13 September, 2017
Hui v Esposito Holdings Pty Ltd [2017] FCA 648
What you need to know
An important feature of arbitration is that there are limited grounds on which a party can ask a court to overturn the outcome – this promotes efficiency and finality in the arbitration process.
However, the Federal Court of Australia's recent decision in Hui v Esposito Holdings Pty Ltd [2017] FCA 648 demonstrates that courts are prepared to set aside arbitral awards where a party has been deprived of a reasonable opportunity to present its case and denied a realistic possibility of a successful outcome.
This decision should reinforce the confidence of parties who seek an efficient, but also fair, outcome through the use of arbitration as an alternative to litigation.
Efficiency and finality in arbitration
Arbitration is increasingly used as an alternative to traditional litigation for a variety of reasons. The benefits of arbitration include the parties' ability to select their own tribunal, privacy in both the hearing and the outcome, and potentially greater efficiency and lower cost than a more formal court process.
One of the key factors which helps to promote arbitration as an efficient process by which to resolve commercial disputes is the limited grounds on which a court can set aside or decline to enforce an arbitral award. Relevantly, Article 34 of the UNCITRAL Model Law on International Arbitration, which is incorporated into Australian law by section 16 of the International Arbitration Act 1974 (Cth), provides that a court may only set aside an arbitral award in limited circumstances, including where the underlying agreement to arbitrate is invalid, the arbitrator purports to decide matters outside the scope of the agreement to arbitrate or an award is contrary to public policy. Consistent with the intention of Article 34, Australian courts have consistently demonstrated a reluctance to set aside arbitral awards, even if an error of law has allegedly been made by the arbitrator.
Although the difficulty of having an arbitral award set aside is generally seen as a positive feature of the arbitration process, some parties may be concerned that this leaves them with no relief against an unfavourable award. The Federal Court of Australia's recent decision in Hui v Esposito should provide confidence to parties that although courts are reluctant to set aside an arbitral award, they are prepared to do so if necessary to ensure that justice is done.
The facts in Hui v Esposito
In Hui v Esposito, the arbitration concerned disputes arising under a share sale agreement by which Esposito agreed to sell all of the issued shares in 5 Star Foods to UDP, with Hui acting as guarantor for UDP.
Esposito brought a claim against UDP and Hui for the balance of money that it alleged was payable for the sale of its shares in 5 Star Foods. UDP, 5 Star Foods and Hui contended that various defences and set offs applied in respect of Esposito's claim. The dispute was referred to arbitration.
Esposito sought a preliminary determination of some elements of its claim, and the arbitrator consented to this request. In doing so, the arbitrator indicated to the parties that the preliminary hearing would be limited to the relevant aspects of Esposito's claim and would not concern the defences and set offs contended for by UDP, 5 Star Foods and Hui. Only Esposito and Hui participated in the preliminary hearing.
After the preliminary hearing, Hui, 5 Star Foods and UDP served extensive amended defences and counterclaims. Without conducting a further hearing, the arbitrator then handed down several sets of reasons. Despite the arbitrator's earlier indications and the fact that the parties' submissions at the preliminary hearing focused on Esposito's claims, the reasons issued by the arbitrator also determined the availability of defences and set offs contended for by 5 Star Foods, UDP and Hui. The arbitrator then made a partial award in accordance with those reasons, despite objections from Hui, UDP and 5 Star Foods.
Hui, UDP and 5 Star Foods applied to the arbitrator to set aside his partial arbitral award to the extent it determined the availability of defences and set offs, and to withdraw himself from office, on the basis of an alleged breach of procedural fairness and perceived bias. The arbitrator rejected this application.
Hui, UDP and 5 Star Foods then applied to the Federal Court to have the arbitral award set aside and the arbitrator removed.
Federal Court sets aside arbitral award
In assessing whether to set aside the arbitral award and remove the arbitrator, the Court outlined the following key principles:
Article 34 of the UNCITRAL Model Law significantly limits the circumstances under which a court may set aside an arbitral award.
If a procedural fairness challenge is made, the context and practical consequences are all important, including that well-represented and resourced commercial operators have chosen arbitration rather than litigation as the relevant dispute resolution mechanism.
Denying a party a reasonable opportunity to present its case is a breach of the rules of natural justice that may warrant setting aside an arbitral award.
In order to justify the setting aside of an award, real unfairness must have resulted from the denial of the opportunity for a party to present its case.
Real unfairness can be demonstrated by showing that there was a realistic rather than fanciful possibility that the award may not have been made or may have differed in a material respect but for the denial of the opportunity (ie the submissions that would have been made must be reasonably arguable).
Real unfairness will not arise if the loss of opportunity is merely a result of the party's own failures or strategic choices.
The onus rests on the party seeking to set aside the award to establish the above matters.
With regard to the above principles, the Court held that as a result of the arbitrator's pre-hearing conduct, Hui, UDP and 5 Star Foods could not have reasonably foreseen that the arbitral award would address the availability of defences and set offs. As a result, those parties had been denied a reasonable and valuable opportunity to present their case on the issues, leading to real unfairness.
In reaching this conclusion, the Court rejected a submission by Esposito that there was no real unfairness because the arbitrator gave Hui, UDP and 5 Star Foods an opportunity to make further submissions on the availability of defences and set offs after issuing his initial award. The Court considered that the arbitrator had prejudged the issues by his award in the absence of submissions from the parties, and that prejudgment could not be cured later.
The Court ultimately determined that the arbitral award should be set aside so far as it dealt with the availability of defences and set offs, and that a new arbitrator should be appointed to determine the balance of the issues in the arbitration.
Confidence in the arbitral process
Although this case involved exceptional circumstances, the Federal Court's reasons provide useful and rare guidance to Australian and international parties regarding the circumstances in which a court may be prepared to set aside an arbitral award under Article 34 of the UNCITRAL Model Law and s 18 of Australia's International Arbitration Act.
Parties who participate in arbitration can take comfort from the Court reinforcing that there are limited circumstances in which an arbitral award may be set aside, and that courts are not entitled to undertake a general merits review.
At the same time, it is reassuring to all parties that a court will intervene where there has been a breach of the rules of natural justice, so long as it can be demonstrated that a valuable opportunity has been lost as a result.
These counterbalancing considerations are consistent with promoting efficiency and finality as key attractions of arbitration as an alternative to litigation, while also ensuring that the process is fair to all participants.
For further information, please contact:
Jos Mulcahy, Partner, Ashurst
jos.mulcahy@ashurst.com
