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

SUPREME COURT OF WESTERN AUSTRALIA
THE COURT OF APPEAL (WA)

STRUCTURAL MONITORING SYSTEMS LTD
(Appellant)

V

TULIP BAY PTY LTD
(First Respondent)

KENNETH JOHN DAVEY 
(Second Respondent)

 

CORAM: Quinlan CJ, Murphy JA, Mitchell JA
HEARD: 9 November 2018
DELIVERED: 29 January 2019
FILE NO: CACV 2 of 2018
CATCHWORDS: Arbitration – Commercial Arbitration Act 1985 (WA) – Appeal against decision dismissing application to set aside arbitral award on ground of misconduct – Whether denial of procedural fairness – Whether excessive delay in delivery of award – Matter heard and determined by two arbitrators where three arbitrators had been appointed – Majority of the arbitrators heard and determined the matter

 

JUDGMENT OF THE COURT:

 

  1. The appellant, Structural Monitoring Systems Ltd, appeals against the decision of the primary judge dismissing its application to set aside an award made by arbitrators Peter John Hannan and Philip George Clifford on the grounds of misconduct, and remove arbitrators Peter John Hannan, Philip George Clifford and Kelvin Lord.
  2. The application was made pursuant to s 42 and s 44 of the Commercial Arbitration Act 1985 (WA) (the Act).
  3. Before the primary judge, the appellant contended that the misconduct was constituted by:

(a) a denial of procedural fairness, by taking into account submissions from the respondents, Tulip Bay Pty Ltd (Tulip) and Kenneth Davey, to which the appellant had no opportunity to respond;

(b) excessive delay in the delivery of the award; and

(c) the matter being decided by two of the arbitrators (Mr Hannan and Mr Clifford) in circumstances where three arbitrators had been appointed.

  1. The primary judge concluded that there had, relevantly, not been any misconduct within the meaning of the Act of a kind which would justify setting aside the award. His Honour dealt separately with each of the identified allegations of misconduct.
  2. Before turning to the grounds of appeal, it is necessary to set out some of the background to, and the conduct of, the arbitration.

Background The Technology Agreement

  1. The appellant and the respondents are parties to an agreement dated 29 November 1999 entitled ‘Technology Agreement’.
  2. The Technology Agreement recited that:

(a) Mr Davey was the inventor of the technology the subject of the agreement, and had assigned full beneficial ownership of the technology to Tulip; and

(b) the appellant had acquired from Tulip the exclusive worldwide licensing rights and the option to purchase the intellectual property rights pertaining to the technology.

  1. By the terms of the Technology Agreement, the appellant exercised the option to acquire the intellectual property rights in the technology in return for a payment of $500,000 and a continuing obligation to make an annual royalty payment for so long as any patent remains in existence. In that regard, the agreement provides for a minimum annual royalty of $60,000 adjusted in accordance with the Consumer Price Index.
  2. Clause 2.3 of the Technology Agreement records an acknowledgement and agreement by the respondents to the effect that the appellant had, by the agreement, acquired full beneficial right, title and interest in the intellectual property rights relating to the technology, together with each ‘Enhancement’. The word ‘Enhancement’ is defined by the agreement to mean each ‘improvement, update, revision, modification, extension or change to the Technology, the Products and the Intellectual Property Rights’ made by or on behalf of the parties.
  3. By cl 17 of the Technology Agreement, the parties agreed that all claims arising out of or in connection with agreement were to be exclusively and finally settled by arbitration (arbitration agreement).
  4. Clause 17.2 of the Technology Agreement provides that a single arbitrator is to be appointed with the unanimous consent of the parties, failing which consent:

[T]he arbitration shall be heard and determined by three (3) arbitrators.

  1. In those circumstances, the Technology Agreement provided that each party is to appoint an arbitrator, who will together appoint a presiding arbitrator.
  2. Clause 17.3.3 of the Technology Agreement provides:

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

The dispute and arbitration

  1. In June 2006, Mr Davey lodged an application for a patent, designated AAPA 2006903137 (the 2006 patent application). In June and July 2009, Tulip and Mr Davey lodged two more applications for patents.
  2. By a Notice of Arbitration dated 7 June 2012, the appellant alleged that each of the patent applications was an ‘Enhancement’ within the meaning of the Technology Agreement, and that making the applications for patents constituted breaches of that agreement. The appellant alleged that the breaches constituted a repudiation of the Technology Agreement by the respondents, which the appellant had accepted, bringing that agreement to an end. The appellant claimed damages for breach of the Technology Agreement, including return of all royalties it had paid since 2006, plus costs and expenses it claimed to have incurred.
  3. In the Notice of Arbitration, the appellant consented to the appointment of Mr Clifford as the arbitrator and, failing agreement, stated that it would appoint Mr Clifford as one of the three arbitrators. Mr Clifford is a barrister.
  4. On 14 September 2012, the respondents nominated Mr Lord and, on 30 January 2013, the nominated arbitrators appointed Mr Hannan as presiding arbitrator. Mr Lord is a patent and trade mark attorney and Mr Hannan is a barrister.
  5. On 14 February 2013, at a preliminary conference before Messrs Hannan and Clifford, the respondents raised an objection to the jurisdiction of the arbitrators on the ground of a misdescription of the appellant in the Notice of Arbitration. That objection was dismissed in reasons published on 18 March 2013 by Mr Hannan, with which Mr Lord and Mr Clifford agreed on 18 March 2013 and 19 March 2013 respectively.
  6. The only relevance of that preliminary decision, for present purposes, is that the letter from Mr Lord to Mr Clifford dated 18 March 2013 advising that he agreed with Mr Hannan’s reasons is the last recorded involvement of Mr Lord in the arbitration until after Messrs Hannan and Clifford delivered their final reasons.
  7. Thereafter, various steps were taken in the arbitration. It is not necessary to set out all of the history of the arbitration. As the primary judge observed, the arbitration as a whole fell well short of an efficient and cost-effective dispute resolution process. It was replete with unnecessary delay and procedural disputes, for which all involved must bear some responsibility.
  8. It suffices to refer to the following matters.
  9. On 30 April 2013, the respondents served their response to the points of claim, and a counterclaim (the Response and Counterclaim). In essence, while the respondents admitted lodging the various patent applications, they denied that their conduct constituted a breach or a repudiation of the Technology Agreement. The Response and Counterclaim included a counterclaim by the respondents seeking both debts and damages. In particular, the respondents claimed payment of unpaid royalties under the Technology Agreement for the years 2010/2011 and 2011/2012.
  10. Following various directions and extensions, the appellant served its response to the Response and Counterclaim on 18 March 2014 (seven months after it was due). That response was largely concerned with the counterclaim, and maintained that the appellant was not obliged to make royalty payments by reason of the termination of the Technology Agreement as a consequence of its acceptance of the respondents’ alleged repudiatory breach.
  11. On 20 March 2014, Messrs Hannan and Clifford made directions relating to the provision of written witness statements and submissions. While all witness statements were served within the times specified by Messrs Hannan and Clifford, the appellant failed to comply with a direction to serve its submissions by 20 May 2014.
  12. There then followed unsuccessful settlement negotiations and the arbitration sat in abeyance until April 2015 when, following correspondence between the parties, the appellant served its written submissions on 20 April 2015 (some 11 months after they were due).
  13. Further programming orders were made (in the name of all three arbitrators) requiring the respondents to file responsive submissions on or before 4 May 2015. The respondents’ solicitor sought, and obtained, a number of extensions of time within which to serve those submissions. The submissions were ultimately served at 5.01 pm on 9 July 2015, seven hours after the final deadline.
  14. In his email attaching the submissions the respondents’ solicitor wrote:

