Hui v Esposito Holdings Pty Ltd
[2017] FCA 648
•9 June 2017
FEDERAL COURT OF AUSTRALIA
Hui v Esposito Holdings Pty Ltd [2017] FCA 648
File numbers: VID 1192 of 2016
VID 1220 of 2016Judge: BEACH J Date of judgment: 9 June 2017 Catchwords: ARBITRATION – international commercial arbitration – application to set aside parts of partial arbitral awards – application to remove arbitrator – whether arbitrator exceeded his jurisdiction – whether arbitrator denied parties a reasonable or full opportunity to present their cases – whether applicants have suffered real unfairness and practical injustice – whether prejudgment by the arbitrator – consideration of arts 12, 18, 34(2)(a)(ii) and (iv) and 34(2)(b)(ii) of the UNCITRAL Model Law on International Commercial Arbitration – application granted Legislation: International Arbitration Act 1974 (Cth) ss 2D, 16, 18A, 18C, 19, 39
UNCITRAL Model Law on International Commercial Arbitration arts 5, 12, 13, 18, 19, 34(2)(a)(ii), 34(2)(a)(iv), 34(2)(b)(ii)
Cases cited: AKN v ALC [2015] SGCA 63
Amasya Enterprises Pty Ltd v Asta Developments (Aust) Pty Ltd [2016] VSC 326
Corporacion Transnacional de Inversiones SA de CV v STET International SpA (1999) 45 OR (3d) 183
Dalcon Constructions Pty Ltd v Chu [2002] WASCA 290
Indrisie v General Credits Ltd [1985] VR 251
Interbulk Ltd v Aiden Shipping Co Ltd; The Vimeira [1984] 2 Lloyd’s Rep 66
Kempinski Hotels SA v PT Prima International Development [2011] 4 SLR 633; [2011] SGHC 171
Lovell Partnerships (Northern) Ltd v AW Construction plc (1996) 81 BLR 83
Modern Engineering (Bristol) Ltd v C Miskin & Son Ltd [1981] 1 Lloyd’s Rep 135
R v Gough [1993] AC 646
Secretary of State for the Home Department v Raytheon Systems Ltd [2015] EWHC 311 (TCC); [2015] 1 CLC 466
Sino Dragon Trading Ltd v Noble Resources International Pte Ltd [2016] FCA 1131
SL Sethia Liners Ltd v Naviagro Maritime Corporation (The Kostas Melas) [1981] 1 Lloyd’s Rep 18
TCL Air Conditioner (Zhongshan) Company Ltd v Castel Electronics Pty Ltd (2014) 232 FCR 361
Terna Bahrain Holding Company WLL v Bin Kamil Al Shamsi [2013] 2 CLC 1
Trustees of Rotoaira Forest Trust v Attorney General [1999] 2 NZLR 452
Tuta Products Pty Ltd v Hutcherson Bros Pty Ltd (1972) 127 CLR 253
Date of hearing: 23 and 24 March 2017 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: International Commercial Arbitration Category: Catchwords Number of paragraphs: 259 Counsel for the Applicant in VID 1192 of 2016 and Second Respondent in VID 1220 of 2016: Mr AG Uren QC with Mr J Masters Solicitors for the Applicant in VID 1192 of 2016 and Second Respondent in VID 1220 of 2016: Herbert Smith Freehills Counsel for the Second and Third Respondents in VID 1192 of 2016 and First and Second Applicants in VID 1220 of 2016: Mr MR Scott QC with Mr CP Young Solicitors for the Second and Third Respondents in VID 1192 of 2016 and First and Second Applicants in VID 1220 of 2016: Ashurst Counsel for the First Respondent in VID 1192 of 2016 and VID 1220 of 2016: Mr GP Harris QC with Mr TB Maxwell Solicitors for the First Respondent in VID 1192 of 2016 and VID 1220 of 2016: K&L Gates Counsel for the Third Respondent in VID 1220 of 2016: The third respondent in VID 1220 of 2016 did not appear ORDERS
VID 1192 of 2016 BETWEEN: WILLIAM YAN SUI HUI
Applicant
AND: ESPOSITO HOLDINGS PTY LTD (ACN 079 763 303)
First Respondent
UDP HOLDINGS PTY LTD (ACN 167 100 692) (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
Second Respondent
5 STAR FOODS PTY LTD (ACN 005 714 616) (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
Third Respondent
JUDGE:
BEACH J
DATE OF ORDER:
9 JUNE 2017
THE COURT ORDERS THAT:
1.Within 7 days of the date of these orders, the applicant and second and third respondents file and serve proposed minutes of orders to give effect to these reasons with written submissions, if any, limited to 3 pages.
2.Within 14 days of the date of these orders, the first respondent file and serve proposed minutes of orders to give effect to these reasons with written submissions, if any, limited to 3 pages.
3.The precise form of orders be decided on the papers.
4.Costs reserved.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ORDERS
VID 1220 of 2016 BETWEEN: UDP HOLDINGS PTY LTD (ACN 167 100 692) (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
First Applicant
5 STAR FOODS PTY LTD (ACN 005 714 616) (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
Second ApplicantAND: ESPOSITO HOLDINGS PTY LTD (ACN 079 763 303)
First Respondent
WILLIAM YAN SAN HUI
Second Respondent
[THE ARBITRATOR]
Third Respondent
JUDGE:
BEACH J
DATE OF ORDER:
9 JUNE 2017
THE COURT ORDERS THAT:
1.Within 7 days of the date of these orders, the applicants and second respondent file and serve proposed minutes of orders to give effect to these reasons with written submissions, if any, limited to 3 pages.
2.Within 14 days of the date of these orders, the first respondent file and serve proposed minutes of orders to give effect to these reasons with written submissions, if any, limited to 3 pages.
3.The precise form of orders be decided on the papers.
4.Costs reserved.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
BEACH J:
The applicant in Federal Court proceedings VID 1192 of 2016, William Yan Sui Hui (Hui), and the applicants in Federal Court proceedings VID 1220 of 2016, UDP Holdings Pty Ltd (receivers and managers appointed) (subject to Deed of Company Arrangement) (UDP) and 5 Star Foods Pty Ltd (receivers and managers appointed) (subject to Deed of Company Arrangement) (5 Star Foods) are the respondents in an international commercial arbitration seated in Melbourne and constituted under a share sale agreement incorporating the provisions of the UNCITRAL Arbitration Rules. The first respondent in both Federal Court proceedings, Esposito Holdings Pty Ltd (Esposito) is the applicant in that arbitration. Hui, UDP and 5 Star Foods have sought pursuant to arts 12, 18 and 34 of the UNCITRAL Model Law on International Commercial Arbitration (as adopted by the United Nations Commission on International Trade Law on 21 June 1985, and as amended by the United Nations Commission on International Trade Law on 7 July 2006) (the UNCITRAL Model Law) and as incorporated into domestic law by s 16 of the International Arbitration Act 1974 (Cth) (the Act) to set aside parts of two partial awards rendered in the arbitration. They have also applied to remove the arbitrator.
The application to set aside part of the first partial award made on 12 September 2016 is based on the assertion that the arbitrator exceeded his jurisdiction and failed to accord procedural fairness to Hui, UDP and 5 Star Foods by his determination of issues concerning the availability of certain defences following a preliminary hearing. Hui, UDP and 5 Star Foods assert that those issues did not fall within the scope of the matters that were to be determined by the arbitrator at the preliminary hearing. By determining those issues, it is said that the arbitrator failed to give Hui, UDP and 5 Star Foods a reasonable opportunity to be heard on material issues in the arbitration. Accordingly, it is said that Hui, UDP and 5 Star Foods have suffered real unfairness and practical injustice. If necessary, they would go so far as to assert that what occurred offends the “most basic notions of morality and justice” to use the form of expression in some of the international jurisprudence discussing arts 18 and 34 of the UNCITRAL Model Law or “shocks the conscience” to use a more colloquial expression.
