Australian Foods v Pars Ram - [2002] NSWSC 1180

No judgment structure available for this case.

CITATION: Australian Foods v Pars Ram [2002] NSWSC 1180

CURRENT JURISDICTION: Equity Division

FILE NUMBER(S): SC 3045/2001

HEARING DATE(S): 7 and 8 November 2002

JUDGMENT DATE: 11 December 2002

PARTIES :

Australian Foods Company Pty Ltd & Anor v Pars Ram Brothers (Australia) Pty Limited

JUDGMENT OF: Acting Justice Macready at 1

COUNSEL : Mr I Archibald for plaintiff
Mr R Horsley for defendant

SOLICITORS: Norton White for plaintiff
Jones King Lawyers for defendant

CATCHWORDS: Arbitration - existence and terms of contract - whether arbitrators validly appointed - non-compliance with procedures - misconduct - improper procurement.

CASES CITED: Presbyterian Church (NSW) Property Trust v Rodean Construction Pty Ltd [1982] 2 NSWLR 398.
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355
Tew v Harris (1847) 11 QB 7
Thomas v Fredericks (1847) 10 QB 775 at 781
Tradax Export SA v Volkswagenwerk AG La Loma [1970] 1 QB 537
Kkowasaki Kreen Kaisha Ltd v Government of Ceylon (1962) 1 Lloyds Ref 424
London Export Corporation Ltd v Jubilee Coffee Roasting Co Ltd [1958] 1 WLR 271
Cockatoo Dockyard Pty Ltd v Commonwealth of Australia [No 3] (1994) 35 NSWLR 689
Advance Civil Engineering Pty Ltd v Norbuilt Pty Ltd (unreported, NTSC, 3 June 1996
Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203
Update Constructions Pty Ltd v Rozelle Childcare Centre Ltd (1990) 20 NSWLR 251,

DECISION: Paragraph 69

- 1 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Acting Justice Macready

Wednesday 11 December 2002

3045/01 Australian Foods Company Pty Ltd & Anor v Pars Ram Brothers (Australia) Pty Limited

JUDGMENT

1 His Honour: These proceedings concern an award made by arbitrators who were appointed by the National Agricultural Commodities Marketing Association to arbitrate a dispute between the first plaintiff and the defendant. The arbitrators handed down their award on 15 May 2001 in which they found that the first plaintiff was liable to pay the defendant the sum of $47,000. The arbitration concerned a dispute between the first plaintiff and the defendant concerning a contract under which the defendant alleged the plaintiff was obliged to sell to it a certain quantity of Dunn peas.

2 The first plaintiff makes a number of claims in its further amended summons filed 6 February 2002 which can be summarised as being: --

1. Various declarations that the award is not binding and is of no force or effect.

2. Orders for setting aside the award under section 42 of the Commercial Arbitration Act .

The background facts to the proceedings

3 The first plaintiff and the defendant are dealers in the grain commodity market and both from time to time deal with brokers. The broker concerned in the present matter is Teague Australia Pty Ltd (“Teague”). Both the parties were at the time of contracting and during the commencement of the arbitration process members of the National Agricultural Commodities Marketing Association (“NACMA”).

4 On 8 November 2000 following discussions between Mr Garvey of Teague, Mr Shivnani of the first plaintiff and Mr Agarwall of the defendant, Mr Garvey sent an e-mail to the plaintiff in the following terms: --

“Pavan just confirming
we have purchased 50 x 20 ft containers @ $228.00 (excluding GST) each approximately 23.mt if heavyweight containers are supplied otherwise 21.5 mt will apply
DPIE inspection for sellers account
December 2000 DCT Freemantle
Farmer dressed as per WACBH receival standards
25 boxes to be cash against documents
25 boxes full invoice due 7 days after vessel sailing
DPIE inspection for sellers account

5 On 9 November 2000 Mr Garvey faxed a document on the letterhead of Teague which document was called “brokerage contract”. It was addressed to the plaintiff as seller and the defendant as buyer and referred to the terms of the sale that had been arranged. It referred to the commodity, quantity, price, packing and then dealt with quality in these terms "farmer dressed as per WACBH receival standards". It then specified the rules as "NACMA" and provided for shipment in December 2000. Payment was specified as "25 containers cash against faxed documents, 25 containers full invoice due no later than seven days from vessel sailing". The contract went on to deal with special conditions that are not relevant and specified the commission. Mr Garvey signed it on behalf of Teague.

6 Thereafter there were further e-mails and contact in which the parties concerned themselves with the quality of the peas to be shipped. The defendant apparently wanted number one grade while the first plaintiff was only prepared to ship number one and number two grade. Apparently the specific description of quality in the brokerage contract covered peas of either grade. At this stage I will not go into the detail but by 22 November the first plaintiff was threatening not to perform. The contract provided for shipment in December 2000 and the first plaintiff did not fulfil the order. The defendant bought into the market at an increased price in order to cover its commitment as it had on sold the peas which it had agreed to buy from the first plaintiff.

7 On 12 January 2001 the defendant wrote to NACMA lodging a complaint. NACMA wrote to both parties on 15 January 2001 referring to the dispute and asking the parties to sign the appropriate arbitration form, nominate arbitrators to represent them and to provide a set of appropriate documents and written statement of facts in the dispute in accordance with the procedures for arbitration.