Please accept my apologies for the delay today, which was due to a serious and recent health issue currently being experienced by a family member.

  1. The appellant’s allegation, before the primary judge and in this Court, that it was denied natural justice by the arbitrators relates to the arbitrators having considered material served after 10 am on 9 July 2015.
  2. As was the case before the primary judge, however, it is unnecessary for us to deal with the effect of the submissions served on 9 July 2015. That is because, before the primary judge and on appeal, the appellant did not rely upon any aspect of those submissions in support of its assertion that it was denied procedural fairness. Rather, its assertion that procedural fairness was denied arose from written submissions lodged by the respondents in January 2016.
  3. On 18 December 2015, following correspondence between the parties and the arbitrators in relation to their progress in October and November that year, Mr Clifford provided a memorandum to the solicitors for the parties and his fellow arbitrators in which he identified 22 issues to be resolved in the arbitration.
  4. Mr Clifford’s memorandum invited the parties to consider whether the 22 issues accurately reflected the issues for resolution, whether the parties wished to jointly concede that any of those issues did not require resolution, and whether there were additional issues.
  5. The memorandum also drew the parties’ attention to three decisions on the subject of repudiation. While the memorandum did not require the parties to make any submissions, it advised that they should feel free ‘to make a further submission of law or mixed fact and law on how the cases mentioned above apply to their case theory’ should they wish to do so.
  6. The memorandum also advised that the arbitrators did not require an oral hearing and proposed to resolve the issues on the papers, but invited either party wanting an oral hearing to advise the arbitrators of that fact, and why. The memorandum directed that any further materials were to be provided not later than 20 January 2016.
  7. On 20 January 2016 the respondents’ solicitor served written submissions with respect to each of the 22 issues identified in Mr Clifford’s memorandum.
  8. By email sent at 12.24 pm on 28 January 2016 to the parties’ solicitors and the other arbitrators, Mr Clifford acknowledged receipt of the materials that had been sent by the respondents’ solicitor on 20 January 2016 and further materials (not submissions) sent on 27 January 2016 and advised that:

Those documents are being considered by the arbitrators now. The arbitrators will send a further communication to the parties shortly regarding this material and the timing of the final resolution of the contentious issues between the parties in the arbitration.

  1. At 9.15 pm on 28 January 2016, the appellant’s solicitor sent an email to the arbitrators and the respondents’ solicitor objecting to the provision of further materials by the respondents. The email related only to the letter and materials provided by the respondents’ solicitor on 27 January 2016, the appellant’s solicitor stating that he had not been provided the response dated 20 January 2016.
  2. In response, the respondents’ solicitor, by letter dated 29 January 2016, confirmed that the submissions had been sent to the appellant’s solicitor in the same email as that which provided them to the arbitrators. The respondents’ solicitor nevertheless provided another copy to the solicitor for the appellant under cover of the letter dated 29 January 2016.
  3. By email dated 4 February 2016, the appellant’s solicitor maintained the objection to the 20 January 2016 response.
  4. The arbitrators did not respond directly to the objection relating to the receipt of the material provided by the respondents’ solicitor at this time. Nevertheless, as the primary judge noted, the arbitrators did not resile from Mr Clifford’s email advice on 28 January 2016 that the material was being considered.
  5. On 8 March 2016 the respondents’ solicitor enquired of the arbitrators’ progress. By email dated 9 March 2016, Mr Clifford advised that Mr Hannan was working on the decision and was expected to discuss it with the other arbitrators shortly.
  6. On 18 March 2016 Mr Clifford advised the parties that he had had an opportunity to discuss deliberations with Mr Hannan but not yet with Mr Lord. He advised that he was unable to provide a fixed date for delivery and publication of the reasons (and an award) but expected it to be a matter of a few weeks.
  7. On 26 April 2016 Mr Clifford sent another email to the parties’ solicitors and the other arbitrators advising that further work done by the arbitrators suggested that the arbitral decision would be ready in three to four weeks.
  8. On 16 June 2016 Mr Clifford sent another email to the parties’ solicitors and the other arbitrators advising that the decision was not likely to be ready for publication before 30 June 2016.
  9. On 30 June 2016 the respondents’ solicitor wrote to the arbitrators, copied to the appellant’s solicitor, foreshadowing an application for leave to adduce fresh evidence and proposing that the tribunal reserve its decision until that application had been made and determined.
  10. By joint memorandum dated 4 July 2016, Messrs Hannan and Clifford set out the matters that they considered would be relevant to any application to adduce fresh evidence.
  11. Significantly, in that memorandum Messrs Hannan and Clifford referred to the invitation in Mr Clifford’s memorandum of 18 December 2015 to make submissions by reference to facts (and documents) already adduced in evidence. The memorandum continued:

Under cover of an email dated 20 January 2016, the Respondents filed submissions in response to the 18 December 2015 memo. Subject to anything the Applicant may say to the contrary, the preliminary view of Arbitrators Hannan and Clifford is that those submissions do not go beyond identifying the issues identified in the 18 December 2015 memo.

  1. On 27 July 2016 the respondents’ solicitor advised that no application to adduce fresh evidence would be made.
  2. The appellant’s solicitor did not cavil with, or communicate anything to the contrary in relation to, Messrs Hannan and Clifford’s view that the 20 January 2016 submissions did not go beyond the issues identified in the 18 December 2015 memorandum.
  3. On 14 September 2016 the respondents’ solicitor again enquired of the arbitrators’ progress. Mr Clifford replied by email on 19 September 2016 advising that:

The delay in publishing arbitral reasons for decision is presently due to Presiding arbitrator Hannan and myself working to agree a common set of conclusions and reasons. We anticipate a common set of both will be agreed and publication of those reasons will be only a few (meaning 3 or 4) weeks.

  1. On 30 September 2016, by memorandum sent to the parties’ solicitors and copied to the other arbitrators, Mr Clifford advised that:

Presiding arbitrator Hannan and myself have been working toward an agreed set of reasons, conclusions and orders to finalise an award. I expect arbitrator Lord will have some comments on the reasons in due course.

  1. On 28 October 2016 Mr Clifford sent another memorandum to the parties’ solicitors and the other arbitrators advising:

Presiding arbitrator Hannan and I have agreed, in principle, upon the arbitral award presently in draft awaiting comments from arbitrator Lord, and are finalising the written arbitral reasons supporting the draft award that are also agreed in principle and substance between us.

  1. On 7 November 2016 Mr Clifford sent another memorandum to the parties’ solicitors and the other arbitrators advising that the reasons for arbitral decision and draft arbitral award had now been finalised as between presiding arbitrator Hannan and himself, and that comments were awaited from arbitrator Lord.
  2. On 18 November 2016, by email to the parties’ solicitors and the other arbitrators, Mr Hannan provided reasons for decision signed by himself and Mr Clifford.
  3. The reasons for decision were thorough, and comprehensive, running to 389 paragraphs (without schedules). In very broad summary, Messrs Hannan and Clifford found that:
    • (a) each of the patent applications made by the respondents in 2009 constituted a breach of the Technology Agreement;
    • (b) those breaches were nonetheless not sufficiently serious to amount to a repudiation of the Technology Agreement by the respondents;

(c) the appellant was not entitled to terminate the Technology Agreement as a result of the respondents’ breaches;

(d) the appellant had adduced no evidence of damage flowing from the breaches, and so was entitled only to nominal damages (assessed at $300) in respect of the breaches; and

(e) Tulip’s claim for unpaid royalties was confined to amounts claimed to be owing as at 31 October 2011 and 31 October 2012, and was found to be established in the amount of $241,958.37 inclusive of interest.

  1. Messrs Hannan and Clifford considered that it was not necessary to determine whether the 2006 patent application amounted to a breach of the Technology Agreement by the respondents. This was because, even if the 2006 patent application were made in breach of the Technology Agreement, the appellant did not terminate the agreement at that time.
  2. Eight schedules were attached to the reasons dealing with a number of matters, often with detailed discussion and reference to authority and the material before the arbitrators. One schedule comprises a draft substantive award. Another schedule gives detailed consideration to the various materials that were provided to the arbitrators and sets out reasons for accepting some and rejecting other parts of those materials.
  3. By email dated 21 November 2016, Mr Clifford advised the parties that, although the reasons which had been previously circulated referred to a draft award, the reasons were not to be considered a draft, but were final ‘subject only to finalising the exact terms of the arbitral award (orders) and costs’.
  4. There then followed a series of communications between Messrs Hannan and Clifford and the parties in relation to the provision of submissions with respect to the costs of the arbitration. While Mr Lord was copied into those communications, there is no evidence to suggest any engagement on his part in the exchanges. On the contrary, the correspondence from Mr Clifford suggested only the active involvement of himself and Mr Hannan. On 13 December 2016, for example, Mr Clifford sent another memorandum to the parties’ solicitors and the other arbitrators advising that he and presiding arbitrator Hannan would like to make and sign all final orders early in the following week.
  5. In the meantime, on 9 December 2016, the appellant had commenced these proceedings to set aside the award (notwithstanding that final orders had not been made). The application included the allegation that the award should be set aside for misconduct on the basis of the matter having been decided by two arbitrators when three had been appointed.
  6. It is apparent, from an email from Mr Clifford to the parties’ solicitors and the other arbitrators dated 14 December 2016, that he was made aware of the proceedings brought by the appellant on 13 December 2016. In that regard, Mr Clifford’s email of 14 December 2016 makes comment questioning the basis for the application.
  7. On 23 December 2016, Messrs Hannan and Clifford published further reasons in relation to the costs of the arbitration. There is nothing to suggest any involvement of Mr Lord in that process (indeed, a copy of the reasons was provided to Mr Lord along with the parties’ solicitors).
  8. On 23 December 2016, Mr Clifford also sent an email to the parties’ solicitors and to Mr Hannan advising that he had been authorised by Mr Lord to publish a letter which Mr Lord had sent to him dated 20 December 2016. In that letter, Mr Lord wrote:

I wish to advise that I have read the reasons for the decision of Philip Clifford and Peter Hannan in the above matter. Further, I wish to advise that I agree with the said reasons.