Hui, UDP and 5 Star Foods have also sought to set aside part of the second partial award made on 15 September 2016 in which the arbitrator refused to grant their applications to have him recuse himself. They contended before the arbitrator and have contended before me that the arbitrator had already reached reasoned conclusions about some of the ultimate questions in the arbitration without giving them a reasonable opportunity to be heard and accordingly had prejudged the matter. It is said that a reasonable person would no longer have confidence in the ability of the arbitrator to arrive at a fair and balanced conclusion on those issues. Accordingly Hui, UDP and 5 Star Foods have sought to have the arbitrator removed from office.
Given the exceptional circumstances of the present matter, I propose to grant their applications for the reasons that follow. But the precise orders to give effect to my reasons will need to be considered further.
Now I accept that a supervisory court in determining whether to set aside an international commercial arbitration award or to disqualify an arbitrator ought exercise considerable caution given:
(a)the contractual and therefore consensual nature of the dispute resolution mechanism chosen;
(b)the need for expedition, commercial efficiency and finality in the application of that mechanism; and
(c)such a context within which procedural fairness questions are to be assessed, so that any consequence short of real unfairness or real practical injustice ought not justify such a remedy.
But even accommodating such robustness underpinned by the necessary commercial conservatism to ensure that contracting parties are bound to their choice of mechanism, I cannot overlook the significant flaws in the present arbitral process. It is necessary to elaborate on the background to a greater extent than is usual to explain the exceptional circumstances of the present case.
I would make one other preliminary observation at this point. The problems that have arisen in the present case have been partly caused by strategic choices made by Esposito and agreed to by the arbitrator in hiving off and determining incomplete separate questions and in doing so where the various issues between the parties had not been properly crystallised. Of course, arbitral proceedings do not have the discipline and formality of judicial proceedings and there is much greater latitude given to the choice of arbitral procedures, including the ability to make what may appear from a supervisory court’s perspective to be questionable procedural choices, provided that they do not lead to the creation of an article 34 ground. But the foreseeable risks inherent in the procedures adopted in the present arbitration have now come to fruition. No doubt Esposito perceived advantage to itself in the procedural course that was adopted by the arbitrator for which Esposito had applied. But if and to the extent that it is relevant to the exercise of my discretion to grant the relief sought, I would observe that there is no inherent unfairness in Esposito now bearing any adverse consequences flowing from the establishment of the article 34 grounds to the extent that they have their genesis in the procedure that Esposito urged on the arbitrator.
FACTUAL BACKGROUND
The arbitration concerns disputes arising under a share sale agreement executed on 11 December 2013. Esposito agreed to sell and UDP agreed to purchase all of the issued shares in 5 Star Foods. Hui guaranteed to Esposito the performance of UDP’s obligations thereunder. The share sale agreement was subsequently amended by deeds dated 17 December 2013, 31 December 2013 and 21 January 2014; for convenience, references to “share sale agreement” in my reasons are to that agreement as amended.
On 17 December 2013, UDP entered into an insurance policy covering warranty claims under the share sale agreement. Pursuant to cl 17 of the share sale agreement, Esposito agreed to pay for that insurance cover for the benefit of UDP with the cover responding to various consequences of breaches of warranties made by Esposito under the share sale agreement.
The share sale was completed on 31 January 2014, but only part of the purchase price was paid on completion. The balance, including adjustments, was to be paid over the year that followed and consisted of two payments of deferred consideration of $1 million each, an earn out payment of up to $7 million, a working capital adjustment and a refund of any tax (including GST) paid on account to the Commissioner of Taxation that was attributable to the period pre-completion; this latter aspect is referred to later in my reasons with the associated description of “Refund Amounts”.
(a) The invocation of arbitration
On 18 September 2014, Esposito served a notice of dispute on Hui, UDP and 5 Star Foods in relation to a dispute concerning the share sale agreement pursuant to the arbitration clause in cl 21A of the share sale agreement.
On 30 October 2014, Esposito served on UDP, Hui, 5 Star Foods and the Institute of Arbitrators and Mediators Australia a notice of arbitration and a statement of claim in relation to disputes arising under the share sale agreement pursuant to cl 21A which incorporated the UNCITRAL Arbitration Rules. In essence, Esposito claimed that it was entitled to the balance of moneys it says were due and payable to it for the sale of its shares in 5 Star Foods.
On 10 November 2014, Rodney Slattery of PPB Advisory and Gregory Quinn of PPB Advisory were appointed by Coöperatiere Centrale Raiffeisen-Boerenleenbank BA, Australia Branch (Rabobank) as receivers and managers of Five Star United Food (Aust) Pty Ltd (FSUFA), the ultimate holding company of UDP and 5 Star Foods. Shortly after 10 November 2014, Marcus Derwin, the sole director of all the companies within the UDP group of companies (UDP Group), commenced a marketing and sale process in relation to the UDP Group. As part of that sale process, Derwin engaged PPB Advisory’s corporate finance team to assist with the sale of the UDP Group. Further, an investigation was initiated as to what had been represented by Esposito to UDP during the sale process of its shares in 5 Star Foods.
Hui, UDP and 5 Star Foods were required to file and serve a response to the notice of arbitration by 30 November 2014 pursuant to art 4 of the UNCITRAL Arbitration Rules, but they did not do so. On 4 December 2014, the parties by joint letter communicated with the proposed arbitrator expressing their willingness to accept their appointment of him as arbitrator. On 8 December 2014, the arbitrator accepted that appointment.
On 18 December 2014, the arbitrator convened a directions hearing in which Esposito was granted leave to file and serve an amended statement of claim. The purpose of the hearing was to hear Esposito’s application for UDP and 5 Star Foods to make discovery of documents relating to allegations in the proposed amended statement of claim concerning the “change of control” and “insolvency event” provisions of the share sale agreement. Esposito contended that the documents sought were “critical” documents and would allow Esposito to better articulate its claims. Further, Esposito contended that it was entitled to the documents under the share sale agreement.
At the directions hearing, Esposito’s counsel also foreshadowed that Esposito might be amenable to having a preliminary assessment and the rendering of partial awards on some issues concerning its claims once defences had been filed.
On 24 December 2014, the arbitrator delivered reasons in respect of Esposito’s discovery application. The arbitrator agreed that the production of the documents sought would facilitate a sharper focus on the issues in the arbitration. The arbitrator also made directions that UDP and 5 Star Foods file a statement of defence by 30 January 2015 with Hui to file a statement of defence by 6 February 2015. He also directed that UDP and 5 Star Foods make discovery by 16 January 2015. He adjourned the matter to 12 February 2015.
UDP and 5 Star Foods failed to file their statement of defence by 30 January 2015. Further, Hui failed to file his statement of defence by 6 February 2015.
On 3 February 2015, Esposito informed Hui, UDP and 5 Star Foods of the claims that it wished to be resolved at a preliminary hearing and in a partial award. Its letter stated the following:
For reasons of costs and expedition, Seller proposes that the following claims be the subject of a preliminary hearing and a partial award in the arbitration:
1.Failure to pay $1M due and payable on 31 July 2014, paragraphs 62 - 64 and paragraphs A1 and D of the relief claimed in the Further Amended Statement of Claim;
2.Failure to pay $1M due and payable on 2 February 2015, paragraph 64A - 64C and paragraphs A1A and D of the relief claimed in the Further Amended Statement of Claim (we enclose a proposed amendment for which leave will be sought on 12 February 2015);
3.Failure to refund to Seller the Tax and GST claimed, paragraphs 49- 52 and paragraphs A2, C2 and D of the relief claimed in the Further Amended Statement of Claim; and
4Failure to pay the $7M Earn Out Cap arising because of the Change of control due to the appointment of the Receivers and Mr Derwin, paragraphs 77A – 77O and paragraph A3 and D of the relief claimed in the Further Amended Statement of Claim.
It is apparent, compared to the balance of the claims the subject of the reference and any defences raised to them, that the proof of these claims and any defences raised to them will be relatively straight forward and involve little hearing time. Further, the parties ought to be in a position to be ready for such a hearing in a matter of weeks from now as any necessary further discovery will be limited as will the evidence, which will be largely documentary and, we anticipate, largely uncontroversial. Further, it will involve few if any issues of credit by a witness called in the preliminary hearing who would also need to be called in any subsequent hearing. Lastly, discovery in respect of the balance of the issues, which is likely to be very substantial and time consuming, and the need to prepare detailed expert and further lay evidence in relation to the balance of claims could be deferred until after the partial award was delivered. In most respects, such discovery and evidence may not be required at all depending on the outcome of the partial award.
