The Arbitration case of Westport Insurance Corporation v Gordian Runoff Ltd [2011] HCA 37

For those involved in domestic commercial arbitration, the recent High Court decision enlivens debate as to the finality of arbitration awards and the circumstances in which courts will grant leave to appeal those awards. Arbitrators need to tread carefully particularly where they interpret statutory provisions in complex matters. Parties aggrieved by what they claim are inadequate reasons will carefully consider the extent to which those inadequacies constitute errors of law arising out of an award.

As a result of the High Court decision I foresee greater activity by the courts in reviewing to arbitration of domestic commercial disputes in certain circumstances. The judgment instils greater confidence in the arbitration process and judicial institutions. Decisions from inferior courts are subject to the review of superior courts. Awards by arbitral tribunals should not be immune from the scrutiny of such courts either. The High Court validates the role of courts to jealously guard their role where public obligations and rights are concerned.

The scope of the Court’s decision is limited in that it applies to domestic arbitrations governed under the now-repealed Commercial Arbitration Act 1984 (NSW), it has no direct application to:

  • international arbitration in Australia – Under the International Arbitration Act 1974 (Cth), which gives effect in Australia to the UNCITRAL Model Law on International Commercial Arbitration, there is no provision for appeal on a question of law and an award may only be set aside on limited grounds under Schedule 2, Article 34 of the UNCITRAL Model Law. Whilst the The Commonwealth Attorney-General, was an intervener the High Court made no comment as to whether an international arbitral award made in Australia could nonetheless be set aside for inadequate reasons.
  • the new State Commercial Arbitration Acts (Uniform Arbitration Acts) as recently passed in New South Wales, Northern Territory, South Australia and Tasmania (awaiting Victoria and Western Australia), which apply to domestic arbitrations.  The Uniform Arbitration Acts no longer refer to “manifest errors of law”, but decisions which are “obviously wrong”: s 34(3)(c)(i). It remains to be seen whether inadequacy of reasons renders a decision “obviously wrong”.

Will the decision result in more leave applications being made by aggrieved parties to appeal against arbitration awards pursuant to section 38 of the Commercial Arbitration Act 1984 (NSW) or its equivalent in other states and territories for arbitrations made  prior to 1 October 2010 or subsequent to that date pursuant to section 34A of the new Commercial Arbitration Act 2010 (NSW))?

The High Court decision expands the test for granting leave to appeal an arbitration award. Prior to this, the generally accepted threshold test was enunciated in 1994, when the New South Wales Court of Appeal in Natoli v Walker (1994) 217 ALR 201 held leave to appeal an arbitration award should only be granted in limited situations where the error of law was “manifest”, that is an obvious error capable of being easily understood or recognised:  [214].

The dispute arose when the reinsurer, Westport Insurance & Ors, denied liability to the reinsured, Gordian Runoff,  under the provisions of a reinsurance contract in respect of claims made on the insurer Gordian Runoff (the defendant) by its original insured, FAI Insurance Limited (FAI) under a Directors & Officers (D&O) liability run off policy.

The dispute was referred to arbitration before a panel of three arbitrators (Hon. G E Fitzgerald AC QC, Mr F Hoffman and Mr I Brown), parties were represented by senior counsel, witness statements and documents were tendered into evidence, witnesses were cross-examined and a transcript prepared.  The hearing took over a week.

In October 2008 the arbitrators decided in favour of the insurer Gordian Runoff and held section s 18B (Limitation on exclusion clauses) of the Insurance Act 1902 (NSW) obliged the reinsurers Westport Insurance & Ors to indemnify the insurer.  Even if the reinsurance treaties did not cover the relevant policy, the effect of s 18B of the Insurance Act (NSW) extended coverage to include the D&O policy.

In April 2009 the reinsurers challenged the Arbitration Award and approached the New South Wales Supreme Court seeking leave to appeal the Award and if granted an order setting aside the Arbitration Award on the basis of an error of law.

In Westport Insurance Corporation & Ors v Gordian Runoff Ltd [2009] NSWSC 245, Einstein J:

  • granted the reinsurers leave to appeal the award pursuant to section 38 of the Commercial Arbitration Act 1984 [NSW] on the basis there was a manifest error of law on the face of the award or otherwise an error of law questions of law arising out of an award (Section 38 applied to these proceedings even though this Act was repealed in 1 October 2010 and replaced by the Commercial Arbitration Act 2010 (NSW), section 34A of that Act deals with Appeals against awards) ; and
  • allowed the appeal on the basis the Arbitrators’ made a primary error of law by failing to recognise that an agreement made at Gordian Runoff’s request to extend cover for D & O policies to include those issued for up to three years, is not a “limitation” or “exclusion” in the sense contemplated by Section 18B(1): [103].The consequence of this judgement was that the reinsurers Westport Insurance & Ors were not obliged to indemnify the reinsured Gordian Runoff.