8 On 17 January 2001 the solicitors for the first plaintiff wrote to NACMA stating that there was no concluded contract and that hence no contractual arbitration clause could be enforced. On 22 January 2001 the Executive Director of NACMA wrote to the parties and also Namoi Traders and indicated that the arbitration would only deal with the dispute between the parties to these proceedings. He asked the parties to comply with requests in his letter of 15 January.

9 On 25 January the defendant nominated three suggested arbitrators and sent a completed arbitration form and payment. On 12 February 2000 the Executive Director once again wrote to the parties and asked the first plaintiff to comply with the requirements in the letter of 15 January 2001 promptly. On 19 February 2001 the defendant sent a statement of facts to NACMA. On 16 March 2001 the Executive Director wrote to the parties and referred to the first plaintiff's refusal to arbitrate until a dispute with the third party was settled. That was not acceptable and the Executive Director required the first plaintiff to forward its submission by Monday 19 March 2001 together with a signed notice of arbitration, its nomination of an arbitrator and a cheque in favour of NACMA for the arbitration fee. There was no response from the first plaintiff.

10 In March 2001 the first plaintiff resigned from NACMA. On 27 April 2001 there was a discussion between the Executive Director of NACMA and Ms Saraceni a solicitor for the first plaintiff. That discussion is in dispute. Ms Saraceni says that according to the discussion Mr Bell indicated that it was in order for the first plaintiff not to take any further steps until it had solved its problem with the third party Namoi Traders. It appears that Mr Bell took the discussion as a request to be passed on the arbitrators. He says that he did pass it on but the arbitrators refused the request.

11 On 3 May 2001 Mr Bell wrote to the parties and advised that the arbitrators who he named had found in favour of the claimant as there had been no response by the respondent in the arbitration. This prompted a response by the solicitors for the plaintiff referring to the telephone call on 27 April and referring to its denial of the defendant's claim. The letter goes on to say that the plaintiff had resolved the matter with Namoi Traders and anticipated being able to respond to defendant's claim and asked that no award would be handed down. Given that the award would have been made this was a somewhat pious hope.

12 There was a response by NACMA on 14 May 2001 when it pointed out that there would be right of appeal and on 15 May the reasons for the award were published.

The claims for a declaration

13 These claims seem to be based, in part, on the assertion that NACMA had no jurisdiction to arbitrate the dispute and make an award on the basis that there was no concluded contract between the parties. The defendant submitted that NACMA had jurisdiction to arbitrate the dispute on three grounds:

1. The first plaintiff and the defendant were both members of NACMA.

2. The contract specified NACMA rules.

14 I will consider each of these submissions in turn.

The parties were members of NACMA

15 There is in evidence copies of the NACMA arbitration rules and also the NACMA trade rules. The preamble to the Trade Rules is as follows:

“The Trade Rules shall govern all disputes of mercantile, financial or commercial character connected with grain, feed, oilseeds or other agricultural commodities, as now existing or hereinafter amended, arising between Member Members of NACMA and related counter-parties, and shall be the basis of arbitration on such controversies, unless otherwise and specifically agreed to at time of the trade, or subsequently thereto.

All Members of NACMA and related counterparties are free to agree upon any contractual provisions that they deem appropriate. The NACMA Trade Rules apply only to the extent that the parties to a Contract have not altered the terms of these Rules or the Contract is silent as to a matter dealt with by the pertinent Rule.”

16 Trade Rule 26.0 provides that the Arbitration Rules form part of the Trade Rules and allows any member to submit a dispute for settlement by arbitration in accordance with the NACMA Arbitration Rules. Clause 2.1 of the Arbitration Rules provides as follows:

“A NACMA National Arbitration Committee may properly consider a case involving a dispute between or among any of the following:

(a) Members or Allied Members of NACMA, as defined in the NACMA Memorandum Articles of Association, among whom arbitration is made compulsory by the Association’s By-Laws;

(b) Members of NACMA and Non Members, by consent of both parties or by court order.”

17 It would appear therefore that the arbitration is compulsory for NACMA members and that NACMA requires consent before it will have jurisdiction over non members.

18 It is necessary to see what is the particular reference to arbitration to see whether a dispute as to whether or not a contract exists may be referred to arbitration. In this respect the following part of the Trade Rules are relevant. Rule 1.0 defines the term “Contract” in the following terms:

“The term "Contract" shall be construed as meaning an agreement by one party to buy and the other party to sell as set forth in the agreed terms of trade. A contract may be created either verbally or in writing and once reached shall be legally binding on both parties -- a contract confirmation shall be issued confirming the agreement.”

19 This definition has relevance to the agreement to submit to arbitration which is as I have indicated in Rule 26.0. That rule is in the following terms:

“NACMA Arbitration Rules form an integral part of these NACMA Trade Rules of which all parties subject to these NACMA trade rules shall be deemed to be cognisant.

If any dispute arises out of or relates to this contract or the breach, termination or subject matter thereof, the dispute shall be submitted to and settled by arbitration in accordance with NACMA arbitration rules in the edition current at the date of the establishment of the terms of trade in the contract, such rules forming an integral part of the contract and of which both parties hereto shall be deemed to be cognisant.

