Article 34(2)(a)(iv) of the Model Law - was the arbitral procedure not in accordance with the agreement of the parties?
77 HJI's submissions in relation to this ground of challenge are similarly misdirected.
78 It may be, as HJI submits, that the agreement of the parties envisaged that, when the dispute was referred to arbitration, the arbitrator would make his own findings and reach his own conclusions in respect of any relevant disputed findings disclosed in the audit report. By incorporating the IAMA Rules in the agreement, the parties agreed that the arbitral procedure may include the preparation of pleadings, the preparation of joint reports of experts, preparation of a joint bundle of documents, witness statements and oral evidence, including cross-examination (see rule 17 and schedule 1 of the IAMA Rules). It is undoubtedly correct that none of this occurred.
79 It does not follow, however, that the arbitral procedure that was adopted was not in accordance with the agreement of the parties. The parties were free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings (see article 19 of the Model Law). Here, as has been said, the parties agreed to have the question whether Mr Tsang's report disclosed a basis for a breach of duty by Mr Martin determined by the arbitrator as a threshold or preliminary issue. They also agreed on the particular procedures to be adopted in determining that threshold issue.
80 Even putting those matters aside, by agreeing to incorporate the IAMA Rules in relation to the arbitral procedure, the parties agreed that the arbitrator could rule on his jurisdiction (see rule 9(7) of the IAMA Rules) and that the arbitrator was empowered to adopt procedures suitable to the particular case so as to provide a fair, expeditious and cost-effective process for determination of the dispute (rule 14 of the IAMA Rules). They also agreed that, if a party continued to take part in the arbitration without objecting, within a reasonable time, that the arbitration had been unfairly conducted, or there had been a failure to comply with the agreement, that party would be deemed to have waived its right to make such objection later (rule 16 of the IAMA Rules).
81 When regard is had to these rules, which are incorporated in the agreement between the parties, together with the fact that the parties agreed (and the arbitrator ruled) that the arbitration proceed in the manner it did, and the fact that HJI did not object to the procedure until after the threshold issue was decided adversely to it, there is no merit in HJI's complaint that the arbitral procedure was not in accordance with the agreement. Whilst the arbitration may not, as HJI complains, have gone to a final hearing on the merits, that was because the threshold issue, which directly or indirectly went to the arbitrator's jurisdiction, was determined adversely to HJI. It does not follow that the arbitral procedure was not in accordance with the agreement of the parties. For the reasons already given, it plainly was.
82 HJI also submits that, in deciding the threshold issue adversely to it, the arbitrator misconstrued the terms of the Deed and therefore the agreement between the parties. This led the arbitrator, so the argument goes, to fail or refuse to conduct a full hearing on the merits as required by the Deed and agreed by the parties.
83 Even if there is some merit in that submission, it is not to the point. It amounts to an impermissible attack on the merits of the award. These proceedings are not an appeal from the arbitrator's award. Nor are they some form of judicial review at large. An award cannot be set aside simply on the ground that it contains errors of fact or law. The Court can only set aside an award if one of the grounds in article 34 of the Model Law is made out.
84 To make out the ground in article 34(2)(a)(iv) of the Model Law, HJI must relevantly furnish proof that the arbitral procedure was not in accordance with the agreement of the parties. The reference to "arbitral procedure" in article 34(2)(a)(iv) must, in the present context, be read as meaning the arbitral procedure adopted in arriving at the award under challenge. The award under challenge here is the arbitrator's "final award" that determined that Mr Tsang's report did not relevantly disclose a breach by Mr Martin. For the reasons already given, HJI has not furnished proof that the procedure adopted in arriving at the award was not in accordance with the agreement of the parties. Such proof as there is demonstrates that the arbitral procedure adopted in arriving at the award in question was in accordance with the agreement of the parties.
85 It may be accepted that in some circumstances an erroneous finding by an arbitrator that he or she has no jurisdiction to conduct an arbitration may give rise to a ground under article 34(2)(a)(iv) where the result is that the arbitrator fails entirely to give any effect to the agreed dispute resolution procedure at arbitration: see Gary B Bom, International Commercial Arbitration (Kluwer Law International, 2nd ed, 2014) at 1103. But this is not such a case. An arbitration was conducted. An agreed procedure was put in place to deal with an agreed threshold issue. That issue was determined adversely to one of the parties to the agreement in a final award. The effect of the determination in the award was to bring the arbitration to an end. It does not follow that the arbitrator failed entirely to give effect to the agreed dispute resolution procedure.
86 In any event, HJI's contention that the arbitrator misconstrued the relevant terms of the Deed, and therefore mistakenly failed to conduct the agreed arbitration, has no merit in the present context and must be rejected.
87 The issue concerning the correctness or otherwise of the arbitrator's award is by no means easy to resolve. The question of construction the arbitrator was required to consider and determine was and is difficult. The words the parties chose to use in clause 10.1 of the Deed ("discloses a basis for a breach of a legal duty") are somewhat obscure if not opaque. To the extent that Mr Tsang's report expresses any findings or conclusions in terms of clause 10.1, those findings or conclusions also lack clarity and certainty. The arbitrator was not a lawyer. It is in these circumstances perhaps not surprising that the arbitrator's reasons are also at times somewhat unclear and difficult to understand.