  1. In the email to the parties, Mr Clifford stated that the reference in the letter to ‘the reasons’ is a reference to the reasons dated 18 November 2016 signed by Messrs Clifford and Hannan. Mr Clifford also advised the parties that ‘Arbitrator Lord has also graciously decided to waive his fees for the arbitration’.
  2. Following further correspondence between Messrs Hannan and Clifford and the parties’ solicitors, in relation to costs and certain mathematical errors, by a memorandum dated 24 January 2017 Mr Clifford advised that he and Mr Hannan had formulated a draft Corrected Final Award which was dated 23 January 2017.
  3. While it is unclear precisely when it occurred, it is that Corrected Final Award that was signed by the arbitrators.

The court’s power to set aside an award for misconduct

  1. The application before the primary judge sought to invoke the power conferred by s 42 and s 44 of the Act.
  2. Section 42 relevantly applies where ‘there has been misconduct on the part of an arbitrator’ or an arbitrator ‘has misconducted the proceedings’. Section 42 provides that, in those circumstances, the court ‘may, on the application of a party to the arbitration agreement, set the award aside either wholly or in part’.
  3. Section 44 relevantly applies where the court is satisfied that ‘there has been misconduct on the part of an arbitrator’ or an arbitrator ‘has misconducted the proceedings’. If it is so satisfied, the court may, on the application of a party to the arbitration agreement, remove the arbitrator.
  4. ‘Misconduct’, under the Act, is defined inclusively and extends to:

corruption, fraud, partiality, bias and a breach of the rules of natural justice.

  1. In Oil Basins Ltd v BHP Billiton Ltd, the Victorian Court of Appeal considered a similar power in s 42 of the Commercial Arbitration Act 1984 (Vic). The court observed:

The expression ‘misconduct’ as used in relation to arbitration does not necessarily or indeed often involve moral turpitude on the part of the arbitrator. As was said in Williams v Wallis and Cox, ‘misconduct’ does not really amount to much more than such a mishandling of the arbitration as is likely to amount to some substantial miscarriage of justice. In our view, failure of an arbitrator to deal in his or her reasons with relevant evidence and substantial submissions is a mishandling of the arbitration and thus is ‘misconduct’ within the meaning of s 42.

  1. Similarly, in Gas & Fuel Corporation of Victoria v Wood Hall Ltd, in reviewing the authorities as to the meaning of misconduct, Marks J summarised the position as follows:

In general it can be said that misconduct is seen to flow from ‘irregularity’, and to be disassociated from any concept of moral turpitude or overtone.

  1. We agree with these remarks. Indeed, that construction of s 42 of the Act is reinforced by the reference in that section not only to ‘misconduct’ but to whether the arbitrator ‘has misconducted the proceedings’. The notion of the proceedings being ‘misconducted’ is redolent of irregularity, rather than moral turpitude.
  2. It is clear that, where misconduct has occurred, the court retains a discretion whether to set aside the award.
  3. The nature of that discretion was discussed by Steytler J in Shirley Sloan Pty Ltd v Merril Holdings Pty Ltd t/as Airen Constructions:

There is no question as to the proposition that breach of the rules of natural justice amounts to ‘misconduct’ for the purposes of s 42(1)(a) of the Act. That is the effect of the definition of that term in s 4 thereof. The real question is whether, where there is misconduct of that kind, it is such as should attract an exercise of the discretion which s 42(1) affords to the court, on the application of a party to the arbitration agreement, to set aside the award either in whole or in part. It is unlikely that a court would exercise its discretion in that way, even in the case of a denial of natural justice, unless the denial was such as (to use the words of Isaacs J in Melbourne Harbour Trust Commissioners v Hancock [1927] HCA 26; (1927) 39 CLR 570 at 588) ‘has or may have unjustly prejudiced a party’ in a respect material to the outcome of the arbitration (cf Doran Constructions Pty Ltd v Health Administration Corporation (NSW) (1994) 12 BCL 59 at 62 – 63 and Van Dongen v Cooper [1967] WAR 143 at 145).

  1. Similarly, in Oil Basins Ltd v BHP Billiton Ltd, the Court observed:

Granted, not every technical irregularity is sufficient to warrant setting aside an award. Indeed, the court will not intervene at all unless it is demonstrated that the misconduct in question may have been productive of a ‘substantial miscarriage of justice’ (as was put by Marks J in Gas & Fuel) or ‘some injustice’ in the sense explained by Lord Donaldson in King v Thomas McKenna Ltd.

  1. It is generally necessary, therefore, to determine whether any ‘misconduct’ established by the evidence was such as to give rise to a ‘substantial miscarriage of justice’ or has or may have ‘unjustly prejudiced’ the party seeking to have the award set aside in a respect material to the outcome of the arbitration.
  2. We turn then to the three grounds of appeal, which correspond to the three issues determined by the primary judge. We have addressed the issues in the order in which they were addressed in the primary reasons.