Neither party to a dispute, nor any persons claiming under either of them, shall bring any action or other legal proceedings against the other in respect to any such dispute until arbitrated in accordance with NACMA Arbitration Rules.

It is expressly agreed and declared within these NACMA Trade Rules that the obtaining of an award through NACMA arbitration shall be a condition precedent to the right of either party or of any persons claiming under either of them to bring any action or other legal proceedings against the other of them in respect of any such dispute.”

20 It seems fairly clear that in respect of matters which are the subject of a contract that it is possible to have a reference to arbitration. It is to be remembered in reading the second paragraph of rule 26.0 that these rules are trade rules which govern relations between members of NACMA. It would seem therefore that although both parties were members of NACMA that would make them bound by the arbitration rules in respect of a contract but in the event that there was no concluded contract between them then there would be no reference to arbitration. It is thus necessary to move to the second matter to both determine whether there was a contract and whether it specified NACMA rules.

The contract specified NACMA rules

21 The parties in the action before me litigated whether there was a concluded contract and whether if that contract was concluded did it include a term that the NACMA rules apply to it. It is clear that the contract if it was made was made through Teague as a broker. The confirmation was faxed on 9 November 2000 and I have referred to the fact that it included as terms "rules: NACMA".

22 Both Mr Garvey and Mr Shivnani gave evidence before me. The affidavit evidence of Mr Shivnani did not refer in any detail to conversations that he had with Mr Garvey. Mr Garvey's evidence included evidence of his conversations with Mr Shivnani and Mr Agawall of the defendant. He gave evidence of sending the brokerage contract by fax after making the arrangements for the sale. Once the trial before me commenced the first plaintiff sought leave to adduce further evidence from Mr Shivnani to suggest that there had been a number of conversations with persons in the broker's office in which conversations Mr Shivnani indicated that he would not accept the NACMA rules as terms of the contract. Ultimately all that was admitted on this aspect were conversations which Mr Shivnani alleged he had with Mr Garvey at some time in November when he said that he told Mr Garvey that he would not accept NACMA rules. Mr Garvey denied that conversation. On the start of the second day of the hearing the plaintiff sought leave which was granted for him to read a further affidavit of 8 November 2002 in which he asserted a conversation he said he had with Mr Garvey in which he said that Mr Garvey was not to conclude the business until he got back to him. He says that he did not receive the email of 8 November until 9 November and when he received it he rang Mr Garvey and denied that he had authorised him to enter into the contract. Mr Garvey also denied this evidence of Mr Shivnani.

23 In the circumstance that this evidence is given as the trial is progressing it is necessary to carefully consider what was alleged by Mr Shivnani against a background of the correspondence between the parties at the time in question. There was one other area of evidence given by Mr Shivnani concerning the NACMA rules. The brokerage contract was received by him by fax on 9 November 2000. It is apparent that the original was mailed to the plaintiff and was received in the first plaintiff's office on 16 November 2000. Mr Shivnani produced the original which bore his company stamp on the back showing it being received on that date. On the front he has crossed out “NACMA” and substituted the words "common law". He said that he then faxed a copy of this back to Teague. Mr Garvey said that he did not receive such faxed copy. It is possible that it may not have come to his attention although as he had done the trade it was more likely that it would come to his attention. In any event this evidence is of little relevance to whether or not the contract that was entered into on 8 November 2000 as evidenced by the brokerage contract of 9 November.

24 The defendant’s submissions were that the documents, which were brought into existence at the time, clearly demonstrated that the first plaintiff well knew that a contract had been made in the conversations and that no objection was taken to the inclusion of the NACMA rules in the contract. It submissions on the documents were as follows: --

25 The email sent by Mr Garvey to Mr Shivnani on 8 November 2000 contained all the relevant terms, and no objection was made to that document. The Brokerage Contract repeated those terms, and added other terms not conflicting with them. No document records any term of that contract being disputed by Australian Foods, either to Teague Australia or to Pars Ram Bros.

26 Pars Ram Bros sent shipping documents to Australian Foods, clearly (as Mr Shivnani conceded) on the basis that there was an existing contract between Australian Foods and Pars Ram. No document records Australian Foods disputing the existence of the contract.

27 On 22 November 2000—nearly two weeks after the contract was made—Teague Australia sent an email to Australian Foods, reciting that Mr Shivnani had “just claimed in his conversation with Jim Garvey from our office that you intend to cancel this contract”. Mr Shivnani confirmed in oral evidence that there was a conversation. No document records Australian Foods disputing the correctness of Teague’s characterisation of the conversation. The same email contains other references to the contract, and it is clear (as Mr Shivnani conceded) that Teague believed, and was writing on the basis, that there was a contract. No document records Australian Foods disputing that there was a contract. The only dispute raised by the reply is as to the terms of the contract. Far from denying the contract, Australian Foods expressly relied on the contract: “Please read your contract carefully.”

28 Teague immediately (3 minutes later) replied, and the reply even more emphatically states that a contract exists: “you have a contract with them and are obligated to supply goods to them”. No document records Australian Foods disputing that there is a contract.

29 On 24 November Pars Ram Bros emailed Australian Foods requesting performance of the contract. No document records Australian Foods disputing the existence of a contract.

30 On 27 November Teague again wrote, again asserting in the clearest possible terms that there was a contract:

Tim Teague.”

