Trade and Transport Bulletin - Arbitration and the obligations to provide sufficient reasons for a decision

Arbitration clauses are quite common in shipping contracts. People agree to resolve their disputes by arbitration mainly in the belief that arbitrations can lead to speedy and cost effective determinations. A recent decision by the Victorian Court of Appeal has questioned that logic at least for arbitrations governed by State law in Australia.

Background

There are two arbitration regimes in Australia – international arbitrations which are governed by the Federal legislation, the International Arbitration Act 1974 (IA Act) (unless excluded by agreement of the parties) and domestic arbitrations which are governed by the various State Commercial Arbitration Acts.

The difference between the two regimes is significant.  The IA Act incorporates the UNCITRAL Model Law on International Commercial Arbitration (Model Law).  The Model Law was developed by the United Nations as a law of arbitral procedure to be adopted by member states for the conduct of arbitrations within their territories.  It was intended to harmonise the conduct of arbitrations throughout the world and lead to reduced judicial interference in arbitrations.

Under Australian law, parties are permitted to exclude the Model Law.  In these circumstances, the arbitration will be governed by the Commercial Arbitration Act of the State or Territory where the arbitration is held.  One of the requirements of the State Commercial Arbitration Acts is that the arbitrators are required to include in their award their reasons for making the award.

The State Commercial Arbitration Acts allow for wider judicial intervention in the judicial process than the Model Law.  The Acts provide that the State Supreme Courts can allow an appeal in certain circumstances, including where they consider there is a manifest error of law on the face of the award.  In a recent decision of the Victorian Court of Appeal Oil Basins Limited v BHP Billiton Ltd [2007] VSCA 255, the Court of Appeal opened the gate wider for further judicial intervention in domestic arbitrations.

The dispute

The dispute between the parties in that case concerned royalties which Oil Basins alleged are due to it under a royalty agreement for oil produced and recovered by BHP from certain blocks in the Blackback field which is located in Bass Strait (between Victoria and Tasmania).

The arbitral tribunal, which included two retired judges and a technical legal expert, found in favour of Oil Basins and ordered BHP to pay royalties under the royalty agreement citing section 29(1) (c) of the Commercial Arbitration Act 1984 (Vic).  BHP challenged the decision in the Supreme Court of Victoria.

Justice Hargrave found that there was an error of law on the face of the award in that there was a failure by the majority of arbitrators to give adequate reasons.  He set aside the award and remitted the arbitration for determination by a differently constituted arbitral panel, one member of the original panel having since died.

Oil Basins appealed Justice Hargrave's decision. The Victorian Court of Appeal comprising Buchanan, Nettle and Dodds-Streeton JJA dismissed the appeal and left the orders of Justice Hargrave intact.  Regarding the obligation of an arbitration tribunal to give reasons for the award, they stated in a joint judgment:

… the requirement to give reasons arose out of s.29(1) (c) of the Commercial Arbitration Act 1984 [Vic]. The extent of that requirement is informed by the purpose of that Act. As Giles J observed in R P Robson Constructions v D & M Williams, the Act fundamentally altered the approach to the provision of reasons in commercial arbitration, by taking away the jurisdiction to set aside the award on the ground of error on the face of the award and replacing it with a right to seek leave to appeal on any question of law arising out of the award which the court considered could substantially affect the rights of one or more of the parties. In order to enable the court to see whether there has been an error of law, s. 29 provides that the award must be in writing and that the arbitrator must include a statement of reasons. And in order to be utile, the requirement is for reasons sufficient to indicate to the parties why the arbitrator has reached the conclusion to which he or she has come. To that extent,the require ment is no different to that which applies to a judge. Of course it is understood that the arbitrators may not always be skilful in the expression of their reasons. Consequently it is accepted that a court should not construe an arbitrator's reasons in an overly critical way.

The Court of Appeal went on to say '…The arbitrators' decision in the present case called for reasons of a judicial standard.  As with reasons which a judge is required to give, the extent to which an arbitrator needs to go in explaining his or her decision depends on the nature of the decision'.

Implications

The Court of Appeal decision, and the first instance decision before it, have been subject to widespread criticism in the arbitration community, not because of the requirement that reasons be given, but because in fact the Tribunal gave reasons, which neither Justice Hargrave or the Court of Appeal thought were up to judicial standard.

In an era where both the House of Lords in the United Kingdom and the Federal Court in Australia have recently given decisions unduly regarded as 'arbitration friendly', the Oil Basins decision is thought by many to be a regressive one. 

While the Victorian Court of Appeal's decision is binding in Victoria, it is only persuasive in the other States and Territories of Australia.  That said – until there is a differing judgment by another State Court of similar standing - it would be foolish to ignore this decision's potential ramifications for arbitrations in other Australian States and Territories.

This judgment may lead to parties incurring increased legal costs in domestic Australian arbitrations – as parties ask their legal advisors to examine their awards to consider if the award can be challenged where they consider inadequate reasons for the award have been given.

It also undermines the relative certainty of obtaining a final decision on a dispute through arbitration, which is a central advantage of arbitration over litigation.

Where parties, arbitrating in Australia, are looking for arbitration awards to be final, they would be well advised, in cases involving international parties to ensure that the arbitration is governed by the IA Act.  The relevant arbitration clause should be carefully drafted to ensure that it does not inadvertently exclude operation of that Act and as such the Model Law.

Alternatively if the arbitration does not involve international parties or the parties prefer the domestic arbitration regime, the parties could agree to execute an 'exclusion agreement' excluding the parties' rights of appeal.  This is permitted by section 40 of the State Commercial Arbitration Acts but all the parties to the arbitration must agree to execute the agreement. 

For more information please contact:

Paul Graham, Solicitor
Tel +61 8 6467 6075
paul.graham@dlaphillipsfox.com