INTRODUCTION AND TAKEAWAY
In a recent decision, the Supreme Court of New South Wales set aside an arbitral award on the basis that the arbitrator had failed to give one party a proper opportunity to present its case. While there is a high bar for judicial intervention in arbitration proceedings, Australian courts will act to protect the integrity of the arbitration process when arbitrators fail to uphold its fundamental safeguards.
CONTEXT
Lieschke v Lieschke [2022] NSWSC 1705 (Lieschke) concerned an application to set aside an arbitral award under sections 34(2)(a)(ii) and 34(2)(b)(ii) of the Commercial Arbitration Act 2010 (NSW) (CAA), on the grounds that the plaintiff was denied, on an unreasonable basis, the opportunity to present his case and that the award was in conflict with the public policy of the State.
The arbitration proceedings concerned the division of property, upon the dissolution of a partnership agreement that had existed between the plaintiff, his son (the first defendant) and his daughter-in-law (the second defendant). As a result of the manner in which the various agreements and financial arrangements between the plaintiff's other children and the partnership occurred, the plaintiff had concerns that the accounting records of the partnership were not accurate.
The arbitration proceedings were bifurcated into two key issues: the nature of any trust or equitable interests in the property as advanced by the plaintiff; and the residual accounting issues, which included the outstanding points of difference between the parties' two accounting experts as to the partnership's records. The first of these issues was the subject of an interim award, which was awarded in favour of the defendants. However, in making this interim award, the arbitrator examined the accounting reports and indicated that he agreed with the defendants' submissions on the accounting issues. This approach blurred what was a clear bifurcation of the proceedings into two separate issues for determination.
After the interim award, the plaintiff replaced his legal representatives. Under this new legal representation, the plaintiff sought to subpoena the relevant accountants and bookkeepers to better analyse the partnership records from inception. This was denied by the arbitrator who ordered the parties to proceed with an expert conference to reconcile the differences between the expert reports. The plaintiff instructed a new expert accountant to provide a report based on the financial records the plaintiff had access to and subsequently instructed their existing expert to consider the new report (which underlined more significant accounting differences than initially identified). However, the arbitrator ordered that the new expert report be excluded from consideration, despite the plaintiff's protests. Based solely on the initial joint expert report, the arbitrator made the final award that accepted the position of this report and the orders as proposed by the defendants. As a result, the plaintiff initiated the current proceedings to set aside this award.
DECISION
Her Honour, Rees J found in favour of the plaintiff's application and ordered that the final award be set aside for the failure of the arbitration process to give the plaintiff a reasonable opportunity to present its case.
In making this decision, her Honour addressed two key issues:
- whether there were process failures in the arbitration; and
- if there were process failures, should the award be set aside, or should the current proceedings be suspended in favour of recommencing arbitration?
The plaintiff's challenge was based on section 34(2) of the CAA which, together with subsection (3) and section 34A, prescribes a limited basis for challenging an arbitral award, including where one party is unable to present its case, or where the award is contrary to public policy. In exercising the powers under this section, the Courts have made clear that 'significant judicial restraint' must be exercised. Further, the plaintiff bears the onus of 'establishing the basis for the appropriate exercise of the Court's discretion'.
The plaintiff's concerns as to his opportunity to present his case arose within the context of his attempts to change his case following the interim award. While accepting that this new case would likely result in more time and money expended, her Honour considered the implications of the change to be significant. If the plaintiff's argument was successful, he would be paid $77,000 with the defendants assuming a debt of $1.2 million, rather than the view of the existing expert accountants, being the payment by the plaintiff of roughly $1 million to the partnership instead. While this new case may not have been welcomed by the arbitrator or the defendants, it was nonetheless the case the plaintiff sought to make, as was its right under s 18 of the CAA.
Significantly, no claim was advanced by the defendants as to why they would be unable to respond to the new case or why their expert accountant could not consider any additional adjustments proposed by the plaintiff. Therefore, Rees J found that the plaintiff was not trying to obstruct the proceedings but was instead seeking to advance a case on the remaining accounting issues.
In these circumstances, her Honour found that the arbitrator had failed to consider the practical injustice that may be occasioned if the plaintiff was precluded from relying on new expert evidence. Instead of considering whether changes to the parties' cases could be remedied by a costs order or some other mechanism, her Honour noted that arbitrator seemed solely focused on ensuring that the parties were held to the expert reports submitted at the earliest stages of the arbitration. As a result, the plaintiff was denied a reasonable opportunity to present his case.
Having determined that there were procedural failures in the arbitration, the Court considered whether the current proceedings should be suspended under section 34(4) to allow the arbitrator to remedy the procedural defects. Her Honour found that in circumstances where 'the arbitrator was extremely critical of the plaintiff's position [with his remarks being] incandescent", "no reasonable person" would expect the Arbitrator to render an impartial and fair decision. On that basis the Court ordered that the final award be set aside.
This case demonstrates that while there is a high bar for judicial intervention in arbitration proceedings, courts will act when arbitrators fail to uphold fundamental safeguards of the arbitration process.
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