Australia: Arbitration-By-Attrition: Is Arbitration In Australia Losing Its Appeal?

Introduction

Arbitration is designed to be both fast and final. However the decision of the Victorian Supreme Court in Oil Basins Ltd v BHP Billiton Ltd demonstrates that this may not always be the case.

The Victorian Supreme Court upheld BHP's bid to have an arbitral award against it set aside, with the result that the product of three years of arbitration was overturned following a further two years of litigation in the courts.

BHP was a powerful adversary in this dispute and had the means to conduct what is essentially Arbitration-by-Attrition. The key question here is; what can be done to prevent a party from conducting Arbitration-by-Attrition and to ensure that arbitration proceedings are both fast and final?

So what was it all about?

In 1960 BHP concluded a royalty agreement with Oil Basins relating to the production of hydrocarbons from the "Blackback" field (Blackback) in the Bass Strait off the coast of Victoria. The royalty agreement was governed by New York law and contained a clause requiring the parties to resolve any disputes by way of arbitration in Australia.

Production of hydrocarbons from Blackback commenced nearly 40 years later 1999. In 2002 Oil Basins commenced arbitration proceedings against BHP seeking the payment of royalties under the 1960 royalty agreement.

The parties concluded a Deed of Submission to Arbitration which recorded the parties' "agreed goal of efficient resolution of the Dispute" and their agreement to use their best endeavours to facilitate the making of an award by the Arbitrators "expeditiously and without undue delay" and that any interim award be made in writing, as soon as reasonably practicable, stating the reasons for making the award, and be final and binding upon the parties.

The Arbitral Tribunal was composed of two retired Australian judges (one a former Federal Court judge, the other a former Supreme Court judge) and an American lawyer. The Chairman and the other Australian arbitrator formed the majority, finding in favour of Oil Basins and ordering BHP to pay royalties under the royalty agreement. In doing so the majority made findings of fact as to New York law.

BHP's bone to pick...

Needless to say, BHP wasn't happy with the award and appealed to the Supreme Court.

The trial judge concluded that the Arbitral Tribunal had failed to give adequate reasons for making the award and that this was both an error of law on the face of the award within the meaning of section 38 of the Victorian Commercial Arbitration Act (the Act) and technical misconduct within sections 42 and 44 of the Act.

The trial judge ordered that the award be set aside and the arbitration remitted for determination before a differently constituted arbitral tribunal. Not surprisingly, Oil Basins appealed.

What the Court of Appeal thought about BHP's argument

The Court of Appeal dismissed the appeal and left the orders of the trial judge intact.

Importantly, the Court of Appeal held that "in arbitration, the requirement is that parties not be left in doubt as to the basis on which an award has been given. To that extent, the scope of an arbitrator's obligation to give reasons is logically the same as that of a judge".

The Court of Appeal went on to say "[a]s with reasons which a judge is required to give, the extent to which an arbitrator needs to go in explaining his or her decision depends on the nature of the decision".

Relevantly, the court noted that it was common ground that the scope of the obligation to give reasons was the same under both the Deed of Submission to Arbitration and the Act.

Why arbitration wasn't fast & final

Arbitration proceedings were commenced in mid 2002 and the interim award was handed down in September 2005. The first appeal of the interim award was decided in November 2006 and the second appeal was decided in November 2007.

Arguably three years for the resolution of a large and complex technical claim between intransigent parties is fairly reasonable.

What is less reasonable is two years spent appealing the arbitral award in the courts, with the result that the matter is remitted to a differently constituted arbitral tribunal to be completely re-heard.

Effect of the Court of Appeal's decision

Parties are entitled to expect arbitrators to give proper reasons for their decisions. But the standard expected of arbitrators needs to be balanced against the importance of ensuring that arbitration remains a fast and final way of resolving disputes.

Amongst other things, if this decision causes a broadening of appeal rights under the state-based Commercial Arbitration Acts it may make it easier for a party to throw lots of time and money at a dispute until it goes away (Arbitration-by-Attrition).

Preventing Arbitration-by-Attrition

So what can be done to prevent Arbitration-by-Attrition following the court's decision in Oil Basins?

Parties can agree that any arbitration proceedings will be governed by the International Arbitration Act (Cth), which has much narrower appeal rights than the state-based Commercial Arbitration Acts.

Specifically, an award can be appealed under the International Arbitration Act where, for example, the subject matter of the award is not capable of being referred to arbitration (like criminal matters) or where the award offends public policy (where the making of the award was induced by fraud, etc).

The application of the International Arbitration Act is particularly appropriate in a situation like the one in Oil Basins, where you have a dispute involving an international party, arising from an agreement relating to the production of hydrocarbons in Australia and governed by the law of New York.

If you prefer domestic arbitration, but want to exclude the appeal rights under the state-based Arbitration Acts, it is possible to do so by concluding an exclusion agreement once arbitration proceedings have commenced (see, for example, section 40 of the Commercial Arbitration Act (NSW)).

In doing so, it is possible to ensure that arbitration remains what it is intended to be; a method for the fast and final resolution of disputes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.