31 The documents certainly contemplate a concluded contract and it is inconceivable that if Mr Shivnani did not believe he had a concluded contract that he would not have raised the matter in correspondence particularly in the face of the correspondence he was receiving. In these circumstances I prefer the evidence of Mr Garvey to that of Mr Shivnani both in respect of whether a contract was concluded and in respect of the conversation as to whether or not the NACMA terms would apply to the contract. I record that Mr Garvey gave his evidence in a natural but considered way. At the time of giving his evidence he was no longer employed by Teague and was therefore remote from the parties. Although Mr Shivnani gave evidence of having on occasions crossed out NACMA in the terms of brokerage contracts with Teague and sent them back none of these concerned contracts negotiated by Mr Garvey.

32 At the hearing the defendant also raised a question of uncertainty and suggested that the parties were not agreed on the terms as to quality. Ultimately the defendant retreated from asking for grade 1 peas and accepted grade 1 or 2. According to Mr Garvey’s evidence it was always bound to accept grade 1 or 2 as the definition in the contract included both these grades. The conduct of the first plaintiff in respect of this aspect seems more to be a shifting of ground later after the contract has been negotiated to receive more favourable treatment as to the terms of payment that it had negotiated in the conversations on 8 November.

33 There was evidence before me that trade practice required parties to notify any disputes about contracts immediately. Given the nature of the trade this is logical. Accordingly I am satisfied that the brokerage contract evidences the terms of the agreement between the plaintiff and the defendant that was reached on 8 November. In these circumstances it is not necessary to rely on the NACMA terms and in particular rule 1.2 and 2.2 which are in the following terms:

Rule 2.2 Powers of a Broker

The defendant submitted to the specific arbitration

34 The defendant submitted that the conduct of the first plaintiff clearly indicated that it submitted to the arbitration. That depends upon whether or not a letter that I admitted provisionally as exhibit M should be admitted into evidence. That letter is a letter from Cocks Macnish in January 2001 enclosing a copy of a letter which they say they sent to NACMA. The letter was said to have been dated 17 January 2001 and is attached as part of exhibit M. There originally were objections as to the falsity of the letter which were dealt with when I rejected its initial tender. In NACMA's letter of 22 January 2001 it refers to receiving faxes, from the solicitors for the plaintiff to Namoi Rural Traders Pty Ltd. The reference to faxes may have been to the two faxes which Cocks Macnish say they sent to NACMA. In these circumstances there is perhaps some corroboration for two faxes having been sent. Accordingly although there is of course still a possibility that the copy fax may have been altered, as it was sent I do propose to admit the exhibit finally. In these circumstances clearly the first plaintiff made its position clear that there was no contract and hence no contractual arbitration clause which could be invoked. In these circumstances the plaintiff did not submit to the jurisdiction of NACMA. It took no part in the arbitration until after the decision was made.

Appointment of Arbitrators – Formation of Panel

35 The first plaintiff also claimed that NACMA had no jurisdiction to arbitrate the dispute and make an award on the basis that the arbitrators were not validly appointed. If the arbitrators were not validly appointed, then the award is void and can be declared to be so by the court. The grounds for this submission appear to be:

2. There was no notification of the names of the arbitrators pursuant to rules 5.8 and 8.1.

36 The first plaintiff appears to be alleging that there has been no compliance with the procedures set out in NACMA’s Arbitration Rules. The relevant rules are:

“4.7 Each NACMA National Arbitration Committee shall consist of three Arbitrators selected from the group of recognised NACMA Arbitrators.

(a) One of the three Arbitrators shall be nominated by the Claimant at the time a case is commenced and within fourteen (14) days of receiving a Notice for Arbitration;
(b) A second of the three Arbitrators shall be nominated by the Respondent within fourteen (14) days of receiving a Notice for Arbitration;
(c) And a third of the three Arbitrators shall be nominated by the NACMA Executive Director prior to submission of the case to Committee and who shall serve as Committee Chairman.

…..

5.7 In the event the respondent fails to duly nominate the second Arbitrator within the said fourteen (14) days or within the seven (7) days of being notified that the original nomination has not been approved, the Claimant shall be entitled to request the NACMA Executive Director to appoint the second arbitrator. Within seven (7) days of receiving such request the NACMA Executive Director with approval of the NACMA President shall appoint the second arbitrator.”

37 It is clear that the defendant did nominate an arbitrator, by its letter of 25 January 2001 to NACMA. The first plaintiff then failed to nominate a second arbitrator. That was a breach of the NACMA Arbitration Rules.

38 NACMA responded to the first plaintiff’s failure by a letter of 16 March 2001.

“The Respondent is required to forward his submission re the dispute with the claimant by Monday 19 March 2001, together with the signed “Notice of Arbitration: form, the Respondent’s nomination of an Arbitrator, and a cheque in favour of NACMA for the arbitration fee.
Failing receipt of this request, NACMA will nominate an arbitrator for the Respondent and a Chairman for the Arbitration.”

39 Thereafter NACMA did nominate an arbitrator for the respondent and a chairman apparently without request from the claimant.

