Court upholds principles of finality and consent in arbitration in defective “med-arb”
Irrespective of the context and industry in which a dispute arises, a common thread to commercial relationships is that they are often governed by a contract containing an arbitration clause in which the parties have consented to resolve any disputes by arbitration. In this regard, commercial parties will usually expect arbitration to be a one-stop-shop for the resolution of their disputes. This is often referred to as the principle of finality in arbitration.
The New South Wales Court of Appeal (Court of Appeal) delivered its judgment in Ku-ring-gai Council v Ichor Constructions Pty Ltd  NSWCA 2 in February this year. Amongst other things, this judgment exemplifies the approach by Australian courts in support of the arbitral process. This case is a further example of an Australian court interpreting Australia’s domestic and international arbitration laws in light of the broader interpretive framework which underpins the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Commercial Arbitration (Model Law), and fundamental principles of arbitration.
Ku-ring-gai Council engaged Ichor Constructions Pty Ltd pursuant to a construction contract to construct a 50 metre swimming pool. Disputes subsequently arose between Ku-ring-gai and Ichor. Like most construction disputes, those disputes concerned claims of overpayments, allegations of delay and claims for damages. The disputes were referred to an arbitrator and proceeded to a 12-day arbitration hearing.
On the last day, the arbitrator adjourned the hearing and put forward a proposal for both parties to settle the disputes under the guise of mediation.
Both parties agreed to the mediation in writing. The arbitrator presented a proposal at the mediation which both parties rejected and the hearing subsequently resumed. A few days after the end of the hearing, Ichor wrote to Ku-ring-gai stating that their client had not consented in writing to the resumption of the hearing.
Ku-ring-gai commenced proceedings in the New South Wales Supreme Court against Ichor seeking a declaration that the arbitrator’s mandate had not terminated following the mediation. The trial judge dismissed the proceedings on the basis that the arbitrator had acted as a mediator and no written consent had been provided in accordance with section 27D(4) of the Commercial Arbitration Act 2010 (NSW) (Act). Under section 27D(4), an arbitrator is required to obtain the written consent of all parties to continue an arbitration once the arbitrator has acted as a mediator in mediation proceedings which have been terminated.
Ku-ring-Gai appealed to the Court of Appeal. The two key issues for the Court of Appeal were:
The Court of Appeal preferred Ichor’s argument and held that the trial judge’s determination was made under section 14(2) of the Act. This provision allows a party to seek redress from a court if an arbitrator fails to perform, or it is impossible for the arbitrator to perform its duties. In doing so, the Court of Appeal rejected Ku-ring-gai’s argument that the power of the trial judge arose under section 9 of the Act, a provision which concerned the compatibility of an arbitration agreement with interim measures, and followed the approach of the Singaporean Court of Appeal in Swift-Fortune Ltd v Magnifica Marine SA  SGCA 42 on the interpretation of this provision.
The Model Law equivalent of section 14(3) of the Act states that a decision “shall be subject to no appeal”. Those words do not appear in section 14(3) of the Act and Ku-ring-gai argued that the absence of those words meant that a right of appeal was intended to be preserved by Parliament.
The Court of Appeal dismissed this argument and held that section 14(3) of the Act had the effect of precluding an appeal from the trial judge’s decision for the following reasons:
The Court of Appeal further stated that even if Ku-ring-gai was successful on the above issues, it would not have granted leave to appeal because the appeal raised no matter of general importance or principle and otherwise had little merit.
The Court of Appeal’s decision to dismiss the appeal in Ku-ring-gai Council v Ichor Constructions Pty Ltd  NSWCA 2 is consistent with maintaining the underlying principles of finality and consent, which are two of arbitration’s attractive features for commercial parties involved in disputes. These principles apply whether the parties are both based in Australia or involve matters which make the arbitration “international” and regardless of the industry in which the dispute arises.
The Act (and interstate equivalents) and the International Arbitration Act 1974 (Cth) incorporate the Model Law into Australian law. As a result, the statutory provisions contained in Australia’s commercial arbitration legislation are interpreted in light of policy factors which include the harmonisation of arbitration laws and the promotion of international best practices for arbitration. The Court of Appeal’s endorsement of the Singaporean Court of Appeal’s views as to the proper interpretation of section 9 of the Model Law is an example of this.
Underlying the Model Law are the principles of finality and consent in arbitration. Finality is implemented in Australia’s arbitration legislation by the inclusion of narrow grounds for appeal to a court against an arbitrator’s award and narrow grounds on which to refuse to recognise or enforce an award. The requirement of consent of the parties is reflected in the statutory language of Australia’s arbitration legislation. Australian courts are likely to consistently uphold these principles for the purpose of supporting the arbitration process. We have previously written about other ways in which Australian courts support the arbitration process here.
This case also demonstrates some practical issues for parties relying upon a hybrid of alternative dispute resolution processes. At least in the context of arbitration, parties should consider the potential consequences if the arbitration is terminated in favour of another dispute resolution process such as mediation.