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Focus: The obligation of an arbitrator to give reasons

5 May 2010

In brief: The Supreme Courts of Victoria and Queensland have handed down decisions that seek to provide clarification on the extent of reasons required in an award issued under the State Commercial Arbitration Acts. Partner Nick Rudge (view CV) and Lawyer Cameron Miles analyse these decisions.

How does it affect you?

  • The decisions in Thoroughvision Pty Ltd v Sky Channel Pty Ltd & Anor [2010] VSC 139 and in Northbuild Construction Pty Ltd v Discovery Beach Project Pty Ltd [2010] QSC 94 provide clarification on the extent of reasons required in an arbitration award so that it is not open to challenge under the State Commercial Arbitration Acts (CAAs).
  • Users of domestic arbitration will find these decisions of use in assessing an arbitrator's obligation to give reasons under the CAAs in light of two significant earlier decisions on this issue, Oil Basins Ltd v BHP Billiton Ltd (2007) 18 VR 346 and Gordian Runoff Ltd v Westport Insurance Corporation [2010] NSWCA 57.

Facts

Thoroughvision

Thoroughvision, Sky Channel and Tabcorp entered into a Deed of Arbitration (the deed) for the purposes of the dispute resolution provisions of a Memorandum of Understanding that the parties had previously concluded. The deed was significantly more detailed than a simple arbitration clause, and included a defined 'overriding objective' for the conduct of the arbitration, that compelled the arbitrator to conduct the arbitration:

  • fairly, expeditiously and cost effectively; and
  • in a manner proportionate to:
    • the amount of money involved in the claim; and
    • the complexity of the issues involved.

Following the grant of the arbitral award, Thoroughvision applied to the Supreme Court of Victoria to overturn the award. One of the bases on which this relief was sought was the arbitrator's alleged failure to provide adequate reasons for his decision.

Northbuild

Northbuild and Discovery Beach Project entered into a building contract. The contract provided that Discovery Beach Project was entitled to issue variation orders and defects and omissions notices. Northbuild took the view that several of these variation orders and defects and omissions notices were illegitimate, and breached Discovery Beach Project's obligations under the contract.

Northbuild applied to the Institute of Arbitrators and Mediators for the nomination of an arbitrator to determine a number disputes under the agreement. The arbitrator eventually published a quantum award for one of the claims. Most of this award dealt with the allocation of dollar values to various deductions which had been included in the progress certificates. Northbuild challenged the award, alleging – amongst other things – that the arbitrator had failed to provide adequate reasons for his decision either by underpinning certain statements with perfunctory or contradictory reasoning, or failing to provide reasoning altogether.

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The decisions

Thoroughvision

Thoroughvision argued that the arbitrator's award provided an inadequate level of detail, rendering it invalid. Justice Croft rejected Thoroughvision's contentions, and upheld the validity of the arbitral award and the statement of reasons provided by the arbitrator.

In resolving this dispute, Justice Croft was bound by the decision of the Victorian Court of Appeal in Oil Basins. Oil Basins equated the obligation for an arbitrator to give reasons with the obligation of a judge to provide sufficient reasoning in his or her judgment, merging arbitration and litigation practices. This approach was declared erroneous earlier this year by the New South Wales Court of Appeal in Gordian Runoff,1 which held that all that was required for a valid statement of reasons was for the arbitrator to set out their view of the evidence led, explain how he or she reached their decision and what that decision was.

Justice Croft sought to resolve the tension between these two decisions by noting the inclusion by the court in Oil Basins of the requirement of 'proportionality' in respect of the arbitrator's reasons. His Honour accordingly noted that the larger and more complex the arbitration, the more expansive and detailed the reasons required.

His Honour considered that the arbitral proceeding here was not large and complex and so required a lower level of reasoning. The arbitration in Thoroughvision concerned limited issues of construction of contractual documents with little evidence led and little discovery sought. On this basis, Justice Croft was able to distinguish Thoroughvision from the decision reached in Oil Basins. His Honour found that as the arbitrator had considered all the issues in dispute, the context of the dispute, the relevant provisions of the Memorandum of Understanding and the proper approach to construction, he had provided a level of detail in his reasons appropriate to the arbitration.

Moreover, Justice Croft noted that this approach is precisely what the parties had provided for in the deed; an arbitration that was expeditious and cost effective in light of the relative size and complexity of the dispute.

Northbuild

In reaching a decision on the Northbuild proceeding, Justice Martin also paid heed to the decisions in Oil Basins and Gordian Runoff before declaring himself to be bound by an earlier Queensland Court of Appeal judgment on this subject, Cypressvale Pty Ltd v Retail Shop Leases Tribunal [1996] 2 Qd R 462. In Cypressvale, Appeal Justices McPherson and Davies held that arbitrators should not be held to the same standard as judges when providing reasoning for their awards, but should have their own standard defined on a case-by-case basis, taking account of a number of factors, including:

  • whether the arbitrator was appointed for their specialist expertise or ability to produce reasons conforming with a judicial standard;
  • the context afforded by the nature of the question to be resolved by the arbitrator;
  • the cost to the parties; and
  • the cost to the general public.

Justice Martin did not expressly consider the arbitrator's ability to produce judicial reasons in determining whether the reasons provided were adequate. Rather, his Honour pointed to a number of deficiencies in the arbitrator's reasons:

  • the arbitrator excluded from consideration a particular payment with minimal reasoning, but later made a conflicting statement that it was a matter that ought be taken into account;
  • the arbitrator made various broad statements without giving reasons for arriving at these positions; and
  • the arbitrator gave inadequate reasons for the adoption of a particular process by which the final amount of the award was reached.

On the basis of these inadequacies, Justice Martin held that the reasons provided by the arbitrator in Northbuild did not meet the requirements of the Queensland CAA.

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Analysis

Thoroughvision and Northbuild reach opposite conclusions on the validity of the reasons considered in each case. Nevertheless, they adopt a position that is broadly similar. Thoroughvision holds that the principle of proportionality and issues of cost-effectiveness may determine the detail that an arbitrator needs to provide in his or her reasons. Northbuild adopts these criteria as well, but adds to them the qualifications of the arbitrator and the reasons that he or she was appointed, as required by Cypressvale. If the arbitrator was appointed because of their ability to write a cogent, detailed award, then a failure to do so is more likely to lead to a declaration of inadequacy than an arbitrator who is appointed for their industry-specific or technical knowledge.

Refusals to permit reconsideration of an arbitral award under this ground may become unnecessary in the future. At the meeting of the Standing Committee of Attorneys-General scheduled for early May 2010, the Attorneys will consider a draft domestic arbitration bill intended to unify the arbitration regime of the states along the lines of those amendments to the International Arbitration Act 1974 (Cth) that are currently being contemplated.

These amendments are themselves based on the United Nations Centre for International Trade Law (UNCITRAL) Model Law.2 Unlike the CAAs, Article 36(1) of the UNCITRAL Model Law limits considerably the grounds under which an arbitral award can be challenged. A failure to provide adequate reasons is not among them.

These legislative amendments and their consequences were previously considered in a Focus article.

Footnotes
  1. A decision which is currently the subject of an application for special leave to appeal to the High Court of Australia.
  2. Robert McLelland MP, International Commercial Arbitration in Australia (Address, International Commercial Arbitration Conference, Melbourne, 4 December 2009).

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