40 In respect of the issue of the formation of the panel, the question to be answered is what is the effect of the non-compliance with Rule 5.7? The traditional test for deciding whether there has been valid reference to arbitration is to consider whether the contractual provision in question was mandatory or directory. This approach has been adopted to determine the effect of non-compliance with procedures in the commencement of the arbitration process. See Presbyterian Church (NSW) Property Trust v Rodean Construction Pty Ltd [1982] 2 NSWLR 398. In this case the preliminary issue to be determined was whether the rules cast the relevant procedure in terms that made it clear that it was a mandatory requirement in the setting up of the arbitration.

41 In Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381-390 the High Court abolished the traditional test which relied on the mandatory/directory distinction in respect of the jurisdiction of statutory bodies. Instead the High Court set out the proper approach in deciding whether or not the failure to comply with a condition regulating the exercise of a statutory power would make the exercise invalid and of no effect. The majority discussed the matter in these terms:-

“Traditionally, the courts have distinguished between acts done in breach of an essential preliminary to the exercise of a statutory power or authority and acts done in breach of a procedural condition for the exercise of a statutory power or authority. Cases falling within the first category are regarded as going to the jurisdiction of the person or body exercising the power or authority. Compliance with the condition is regarded as mandatory, and failure to comply with the condition will result in the invalidity of an act done in breach of the condition. Cases falling within the second category are traditionally classified as directory rather than mandatory. In Pearse v Morrice , Taunton J said "a clause is directory where the provisions contain mere matter of direction and nothing more". In R v Loxdale , Lord Mansfield CJ said "[t]here is a known distinction between circumstances which are of the essence of a thing required to be done by an Act of Parliament, and clauses merely directory". As a result, if the statutory condition is regarded as directory, an act done in breach of it does not result in invalidity. However, statements can be found in the cases to support the proposition that, even if the condition is classified as directory, invalidity will result from non-compliance unless there has been "substantial compliance" with the provisions governing the exercise of the power. But it is impossible to reconcile these statements with the many cases which have held an act valid where there has been no substantial compliance with the provision authorising the act in question. Indeed in many of these cases, substantial compliance was not an issue simply because, as Dawson J pointed out in Hunter Resources Ltd v Melville when discussing the statutory provision in that case:

"substantial compliance with the relevant statutory requirement was not possible. Either there was compliance or there was not."

In our opinion, the Court of Appeal of New South Wales was correct in Tasker v Fullwood in criticising the continued use of the "elusive distinction between directory and mandatory requirements" and the division of directory acts into those which have substantially complied with a statutory command and those which have not. They are classifications that have outlived their usefulness because they deflect attention from the real issue which is whether an act done in breach of the legislative provision is invalid. The classification of a statutory provision as mandatory or directory records a result which has been reached on other grounds. The classification is the end of the inquiry, not the beginning. That being so, a court, determining the validity of an act done in breach of a statutory provision, may easily focus on the wrong factors if it asks itself whether compliance with the provision is mandatory or directory and, if directory, whether there has been substantial compliance with the provision. A better test for determining the issue of validity is to ask whether it was a purpose of the legislation that an act done in breach of the provision should be invalid. This has been the preferred approach of courts in this country in recent years, particularly in New South Wales. In determining the question of purpose, regard must be had to "the language of the relevant provision and the scope and object of the whole statute".

An act which breaches a condition regulating the exercise of statutory power is not necessarily valid and of no effect. Whether it is depends upon whether there can be discerned a legislative purpose to invalidate any act that fails to comply with the condition. The existence of the purpose is ascertained by reference to the language of the statute, its subject matter and objects, and the consequences for the parties of holding void every act done in breach of the condition. A better test for determining the issue of validity is to ask whether it was a purpose of the legislation that an act done in breach of the provision should be invalid.”

42 The principles enunciated by the High Court in respect of the exercise of statutory powers are equally applicable to the circumstances of arbitrators who derive their powers from the consensual arrangements between the parties. One must thus look at the language of the relevant rule and the scope and object of the whole rules to determine the purpose of the rule. The purpose of Rule 5.7 is to prevent arbitration being stalled or rendered unworkable by a respondent who refuses to nominate an arbitrator. The procedure put in place to fulfil this purpose relies upon the request of the claimant, but ultimately it is the Executive Director who is required to appoint the second arbitrator. In this case the claimant was clearly keen to proceed with the arbitration and voiced no objection to the appointment of the second arbitrator by the Executive Director in the absence of a formal request. Regardless of whether the procedures in Rule 5.7 were complied with, the outcome for the first plaintiff is the same, and no disadvantage can be complained of. Accordingly, in my view, the non-compliance with the Rule 5.7 procedure in this case does not invalidate the appointment of the second arbitrator.

Failure to notify first plaintiff of membership of the panel

43 The relevant rules as far as this matter is concerned are as follows:

“5.8 Prior to assigning a case as herein provided, the NACMA Executive Director shall notify each party of the names and addresses of the Chairman and each of the Members of NACMA National Arbitration Committee processing said case.

(a) Upon receipt of such notice, either party to the case may challenge the appointment of a Member of the NACMA National Committee for prejudicial or other causes within five (5) days of receipt of this notice.
(b) Upon determination by the executive director that such challenge is valid, said Member shall be replaced in the same manner as which originally established within seven (7) days of receipt of this notice.”

…..

