Australia: The End Of Oil Basins - NSW Rekindles Love Affair With Arbitration
Corporate Risk and Insurance update

In 2008 the Victorian Court of Appeal handed down a judgment that arguably equated the arbitral tribunal's duty to give reasons under the uniform Commercial Arbitration Acts with that of a judge (Oil Basins Ltd v BHP Billiton Ltd [2007] VSCA 255; 18 VR 346) (Oil Basins).

The decision in Oil Basins had the effect of blurring the line between the very different dispute resolution mechanisms of litigation and arbitration. Arbitration began to look like an expensive and time consuming process subject to increasingly broad grounds for appeal.

The New South Wales Court of Appeal in Gordian Runoff Limited v Westport Insurance Corporation [2010] NSWCA 57 distanced itself from the decision in Oil Basins, signalling renewed judicial support in New South Wales for commercial arbitration as it is supposed to be - efficient and final.

In the course of its judgment, the Court of Appeal also gave close consideration to the parties' major bone of contention, being the operation of s18B of the Insurance Act 1902 (NSW) (the Act).

The pickle

The plaintiff, Gordian Runoff Limited, was an insurer (Gordian). The defendant, Westport Insurance Corporation, was one of Gordian's excess of loss reinsurers (Westport).

Westport and Gordian became involved in a dispute relating to Westport's liability as reinsurer for claims made on Gordian under a policy issued by Gordian to FAI Insurance Ltd (FAI). Specifically, Gordian's policy with FAI covered claims made within seven years of inception of the policy, while Gordian's reinsurance contract with Westport only covered underlying policies providing cover in relation to claims made within three years of inception.

The key issue for the Arbitral Tribunal was whether the application of s18B 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.

Findings of the Arbitral Tribunal and the Supreme Court

In general terms, s18B of the Act gives the court the power to excuse failure by an insured to observe or perform a term or condition of the insurance. Westport's key argument was that s18B of the Act did not apply, and therefore could not be used to support Gordian's claim for coverage.

The Arbitral Tribunal held that s18B of the Act did in fact apply and had the effect of requiring Westport to pay claims notified to Gordian under the policy issued to FAI within a three year period.

Westport was not keen on the Award and appealed to the Supreme Court on grounds contained in s38 of the Commercial Arbitration Act 1984 (NSW) (the Arbitration Act).

Justice Einstein of the New South Wales Supreme Court agreed with Westport, finding that the Arbitral Tribunal had misunderstood s18B of the Act.

On 1 April 2010 the New South Wales Court of Appeal put the kibosh on Westport and overturned the decision of the Supreme Court (Allsop P, Spigelman CJ and Macfarlan P concurring).

In determining that leave to appeal should not have been granted, the Court of Appeal gave careful consideration to the:

• hearing of an application for leave to appeal and an appeal at the same time;
• circumstances in which leave to appeal an arbitral award should be granted; and
• duty of the Arbitral Tribunal to give adequate reasons for its award.

The Insurance Regulations which commenced on 1 September 2009 had the effect of removing reinsurance from the scope of s18B of the Act. Accordingly, the Court of Appeal's consideration of s18B of the Act is of limited future relevance and will not be addressed in detail in this update. Suffice it to say that the Court of Appeal agreed with much of the arbitrators' initial approach, with some reservations.

Hearing the application for leave to appeal and the appeal together

The Court of Appeal's view was that the hearing of the application for leave to appeal and the appeal at the same time should only occur in 'special, indeed exceptional, cases'. [109]

The terms of the Arbitration Act support the finality of the arbitral award. 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 is 'inimical' to the Arbitration Act and should not be encouraged. [109 & 112]

When leave to appeal should be granted

The Court of Appeal went on to consider whether leave to appeal should have been granted.

The Arbitration Act contains limited grounds upon which leave to appeal may be sought. Westport chose to rely upon:

• an error of law on the face of the Award [s38(5)(b)(i) of the Arbitration Act]; and
• strong evidence of an error of law where the determination of that question may, or may be likely to, add substantially to the certainty of commercial law [s38(5)(b)(ii) of the Arbitration Act].

The first ground for appeal was not pressed before the Court of Appeal, but it is important to note the Court of Appeal's comment that:

'The error must be more than arguable; it 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.' [116]

The Court of Appeal was not persuaded by Westport's submissions on its second ground for appeal. In so finding, the Court of Appeal noted that the length and complexity of the submissions made on s18B of the Act demonstrated a contestable argument rather than a 'prima facie case of error'. [128] Relevantly, the Court of Appeal noted that such an application 'is to be assessed by reference to argument suitable to a leave application in which the task is to assess the strength of the case for error, not decide the case for error.' [128]

Reasons for the award - Oil Basins

The Court of Appeal also rejected Westport's argument that the Arbitral Tribunal had committed an error of law by failing to provide adequate reasons for the Award in accordance with the test in Oil Basins.

Westport relied on Oil Basins as authority for the proposition that the requirement to give reasons set out in s29(1)(c) of the Arbitration Act was a statutory importation of the standard that applies to judges.

While the Court of Appeal did not consider it to be clear that Oil Basins was in fact authority for this proposition, it held that, if it was, such authority was plainly or clearly wrong and should not be followed. [224]

The Court of Appeal considered the appropriate test to be the one set out in Bremer Handelsgesellschaft mbH v Westzucker GmbH (No 2) [1981] 2 Lloyd's Rep 130 at 132-133 (Bremer):

'All that is necessary is that the arbitrators should set out what, on their view of the evidence, did or did not happen and should explain succinctly why, in the light of what happened, they have reached their decision and what the decision is.' [215]

In applying the test in Bremer, the Court of Appeal noted:

'The Court is an arm of the state; its judgment is an act of state authority, subject generally in a common law context to the right of appeal available to parties. The arbitration award is the result of a private consensual mechanism intended to be shorn of the costs, complexities and technicalities often cited... as the indicia and disadvantage of curial decision making.' [215]

The Court of Appeal ultimately found that none of the grounds for appeal considered by the Supreme Court constituted an adequate basis for granting Westport's application for leave to appeal from the Award.

What does this decision mean?

In addition to providing some insight into the operation of s18B of the Act, the Court of Appeal's decision clarifies and arguably limits the circumstances in which the court will grant an application for leave to appeal an arbitral award.

More importantly, the Court of Appeal took the opportunity to right the Oil Basins wrong and to reaffirm the fundamental distinction between arbitration and litigation. In doing so, the Court of Appeal has provided valuable judicial support for the commercial resolution of disputes by way of arbitration.

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