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Focus: NSW Supreme Court declines to intervene in arbitral awards

1 October 2009

In brief: In two recent decisions, the NSW Supreme Court has declined to intervene in determinations made by arbitrators. In Yang v S & L Consulting, the court enforced a Chinese arbitral award under the International Arbitration Act 1974, despite opposition by the award debtor that to do so would be contrary to public policy. In Goodman Holdings v Hughes, the court refused leave to appeal from a domestic arbitral award on the grounds of manifest error of law or technical misconduct of the arbitrator under the Commercial Arbitration Act 1984. Partner Andrea Martignoni (view CV), Special Counsel Nicola Nygh (view CV) and Lawyer Tom Randall report.

How does it affect you?

  • Yang v S & L Consulting indicates that:
    • the circumstances in which a court will decline to enforce a foreign arbitral award on the grounds of public policy appear to be limited to instances of unlawfulness.
    • even in cases of unlawfulness, it will not be contrary to public policy to enforce an award, unless the underlying contract is unenforceable under ordinary contractual principles.
    • other principles of contract law, such as severance, may operate to salvage an award where only part of the underlying contract is unlawful.
  • Goodman Holdings v Hughes indicates that:
    • submissions that a party makes to an arbitrator may limit that party's avenues for appeal.
    • an error in interpreting a clause of a deed that has costs consequences may not constitute a 'manifest error' of law capable of review under the Commercial Arbitration Act 1984 (NSW).

Case 1: Yang v S & L Consulting [2009] NSWSC 223

Background

Mr Yang engaged registered migration agent Stephen Lee to assist with an Australian residency visa application for Mr Yang and his family. On 12 January 2004, after obtaining the visa, Mr Yang entered into a contract with S & L Consulting whereby he agreed to pay $500,000 for shares in an Australian company that he would hold for three years (the relevant period). Under the contract, S & L relevantly guaranteed:

  • to complete all formalities relating to Mr Yang and his family obtaining Australian citizenship;
  • that Mr Yang and his family's permanent residency would not be revoked by the government, unless they failed to reside in Australia for a sufficient period during the relevant period; and
  • to purchase all Mr Yang's shares for $500,000 if a third-party purchaser had not been procured after the expiry of the relevant period.

The parties also agreed that any dispute arising out of the contract was to be submitted for arbitration to the China International Economic & Trade Arbitration Commission (CIETAC).

Following the expiry of the relevant period, a purchaser for Mr Yang's shareholding had not been found, and S & L had not paid Mr Yang the $500,000 as required by the contract. Mr Yang obtained an award from CIETAC for $500,000 (plus $30,000 penalty for breach of contract) and costs against S & L and Mr Lee, who was the guarantor of S & L's obligations.

Mr Yang applied to enforce the award under the International Arbitration Act 1974 (Cth). Enforcement was opposed by S & L on public policy grounds.

S & L did not argue that the agreement itself was unlawful. Rather, it argued that the guarantee relating to permanent residency was contrary to the policy of the law in the Migration Act 1958 (Cth) and Regulations by providing an incentive for Mr Yang not to comply with the undertakings he had made to the Australian Government. Mr Yang had undertaken that, if granted a business skills visa, he would make genuine efforts to actively participate as an owner or part-owner in the day-to-day management, at a senior level, of a new or existing business in Australia.

Decision

Justice White, holding that public policy considerations did not prevent the enforcement of the award, made the following comments in the course of delivering judgment:

  • the Migration Act and Regulations do not require Mr Yang to have an active role as an owner in the day-to-day management at a senior level of a new or existing business; rather, if he failed to be so involved, then the Minister's discretionary power to cancel his visa would be enlivened. It follows that the guarantee was neither unlawful, nor for an unlawful purpose;
  • even if the guarantee had been for an unlawful purpose, it would not be contrary to public policy to enforce an award in respect of it unless the guarantee was unenforceable on ordinary contractual principles. Justice White noted that public policy would be promoted by allowing an unsuccessful visa applicant to sue on an agreement with a migration agent in which the agent guaranteed the success of a visa application, although the agent may have acted illegally in giving the guarantee; and
  • if the relevant contractual provision was found to be unlawful, then it could be severed, leaving the other clauses effective. As the award did not rely on the guarantee relating to permanent residency, severance of it would leave the award effective for the court to enforce.
Impact of the decision

This decision supports the view that Australian courts are increasingly willing to enforce foreign arbitral awards and contributes to the impression of Australia as a jurisdiction that is friendly to international commercial arbitration.