8.1 When a case is fully prepared and ready to be assigned for hearing, the NACMA Executive Director shall present all the information submitted in regards to the case to a duly formed NACMA National Arbitration Committee as stated in s 4 for the expeditious handling of the case. Prior to this time the NACMA Executive Director shall have informed the Claimant and Respondent of the names of the Members of the NACMA National Arbitration Committee.”

44 The parties submitted that the evident purpose of the requirement in the Rules of prior notification of the proposed membership of the arbitration panel, is to allow the parties to object to any proposed arbitrator. The defendant’s submissions were that the first plaintiff does not suggest that it has any objection to any of the arbitrators who conducted the arbitration, or that if advised of the names beforehand it would have had any such objection. The defendant submitted that the first plaintiff has suffered no injustice thereby and in those circumstances the court would not set aside the arbitration on the basis of those irregularities. I also note that the first plaintiff had taken the view that there was no jurisdiction to arbitrate.

45 In my view, it is irrelevant whether or not the first plaintiff would have raised an objection. The relevant question is again whether it was the purpose of the Rules that an act done in breach of Rules 5.8 and 8.1 should be invalid. I am in agreement with the parties that the purpose of the relevant rules is to enable the parties to challenge the appointment of a member of the arbitration panel for prejudicial or other causes prior to commencement of the arbitration. This is clear on their face.

46 The authorities emphasise the importance of the requirement that the name of the arbitrator and the fact of the appointment be communicated to the other party. In Tew v Harris (1847) 11 QB 7; 116 ER 376, a case involving the nomination of referees under a contract, Lord Denman CJ, Coleridge, Wightman and Erle JJ held that “there was no effective nomination till the notice was given to the other party”. Erle J’s reasons related to the provisions of the particular contract, however the reasons of the other members of the court were not so confined. Coleridge J (11 QB at 11; 116 ER at 378) commented:

"… it seems to me that there was no effective nomination till the notice was given to the other party. For, though one party might, on hearing who the referee of the other party was, be satisfied with the referee whom he had selected for himself, yet the meaning of the agreement here must have been to include all cases. Each was to know who the referee of the other was. Otherwise, each might have nominated the same person, or one might have nominated a person to whom the other had a valid objection.”

Wightman J’s judgment read 11 QB at 12; 116 ER at 378:

“I am of the same opinion. The agreement could hardly mean that each party was to name, without communicating to the other party, his own referee. If so, there would be no opportunity of appointing a new referee in case the one before selected appeared objectionable, nor indeed any opportunity of knowing that an appointment had taken place.”

Lord Denman CJ said (ibid):

“Clearly, to bind one party with respect to the opposite party, something should take place authorizing the one to consider that the other has made his nomination.”

47 In Thomas v Fredericks (1847) 10 QB 775 at 781; 116 ER 294 at 296, Lord Denman stated that

“Neither party can be said to have chosen an arbitrator, until he lets the other party know the object of his choice.”

48 In Tradax Export SA v Volkswagenwerk AG La Loma [1970] 1 QB 537 at 546, Edmund Davies LJ observed that appointment “involves the concepts both of knowledge and of assent”. Lord Denning MR and Salmon LJ considered that three things were necessary to constitute the effective appointment of an arbitrator. In the words of Lord Denning MR at 544:-

“First, it is necessary to tell the other side. That is plain from Tew v Harris . … Second, it is necessary to tell the appointee himself. That is obvious because he often has to start acting at once. Third, it is necessary that he should be willing to act and have intimated his willingness to accept the appointment.”

49 For the panel to have been legitimately constituted under the Rules, both parties should have been notified of the membership of the panel. There are important reasons for the requirement of notification, to which the above cases have referred, and the failure to comply with the requirement, in the context of the purpose of the Rules, is, in my view, sufficient to render the appointment invalid and of no effect. Accordingly, the arbitration panel was not validly constituted and in these circumstances I consider it appropriate to declare the award void. In case I am wrong, however, I will refer the first plaintiff’s application to set aside the award which is not a true alternative. As McNair J indicated in Kkowasaki Kreen Kaisha Ltd v Government of Ceylon (1962) 1 Lloyds Ref 424 (a case where there was excess not absence of jurisdiction) as follows:-

“There can scarcely be misconduct where there is no agreement to arbitrate and no valid appointment; for the arbitrator never conducted the arbitration at all.”

The application to set aside the award

50 Section 42 of the Commercial Arbitration Act is in the following terms:

42. Power to set aside award
(1) Where:

(a) there has been misconduct on the part of an arbitrator or umpire or an arbitrator or umpire has misconducted the proceedings; or
(b) the arbitration or award has been improperly procured,

the Court may, on the application of a party to the arbitration agreement, set the award aside either wholly or in part.

(2) Where the arbitrator or umpire has misconducted the proceedings by making an award partly in respect of a matter not referred to arbitration pursuant to the arbitration agreement, the Court may set aside that part of the award if it can do so without materially affecting the remaining part of the award.
(3) Where an application is made under this section to set aside an award, the Court may order that any money payable by the award shall be paid into court or otherwise secured pending the determination of the application.