While we acknowledge that we are yet to receive the respondents’ defences, given the nature of those essentially debt/property based claims the subject of the proposal, we consider it highly unlikely that the terms of the defences would preclude such a course being undertaken in the arbitration or erode the obvious merits of such a course (particularly given the terms of clause 17 of the SSA) at all or, at least, in a way that could not be readily accommodated by appropriate directions.
On 9 February 2015, UDP and 5 Star Foods informed Esposito that it opposed Esposito’s proposal for a preliminary hearing.
On 12 February 2015, a further directions hearing was held in which it was discussed whether there should be a preliminary hearing on the issues raised in Esposito’s letter of 3 February 2015 and the scope of any such hearing. The arbitrator directed UDP and 5 Star Foods to file a statement of defence by 6 March 2015 and Hui to file a statement of defence by 13 March 2015. He further directed Esposito to file a formal application for a preliminary hearing by 16 February 2015.
On 17 February 2015, Esposito filed an application in the arbitration seeking directions in the following terms:
1.There be a preliminary hearing and a partial award (the Preliminary Hearing) of:
(a)the following claims made by the further amended statement of claim dated 16 February 2015:
(i)the Initial Deferred Consideration Payment of $1,000,000 plus interest calculated in accordance with clause 26.1 of the Share Sale Agreement dated 11 December 2013 (as amended) (SSA) (see paragraphs 62-64 and paragraph 1A of the prayer for relief);
(ii)the Final Deferred Consideration of $1,000,000 plus interest calculated in accordance with clause 26.1 of the SSA (see paragraphs 64A-64C and paragraph A1A of the prayer for relief);
(iii)the Refunds of Income Tax for the 2013 financial year in the amount of $1,387,110 and GST referrable to the period prior to Completion in the amount of $1,496,111 plus interest calculated in accordance with clause 26.1 of the SSA (see paragraphs 49-52 and paragraphs A2 and C2 of the prayer for relief);
(iv)the Earn Out Cap of $7,000,000 due to a Change of Control or an Insolvency Event under the SSA plus interest calculated in accordance with clause 26.1 of the SSA (see paragraphs 77A-77O and paragraphs A3 of the prayer for relief);
(b)such of the defences raised to the claims referred to in paragraph 1(a) above as the arbitrator considers appropriate for the Preliminary Hearing; and
(c)the operation and effect of cl. 17 of the SSA on the defences the subject of paragraph 1(b) above.
[…]
On 27 February 2015, the arbitrator convened a further directions hearing. At that time, he adjourned Esposito’s application for a preliminary hearing until 19 March 2015.
By letter dated 2 March 2015, UDP notified its insurer of a potential claim under its warranty insurance policy to cover breaches by Esposito under the share sale agreement. UDP explained that there were a number of potential claims which could arise from possible breaches of warranties given by Esposito.
By 6 March 2015, UDP and 5 Star Foods had not filed a statement of defence. UDP and 5 Star Foods informed the arbitrator on 6 March 2015 that they could not file a defence in time because they needed to undertake a review of certain due diligence material in respect of the sale of 5 Star Foods and whether, inter alia, Esposito had breached its warranties. Apparently, such material had been requested to be produced by Esposito but it had only been produced by it three days earlier. Further, by 13 March 2015, Hui had not filed a statement of defence.
(b) 19 March 2015 directions hearing
On 19 March 2015, the arbitrator held a directions hearing which was attended by the legal representatives of UDP, 5 Star Foods, Hui and Esposito. At the time of this directions hearing, neither UDP, 5 Star Foods nor Hui had filed a statement of defence. The directions hearing was held to address Esposito’s preliminary hearing application.
Unfortunately, it is necessary to descend into the detail of the directions hearing on 19 March 2015 in order to reveal the scope of the preliminary hearing that was contemplated.
Initially Esposito’s counsel suggested that a preliminary hearing might not be able to be set down as Hui, UDP and 5 Star Foods had not filed their statements of defence. The arbitrator nevertheless indicated that if there was insufficient cause for non-compliance with the directions for the filing of defences, he could direct that the arbitration proceed and could deal with such “claims as are appropriate”.
UDP’s and 5 Star Foods’ counsel explained that his clients were not in a position to file a defence or cross-claim at that stage due to the appointment of receivers and managers and the investigations being undertaken by them concerning claims for breaches of warranties that may be pursued against Esposito.
UDP’s and 5 Star Foods’ counsel proposed that the preliminary hearing could hear argument about the “availability of defences and set offs” under the share sale agreement, and that the arbitrator could determine those questions. But he contended that such a preliminary determination would not be in the form of an award that would be enforceable. It was said that this course would progress the resolution of the issues in the arbitration notwithstanding the extra time needed to file their defences. UDP’s and 5 Star Foods’ counsel stated that for the purposes of the preliminary hearing he could prepare a “statement of position or issues on [the] availability of the contractual claims in the context of a preliminary hearing”. He suggested that the availability of a “defence of set off or cross claim” under the share sale agreement could be dealt with as a matter of contractual construction.
Hui’s counsel agreed with the proposal put by UDP’s and 5 Star Foods’ counsel for a preliminary hearing that could deal, inter alia, with the question of the availability of any set off defence.
Esposito’s counsel said that if the arbitration respondents wished to rely on a cross-claim by way of set off to any of the claims in paragraph 1(a) of Esposito’s application dated 17 February 2015 (the paragraph 1(a) claims), Esposito would have to investigate it to determine whether it was an appropriate matter to be dealt with as part of the preliminary hearing.
The arbitrator then proceeded to identify the possibilities as to how the preliminary hearing could proceed. First, he suggested that the preliminary hearing could deal with the paragraph 1(a) claims only. Second, he suggested that the preliminary hearing could proceed with the paragraph 1(a) claims together with “such limited defence[s] concerning the construction of clause 17”. Third, he suggested that the matter could proceed with the paragraph 1(a) claims heard with a full hearing of any cross-claim.
The arbitrator stated that the first option could deal with a determination of the paragraph 1(a) claims but could lead to questions about whether a partial award should be made and, if so, whether the partial award should be stayed. UDP’s and 5 Star Foods’ counsel submitted that the first option could not produce a partial award.
The arbitrator queried whether it was open to him to deal with the paragraph 1(a) claims and make a partial award in relation to them whilst reserving the right of the arbitration respondents to pursue cross-claims and to apply for a stay of the partial award. UDP and 5 Star Foods resisted the suggestion that a partial award could be made after the arbitrator had preliminarily determined the paragraph 1(a) claims.
Esposito’s counsel stated that Esposito supported the arbitrator’s first option of proceeding with the paragraph 1(a) claims only. He further stated that the paragraph 1(a) claims could be determined without the benefit of any defence from the arbitration respondents and that if the arbitration respondents had a cross-claim, such a claim could be heard as “phase two”. Esposito’s counsel stated that there was no reason why the arbitrator could not make a binding partial award in relation to the paragraph 1(a) claims because what was being brought against Esposito was a counterclaim. It is worthwhile reproducing what was said, which was the following:
MR HARRIS: We oppose that. Our view is the suggestion that came from you is the appropriate one - we should proceed with paragraph (a) claims. They should be dealt with without the benefit of any defence from my learned friend. If he has a cross-claim, that cross-claim can be heard as Phase 2. There is no reason why you can’t make a partial award which is binding in relation to the paragraph (a) claims because, by definition, what is being brought against us is a cross-claim.
THE ARBITRATOR: Mr Scott has submitted I would not, on a return of that, be able to make a partial award. Do we have to have that argument today?
MR HARRIS: No, that can be - it is a matter for you, at the end of the hearing, about whether you feel, having conducted the hearing, that you’re in a position to properly make a partial award, but we see no impediment to that and as, with respect, you observed, it becomes a question of enforcement.