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Case 2: Goodman Holdings v Hughes [2009] NSWSC 682

Background

Goodman sought leave to appeal in relation to the arbitrator's award of costs in favour of Hughes and Manuden Consulting (the second defendant). The settlement deed under which the dispute was referred to arbitration provided that:

  • 'each party will bear its own costs both in connection with this Deed and of the Proceedings' (clause 13). The proceedings were defined to mean the dispute resolved by the settlement deed; and
  • 'the Deed is to be construed according to the laws of New South Wales and the parties submit to the exclusive jurisdiction of the courts in New South Wales in relation to any dispute which may arise concerning the interpretation or enforcement of its provisions.' (clause 12).

The arbitrator determined that clause 13 was inapplicable to the arbitration and that, in accordance with section 34 of the Commercial Arbitration Act, the question of costs was within his discretion. Having determined the substantive question in favour of Hughes, he then held that the question of costs should be determined according to the general rule that costs follow the event.

Goodman made the following submissions:

  • the arbitrator fell into jurisdictional error in determining that clause 13 did not apply to the dispute before him, as clause 12 denied him the power to determine the scope of clause 13;
  • the arbitrator's interpretation of clause 13 was incorrect, and was a manifest error of law on the face of the award; and
  • the arbitrator failed to give adequate reasons as to the awarding of costs to Hughes and the quantum of those costs.

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Judgment

Justice McDougall rejected each of Goodman's submissions.

His Honour found that Goodman had invited the arbitrator to make a determination as to the construction of clause 13. As a result, Goodman was barred from arguing on appeal that the arbitrator had acted outside his jurisdiction by determining the issues. In any event, his Honour commented that the context of the relevant provisions of the deed suggested that it was clearly within the arbitrator's purview to consider the operation of clause 13.

On the question of construction, his Honour commented that, if he was hearing an appeal and not merely an application for leave and was required to decide the question, he would be of the view that the interpretation given to the clause by the arbitrator – that the parties were only concerned with the costs up to the date of execution and not further costs – was supported by the context of the deed.

As to the final submission, his Honour held that, while an arbitrator is obliged to give reasons for an award of costs, the extent of this obligation depends on the matters in contention. He found that in this case it was common ground that, should the arbitrator find he had the power to order costs, then the principle, that costs followed the event, would apply. Therefore, the arbitrator did not err by failing to address the fundamental proposition that the starting point was that, ordinarily, costs follow the event.

On the question of quantum, the arbitrator's reasons were limited to reciting the amount of fees and disbursements provided in the statutory declaration of Hughes' solicitor. As this evidence had been unopposed, his Honour held that the arbitrator did not err by restricting his discussion on costs to an acceptance of this evidence.

Goodman had accepted during argument that its claim for technical misconduct stood or fell with the challenges based on a manifest error of law.

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Impact of the decision

This case shows that the way a party conducts its case in an arbitration will affect its options after the award is rendered. The interests of finality of arbitral proceedings means that a party will not get 'two bites of the cherry'. It cannot succeed on an argument on appeal that is inconsistent with either submissions that it made to the arbitrator or with a failure to make submissions to the arbitrator.

Conclusion

The court had to deal with very different considerations in these two cases. The first case concerned an international arbitration given by the International Arbitration Act, while the second concerned a domestic arbitral award governed by the Commercial Arbitration Act. However, both court decisions are consistent with the increasing tendency of the NSW Supreme Court to decline to intervene in both international and domestic arbitral awards, unless there are very strong grounds for doing so.

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