88 Nevertheless, the interpretation of clause 10.1 arrived at by the arbitrator is one which the words used in clause 10.1 can reasonably bear. It is and was reasonable for the arbitrator to conclude that the words used in clause 10.1, read in context, meant that for clause 10.1 to be engaged, the audit report had to, at a minimum, identify, with some degree of clarity or precision, the basis of a breach and the link that the breach had to a consequential loss to one or both of the relevant companies. It was open to the arbitrator to find, on a proper construction of clause 10 of the Deed, that it was not enough for the report to simply flag areas of possible irregularity. The Deed gave Mr Martin a right to dispute any finding in the report that disclosed a breach or basis for a breach. It is difficult to see how one can dispute part of a report that simply "flags" a possible irregularity or a possible breach.
89 The arbitrator did not, as it appears to be submitted by HJI, find that the words used in clause 10.1 required the audit report to identify the legal elements of any alleged breach, together with the facts or evidence that tended to establish each element. Nor did the arbitrator suggest that clause 10.1 required that the audit report express legal views or conclusions. Rather, the arbitrator found only that the identification of the basis of the breach, and the link to any consequential loss, had to be sufficient to enable Mr Martin to make an informed decision whether or not to dispute the "alleged breach, basis for breach, or loss". It also had to be sufficient to "set the content" of any arbitration. Contrary to HJI's submission, in so finding, the arbitrator had regard to the context in which the words were used, including the commercial context.
90 HJI submits that the construction or interpretation arrived at by the arbitrator was too strict and failed to have regard to the surrounding circumstances. The surrounding circumstances were said to include correspondence between the parties' solicitors in relation to the drafting of the Deed. That correspondence tends to reveal that clause 10.1 was ultimately worded as it was because HJI suggested (and Mr Martin ultimately agreed) that an auditor was unlikely to express legal views about whether or not there had been a breach. That context is said to inform the meaning of the words "basis for".
91 Mr Martin objected to the admission into evidence of the correspondence on the basis of relevance and because the communications were privileged under s 131 of the Evidence Act 1995 (Cth) (Evidence Act). The admissibility of these documents was not determined at the hearing. Rather, it was indicated that the admissibility would be dealt with in the final judgment.
92 To a certain extent the question of the admissibility of the correspondence is somewhat academic. That is because, even if admitted, the correspondence is of very marginal relevance. The context provided by the correspondence does not greatly assist in resolving the question of construction of clause 10.1 of the Deed and ultimately does not establish that the arbitrator's interpretation of clause 10.1 was erroneous.
93 Nevertheless, to avoid any doubt, it should be made clear that Mr Martin's objection to the admissibility of the correspondence is overruled and the documents are admitted in evidence. The correspondence is potentially relevant to the surrounding circumstances, though for the reasons already given, ultimately it is of only marginal relevance and is to be afforded little weight. It should also be noted that the correspondence was, in any event, before the arbitrator. It is probably relevant and admissible on that basis alone. To the extent that the documents may fall within s 131(1) of the Evidence Act, the exception in s 131(2)(f) may be taken to apply. That paragraph should not be narrowly construed and can encompass proceedings where the interpretation of a settlement agreement is in issue.
94 HJI's submission that the arbitrator erred in concluding that the findings in Mr Tsang's report, such as they were, did not satisfy the minimum requirements of clause 10.1 also has no merit. It was open to the arbitrator to conclude that the report did not sufficiently disclose any "basis" for a breach by Mr Martin, or disclose a link to any consequential loss.
95 The conclusion that the arbitrator did not err in construing the Deed, or in finding that the audit report did not engage clause 10.1, is also fortified by the principle of judicial restraint that generally applies in relation to international commercial arbitrations. Section 39 of the IA Act relevantly provides, in effect, that where the Court is considering an application under article 34 of the Model Law (see s 39(1)(a)(v) of the IA Act) the Court must, in doing so, have regard to the objects of the IA Act and the fact that arbitration is an efficient, impartial, enforceable and timely method by which to resolve commercial disputes and the fact that awards are intended to provide certainty and finality.
96 Those considerations indicate that there should be a degree of judicial restraint in relation to challenges to international arbitral awards. Judicial restraint in this context is supported by both Australian and international authority: Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd (No 2) [2012] FCA 1214 at [34]-[35], [50] (Castel Electronics); Emerald Grain at [7]-[12]; Quintette Coal Limited v Nippon Steel Corporation 1990 CarswellBC 232, 50 BCLR(2d) 207, [1991] 1WWR 219 at [27]-[33] and the cases there referred to and cited. Although decisions of courts in other countries which give effect to the Model Law are not binding, there is an obvious importance in taking them into account to ensure uniformity in the interpretation of the Model Law: Castel Electronics at [36]; Hebei Import & Export Corp v Polytek Engineering Co Ltd [1999] 2 HKC 205 at 216.
97 Judicial restraint in this context would suggest both that arbitral awards should not be scrutinised upon by overzealous judicial review, and that the discretion to set aside awards should be exercised sparingly and only in clear cases. This is not such a case.
98 It follows that HJI's challenge to the arbitral award under article 34(2)(a)(iv) of the Model Law has no merit and must be dismissed.