Australia: The Westport decision: interpretation of "manifest error on the face of the award" and arbitrator's reasons

Last Updated: 29 October 2011
Article by Barry O'Keefe

Key Points:

The Westport decision opens up the ambit of matters that fall within the rubric of manifest error on the face of the award and lowers the standard to be expected of the reasons given by an arbitrator.

In the recent decision of Westport Insurance Corporation v Gordian Runoff Ltd [2011] HCA 37 the High Court expunged two heresies that had been introduced into the law of arbitration, one from New South Wales, the other from Victoria.

The decision dealt with two matters, the first relating to arbitration law, the other relating to insurance law. This note is confined to a consideration of the arbitration aspects of the decision. It does not deal in detail with the wording of section 34A of the Commercial Arbitration Act 2010, which was proclaimed to commence on 1 October 2010.

"Manifest error on the face of the award"

As a result of section 38(5) of the Commercial Arbitration Act 1984 (NSW) and its equivalent in other States, the rights of appeal by parties to an arbitration were significantly modified and restricted. One of the criteria that has to be met is that there should be "manifest error on the face of the award" (section 38(5)(b)(i)).

In Natoli v Walker (1994) 217 ALR 201 at 215-217 the majority of the NSW Court of Appeal construed the word "manifest" in section 38(5)(b)(i) in such a way as to require the error of law to be obvious and to exclude errors of law that were complex. This had the effect of permitting judicial determinations in respect of egregious errors, but not of difficult questions of law which were open to competing arguments.

French CJ, Gummow, Crennan and Bell JJ said that such a construction "would be incongruous" and went on to refute the heresy, saying:

"Natoli should not be accepted in this court as correctly construing section 38(5)(b)(i) of the Arbitration Act. The character or quality of the error falls for consideration, if relied upon, at the next stage, namely when the Supreme Court is considering under section 38(4)(b) whether to grant leave".

The wording used in section 34A of the Commercial Arbitration Act 2010 is somewhat different from that used in section 38(5)(b)(i) of the 1984 Act. Although the new Act provides for an appeal to the Supreme Court on a question of law arising out of an award, leave is still required and there is a provision that requires four criteria to be met. These are cumulative and one of them provides that "on the basis of findings of fact in the award the decision of the tribunal on the question is obviously wrong or the question is one of general public importance and the decision of the tribunal is at least open to serious doubt" [emphasis added].

Whether the High Court will treat the phrase "obviously wrong" in the same way as it treated "manifest error" is yet to be decided. However, given that the High Court appears to have adopted a pragmatic approach to the interpretation of "manifest" and one of the synonyms for "manifest" is "obvious", it may well apply similar reasoning to section 34A(3)(c)(i) of the 2010 Act as it did to section 38(5)(b)(i) of the 1984 Act. As against this, the fact that section 34A(3)(c)(ii) refers to a decision that "is at least open to serious doubt" may be resorted to as an indication of a contrary intention.

Given the absence of further authority, the reversal of Natoli may still have an effect on the manner in which applications for leave to appeal on matters of law arising out of an arbitral award will be dealt with by a court at first instance. It is therefore a matter that needs to be kept in mind when consideration is being given as to whether to appeal or not.

The second heresy: Oil Basins Ltd v BHP Billiton Ltd

The second heresy dealt with by Westport was that introduced into the law of arbitration by the decision of the Victorian Court of Appeal in Oil Basins Ltd v BHP Billiton Ltd (2007) 18 VR 346.

In that case there was a challenge to an award made pursuant to the Commercial Arbitration Act 1984 (Vic). Under section 29(1)(c) of that Act an arbitrator is required to include in the award a statement of the reasons for making the award. Under section 38 a restriction is imposed on appeals in that leave to appeal is required and leave is not to be granted unless, inter alia, there is manifest error on the face of the award or strong evidence that the arbitrator made an error of law and that the determination of the question might add substantially to the certainty of commercial law.

In the instant case the primary judge set aside the award for two reasons, one of which was error on the face of the award. The unsuccessful defendant appealed against the decision.

In his reasons for judgment the primary judge held that "The arbitrators were under a duty to give reasons to a standard which was equivalent to the reasons to be expected from a judge deciding a commercial case". This conclusion followed a process of reasoning in which the extent and quality of the reasons said to be required of an arbitrator would be higher in a more complex case "especially so where the arbitrator is a retired judicial officer" (BHP Billiton Ltd v Oil Basins Ltd [2006] VSC 402). Thus what constituted reasons for an award that complied with the contractual and statutory requirements, could depend on the characteristics or former characteristics of the arbitrator.

In the appeal to the Court of Appeal counsel for Oil Basins argued that it was unnecessary for the reasons given by an arbitrator "to be anything like as rigorous or complete as those demanded by the judge". The Court of Appeal rejected this submission, indicating that "the requirement (for reasons) is no different to that which applies to a judge" [emphasis added]. While the court went on to recognise that arbitrators may not always be as skilful in their methods of expressing their reasons as would a judge and that as a consequence the court should not construe an arbitrator's reasons "in an over critical way", it ultimately held that the judge had not erred and that the arbitrator's decision "called for reasons of a judicial standard".

The High Court rejected the requirement that an arbitrator's reasons should be of a judicial standard. The judges described the use of such a phrase and cognate expressions as having "placed an unfortunate gloss upon the terms of section 29(1)(c)". The true test is that what is required to satisfy [the] provision (of section 29(1)(c) will depend upon the nature of the dispute and the particular circumstances of the case. Gone is the need for reasons to be such as one would expect from a judge deciding a commercial case or to be of a judicial standard.1

The decision of the High Court in Westport is important for practitioners who are considering whether or not to seek leave to appeal to a Supreme Court from an award of an arbitrator. It opens up the ambit of matters that fall within the rubric of manifest error on the face of the award (and perhaps "obviously wrong" under the Commercial Arbitration Act 2010) and lowers the standard to be expected of the reasons given by an arbitrator.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.


1 The provisions of section 31 of the Commercial Arbitration Act 2010 in relation to giving reasons for an award are not different from those contained in the Arbitration Act 1984

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