Ground 1 – Procedural fairness

  1. Ground 1 of the appeal turns upon the proposition that the arbitrators denied the appellant procedural fairness by taking into account material lodged with the arbitrators after 10 am on 9 July 2015 in circumstances in which:
    • (a) the appellant objected to the receipt of the material; and
    • (b) the arbitrators did not give notice that they would consider the material prior to delivering the reasons for decision on 18 November 2016.
  2. While the ground refers to all material lodged after 10 am on 9 July 2015 (including the submissions served at 5.01 pm on that day), the appellant’s assertion that it was denied procedural fairness in reality arises from the written submissions lodged by the respondents in January 2016. It is those submissions that the appellant identifies as including matters in relation to which it was denied the opportunity to put its case.
  3. The primary judge identified the scope of that allegation as follows:
    1. … I pressed counsel for SMS on this question during the course of oral argument. He confirmed that the only matter to which he could point as being a matter upon which SMS was denied an opportunity to present its case to the arbitrators related to the following passages in the reasons published by Mr Hannan and Mr Clifford on 18 November 2016:
      1. … Tulip Bay and Mr Davey 2nd point out that AAPA2006903137 was assigned to SMS. See 2nd TB/Davey Submissions (as defined in para 21 of the 3rd schedule hereto) at para 3(b). That submission is supported by Mr Davey’s First Witness Statement at para 20. The instrument of assignment has not, however, been put in evidence.
      2. We have, however, found that on 25 May 2007, Mr Davey executed a document by which AAPA2006903137 was assigned to Structural Monitoring Systems PLC (rather than SMS). See para 102 above.
      3. Tulip Bay and Mr Davey submit that, having regard to the assignment referred to in para 166 above, whether or not AAPA2006903137 was an ‘Enhancement’ for the purposes of the Technology Agreement ‘is not an enquiry that would lead to any productive end’. See 2nd TB/Davey Submissions at para 3(c).
      4. Tulip Bay and Mr Davey also submit that, having regard to the assignment referred to in para 166 above, the issue of whether or not AAPA2006903137 was an ‘Enhancement’ for the purposes of the Technology Agreement was ‘resolved between Mr Davey, Tulip Bay and SMS by agreement without any need for a determination’ of that issue. See 2nd TB/Davey Submissions at para 3(d).
      5. No submission has been made on behalf of SMS in response to the submissions (on behalf of Tulip Bay and Mr Davey) referred to in paras 167 & 168 above. Further, no submission has been made on behalf of SMS as to the impact (if any) on the issues in this arbitration of the assignment (on 25 May 2007) of AAPA2006903137 from Mr Davey to Structural Monitoring Systems PLC (rather than SMS).
      6. We uphold the submission (on behalf of Tulip Bay and Mr Davey) referred to in para 167 above. Accordingly we make no finding as to whether or not AAPA2006903137 was an ‘Enhancement’ for the purposes of the Technology Agreement.

  1. Subject to the caveat referred to in para 205 below, even if the 1st Alleged Conduct constitutes a breach of the Technology Agreement by Tulip Bay and/or Mr Davey, the assignment AAPA2006903137 to Structural Monitoring Systems PLC (rather than SMS), referred to in para 166 above, effectively remedies any breach by Tulip Bay and/or Mr Davey.
  2. The caveat to para 204 above is that AAPA2006903137 was assigned to Structural Monitoring Systems PLC rather then SMS.
  3. Counsel for SMS drew particular attention to par 169 above, and asserted that, if SMS had known that reliance was to be placed on the matters to which reference was made in pars 167 and 168 above, it would have made submissions with respect to them. Counsel confirmed that this is the only respect in which SMS is said to have been denied procedural fairness.

81 The primary judge rejected the claim of a denial of procedural fairness. In that regard, his Honour held that:

(a) as the submissions of 20 January 2016 were specifically in response to the 22 issues identified in Mr Clifford’s memorandum, it was inherently unlikely that the response to those issues would deal with any matter that was not alive as between the parties; 

(b) the appellant had every opportunity to put its case in relation to the passages of the arbitrators’ reasons relating to the 2006 patent application identified by the appellant;

(c) counsel for the appellant could not identify any new proposition it would have put in relation to the 2006 patent application. In particular, whether there was an earlier breach in relation to the 2006 patent application could not affect the characterisation of the 2009 breaches, which were determined not to be of such a character as to constitute a repudiation of the Technology Agreement; 

(d) the appellant, in effect, unilaterally determined that it would not respond to the 9 July 2015 materials, in an attempt to force the arbitrators into accepting its proposition that the materials should not be considered because they were served seven hours after the time specified, a position that his Honour described as manifestly unreasonable and entirely unjustified; and

(e) the appellant, similarly, unilaterally determined that it would not respond to the 20 January 2016 materials, in circumstances in which it was not reasonable to adopt that position.

  1. In our view, the appellants have not demonstrated any error on the part of the primary judge in relation to these conclusions. In light of the sequence of events identified by the primary judge we agree that there is no basis for the contention that the appellant was denied the opportunity to respond to the submissions and other materials provided by the respondents.
  2. Indeed, we would go further. As set out above, in their joint memorandum of 4 July 2016, Messrs Hannan and Clifford specifically referred to the 20 January 2016 submissions, advising the parties of their preliminary view that those submissions did not go beyond the issues identified in the 18 December 2015 memorandum. In our view, the expression of that preliminary view, with which the appellant did not cavil, made clear that the arbitrators proposed to have regard to the 20 January 2016 submissions.
  3. We should add that, in its submissions on appeal, the appellant also sought to identify further matters, in addition to those it identified before the primary judge, in relation to which the appellant alleged it was denied the opportunity to respond. The appellant, however, did not challenge the primary judge’s findings (at [91] and [92]) as to the scope of the matters in relation to which it alleged it was denied the opportunity to respond.
  4. For that reason alone, in our view, the primary judge could hardly be in error in not dealing with matters that were not raised before him. In any event, for the reasons we have given, the primary judge was correct to hold that the appellant was not denied the opportunity to respond to the submissions and other materials provided by the respondents.
  5. Ground 1 must fail.