In the ordinary course of things, claims are heard concurrently with counterclaims, a judgment is determined in relation to the claims made and the counterclaims that have been made and then the two are set off against each other to get a net figure. It is perfectly acceptable that claims can be determined ahead of counterclaims, a final award can be made, that award can be enforced. If, in Phase 2, counterclaims are established and an award is made, then that award can be enforced.
Esposito’s counsel stated that there was no reason why the arbitrator could not set a timetable for the hearing of the paragraph 1(a) claims and “leave open the opportunity” for UDP and 5 Star Foods to subsequently expand the scope of the preliminary hearing as long as it did not affect the timetable. He said that if additional matters could be “bolted on” to the determination of the paragraph 1(a) matters, then “presumably we’ll be notified about that”.
The arbitrator then stated that what he proposed to do was to schedule a preliminary hearing of the paragraph 1(a) claims, and that he would adjourn the matter for a short time to allow the parties to draft programming orders for a preliminary hearing in May 2015.
After lunch, Esposito’s counsel handed up a draft minute. There was then a discussion about whether paragraph 3 of the draft minute should include the words “and (if considered by the arbitrator to be appropriate) a partial award”. Esposito’s counsel submitted that those words were included in the draft minute because Esposito would seek a partial award at the end of the hearing. UDP’s and 5 Star Foods’ counsel stated that he understood that the arbitrator would make directions to fix a date for the hearing of the paragraph 1(a) claims and that that was all that the direction needed to say. The arbitrator agreed to take out the words, “and (if considered by the arbitrator to be appropriate) a partial award”, but stated that it was a “live question” as to whether as a result of the preliminary hearing, the outcome would be a partial award and that he had removed those words on that understanding.
The arbitrator directed that there be a preliminary hearing in respect of the paragraph 1(a) claims only. The arbitrator also directed UDP and 5 Star Foods to file a statement of defence by 2 April 2015 and Hui to file a statement of defence by 10 April 2015. It may be observed at this point that necessarily questions of set off and the like were not contemplated by the parties or the arbitrator as being within the scope of the preliminary hearing; indeed no relevant pleadings had been filed at that time on that aspect.
The precise directions made by the arbitrator on 19 March 2015 in respect of the preliminary hearing were as follows:
Preliminary Hearing
4.There be a preliminary hearing in respect of the claims the subject of paragraph 1(a) of the claimant’s application dated 17 February 2015 (Preliminary Hearing) namely –
(i)the Initial Deferred Consideration Payment of $1,000,000 plus interest calculated in accordance with clause 26.1 of the Share Sale Agreement dated 11 December 2013 (as amended) (SSA) (see paragraphs 62-64 and paragraph 1A of the prayer for relief);
(ii)the Final Deferred Consideration of $1,000,000 plus interest calculated in accordance with clause 26.1 of the SSA (see paragraphs 64A-64C and paragraph A1A of the prayer for relief);
(iii)the Refunds of Income Tax for the 2013 financial year in the amount of $1,387,110 and GST referrable to the period prior to Completion in the amount of $1,496,111 plus interest calculated in accordance with clause 26.1 of the SSA (see paragraphs 49-52 and paragraphs A2 and C2 of the prayer for relief); and
(iv)the Earn Out Cap of $7,000,000 due to a Change of Control or an Insolvency Event under the SSA plus interest calculated in accordance with clause 26.1 of the SSA (see paragraphs 77A-77O and paragraphs A3 of the prayer for relief).
5.The date of the Preliminary Hearing is 25 May 2015 (Hearing Date) on an estimate of three to five days.
(c) Other directions hearings and steps
After the 19 March 2015 directions hearing, the solicitors for UDP and 5 Star Foods informed the receivers of FSUFA that the preliminary hearing was listed for 25 May 2015. I would note at this point that Slattery of PPB Advisory, the receivers of FSUFA, deposed that he understood that the preliminary hearing would deal only with certain claims made by Esposito and would not deal with any possible claims under investigation by UDP and 5 Star Foods for breaches of warranty or related defences. Slattery also deposed that if he had been told that the alleged breaches of warranty or the availability of related defences would arise for determination at the preliminary hearing, he would have sought advice to protect UDP’s and 5 Star Foods’ position.
On 27 March 2015, the arbitrator held a further directions hearing, the detail of which is not presently relevant. The hearing had been sought by UDP and 5 Star Foods who sought to vacate the arbitrator’s direction to make discovery concerning correspondence between UDP, the receivers at PPB Advisory and Rabobank. The arbitrator refused to vacate that direction.
On 30 March 2015, Esposito filed with the arbitrator an application for permission to issue subpoenas in the Supreme Court of Victoria. Again, the background to this is not directly relevant for present purposes.
On 2 April 2015, UDP and 5 Star Foods served a statement of defence. On 10 April 2015, Hui served a statement of defence and counterclaim.
On 15 April 2015, the arbitrator convened a further directions hearing in which UDP and 5 Star Foods applied to dismiss Esposito’s application to issue subpoenas. I would note that the arbitrator ultimately directed that Esposito be granted permission to seek to issue subpoenas and that UDP and 5 Star Foods make discovery.
On 22 April 2015, Slattery and Quinn were appointed joint and several receivers of UDP and 5 Star Foods. Also on that day, Peter Marsden, Richard Stone and Andrew Beck of RSM Bird Cameron were appointed joint and several administrators of UDP and 5 Star Foods.
On 23 April 2015, the receivers of UDP and 5 Star Foods instructed Campbell Jaski of PPB Advisory to investigate whether Esposito had engaged in any breaches of warranty under the share sale agreement.
Michael Sloan, a partner of Ashurst, deposed on behalf of UDP and 5 Star Foods that he understood in late April / early May 2015 that notwithstanding the appointment of administrators, investigation into the conduct of 5 Star Foods’ business was ongoing and that an objective of those investigations was to identify potential claims available to UDP and 5 Star Foods against Esposito in the arbitration. It was perceived that such claims might constitute or provide valuable assets to the receivers.
On 24 April 2015, the receivers of FSUFA, UDP and 5 Star Foods wrote to Esposito’s solicitors (K&L Gates), confirming the above appointments and noting that they were in the process of seeking instructions in relation to the arbitration.
Sloan deposed that at around 5 May 2015, he understood, based on the arbitrator’s directions made on 19 March 2015, that any positive defences foreshadowed in UDP’s and 5 Star Foods’ defence were not for hearing and determination in the preliminary hearing.
Sloan also deposed that if he had known that the arbitrator intended to determine any set off defences available to UDP and 5 Star Foods, he would have sought instructions from the receivers to intervene in the arbitration to update the arbitrator on investigations and in the arbitration to prevent related issues being heard or determined in the absence of UDP and 5 Star Foods. He said that whilst Esposito’s claim in the arbitration had little economic value (given that that claim was made against two companies in voluntary administration and receivership), his clients’ counterclaim had potentially significant value, particularly having regard to the position in relation to the relevant insurance policy. He deposed that these reasons and in his view the limited scope of the preliminary hearing informed the decision not to participate in the preliminary hearing.
On 5 May 2015, the solicitors for UDP and 5 Star Foods (Ashurst) sent a letter to K&L Gates, explaining that Ashurst no longer held instructions to act for UDP and 5 Star Foods in the arbitration. The letter requested that all future correspondence be directed to the administrators at RSM Bird Cameron. Ashurst then forwarded that letter to the arbitrator and the arbitration parties.
Later on 5 May 2015, K&L Gates sent a letter to the administrators at RSM Bird Cameron which relevantly stated:
In respect of the Arbitration, we note that a preliminary hearing is listed for 25 May 2015 to deal with a number of disputed issues in the Arbitration, including whether an Insolvency Event and Change of Control occurred for the purposes of the SSA. Esposito is seeking to obtain documents and materials from non-parties to the arbitration, PPB Advisory (PPB) and Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (RaboBank) in connection with those issues.
On 7 May 2015, the administrators of UDP and 5 Star Foods wrote to K&L Gates stating that because of the appointment of administrators, under s 440D of the Corporations Act 2001 (Cth) the arbitration should be stayed, given that they would not consent to the continuation of the arbitration.
