The Courts and Arbitration – an Australian View

As the courts in Canada continue to struggle with difficult issues relating to the enforcement of arbitration agreements and the enforcement of arbitral awards, it is worth looking at how courts in other common law jurisdictions see the relationship between the courts and arbitration.

The Hon James Allsop, Chief Justice of the Federal Court of Australia, gave a very thoughtful address at 2013 Clayton Utz University of Sydney International Arbitration Lecture (29 October 2013).

Like others, he sees serious problems with the trend in many countries toward “over-elaborate, over-lawyered, and slow and costly [arbitration] hearings. …[R]ecalcitrance and excessive demands for time and procedural steps lie at the root of costly inefficiency,” he said.

But he said the prevailing attitudes of the courts and the legal profession toward requirements of equality and fairness are a big part of this trend. If the courts are reluctant to enforce arbitration agreements or awards, or quick to second-guess arbitrator’s decisions, on the basis that the arbitration process lacks some of the procedural protections offered by those courts, then arbitration will inevitably come to look more and more like litigation.

The arbitrator’s authority stems from the agreement of the parties. This defines the power the arbitrator exercises. That power is also defined by the applicable law and requirements of equality and fairness that underlie the arbitration process. But those broad concepts are susceptible to manipulation by parties seeking procedural advantages over their adversaries. This can happen in any arbitration case, domestic or international, regardless of the value of the claim. It is, perhaps, a natural consequence of any adversarial process.

To the extent that the courts reward those procedural tactics, parties and their counsel will continue to be encouraged to use them.

In international commercial agreements, arbitration clauses must be construed against the background of a presumed intention that a single tribunal will determine all of the parties’ disputes and the arbitration clause must be given a broad interpretation.

This raises difficult questions of policy for the courts. Should arbitrators be free from judicial control based on legal errors, in order to encourage the freedom to arbitrate? If arbitrators are subject to such control, what is the appropriate standard of review?

These considerations apply in any jurisdiction that encourages arbitration as a means of resolving commercial disputes, either to promote international trade or simply to divert such cases from the domestic courts. Nevertheless, courts everywhere seem reluctant to relinquish their residual authority, whether it is over arbitration or any kind of administrative tribunal. So parties are continually encouraged to resort the courts to argue questions of jurisdiction, procedure and enforcement, if they are not satisfied with the arbitrator’s decision on the merits of the case.

Justice Allsop refers to the recent situation in Australia where the courts interpreted the words “manifest error” in the arbitration legislation to mean, not only obvious error, but any error capable of be discerned in the award. This, he says, was completely contrary to the intent of the Australian parliament when they added “manifest” to the legislation in order to restrict the scope of judicial review.

More recently, however, the Australian High Court unequivocally affirmed the constitutional validity of their International Arbitration Act and in doing so established the independence of arbitral authority from review for legal error. TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5. [See more detailed commentary here.]

The court looked to the UNCITRAL Model Law in support of the independence of the international commercial arbitration process from review for legal error. Justice Allsop cites several important points made by the Australian court

First, the authority or power exercised by the arbitrator to determine the parties’ rights was by reference to private law and private power derived from contract, and not public power. While this constrains the arbitrator’s authority and power to the scope conferred by the contract, it also insulates the arbitrator from any implied term that the chosen law be applied correctly.

Second, the courts rejected the argument that public policy requires court supervision on a “correctness” standard, because such a role for national courts in arbitral proceedings is contrary to the presumed intention of the parties that their dispute be resolved by one tribunal.

Article 18 of the Model Law expresses the fundamental norms of equality and fairness:

The parties are to be treated with equality and each party shall be given a full opportunity of presenting his case.

This principle does not only bind the tribunal. It also binds the parties. That means the parties also have an obligation to act fairly. As Justice Allsop puts it:

If the parties have agreed to submit their dispute to arbitration, that contractual submission may be taken as having implicit within it a duty to act honestly and reasonably in the efficient resolution of that dispute.

