Commercial arbitration - Application for leave to appeal and to remove arbitrator - Turns on own facts

Commercial Arbitration Act 1985, s 38

Attwood v Lamont [1920] 3 KB 571

Bridge v Campbell Discount Co Ltd [1962] AC 600

Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410

Codelfa Construction Pty LTd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337

Doran Constructions Pty Ltd v Health Administration Corp NSW (1994) 12 BCL 59

Fitzgerald v Masters [1969] HCA 4; (1969) 121 CLR 432

George T Collings (Aust) Pty Ltd v H F Stevenson (Aust) Pty Ltd (1991) ASC 56-051

Himbleton Pty Ltd v Kumagai (NSW) Pty Ltd (1991) 29 NSWLR 44

Korin v McInnes [1990] VicRp 62; [1990] VR 723

Masawa Australasia Pty Ltd v J Corp Pty Ltd & Anor [2000] WASC 5

McFarlane v Daniell (1938) 38 SR(NSW) 337

Peters American Delicacy Co Ltd v Champion [1928] HCA 27; (1928) 41 CLR 316

Stannard v Sperway Constructions Pty Ltd [1990] VicRp 57; [1990] VR 673

The Moorcock (1889) 14 PD 64

UDR Equipment Pty Ltd v Afkos Industries Pty Ltd [2000] WASC 57; (2000) 22 WAR 221

Voncorp Pty Ltd v Thames Water Asia/Pacific Pty Ltd (1995) 12 BCL 139

Warming's Used Cars Ltd v Tucker [1956] SASR 249

1 MASTER SANDERSON: This is an application by originating motion to set aside an arbitration award. The orders sought by the applicant are in the following terms:

"1. The Applicant have leave pursuant to Section 38(4)(b) to appeal to this Honourable Court from the Reconsidered First Interim Award ('the Reconsidered Interim Award') made by the Arbitrator, Mr Philip D Faigen, on 22 December 2003 and delivered to the Applicant on 5 January 2004.

2. Pursuant to Section 38(3) the Reconsidered Interim Award be wholly set aside.

3. Pursuant to Section 44, Mr Phillip D Faigen be removed as Arbitrator in the Arbitration between the parties.

4. The Respondent do pay the costs of this application."

2 Section 38 of the Commercial Arbitration Act 1985 is in the following terms:

(1) Without prejudice to the right of appeal conferred by subsection (2), the Court shall not have jurisdiction to set aside or remit an award on the ground of error of fact or law, on the face of the award.

(2) Subject to subsection (4), an appeal shall lie to the Supreme Court on any question of law arising out of an award.

(3) On the determination of an appeal under subsection (2), the Supreme Court may by order ¾

(a) confirm, vary or set aside the award_;_ or

(b) remit the award, together with the Supreme Court's opinion on the question of law which was the subject of the appeal, to the arbitrator or umpire for reconsideration or, where a new arbitrator or umpire has been appointed, to that arbitrator or umpire for consideration,

and where the award is remitted under paragraph (b) the arbitrator or umpire shall, unless the order otherwise directs, make the award within 3 months after the date of the order.

(4) An appeal under subsection (2) may be brought by any of the parties to an arbitration agreement ¾

(a) with the consent of all the other parties to the arbitration agreement_;_ or

(b) subject to section 40, with the leave of the Supreme Court.

(5) The Supreme Court shall not grant leave under subsection (4)(b) unless it considers that ¾

(a) having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more parties to the arbitration agreement_;_ and

(b) there is ¾

(i) a manifest error of law on the face of the award_;_ or

(ii) strong evidence that the arbitrator or umpire made an error of law and that the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law.

(6) The Supreme Court may make any leave which it grants under subsection (4)(b) subject to the applicant complying with any conditions it considers appropriate.

(7) Where the award of an arbitrator or umpire is varied on an appeal under subsection (2), the award as varied shall have effect (except for the purposes of this section) as if it were the award of the arbitrator or umpire."

3 What is envisaged by s 38 is a two-stage process. In the absence of agreement between the parties (and in this case there was no such agreement) an appeal will only lie under s 38(2) with leave of the Court. Under s 38(5) an applicant for a grant of leave must satisfy three conditions. First, the appeal must be on a question of law. If the matters raised by an applicant were merely questions of fact, no appeal would lie. The application would not fall within s 38(2). Second, determination of the question of law must "substantially" affect the rights of one or more of the parties. Thirdly, there must be either a manifest error of law on the face of the award or, there must be strong evidence that the arbitrator made an error of law and that the determination of the question "may add, or may be likely to add, substantially to the certainty of commercial law".

4 It may be said at the outset that this is not a case where the second limb of the third consideration is relevant. It was not submitted that the arbitrator made an error of law, the determination of which may be likely to add substantially to the certainty of commercial law. What was submitted was that there was a manifest error of law on the face of the award.