Ground 3 – Delay

  1. Ground 3 challenges the primary judge’s finding that the delay in the delivery of the award did not constitute misconduct of a kind that would justify the setting aside of the award.
  2. There is no challenge to the findings of fact in relation to this ground. Indeed, as a matter of fact, the primary judge concluded that there was excessive delay in the delivery of the award. In that respect, his Honour noted that more than 16 months elapsed between the lodgement of the evidence and submissions of the parties (9 July 2015) and the delivery of the reasons by Messrs Hannan and Clifford (18 November 2016), and 18 months elapsed before Mr Lord indicated his agreement (on 20 December 2016).
  3. During that period of time, however, it is to be noted that other steps were taken in relation to the arbitration, including Mr Clifford’s memorandum of 18 December 2015, the respondents’ submissions of 20 January 2016, the foreshadowed application to lead further evidence on 30 June 2016 and the joint memorandum of Messrs Hannan and Clifford of 4 July 2016.
  4. It may be accepted that the time taken for the completion of the reasons of Messrs Hannan and Clifford was longer than anyone involved in the process would have desired. However, the time taken to complete those reasons must be assessed having regard to the long and sorry history of delay in the arbitration generally, the material which the arbitrators were required to consider, the number of issues identified as potentially requiring resolution and the range of matters with which it was necessary to deal in resolving the issues. In the present case, where it is sought to set aside an award which has been made, it is also permissible to have regard to the content of the arbitrator’s reasons. The reasons provided by Messrs Hannan and Clifford in this case would have taken significant time and effort to prepare.
  5. There will be cases where inordinate delay in the making of an award will constitute misconduct within the meaning of the Act. However, even where inordinate delay is found to constitute misconduct, it remains necessary to consider whether the misconduct is such as to justify setting aside the award.
  6. We agree with the primary judge that assistance is gained in this regard from authorities dealing with delay in delivering judgment in courts. The principles were recently summarised by this court in G v O:

Excessive delay in judgment delivery after trial is not itself a ground of appeal. It remains necessary to demonstrate error in the Primary Decision or a miscarriage of justice. Inordinate delay (which a period of over 2 years clearly constitutes) is commonly recognised as being relevant for the exercise of appellate jurisdiction in the following ways:

(1) In rare cases where the delay disables a primary court or tribunal from considering a party’s case at trial, or possibly if it gives rise to a real and substantial risk that capacity for competent evaluation of the evidence is diminished, there may be a failure to accord procedural fairness or an unfair trial.

(2) There may be a need for greater clarity and specificity in the reasons of the primary court or tribunal. Assertive general statements which would normally be taken to reflect a comprehensive consideration of the evidence are to be treated with reserve.

(3) The appellate court may look at the findings of the primary judge, including credit-based findings, with special care and may more readily infer that the judicial function has miscarried.

(citations omitted)

  1. The appellant, in seeking to distinguish the authorities in relation to court proceedings, draws attention to differences between court proceedings and arbitration, the latter being intended to provide informality, flexibility and expedition. In our view, those differences do not require any different principles to be applied in considering whether delay is a basis for setting aside an arbitral award under s 42 of the Act. While delay may be regrettable, to be a basis for setting aside a delivered award the delay must impact on the decision-making process.
  2. In our view, there is no basis in the present case for apprehending that the delay in delivering reasons in the present case (whether or not it is classified as inordinate) gives rise to a miscarriage of justice or operated to the prejudice of the appellant in relation to the determination of the matters in dispute. Because the hearing was conducted on the papers, and there were no seriously contested issues of fact resolved by credit based findings, there is no basis for apprehending that the arbitrators’ capacity for competent evaluation of the evidence might have been diminished by the delay. The reasons address the evidence and submissions in meticulous detail, and reflect a comprehensive consideration of the material. Nothing in the appellant’s submissions, or in our reading of the reasons, gives any reason to doubt the correctness of the conclusions which the arbitrators reached on critical issues. The delay has not been shown to have had, actually or potentially, any impact on the decision-making process.
  3. Therefore, the primary judge was correct to conclude, for the reasons which his Honour gave, that the delay in provision of reasons by Messrs Hannan and Clifford could not constitute misconduct of a kind which would justify setting aside the award.
  4. There is a further reason for this court to decline to exercise its discretion under s 42 of the Act even if the delay in providing reasons were found to constitute misconduct within the meaning of the Act. The appellant was aware of the delay, yet did not make, or foreshadow, an application under s 44 of the Act to remove the arbitrators prior to the reasons being made available to it. The appellant chose to wait until a decision was given adverse to its interests before taking any action.
  5. None of the above should be taken to say that delay, per se, can never give rise to misconduct in the context of an arbitration. Indeed, unlike in court proceedings, where there has been inordinate delay in an arbitration it is open to a party to the arbitration to seek the removal of an arbitrator for misconduct prior to the delivery of the arbitral decision. However, in all the circumstances of the present case, delay by Messrs Hannan and Clifford providing their reasons did not constitute misconduct of a kind which justified setting aside the award.
  6. Ground 3 must fail.

Ground 2 – Did three arbitrators hear and determine the dispute

  1. Ground 2 relates to the primary judge’s finding that the appellant had not established misconduct on the part of the arbitrators on the basis of the matter having been decided by two of the arbitrators (Messrs Hannan and Clifford) in circumstances where three arbitrators had been appointed.
  2. The primary judge identified that the critical question in relation to this ground was a question of fact, namely whether Mr Lord ‘heard and determined’ the arbitration as required by cl 17.2 of the Technology Agreement.
  3. The primary judge’s findings in relation to this question of fact were as follows:
    1. The pertinent features of the evidence which bear upon this question are as follows:

(a) Mr Lord was copied into all communications between the parties and the other arbitrators;

(b) throughout the proceedings express provision was made for Mr Lord’s contribution, should he have formed a view different to that of the other arbitrators;

(c) there were a number of occasions upon which Mr Lord expressed no view in relation to procedural issues addressed by the other arbitrators, albeit in a context in which his concurrence with the views formed by those other arbitrators might be inferred;

(d) there is no reason to suppose that Mr Lord was not provided with the evidence and submissions upon which the parties relied at the time those materials were served;

(e) it is a fair inference from the evidence that the joint reasons published by Mr Clifford and Mr Hannan were developed by conferral between those two arbitrators with little or no input from Mr Lord;

(f) the joint reasons to which I have referred were provided to Mr Lord who indicated his concurrence with those reasons;

(g) the reasons with which Mr Lord concurred included a draft award;

(h) Mr Lord has not signed either the first or amended award, which has been signed by the other arbitrators, and no provision was made for Mr Lord to sign any award; and

(i) Mr Lord did not charge any fees for his services as arbitrator.

