The Courts of Queensland set aside an arbitrator's award for breach of natural justice in its March 2012 decision in the case of Sugar Australia Pty Limited vs. Mackay Sugar Ltd.  The successful party’s argument was that the arbitrator had failed to provide it an opportunity to address a point, which had not been raised by the parties nor anticipated by them, and which had ultimately formed a critical element of the arbitrator's reasoning in his award.

This is the first case to address the concept of natural justice since the recent amendments to Australia's International Arbitration Act (Cth) 1974. The amendments introduced a provision expressly stating that a failure to comply with natural justice may be a breach of public policy sufficient to allow a party to resist enforcement of a foreign arbitral award in Australia.

While the Sugar Australia case was decided under Queensland's domestic arbitration act, it imparts useful guidance to parties who might be considering a natural justice argument in relation to the challenge or enforcement of an international arbitration award in Australia.

Background

The arbitration proceedings were between the manager of a joint venture operating a sugar refinery, and the owner and operator of an adjacent sugar mill, which was a participant in the joint venture. 

Under the joint venture agreement, the sugar mill was obliged to supply the sugar refinery with raw sugar for processing. In April/May 2011, however, the sugar mill did not have sufficient sugar to meet the refinery's requirements and the manager of the joint venture had to source the sugar from elsewhere at a higher cost.

The manager therefore commenced arbitration proceedings for breach of contract to try to recover the loss it had suffered.

The claim was complicated by the fact that there were two relevant contracts. The joint venture had commenced in 1998 but was (at the time of the dispute) governed by the terms of an agreement dated 20 June 2006 (the “JVA”), which had been entered into before the deregulation of the sugar industry.  Clause 2.8 of the JVA did, however, foresee the deregulation and stated that in the event of deregulation, the provisions of Schedule 2 of the JVA would apply. Schedule 2 in turn stated that the sugar mill's obligation to supply to the refinery was subject to production limitations and set out contingency provisions that would apply in the event of a shortfall of sugar.

Following the deregulation of the Queensland sugar industry, the parties entered into a "Sale Contract" on 1 June 2007 under which the refinery agreed to buy sugar sold by the sugar mill. The Sale Contract was for a term of three years from 1 July 2007 and stated that the mill would provide sufficient sugar to meet the refinery's requirements, under the condition that this was no more than the mill's total annual raw sugar production. The Sale Contract did not address what should happen in the event of a shortfall.

On 4 June 2010, the parties met and agreed to continue to be bound by the terms of the Sale Contract for another three months starting 1 July 2010. The minutes of the meeting stated that "the raw sugar supply terms and conditions will remain unchanged from the existing agreement for this period".

After the expiry of the three-month extension, the parties continued their relationship without any further express agreement until April/May 2011 when, as the result of unseasonably wet weather in late 2010 and the low stock of stored raw sugar held by the mill, the mill found itself unable to provide to the refinery the requested amount of sugar.

The Arbitration

The arbitration was brought under Queensland's domestic arbitration act and was decided on the papers, without an oral hearing before the arbitrator. The parties' written agreement for this arbitration was stated to be "defined by the Points of Contention to be exchanged between the parties", and their evidence and submissions were set out in an extensive exchange of documents, including Points of Contention and submissions. 

The refinery relied on the terms of the Sale Contract and argued that a production limitation could only be excused when the total annual raw sugar production was less than the requirements of the refinery.  Here, the refinery argued, the mill had produced enough raw sugar in the 2010 season, with the cause of the shortfall being the failure of the mill to manage its risks, by incautiously sending sugar to other buyers early in the season and therefore having insufficient stores when the unseasonably wet weather arrived.

The mill agreed that its total production had been more than the requirements of the refinery, but argued that the failure to supply the required amount of sugar was due to "production limitations" and therefore fell within the ambit of the condition in Schedule 2 of the JVA. The mill argued that the shortfall provisos in Schedule 2 of the JVA prevailed over the terms of the Sale Contract, because shortfall was not dealt with in the Sale Contract.

