The respondents in an international commercial arbitration were successful in the Federal Court in Australia in setting aside parts of two partial awards and removing the sole arbitrator pursuant to Articles 12, 18 and 34 of the UNCITRAL Model Law. These articles are incorporated into Australian law by the International Arbitration Act 1974 (Cth).

The Court found that the arbitrator had conducted himself in such a manner that the applicants could no longer have confidence in him. This was mainly because the arbitrator had decided various substantive questions in a final manner without giving some of the parties an opportunity to be heard on those questions.

The Court observed that procedural difficulties were encountered due to the hiving off and determination of incomplete separate questions where issues between the parties had not been properly crystallised.

Hui v Esposito Holdings Pty Ltd [2017] FCA 648 and Hui v Esposito Holdings Pty Ltd (No 2) [2017] FCA 728 demonstrate the circumstances in which the Court may review the actions of an arbitrator and may be prepared to terminate an arbitrator’s mandate and set aside awards.

Background

Upon an application by the claimant in the arbitration, the arbitrator directed that there be a preliminary hearing in relation to certain of the claimant’s claims. It had not been contemplated that defences to those claims (such as set off defences) were within the scope of the preliminary hearing. Despite this, the claimant in its closing address sought to make submissions, for the first time, related to the set off defences. In his reasons, the arbitrator made findings concerning the availability of set off defences.

The respondents challenged the arbitrator’s reasons, in part successfully. However, the arbitrator declined an application that he recuse himself and maintained that he did not exceed his jurisdiction in deciding the set off issues.

The respondents commenced proceedings in the Federal Court of Australia to set aside the partial award and to have the arbitrator removed.

Decision

Justice Beach of the Federal Court found that it was well understood by the parties, and acceded to by the arbitrator, that the preliminary hearing would not concern the availability of set off defences or the merits of these defences. Despite this, the arbitrator entered upon and decided issues relating to the availability of those defences.

In finding that the applicants had lost a valuable opportunity to argue these defences, Justice Beach observed that:

  • in order to justify set aside or remittal, real unfairness or real practical injustice must have resulted by the denial of the relevant opportunity to a party to present its case;
  • real unfairness or real practical injustice can be demonstrated by showing that there was a realistic, rather than fanciful, possibility that the award may not have been made or may have differed in a material respect favourable to the party said to have been denied the opportunity. Here, this required set off defences that were reasonably arguable. The judge noted that, if the applicants’ arguments had been hopeless, then they would have lost nothing of value and no real injustice would have been caused to them by the lost opportunity. He rejected the notion that the opportunity to put an argument itself has intrinsic value irrespective of the argument’s merits; and
  • the onus rests on the party seeking to set aside an award or remit it to the arbitrator for reconsideration.

The Court also considered the interaction of the ‘justifiable doubts’ standard in relation to the impartiality and independence of the arbitrator in the UNCITRAL Model Law and the ‘real danger of bias’ test in section 18A(2) of the International Arbitration Act 1974 (Cth).

Justice Beach decided that where there is no allegation of actual bias, the correct perspective for the ‘real danger of bias’ test is that of a ‘reasonable bystander’ or a ‘reasonable man’, in contrast with the perspective of the Court (cf Sino Dragon Trading Ltd v Noble Resources International Pte Ltd [2016] FCA 1131, [197]-[198] (Beach J)). The judge supported the test in Lovell Partnerships (Northern) Ltd v AW Construction plc (1996) 91 BLR 83 that illustrates the connection between a breach of the no hearing rule and the basis on which an arbitrator breaching the rule ought be removed for prejudice.

In Lovell, Mance J (as he then was) stated that the legal test is whether a reasonable person would no longer have confidence in the arbitrator’s ability to come to a fair and balanced conclusion on the issues if the case were remitted to the arbitrator.

Observations

These decisions by the Federal Court of Australia confirm that Australia is a safe seat for international arbitrations with a judiciary that understands and safeguards the integrity of the arbitral process within the outer limits of what is prescribed in the International Arbitration Act and Model Law.

In practice, these decisions also demonstrate that parties should ensure that there is clarity around the scope of preliminary issues determination or split hearings (bifurcation), in order to ensure that each party is given an opportunity to be heard.