On 14 May 2015, Jaski of PPB Advisory issued a draft report into the alleged breaches of warranties by Esposito. Apparently, after being given that draft report, the receivers decided to instruct Ashurst to actively participate in the arbitration and to bring a cross-claim against Esposito in respect of the breaches of warranty that the report had identified. But Slattery deposed that he was not concerned for UDP and 5 Star Foods to participate in the preliminary hearing because, as he understood it, that hearing would not involve the issues to be raised by UDP and 5 Star Foods in relation to the alleged breaches of warranty.
On 20 May 2015, the administrators of UDP and 5 Star Foods sent an email to the arbitrator and the parties stating that they did not intend to take part in the arbitration and accordingly would not attend the directions hearing scheduled on 21 May 2015. In context, it would seem that this was to be understood at least in respect of their participation in the preliminary hearing.
On 21 May 2015, the arbitrator held a directions hearing in which he appeared to state that the preliminary hearing would not concern the availability of defences, including set off defences. Only representatives of Hui and Esposito were in attendance. Relevantly, the following exchange occurred between the arbitrator and counsel for Hui:
THE ARBITRATOR: You know the claims that are made. They have pleaded it.
MR MASTERS: I do. But it's in circumstances where there are set-off defences and counterclaims - - -
THE ARBITRATOR: But we won’t be entering into those, will we.
MR MASTERS: I know, no. But the argument that we will be having will have regard to the fact that there are counterclaims and set-off defences that are made in relation to these very points.
THE ARBITRATOR: But how will they go to the proof of these claims?
MR MASTERS: It will all depend on what Mr Harris says in his outline.
THE ARBITRATOR: This is a preliminary hearing. It is simply the claims. I understand you are putting them to proof and you have flagged these other defences. We are not dealing with the other defences. But you will have to meet an application that’s been foreshadowed that there be a partial award or interim relief of some kind. That’s what’s been foreshadowed. You will have to meet that.
MR MASTERS: Indeed.
THE ARBITRATOR: That’s the scope of what will happen at this preliminary hearing, as I’m understanding it.
(emphasis added)
Now although the arbitrator stated that the arbitration respondents would need to meet a foreshadowed application at the preliminary hearing that there be a partial award or interim relief, he appeared to make it clear that the preliminary hearing would only concern the paragraph 1(a) claims and would not concern defences to those claims.
Also on 21 May 2015, the arbitrator made directions postponing the preliminary hearing date from 25 May 2015 to 3 June 2015.
On 27 May 2015, Esposito filed an outline of submissions for the preliminary hearing. On 1 June 2015, Hui filed an outline of submissions for the preliminary hearing. He set out reasons why a partial award should not be made in respect of the paragraph 1(a) claims. I will return to this later.
(d) The preliminary hearing – 3 and 4 June 2015
On 3 and 4 June 2015, the preliminary hearing was held. Esposito and Hui appeared and were represented. There was no appearance for UDP and 5 Star Foods. This was unsurprising given that the administrators of UDP and 5 Star Foods had previously informed the arbitrator that they did not intend to participate. Further, UDP and 5 Star Foods, consistently with that position, had not filed an outline of submissions in advance of the preliminary hearing.
In summary, at the preliminary hearing, Esposito’s counsel addressed the availability of the set off defences despite what the arbitrator had determined would be the scope of the preliminary hearing. But Hui’s counsel did not engage with the availability of set off defences at the hearing. He stated throughout that the arbitrator had made it clear that the availability of Hui’s set off defences was not within the scope of the preliminary hearing. Further, the arbitrator accepted throughout the preliminary hearing that he would not adjudicate on the merits of the set off claims and would, for the purposes of the preliminary hearing, accept that there were claims for a set off but would make no judgment about their merit. I will return to the detail of the preliminary hearing in a later section of my reasons, save to mention one matter at this point.
In terms of dealing with a claim by the arbitration respondents against Esposito, a distinction needs to be made between the existence and quantification of such a claim and the issue of whether, if such a claim existed, it was available as a contractual set off under the share sale agreement or as an equitable set off. And if it was available as such a set off, whether it could provide a defence to Esposito’s paragraph 1(a) claims. The further dimension was whether Hui could indirectly avail himself of such claims by arguing that his liability under the guarantee could rise no higher than that of UDP (the principal debtor).
I am satisfied on the evidence as to the sequence of events that such matters were not within the scope of the preliminary hearing or the paragraph 1(a) claims. Neither were issues concerning the enforceability of the guarantee against Hui. They were for later determination.
(e) Later events
On 12 June 2015, Hui filed an amended statement of defence and counterclaim.
On 18 June 2015, the administrators and receivers of UDP executed a deed of company arrangement.
On 1 July 2015, UDP and 5 Star Foods sought to file an amended statement of defence and counterclaim which pleaded set off defences that were based on breach of warranty claims alleged against Esposito. Apparently, the amendments were made as a result of findings and recommendations in the PPB Advisory draft report of 14 May 2015.
On 14 July 2015, Hui filed a further amended statement of defence and counterclaim, which pleaded set off defences.
(f) The arbitrator’s three sets of reasons and two partial awards
On 25 September 2015, the arbitrator delivered his reasons in respect of the preliminary hearing. At [1] of his reasons, the arbitrator said:
On 19 March 2015, on the application of the claimant and after hearing from the parties, the arbitral tribunal directed that there be a preliminary hearing in respect of the claims the subject of paragraph 1(a) of the claimant’s application dated 17 February 2015 (Preliminary Hearing), namely –
(i)the Initial Deferred Consideration Payment of $1,000,000 plus interest calculated in accordance with clause 26.1 of the Share Sale Agreement dated 11 December 2013 (as amended) (SSA) (see paragraphs 62-64 and paragraph 1A of the prayer for relief);
(ii)the Final Deferred Consideration of $1,000,000 plus interest calculated in accordance with clause 26.1 of the SSA (see paragraphs 64A-64C and paragraph A1A of the prayer for relief);
(iii)the Refunds of Income Tax for the 2013 financial year in the amount of $1,387,110 and GST referrable to the period prior to Completion in the amount of $1,496,111 plus interest calculated in accordance with clause 26.1 of the SSA (see paragraphs 49-52 and paragraphs A2 and C2 of the prayer for relief); and
(iv)the Earn Out Cap of $7,000,000 due to a Change of Control or an Insolvency Event under the SSA plus interest calculated in accordance with clause 26.1 of the SSA (see paragraphs 77A-77O and paragraphs A3 of the prayer for relief).
In his reasons, the arbitrator determined the paragraph 1(a) claims, but also determined issues concerning the availability of set off defences and Hui’s guarantee. Most if not all of such issues were not within the ambit of the preliminary hearing. Indeed, little, if any submissions were made thereon even by Esposito. The arbitrator said the following at [7(i)] to [7(q)] of his reasons:
The general set-off clause – clause 31.21
(l)The Buyer is entitled under clause 10 of the SSA to set-off reasonable costs of preparing tax returns against any Refund Amounts due. Subject to that one exception which is not relevant to the present case, as a matter of construction of the provisions of the SSA, the respondents have no contractual right of set-off in respect of the Refund Amounts. The exception to the general set-off in clause 31.21 applies, the SSA expressly providing otherwise in the case of the Refund Amounts. The Buyer is not relevantly entitled under clauses 12.4 or 16 or otherwise under the SSA, to a reduction or extinguishment of the Refund Amounts by way of adjustment of the obligation.
(m)The Buyer is however entitled to set-off against the Refund Amounts its claim for the Working Capital Adjustment Amount of $5,042,801 as a debt claim giving rise to a defence of set-off at law. It is a money claim for a liquidated amount. That claim did not accrue to either the Company or the second respondent and accordingly they cannot avail themselves of this set-off.
(n)In my view neither the Company nor the Guarantor show an entitlement under the SSA or in equity or otherwise to set off against the Refund Amounts the cross claims for Working Capital Adjustment or for damages for Warranty Claims.
