The High Court of Australia’s recent decision in Westport Insurance Corporation v Gordian Runoff Ltd [2011] HCA 37 may provide further ammunition for those who see Australian courts’ approach to arbitration as parochial and interventionist. 

Instead, the Court’s decision on the adequacy of reasoning under the now-repealed Commercial Arbitration Act 1984 (NSW) should be viewed as:

  • applying only to domestic arbitrations governed by the old State arbitration laws;
  • being of no direct application to international arbitration;
  • largely consistent with the approach of other jurisdictions; and
  • revealing a mature appreciation of arbitration and its history by Australia’s highest court. 

This update provides an overview of the High Court’s decision, the implications for arbitration in Australia moving forward and practical tips for avoiding the lengthy delays and high costs the parties to this litigation experienced following the arbitration.  

Background to the case

The case concerned a dispute as to whether reinsurance treaties covered a particular policy. Gordian Runoff had succeeded before the arbitral tribunal on the submission that, even if the reinsurance treaties did not cover the relevant policy, s 18B of the Insurance Act 1902 (NSW) would have the effect of extending coverage to include the policy. 

The appellant sought leave to appeal from the award under s 38 of the Commercial Arbitration Act 1984 on two key grounds:

  1. The tribunal failed to give adequate reasons as to why s 18B of the Insurance Act applied;
  2. The tribunal erred in its construction of s 18B of the Insurance Act.

Section 38 of the Commercial Arbitration Act 1984 did not allow a court to grant leave to appeal from an award unless there was a “manifest error of law on the face of the award” or there was otherwise an error of law, the determination of which would add substantially to the certainty of commercial law.

 The High Court decision

On the question of the adequacy of reasons, the majority of the Court held:

  • The nature and extent of reasons for an award depends upon the circumstances of the particular dispute.
  • If the dispute involves complex questions of law, reasons akin to a judicial standard may be required.
  • Inadequate reasons constitute a “manifest error of law on the face of the award” for the purposes of the Commercial Arbitration Act 1984.
  • In this case, the arbitrators were obliged to explain the reasons why each of the criteria in s 18B of the Insurance Act were met; they failed to do so.
  • Usually, the remedy for inadequate reasons is to remit the matter back to the arbitral tribunal for further reasons.

On the question of appealing awards due to errors of law, the majority clarified the operation of s 38 of the Commercial Arbitration Act 1984:

  • In considering whether to allow a party to appeal from an award, a court must balance interests of finality with accuracy of legal reasoning.
  • Even when a party can show a “manifest error on the face of the award”, a court still has a discretion in granting leave to appeal from the award.
  • The words “manifest error” which appeared in the Commercial Arbitration Act 1984 do not mean only egregious errors of law, but any error of law which is apparent from reading the reasons. 

Implications for international arbitration in Australia and the new Uniform Arbitration Acts

The High Court’s decision was based on the construction of the old Commercial Arbitration Act 1984. It has no direct application to:

  • the 2006 UNCITRAL Model Law on International Commercial Arbitration, which applies to international arbitrations; and
  • the new State Commercial Arbitration Acts (Uniform Arbitration Acts) recently passed in New South Wales, Northern Territory, South Australia and Tasmania (and currently before Parliament in Victoria and Western Australia), which apply to domestic arbitrations.

However, the Court’s decision on the adequacy of reasons may influence future decisions on the requirement for reasons under the Model Law or the Uniform Arbitration Acts. 

It should be noted that the decision is largely consistent with decisions of courts in other jurisdictions on the standard of reasoning required under legislative provisions similar to the Model Law (see, eg, Bremer Handelsgesellschaft mbH v Westzucker GmbH (No 2) [1981] 2 Lloyd's Rep 130; Born, International Commercial Arbitration (2009) at 2453-2454). 

In terms of whether a court could set aside an award because of inadequate reasons:

  • The Model Law does not allow appeals from awards on errors of law. Courts in other jurisdictions have held that a failure to give adequate reasons is not a ground for setting aside an award (see Born, International Commercial Arbitration (2009) at 2455).
  • 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 Uniform Arbitration Acts no longer refer to “manifest errors of law”, but decisions which are “obviously wrong”. Whether or not inadequate reasons would render a decision “obviously wrong” remains to be seen and may be influenced by the extent of the inadequacy.   

Steps to limit appeals on awards – the arbitration agreement

Even under the old Commercial Arbitration Act 1984, parties are at liberty to agree that an arbitrator need not state the reasons for their award. If parties truly desire finality above all else, such an agreement may be desirable.

Otherwise, parties to international arbitrations need take no further steps to limit appeals on awards in Australia as the Model Law will govern the arbitration and it already restricts rights of appeal.

For domestic arbitrations, parties should ensure the arbitration agreement:

  • provides for a seat of arbitration to be in a State that has adopted the Uniform Arbitration Acts; and
  • if desired, expressly excludes all rights of appeal from the award.

A well drafted arbitration agreement can be the key to reducing costs and delay in the long term.

Steps to limit appeals on awards – requesting a supplementary award

Upon receiving an award, parties should consider whether the award identifies the determinative issues and explains the thought process of the arbitrator (including the evidence, facts found and conclusions) adequately.

If a party is concerned that an arbitral award contains inadequate reasons, within 30 days of receiving the award it should request the tribunal to make a supplementary award dealing with matters raised in the proceedings but omitted from the award. Such a procedure is allowed for under most institutional rules and the Model Law. Doing so may prevent a ground of appeal from arising.

Is Australia perceived internationally as being an arbitration friendly jurisdiction?

The amendments to both the international and domestic arbitration regimes since 2010 should make Australia an attractive venue for arbitration, but whether that is the case in practice remains to be seen. Australia remains one of only 12 jurisdictions world-wide to have adopted the 2006 amendments to the Model Law. The High Court decision is not a decision on these new developments in Australia, and while the decision should not impact on the international perception of Australia’s merit as a jurisdiction for arbitration, there is a risk that this will occur on some level.