The arbitrator accepted that the Sale Contract governed the agreement between the parties. The arbitrator focused, however, on the difficulty of ascertaining the relevant period for determining the mill's annual sugar production. Because the extension to the Sale Contract was only for three months, with no reference to any annual period, the arbitrator found that the clause referring to annual production was not included in the extension. He also held that any further interim agreement operating after the three-month extension did not incorporate the clause referring to annual production. Accordingly, the arbitrator concluded that there was no breach of contract, because the clause on which the refinery relied did not apply to the agreement between the parties at the relevant time.

Application to set aside arbitral award

The refinery applied to the Supreme Court of Queensland for the award to be set aside, relying on Section 42 of the Queensland domestic arbitration act (Commercial Arbitration Act 1990 (QLD)), which allows the Court to set aside an award where there has been misconduct on the part of an arbitrator. Misconduct is expressly defined in the Act to include a breach of the rules of natural justice.

The refinery argued that no submissions had been made to the arbitrator on which the arbitrator could conclude that the clause relating to annual production was excluded.

The judge, McMurdo J, accepted the refinery's submission and held that the mill had not made any submissions for the exclusion of the relevant clause.

The question for the Court was therefore whether or not the refinery had been unfairly deprived of an opportunity to present a case on the exclusion of the annual production clause.

McMurdo J restated the fundamental principle that a party, whether in litigation or arbitration, is entitled to know of the case put against it and to be given an opportunity of replying to that case.

The question here therefore turned largely upon whether or not the refinery should reasonably have anticipated that the arbitrator might determine the dispute by the reasoning he used (which had not been argued by the parties). 

In this case, McMurdo J observed that the arbitrator's reasoning led to the conclusion that the relevant clause was not contained in the contract and, remarkably, that there was no contract containing any term which obliged the mill to supply any sugar to the refinery. This position had not been argued by either party. On the contrary, it had been common ground that there was some obligation to supply.  McMurdo J therefore held that the relationship between the parties, as determined by the arbitrator, was markedly different from that for which either party contended.

McMurdo J emphasized that it was not suggested that it had been beyond the power of the arbitrator to reach the view he had as to the terms of the parties' agreement. He held, however, that the refinery had been denied natural justice (and that, therefore, there was misconduct by the arbitrator), because the refinery should not reasonably have anticipated that the arbitrator would reason in the manner that he did without first providing the refinery with an opportunity to make submissions on the point. 

The Court therefore set aside the arbitral award and remitted the dispute to the arbitrator for further consideration.

Relevance to international arbitration

As noted at the outset of this article, the Sugar Mills case was decided under Queensland's domestic arbitration act and the provision relating to misconduct, which includes a denial of natural justice.

Australia's International Arbitration Act (Cth) 1974 does not include the same concept of misconduct, but states that the court may refuse to enforce a foreign award if it finds that to enforce the award would be contrary to public policy. Section 8(7A) of the Act, which was introduced in July 2010, expressly states that the enforcement of an award will be contrary to public policy if a breach of the rules of natural justice occurred in connection with the making of the award.

It is therefore likely that the Australian court would refuse to enforce a foreign award in a similar situation to the Sugar Australia case.

Since October 2010, a number of Australia's States, including New South Wales and Victoria, have enacted new uniform domestic arbitration legislation, the content of which was agreed upon by the States and Territories in May 2010.  The new acts bring Australia's domestic arbitration legislation into line with Australia's International Arbitration Act (Cth) 1974 and the UNCITRAL Model Law. 

The new domestic legislation does not refer to the concept of 'misconduct' relied on in this case, but does allow the Court to set aside an award if the award is in conflict with public policy. Although the new domestic legislation does not contain an express provision akin to Section 8(7A) of the International Arbitration Act (Cth) 1974, the Australian Court would almost certainly accept that a breach of natural justice would render a domestic award in breach of public policy, as reflected by the commentary in the Explanatory Memorandum to the Commercial Arbitration Bill 2010 (NSW).