The Guarantee
(o)Pursuant to the guarantee in the SSA, the second respondent guaranteed to the Seller the punctual performance by the Buyer of the Buyer’s obligations under the SSA including its obligations to pay money. The second respondent did not guarantee the Buyer’s obligation to pay either the Deferred Consideration amounts or the Earn Out Cap, independently of any adjustment by way of set-off for the Working Capital Adjustment amount or for damages for Warranty Claims. Put another way, the second respondent is entitled to invoke the set-off claims under clause 12.4 and clause 16 by way of defence to those claims. The Buyer’s obligation to pay the Deferred Consideration amounts or the Earn Out Cap is to be assessed, taking into account any such adjustments, if they are made out.
(p)The second respondent stands therefore in a similar position to the Buyer in relation to the claims for the Deferred Consideration amounts and the Earn Out Cap. It is open to the Guarantor to claim that the claimed set-offs under clause 12.4 and clause 16 apply to reduce or extinguish the liability of the Buyer under the SSA to the Seller for the Deferred Consideration amounts and the Earn Out Cap and as a result, to reduce or extinguish the amount for which the second respondent is liable under the guarantee.
(q)I consider however that the claim for the Refund Amounts stands in a different position. As a matter of construction of the SSA, there is no provision for amounts payable by the Seller under clause 12.4 or 16 to operate as an adjustment or decrease in any Refund Amounts that may be payable. There is no other relevant provision which would operate to extinguish or diminish the Buyer’s obligation to pay the Refund Amounts, the punctual performance of which the second respondent guaranteed.
The arbitrator at [166] said:
I accept that the Seller has not received the Refund Amounts. I have determined that, subject to its claimed set-off for the Working Capital Adjustment Amount of $5,042,801, the Buyer is liable under the provisions of the SSA for the payment to the Seller of an amount equal to those Refunds totalling $2,883,225 and $780,622, making a total of $3,663,847 together with interest in accordance with the provisions of the SSA from the dates when the respective amounts became due. I have also determined that the Company is liable under the provisions of the SSA, with no right of set-off, for the payment to the Seller of an amount equal to those Refund Amounts. I will hear argument about the question of interest in relation to the Company.
At [174] and [175], the arbitrator said:
In my view, by these provisions the Seller has chosen to accept a contractual promise from the Buyer and the Company to procure that the Company (or the relevant Group Member) or the Buyer pay an amount equal to the Refund Amounts. These provisions do not in my view constitute a promise by the Buyer or indeed the Company or other Group member to hold any refunds received for the Seller, in the sense of requiring any of them to set apart in a separate fund for the Seller the refunds received. They do not constitute any direction, irrevocable or otherwise, to pay the amounts in question direct to the Seller out of the refunds as they come to hand. In my view therefore the claim for the declaration in relation to the Refund Amounts fails.
What is clear however from the context of the SSA and these provisions concerning the Refund Amounts is that the Seller was assured of the benefit of the Refund Amounts as a payment from either the Company or the other Group member. The Buyer and the Company agreed to this in the SSA. It was not intended as between the Seller and the Buyer that the Refund Amounts would be subject to adjustment in the same way that the components of the Purchase Price were subject to adjustment for the Working Capital Adjustment Amount or for damages for Warranty Claims. The Refund Amounts were intended primarily to come from a party other than the Buyer. I attach significance to this aspect in considering the claims of the respondents to set off against the Refund amounts the amounts for which they claim a set-off against the Purchase Price otherwise payable.
At [183] to [198] and also [219] et seq there was a discussion of set off.
The arbitrator then went on at [236] to say:
I have also determined that the Company and the second respondent are each liable to the Seller for the Refund Amounts without right of set-off. I will make a partial award in that respect against them. I will hear the parties on the question of both interest and costs in relation to that issue. I will hear submissions as to whether in that partial award I should also formally dismiss the claimant’s application for a declaration in paragraph C2 of the prayer for relief that the Company holds the Refund Amounts for the Seller.
Relevantly, earlier in the arbitrator’s reasons at [6], he set out a summary of the principal issues in the application:
The claimant has applied for a partial award for each of the amounts determined to be due and owing in respect of the claims the subject of the Preliminary Hearing. In defence, the respondents relied on certain specified set offs to deny liability to the claimant. By its July amended statement, the first respondent now also counterclaims. The second respondent also counterclaimed. At the hearing he contended that if the arbitral tribunal finds in favour of the claimant on any of those claims, the tribunal should do no more than make a determination to that effect, falling short of making any partial award. The effect of the set offs claimed is one of the principal issues the subject of the Preliminary Hearing.
On 26 November 2015, Hui filed an outline of submissions challenging the arbitrator’s 25 September 2015 reasons. He contended that the arbitrator had exceeded his jurisdiction and had denied Hui procedural fairness by entering into and deciding issues as to the availability of the set off and Hui’s guarantee. He contended that these matters formed no part of the issues that the arbitrator was authorised to decide at the preliminary hearing. It was said that the scope of the preliminary hearing was limited to the paragraph 1(a) claims only and that there was not to be any consideration of the set off defences and Hui’s guarantee. Hui contended that the arbitrator should make a limited partial award but only in terms that Hui contended for and that the arbitrator should then withdraw from office. The terms of the partial award sought by Hui were set out at [20] of his submissions:
Accordingly, the second respondent asks the arbitrator to make an award as follows:
(a)subject to any defences (including set offs), the Initial Deferred Consideration of $1,000,000 became due and payable by the Buyer under the SSA on 31 July 2014 and interest commenced to accrue on that amount from that date in accordance with the SSA;
(b)subject to any defences (including set offs), the Final Deferred Consideration of $1,000,000 became due and payable by the Buyer under the SSA on 2 February 2015 and interest commenced to accrue on that amount from that date in accordance with the SSA;
(c)subject to any defences (including set offs), the Earn Out Cap of $7 million became due and payable by the Buyer as an instalment of the Purchase Price under the SSA on 10 November 2014 and interest commenced to accrue on that amount from that date in accordance with the SSA;
(d)subject to any defences (including set offs), the Buyer and the Company are liable to the Seller for the Refund Amounts of $3,663,847 together with interest in accordance with the provisions of the SSA from the dates the respective amounts became due;
(e)the Refund Amounts were not, and are not, held for the Seller by way of an equitable assignment or express trust.
By email to the parties on 18 December 2015, the arbitrator noted that he was yet to make an award in the matter and was open to hearing argument as to whether his reasons were “substantively wrong”. He explained that he remained “open to argument” as to whether he had “misapplied the legal authorities and principles referred to in relation to the present matter and whether for that reason the tribunal should not make any partial award for a money amount against [Hui]”. The arbitrator also invited the parties to make submissions to address the question as to “whether and on what basis the arbitral tribunal should have come to a different conclusion and if so what conclusion, notwithstanding the reasons for determination given”. This was a curious invitation given that the arbitrator appears to have already made up his mind on such matters and had ruled thereon.
On 22 December 2015, the arbitrator made directions fixing a hearing on 16 March 2016 in respect of Hui’s application made by way of his submissions dated 26 November 2015. The arbitrator also made directions for the filing of submissions in response to Hui’s application. I note for completeness that there was an issue raised by Esposito against Hui’s application which was to the effect that Hui was out of time in making his application and that an extension should not be granted. The hearing on 16 March 2016 was to also deal with this issue raised by Esposito. This timing issue was not raised in the proceedings before me and I will not comment further on it.
On 18 January 2016, UDP and 5 Star Foods filed an outline of submissions which supported Hui’s challenge to the arbitrator’s reasons and supported the form of award proposed in Hui’s 26 November 2015 submissions. Further, they supported Hui’s application for the arbitrator to withdraw from office. At [2] to [4] of their submissions, UDP and 5 Star Foods stated:
First, although the administrators of the first and third respondents told the arbitrator on 20 May 2015 that “the administrators do not intend to take part in the arbitration and accordingly will not be attending the directions hearing scheduled to take place tomorrow”, on 1 July 2015 Ashurst sent a proposed amended defence and counterclaim supported by a detailed draft report of PPB Advisory to the arbitrator and requested a directions hearing be held.