Any obligation to co-operate and act reasonably efficiently in the conduct of the reference must inform the authority of the arbitrator. He or she must be able to take it that, subject to any express provision of the reference concerning procedure to the contrary, the parties are obliged to act honestly, reasonably and with a reasonable degree of co-operation to bring about an efficient resolution of the dispute. This is to be assessed by the arbitrator in his or her conduct of the reference. Combined with the obligation to act equally and fairly to both parties, the arbitrator’s authority to assess what is reasonably required for a full opportunity to be heard is ample. It is then up to the supervising court to recognise and support those informing conceptions.

Although the parties are free to agree on procedure, and failing such agreement the tribunal may conduct the arbitration in the manner it considers appropriate, that freedom is subject to the other provisions of the Model Law, including Article 18.

The Model Law does not define “equality” and “full opportunity”. These concepts depend largely on the context of the dispute. They must be interpreted reasonably. And this is the job of the arbitral tribunal, not the courts.

There is no real difference between “a full opportunity” and “a reasonable opportunity to be heard,” Justice Allsop says.

Clearly, the provision does not entitle a party to obstruct an arbitration by dilatory or specious tactics, merely because the party thinks, even if honestly, that it needs that time or needs to take that step. To permit such would impinge on the equal and fair treatment of the other party… Yet to deny such obviously inappropriate conduct is not to answer the dilemma faced by arbitrators (and, indeed, judges) on a daily basis: how do I balance considerations of efficiency, despatch, cost and time in how I treat these parties?

Whether one refers to natural justice, procedural fairness, due process, the right or opportunity to be heard, the principle of contradiction (le principe de la contradiction) or the right to equal treatment, the underlying conception of fairness is the same. … It is, however, the translation of the norm into the resolution of a particular dispute and the personal requirement upon the arbitrator to convert conceptions of justice into precise directions and orders about the conduct of a reference that may not be straightforward.

The legal culture of the supervising court plays a critical role in determining how much autonomy the arbitration process should have. The question then becomes whether the courts in the jurisdiction(s) where the award is to be enforced will grant the same deference to either the arbitral tribunal or to the courts where the tribunal was seated.

Efficient, skilled and experienced commercial courts have a part to play in fostering and encouraging this development [of healthy arbitration]. They do so by fostering the legal culture of efficiency and despatch in the support of arbitrations in the jurisdiction. They also do so by constantly maintaining and developing their own efficiencies in the despatch of their business. It is of the utmost importance for the health of arbitration in any jurisdiction that the commercial courts of the jurisdiction are viewed both as skilful and efficient and knowledgeable of commercial matters, and knowledgeable of, and sympathetic to, arbitration as the choice of the commercial community if that choice be made.

…[I]t is ultimately the support of the courts, supervising and enforcing (especially the former), that is essential for the empowerment of the arbitrator by the support of his or her authority flowing from these underlying conceptions that have such a close relationship to each other: equality, fairness, co-operation and reasonable efficiency.

The … notions of equality and fairness, reflected in a full (that is, reasonable) opportunity to be heard do not require acceptance of protracted submissions, unnecessary discovery and delay. It is wrong to consider that the arbitral culture, drawing upon the very best practices of good commercial courts, does not empower the arbitrator, the tribunal and the institution to require efficient and fair process based on cooperation in good faith of parties.

The arbitrator or tribunal or institution that builds a reputation for lack of tolerance for delay and waste and which is supported by its court of supervision reflecting similar ideals will truly be providing equality and fairness as well as the promptness demanded always by commerce.

The source of the authority to demand these things lies in the inhering norms of commerce and any legal order for dispute resolution: good faith, equality and fair treatment. In commerce these notions contain a demand for cooperation for expedited resolution of only the real issues in dispute.

Read the full text of Justice Allsop’s insightful remarks here.

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