5 In Lamac Developments Pty Ltd v Devaugh Pty Ltd [2002] WASCA 245, the Full Court had reason to consider the meaning that should be attributed to the criteria set out in s 38(5)(b). Matthews AJ referred with approval (at par 132) to what was said by Sheller JA in Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203. His Honour said (at 222):

"The added requirements of manifest error of law on the face of the award or strong evidence that the arbitrator made an error of law and that the determination of the question may add substantially to the certainty of commercial law suggests that the draftsman was seeking to constrain the exercise of court control over arbitral awards in the manner described by the House of Lords in The Nema. A manifest error of law on the face of the award may be an error which would be apparent to the judge upon a mere perusal of the reasoned award itself without the benefit of adversarial argument. A determination which adds substantially to the certainty of commercial law may be a determination of a question of the construction of a contract in standard terms rather than the construction of a one-off clause. In such a situation, strong evidence that the arbitrator made an error of law may equate with a strong prima facie case that the arbitrator has been wrong in his construction."

6 This matter has something of a history. This is the second occasion in which the present applicant has sought to set aside an award by the arbitrator. In Pindan Pty Ltd v Uniseal Pty Ltd [2003] WASC 168, McKechnie J set aside the award of the arbitrator and referred the matter back to the same arbitrator for determination in accordance with his Honour's reasons. His Honour dealt with the applicant's complaints about the award and found that there was a manifest error of law on the face of the award: see par 23. His Honour then went on to deal with a number of matters and at par 36, sets out all matters which the arbitrator was to address. The first of these matters his Honour expressed in the following terms:

"the arbitrator should first determine in respect of each contract what are the terms and conditions, express or implied, which are incorporated in that contract."

7 Pursuant to his Honour's order, the arbitrator did reconsider his award. The arbitrator published what he titled his "Reconsidered First Interim Award" on 5 January 2004. A copy of that award is annexure "AVR11" to the affidavit of Alan Victor Riley, sworn 26 February 2004 and filed in support of this application. The arbitrator approached the reconsidered award in a rather unusual fashion. He retained parts of his original award, deleted parts of that award by crossing out sections and added to the award, the additions being underlined. The result is somewhat confusing, but nonetheless, with effort, it is possible to work out what the arbitrator has decided. Although this approach was criticised by counsel for the applicant, it is not a matter which in and of itself would amount to a manifest error of law.

8 This arbitration concerned five separate contracts. It was alleged by each party to the arbitration that the other had breached the terms of the contract. Clearly, as a starting point it was necessary for the arbitrator to determine what were the terms of each of the contracts. McKechnie J made that point and that is why he made the specific direction to the arbitrator to which I have referred above.

9 The difficulty with the reconsidered award is that the arbitrator simply has not dealt with that issue. It is not possible on a reading of the award to determine what view the arbitrator takes as to the contractual relationship between the parties on each of the five projects. In other words, the arbitrator has not done what he was directed to do. The applicant had a raft of other complaints about the way in which the arbitrator has approached the reconsidered award. But I need not deal with any of these complaints. It is clear on this application, as it was clear on the application before McKechnie J, that the failure of the arbitrator to determine the contractual position between the parties to the arbitration is an error of law manifest on the face of the record. That being the case, leave to appeal ought be granted and the award ought be set aside. The question then is what should be done as the next step. The applicant says that the arbitrator ought be removed. The respondent says that the arbitrator ought be given another chance - he should be permitted to reconsider his award again and rectify the defects.

10 At the conclusion of the hearing I directed the solicitors for both parties to ascertain whether or not evidence was recorded in this matter and if so, in what form. I had in mind that it might be possible, if the present arbitrator were removed for a new arbitrator to rely upon the recorded evidence, rather than having to hear all the evidence again. It was also not clear from the material available at the hearing the time that had been occupied by the arbitration. Consistent with this direction, the solicitors for the parties wrote to the arbitrator. It seems that all of the evidence was recorded, there being 36 tapes occupying 1.5 hours each. The arbitrator is of the view that these tapes could be transcribed, albeit at a significant cost. The arbitration itself appears to have occupied nine days, with the arbitrator undertaking at least two views of various sites. Clearly the parties have already been put to considerable expense and whichever approach is now adopted, further expense is inevitable.

11 On balance, I am satisfied that the proper order is to remove the arbitrator. In the face of a clear and specific direction from McKechnie J, the arbitrator has not dealt with what is a fundamental aspect of the dispute between the parties. It is impossible to have any confidence that given a further opportunity, he will deal with the arbitration in a proper manner. With the utmost regret and with due respect to the arbitrator, I am of the view that he should be removed. It may well be that when a new arbitrator is appointed, he will deal with the matter on the basis of the tape recorded evidence. But that is a matter for the new arbitrator and it is not a matter about which it would be proper for me to give directions.

12 I will hear the parties as to the precise form of orders and as to costs.