  1. As I have indicted, I would infer, and find, that Mr Lord did not confer with Mr Hannan and Mr Clifford in relation to the terms of their reasons. However, I would not construe the arbitration agreement as requiring the arbitrators to confer with each other prior to the publication of reasons as a condition of the exercise of their jurisdiction even though, in the ordinary course, such conferral would be expected. It is sufficient for the valid exercise of jurisdiction if each arbitrator turns his (or her) mind to the evidence, the submissions of the parties, and the terms upon which the dispute should be resolved, and either expresses or concurs in reasons which reveal the intellectual process which was followed.
  2. Mr Lord has produced a document which has been distributed to the other arbitrators and the parties in which he records his concurrence with the reasons prepared by Mr Hannan and Mr Clifford. There is no reason to suppose that he did not have the evidence and the submissions of the parties at the time he expressed that concurrence. In the absence of any evidence, I am not prepared to infer that Mr Lord expressed that concurrence without turning his mind to the evidence and submissions which he presumably had, or without turning his mind to the terms upon which the dispute between the parties should be resolved. To express concurrence without giving genuine consideration to the evidence and submissions, or without turning his mind to the proper determination of the dispute, would be an abdication of Mr Lord’s responsibilities as arbitrator, and I am not prepared to infer that he would take that course without some evidence to that effect.
  3. Neither party drew my attention to the fact that Mr Lord had not charged any fee for his services, or presented any submissions with respect to the inferences which might be drawn from that fact. In my view it is a fact of considerable significance to the question of the extent of Mr Lord’s engagement. However, it does not follow from the fact that Mr Lord charged no fees that he did not consider the evidence or submissions served by the parties, or turn his mind to the terms upon which their dispute should be resolved. In the absence of evidence it is of course a matter of speculation and conjecture, but there might be reasons for Mr Lord’s failure to render a fee other than his failure to engage with the issues in the arbitration – such as, for example, a desire to maintain favourable commercial relations with one or other party, or perhaps as a result of embarrassment arising from the delay in resolving the dispute.
  4. For these reasons I conclude that SMS has failed to discharge the burden of proving that Mr Lord did not consider the evidence and submissions presented by the parties or determine the terms upon which their dispute should be resolved. In the words of the arbitration agreement, SMS has failed to prove that Mr Lord did not ‘hear and determine’ the dispute.
  5. Ground 2 expressly challenges the primary judge’s finding of fact that the appellant failed to discharge the burden of proving that Mr Lord did not consider the evidence or submissions of the parties, and implicitly challenges the primary judge’s conclusion that Mr Lord’s lack of involvement did not amount to ‘misconduct’.
  6. We would uphold the challenge to the primary judge’s finding of fact.
  7. The gravamen of his Honour’s reasons for the finding was that his Honour was not prepared to infer that Mr Lord expressed concurrence with the reasons published by Messrs Hannan and Clifford without turning his mind to the evidence and submissions which he presumably had, or without turning his mind to the terms upon which the dispute between the parties should be resolved. To do so, his Honour went on, would be an abdication of Mr Lord’s responsibility as an arbitrator.
  8. In our view that finding fails to have regard to a number of critical features of the history of the matter.
  9. First, the events in December 2016 must be understood in light of the history of the arbitration as a whole. As set out above, the last recorded involvement of Mr Lord in the arbitration was a letter from Mr Lord to Mr Clifford dated 18 March 2013 advising that he agreed with Mr Hannan’s reasons in relation to the first issue raised in the arbitration. That was more than three years and six months prior to his concurrence with the reasons of 18 November 2016.
  10. Notwithstanding that Mr Lord was copied into email correspondence, given the lack of any involvement by him in the matter over that period, together with other references in the material to the other arbitrators not having heard from Mr Lord, the most probable inference is that well prior to 18 November 2016, for whatever reason, Mr Lord had become disengaged from the arbitration.
  11. Second, there were a number of important features of the timeline, not referred to by the primary judge at [142]-[146], that occurred before Mr Lord expressed his agreement with the reasons by letter dated 20 December 2016:

(a) Mr Clifford had expressly advised the parties, on 21 November 2016, that the reasons were not in draft and were final ‘subject only to finalising the exact terms of the arbitral award (orders) and costs’;

(b) the originating summons to set aside the arbitral award was issued by the Court on 9 December 2016. The application included the allegation that Messrs Hannan and Clifford proceeded to decide the matter, whereas three arbitrators had been appointed; and

(c) Mr Clifford became aware of, and had considered, the originating summons by at least 14 December 2016. An email from Mr Clifford on that date includes the following:

In any event the application does not appear, at all, to challenge the substantive reasons for the Arbitral award published jointly by Presiding Arbitrator Hannan and myself or suggest the reasons are in any way incomplete.