51 The ground which was advanced under section 42(1)(a) appears to be the circumstances of the conversation between Ms Saraceni and Mr Bell of NACMA on 27 April 2001. The other grounds under subsection (b) appear to be the same as those advanced under the application for a declaration, namely that the panel was not duly formed, for the reasons mentioned previously, in that there was no notification of the names of the arbitrators pursuant to Rules 5.8 and 8.1.

52 The distinction between misconduct and improper procurement is not a clear one. Sharkey and Dorter suggest that “misconduct looks to the behaviour of the arbitrator during the course of the proceedings whereas improper procurement is more concerned with the conduct of the parties” (Commercial Arbitration, Sydney: LBC, 1986, at 278). The term “misconduct” is defined in s4 of the Commercial Arbitration Act to include “corruption, fraud, partiality, bias and a breach of the rules of natural justice”.

53 In London Export Corporation Ltd v Jubilee Coffee Roasting Co Ltd [1958] 1 WLR 271 Diplock J suggested that in the context of commercial arbitrations, misconduct embraced two distinct grounds for setting aside an award, namely, a failure to follow the procedure upon which the parties have agreed should apply to the conduct of the arbitration; and a violation of the rules of natural justice.

Improper procurement

54 Section 42(1)(b) of the Commercial Arbitration Act provides that the court may set aside an award where the award has been improperly procured. In Cockatoo Dockyard Pty Ltd v Commonwealth of Australia [No 3] (1994) 35 NSWLR 689, documents which would merely confirm what was already known to the arbitrator, were not produced on subpoena. Rolfe J held that in the absence of wilful concealment or fraud, the failure to comply with the notice to produce could not result in the arbitration being “improperly procured”. Rolfe J stated that although the categories of case in which an award may be improperly procured are not closed, “the conduct must have at least an element of impropriety, and have caused the obtaining of the award” (at 700). His Honour held that the failure to produce the financial statements did not cause the interim award to be made in the terms in which it was.

55 In Advance Civil Engineering Pty Ltd v Norbuilt Pty Ltd (unreported, NTSC, 3 June 1996) the defendant failed to discover two letters prior to an interim award being made by the arbitrator. The plaintiff sought to have the interim award set aside on the grounds that it had been improperly procured. Thomas J said:

“The question is, does the failure to discover those two documents mean that the award made on 30 September 1995 was improperly procured. The defence submission is that the failure to discover those documents made no difference to the outcome of the proceedings. The defendant further argues there has not been a miscarriage of any proceeding before the Arbitrator because of the conduct of the defendant.
The defendant submits the plaintiff has no cause of action and accordingly its claim must fail and the provisions of r23.01 should apply. It is the defendant's argument that for there to be an improper procurement of the award, there has to be something to indicate that this evidence, which has come to light subsequently to the award, would lead to a real possibility that the award would not have otherwise been made.
I agree with the plaintiff that the power to order summary judgment must be exercised with “exceptional caution” …..However, I consider the plaintiff has to go further than to rely on the bald fact that two letters were not discovered. I agree with the defendant's submission that the plaintiff should be able to put forward something to indicate that there is a real possibility had these two letters been discovered the Interim Award would have been different.” (at 13-14).

56 The failure to appoint the second arbitrator in accordance with Rule 5.7 was not improper conduct that led to the award being made in the terms it was. There is no evidence that, had the Rule 5.7 procedures been followed, the award would not have been made in the terms it was. The failure to comply with the procedure for requesting the appointment of a second arbitrator would have had no effect on the ultimate result. It is clear on the evidence that the defendant was keen to proceed with the arbitration, and there was no objection taken by the defendant to the actions of the Executive Director in making the appointment.

57 Similarly, although pursuant to Rules 5.8 and 8.1 notification of the arbitrator’s names was required, the failure to do so cannot be characterised as having an element of impropriety, nor did it lead to the award being made in the terms that it was.

Misconduct

58 The first plaintiff’s case appears to turn on a conversation alleged to have occurred between Ms Saraceni, solicitor, and Mr Bell, NACMA’s Executive Director. The relevant evidence appears in paragraph 2 of Ms Saraceni’s affidavit sworn on 16 January 2002. In that paragraph she said that she had had a discussion on 27 April with Mr Bell who had asked her why the plaintiff had not responded to the notice of arbitration. She said she informed Mr Bell that the application to set aside the statutory demand which had been issued by Namoi in proceedings in Sydney was returnable on 30 April 2001 as Australian Foods was concentrating on finalising that matter before addressing the Pars Ram matter. Mr Bell said to her, according to her, that he understood the situation and she said he had informed her that it was in order for them not to take any other steps in the arbitration on behalf of Australian Foods until the Namoi issue had been heard and determined.

59 Because Ms Saraceni was from Western Australia the parties agreed that there would be no cross examination of her. It is apparent, however, from the subsequent correspondence which transpired between NACMA and Ms Saraceni that, in fact, Mr Bell passed on that application to the arbitrators who apparently refused to extend the time. In the circumstances of him passing this application on to the arbitrators this is inconsistent with the response alleged by Ms Saraceni. Accordingly, I do not propose to accept that a response was given in the simple terms recounted in the affidavit in indirect speech.