This correspondence was only consistent with the first and third respondents continuing to participate in the arbitration and bringing to the arbitrator’s attention the basis (not just the form) of their proposed amended defence and counterclaim
For that reason, the second respondent’s criticism of the arbitrator’s pre-judgment of questions in issue applies equally to the first and third respondents, if not more so, because at no time were they notified that there was any possibility of any defences of set off raised by them being ruled in or out as a result of the preliminary hearing. Their 1 July 2015 application was only consistent with the opposite expectation and understanding. At no time prior to the arbitrator’s reasons published 25 September 2015 were the first and third respondents informed of any change in the scope of the preliminary hearing or given any opportunity to be heard on the issues of greatest importance.
On 2 February 2016, Esposito filed an outline of submissions in response to the challenge against the arbitrator’s 25 September 2015 reasons. On 17 February 2016, Hui, UDP and 5 Star Foods filed submissions in reply to Esposito’s submissions. Further submissions were filed by Esposito on 26 February 2016.
On 16 March 2016, the arbitrator held a hearing of Hui’s, UDP’s and 5 Star Foods’ application for a partial award in the terms set out in their outlines of submissions and a determination that the arbitrator withdraw from his office and that the arbitration continue before a new arbitrator.
On 15 April 2016, the arbitrator delivered a detailed second set of reasons addressing the proposed partial award and Hui’s, UDP’s and 5 Star Foods’ application.
First, the arbitrator expressed the application in the following terms at [62] and [64]:
In his written submissions dated 26 November 2015, [Hui] contends that the question of what was - and what was not - to be the subject of the Preliminary Hearing was expressly determined by the arbitrator when directions for the Preliminary Hearing were made on 19 March 2015. He refers both to the claimant’s application dated 17 February 2015 and to the actual directions made on 19 March 2015 in connection with the Preliminary Hearing. The corollary of these submissions is that it was not open to the claimant at the Preliminary Hearing to seek a partial award that the respondents or any of them pay money to the claimant.
[…]
[Hui] contends that the arbitrator was authorised by the parties to decide, and clearly himself understood that he was permitted only to decide, those claims, which he set out in full at [1] of the Reasons, that is to say, the specified claims made by the claimant but not any defences, either as referred to in the application or otherwise; that there was no agreement between the arbitrator and the parties that questions other than those claims should be determined. …
It follows from this primary contention, the second respondent contends, that the determinations as to set offs were made in circumstances where the second respondent was given no opportunity to be heard on the question and that if an award strays beyond the claims set out in full at paragraph [1] of the Reasons, it would be liable to be set aside on its face without more.
Second, the arbitrator considered the scope of the preliminary hearing. He rejected the arbitration respondents’ contentions as to that scope. He said at [81]:
I reject the respondents’ contentions as to the scope of the Preliminary Hearing directed to be held. In my view, for the reasons here discussed and, by the directions setting down the subject claims, the arbitral tribunal set down for preliminary hearing the subject claims, reserving as one possible outcome of the Preliminary Hearing that the tribunal might make a partial award in favour of the claimant for a dollar amount in respect of all or any of the claims against the respondents. This meant that the tribunal was at liberty to decide not only whether the claimant made out the claims at [1] of the Reasons but also whether there should be a partial award in favour of the claimant for the payment of any specified amount. The respondents had at that stage filed no claims to set-off or other defences, despite directions to do so.
In summary, the arbitrator took the view that at the preliminary hearing, the arbitral tribunal was at liberty to decide not only whether Esposito made out the paragraph 1(a) claims but also whether there should be a partial award in favour of Esposito for the payment of any specified amount. The arbitrator then stated at [90] in his reasons:
There was no direction or determination that the arbitral tribunal would adjudicate the specified claims on the basis that any defence that was pleaded was not to be taken into account. To the contrary, any such defence or the availability of it needed to be taken into account in deciding whether there would be a partial award for a specified amount or amounts. If one outcome open was the making such a partial award, the other was the converse that, if the claims were not made out on the evidence, the arbitral tribunal could dismiss them. There was no agreement by the parties as to the directions made for the Preliminary Hearing.
I must say that I found the characterisation of the arbitrator’s description at [81] to be in some respects curious and his propositions at [90] to be in some respects vague. Generally, the arbitrator’s position and assessment after the event cannot dictate my objective assessment of the events of 19 March 2015, 3 and 4 June 2015 and the arbitrator’s reasons published on 25 September 2015.
Third, the arbitrator considered that the arbitral tribunal did not exceed its jurisdiction in respect of the preliminary hearing in determining the set off issues. The arbitrator took the view that Hui, UDP and 5 Star Foods as reasonable litigants would have foreseen the possibility of the arbitral tribunal determining the set off issues. Accordingly, so the arbitrator found, there was no breach of procedural fairness. The arbitrator provided the following reasons at [137] and [138] in respect of the set off issues:
As reasonable litigants, the respondents would in my view have foreseen the possibility of the arbitral tribunal determining the set-off issues for the following reasons –
(a) The scope of the Preliminary Hearing as directed to be held was not confined as contended by the respondents. They were reasonably put on notice that the tribunal was at liberty to decide not only whether the claimant made out the claims at [1] of the Reasons but also whether there should be a partial award in favour of the claimant for the payment of any specified amount. That necessarily involved consideration of such defences that may thereafter be taken by the respondents. I refer to the discussion above at paragraphs [80] to [90];
(b) The broader scope of the Preliminary Hearing was confirmed in discussions at the directions hearing on 21 May 2015. While the substantive merits of the claims to a set-off of the Working Capital Adjustment Amount and for warranty claims were not to be agitated at the Preliminary Hearing, the claimant was seeking a partial award that the respondents pay moneys to the claimant. I refer to the discussion above at paragraphs [96] to [99];
(c) The submissions filed by the claimant dated 27 May 2015 prior to the Preliminary Hearing foreshadowed the set-off issues. I refer to the discussion above at paragraphs [100] to [102]. The second respondent advanced contentions in response that the alleged entitlement of the Buyer to set off was not within the scope of the Preliminary Hearing. This in my view did not foreclose the possibility that the tribunal would address the set-off issues and, depending on the view taken, make a partial award against the second respondent. I do not accept that the claimant did not demur from those contentions of the second respondent.
(d) During the Preliminary Hearing itself, the second respondent was put on notice that the tribunal would be addressing the set-off issues. I refer to the discussion above at paragraphs [103] to [123]; and
(e) The second respondent was given the opportunity to file further material. I refer to paragraph [123].
The discussion at the directions hearing on 19 March 2015 and the subsequent statement of defence filed by the first and third respondents dated 10 April 2015 suggested that those respondents defended the claims made by the claimant by alleging a set-off of claims for the Working Capital Adjustment amount and for damages for breach of warranties. These were raised by way of defence but were discrete in the sense that they could have been but were not framed as independent claims by the first respondent. The second respondent also raised those set-offs by way of defence although he could not have raised those set-offs as independent claims by him. The tribunal in its reasons took the approach of treating the set-offs as valid on their face but enquiring whether as a matter of law or equity they could be raised by way of a defence of set-off to the various claims made. That approach was signalled to the claimant and the second respondent during the Preliminary Hearing. As discussed below, it was an approach identified by Robert Goff J in The Kostas Melas as open to the tribunal.
I will discuss SL Sethia Liners Ltd v Naviagro Maritime Corporation (The Kostas Melas) [1981] 1 Lloyd’s Rep 18 later in my reasons in some detail. In my view, Esposito’s and the arbitrator’s reliance thereon to provide a justification for what occurred before the arbitrator and what he decided was misconceived. Moreover, what the arbitrator said at [138] was, with due respect, a post-rationalisation of what in fact occurred on 4 June 2015.
Fourth, the arbitrator accepted that he had erred by determining that Hui was liable to pay amounts under the guarantee to Esposito. The arbitrator accepted that Hui had not been given the opportunity to adduce evidence going to the unenforceability of the guarantee. The arbitrator found that Hui would not have foreseen the possibility of the arbitral tribunal determining the guarantee issues and had been denied procedural fairness. In this regard, the arbitrator in his reasons at [163] and [164] made the following observations:
I now turn to the guarantee issue. In my view, having considered the submissions of the parties and examined the transcript of proceedings, the second respondent as a reasonable litigant would not in my view have foreseen the possibility of the arbitral tribunal determining whether, there being no evidence going to the unenforceability or discharge of the guarantee, the claimant had made out its claims under the guarantee to the Refund. Amounts and is entitled to a partial award that the second respondent pay the Refund Amounts to the claimant (the guarantee issue).
