive re-agitation of the arguments made before the primary judge as to the inadequacies of the factual findings of the arbitrators.  Grounds 4, 5 and 6 concerned the asserted lack of evidence for the three critical findings:  the 14% Starting Point Finding, the Uplift Finding and the Lost Sales Finding, respectively.  Ground 7 dealt with the hearing rule ground, that, in the light of Mr Acton’s conceded lack of expertise, it could not reasonably be anticipated that the arbitrators would make findings as to loss other than ones based on, or in accordance with, Mr Williams’ evidence.
  2. All of grounds 4 to 7 were without merit. They involved the dressing up of complaints about the factual findings into a claim concerning asserted procedural unfairness. The primary judge (as he himself recognised) went more deeply into the facts than was necessary for the proper and efficient resolution of the matter. That is not said by way of criticism of the primary judge, who undertook a careful, and correct, analysis of the facts. Rather, it is said to make clear that nothing in the IAA is likely to permit a party to an arbitration award to spend three days before a judge arguing about the factual findings made by experienced arbitrators after a ten-day hearing, when the substance of the complaint is the evidential foundation for, and reasoning process towards, facts as found.

The proper approach to ss 8(7A) and 19 in relation to natural justice and public policy

  1. It is convenient to state our conclusions immediately in order that the following discussion of the statutory and jurisprudential background be given some greater focus.  If the rules of natural justice encompass requirements such as the requirement of probative evidence for the finding of facts or the need for logical reasoning to factual conclusions, there is a grave danger that the international commercial arbitral system will be undermined by judicial review in which the factual findings of a tribunal are re-agitated and gone over in the name of natural justice, in circumstances where the hearing or reference has been conducted regularly and fairly.  That danger is acute if natural justice is reduced in its application to black-letter rules, if a mindset appears that these rules can be “broken” in a minor and technical way and if the distinction between factual evaluation of available evidence and a complete absence of supporting material is blurred.  All these things occurred in the argument in this case.  Their presence persuaded or required the judge to spend three days reviewing the award that was the product of a ten-day reference.  That should not be how such a review takes place.  We are not being critical of the primary judge.  His reasons are careful, thorough and substantially correct.  The application was a disguised attack on the factual findings of the arbitrators dressed up as a complaint about natural justice.
  2. An international commercial arbitration award will not be set aside or denied recognition or enforcement under Arts 34 and 36 of the Model Law (or under Art V of the New York Convention) unless there is demonstrated real unfairness or real practical injustice in how the international litigation or dispute resolution was conducted or resolved, by reference to established principles of natural justice or procedural fairness.  The demonstration of real unfairness or real practical injustice will generally be able to be expressed, and demonstrated, with tolerable clarity and expedition.  It does not involve the contested evaluation of a fact finding process or “fact interpretation process” or the factual analysis of asserted “reasoning failure”, as was argued here.
  3. The illumination and explanation of this approach requires something to be said about the statutory framework, the history of the relevant international instruments, the key notion of “public policy”, the essential characterisation of natural justice, and the legal regimes and jurisprudence in other countries, particularly those in this region.

The IAA and public policy

  1. The IAA gives effect to Australia’s international obligations as a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted in 1958 by the United Nations Conference on International Commercial Arbitration (“the New York Convention”) and also adopts as Australian law the Model Law.   The IAA also reflects Australia’s acceptance of the United Nations General Assembly’s recommendation to give “due consideration” to the Model Law in the interests of international uniformity.  Though the Model Law is not a treaty, it was the product of detailed international discussion born of a recognition of the lack of harmony and of consistent modern form of national laws on arbitration: see generally the explanatory note by the UNCITRAL secretariat on the 1985 Model Law at 24-25.
  2. The Model Law dealt with many aspects of arbitration and arbitral procedure not touched upon by the New York Convention, which was broadly limited to protecting, recognising and enforcing awards in the field of international commercial arbitration.  Thus, the Model Law deals with such topics as the composition of the arbitral tribunal, the jurisdiction of the arbitral tribunal and its competence, interim measures and preliminary orders, the conduct of arbitral proceedings, the making of the award, the termination of proceedings, and, most importantly for present purposes, the grounds for setting aside the award.  The Model Law also deals with subjects covered by the New York Convention: the arbitration agreement, and the recognition and enforcement of awards.
  3. It is important to recognise that, while the New York Convention dealt with the subject of recognition and enforcement of the foreign award utilising the limited grounds in Art V for refusal of such, it did not purport to regulate the grounds on which an award could be set aside, though the possibility of such an action was recognised by Art V(1)(e).  Article V is in the following terms:

ARTICLE V

  1. Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:

(a)       The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or

(b)       The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or

(c)       The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced; or

(d)       The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or

(e)       The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.

  1. Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that:

(a)       The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or

(b)       The recognition or enforcement of the award would be contrary to the public policy of that country.

  1. The Model Law was designed and drafted to be available to be taken up as a form of national law (as has been done in Australia) to govern international commercial arbitration carried on in the country in question, and in other countries.
  2. As appears from the travaux préparatoires to the Model Law discussed in H M Holtzmann and J E Neuhaus, A Guide to the UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary (Kluwer Law and Taxation Publishers) at p 911ff, the difficult problem of agreeing upon the grounds to set aside an award took up considerable discussion.  The debates were substantially concerned with how far the grounds in Art V of the New York Convention (for recognition and enforcement) should be departed from.
  3. It is appropriate to say something of the notion of “public policy” as it came to be used in Arts 34 and 36 as finally agreed upon.  Those articles are in the following terms:

Article 34.     Application for setting aside as exclusive recourse against arbitral award

(1)          Recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with paragraphs (2) and (3) of this article.

(2)       An arbitral award may be set aside by the court specified in article 6 only if:

(a)       the party making the application furnishes proof that:

(i)          a party to the arbitration agreement referred to in article 7 was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of this State; or

(ii)         the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iii)        the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside; or

(iv)         the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law; or

(b)       the court finds that:

(i)          the subject matter of the dispute is not capable of settlement by arbitration under the law of this State; or

(ii)         the award is in conflict with the public policy of this State.

(3)          An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the award or, if a request had been made under article 33, from the date on which that request had been disposed of by the arbitral tribunal.

(4)          The court, when asked to set aside an award, may, where appropriate and so requested by a party, suspend the setting aside proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the arbitral tribunal’s opinion will eliminate the grounds for setting aside.

Article 36.       Grounds for refusing recognition or enforcement

(1)          Recognition or enforcement of an arbitral award, irrespective of the country in which it was made, may be refused only:

(a)       at the request of the party against whom it is invoked, if that party furnishes to the competent court where recognition or enforcement is sought proof that:

(i)          a party to the arbitration agreement referred to in article 7 was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or

(ii)         the party against whom the award is invoked was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iii)        the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced; or

(iv)         the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or

(v)          the award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which, or under the law of which, that award was made; or

(b)       if the court finds that:

(i)          the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State; or

(ii)         the recognition or enforcement of the award would be contrary to the public policy of this State.

(2)          If an application for setting aside or suspension of an award has been made to a court referred to in paragraph (1)(a)(v) of this article, the court where recognition or enforcement is sought may, if it considers it proper, adjourn its decision and may also, on the application of the party claiming recognition or enforcement of the award, order the other party to provide appropriate security.

Segment #3

Segment #4

  1. In Ferguson v Cole [2002] FCA 1411; 121 FCR 402 at 416 [38], Branson J, after referring to BondMahonand Rajamanikkam considered that it may be that in 2002 the law of Australia was reflected in Mahon, though it was unnecessary to decide the question.
  2. In Re Minister for Immigration and Multicultural Affairs; Ex parte Applicant S20/2002 [2003] HCA 30; 198 ALR 59, Gleeson CJ at 62 [9] again endorsed the views of Deane J in Bondconcerning the content of the duty to act judicially.
  3. In Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations [2011] FCAFC 88; 195 FCR 318 the Full Court (Keane CJ, Lander and Foster JJ) cited Mahonat 820-821. This, however, was in the specific context of the requirement that persons at risk of adverse findings be given an opportunity to be heard on the finding – an aspect of the hearing rule. The Full Court said at 365 [78]:

… the appellant’s entitlement to procedural fairness is measured by the need to ensure that it has an opportunity to place such material before the second respondent as might deter him from making a decision to place the appellant under special administration. [The Court then, in this regard, referred to Mahon.]

  1. A number of matters can be said arising out of the above cases and discussion.  First, the above cases deal with the exercise of public or state power.  The context of international commercial arbitration is the exercise of private power through an arrangement and a tribunal to which the parties have consented under a regime wherein errors of fact or law are not legitimate bases for curial intervention: TCL [2013] HCA 5; 295 ALR 596 at 617 [81].
  2. Secondly, until the High Court decides otherwise, this Court should respect the binding character of what was said by Mason CJ in Bond.  To the extent that cases such as Minister for Immigration and Citizenship v Li[2013] HCA 18; 249 CLR 332 may be seen to encompass in the conception of legal unreasonableness notions referred to by Deane J in Bond, that does not require the conclusion that the characterisation of Diplock LJ in Moore or Deane J in Pochi be adopted.  As Gageler J said in Li at 371 [92], procedural fairness is closely linked with reasonableness.
  3. Thirdly, Deane J in Pochisaw what Diplock LJ said in Moore as necessary to avoid the procedural aspects of natural justice being reduced to a charade.  There was, in everything Deane J said, the necessary presence of unfairness in the impugned decision.
  4. Fourthly, the essence of natural justice is fairness – it is its root as a legal conception and it lies at the heart of its operation.  Unless there is unfairness, true practical injustice, there can be no breach of any rule of natural justice.  That recognition is vital in the distinction made by Gleeson CJ in Rajamanikkam210 CLR at 232-233 [26] between a conclusion that a decision was not made on evidence and a contest about the proper view of the evidence and the facts; and in the distinction made by Bray CJ in Glenelg at 260. That recognition is also central to an appreciation of what Deane J said in Pochi and Bond, and indeed what Bray CJ said in Glenelg:  that in some circumstances the absence of any evidential or material foundation for a decision will betray a decision that had a “futile illusion of fairness” (Deane J in Pochi at 689) or a decision come to without bona fides or with bias or by reference to a test foreign to that proscribed by law (Bray CJ in Glenelg at 260).
  5. Fifthly, the relevant context of the placement of the rules of natural justice is international commercial arbitration. The Model Law and the IAA embody a framework of law for the regulation of arbitration. The avowed intent of both is to facilitate the use and efficacy of international commercial arbitration: see Resolution 40/72 of the United Nations General Assembly (11 December 1985), Art 5 of the Model Law and s 2D of the IAA. Basal to the working of the New York Convention, Art V and the Model Law, Arts 34 and 36 was the absence of any ground for the review or setting aside or denial of recognition or enforcement of awards because of errors by the arbitrator in factual findings or in the application of legal principle (as viewed by national courts). The system enshrined in the Model Law was designed to place independence, autonomy and authority into the hands of arbitrators, through a recognition of the autonomy, independence and free will of the contracting parties. The a-national independence of the international arbitral legal order thus created required at least two things from national court systems for its efficacy: first, a recognition that interference by national courts, beyond the matters identified in the Model Law as grounds for setting aside or non-enforcement would undermine the system; and secondly, the swift and efficient judicial enforcement and recognition of contracts and awards. The appropriate balance between swift enforcement and legitimate testing of grounds under Arts 34 and 36 is critical to maintain; essential to it is courts acting prudently, sparingly and responsibly, but decisively when grounds under Arts 34 and 36 are revealed. An important part of that balance is the protection by the courts of the fundamental norms of fairness and equality embodied in the rules of natural justice within the concept of public policy.
  6. This balance reflected in international and Australian policy does not carry with it any necessary implied criticism of national courts.  Parties in international commerce may choose arbitral dispute resolution for many reasons: Comandate Marine Corp v Pan Australia Shipping Pty Ltd [2006] FCAFC 192: 157 FCR 45 at 95-96 [192]-[193]; that chosen international legal order depends crucially upon reliable curial enforcement and a respect by the courts for the choice and autonomy of the parties and for the delicate balance of the system. A demand for fairness and equality is at the heart of the supervisory balance, as is a recognition that this is not reflected in mechanical technical local rules. The real question is whether an international commercial party has been treated unfairly or has suffered real practical injustice in the dispute and litigation context in which it finds itself. Formalism in the application of the so-called rules is not the essence of the matter: fairness and equality are. How unfairness is revealed or demonstrated in any particular case will depend on the circumstances. The requirement of a fair hearing in an international commercial arbitration has been discussed in many cases. Reference need only be made to the cases cited by the primary judge and referred to at [42] above. As Goff LJ said in The Vimeira [1984] 2 Lloyd’s Rep at 74-75, the question is whether the hearing was fair. For a recent example of the relationship between fairness and expedition, see Gujarat NRE Coke Ltd v Coeclerici Asia (Pte) Ltd [2013] FCAFC 109; 304 ALR 468.
  7. The above leads one to the conclusion that Arts 34 and 36 should be seen as requiring the demonstration of real practical injustice or real unfairness in the conduct of the reference or in the making of the award.  The rules of natural justice are part of Australian public policy.  The assessment as to whether those rules have been breached by reference to established principle is not a matter of formal application of rules disembodied from context, or taken from another statutory or human context.  The relevant context is international commercial arbitration.  No international arbitration award should be set aside for being contrary to Australian public policy unless fundamental norms of justice and fairness are breached.  Each of Art 34 and 36 contains a form of discretion or evaluative decision: “may be set aside” (Art 34), “may be refused only” (Art 36).  It is not profitable to seek to differentiate between the engagement of public policy under the Articles and a supposedly separate and a later question whether to exercise the discretion; nor is it profitable, but only likely productive of difficulty or error, to read into Arts 34 and 36 any precise notions of required prejudice or other preconditions to the exercise of any discretion.  The provisions (ss 8(7A), 19 and Arts 34 and 36) deal with fundamental conceptions of fairness and justice.  It suffices to say that no international award should be set aside unless, by reference to accepted principles of natural justice, real unfairness and real practical injustice has been shown to have been suffered by an international commercial party in the conduct and disposition of a dispute in an award.  It is likely that real prejudice, actual or potential, would be a consideration in the evaluation of any unfairness or practical injustice.
  8. It is unnecessary for present purposes to answer the question whether making a finding of fact without probative evidence should ever be characterised as a breach of the rules of natural justice.  It is sufficient to accept without the benefit of argument that it may be; but in this statutory context, such will form the basis of effective review or non-recognition or non-enforcement for breach of the rules of natural justice only if real unfairness or real practical injustice is suffered thereby.  Were such question to be addressed, regard would need to be had to the history of the development of natural justice or procedural fairness; to the question whether it is a safeguard of fairness in process or something more directed to fairness of the outcome; to the question whether natural justice is a defining or informing basis for legal unreasonableness; to the works and approaches of scholars and law reformers such as HWR Wade, Administrative Law (2nded at pp 194-195, 3rd ed at p 213, 5th ed at p 485, 10th ed at p 435); the Kerr Committee Report in 1973 (Prerogative Writ Procedures: Report of Committee of Review (Cth Parliament 1973)) at [43] where the “no evidence ground” was identified as separate from natural justice, as is now reflected in the Administrative Decisions (Judicial Review) Act 1977 (Cth), ss 5(1)(a),(h) and 5(3); and M Aronson and M Groves, Judicial Review of Administrative Action (5th ed) at pp 398-405 [7.20]-[7.30]; and, critically, to the influence of context (here, international commercial arbitration) on the fashioning of the proper content and reach of generally expressed rules designed to secure fairness.  In this context, it can be readily accepted that, under various legal regimes, courts have been concerned with reviewing arbitral awards made in the absence of probative evidence, especially by reference to the distinction between a trade arbitration before a commercial person chosen for his or her factual experience and an arbitration conducted by someone not chosen with that experience: Wright v Howson (1888) 4 TLR 386 at 387; Mediterranean & Eastern Export Co Ltd v Fortress Fabrics (Manchester) Ltd [1948] 2 All ER 186 at 187-188; Fox v PG Wellfair Ltd [1981] 2 Lloyds Rep 514 at 521-522; Motrix Supplies Pty Ltd v Bonds and Kirby (Victoria Avenue) Pty Ltd (Sup Ct of NSW Commercial Division, 12 September 1990, Giles J, BC9002025) at 21.
  9. In most, if not all, cases a party who says that it has suffered such unfairness or practical injustice should be able to demonstrate that without the kind of detailed re-examination of the facts that occurred in this case.  Applications involving review, enforcement and recognition under Arts 34, 35 and Art 36 (or Art V of the New York Convention) should not be permitted to be used (or hijacked) to undertake, in substance, a rehearing of factual or legal reasoning under the guise of a complaint about a breach of the rules of natural justice based on the “no evidence rule”.  Unfairness or practical injustice in the conduct of international commercial arbitration should, if it exists, be able to be expressed shortly and, likewise, demonstrated tolerably shortly.  It will not be demonstrated as a result of a detailed factual analysis of evidence regularly and fairly brought forward involving asserted conclusions of facts different to those reached by the arbitrator.  If a party can demonstrate that it has been, in essence, denied the opportunity to be heard on an important and material issue as revealed by such a finding made without material, real unfairness or real practical injustice may be shown.  That was not the case here.