60 The first plaintiff submits that the actions of Mr Bell relating to the alleged conversation of 27 April 2001 constitute a breach of natural justice which amounts to misconduct. Section 42(1)(a) provides for the setting aside of an award where there has been misconduct on the part of an arbitrator or umpire. The problem for the first plaintiff is that the conduct complained of is the conduct of the Executive Director of NACMA rather than the conduct of the arbitrators. In any event, I am not satisfied that the conversation occurred in the terms alleged by Ms Saraceni and, accordingly, on both bases I would not have set the award aside on this ground.

The application for leave to appeal

61 Section 38 for the Commercial Arbitration Act 1984 is in the following terms:

62 It can be seen that the first plaintiff needs leave under subsection (2) to appeal. The defendant concedes that section 38 (5) (a) is made out. It submits that there has been no demonstration of the factors in s 38 (5) (b).

63 In its further amended summons the first plaintiff identified the error of law as being "the manifest error of law on the face of the award is that the Tribunal did not consider the validity of the contract pursuant to which the defendant pursued its claim and obtain the award". A perusal of the award does not make reference to the first plaintiff's contentions that there was no concluded contract. That is not surprising given that the first plaintiff made no submissions. The reasons however do recite the detail of the contract and how it was made. This would tend to indicate that there was consideration given to the evidence before the arbitrators of what was the contract.

64 The defendants also submitted that any such error would not be manifest on the face of the award. Subsection 38 (5) in its current form was inserted in 1990. The provision, as amended, was discussed by the Court of Appeal in Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203.

“The expression ‘error of law on the face of the award’ is one of a type well-known to courts. The award having been examined the question is whether there is apparent (and such is the denotation of the word ‘manifest’) an error of law. ‘Manifest error’ is an expression sometimes used in reference to reasons given by judges or the approach taken by juries: see, eg, section 107(c) (iii) of the Supreme Court Act 1970 and the judgments of Kirby P in Azzopardi v Tasman UEB Industries Ltd (at 151) and Otis Elevators Pty Ltd v Zitis (1986) 5 NSWLR 171 at 181. It is used to indicate something evident or obvious rather than arguable: see generally per McHugh JA in Larkin v Parole Board (1987) 10 NSWLR 57 at 70-71.”

65 The purpose of s 38 in general, and the 1990 amendments in particular, is to limit the scope of judicial review. Update Constructions Pty Ltd v Rozelle Childcare Centre Ltd (1990) 20 NSWLR 251, 259b-g per Kirby P; Promenade Investments at 222a-b per Sheller JA (with whom Meagher JA agreed).

66 The defendants submitted that, far from the arbitrators erring in law in finding that there was a contract, it would have been clearly wrong for them to hold that there was no contract. I have earlier indicated my reasons for finding that there was a contract. The arbitration would have the correspondence which gave clear scope for them to find that there was a contract.

67 In my view there is no manifest error of law on the face of the award and nor is there any strong evidence that the arbitrators made an error of law. The present dispute between the parties is in small compass and the determination of the dispute will not nor will be likely to add substantially to the certainty of commercial law. In the circumstances leave to appeal, if it became relevant, should not be granted.

The defendant's cross-claim

68 The defendant by cross-claim filed 5 November 2001 seeks leave to enforce the award obtained by them in the arbitration. That award required payment by 31 May 2001. Given my decision, the cross claim should be dismissed.

Orders of the court

69 The orders of the Court are as follows:

Last Modified: 12/11/2002

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Citations

Australian Foods v Pars Ram [2002] NSWSC 1180

Cases Citing This Decision

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Cases Cited

7

Statutory Material Cited

0

Amalgamated Society of Engineers v Adelaide Steamship Co Ltd [1920] HCA 54

Diploma Construction Pty Ltd v Windslow Corporation Ltd [2005] WASC 74

CITATION:	Australian Foods v Pars Ram [2002] NSWSC 1180
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	SC 3045/2001
HEARING DATE(S):	7 and 8 November 2002
JUDGMENT DATE:	11 December 2002
PARTIES :	Australian Foods Company Pty Ltd & Anor v Pars Ram Brothers (Australia) Pty Limited
JUDGMENT OF:	Acting Justice Macready at 1

COUNSEL :	Mr I Archibald for plaintiff Mr R Horsley for defendant
SOLICITORS:	Norton White for plaintiff Jones King Lawyers for defendant
CATCHWORDS:	Arbitration - existence and terms of contract - whether arbitrators validly appointed - non-compliance with procedures - misconduct - improper procurement.
CASES CITED:	Presbyterian Church (NSW) Property Trust v Rodean Construction Pty Ltd [1982] 2 NSWLR 398. Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 Tew v Harris (1847) 11 QB 7 Thomas v Fredericks (1847) 10 QB 775 at 781 Tradax Export SA v Volkswagenwerk AG La Loma [1970] 1 QB 537 Kkowasaki Kreen Kaisha Ltd v Government of Ceylon (1962) 1 Lloyds Ref 424 London Export Corporation Ltd v Jubilee Coffee Roasting Co Ltd [1958] 1 WLR 271 Cockatoo Dockyard Pty Ltd v Commonwealth of Australia [No 3] (1994) 35 NSWLR 689 Advance Civil Engineering Pty Ltd v Norbuilt Pty Ltd (unreported, NTSC, 3 June 1996 Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203 Update Constructions Pty Ltd v Rozelle Childcare Centre Ltd (1990) 20 NSWLR 251,
DECISION:	Paragraph 69