Australia: Oil Basins rises from the ashes? Westport Insurance Corporation & Ors v Gordian Runoff

On 5 October 2011, the High Court of Australia (HCA) handed down its decision in Westport Insurance Corporation & Ors v Gordian Runoff Limited¹. By majority joint judgment, Chief Justice French and Justices Gummow, Crennan and Bell set aside the earlier arbitral award on the basis of a manifest error of law within the meaning of section 38(5)(b)(i) of the Commercial Arbitration Act 1984 (NSW) (the Arbitration Act)².

The outcome is one of importance for arbitration practice in Australia because the primary ground of appeal was the adequacy of the reasons given by the arbitral tribunal in relation to its interpretation of section 18B of the Insurance Act 1902 (NSW) (the Act).

The appellants argued that the tribunal failed to explain why it was reasonable that the reinsurers should indemnify Gordian Runoff Limited in the circumstances and thus had failed to provide reasons in support of their award to the standard required by section 29(1)(c) of the Arbitration Act. Relying upon the Victorian case of Oil Basins Ltd v BHP Billiton Ltd³, the appellants argued that the NSW Court of Appeal (NSWCA) was wrong to find that section 29(1)(c) of the Arbitration Act does not require reasons to the same standard as would be required of a judge.

The love affair begins...

In our earlier update entitled The end of Oil Basins - NSW rekindles love affair with arbitration (click here) on the NSWCA decision in Gordian Runoff Limited v Westport Insurance Corporation⁴, we discussed how the NSWCA had distanced itself from the Victorian Court of Appeal decision in Oil Basins Ltd v BHP Billiton Ltd⁵ (Oil Basins), which had arguably equated the arbitral tribunal's duty to give reasons under the uniform Commercial Arbitration Acts 1984-5 with that of a judge. Our previous update set out the background to the dispute and we have not repeated those facts here.

The key issue for the arbitral tribunal was whether the application of the Act operated to prevent Westport from denying Gordian's claim on the basis that the FAI policy did not fall within the terms of Gordian's reinsurance. On 10 October 2008, in an arbitration conducted under the Arbitration Act the arbitrators delivered their written award in favour of Gordian. They found that section 18B of the Act applied and had the effect of requiring Westport to pay claims notified to Gordian under the policy issued to FAI within a three year period.

Under s 29(1) of the Arbitration Act, the New South Wales Supreme Court found that the arbitrators were required to make the award in writing, sign the award and include in the award a statement of the reasons for making that award. Accordingly, Justice Einstein gave leave to appeal finding that the arbitral tribunal had misunderstood section 18B of the Act and set aside the arbitral award.

The NSWCA noted that the submissions made on section 18B of the Act demonstrated a contestable argument rather than a 'prima facie case of error'⁶. The NSWCA commented that an error of law must be: 'evident or obvious; there must be powerful reasons leaving little or no doubt on a preliminary basis, without any prolonged adversarial argument, that there is on the face of the award an error of law.'⁷ Accordingly, it was held that the terms of the Arbitration Act supported the finality of the arbitral award, on the ground that in circumstances where the hearing of substantive arguments before granting leave to appeal increases the likelihood that arbitral awards will be subject to judicial review, the hearing of the application for leave to appeal and the appeal together should not be encouraged⁸.

The love affair ends...

The HCA disagreed with the NSWCA's strict position that the performance of the arbitral function is a purely private matter of contract, in which the parties have given up their rights to engage judicial power, and is wholly divorced from the exercise of public authority.⁹ The majority decision held that the arbitrators gave inadequate reasons for their decisions, paving the way for the above discussed appeal process.

