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Brief Counsel

Arbitration agreement set aside where parties provided for unavailable appeal rights

27 June 2014

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The New Zealand Supreme Court has unanimously reversed the Court of Appeal in finding that an arbitration agreement, expressed to be subject to rights of recourse including a non-existent appeal on “questions of fact”, was invalid.  Four of the five judges then exercised their discretion to set the resulting award aside.

The case

The case – Carr & Anor v Gallaway Cook Allan – stemmed from a failed property transaction in 2007 in which a law firm had acted for Carr.  Carr alleged negligence on the part of the law firm, and the parties agreed to submit the dispute to arbitration pursuant to an agreement which provided:
The parties undertake to carry out any award without delay subject only to such rights as they may possess under Articles 33 and 34 of the First Schedule to the Arbitration Act 1996 (judicial review) and clause 5 of the Second Schedule (appeals subject to leave) but amended to as to apply to “questions of law and fact” (emphasis added).
Both parties then participated in the arbitration.  Following a hearing, the arbitrator rendered a partial award in favour of the law firm.  Carr sought to challenge the award in the High Court on matters of fact.  It was quickly established that the parties’ agreement exceeded the rights available under the Arbitration Act 1996 (the Act), which limited judicial review of awards to questions of law. 

The question became instead whether the award should be set aside because the parties’ agreement to arbitrate, by providing for impermissible judicial review, was invalid.

High Court

The High Court found that the words “and fact” formed a “fundamental part of the exchange of promises between the parties” and there would not have been any agreement to arbitrate had they not been included.  The arbitration agreement was therefore invalid, and the award set aside.

Court of Appeal

The Court of Appeal overturned this decision on the basis that:
  • the severance of “and fact” would not change the nature of the arbitration agreement, but would remove only an ancillary right of appeal against any resulting award, and
  • the intent of the Act was that parties should be bound to accept an arbitral award where they elected to resolve their dispute by arbitration.

The Supreme Court

There were three issues before the Supreme Court:
  • what was comprised within the arbitration agreement for the purposes of the Act
  • whether the ineffective words could be severed leaving a valid agreement and, if not
  • whether the award should be set aside.

The meaning of the arbitration agreement

The law firm and the interveners, the Arbitrators’ and Mediators’ Institute of New Zealand, argued that an “arbitration agreement” is merely an agreement to refer the dispute to arbitration.  The parties had formed this agreement.  Any additional matters concerning procedure or outcome were separate.  This position had “wide international acceptance”.
The Court unanimously rejected this argument, finding that:
“The fact that different rules apply to the agreement to arbitrate and the procedure governing the arbitration does not mean that they are separate agreements.  In our view, if parties’ contractual assent to arbitration is made conditional…upon certain procedural matters or other terms, it must follow that those conditions are part of the arbitration agreement”.
In this case, the submission to arbitration was contingent on the non-existent right of appeal.  The unavailability of that appeal right invalidated the agreement as a whole.

Severability of ineffective words

The Court took the view that severance is permissible in circumstances where it will not do violence to the central purpose or substance of what has been agreed.  The question was therefore one of construction.

In their agreement, the parties had italicised the words “questions of law and fact” and had further noted “(emphasis added)”.  This, along with the broader factual matrix, indicated that the wide appeal right was central to the agreement to arbitrate.  Against this background, it would be inappropriate to sever the invalid words.

Exercise of the discretion to set aside the award

The majority found that the absence of a valid arbitration agreement was so fundamental a defect that the High Court had been correct in using its discretion to set the award aside.
Justice Arnold dissented, holding that the policy underlying the Act should be to refrain from exercising the discretion to set aside an award where the only defect is that the award is the result of an agreed procedure which is contrary to a mandatory process.  Applying this principle, the court should not lightly refuse to enforce an award where the parties were the authors of their own misfortune. 

Chapman Tripp comments

The main lesson from the case is that parties must take care to draft and agree a valid arbitration agreement from the outset.  The problem was reference to a non existent appeal right.  The result has been a wasted arbitration, despite the full participation of both parties without protest, and no indication that the award itself was flawed.
The decision to set the award aside on a “proper agreement” approach marks a departure from the “pro-enforcement” approach adopted by the Court of Appeal.  This divergence reflects an issue of controversy in international arbitration jurisprudence.  We expect that the Supreme Court’s decision will be closely scrutinised by commentators overseas.

Our thanks to Campbell Herbert for writing this Brief Counsel.

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Footnote

1. Carr & Anor  v Gallaway Cook Allan [2014] NZSC 75 (20 June 2014)

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