The law in the region

  1. Before turning to the immediate reasons for the dismissal of the appeals here, it is appropriate to say something of the learned and helpful decisions of courts in the region to assist in the recognition of the relevant principle.
  2. Before dealing with cases in New Zealand and Singapore, it is necessary to say something of the relevant legislation in the region, and its development.  New Zealand, Singapore and Hong Kong have based their legislation on the Model Law.

New Zealand legislation

  1. In New Zealand, the Model Law was modified and made the law of New Zealand as a Schedule to the Arbitration Act 1996 (NZ).  Article 34 was amended by adding paras (5) and (6).  Paragraph (5) is presently irrelevant; para (6) is in the following terms:

(6)       For the avoidance of doubt, and without limiting the generality of paragraph (2)(b)(ii), it is hereby declared that an award is in conflict with the public policy of New Zealand if –

(a)       the making of the award was induced or affected by fraud or corruption; or

(b)       a breach of the rules of natural justice occurred –

(i)        during the arbitral proceedings; or

(ii)       in connection with the making of the award.

  1. The only relevant difference between Art 34(6) in the New Zealand Act and s 8(7A) or s 19 is the clarification contained in paras (6)(b)(i) and (ii), which calls to mind the argument of Castel below, rejected by the primary judge, and (perfectly correctly) not agitated on appeal (see [13(f)] above).
  2. The origin of the New Zealand legislation was a report of that country’s Law Commission, which in October 1991 recommended a new legislative framework for both domestic and international arbitration in New Zealand (Law Commission (NZ), Arbitration (Report No 20, 1991), ix). The report recommended the insertion of a new paragraph (6) similar to that set out above, except that the words of subparagraph (6)(b)(i) were not present in the Commission’s draft. The Commission’s explanation of its proposal was as follows:

[403] Paragraph (6) elaborates the meaning of “public policy” for the purposes of setting aside an award under article 34, and follows closely the wording of s 19 of the [International Arbitration Act 1974 (Cth)]. Although the [International Arbitration Act 1974 (Cth)] includes this provision as a section of the Act, rather than in the Model Law, a somewhat similar provision was added to article 34(2)(a) of the Model Law as applied in Scotland. We believe that the provision is appropriately placed in that article (and also in article 36 where there is also a reference to “public policy”).

[404]  We have hesitated before including the reference to “the rules of natural justice” in article 34(6)(b) for two reasons.  First, the principal rules of natural justice, an impartial decision-maker, and a proper opportunity to be heard, are clearly embodied in articles 12, 18, and 24.  Second, the thrust of the Model Law, and of the draft Act, involves a reduction in judicial involvement in arbitral proceedings, and an expansive approach to judicial review by New Zealand courts would contradict that thrust.  Nevertheless, we have concluded that the Australian provision should be followed:  the significance of natural justice in arbitral proceedings can be emphasised; and many recent decisions of New Zealand courts show that our judges are sensitive to their relatively limited role in arbitrations.

  1. The mention of the Model Law as applied in Scotland in the first paragraph above appears to refer to the insertion of a new subparagraph 34(2)(a)(v) in the version of the Model Law given the force of law in Scotland by s 66(2) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 (UK).  That new paragraph, which appeared in Schedule 7 of that Act, read as follows:

(2)       An arbitral award may be set aside by the court specified in article 6 only if:

(a)       the party making the application furnishes proof that:

(v)       the award was procured by fraud, bribery or corruption  …

  1. The provision (enacted for a jurisdiction with a civilian tradition) made no mention of natural justice.
  2. After a bill to implement the recommendations of the Law Commission was introduced in the New Zealand Parliament in 1995, it was referred to the Government Administration Committee.  That committee received a submission that the “natural justice” provision, as it was then drafted (referring only to breaches of natural justice “in connection with the making of the award”), was too narrow, “as breaches can occur during the course of the arbitration as well.”  The Committee agreed with this submission, recommending that Art 34 of Schedule 1 of the bill (which contained the Model Law) “be extended to cover the entire course of the arbitration”. The Parliament accepted the recommendation, and Art 34 passed into law in its present form when the bill was enacted in 1996.

Singapore legislation

  1. In Singapore, the Model Law has the force of law by virtue of s 3(1) of the International Arbitration Act (Cap 143A, 2002 Rev Ed) (Sing). Section 24 of the same Act deals with the setting aside of arbitral awards on the ground of a breach of the rules of natural justice:

Notwithstanding Article 34(1) of the Model Law, the High Court may, in addition to the grounds set out in Article 34(2) of the Model Law, set aside the award of the arbitral tribunal if –

(a)       the making of the award was induced or affected by fraud or corruption; or

(b)          a breach of the rules of natural justice occurred in connection with the making of the award by which the rights of any party have been prejudiced.

  1. The Singapore Act is the result of recommendations contained in an August 1993 report of the Singapore Law Reform Committee’s Sub-Committee on Review of Arbitration Laws (Law Reform Committee (Singapore), Sub-Committee on Review of Arbitration Laws: Report (1993)).  The wording proposed by the sub-committee was slightly different to that which was ultimately enacted.  The sub-committee expressed its draft clause 24 as follows:

Without prejudice to Article 34(2) of the Model Law, the High Court may on the application of any party to an arbitration set aside the award of the arbitral tribunal if –
(a)       the making of the award was induced or affected by fraud or corruption; or

(b)          a breach of the rules of natural justice occurred in connection with the making of the award by which the rights of any party have been prejudiced.

  1. The only difference is in the clarification of the provision’s relationship to paragraphs 34(1) and 34(2) of the Model Law.
  2. Section 24, as enacted, states that the grounds for setting aside an award enumerated in the provision are “in addition” to those contained in Art 34(2). This suggests the Singapore Parliament did not see a breach of the rules of natural justice as necessarily contrary to public policy.
  3. The sub-committee’s report included a section outlining its consideration of the question “whether ‘public policy’ should be defined, and if so to what extent” (at [26]).  The conclusion in the sub-committee’s report at [28] was as follows:

The Committee is of the view that it may be neither wise nor possible to define the scope and extent of “public policy”.  In the New Zealand draft, a new s 34(6)(b) [sic: Art 34(6)(b)] was proposed to explain “public policy” but the Committee does not think that this definition would be helpful, as it is expansive in nature.  The use of the term “rules of natural justice”, especially, provides a wide discretionary basis for curial intervention in arbitration.  Instead, an attempt should be made to prevent certain situations, such as the power of arbitrators to grant civil reliefs based on certain statutes, from being characterised as contrary to “public policy”.

  1. The sub-committee, after setting out the avenues for curial intervention in the arbitral process under the Model Law (including Art 34), also recommended the express inclusion of references to corruption, fraud and “partiality” (the latter in its commentary, but not in its proposed draft) (at [23]).
  2. Whilst it is apparent that the sub-committee and legislature in Singapore did not have the same view as the Parliaments in Australia and New Zealand that the insertion of the rules of natural justice into the concept of public policy was for the avoidance of doubt, it is clear that the Singapore sub-committee report (as did the New Zealand Law Commission report) identified s 19 of the IAA as a source of law for what became s 24 of the Singapore Act. (See Annex VI to the report.)

Hong Kong legislation

  1. Implementation of the Model Law in Hong Kong was first recommended in a report of the Law Reform Commission of Hong Kong in September 1987.  The proposal made its way into law via the Arbitration (Amendment) (No 2) Ordinance(No 64 of 1989) of November 1989, which amended the pre-existing legislative regime.
  2. The Commission recommended wholesale adoption of Art 34 of the Model Law without amendment.  There was no attempt to clarify the meaning of “public policy” or to specify that an award could be set aside where there had been a breach of natural justice.  The Commission’s stated approach to adoption of the Model Law was to “give primacy to the international recognisability and acceptability of the law and to leave it as little changed as possible” (Law Reform Commission of Hong Kong, Report on the Adoption of the UNCITRAL Model Law of Arbitration (September 1987), 13).  Observing that a number of provisions of the Model Law were not, in its opinion, entirely satisfactory, the Commission nonetheless thought it “far better to leave them as they stand, rather than tinker with them in an attempt to improve them, thereby causing only confusion to those foreign parties who wish to be sure they know what Hong Kong’s law for international commercial arbitration is”: Law Reform Commission Report at 13.
  3. In any event, when it came to natural justice and its role in the setting aside of awards on public policy grounds, it appears the Commission viewed any clarification along the lines of s 19 of the IAA as unnecessary. The Commission’s commentary on Art 34 appears in a section of the report dealing with provisions that were recommended to be adopted unchanged: Law Reform Commission Report at 13. As to Art 34(2)(b)(ii), the Commission observed that the phrase “public policy” may appear nebulous to a common lawyer (Law Reform Commission Report at 17). This reflects the view of the Mustill report that common law jurisdictions “had not developed any general doctrine of ordre publicin relation to arbitration procedures”: [1989] 4 Arbitration Materials 5 at 70.  However, the Commission reassured readers that the expression was already familiar to courts in this context, since it appeared in Art V(2)(b) of the New York Convention.  The Commission elaborated in the report at 17:

The civil law concept of “order publique” (translated in the English language version of the Model Law as “public policy”) covers fundamental principles of law and justice in procedural as well as substantive respects.  These include corruption, bribery, fraud and other serious cases, as well as the elements of the common law concept of natural justice.  They would also include a violation of Article 18 (equal treatment of parties).

(Emphasis added.)

  1. Importantly, in light of that last sentence, the Commission’s commentary on Art 18 (also recommended to be adopted unchanged) at 16, read as follows:

This is a particularly significant Article, guaranteeing the rights of the parties to equal treatment.  We think it will allow the courts to intervene under Article 34 in cases where for example there has been a failure to abide by the rules of natural justice.

(Emphasis added.)

  1. In other words, any addition of words of the kind made in the Australian, New Zealand and Singapore Acts would, on the Commission’s view, have been otiose. Indeed, even in the section of the Commission’s report at 26 dealing with “additional provisions considered but rejected”, there is no mention of anything resembling s 19 of the IAA or later analogues in New Zealand and Singapore legislation.
  2. Subsequent to the 1989 enactment of the Model Law in respect of international commercial arbitrations, the Committee on Arbitration Law of the Hong Kong International Arbitration Centre issued a report in 1996 recommending, inter alia, that Hong Kong arbitration legislation be completely redrawn in order to apply the Model Law to both domestic and international arbitrations: Report of the Hong Kong International Arbitration Centre Committee on Arbitration Law(1996).  That recommendation was examined and endorsed by the Committee on Hong Kong Arbitration Law, which was established in 1998 by the Hong Kong Institute of Arbitrators in co-operation with the Hong Kong International Arbitration Centre.  The Committee reported in April 2003: Hong Kong Institute of Arbitrators, Report of Committee on Hong Kong Arbitration Law (30 April 2003).
  3. In its commentary on provisions of the Model Law, the Committee made the following observation in connection with Art 30 (dealing with settlement of disputes) at 171:

We recommend that Article 30 is to be adopted unchanged and applies in all cases.  We are of the view that, in case an award on agreed terms had been procured by fraud, it should be capable of being set aside under Article 34(2)(b)(ii) in that it is in conflict with the public policy.

  1. Again, then, “public policy” was considered as evidently encompassing subject matter that other jurisdictions had seen fit explicitly to enumerate in their legislation.
  2. The recommendations of the Committee were put into the form of a draft bill in a consultation paper of the Hong Kong Department of Justice in 2007: Department of Justice (Hong Kong), Consultation Paper: Reform of the Law of Arbitration in Hong Kong and Draft Arbitration Bill(December 2007).  Submissions on that draft were then received.  One such submission suggested clarification or specification of the grounds for setting aside an award under draft clause 82(1) (which sought to give the force of law to Art 34 of the Model Law).  It was suggested that the provision of the Arbitration Act 1996 (Eng) dealing with setting aside for “serious irregularity” should be emulated (see Arbitration Act 1996 (Eng) s 68).  The Department of Justice rejected the submission, explaining that it did not want to cause confusion as to whether or not Hong Kong was a Model Law jurisdiction: Department of Justice (Hong Kong), Summary of Submissions and Comments on the Consultation Paper on Reform of the Law of Arbitration in Hong Kong and Draft Arbitration Bill (2009), 21.
  3. The bill to revise Hong Kong’s arbitration regime was introduced in the Legislative Council in June 2009.  Having been the subject of report by the Bills Committee, it was enacted as the Arbitration Ordinance(Cap 609) (HK) in November 2010, and it came into force on 1 June 2011.  Section 81 of the ordinance enacts Art 34 of the Model Law without amendment.

The relevant international case law

  1. As already referred to, the influence of Moore and Mahon in New Zealand is the foundation for the proposition that making findings of fact in the absence of probative evidence is a breach of the rules of natural justice in an arbitral context.
  2. The New Zealand decisions of Trustees of Rotoaira Forest Trust v Attorney-General [1999] 2 NZLR 452 (Fisher J); Methanex Motunui Ltd v Spellman [2004] 1 NZLR 95 (Fisher J); Amaltal Corporation Ltd v Maruha (NZ) Corporation Ltd [2004] 2 NZLR 614 (Court of Appeal); Downer-Hill Joint Venture v Government of Fiji [2005] 1 NZLR 554 (Wild and Durie JJ); Gallaway Cook Allan v Carr [2013] 1 NZLR 826 (Court of Appeal) are not in any way inconsistent with the above expression of principle and approach. The following matters of concordance or agreement should be noted.
  3. First, the helpful (if we may respectfully say so) but not determinative, expression of approach by Fisher J in Trustees of Rotoaira Forest Trust at 463 in paras (a) – (j) accords with the need for real unfairness or real practical injustice in the litigation context of international commercial arbitration: see, in particular, paras (b), (e), (f), (g), (i) and (j).
  4. Secondly, the balance between party autonomy and finality on the one hand, and fairness through natural justice and the fundamental norm of equality on the other, was discussed by Fisher J in Methanex at 110-113 [37]-[53]. That was not in aid of the introduction of review by reference to technical rules, but by reference to basal standards of fairness and equality that are internationally recognised.
  5. Thirdly, the scope of “public policy” is to be narrowly confined: Amaltalat 625-626 [41]-[46], and Downer-Hill at 568-571 [76]-[84].
  6. Fourthly, the Court in Downer-Hill recognised the need for the display of unfairness in a real sense.  The judgment of Wild and Durie JJ concerned a successful application  to strike out, summarily, an application to set aside an award of the International Court of Arbitration at Paris.  The application to set aside the award contained a number of grounds but relevantly for the present appeal included grounds that resonate with TCL’s arguments here (which are dealt with later): the findings of numerous facts asserted to have been unsupported by evidence and/or unreasonably found or against the weight of probative evidence; the finding of facts and dealing with issues in an unforeseen way and in a way not conformable with the underlying contract (see Downer-Hill at 559 [23]). The Court accepted the Mahonformulation of the “no evidence rule”; the Court required that there be demonstrated a substantial miscarriage of justice: 570 [84], their Honours saying:

Even assuming that Downer could establish a breach of the [Mahon] ground of natural justice, the “public policy” requirement in art 34 imposes a high threshold on Downer.  The phrases “compelling reasons” and “a very strong case” are employed in the judgments of the Hong Kong Court of Appeal in Hebei Import and Export Corporation v Polytek Engineering Co Ltd [1999] 2 HKC 205 at pp 211 and 215. Hebei involved an application to set aside a foreign award.  To warrant interference there must be the likelihood that the identified procedural irregularity resulted in a “substantial miscarriage of justice”: Honeybun v Harris [1995] 1 NZLR 64 at p 76. That entails the impugned finding being fundamental to the reasoning or outcome of the award. The Court of Appeal suggested in Amaltal (at para [47]) that the arbitrator’s findings of fact should not be reopened unless it was “obvious” that what had occurred was contrary to public policy.

  1. The Court in Downer-Hill then dealt with the matter at a summary strike-out level.  After that review, the Court at 575 [105]-[106] by way of emphasis of approach referred to what Lord Mustill said in the Privy Council in a New Zealand appeal in Pupuke Service Station Ltd v Caltex Oil (NZ) Ltd[2000] 3 NZLR 338n at 338-339, as follows:

[105]    We accept Fiji’s argument that the Court’s role where evidentiary inadequacy is alleged is to ensure that there was evidence to support the impugned finding.  Or, conversely, that the burden on the party alleging inadequacy is to establish that there was no evidence.  Downer has not discharged that onus.  Mr Johnston concluded his oral submissions by referring us to the following part of Lord Mustill’s opinion in Pupuke Service Station Ltd v Caltex Oil (NZ) Ltd [2000] 3 NZLR 338 (PC) at pp 338-339:

LORD MUSTILL.   [1] Arbitration is a contractual method of resolving disputes.  By their contract the parties agree to entrust the differences between them to the decision of an arbitrator or panel of arbitrators, to the exclusion of the Courts, and they bind themselves to accept that decision, once made, whether or not they think it right.  In prospect, this method often seems attractive.  In retrospect, this is not always so.  Having agreed at the outset to take his disputes away from the Court the losing party may afterwards be tempted to think better of it, and ask the Court to interfere because the arbitrator has misunderstood the issues, believed an unconvincing witness, decided against the weight of the evidence, or otherwise arrived at a wrong conclusion.  All developed systems of arbitration law have in principle set their face against accommodating such a change of mind.  The parties have made a choice, and must abide by it.  This general principle is, however, applied in different ways under different systems, according to the nature of the complainant.

[2]       Where the criticism is that the arbitrator has made an error of fact, it is an almost invariable rule that the Court will not interfere.  Subject to the most limited exceptions, not relevant here, the findings of fact by the arbitrator are impregnable, however flawed they may appear.  On occasion, losing parties find this hard to accept, or even understand.  The present case is an example.

[3]       At the other extreme are complaints that the decision has been reached by methods which are unfair, contrary to natural justice, in breach of due process, or whatever other term is preferred.  With very few exceptions all systems of law permit the injured party some means of recourse.  They need not be explored, since there are no such allegations here.

[106]    Mr Johnston suggested that Downer’s application to set aside the award represented exactly the sort of “change of mind” Lord Mustill refers to.  We suspect that submission is not far wide of the mark.  Having agreed to arbitrate its very substantial claims, and having had them largely rejected by the arbitral tribunal following a lengthy hearing, Downer is essentially seeking to have the Court upset the result, so that it can rerun its claims.  As Lord Mustill observes, the Courts have set their face against accommodating that.

  1. Fifthly, the Court of Appeal in Gallaway Cook Allan [2013] 1 NZLR 826 discussed the nature of the discretion in Art 34. The Court’s expression of view is, with respect, a helpful expression of the balance between finality and curial review, to the effect that the circumstances of a case such as Downer-Hill demand, for asserted breaches of the rules of natural justice to be made out, demonstrated unfairness or practical injustice in the context of the litigation between the parties before an award will be set aside or not enforced. The Court said at 846 [66]:

The discretion vested by art 34 is of a wide and apparently unfettered nature.  We are satisfied it must be exercised in accordance with the purposes and policy of the Arbitration Act.  Two specific purposes are to encourage the use of arbitration as an agreed method of resolving commercial and other disputes; and to facilitate the recognition and enforcement of arbitration agreements and arbitral awards.  The principles and philosophy behind the statute are party autonomy within its framework, equal treatment, reduced court intervention and increased powers for the arbitral tribunal.  Parliament has clearly stated its intention that parties should be bound to accept the arbitral decision where they have chosen that method of resolution.  The recognised benefits of arbitration include speed, economy, choice of forum, anonymity and finality, the last by allowing the parties to limit their rights of appeal even though they cannot contract out of art 34.

(Citations omitted.)

  1. The Singapore decisions, likewise, are not, subject to the comments below, inconsistent with the above expression of principle and approach: see John Holland Pty Ltd (fka John Holland Construction & Engineering Pty Ltd) v Toyo Engineering Corp (Japan) [2001] 2 SLR 262 at 271 [18] (Choo Han Teck JC); PT Asuransi Jasa [2007] 1 SLR at 619-622 [52]-[60]; Soh Beng Tee & Co Pte Ltd v Fairmont Development Pte Ltd [2007] SGCA 28; [2007] 3 SLR(R) 86 at 102-120 [28]-[65] (Singapore Court of Appeal); Pacific Recreation Pte Ltd v SY Technology Inc [2008] SGCA 1; [2008] 2 SLR(R) 491 at 508-510 [30]-[34] (Singapore Court of Appeal); CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK [2011] SGCA 33; [2011] 4 SLR 305 at 317-318 [25]-[27] (Singapore Court of Appeal); Kempinski Hotels SA v PT Prima International Development [2011] SGHC 171; [2011] 4 SLR 633 at 656 [65], 664-665 [101]-[102] (Judith Prakash J); LW Infrastructure Pte Ltd v Lim Chin San Contractors Pte Ltd [2012] SGCA 57; [2013] 1 SLR 125 at 139-142 [47]-[54] (Singapore Court of Appeal); PT First Media TBK v Astro Nusantara International BV [2013] SGCA 57 at [52] (Singapore Court of Appeal); TMM Division Maritima SA de CV v Pacific Richfield Marine Pte Ltd [2013] SGHC 186 (Chan Seng Onn J).
  2. The following matters should be noted.
  3. First, there has been no authoritative recognition of the “no evidence rule” as part of the rules of natural justice.  In Kempinski Hotelsat 656 [65], Judith Prakash J said the following:

As is well known, the concept of natural justice comprises two rules.  The first is that the adjudicator must be disinterested and unbiased and the second is that the parties must be given adequate notice and opportunity to be heard (see Soh Beng Tee & Co Pte Ltd v Fairmont Development Pte Ltd [2007] 3 SLR(R) 86 at [43] …

  1. In Soh Beng Teeat 109 [43], the Court of Appeal, in its discussion of the hearing rule at 108-115 [42]-[58], cited Marks J in Gas & Fuel Corporation [1978] VR 365 (referred to at [84] above), where his Honour expressed the rules of natural justice as comprising the bias rule and the hearing rule.
  2. The emphasis of the Court of Appeal in Pacific Recreation (see 509 [32] especially) was on the fairness of the hearing, not on the legitimacy of the foundation of the factual findings.
  3. In TMM Division Maritimaat [119]-[120], Chan Seng Onn J noted the primary judge’s decision here and remarked that the “no evidence” rule had not yet been accepted in Singapore as part of the rules of natural justice, and referred to a decision of Judith Prakash J that could be seen to be to the contrary: Sui Southern Gas Co Ltd v Habibullah Coastal Power Co (Pte) Ltd [2010] SGHC 62; [2010] 3 SLR 1.
  4. Secondly, in CRW Joint Operation VK Rajah JA, delivering the judgment of the Court at 317-318 [25]-[27], expressed the balance between finality and interference in a helpful way, emphasising that whilst courts should not interfere lightly in the arbitral process, due process (and fairness accordingly) was fundamental, and the Court should not hesitate to interfere if a ground under Art 34 were clearly established. Later in the reasons, the Court expressed the view at 342-343 [97] that if the existence of a ground under Art 34 were made out the exercise of discretion would be “virtually automatic”. With respect, care needs to be taken when one is dealing with the rules of natural justice. As long as one recognises and emphasises that there is likely to be no breach of such rules unless real unfairness or real practical injustice be demonstrated, the expression of the matter thus will not mislead. There is sometimes, however, a tendency of some to speak of a technical or minor breach of the rules of natural justice: see for instance the primary judge here at J[30]. To the extent that such expression may be acceptable in some contexts, it will be important to recognise that for the discretion under Arts 34 and 36 to be exercised, real unfairness or real practical injustice will need to be demonstrated. Whilst the IAA does not use phraseology of “prejudice” as does the Singapore Act, such a notion inheres in the conceptions of fairness, unfairness, practical justice and practical injustice. Thus, the expression of view by the Court in Soh Beng Tee at 120 [65] that “only meaningful breaches of the rules of natural justice that have actually caused prejudice are ultimately remedied” can be seen to be concordant with a notion that real unfairness or real practical injustice must be demonstrated.
  5. Thirdly, the notion of prejudice or unfairness does not involve re-running the arbitration and quantifying the causal effect of the breach of some rule.  The task of the Court in assessing prejudice or unfairness or practical injustice is not to require proof of a different result: see generally the discussion in LW Infrastructure at 140-142 [50]-[54]. If a party has been denied a hearing on an issue, for instance, it is relevant to enquire whether, in a real and not fanciful way, that could reasonably have made a difference. It should be recalled that the proper framework of analysis for the IAA is the setting aside or non-recognition or enforcement of an international commercial arbitration. In that context, it is essential to demonstrate real unfairness or real practical injustice.

The disposition of these appeals

The asserted breach of the rules of natural justice

  1. Grounds 4 to 7 were a disguised factual challenge to the conclusions of the arbitrators. The contents of the argument on appeal illustrate this.  The written submissions simply annex a schedule and invite the Court to examine the record of the arbitration.  The oral submissions did likewise.
  2. The submissions were first directed to the suggestion that there was a higher impact than the 7.4% suggested by Mr Williams.  The submissions criticised the “fact interpretation and reasoning functions” of the arbitrators and quarrelled with their interpretation of the contents of Mr Williams’ report.  The submissions challenged the weight and value of the evidence of Mr Francis about what he had been told by former customers.  This evidence was said not to have “probative value” and placement of weight on it was a failure of “the tribunal’s fact finding and fact interpretation”, thus leading to “its reasoning failure”.  Arguments about the evidence sometimes identified some of its hearsay character, going to its weight.  Such expressions and such analysis cannot demonstrate a breach of any rule of natural justice, nor even an error of law.  They reflect complaints about findings of fact and no more.
  3. Mr Kwong’s evidence was also criticised as limited in its effect and overstated.  It was said also to lack probative value.  There are judgments and evaluative assessments of the weight of evidence that was directed to the subject matter in question.  Again, the submission referred to the “failure of the tribunal’s fact finding and fact interpretation function” leading to “its reasoning failure”.
  4. The same kinds of arguments were directed to 14% being a better starting point.  The conclusion of the arbitrators was that the factors in A[233] were not sufficiently mentioned in Mr Williams’ report was challenged.  This was a debate about the proper evidential evaluation of Mr Williams’ report.  Once again, the arbitrators’ evaluation of Mr Williams’ report was said to constitute a failure of “fact interpretation and reasoning function”.  There were submissions about the weight given to admissions made by Mr Williams in cross-examination.  The proposition drawn by the arbitrators from Mr Williams’ admissions was said to be inconsistent with other evidence.
  5. The criticism of the arbitrators concerning the need for an uplift from 14% was likewise concerned with the evaluation of the evidence.  It was submitted that there was no “clear” evidence; it was submitted that the evidence did not warrant a conclusion of an uplift and that the “fact finding and interpretation functions” led to “reasoning failure”.
  6. The 22.5% finding was criticised at a number of levels.  First, too much weight was said to have been given to an unimportant piece of evidence, being the perceived commercial importance to Castel of the non-competition clause.  This was an argument about the weight of a commercial consideration in a context where the people who sought to rely on it, especially Mr Kwong, were cross-examined on the provision and on its importance.
  7. It was submitted that 22.5% was “pulled from the air”.  In a case where the parties called expert evidence, the rejection of Mr Acton’s evidence required the arbitrators, it was submitted, to determine the case on Mr Williams’ evidence. Further, this was said to be reinforced by the lack of available material to permit the arbitrators to “do their best” on sufficient material.  Further, it was submitted that there could be no reasonable anticipation by TCL that the arbitrators would approach the matter in this way – that it had been denied a hearing.
  8. If the reference had been conducted in such a way that the central approach of the arbitrators did not reflect how the case was conducted and could be reasonably seen as a surprise, it might be open to conclude that the parties (and most particularly, of course, the losing party) had been denied the opportunity of a hearing.
  9. That was plainly not the case here.  In a contest such as this about the effect of wrongful conduct on a business, expert evidence was obviously relevant and of assistance.  The fact that one expert was discounted as unhelpful did not drive the arbitrators to the necessary acceptance of the other.  No commercial litigator would have assumed that unless the reference had been run in a way to demand that conclusion.  It was not so run.  Here there was full cross-examination of Mr Williams.  There cannot have been the slightest doubt that his evidence was challenged and that the arbitrators were free to assess all the evidence and reach a result not precisely reflected by either expert.  The arena of dispute was between 7.4% and 100%.  The approach of Holmes JA in Thurston v Todd (1966) 84 WN (Pt 1) (NSW) at 246 (cited by the primary judge) is a sound reflection of that approach.
  10. Further, it was plain that the arbitrators were entitled to take all of the evidence and make their own assessment of it. The primary judge referred to the relevant authorities at J[139]-[144]. The principal criticism of this approach was that the facts here required real speculation and a guess about quantification. Emphasis was placed by TCL on JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237 and on Schindler Lifts Australia Pty Ltd v Debelak(1989) 89 ALR 275. The criticism of the primary judge was truly one of the evaluation of the evidence, not one of principle. At one level there is a tension between Enzed Holdings Ltd v Wynthea Pty Ltd (1984) 57 ALR 167 and cases such as Schindler.  As Pincus J said in Schindler 89 ALR at 319, the evidence brought by someone with an onus may be so inadequate in its totality, when the whole context is examined, that there can be said to be no rational foundation for any proper estimate. In other cases, the court is required to make its best estimate on the materials provided. The proper approach will, in any given case, be an evaluative one influenced by such considerations as the nature of the question, including its amenability to precise proof or assessment, the availability and control of evidence, and the onus of proof. Considerations such as the assessment of evidence according to the power of the party to adduce it will be important to such an evaluation: cf Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969 at 970; Cullen v Welsbach Light Co [1907] HCA 3; 4 CLR 990 at 1013-1014; Hampton Court Ltd v Crooks [1957] HCA 28; 97 CLR 367 at 371-372; Parker v Paton (1941) 41 SR (NSW) 237 at 243; Re Alexander; Ex parte Ferguson (1944) 45 SR (NSW) 64 at 67; Vetter v Lake Macquarie City Council [2001] HCA 12; 202 CLR 439 at 454 [36];
  11. The primary judge’s review of the evidence demonstrated that the arbitrators did not engage in guesswork or speculation.  Further, the criticism of the arbitrators and of the primary judge’s conclusion reduced to a contest about the evaluation of that evidence.  This was particularly clear when it was obvious (and common ground) that Castel’s lost sales were not capable of precise calculation and were not a subject peculiarly within Castel’s power to prove from its own records or knowledge.  The subject depended upon how third parties responded or might respond to conduct which was a breach of contract by TCL.
  12. It is unnecessary to embark on any restatement or reconsideration of the proper approach to the assessment of damages in circumstances where precise evidence of loss cannot be exacted.  No criticism was made on appeal of the approach of Brooking J in JLW (Vic) that, to a degree, guided the primary judge at J[142]-[144] in his statement of principle.  It can be accepted that if the Court has before it a question about which the Court could reasonably expect a party to bring evidence of some precision and no such evidence is brought, and no explanation is given, the Court may be entitled to say the burden of proof has not been discharged: Ted Brown Quarries 16 ALR at 37 (Gibbs J); or the Court might say that in the circumstances sufficient evidence has been brought to require the Court to do its best: Ted Brown Quarries at 26 (Barwick CJ). The difference will reflect (as it did in Ted Brown Quarries) differences of opinion from the evaluation of the evidence and the circumstances of the litigation.  That was the task that the arbitrators undertook.  TCL’s complaint is about that evidential evaluation.
  13. The evidence revealed that TCL received a scrupulously fair hearing in a hard fought commercial dispute.  Its complaints are about the evaluation of factual material.  No rule of natural justice was breached.

Residual aspects of the submissions of the appellant on the appeal

  1. The above discussion deals in substance with the arguments put by the appellant.  We should, however, finish with a response to one particular submission of the appellant.
  2. The appellant argued that even so-called minor or technical breaches of the rules of natural justice would suffice for the setting aside or non-recognition or non-enforcement of an international commercial arbitration award, unless the Court could exclude any possibility of a different result being reached. This was said to flow from the lack of any reference to prejudice in the IAA and the unqualified statement of Parliament in effect that any breach of the rules of natural justice was contrary to Australian public policy. This should be rejected for the reasons that we have given. It confuses and misstates the relevant conception of natural justice as one divorced from unfairness or practical injustice, it disembodies the words of Parliament from their statutory context, and it would impute to Parliament an intention to interfere with arbitral awards in a manner that would undermine fatally the facilitation and encouragement of international commercial arbitration in Australia.
I certify that the preceding one hundred and sixty-nine (169) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop and the Honourable Justices Middleton and Foster.

 

Associate:
Dated:        16 July 2014

 

Vale S.A. & Ors v Steinmetz & Ors (Rev 1) [2021] EWCA Civ 1087 (16 July 2021)

 

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE

Vale S.A. & Ors v Steinmetz & Ors (Rev 1) [2021] EWCA Civ 1087 (16 July 2021)

FILE NUMBER: A4/2021/0222
JUDGE(S): LORD JUSTICE BEAN

LORD JUSTICE MALES

and

LORD JUSTICE LEWIS

REGISTRY: Royal Courts of Justice

Strand, London, WC2A 2LL

DATE OF HEARING: 29th June 2021
DATE OF JUDGMENT: 16th July 2021
CASE MAY BE CITED AS: Vale S.A. & Ors v Steinmetz & Ors (Rev 1) [2021] EWCA Civ 1087 (16 July 2021)
MEDIUM NEUTRAL CITATION: [2021] EWCA Civ 1087
DIVISION: CIVIL DIVISION
LIST
PARTIES: (1) VALE S.A.

(2) VALE HOLDINGS BV

(3) VALE INTERNATIONAL S.A.

Claimants/

Respondents

– and –

(1) BENJAMIN STEINMETZ

(2) DAG LARS CRAMER

(3) MARCUS STRUIK

(4) ASHER AVIDAN

(5) JOSEPH TCHELET

(6) DAVID CLARK

Defendants

(7) BALDA FOUNDATION

(8) NYSCO MANAGEMENT CORPORATION

Defendants/

Appellants

REPRESENTATION: Stephen Houseman QC & Frederick Wilmot-Smith (instructed by PCB Byrne LLP) for the

 

Appellants

 

Sonia Tolaney QC & James Ruddell (instructed by Cleary Gottlieb Steen & Hamilton LLP)

for the Respondents

 

The 1st to 6th Defendants took no part in the appeal

Appeal: Vale SA & Ors v Steinmetz & Ors [2020] EWHC 3501 (Comm)

 

 

JUDGMENT

 

Lord Justice Males:

 

  1. This appeal is concerned with the impact, if any, of an arbitration award rescinding a contract for fraud on a proprietary claim against a stranger to the arbitration.

 

  1. For the purpose of the appeal it is common ground that, upon such rescission, a constructive trust may arise which enables the rescinding party to make a proprietary claim to recover the proceeds of a payment made pursuant to the contract, and that such a claim can be made to recover traceable trust property in the hands of a third party who is not a good faith purchaser for value without notice of the fraud. So if A pays money to B under a contract between them which is then rescinded for fraud, B may hold the money on trust for A. Similarly, if B has transferred the money to C who is not a good faith purchaser for value without notice, it may be held by C on trust for A.

 

  1. But the question is whether such a proprietary claim against the third party (C) is barred as a result of an arbitration award between the contracting parties in which it is held, perhaps wrongly, that the rescinding party (A) does not have a personal restitutionary claim to recover the payment in question from its contractual counterparty (B).

 

  1. Depending on the answer to that question, a further question may arise from the fact that the payment in question was not made by the contracting party but by another company within the same group. Who then is entitled to make any proprietary claim? Is it the contracting party whose obligation was discharged by the payment made by its subsidiary? Or is it the subsidiary who actually made the payment?

 

The factual background

 

  1. The context in which these issues arise is a joint venture agreement dated 30th April 2010 between Vale S.A. (the first claimant in the action and the first respondent to the appeal, or A in the illustration above) (“Vale”) and a company called BSG Resources Ltd (“BSGR” or B in the illustration above), pursuant to which BSGR sold 51% of a subsidiary company, BSG Resources (Guinea) Ltd, to a wholly owned subsidiary of Vale. The price included an Initial Consideration of US $500 million payable by Vale. In fact the payment was not made by Vale itself but was made, upon Vale’s instructions, by Vale International S.A. (the third claimant in the action and the third respondent to the appeal) (“Vale International”).

 

  1. BSGR was owned by Nysco Management Corporation, a BVI company which is the eighth defendant in the action and the second appellant (“Nysco”). Nysco was owned by Balda Foundation, a Liechtenstein Foundation which is the seventh defendant in the action and the first appellant (“Balda”). The beneficiaries of Balda are the first defendant, Mr Benjamin Steinmetz, and members of his family. It is common ground for the purpose of this appeal that at least some part of the Initial Consideration received by BSGR was transferred to Balda and Nysco (together “the appellants”, or C in the illustration above). It must be assumed, although this will if necessary be a matter for investigation at trial, that the payments thus made to the appellants can be traced into their accounts in accordance with standard principles of tracing in equity.

 

  1. The joint venture agreement was concluded because a wholly owned subsidiary of BSG Resources (Guinea) Ltd held valuable mining licences from the Republic of Guinea entitling it to exploit substantial deposits of iron ore. Unfortunately, however, the Government of Guinea revoked those licences after the joint venture had been concluded on the ground that they had been procured by bribery.

 

The LCIA award

 

  1. Revocation of the licences gave rise to a claim by Vale against BSGR for (among other things) rescission of the joint venture agreement for fraudulent misrepresentation. Because the joint venture agreement provided for arbitration in London under LCIA Rules, that claim was pursued in arbitration before a tribunal consisting of Sir David A R Williams QC, Dr Michael Hwang and Professor Filip de Ly (Chairman), all wellknown international arbitrators. It was evidently a substantial arbitration, lasting over five years and resulting in an award running to 280 pages and 1005 paragraphs. Some further indication of the scale of the arbitration can be seen from the fact that Vale’s lawyers charged a total of US $20 million, while the arbitrators’ fees amounted to over £1.5 million.

 

  1. In their award, dated 4th April 2019, the arbitrators upheld Vale’s claim for fraudulent misrepresentation and, as a result, made an order rescinding the joint venture agreement. However, they rejected Vale’s claim in restitution for the return of the Initial Consideration. Mr Stephen Houseman QC for the appellants subjected the arbitrators’ reasoning to a close analysis and I therefore set out the relevant paragraphs of the award (the emphasis is the arbitrators’):

 

“920. The Tribunal holds that BSGR has not fulfilled its burden to establish the bar of restitutio in integrum impossible [sic.], and that Vale is entitled to equitable rescission of the Joint Venture Agreements.

 

  1. In considering the orders to make to achieve restitutio in integrum, the Tribunal recalls that the objective of rescission is to place the Parties in their original positions as far as possible by ordering each side to return the benefits it has received from the other side. In this connection, the Tribunal notes that rescission only envisages the return of benefits which one party transferred to the other party, and does not envisage the return of benefits that one party originally transferred to a third party.

 

  1. In this case, Vale claims the return of (1) the Initial Consideration; (2) the Outstanding Loan Amount; (3) the Feasibility Study Funding; and (4) Internal Costs. The Tribunal considers that the first three heads cannot be claimed under rescission, and the Tribunal cannot order BSGR to pay these sums to Vale as part of its rescission order, because they do not involve transfers of money from Vale but involve transfers of money from Vale’s subsidiaries:

 

922.1. The Initial Consideration was paid by Vale International to BSGR. …

 

  1. The Tribunal also considers that the fourth head of Internal Costs cannot be claimed under rescission because, although the Internal Costs were paid by Vale, the recipient of these payments was not BSGR.

 

  1. Accordingly the Tribunal must next consider if these sums can be claimed as damages for fraudulent misrepresentation.”

 

  1. The arbitrators went on to consider whether Vale could recover the same sums (including the Initial Consideration) as damages for fraudulent misrepresentation. They concluded at paragraph 944 that it could (again, the emphasis is in the award):

“944. As the Tribunal has explained at paragraph 926 of this Award, the claimant is entitled to all expenditures which he had incurred in reliance on the defendant’s representation. So when the question arises as to the causative link between the tort of deceit and the losses suffered, the law only asks one question: did the claimant incur those losses in reliance on the defendant’s representation? Once it is shown that the claimant did so rely, the causative link is established, and the loss is taken to have directly flowed from the deceit. BSGR may claim that there was a slump in iron ore value, or an intervening act in the form of the [Government of Guinea’s] revocation of the mining rights, but these arguments are wholly immaterial. All that matters is whether Vale incurred these losses in reliance on BSGR’s deceit for the purpose of establishing the causative link. Framed as such, this must be answered in the affirmative. The Tribunal has found at paragraph 724 above that Vale relied on BSGR’s deceit to enter into the Framework Agreement [i.e. the joint venture agreement] and the SHA and suffered loss as a result.”

 

  1. Accordingly the arbitrators awarded damages to Vale which included US $500 million in respect of the Initial Consideration. The material parts of their formal award, which they called the “Dispositif”, were as follows:

 

“1004. For all of the foregoing reasons and rejecting all submissions to the contrary, the Tribunal hereby FINDS (paragraph 676) that the Claimant has established its case alleging fraudulent misrepresentation. All other causes of action by Vale are hereby dismissed.

 

  1. As a consequence of its finding in paragraph 1004, the Tribunal hereby ORDERS AND AWARDS the following relief.

 

1005.1 The Tribunal hereby rescinds the Framework Agreement and the SHA on account of fraudulent misrepresentation (paragraph 920).

 

1005.2 The Tribunal orders BSGR to pay forthwith to Vale damages of USD 1,246,580,846 on account of fraudulent misrepresentation (paragraph 980).”

 

  1. The arbitrators’ further award of interest and costs need not be set out.

 

  1. BSGR has not paid any part of the sum awarded.

 

The proprietary claim in this action

 

  1. In the present action the claimants make various claims against Mr Steinmetz, his companies and others, including the appellants, who are alleged either to have been involved in the fraud or to have received its proceeds, directly or indirectly. The appellants, who were not parties to the arbitration, deny any fraudulent conduct. However, they accept for the purpose of this appeal that the claimants have a properly arguable case that the joint venture agreement was procured by fraud.

 

  1. One such claim is a proprietary claim over assets held by the appellants as the recipients of traceable proceeds of the Initial Consideration.

 

  1. It was common ground for the purpose of the application before the judge and the appeal before this court that, if a contract is voidable for fraud, the innocent party’s right to rescind the contract gives rise to an equity (referred to in argument as a “rescission equity”), such that upon rescission a payment made by the rescinding party is impressed with a constructive trust (a “rescission trust”) (see the discussion at Goff & Jones, The Law of Unjust Enrishment, 9th Ed (2016), paras 40-18 to 40-28 and Snell’s Equity, 34th Ed (2019), paras 2-006 and 2-007). It was also common ground for the purpose of the appeal that this rescission equity can in principle be asserted against a third party transferee of the payment who is not a good faith purchaser for value without notice of the fraud; and that the appellants were not such good faith purchasers for value.

 

  1. Accordingly, on the basis that some or all of the Initial Consideration of US $500 million was transferred to the appellants, the claimants’ case is that upon rescission of the joint venture agreement the money in the appellants’ hands was impressed with a rescission trust in favour of either Vale or Vale International so as to give rise to a proprietary claim against them.

 

  1. However, the appellants contend that no such rescission trust arose against BSGR in this case because of the way in which the arbitrators dealt with the issue of rescission in the arbitration and that, as a result, no proprietary claim is available against either of them as transferees of the Initial Consideration from BSGR. By an application notice dated 18th May 2020 the appellants sought summary judgment dismissing the proprietary claim against them. They accepted that the claims as a whole would have to go to trial, but submitted that this proprietary claim is bad in law as a result of the award in the arbitration between Vale and BSGR (and for other reasons rejected in the court below with which we are not now concerned) and that its summary dismissal would reduce the scope of the issues to be determined at trial.

 

The judgment

 

  1. The judge, Mr Justice Andrew Baker, was sceptical whether the summary dismissal of the proprietary claim would make much difference to the scope of the trial, but nevertheless determined the application. He held that the award did not afford the appellants any defence to the proprietary claim made against them and that nothing was likely to emerge at trial to change this position. Accordingly he not only dismissed the application for summary judgment, but made a declaration that the award did not afford the appellants any defence to the proprietary claim pleaded against them.

 

  1. Mr Justice Andrew Baker held that, although the arbitration award was binding for what it decided as between Vale and BSGR, and even though it might now be too late for Vale to assert a proprietary claim against BSGR, the award did not affect Vale’s claim against the appellants. Just as the appellants as non-parties were not bound by the arbitrators’ findings (it has not been suggested that they should be regarded as privies of BSGR for the purpose of any res judicata argument), neither was Vale bound by the arbitrators’ view expressed in paragraphs 921 and 922 of the award that the Initial Consideration payment was not in law the conferring of a benefit on BSGR by Vale. In any event the creation of a rescission trust upon rescission of the joint venture agreement did not depend on any determination by the arbitrators; rather, such a trust arose by operation of law.

 

  1. This conclusion made it unnecessary for the judge to decide whether the beneficiary of any rescission trust was Vale or Vale International. The appellants contended that any claim could only be vested in Vale as the party to the joint venture agreement and was barred by the arbitration award. The claimants contended that the claim was vested in Vale International, or at any rate that Vale International had its own proprietary claim; and that even if the award constituted a bar to any claim by Vale, it did not affect Vale International which was not a party to the joint venture agreement or the arbitration. The judge considered that because this issue gave rise to a novel question of law whose answer might depend on a closer analysis of the facts than was possible on the evidence before him, it was best left, if it arose, for determination at trial. Submissions on appeal

 

  1. For the appellants Mr Stephen Houseman QC (who did not appear below and who was instructed a few weeks before the hearing when counsel previously instructed became unavailable) submitted, in outline, as follows:

 

(1) Rescission in equity (which is all that Vale claimed in the arbitration) does not depend on any election by the rescinding party, but is effected by court order (or arbitral award) (Goff & Jones, para 40-28); the order or award granting rescission is itself an act with legal consequences; the court’s (or tribunal’s) decision whether or on what terms to order restitutio in integrum is part of and inextricably connected with the order for rescission itself (as Lord Wright put it in Spence v Crawford [1939] 3 All ER 271, 288, “where the remedy [of rescission] is applied, it must be moulded in accordance with the exigencies of the particular case”) and is also, therefore, an act with legal consequences.

 

(2) Vale did not make any claim in the arbitration for restitution of the Initial Consideration independently of its claim for rescission of the joint venture agreement and the arbitrators therefore had no jurisdiction to determine any such claim. Accordingly paragraphs 920 to 923 of the award must be read together as a determination by the arbitrators that rescission would be ordered, but only on the basis that BSGR had no obligation to return the Initial Consideration by way of restitutio in integrum. The two aspects of this determination (rescission but no restitution) were indivisible.

 

(3) There can be no proprietary claim by way of a rescission trust against the original contracting party unless that party is also liable to a personal restitutionary claim. That is because the rationale for a rescission trust is that the defendant has been unjustly enriched (Goff & Jones, para 40-17: “a proprietary remedy for unjust enrichment”; In re Goldcorp Exchange Ltd [1995] 1 AC 74, 102E per Lord Mustill: “… any such proprietary right must have as its starting point a personal claim by the purchaser to the return of the price”; and National Crime Agency v Robb [2015] Ch 520 per Sir Terence Etherton C at [48] referring, albeit in passing, to “a proprietary restitutionary remedy for unjust enrichment”).

 

(4) Although in principle a rescission trust can be asserted against a third party transferee of the contractual payment (C), subject to equitable tracing principles, such a proprietary claim depends upon the availability of a proprietary claim against the original contracting party (B). If the rescission equity never crystallises into a rescission trust available against the original contracting party, there is no trust which can be asserted against third parties whose liability is parasitic on the liability of the original party.

 

(5) Accordingly the arbitrators’ determination that rescission would be ordered on the basis that BSGR (B) had no obligation to return the Initial Consideration by way of restitutio in integrum means that Vale (A) had no personal claim against BSGR for restitution of the Initial Consideration; therefore no rescission trust against BSGR ever came into existence (or to put it another way, Vale’s rescission equity never crystallised into a rescission trust); and as BSGR (B) never became subject to a rescission trust, transferees of the Initial Consideration from Vale such as the appellants (C) never became subject to such a trust either.

 

(6) The arbitrators’ determination that BSGR had no obligation to return the Initial Consideration by way of restitutio in integrum constitutes a legal fact (“a fact in the world”), binding Vale for all purposes, with the consequences set out in (5) above.

 

(7) For Vale to assert otherwise amounts to an abuse of process as a collateral attack on the arbitrators’ award.

 

(8) Any rescission equity could only belong to Vale as the contracting party with a right to rescind the contract (Independent Trustee Services Ltd v GP Noble Trustees Ltd [2012] EWCA Civ 195, [2013] Ch 91 at [52] and [53]); it is logically impossible for Vale International, which never had the equity on which the rescission trust is founded to be the beneficiary of such a trust.

 

  1. We did not find it necessary to call upon Ms Sonia Tolaney QC for the respondents, although we have the benefit of her written submissions, in which she took issue root and branch with Mr Houseman’s analysis.

 

The scope of the appeal

 

  1. It is important to keep in mind that we are not concerned on this appeal with whether the claimants or either of them have a viable proprietary claim against the appellants on the basis of a rescission trust. Nor are we concerned with whether it is an essential element of a rescission trust claim by A against a third party transferee of a contractual payment (C) that there should be a personal claim in restitution against the original contracting party (B), a point on which it appears that there is no direct authority. Although Mr Houseman developed a powerful argument why that should be necessary, as outlined above, there are arguments to the contrary: as Lord Millett pointed out in Foskett v McKeown [2001] 1 AC 102, proprietary claims to the beneficial ownership of property and restitutionary claims based on unjust enrichment are different, being concerned to enforce different interests and with different defences available to a defendant. These, however, are not issues suitable for summary determination. They should be determined, to the extent they arise, at trial.

 

  1. The narrow issue with which we are concerned is whether Vale is bound by (or, to the same effect, whether the appellants can take the benefit of) the arbitrators’ award in these proceedings between Vale and the appellants. For this purpose I propose to consider first what the arbitrators actually decided and then to consider the extent to which, if at all, Vale is bound by that in the present proceedings. I will then deal with the argument about abuse of process. What did the arbitrators decide?

 

  1. Mr Justice Andrew Baker observed that the arbitrators’ reasoning is internally inconsistent. They rejected a claim for restitution at paragraphs 921 to 923 of the award on the ground that payment of the Initial Consideration had not been made by Vale but by its subsidiary Vale International, but then awarded damages to Vale at paragraph 944 on the basis that the Initial Consideration was a loss which Vale had suffered. I share the judge’s view (and Mr Houseman expressly accepted) that it is impossible to reconcile these paragraphs of the award. As the judge put it:

“18. Thus, a restitutionary analysis was rejected (at paragraphs 921 to 922 of the LCIA Award) on the basis that the Initial Consideration payment was not expenditure by Vale; and then damages were awarded in respect of the Initial Consideration payment on the basis (set out in paragraph 944) that it was expenditure by Vale. …”

 

  1. It would appear, therefore, that the award must be wrong, at least to some extent. Either the Initial Consideration payment was not expenditure by Vale even though it had the effect of discharging Vale’s liability for the Initial Consideration, in which case the arbitrators were right to reject the restitutionary claim but wrong to award damages on the basis that Vale had suffered the loss of this expenditure; or it was expenditure by Vale, in which case the restitutionary claim ought to have succeeded and the damages awarded ought to have been correspondingly reduced.

 

  1. Undaunted, Mr Houseman submitted that the arbitrators’ treatment of the claim for rescission at paragraphs 922 to 923 could be “ring fenced”, and that it is on these paragraphs that it is necessary to concentrate to see what the arbitrators decided about that claim. He submitted that the arbitrators’ decision not to make an order for restitution by BSGR of the Initial Consideration was part of and inextricably connected with the order for rescission itself; and that this is a legal fact binding on Vale against all the world. Is Vale bound by the award in these proceedings?

 

  1. However, even if the effect of the award is that, as between Vale and BSGR, rescission was ordered on terms which meant that no personal restitutionary claim or rescission trust arose against BSGR, it does not follow that Vale is bound by that determination in these proceedings.

 

  1. Arbitration is a consensual process by which the parties agree to resolve disputes between them by accepting the decision of a tribunal chosen by them or in accordance with a procedure which they have agreed. An award thus produced is final and binding on them: section 58 of the Arbitration Act 1996. For this purpose it makes no difference whether the arbitrators’ decision is right or wrong. Although section 69 of the 1996 Act permits an appeal to the court on a question of law arising out of an award, it is open to the parties to exclude any such appeal and the LCIA Rules contain such an exclusion agreement. Accordingly, when parties agree to arbitrate their differences under LCIA Rules, they agree to be bound by the arbitrators’ decision even if the arbitrators get the law or the facts wrong. The only bases on which such an award can be challenged are that the arbitrators acted without jurisdiction (section 67) or that a serious irregularity of the limited kind listed in section 68 resulted in substantial injustice. In the present case the arbitrators’ award may have been wrong in the sense indicated above, but there was no scope for Vale to challenge the dismissal of its restitutionary claim.

 

  1. However, while the award is final and binding as between Vale and BSGR, it is not binding on third parties. It is elementary that an arbitrator cannot make an award which is binding on third parties who have not agreed to be bound by his decision (Mustill & Boyd, Commercial Arbitration, 2nd Ed (1989), pages 149-150; Russell on Arbitration, 24th Ed (2015), para 6-183). The position is different if the third party can be regarded as a privy of one of the parties for the purpose of the doctrine of res judicata, but that is not suggested here. Accordingly, it is common ground that as third parties the appellants are not bound by the arbitrators’ decision that Vale was the victim of a fraud. Indeed, until the hearing before us the appellants even challenged in these proceedings the fact that the joint venture agreement has been rescinded and the respondents accepted that they are entitled to do so.

 

  1. On this last point, the appellants’ position changed in the course of Mr Houseman’s oral submissions. He accepted that the joint venture agreement has been rescinded by the decision of the arbitrators and that it is not open to the appellants in these proceedings to contend otherwise.1 As we did not call on Ms Tolaney, and as this apparent concession appears to have been somewhat tactical, as I shall explain, I prefer to reserve my position on whether it is correct, not least as the appellants continue to challenge the finding of fraud on which the rescission was premised.

 

  1. If the appellants are not bound by the award, what is the principle which enables them to rely on parts of it, and specifically its determination that Vale was not entitled to a restitutionary claim against BSGR, as binding Vale? As I understood it, Mr Houseman puts his case in two ways. The first is that Vale’s proprietary claim depends on establishing the fact that the joint venture agreement has been rescinded, for which purpose Vale needs to invoke the award which contains the order granting rescission; 1 Mr Houseman submitted that this concession, departing from the appellants’ pleaded case, had already been made in the skeleton argument seeking permission to appeal which was settled by counsel then instructed, Mr Paul Stanley QC. That is not, however, how I read the relevant paragraphs. Nor did the respondents understand them in this way. and that it is an intrinsic part of the order for rescission that Vale had no personal claim for restitution by BSGR of the Initial Consideration. The second is an argument of abuse of process.

 

  1. I would reject the first way of putting the case. Save for limited purposes not applicable here an award between A and B has no binding effect in proceedings between A and C. The essential reason why this is so derives from the consensual nature of arbitration. Just as C has not agreed to be bound by the decision of arbitrators in an arbitration between A and B, neither has A agreed to be bound by any such decision in any dispute he may have with C. While it may be good business sense in the interests of certainty and finality for A and B to agree to accept the decision of an arbitral tribunal (and in some cases to exclude rights of appeal) even if that decision is wrong, in order to resolve disputes between them, it is quite another thing to say that A agrees to accept the (potentially erroneous and in practice virtually unchallengeable) decision of that tribunal in a subsequent dispute with a stranger.

 

  1. In this connection I would refer to two authorities. Ward v Savill [2021] EWCA Civ 1378 was not an arbitration case, but it concerned the effect in later proceedings of a declaration in earlier proceedings as to the existence of a constructive trust following rescission of a contract. In the earlier proceedings against the promoters of film development schemes the claimants obtained declarations that they had been induced to invest in the schemes by fraud and that the promoters and LLPs in which they had invested held the funds invested on trust for them. The claimants then brought further proceedings against the wife of one of the promoters, alleging that a property held by her represented the traceable proceeds of sums beneficially owned by them as a result. They sought to rely on the declarations made in the earlier proceedings to establish their beneficial ownership of the funds invested in the schemes. The question arose whether the declaratory judgements obtained by the claimants in the earlier proceedings had legal effect so as to enable them to found their proprietary claim in the second action without having to re-plead and prove the underlying facts. They argued that the effect of the order made by Mr Justice Butcher in the first action was that the contracts in question were rescinded ab initio with the consequence in law that the beneficial interest never passed to the LLPs. Sir Julian Flaux C (with whom Lady Justice Elisabeth Laing and Lord Justice Warby agreed) rejected this argument on the ground that it would be unjust for a party to be bound by a judgment without an opportunity to be heard, and that this was so even though the first judgment involved declarations as to proprietary rights. He referred to the statement of principle in the well-known case of Hollington v Hewthorn & Co Ltd [1943] 1 KB 587, 596-7:

“A judgment obtained by A against B ought not to be evidence against C, for, in the words of the Chief Justice in the Duchess of Kingston’s Case (1776) 2 Sm LC 13th ed. 644, ‘it would be unjust to bind any person who could not be admitted to make a defence, or to examine witnesses or to appeal from a judgment he might think erroneous: and therefore …the judgment of the court upon facts found, although evidence against the parties, and all claiming under them, are not, in general, to be used to the prejudice of strangers’. This is true, not only of convictions, but also of judgments in civil actions. If given between the same parties they are conclusive, but not against anyone who was not a party. If the judgment is not conclusive we have already given our reasons for holding that it ought not to be admitted as some evidence of a fact which must have been found owing mainly to the impossibility of determining what weight should be given to it without retrying the former case. A judgment, however, is conclusive as against all persons of the existence of the state of things which it actually affects when the existence of that state is a fact in issue. Thus, if A sues B, alleging that owing to B’s negligence he has been held liable to pay xl . to C, the judgment obtained by C is conclusive as to the amount of damages that A has had to pay C, but it is not evidence that B was negligent: see Green v New River Co (1792) 4 Term Rep. 589, and B can show, if he can, that the amount recovered was not the true measure of damage.”

 

  1. The Chancellor continued:

81. … It is quite clear from that passage that the appellants’ purported distinction between factual findings in a judgment which are not binding on a stranger to it and the legal effect of a judgment, which the appellants contend is binding on a stranger, is not a distinction recognised by the rule. The citation with approval from the Duchess of Kingston’s case refers to ‘the judgment of the court upon facts found’ distinguishing between the facts and the judgment and, as Mr Mather correctly pointed out, the circumstances of the Duchess of Kingston’s case itself demonstrate that the rule is not limited to findings of fact but extends to the legal consequences of those findings, as determined by a court in its judgment.”

 

  1. His conclusion was that the claimants had to plead and prove in the second action all the elements of their proprietary case, which included the existence of the fraud and the fact of rescission:

“92. The appellants should be required to plead and prove all the elements of their case against the respondent that they have a beneficial interest in her property, in the same way as the claimants in Calyon were required to establish against the bank their title to the collection. Nothing in Patten LJ’s analysis of the legal effect of rescission in his judgment in Independent Trustee Services supports the appellants’ case that they can rely upon the Butcher Declarations against the respondent without having to plead and prove all the elements of their case against her that they have a beneficial interest in her property.

 

  1. Accordingly, applying both the rule in Hollington v Hewthorn and the wider principle enunciated in Gleeson v Wippell, I consider that the respondent is entitled to require the appellants to plead and prove all the elements of their case against her and that they cannot simply rely upon the Butcher Declarations against her.”

 

  1. This case has obvious parallels with the present case, although there are also some differences. Like the present case, it was concerned with whether a decision about rescission and its effect in earlier proceedings between A and B had legal effect in later proceedings between A and C. It holds firmly that the rescission established in the earlier proceedings is not a legal fact binding on C in the later proceedings, but requires to be proved. On the other hand, in Ward v Savill it was A who was seeking to take the benefit of the earlier judgment. In the present case it is C who is seeking to do so.

 

  1. The second case, Sun Life Assurance Co of Canada v Lincoln National Life Insurance Co [2004] EWCA Civ 1660, [2005] 2 CLC 664, was an arbitration case. In the first arbitration, between Sun Life and a reinsurer, Cigna, the arbitrators held that Cigna was entitled to avoid the reinsurance for misrepresentation and non-disclosure. They added that, if the reinsurance had not been avoided, certain risks (“the Unicover book”) would have been covered under the Cigna reinsurance. The issue in the second arbitration, which was between Sun Life and another reinsurer, Lincoln, was whether the Unicover book would have been covered by the Cigna reinsurance if that had not been avoided. The issue mattered because, if it would have been, the relevant losses could not be recovered from Lincoln; if it would not have been, they could. Lincoln sought to rely on the decision in the first arbitration (to which they were not a party) that the Unicover book would have been covered. They relied on an obiter dictum by Mr Justice Saville in George Moundreas & Co SA v Navimpex Centrala Navala [1985] 2 Lloyd’s Rep 515:

 

“It seems to me that where the rights and obligations of the parties to a contract are determined by the contractual machinery of arbitration under that contract there is something to be said for the view that the result that the arbitrators reach can (in the absence of special circumstances) be treated in effect as part of the contract and thus established by third parties in the same way as any contract can be proved. Thus in the present case the arbitrators have concluded that the sellers [sic.] had a right to cancel the contract and to claim damages as the result of the failure of the buyers [sic.] to perform their obligations under the contract. As between the parties that is now the contractual position as determined by the contractual machinery of arbitration — and it is difficult to see why a stranger to the contract cannot prove that contractual position by simply producing the award as he can prove other contractual rights and obligations by simply producing the contract.”

 

  1. This court disapproved this statement of principle by Mr Justice Saville, although it is right to say that the discussion of this issue was itself obiter. Nevertheless, the issue was fully considered. Indeed, Lord Justice Longmore and Lord Justice Jacob went to the trouble of giving concurring judgements on this issue while recognising that strictly it did not arise.

 

  1. Giving the leading judgment, Lord Justice Mance pointed out that a feature of the case was that it was the stranger to the first arbitration who was seeking to rely in the second arbitration on the award in the first arbitration. He held that there was no legal principle which would enable it to do so:

 

63. … The new principle which Mr Hunter seeks to develop from Saville J’s dicta must, therefore, seek some foundation in legal principle other than the simple considerations of abuse of process which may apply in relation to the administration of justice in court.

 

  1. However, as I see it, there is no foundation in legal principle for Mr Hunter’s suggested new principle. First, as I have observed, Saville J’s dicta are open to criticism for failing to distinguish between the relevance in relation to third parties of (on the one hand) the main obligations of a contract and (on the other hand) a judgment or arbitration award regarding such obligations.

 

  1. Second, Mr Hunter’s attempt to qualify Saville J’s dicta so as to make them operate only one-way is contrary to ordinary principle. The principles of res judicata and issue estoppel commonly operate mutually. Saville J’s dicta in Moundreas were themselves couched in terms suggesting an extended mutual principle. …

 

  1. Thirdly, I do not consider that the arguments based on general justice have the force in the present context which Mr Hunter suggests and which Toulson J accepted. I do not think that it is obviously just, or even convenient, to allow a stranger to enjoy a one-sided entitlement to hold a party to the award or judgment to its terms, with a concomitant right to challenge its correctness whenever it appeared favourable to do so. …

 

  1. Fourthly, and linked with the third point, there is a strong element of fortuity about the one-sided benefit for which Mr Hunter contends. Why should Lincoln gain any benefit from an award to which they were not party, particularly in the present context? Sun/Phoenix could not be said to have gained any benefit against anyone — let alone as against Lincoln — from any conclusion by the Cigna tribunal that, but for the avoidance, the Unicover book was protected. Further, if Sun/Phoenix had realised the hopelessness of their case on avoidance and had conceded avoidance or compromised their claim, without any award ever being issued by the Cigna tribunal, Lincoln would have had to arbitrate the scope of the Cigna reinsurances in relation to the Unicover book with Sun/Phoenix without the benefit of any of the present submissions based on the Cigna award. …

 

  1. Fifthly, and more fundamentally, the solution for which Mr Hunter contends appears to me to overlook or obscure important differences between arbitration and litigation. In the context of litigation, problems of potentially conflicting judgments arrived at between different parties to the same overall complex of disputes are met by provisions for joinder of parties or proceedings or for trial together, if necessary on a mandatory basis using the courts’ compulsive powers. Even in circumstances in which there has been no such joinder, and where neither res judicata nor issue estoppel has any application, the court may intervene to prevent abuse of its process, as stated in paragraphs 63 and 65 above. All this is facilitated by the public nature of litigation, the public interest in the efficient administration of justice and the courts’ coercive powers. Considerations of general justice of the sort to which Toulson J referred thus have relevance and can be given effect in the context of litigation. Arbitration is in contrast a consensual, private affair between the particular parties to a particular arbitration agreement. The resulting inability to enforce the solutions of joinder of parties or proceedings in arbitration, or to try connected arbitrations together other than by consent, is wellrecognised — though the popularity of arbitration may indicate that this inability is not often inconvenient or that perceived advantages of arbitration, including confidentiality and privacy are seen as outweighing any inconvenience. Different arbitrations on closely inter-linked issues may as a result lead to different results, even where, as in the present case, the evidence before one tribunal is very largely the same as that before the other. The arbitrators in each arbitration are appointed to decide the disputes in that arbitration between the particular parties to that arbitration. The privacy and confidentiality attaching to arbitration underline this; and, even if they do not lead to nonparties remaining ignorant of an earlier arbitration award, they are calculated to lead to difficulties in obtaining access, and about the scope of any access, to material relating to that award.

 

  1. The conclusion that I would reach is that Mr Hunter’s suggested principle has no sound basis, and that the dicta of Saville J in Moudreas cannot be regarded as reflecting or as based on any general principle of law in the arbitral context to which they were directed.

 

  1. Lord Justice Longmore also identified a number of difficulties with Mr Justice Saville’s dictum. These included that a stranger to the arbitration may not in practice be able to produce a private and confidential award, and that there was a lack of mutuality if a party to the arbitration was bound but a stranger was not. He concluded:

 

“84. All the above is not to deny that there may be cases in which an award can be evidence in subsequent proceedings even though it will not necessarily be conclusive evidence. It may, to use Rix LJ’s expression in Drake Insurance Plc v Provident Insurance Plc [2003] EWCA Civ 1834, be a ‘fact in the world’. A good example of this is to be found in The Sargasso [1994] 1 Lloyds Rep. 412 where a charterer had been held liable by an award in favour of a sub-charterer who had sued to recover damages for damage to cargo. The charterer then sued the shipowner and proved breach of contract; the measure of damages to which he was entitled was governed by the award pursuant to which he had been held liable to the sub-charterer. It quantified the loss which he had actually suffered; he was entitled to put it in evidence for that purpose and say he should be able to recover not less than the amount of the award; the shipowner would also be entitled to say that the charterer should not recover more than the amount of [the] award. That would not have prevented the shipowner from arguing that the charterer had not taken the right points and that he had thus failed to mitigate his damages or, indeed, that the award against him had been made by reason of some fact which was not a breach of contract on the owners’ part.

 

  1. In The Sargasso Clarke J referred to the observations of Saville J in the Moundreas case and in that context they are uncontroversial. But I do not consider that they form a safe basis on which to found any extension of the existing law of issue estoppel, and they should not be followed in future for that purpose.”

 

  1. Lord Justice Jacob reached the same conclusion:

 

86. I agree with both judgments. It is worth standing back from the detail. What Lincoln seek to do is to rely upon a nonoperative (in the sense that no actual consequences flow from it), opinion expressed by the Cigna arbitrators. The opinion is in its nature private. Moreover it was unappealable. Lincoln seek more than just to rely upon the opinion —they say it is conclusive for all purposes and so conclusive in the later arbitration.

 

  1. I think such a result would be obviously wrong for the following reasons:

 

(a) An arbitration is an essentially private matter between the parties to it. Only some consequence of an award (e.g. that A should pay B money) can go further and extend beyond the privacy of the arbitration itself — so as to become a ‘fact in the world.’ (Rix LJ’s phrase).

 

(b) Because the determination of arbitrators is itself a private matter it is in its nature not intended to be available to third parties for any purpose. A third party’s rights against one of the parties to an earlier arbitration cannot depend on the happenstance of the availability of the details of that arbitration in a later arbitration involving that third party. In this connection I note that the position may be different if the earlier decision is that of a court. In particular a decision of a court as to the construction of a contract is a matter of law — with the consequence that the further principle of judicial precedent on such a question may come into play. Judgment Approved by the court for handing down.

 

  1. Where a party seeks to re-litigate in subsequent proceedings against Y a point he fought fully in earlier proceedings against X, it may be that, notwithstanding a lack of mutuality, he can be prevented from doing so on the grounds of abuse of process. As to that I express no concluded opinion for, for the reasons given by Mance LJ, there is no question of abuse of process here.

 

  1. Mr Houseman sought to distinguish Sun Life v Lincoln on various grounds. He pointed out that it was the claimants who had introduced the arbitrators’ award into the present proceedings, referring to it in their pleadings and obtaining permission to refer to it for the purpose of obtaining a worldwide freezing order, thereby removing any difficulty arising out of the confidentiality of the arbitration. He submitted that the element of mutuality was present in this case, because the arbitrators’ decision on rescission was binding on the appellants as well as the claimants. This was the apparently tactical concession, to which I have referred, on which I prefer to express no concluded view. He submitted that the problem that strangers to the contract cannot be joined in an arbitration, to which both Lord Justice Mance and Lord Justice Longmore referred, did not arise in an arbitration under the LCIA Rules where the arbitrators have a power to order joinder if the stranger consents to be joined.

 

  1. I would accept that some of the reasons given in the judgments in Sun Life v Lincoln do not apply with the same force, or at all, on the facts of the present case. I accept also that we are not bound by this decision. Nevertheless, it contains a clear and considered statement of principle, with which I agree. That principle, founded on the consensual nature of arbitration, is that save for limited purposes not applicable here an award between A and B has no binding effect in proceedings between A and C. The consensual nature of arbitration explains also why the analogy with a decree of divorce on which Mr Houseman relied is not valid. A decree of divorce, made in court, affects the status of the divorcing parties against all the world and may affect third parties, for example because of its effect on inheritance rights. Rescission is a purely contractual matter. Abuse of process

 

  1. The second way in which Mr Houseman puts his case is that it is an abuse of process for Vale to seek to rely on the arbitrators’ rescission of the joint venture agreement without also accepting the burden of their decision that it has no restitutionary claim against BSGR. The first difficulty with this way of putting the case is that no point on abuse of process was taken before the judge and no such argument is advanced in the appellants’ notice. Accordingly the appellants would need permission to amend their appellants’ notice to advance such an argument in this court. They have made no such application. Nevertheless there is a more fundamental difficulty, which I consider we ought to address because Mr Houseman indicated that an application to dismiss the claim on abuse of process grounds may be made in future.

 

  1. The applicable principles were summarised by Lord Justice Simon (with whom Lord Justice Patten and Lord Justice Ryder agreed) in Michael Wilson & Partners Ltd v Sinclair [2017] EWCA Civ 3, [2017] 1 WLR 2646:

 

“48. The following themes emerge from these cases that are relevant to the present appeal.

 

(1) In cases where there is no res judicata or issue estoppel, the power to strike out a claim for abuse of process is founded on two interests: the private interest of a party not to be vexed twice for the same reason and the public interest of the state in not having issues repeatedly litigated; see Lord Diplock in Hunter’s case [1982] AC 529, Lord Hoffmann in the Arthur J S Hall case [2002] 1 AC 615 and Lord Bingham in Johnson v Gore Wood & Co [2002] 2 AC 1. These interests reflect unfairness to a party on the one hand, and the risk of the administration of public justice being brought into disrepute on the other, see again Lord Diplock in Hunter’s case. Both or either interest may be engaged.

 

(2) An abuse may occur where it is sought to bring new proceedings in relation to issues that have been decided in prior proceedings. However, there is no prima facie assumption that such proceedings amount to an abuse, see Bragg v. Oceanus [1982] 2 Lloyd’s Rep 132; and the court’s power is only used where justice and public policy demand it, see Lord Hoffmann in the Arthur J S Hall case.

 

(3) To determine whether proceedings are abusive the court must engage in a close ‘merits based’ analysis of the facts. This will take into account the private and public interests involved, and will focus on the crucial question: whether in all the circumstances a party is abusing or misusing the court’s process, see Lord Bingham in Johnson v Gore Wood and Buxton LJ in Laing v Taylor Walton [2008] PNLR 11.

 

(4) In carrying out this analysis, it will be necessary to have in mind that: (a) the fact that the parties may not have been the same in the two proceedings is not dispositive, since the circumstances may be such as to bring the case within ‘the spirit of the rules’, see Lord Hoffmann in the Arthur J S Hall case; thus (b) it may be an abuse of process, where the parties in the later civil proceedings were neither parties nor their privies in the earlier proceedings, if it would be manifestly unfair to a party in the later proceedings that the same issues should be relitigated, see Sir Andrew Morritt V-C in the Bairstow case [2004] Ch 1; or, as Lord Hobhouse put it in the Arthur J S Hall case, if there is an element of vexation in the use of litigation for an improper purpose.

(5) It will be a rare case where the litigation of an issue which has not previously been decided between the same parties or their privies will amount to an abuse of process, see Lord Hobhouse in In re Norris.”

 

  1. Lord Justice Simon added at [54] that “there are good reasons why a court should be cautious before accepting that later court proceedings are an abuse of its process because it involves a collateral attack on an earlier arbitration award” and at [68] that, while accepting the possibility in principle, “it will probably be a rare case, and perhaps a very rare case, where court proceedings against a non-party to an arbitration can be said to be an abuse of process”.

 

  1. I agree with Ms Tolaney’s written submissions on this point that in the present case there is no viable basis on which to allege that the present proceedings are an abuse of process. There is no question here of the claimants making any collateral attack on the award. On the contrary they seek to establish that its factual findings as to the existence of the fraud are correct, that the joint venture agreement was validly rescinded, and that the basis on which the arbitrators awarded damages (namely that the Initial Consideration represented a loss suffered by Vale) was also correct notwithstanding the arbitrators’ contradictory reasoning on this point when they dealt with the restitutionary claim. Moreover, for the purpose of any argument about abuse of process it must be assumed that the appellants have received some or all of the Initial Consideration with (at least) notice of the fraud. In those circumstances any submission that the claimants are guilty of an abuse of process by bringing their claims in these proceedings is farfetched. A “close ‘merits based’ analysis of the facts” can yield only one answer.

 

Whose equity?

 

  1. The conclusions which I have read so far mean that it is open to Vale to seek to prove its proprietary claim against the appellants in these proceedings and that the award does not afford the appellants any defence. This means that it will be open to Vale to demonstrate, if it can, and if it needs to in order to make good its proprietary claim against the appellants, that contrary to the arbitrators’ view it did have a valid personal claim in restitution against BSGR.

 

  1. It means also that the question whether the beneficiary of any rescission trust is Vale or Vale International need not be decided at this stage or, perhaps, at all. The judge considered that this question was a novel question of law which was better decided, if it arose, at trial on the basis of full findings of fact. That is a case management decision with which this court should not lightly interfere but, in any event, I agree with the judge’s view.

 

Disposal

 

  1. I would dismiss the appeal. The LCIA award does not afford the appellants any defence to the proprietary claim made against them. Lord

 

Justice Lewis:

 

  1. I agree.

 

Lord Justice Bean:

 

  1. I also agree.

 

 

 

 

 

 

Chongqing Loncin Engine Parts v New Monarch Machine Tool, No. 5:21-cv-00084 (N.D.N.Y. 3 August 2021).

 

UNITED STATES DISTRICT COURT

Chongqing Loncin Engine Parts v New Monarch Machine Tool, No. 5:21-cv-00084 (N.D.N.Y. 3 August 2021).

FILE NUMBER: No. 5:21-cv-00084
JUDGE(S): DAVID N. HURD United States District Judge
REGISTRY: NORTHERN DISTRICT OF NEW YORK
DATE OF HEARING:
DATE OF JUDGMENT: 3 August 2021
CASE MAY BE CITED AS: Chongqing Loncin Engine Parts v New Monarch Machine Tool, No. 5:21-cv-00084 (N.D.N.Y. Aug. 3, 2021).
MEDIUM NEUTRAL CITATION: 5:21-cv-00084-DNH-TWD
DIVISION: UNITED STATES DISTRICT COURT
LIST
PARTIES: CHONGQING LONCIN ENGINE PARTS CO., LTD. (also known as Chongqing Lightweight Automotive Components Co. Ltd.),

and

NANJING LONCIN NEMAK PRECISION MACHINERY CO. LTD., Plaintiffs,

-v-

NEW MONARCH MACHINE TOOL, INC., Defendant.

REPRESENTATION: REN RONG PAN ATTORNEY AT LAW of REN RONG PAN, ESQ.

Attorneys for Plaintiffs

45 Division Street, 2nd Floor

Suite 201

New York, NY 10002

 

and

 

HANCOCK ESTABROOK, LLP of ANNELIESE ALIASSO, ESQ.

Attorneys for Defendant

1800 AXA Tower I

100 Madison Street

Syracuse, NY 13202

Appeal:

 

 

JUDGMENT
 

 

DAVID N. HURD United States District Judge

 

MEMORANDUM-DECISION and ORDER

 

  1. INTRODUCTION

 

On January 14, 2021, petitioners Chongqing Loncin Engine Parts Co., Ltd. (“Chongqing”) and Nanjing Loncin Nemak Precision Machinery Co., Ltd. (“Nanjing”), two Chinese engine parts manufacturers, filed this action under the Federal Arbitration Act (“FAA”) and the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) seeking to confirm an arbitration award they received from the China International Economic & Trade Arbitration Committee (“CIETAC”) against respondent New Monarch Machine Tool, Inc. (“New Monarch” or “respondent”), an American tool manufacturer based in Cortland, New York.1 The petition has been fully briefed and will be considered on the basis of the submissions without oral argument.

  1. BACKGROUND2

Chongqing and Nanjing (collectively “petitioners”) are two Chinese companies that purchase and import machine tools used in the manufacture of automobile engines and other machine parts. New Monarch is an

———————————————————————————————————————————-

1 Petitioners initially laid venue in the Southern District of New York. However, on January 19, 2021, U.S. District Judge Gregory H. Woods issued an order to show cause why the matter should not be transferred to the Northern District of New York in light of the petition’s allegation that respondent was “located” in Cortland County. See Dkt. No. 15. After petitioners consented, the case was transferred to this judicial district pursuant to 28 U.S.C. § 1406(a). Dkt. No. 16. 2 The background is taken from the petition and attached exhibits.

——————————————————————————————————————————

company that manufactures and exports machine tools to international customers in China and elsewhere.

 

As relevant here, in late 2013 and early 2014 the parties entered into three sales contracts (No. DLBJ130018, No. DLBJ130019, and No. DLBJ140010) in which New Monarch agreed to supply and install certain CNC boring machines at petitioners’ manufacturing facilities in China. Each sales contracts contained an arbitration clause:

“All disputes in connection with this Contract or the execution thereof shall be settled friendly through negotiation. In case no settlement can be reached, the case may then be submitted for arbitration to the International Economic and Trade Arbitration Committee of the People’s Republic of China in accordance with its rules and procedures. The arbitration shall take place in Beijing, China. The Chinese laws shall be applied in arbitration. The decision of the Arbitration Committee shall be final and binding upon both parties. Neither party shall seek recourse to a law court or other authorities to appeal for revision of the decision. Arbitration fee shall be borne by the losing party. During the course of the arbitration proceedings, the provisions of this Contract shall not be affected thereby except for the portion of this Contract under the arbitration and this Contract shall continuously be performed.”

 

On August 16, 2016, petitioners claimed that New Monarch had materially breached its obligations under the sales contracts by, inter alia, defaulting on the delivery and installation of the agreed-upon machines. Petitioners declared that the three sales contracts were therefore terminated under the United Nations Convention on Contracts for the International Sale of Goods (“CISG”).

 

On September 13, 2016, in accordance with the arbitration clause written into each sales contract, petitioners applied for arbitration to CIETAC, an arbitration institution headquartered in Beijing, China.3 Although CIETAC initially opened three separate arbitration cases (one for each sales contract), the Arbitration Tribunal (the “Arbitration Panel”) later consolidated and merged them into a single arbitration proceeding.

 

On April 19, 2017 and October 27, 2017, the Arbitration Panel held hearings on the various procedural and substantive disputes between the parties. Ultimately, the Panel found that petitioners had rightfully terminated the three sales contracts with New Monarch because of serious quality problems with the goods in question.

 

On June 28, 2018, the Arbitration Panel rendered an Arbitral Award (the “Arbitral Award”) in favor of petitioners in the amount of $2,407,385.00 plus interest payable within thirty days. New Monarch did not pay the Award. This petition followed.

——————————————————————————————————————————

3 Initially established by the People’s Republic of China in 1954, CIETAC “operates independently of the Chinese government, with CIETAC arbitrators having the power to issue awards that Chinese law will recognize as ‘final and binding.’” In Re Guo, 965 F.3d 96, 100–101 (2d Cir. 2020).

——————————————————————————————————————————

 

III. LEGAL STANDARD

 

“The FAA was enacted in 1925 in response to widespread judicial hostility to arbitration agreements.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011). “[T]he purpose behind its passage was to ensure judicial enforcement of privately made agreements to arbitrate.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 219 (1985). Consequently, the Act creates a “strong presumption in favor of enforcing arbitration awards.” Wall Street Assocs., L.P. v. Becker Paribas Inc., 27 F.3d 845, 849 (2d Cir. 1994).

To effectuate its purpose, the FAA also “provides for expedited judicial review to confirm, vacate, or modify arbitration awards.” Hall Street Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 578 (2008). However, courts have an “extremely limited” role in reviewing such awards. Landau v. Eisenberg, 922 F.3d 495, 498 (2d Cir. 2019). “Indeed, confirmation of an arbitration award is a summary proceeding that merely makes what is already a final arbitration award a judgment of the court.” Salus Cap. Partners, LLC v. Moser, 289 F. Supp. 3d 468, 476 (S.D.N.Y. 2018) (cleaned up).

 

Importantly, though, the Act does not “independently confer subject matter jurisdiction on the federal courts.” Scandinavian Reinsurance Co. Ltd. v. St. Paul Fire & Marine Ins. Co., 668 F.3d 60, 71 (2d Cir. 2012) (cleaned up). Instead, “there must be an independent basis of jurisdiction before a district court may entertain petitions to confirm or vacate an award Case 5:21-cv-00084-DNH-TWD Document 33 Filed 08/03/21 Page 5 of 16 – 6 – under the FAA.” Id. As relevant here, the New York Convention governs the enforcement of arbitral awards stemming from disputes that are “commercial and . . . not entirely between citizens of the United States.” Republic of Ecuador v. Chevron Corp., 638 F.3d 384, 391 (2d Cir. 2011) (citation omitted).

 

“Congress implemented the New York Convention by enacting Chapter 2 of the Federal Arbitration Act.” Goel v. Ramachandran, 823 F. Supp. 2d 206, 210 (S.D.N.Y. 2011). Under Section 207 of the Act, any party may, “[w]ithin three years after an arbitral award . . . is made, . . . apply to any court having jurisdiction . . . for an order confirming the award.” 9 U.S.C. § 207.

 

  1. DISCUSSION

 

Petitioners contend that they are entitled to an order confirming the Arbitral Award because they have satisfied all of their obligations under the FAA and the New York Convention. See Pets.’ Mem., Dkt. No. 13.4 In opposition, New Monarch offers three reasons why the Award should not be confirmed: (1) the arbitration was not conducted in accordance with CIETAC’s own procedures and rules; (2) the Award is against the public policy of the United States; and/or (3) the Award includes attorney’s fees, which are outside the scope of the parties’ arbitration agreements. Resp’t Mem., Dkt. No. 29 at 6–11.

——————————————————————————————————————————

4 Pagination corresponds to CM/ECF.

——————————————————————————————————————————

Case 5:21-cv-00084-DNH-TWD Document 33 Filed 08/03/21 Page 6 of 16 – 7 – “When a party applies to confirm an arbitral award under the New York Convention, ‘[t]he court shall confirm the award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention.’” Encyclopaedia Universalis S.A. v. Encyclopaedia Britannica, Inc., 403 F.3d 85, 90 (2d Cir. 2005) (quoting 9 U.S.C. § 207).5 Under Article V of the Convention, the grounds for refusing to recognize or enforce a foreign arbitral award are:

(1)(a) The parties to the agreement were under some incapacity, or the agreement is not valid under the law;

(1)(b) The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case;

(1)(c) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration;

(1)(d) The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties or, failing such an agreement, was not in accordance with the law of the country where the arbitration took place;

——————————————————————————————————————————

5 “The party seeking enforcement need only submit an authentic copy of the award, the agreement to arbitrate and, if the award is in a language other than English, a duly certified translation.” Jiangsu Changlong Chems., Co., Inc. v. Burlington Bio-Med. & Sci. Corp., 399 F. Supp. 2d 165, 168 (E.D.N.Y. 2005).

——————————————————————————————————————————

(1)(e) The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made;

(2)(a) The subject matter of the difference is not capable of settlement by arbitration under the law of the country where recognition and enforcement is sought; or

(2)(b) The recognition or enforcement of the award would be contrary to the public policy of the country in which enforcement or recognition is sought.

 

See Yusuf Ahmed Alghanim & Sons v. Toys “R” Us, Inc., 126 F.3d 15, (2d Cir. 1997). “[T]he party opposing enforcement of an arbitral award has the burden to prove that one of the seven defenses under the New York Convention applies.” Zeiler v. Deitsch, 500 F.3d 157, 164 (2d Cir. 2007) (cleaned up). “The burden is a heavy one, as the showing required to avoid summary confirmance is high.” Id.

 

  1. CIETAC’s Rules and Procedures

 

First, New Monarch contends that the Arbitral Award should not be confirmed because the Arbitration Panel failed to follow CIETAC’s rules and procedures. Resp’t Mem. at 6–7. As respondent explains, the Panel took well over a year to render a decision even though CIETAC’s arbitration rules impose a six-month deadline. Id. at 6.

Upon review, this timeliness argument must be rejected. “Under Article V(1)(d) [of the New York Convention], [r]espondent must show that the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place.” BSH Hausgeräte GmbH v. Kamhi, 291 F. Supp. 3d 437, 443 (S.D.N.Y. 2018) (cleaned up).

 

The “arbitration proceedings of this case [were] governed by the Arbitration Rules of the Arbitration Commission effective as of January 1st, 2015.” Ex. D to Pet., Dkt. No. 8-5 at 10. Article 48 of these Rules require a CIETAC arbitration panel to render an award within six months unless the tribunal receives permission from the President of the Arbitration Court to extend the deadline. Ex. 1 to Ping Yu Decl., Dkt. No. 29-9 at 25. Contrary to New Monarch’s argument, the Arbitration Panel appears to have complied with this Rule. The certified English translation of the Arbitral Award explicitly states that the Panel sought and received permission to extend the deadline from the President of the Arbitration Court. Ex. D to Pet., Dkt. No. 8-5 at 12 (“To meet the needs of the ongoing proceedings, upon application by the arbitration tribunal, the president of the court of arbitration agreed and decided to extend the time deadline for making a verdict on the case to June 28th, 2018.”).

 

In short, New Monarch has not shown that the “the arbitral procedure was not in accordance with the agreement of the parties” and therefore has not carried its “heavy” burden of proving that the Article V(1)(d) defense applies. Accordingly, this argument must be rejected.

 

  1. Public Policy

 

Second, New Monarch contends that the Arbitral Award should not be confirmed because the Arbitration Panel’s long delay in rendering a decision “is against the public policy of the United States calling for just and expeditious resolution of disputes.” Resp’t Mem. at 8–10.

New Monarch’s public policy argument is actually two-fold: that the one-year period between the final hearing (on October 27, 2017) and the Arbitration Panel’s entry of a final Award (on June 28, 2018) took too long and that, during this long delay, U.S.–Chinese trade relations deteriorated, making it “impossible for an American company like New Monarch to get a fair shake before the Chinese-based CIETAC.” Resp’t Mem. at 8–9.

Upon review, this argument will also be rejected. “Article V(2)(b) [of the New York Convention] allows a court to refuse enforcement of an arbitration award where enforcement would violate the forum state’s public policy.” Yukos Cap. S.A.R.L. v. Samaraneftegaz, 592 F. App’x 8, 11 (2d Cir. 2014) (summary order). However, the public policy defense in Article V(2)(b) must be “construed very narrowly to encompass only those circumstances where enforcement would violate our most basic notions of morality and justice.” Telenor Mobile Commcn’s AS v. Storm LLC, 584 F.3d 396, 411 (2d Cir. 2009) (cleaned up).

 

As an initial matter, the Second Circuit has explicitly recognized that CIETAC is an organization that “operates independently of the Chinese government.” In Re Guo, 965 F.3d at 101. But even assuming CIETAC was in some way affiliated with the Chinese government, this argument boils down to an assertion that the confirmation of a foreign arbitral award somehow hinges on the current state of trade relations between signatories to the New York Convention.

That is not the law. “The goal of the Convention, and the principal purpose underlying American adoption and implementation of it, was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries.” Scherk v. Alberto-Culver Co., 417 U.S. 506, 520 n.15 (1974).

 

In sum, New Monarch has not shown that confirming a monetary arbitral award won by a foreign party in a contract dispute over the delivery of commercial goods would “be directly at odds with a well[-]defined and dominant [American] public policy resting on clear law and legal precedent.” St. Mary Home, Inc. v. Serv. Emps. Int’l Union, Dist. 1199, 116 F.3d 41, 46 (2d Cir. 1997). Accordingly, this argument will be rejected.

 

  1. The Panel’s Award of Attorney’s Fees

 

Third, New Monarch contends that the Arbitral Award should not be confirmed because it improperly includes an award of attorney’s fees. Resp’t Mem. at 10–11. According to respondent, the contractual arbitration clause in each of the three sales contracts “does not provide for an award of attorney’s fees and costs in excess of the arbitration fee.” Id. at 10.

 

Upon review, this argument must be rejected. The arbitration clause in each sales contract states that the “[a]rbitration fee shall be borne by the losing party.” According to New Monarch, this quoted language “does not provide for an award of attorney’s fees and costs in excess of the arbitration fee.” Resp’t Mem. at 10.

But New Monarch’s assertion is begging the question. It relies on the implicit premise that the definition of “arbitration fee” necessarily excludes attorney’s fees or other costs associated with the arbitration. And that might be true, but the burden of establishing a defense invoked under Article V of the New York Convention lies with the respondent. Respondent not pointed to a clear definition of this contract term—whether in the sales contracts, the rules and procedures governing CIETAC arbitration, or Chinese law—that would support its desired conclusion.

 

Equally problematic for this argument is the fact that the rules and procedures governing the arbitration appear to explicitly permit the tribunal to award attorney’s fees. As relevant here, Article 52 of CIETAC’s Arbitration Rules empower the Arbitration Panel to:

“decide in the arbitral award, having regard to the circumstances of the case, that the losing party shall compensate the winning party for the expenses reasonably incurred by it in pursuing the case. In deciding whether or not the winning party’s expenses incurred in pursuing the case are reasonably, the arbitral tribunal shall take into consideration various factors such as the outcome and complexity of the case, the workload of the winning party and/or its representative(s), the amount in dispute, etc.

Ex. 1 to Ping Yu Decl., Dkt. No. 29-9 at 27.

 

This language allocates authority to the Arbitration Panel to award attorney’s fees in an appropriate case. New Monarch has not pointed to any clear basis on which to conclude that the parties (in the sales contracts or elsewhere) intended to limit the authority that is otherwise conferred on the Panel by these Arbitration Rules. Cf. In re Arb. Between Gen. Sec. Nat. Ins. Co. & AequiCap Program Adm’rs, 785 F. Supp. 2d 411, 419 (S.D.N.Y. 2011) (rejecting similar argument where parties “used expansive language”). Thus, especially in light of the substantial deference owed to foreign arbitration awards, this argument must also be rejected.

 

Remaining Matters In addition to confirmation of the Arbitral Award, the verified petition also requests (1) the entry of pre-judgment interest running from July 27, 2018 and (2) an award of attorney’s fees related to the additional costs of bringing this confirmation proceeding in federal court. Dkt. No. 8 at 6.

Upon review, petitioner’s request for pre-judgment interest will be denied. There is a general presumption in favor post-award, pre-judgment interest. In re Arb. Between Westchester Fire Ins. Co. v. Massamont Ins. Agency, Inc., 420 F. Supp. 2d 223, 226 (S.D.N.Y. 2005). However, such an award is only appropriate if it would be “fair, equitable and necessary to compensate the wronged party.” Wickham Contracting Co. v. Local Union No. 3, Int’l Brotherhood of Elec. Workers, AFL-CIO, 955 F.2d 831, 835 (2d Cir. 1992).

 

Petitioners have failed to identify any provision of the Arbitration Panel’s Award that would support the entry of pre-judgment interest. Cf. Oracle Co. v. Wilson, 276 F. Supp. 3d 22, 34 (S.D.N.Y. 2017) (“[C]ourts in this Circuit have found that a district court may not provide prejudgment interest if the Arbitrator’s award is silent on such interest.”). Nor have they indicated the rate of interest they seek, or explained why that rate would be appropriate under the governing law. In short, because petitioners have failed to establish that an award of pre-judgment interest in this case would be “fair, equitable and necessary,” the request will be denied.

Petitioners’ request for additional attorney’s fees will also be denied. “The FAA does not provide for an award of attorney’s fees and expenses for arbitration- confirmation proceedings, but a court remains authorized to enter such an award pursuant to its inherent equitable powers.” Seneca Nation of Indians v. New York, 420 F. Supp. 3d 89, 106 (W.D.N.Y. 2019) (cleaned up). “In the arbitration context, the guiding principle has been stated as follows: when a challenger refuses to abide by an arbitrator’s decision without justification, attorney’s fees and costs may properly be awarded.” Id.

Upon review, that standard has not been met. Cf. Seneca Nation of Indians, 420 F. Supp. 3d at 106 (“Such awards may be made, for example, when a party pursues a frivolous course.”). Even assuming otherwise, petitioners have failed to substantiate their request with contemporaneous time records or other supporting documentation. Accordingly, the request for attorney’s fees will also be denied.

 

  1. CONCLUSION

 

Petitioners’ motion to confirm the Award will be granted. However, petitioners’ requests for pre-judgment interest and for attorney’s fees incurred in bringing this confirmation action will be denied.

Therefore, it is ORDERED that

  1. The Arbitral Award is CONFIRMED; and
  2. Judgment shall be entered in the amount of $2,407,385.00.6

 

The Clerk is directed to enter a judgment accordingly and close the file.

IT IS SO ORDERED.

Dated: August 3, 2021 Utica, New York.

——————————————————————————————————————————

6 Post-judgment interest shall accrue on the full amount of the judgment in accordance with 28 U.S.C. § 1961(a) because “[t]he award of post-judgment interest is mandatory on awards in civil cases as of the date judgment is entered.” Lewis v. Whelan, 99 F.3d 542, 545 (2d Cir. 1996).

Rowland v. Sandy Morris Financial & Estate Planning Services, LLC., No. 20-1187 (4th Cir. 2021)

 

United States Court of Appeals, Fourth Circuit

 

Rowland v. Sandy Morris Financial & Estate Planning Services, LLC., No. 20-1187 (4th Cir. 2021)

FILE NUMBER: No. 20-1187.
JUDGE(S): Before WILKINSON, NIEMEYER, and QUATTLEBAUM, Circuit Judges.
REGISTRY:
DATE OF HEARING: March 12, 2021
DATE OF JUDGMENT: April 7, 2021
CASE MAY BE CITED AS: Rowland v. Sandy Morris Financial & Estate Planning Services, LLC., No. 20-1187 (4th Cir. 2021)
MEDIUM NEUTRAL CITATION: Rowland v. Sandy Morris Financial & Estate Planning Services, LLC., No. 20-1187 (4th Cir. 2021)
DIVISION: United States Court of Appeals, Fourth Circuit
LIST
PARTIES: BARRY ROWLAND; DONNA ROWLAND, Plaintiffs-Appellees,

v.

SANDY MORRIS FINANCIAL & ESTATE PLANNING SERVICES, LLC; SANDEVA O’BRYAN MORRIS, Defendants-Appellants,

and

GLOBAL FINANCIAL PRIVATE CAPITAL, LLC; GF INVESTMENT SERVICES, LLC; MINNESOTA LIFE INSURANCE COMPANY, Defendants.

REPRESENTATION: Donald R. Pocock, NELSON MULLINS RILEY & SCARBOROUGH LLP, Winston-Salem, North Carolina, for Appellant.

Brooke A. Howard, HOWARD LAW, PLLC, Raleigh, North Carolina; James A. Roberts, III, Matthew D. Quinn, LEWIS & ROBERTS, PLLC, Raleigh, North Carolina, for Appellees.

Appeal: Appeal from the United States District Court for the Western District of North Carolina, at Statesville. Kenneth D. Bell,

District Judge. (5:19-cv-00069-KDB-DCK).

 

 

JUDGMENT
 

 

Judge Wilkinson wrote the opinion, in which Judge Niemeyer and Judge Quattlebaum joined.

 

WILKINSON, Circuit Judge.

 

In this appeal, defendants Sandeva “Sandy” Morris and Sandy Morris Financial LLC (SMF) challenge the district court’s denial of their motion to compel arbitration of plaintiffs Barry and Donna Rowland’s North Carolina contract and tort claims. Because we agree with the district court that the parties did not form an agreement to arbitrate, we affirm the order below.

 

I.

In 2014, the Rowlands first met with Morris in Tampa, Florida, for financial planning advice. Later that year, they moved to North Carolina but continued to use Morris and her firm for their financial affairs. From 2015 to 2018, Morris served as the Rowlands’ financial advisor. In 2015, Morris sold them two annuity contracts and the next year recommended a particular universal life insurance policy, which the Rowlands purchased.

 

The Rowlands expanded the scope of their professional relationship with Morris and her firm in 2017 by hiring her to manage their investment accounts. To do this, plaintiffs filled out SMF’s Asset Management Agreement (AMA) and new account forms from TD Ameritrade. The AMA and TD Ameritrade forms were bundled together in a single pdf. The brokerage forms rolled money from Mr. Rowland’s Charles Schwab IRA over to a TD Ameritrade IRA managed by Morris and her firm.

 

The AMA included an addendum and a Risk Profile Questionnaire (RPQ) that documented what accounts SMF was to manage and how the firm was to manage them. The AMA also included an arbitration section. It required the parties to use arbitration to settle “any controversy or dispute which may arise between Client and Sandy Morris Financial concerning any transaction or the construction, performance or breach of this Agreement.” J.A. 121. The AMA dictated that the rules of the American Arbitration Association would govern any arbitration. J.A. 121. Right above the signature block, the contract included this disclaimer, bolded and in all capital letters: “This Agreement contains a pre-dispute arbitration clause.” J.A. 122.

 

On October 2, 2017, Mr. Rowland received a fifty-four-page pdf from SMF, which included the AMA and the TD Ameritrade documents. He signed and returned the document via Docusign, a well-recognized online platform for signing and transmitting documents. When SMF received the signed agreement, Steve Zanolli, the Chief Compliance Officer, signed it on behalf of SMF.

 

Unfortunately the Rowlands’ investments did not work out as they had hoped. After the Rowlands commenced this suit in the Western District of North Carolina for state law contract and fraud claims, the parties submitted different versions of the AMA to the district court for its decision on Morris and SMF’s motion to compel arbitration. The Rowlands’ version (Rowland AMA) included on page fourteen of the AMA one account (ending in 8519) for management by SMF and Mr. Rowland’s Docusign signature. And on page fifteen, the RPQ did not have a box marked for Risk Tolerance or Investment Objective, nor did it denote how many years of experience Mr. Rowland had with stocks— the only investment vehicle for which he indicated having any background. This page also had Mr. Rowland’s Docusign signature.

 

The version submitted by SMF (SMF AMA) with Zanolli’s signature was not the same. The SMF AMA included a second account (ending in 8521) and Sandy Morris’s signature. And the RPQ on page fifteen of the AMA had several boxes left blank by Mr. Rowland checked in a different color ink. It had his risk tolerance marked as “Moderate,” his investment objectives marked as both “Balanced” and “Growth & Income,” and his investment experience expanded to “Mutual Funds” with thirty years of experience denoted for both mutual funds and stocks. J.A. 125. Finally, the document had marked that the Rowlands would need “$6” of their assets in less than three years. J.A. 125.

 

Defendants filed motions to compel arbitration, to dismiss for lack of personal jurisdiction, to transfer venue, and to dismiss for failure to state a claim. The district court denied all of them. On the arbitration motion, the court found that the parties had not formed an agreement to arbitrate. On February 18, 2020, Morris and SMF timely filed a notice of appeal. Though noting that the defendants’ “appeal could be considered frivolous,” the district court nonetheless granted them a stay during the pendency of this appeal. J.A. 396. We have jurisdiction pursuant to 9 U.S.C. § 16(a)(1).

 

II.

 

We review “the decision to deny [a] motion for stay and to compel arbitration” de novo. Noohi v. Toll Bros., Inc., 708 F.3d 599, 602 (4th Cir. 2013) (quoting Patten Grading & Paving, Inc. v. Skanska USA Bldg., Inc., 380 F.3d 200, 204 (4th Cir. 2004)). Whether an agreement to arbitrate was formed is a question of “ordinary state-law principles that govern the formation of contracts.” Hill v. Peoplesoft USA, Inc., 412 F.3d 540, 543 (4th Cir. 2005) (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)). We review these questions of state contract law de novo as well. Muriithi v. Shuttle Exp., Inc., 712 F.3d 173, 178 (4th Cir. 2013).

 

Furthermore, in reviewing the district court’s denial of a motion to compel arbitration, “we accept as true the allegations of the . . . Complaint that relate to the `underlying dispute between the parties.'” Berkeley Cty. Sch. Dist. v. Hub Int’l Ltd., 944 F.3d 225, 233 (4th Cir. 2019) (quoting Schnabel v. Trilegiant Corp., 697 F.3d 110, 113 (2d Cir. 2012)).

 

A.

 

In the modern American legal system, arbitration is an important means of dispute resolution. When state and federal courts require time-consuming, complex, and expensive procedures, arbitration offers a means of dispute resolution that is faster, easier, and cheaper for parties to utilize. And it has been given the imprimatur of the Supreme Court over the last decade. See, e.g., Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019); Am. Express Co. v. Italian Colors Rest., 570 U.S. 228 (2013); AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).

 

It was not always so. When Congress passed the Federal Arbitration Act (FAA), Pub. L. No. 68-401, 43 Stat. 883 (1925), it did so in response to extreme judicial hostility to arbitration. The FAA “sought to `overcome the rule of equity, that equity will not specifically enforce any arbitration agreement'” because first the English—and then the American—courts jealously guarded their own jurisdiction. Southland Corp. v. Keating, 465 U.S. 1, 13 (1984) (quoting Hearing on S. 4214 Before a Subcomm. of the S. Comm. on the Judiciary, 67th Cong. 6 (1923) (remarks of Sen. Walsh)).

 

Since the FAA established “a national policy favoring arbitration,” id. at 10, the Supreme Court has been quick to halt the lower courts’ creation of exceptions to the FAA that have no basis in the statute’s text. In Italian Colors, the Court rejected the “judgemade exception to the FAA” that declared arbitration “agreements that prevent the `effective vindication’ of a federal statutory right” to be unenforceable. 570 U.S. at 235. More recently, the Supreme Court unanimously rejected the “wholly groundless” exception adopted by four circuits. Henry Schein, 139 S. Ct. at 528. Under this exception, district judges had denied motions to compel arbitration when they found the movant’s “argument that the arbitration agreement applie[d] to the particular dispute [to be] `wholly groundless.'” Id. at 527-28.

 

This is not to say that district courts are to grant blindly all motions to compel arbitration. The FAA balances the goals of facilitating arbitration with the aims of contract law by recognizing a limited role for federal courts to play. The statute mandates that “[i]f the making of the arbitration agreement . . . be in issue, the court shall proceed summarily to the trial thereof.” 9 U.S.C. § 4. The Supreme Court has also held that when the parties disagree as to whether an agreement to arbitrate has been formed, “the dispute is generally for courts to decide.” Granite Rock Co. v. Int’l Bhd. of Teamsters, 561 U.S. 287, 296 (2010).

 

There is a difference between disputes over arbitrability and disputes over contract formation. See Hub Int’l, 944 F.3d at 234 n.9. While “`parties may agree to have an arbitrator decide . . . gateway questions of arbitrability,'” such an agreement does not “preclude a court from deciding that a party never made an agreement to arbitrate any issue.” Id. (quoting Henry Schein, 139 S. Ct. at 529). That is, it does not erase the court’s obligation to determine whether a contract was formed under 9 U.S.C. § 4. Thus the incorporation of the rules of the American Arbitration Association, which allow the arbitrator to rule on questions of arbitrability, see Am. Arbitration Ass’n, Consumer Arbitration Rules, R-14 (amended Sept. 1, 2014), does not obviate the need for courts to decide the threshold issue of contract formation.

 

This pre-arbitration process accomplishes an important function. It must be remembered that mandatory arbitration is not the default form of dispute resolution but rather is permitted only when the parties agree to it. “Arbitration is,” after all, “a matter of contract.” Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 67 (2010). A party cannot be forced into arbitration. Rather, parties must actually contract to arbitrate disputes between them. Section 4 of the FAA has made clear that it is up to courts to determine whether a contract has been formed, and the district court properly heeded that call. This respects party autonomy and the general principles of contract law.

 

B.

 

Having found that the district court was the proper one to resolve the parties’ dispute over whether they agreed to arbitrate, we now turn to how that disagreement ought to be resolved.

 

Section 4 of the FAA requires the court to conduct a trial of the issue if there are “`sufficient facts’ support[ing] a party’s denial of an agreement to arbitrate.” Hub Int’l, 944 F.3d at 234. However, the right to a jury trial “is not automatic.” Chorley Enters., Inc. v. Dickey’s Barbecue Rests., Inc., 807 F.3d 553, 564 (4th Cir. 2015). Just as in traditional litigation, the district court must employ the summary judgment standard as a gatekeeper, so a trial occurs only if there are “genuine issues of material fact.” Id.; see also Hub Int’l, 944 F.3d at 234. In applying that standard, the burden is on the defendant to “establish[] the existence of a binding contract to arbitrate the dispute.” Minnieland Private Day Sch., Inc. v. Applied Underwriters Captive Risk Assurance Co., Inc., 867 F.3d 449, 456 (4th Cir. 2017). Here the district court in effect granted summary judgment to the plaintiffs by finding that, as a matter of law, the parties did not form an agreement. We have long held that appropriate. See, e.g., Stedor Enters., Ltd. v. Armtex, Inc., 947 F.2d 727, 732-33 (4th Cir. 1991).

 

Whether an agreement to arbitrate was formed is, as we have noted, a question of ordinary state contract law principles. See Chorley Enters., 807 F.3d at 563. Here, as both parties agree, the dispute is governed by North Carolina law. For a valid contract to be formed, the two parties must “assent to the same thing in the same sense, and their minds meet as to all terms.” Normile v. Miller, 326 S.E.2d 11, 15 (N.C. 1985) (quoting Goeckel v. Stokely, 73 S.E.2d 618, 620 (N.C. 1952)). There must be “an offer and acceptance in the exact terms.” Id. If the original terms are changed or new ones added, “there is no meeting of the minds.” Id. (quoting 8A G. Thompson, Commentaries on the Modern Law of Real Property § 4452 (1963)). “When there has been no meeting of the minds on the essentials of an agreement, no contract results.” Creech v. Melnik, 495 S.E.2d 907, 912 (N.C. 1998). This is nothing more than the standard black-letter law taught in every first year Contracts course.

 

Based on the undisputed evidence submitted by both parties, there was no such meeting of the minds—and thus no contract—because both parties did not agree to the same terms. The parties make a fuss about Docusign, the other files in the pdf with the AMA, whether there was a counteroffer, and how the differences in the AMAs submitted by each party came about. But at its core, this is a very simple contract dispute.

 

To wit, Mr. Rowland signed the AMA, which he submitted into evidence. Morris and SMF did not dispute that the Rowland AMA was in fact the version that Mr. Rowland signed. Morris and SMF also submitted into evidence the AMA that their agent signed. Mr. Rowland never received a copy of the SMF AMA and did not dispute that the version SMF submitted was the version that they signed. Those two AMAs differed as to a number of terms. In particular, an unknown employee at SMF added an extra account to be managed and filled in Mr. Rowland’s investment objectives and risk preferences, which according to the contract, were to govern how SMF managed his money. There was no evidence in the record that Mr. Rowland ordered them to do so or was even informed that they made such changes. There was no evidence that he reviewed or initialed those changes.

 

These discrepancies are not minor—they are material differences in the agreement between the parties. An investment advisor cannot unilaterally add another account for it to manage. The investment objectives and risk tolerance of the client are not insignificant preferences; rather, they set the ground rules for how SMF was to manage the plaintiffs’ money. The designation of which accounts were to be managed and how they were to be managed would be of paramount importance for any couple turning over its hard-earned savings to a financial firm for management. SMF did not bother to solicit from Mr. Rowland this information after he submitted the signed form, when it easily could have done so. Either one of the above omissions was sufficient to make for a material difference defeating the formation of the contract. Together they undoubtedly did so. Because the difference in material terms in the AMA prevented a meeting of the minds on the essential elements of the contract, we find that no contract between the parties was formed.

 

Although not dispositive, it is important to note the difference in sophistication of the parties. The Rowlands are individuals without extensive personal experience in finance or investing. Morris is a certified financial professional and her firm is in the business of managing money. The documents were so technical and voluminous as to daunt, and perhaps overwhelm, persons with the plaintiffs’ level of experience. We are not saying that volume or difference in sophistication is sufficient to defeat the formation of a contract, but the firm changing terms of an agreement after the customer signs it certainly does not add to the impression of fairness that one hopes to get from a financial institution managing an individual investor’s portfolio.

 

C.

 

There is no question that the digital age has changed the nature of contract formation. See, e.g., Robin Bradley Kar & Margaret Jane Radin, Pseudo-Contract and Shared Meaning Analysis, 132 Harv. L. Rev. 1135, 1141-42 (2019) (discussing how the Internet allowed a rise in boilerplate language that changed contracting and stretched traditional legal concepts); Ian Ayres & Alan Schwartz, The No-Reading Problem in Consumer Contract Law, 66 Stan. L. Rev. 545 (2014) (discussing the difficulty of translating the duty to read to the Internet era). Long gone are the days when two parties might sit down across a wooden table and sign with their own pens the same sheet of paper. With the advent of email, what is the significance of the Mailbox Rule? See generally Restatement (Second) of Contracts § 63 (Am. Law Inst. 1981). One can now send drafts, modifications, edits, and revisions with such speed and alacrity that it becomes easy to get sloppy. A casual Internet browser might enter a contract with a company merely by using its website. See, e.g., Nguyen v. Barnes & Noble, Inc., 763 F.3d 1171, 1175-76 (9th Cir. 2014) (discussing “clickwrap” and “browsewrap” agreements online). In some cases, an “electronic `click’ can suffice to signify the acceptance of a contract.” Sgouros v. TransUnion Corp., 817 F.3d 1029, 1033 (7th Cir. 2016). For the unwary, this can be treacherous.

 

Although “new commerce on the Internet has exposed courts to many new situations”—and opened up useful new tools through which contracting parties can communicate—”it has not fundamentally changed the principles of contract.” Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 403 (2d Cir. 2004). Courts are not licensed to ignore the old chestnuts— cases that remind us that (1) certain formalities are required for a contract to be formed, see Bailey v. West, 249 A.2d 414 (R.I. 1969), and (2) when the formalities are met, a contract it does make, see Lucy v. Zehmer, 84 S.E.2d 516 (Va. 1954) (finding an impromptu land contract on a napkin agreed to over drinks to be an enforceable contract).

 

“About suffering, they were never wrong, / The old Masters.” W.H. Auden, Musee des Beaux Arts (1938). Perhaps the same can be said about formalities. Justice Holmes once declared “that all contracts are formal, that the making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs—not on the parties’ having meant the same thing but on their having said the same thing.” Oliver Wendell Holmes, The Path of the Law, 110 Harv. L. Rev. 991, 996 (1997) (reprint of address given at Boston University School of Law on January 8, 1897). The electronic age has not made the formalities of contract less crucial, but more so—it is imperative that parties turn square corners and ensure that the documents on which signatures are affixed are as identical as possible and certainly identical as to all material terms. In the past, parties meeting face-to-face might have interacted with other people who could testify as to disputed facts over contract formation. When personal contact (and perhaps extrinsic evidence) is reduced, and documents are swapped back and forth via email or Docusign, there may be fewer such people. All we are left to rest on are the formalities.

 

III.

 

What happened here was at best sloppy on the part of Morris and SMF and at worst duplicitous—changes effected by sleight of hand. We need not decide which because, either way, no contract was formed. Unilateral unratified material changes on the part of Morris and her firm prevented the formation of a contract. Thus we readily affirm the order of the district court declining to compel arbitration.

 

AFFIRMED