The reinsured Gordian Runoff appealed the decision. In April 2010 the New South Wales Court of Appeal in Gordian Runoff Ltd v Westport Insurance Corporation [2010] NSWCA 57 (principal judgement by Allsop P with Spigelman CJ and Macfarlan JA agreeing) allowed the appeal and set aside the decision and held:

  • A “manifest error” for the purposes of s 38(5)(b)(i) must be more than arguable; it must be evident or obvious. The primary judge erred in concluding that the arbitrators’ construction of s 18B was manifestly wrong: [116]-[118].
  • The primary judge was wrong to conclude that there was strong evidence of an error of law: [119]-[174]. The arbitrators adopted a broad construction of s 18B, supportable by the words of the legislation.
  • Despite the decision in Oil Basins Ltd v BHP Billiton Ltd [2007] VSCA 255, the arbitrators are not subject to the same legal obligation to provide reasons as judges and Oil Basins should not be followed: [199]-[222].
  • Order that leave to appeal in respect of the Arbitration award be refused. The effect of the Court of Appeal judgement was that the reinsurers Westport Insurance & Ors were obliged to indemnify the reinsured Gordian Runoff.

On 5 October 2011, the High Court in Westport Insurance Corporation v Gordian Runoff Ltd [2011] HCA 37 (joint judgement by French CJ, Gummow, Crennan and Bell JJ, separate judgement by Kiefel J and Heydon J in dissent) allowed the appeal and restored the orders of the primary judge who set aside the arbitration award:

  • In deciding whether to grant leave to appeal an arbitration award, there needs to be, inter alia, pursuant to s.38(5) a manifest error of law, the error must appear on the face of the Award, which includes the reasons for it, and that the error be apparent to the understanding of the reader. It does not require that the error be of a particular quality or that errors involving complex questions be disqualified: [45], [163]. Even when a party can show a manifest error on the face of the award”, the court has a discretion in granting leave to appeal from the award.
  • As to the adequacy of reasons, the nature and extent of reasons for an award depends upon the circumstances of the particular dispute: [49]-[59]. The complexity of the arbitration will be relevant when considering the requirement of the arbitrators to provide a statement of the reasons for the making of the award: [5]. The reference in Oil Basins to the giving by the arbitrators in that dispute of reasons to a “judicial standard”[33] and cognate expressions[34] placed an unfortunate gloss upon the terms of s 29(1)(c): “If a dispute turns on a single short issue of fact, and it is apparent that the arbitrator has been chosen for his or her expertise in the trade or calling with which the dispute is concerned, a court might well not expect anything more than rudimentary identification of the issues, evidence and reasoning from the evidence to the facts and from the facts to the conclusion[37].” [53] In the present case, the reinsurers correctly submit that no wholly satisfactory formula can be found to flesh out the requirement in s 29(1)(c): [54]
  • That statutory regime involves the exercise of public authority, whether by force of the statute itself or by enlistment of the jurisdiction of the Supreme Court. It also ……displays a legislative concern that the jurisdiction of the courts to develop commercial law not be restricted by the complete insulation of private commercial arbitration: [19] The Court held section 18B of the Insurance Act was a critical element in reaching their award, the arbitrators were obliged to explain succinctly why the various integers in that complex statutory provision were satisfied: [55] –[56] however they failed to do so. The appropriate remedy in respect of inadequacy of reasons is to remit the matter back to the arbitral tribunal for further reasons pursuant to s 38 (3)(b), however the reinsurers successfully argued for a more drastic remedy to set aside the arbitration award as the issues had been extensively argued: [59]

Parties to domestic arbitrations in Australia should ensure the arbitration agreement provides the seat of arbitration to be in a State that has adopted the Uniform Arbitration Acts and if finalising the dispute is paramount then expressly excludes all rights of appeal from the award. However, this does agitate fertile arguments as to whether such a term should be severed or any award be set aside on public policy grounds on the basis it attempts to ouster the jurisdiction of the courts. This High Court judgement shows courts in Australia will be enlivened to this issue.

A more appropriate alternative is provided under most institutional rules and the Model Law, which allows an aggrieved party to, within 30 days of receiving the award, request a supplementary award. That party should identify the matters raised in the proceedings but omitted from the award, the inadequate reasons and request the tribunal make a supplementary award.

In summary, this High Court decision was made subject to the provisions of statute law which has now been repealed (though arbitration awards made before 1 October 2010 may still be challenged subject to statutory limitation). The test has been modified by statute. If there is one message to take from this case it is this, in the context of domestic commercial arbitration the role of courts is not derogated particularly where arbitrators are called to resolve disputes involving statutory interpretation of complex matters.

 

Tags: Arbitration, Arbitrator, Commercial Arbitration Act, Commercial Litigation, High Court, International Commercial Arbitration, Legislation, Model Law, Supreme Court of NSW, UNCITRAL