  1. It is apparent, therefore, that the very issue of Mr Lord’s non-involvement in the decision had been raised by way of the application, and considered by Mr Clifford, prior to Mr Lord’s concurrence with the reasons.
  2. It is significant, then, that the letter from Mr Lord expressing his concurrence with the reasons was a letter written to Mr Clifford and communicated by Mr Clifford to the parties by the email of 23 December 2016. In that email Mr Clifford also advised the parties that the reference in the letter to ‘the reasons’ was a reference to the reasons dated 18 November 2016 and that Mr Lord had decided to waive his fees. Mr Clifford and Mr Lord had, therefore, clearly conversed in relation to the letter.
  3. In all of the circumstances, in our view, the clear inference is that the concurrence of Mr Lord with the reasons for decision was the product of an attempt by him, after the event, to rectify his failure to have engaged in the arbitration process prior to that time. It is significant that his letter only refers to having read the reasons. It does not say that he had independently considered the evidence and the submissions. Given the impetus for providing the letter, and the events leading to it, in our view the proper inference is that he had not done so.
  4. This is not to conclude that Mr Lord did not genuinely agree with the reasons once he had read them. The reasons themselves were comprehensive. Nevertheless, particularly given that the parties had already been advised that the reasons of Messrs Hannan and Clifford were ‘final’, the circumstances are such that someone in Mr Lord’s position would be predisposed (consciously or unconsciously) to agree with them.
  5. Nor, in our view, is the inference that Mr Lord had not independently considered the evidence and the submissions tantamount to a conclusion that he had ‘abdicated’ his responsibilities as an arbitrator, as the primary judge considered. As we have said, there is no reason to give Mr Lord’s failure a pejorative connotation; he may well have genuinely, albeit mistakenly, considered that it was sufficient for him to have read the reasons.
  6. For these reasons, in our view, the evidence before the primary judge did establish, on the balance of probabilities, that Mr Lord had failed to independently consider the evidence and submissions of the parties. The primary judge was in error to hold otherwise.
  7. Similarly, in relation to the characterisation of that failure, in our view, the failure of Mr Lord to meaningfully engage in the arbitration, up to and including the preparation of the reasons for decision, was ‘misconduct’ for the purposes of the Act. As has been emphasised in a number of recent decisions of this court, actually considering the submissions and evidence adduced by a party who is entitled to be heard is an aspect of what procedural fairness requires. Failure to consider the material submitted by the appellant constitutes a breach of the rules of natural justice, which the definition of ‘misconduct’ expressly includes.
  8. While it was not misconduct for Messrs Hannan and Clifford to publish their draft reasons, in our view the failure of Mr Lord to engage in the arbitration, and to independently consider the submissions and evidence submitted by the appellant, constitutes misconduct. His belated, and limited, involvement in the case after the primary proceedings were commenced did not cure that deficiency. There was a mishandling of the arbitration in the relevant sense and thus misconduct within the meaning of the Act.
  9. In a properly conducted multi-member arbitration, it should be apparent that each arbitrator has engaged with and given serious consideration to the evidence and the submissions. How that may appear will vary from case to case, and may be inferred from the publication of reasons attributed to each of them. In the present case, however, it is properly to be concluded that Mr Lord considered only the reasons of Messrs Hannan and Clifford (which had been declared to be final) and, as such, that the arbitration was mishandled.

Notice of Contention – Discretion

  1. As noted above, the conclusion that there has been misconduct on the part of an arbitrator does not necessarily result in the award being set aside.
  2. By its notice of contention, the respondents contend that the Court should not exercise its discretion to set aside the award, given that:

(a) only one of the three arbitrators did not fulfil the function of hearing and determining the matter; and

(b) a majority decision was permissible under the Technology Agreement.

  1. In our view, in the particular circumstances of this case, it cannot be said that there has been a substantial miscarriage of justice or that the appellant has been unjustly prejudiced.
  2. First, as the respondents submitted, the arbitration was mishandled by reason of the insufficient involvement of Mr Lord. There is no basis to conclude that there was any misconduct on the part of Mr Hannan or Mr Clifford.
  3. Secondly, cl 17.3.3 of the Technology Agreement provides that where there is more than one arbitrator all decisions and awards shall be made by majority vote of the arbitrators. That is consistent with s 15(b) of the Act, which provides:

Unless a contrary intention is expressed in the arbitration agreement, where an arbitration agreement provides for the appointment of 3 or more arbitrators —

(b) any decision to be made in the course of the proceedings may be made by a majority …

  1. In the present case, the terms of the award were clearly agreed by a majority of the arbitrators, notwithstanding Mr Lord’s insufficient involvement. Messrs Hannan and Clifford did not diverge on any issue on which Mr Lord’s vote might have been required to establish a majority.
  2. Thirdly, it is apparent from the reasons for decision that the consideration of the issues by Messrs Hannan and Clifford was comprehensive and thorough. It is also clear that the outcome of the arbitration turned entirely upon legal issues and, in particular, on whether particular breaches of the Technology Agreement amounted to a repudiation of the agreement.
  3. It may be noted that the issues on which the resolution of the dispute turned were legal matters within the expertise of Messrs Hannan and Clifford and outside the area of expertise of Mr Lord. Mr Lord, being a patent attorney, could be expected to bring a particular understanding of the nature of patents in the context of the arbitration. In this case, however, it was accepted (in the appellant’s favour) that the 2009 patent applications were breaches of the Technology Agreement. Whether those breaches of the Technology Agreement amounted to a repudiation of the agreement was a legal question.
  4. Fourthly, in the present case, the reasons of Messrs Clifford and Hannan, in dealing with the legal issues, are not attended by any obvious error. As noted above, nothing in the appellant’s submissions or our reading of the reasons gives us reason to doubt the correctness of the critical aspects of the arbitrators’ decision.
  5. In light of all of these considerations, in our view it may be confidently concluded that Mr Lord’s misconduct could have had no effect on the outcome in this case. In those circumstances, there was no prejudice to the appellants and no substantial miscarriage of justice by reason of the misconduct.
  6. We would therefore not exercise the discretion in s 42 to set aside the award. It follows that we would not exercise the power to remove the arbitrators.
  7. Accordingly, while the appellant has demonstrated error on the part of the primary judge in relation to Ground 2, we would uphold the notice of contention and dismiss the appeal.
  8. We should observe that, while an important consideration in this case, as a general proposition the fact that the decision was made by two (and thereby a majority of) arbitrators will not, by itself, lead to the conclusion that there has not been a substantial miscarriage of justice in all cases. The provision for majority decisions cannot, and should not, be regarded as a licence to disregard the involvement of a minority of the arbitrators. However, in all of the circumstances of this particular case, the misconduct of Mr Lord does not provide a proper basis for setting aside the award.

Conclusion

  1. The appeal must be dismissed.

 

Cases referred to in decision: