Carr v Gallaway Cook Allan [2014] NZSC 75

Commercial parties are now put on notice that seemingly minor defects in arbitration clauses can actually lead to the invalidity of the entire arbitration agreement, leaving parties with the wasted cost and time of participating in an arbitral process only to receive an arbitral award that is unenforceable because of a defect in drafting at the time of contract. It reminds us that the freedom of contract that permits submission of disputes to ADR is not absolute and there are some technical minimum requirements that must be met to ensure that a party’s agreement to ADR is not undermined.

Background

On 20 June 2014 the New Zealand Supreme Court (New Zealand’s highest court of appeal) delivered its decision in Carr v Gallaway Cook Allan [2014] NZSC 75. In that case, Mr Carr sued his law firm, Gallaway Cook Allan, alleging that their negligent conduct caused his settlement agreement with a third party to be terminated. Mr Carr and Gallaway Cook Allan agreed to have their dispute submitted to arbitration and included a provision in their arbitration agreement that permitted the right to appeal on “questions of law and fact”.

The parties participated fully in the arbitration and the sole arbitrator ultimately rendered an award in favour of Gallaway Cook Allan. Mr Carr, dissatisfied with the result, sought to have the award set aside arguing that the right to appeal on questions of fact was invalid under NZ law and so the entire arbitration agreement was compromised by the inclusion of the words “and fact”.

The decision

The New Zealand Supreme Court agreed with Mr Carr and set aside the award. The Court determined that the right to appeal an arbitral award on questions of fact was a fundamental part of the parties’ agreement to submit their disputes to arbitration in the first place. Because such an appeal is not permitted under the Arbitration Act 1996 (NZ), this undermined the parties’ consent to arbitration from the beginning and so the arbitral award could not be enforced.

This case demonstrates that because arbitration is a creature of contract, it is critically important to get the arbitration agreement right from the beginning. Submission of disputes to arbitration, or any other alternative dispute resolution mechanism for that matter, has distinct time and cost advantages over the ordinary litigious process and it is for this reason that courts will usually give primacy to agreements to use ADR. However, courts around the world also recognise that when you agree to use ADR, you are giving up the right to seek a remedy from a domestic court. It is for this reason that courts will encourage the freedom to contract for an alternative method of resolving disputes but will take seriously any issue that undermines a party’s consent to bypass the ordinary litigation process.

The key point to take away from the Carr v Gallaway Cook Allan case is that when it comes to arbitration agreements and agreements to submit to other methods of ADR, freedom of contract is not absolute. The relevant Arbitration Act in each relevant jurisdiction will usually set out some key “mandatory” provisions which cannot be amended by party agreement and any attempt to do so might vitiate the entire agreement to arbitrate. In this case, the NZ Arbitration Act only permitted appeal on questions of law. The parties could not validly agree to allow appeals on questions of fact. Because the parties would only agree to arbitrate so long as they had the right to appeal on questions of fact, invalidity of this appeal right meant that they could no longer be considered to have consented to arbitration and forgone their right to litigate.

Parties should consider this case carefully and recognise the importance of getting the drafting right in dispute resolution clauses. While these clauses are often glossed over or done last minute, this case shows that the consequences of a minor defect in the drafting of a dispute resolution clause can be catastrophic years later when that clause is finally engaged. The cost of getting specialist advice on the drafting of dispute resolution clauses can save a party lengthy delays and wasted costs of going through an entire ADR process only to discover that their arbitral award or expert determination is unenforceable.