In reaching this decision, their Honours unanimously agreed that section 38(5) of the Arbitration Act required a manifest error of law that appears on the face of the Award, and that this was the case in this appeal¹⁰. The failure of the arbitrators to give reasons for the section 18B finding was held to be an adequate manifest error of law. Their Honours made particular reference to the statement by Justice Giles in R P Robson Constructions Pty Ltd v D & M Williams¹¹ that the statement of reasons the arbitrator was required to give under s 29 was: 'necessary in order that it can be seen whether or not the arbitrator was in error on any question of law arising out of the award'. ¹²

It was held that the arbitrators were obliged to succinctly note the considerations relating to all aspects of the pleadings¹³ and a failure to do so was both a manifest error of law on the face of the award and strong evidence that the arbitrators made an error of law, which may add substantially to the certainty of commercial law¹⁴. Ultimately, the HCA overturned the decision of the NSWCA and reinstated orders of the primary judge setting aside an arbitral award.

The significance of this decision was indicated by the presence at trial of the Commonwealth, the Australian Centre for International Commercial Arbitration Limited, the Australian International Disputes Centre Limited, the Institute of Arbitrators and Mediators Australia Limited and the Chartered Institute of Arbitrators (Australia) Limited who were given leave to appear as amici curiae.

Or does it?

The decision effectively means that arbitrators will be subject to scrutiny if the reasons given for an award do not reflect consideration of all the issues presented by the parties in dispute. The Court found that arbitrators are not necessarily subject to the same scrutiny as judges. When discussing Westport's asserted meaning of Oil Basins, their Honours observed that:

Such commentary suggests that although judges and arbitrators are not subject to the same requirements when giving their reasons, an arbitrator's reasons will be subject to a level of scrutiny sufficient to achieve justice for the parties and to ensure that there has been no inadequate consideration of the issues on part of the arbitrator.

The Judges, particularly Justice Heydon lamented the fact that arbitration in this instance hardly delivered its intended purpose. Despite being in dissent, Justice Heydon observed:

A final observation

Increasingly, it appears that the highest courts of the States and Territories and the highest court of the nation have quite different interpretations of the law.

On the date that the HCA set aside this NSWCA decision, their Honours also set aside three other NSWCA decisions¹⁷. The last decision in which an appeal was not allowed was on 7 September 2011¹⁸, ten judgments away from the HCA's most recent decision on 6 October 2011¹⁹. Although, it is noted that many more cases would have been refused leave to appeal in the first instance.

The reason for this disparity, whether it will prove to be endemic, or the full breadth of its implications is not clear. However, what is certain is that given the interpretive disparity at the highest level, every day legal practitioners are finding it increasingly difficulty to provide certainty in their advice to their clients.

Footnotes

¹ [2011] HCA 37

² per French CJ, Gummow, Crennan and Bell JJ at [36].

³ ((2007) 18 VR 346)

⁴ [2010] NSWCA 57.

⁵ [2007] VSCA 255; 18 VR 346.

⁶ Gordian Runoff Limited v Westport Insurance Corporation [2010] NSWCA 57 at [128].

⁷ Gordian Runoff Limited v Westport Insurance Corporation [2010] NSWCA 57 at [116].

⁸ Gordian Runoff Limited v Westport Insurance Corporation [2010] NSWCA 57 at [109] and [112].

⁹ per French CJ, Gummow, Crennan and Bell JJ at [20].

¹⁰ per Kieffel J at [163].

¹¹ (1989) 6 BCL 219.

¹² (1989) 6 BCL 219 at 221.

¹³ per French CJ, Gummow, Crennan and Bell JJ at [56].

¹⁴ per French CJ, Gummow, Crennan and Bell JJ at [57].

¹⁵ per French CJ, Gummow, Crennan and Bell JJ at [53].

¹⁶ per Heydon J at [111].

¹⁷ Shoalhaven City Council v Firedam Civil Engineering Pty Limited [2011] HCA 38; Muldrock v The Queen [2011] HCA 39; Tasty Chicks Pty Limited & Ors v Chief Commissioner of State Revenue [2011] HCA 41.

¹⁸ Jemena Asset Management (3) Pty Ltd v Coinvest Limited [2011] HCA 33.

¹⁹ AB v Western Australia [2011] HCA 42.

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This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.