As noted, the tribunal determined at [182] of the Reasons that –
‘there being no evidence going to the unenforceability or discharge of the guarantee, I have determined that the claimant has made out its claims under the guarantee, subject in the case of the claims for the Deferred Consideration amounts and the Earn Out Cap, to the question of the claimed set-offs.’
This determination in relation to the second respondent was made without any forensic enquiry into the matters raised by the second respondent in paragraphs 80 to 90 of his amended statement of defence and counterclaim. It was based on the incorrect premise that the second respondent had had an opportunity to adduce that evidence. It denied the second respondent the opportunity to present his defence going to the unenforceability of the guarantee. The conclusion can readily follow that with adequate notice, and on evidence being adduced, the second respondent might have been able to persuade the tribunal to a different result.
I must say that this concession by the arbitrator did not instill in me confidence in what had occurred concerning the scope of and issues to be determined at the preliminary hearing and what the arbitrator thought he was doing in that regard. Moreover, in my view his prejudgment of the guarantee issues alone, notwithstanding the attempts to remedy what occurred, provides reason enough as to why he should not continue as arbitrator.
Finally, the arbitrator determined that he would not withdraw from office as arbitrator but would allow the parties to make further submissions on this aspect before he made a final decision. He made the following observations at [180] to [181] of his reasons:
In the case of the set-off issues, as arbitrator, I did express conclusions on those particular issues and in that sense ‘made up my mind’ on those questions. As I am of the view that it was proper to determine those issues and that there has not been a breach of the ‘hearing’ rule, subject to any contrary view of the court, I would not be reconsidering those set-off issues again in the arbitration. If on the other hand, I am incorrect in the conclusions I have expressed above on those set-off issues and have in fact determined those issues when there was no proper basis for doing so, as arbitrator I would have to revisit and determine those issues again. I would in those circumstances and subject to the views of the Court be more sympathetic to the application that I withdraw from office.
On the guarantee issue, as discussed above, I undertook no forensic enquiry of the matters pleaded in paragraphs 80 – 90 of the second respondent’s statement of defence. I made the determination in paragraph 236 of the Reasons, expressly on the basis of their being no evidence in support of those allegations. I have not deliberated on the allegations going to the unenforceability of the guarantee or come to any conclusion on the issues raised by that pleading. In those circumstances I have not ‘made up my mind’ on them and any future consideration of them would not involve any reconsideration of conclusions previously arrived at. As Mr Scott QC submitted in relation to the Reasons on the set-off issues, they are reasonably extensive. The same does not apply to the issue whether the guarantee is enforceable and the associated issues raised in the defence and counterclaim.
The arbitrator concluded that he would not make a partial award in the terms proposed in Hui’s submissions of 26 November 2015. Instead, he proposed making a partial award in the terms set out in the annexure to his reasons and invited the parties to make any submissions as to the form and content thereof.
I must say that I am struck by the stark contrast between the legal and factual propositions dealing with the set offs that are discussed in great detail in the arbitrator’s reasons of 25 September 2015 and 15 April 2016, yet are singularly absent from Esposito’s written submissions filed before the preliminary hearing, with only some of them raised for the first time in closing address by Esposito at the preliminary hearing. That contrast alone is a powerful demonstration that the arbitrator travelled well beyond what was contemplated as the scope of the preliminary hearing.
On 13 May 2016, Hui filed an outline of submissions which contended that the arbitrator should nevertheless still withdraw from office given that the arbitrator had decided in his 15 April 2016 reasons that he had erred in deciding adversely to Hui on the guarantee question without affording him an opportunity to be heard. Hui submitted that a reasonable person would no longer have confidence that the arbitrator could come to a fair and balanced conclusion on the issues if he were to reconsider them. Hui persisted with the submission that the arbitrator should make a partial award in the terms proposed in Hui’s submissions of 26 November 2015. Also on 13 May 2016, UDP and 5 Star Foods filed an outline of submissions which adopted Hui’s submissions on the withdrawal and the form of partial award. On 29 June 2016, Esposito filed an outline of submissions which supported the arbitrator’s form of partial award annexed to his 15 April 2016 reasons. Submissions in reply were filed by Hui on 11 July 2016 and by UDP and 5 Star Foods on 13 July 2016. Esposito filed rejoinder submissions on 23 August 2016.
On 12 September 2016, the arbitrator delivered a third set of reasons addressing the form of the partial award and the withdrawal application. As to the form of the partial award, the arbitrator stated at [10] that he stood by the grounds expressed in his 15 April 2016 reasons in relation to the determination of the set off issue. He reiterated at [2(c)] that the arbitration respondents “as reasonable litigants, would have foreseen the possibility of the tribunal determining the set-off issues”. But not only was that not reasonably foreseeable in my view, but the arbitrator’s conduct at and before the preliminary hearing reasonably induced the opposite belief. The arbitrator decided that he would render a partial award substantially in the form of the proposed partial award annexed to his 15 April 2016 reasons. As to the withdrawal application, the arbitrator stated that he was not persuaded that he should withdraw from office.
The arbitrator’s 12 September 2016 reasons were delivered with a partial award (the first partial award) which declared that Hui, UDP and 5 Star Foods were obliged to pay certain sums under the share sale agreement subject to some (but not all) of the defences. The first partial award was expressed in the following terms:
1. Declare that subject to paragraph 2 –
(a)the Initial Deferred Consideration of $1,000,000, became due and payable by the first respondent (the Buyer) and the second respondent (the Guarantor) to the claimant (the Seller) under the SSA on 31 July 2014;
(b)the Final Deferred Consideration of $1,000,000, became due and payable by the first respondent and the second respondent to the claimant under the SSA on 2 February 2015;
(c)the Earn Out Cap of $7 million became due and payable by the first respondent and the second respondent to the claimant as an instalment of the Purchase Price under the SSA on 10 November 2014
with the question of interest in each case reserved for later determination;
2. Declare that –
(a)the first respondent and the second respondent (the Guarantor) are each entitled to set off in reduction of each of the amounts referred to in paragraph 1 such amount if any as may be found due by the claimant to the first respondent for the Working Capital Adjustment Amount under clause 12.4 of the SSA or for damages for the Warranty Claims under clause 16;
(b)the question whether by reason of the matters referred to in paragraphs 84-86 of the second respondent’s further amended statement of defence and counterclaim –
(i) the Seller is in breach of the SSA;
(ii) the SSA is discharged as against the second respondent;
(iii)the Seller is precluded in equity from enforcing the guarantee provided for in clause 29 of the SSA as against the second respondent; and
(iv)the guarantee the subject of clause 29 in the SSA is discharged as against the second respondent
is reserved to a further hearing, whether the final hearing or otherwise;
(c)the question of the first and third respondents’ entitlement to set off against the amounts referred to in paragraph 1 the loss and damage alleged in paragraph 77S of the first and third respondents’ amended statement of defence dated 1 July 2015 is reserved to a further hearing, whether the final hearing or otherwise;
3.Declare that, subject to paragraph 4, under the terms of the SSA, the Refund Amounts set out below became due and payable by the first respondent, the second respondent and the third respondent to the claimant:
(a) income tax refund received in July 2014
due on 7 August 2014 $1,387,110
(b) income tax refund received in August 2014
due on 7 September 2014 $1,496,115
(c) GST refund received in April 2014
due on 7 May 2014 $780,622
TOTAL $3,663,847
with the question of interest in each case reserved for later determination;
4. Declare that–
(a)the first respondent is entitled to set off in reduction of the Refund Amounts referred to in paragraph 3 such amount if any as may be found due by the claimant to the first respondent for the Working Capital Adjustment Amount under clause 12.4 of the SSA;
(b)neither the first respondent nor the third respondent is entitled to set off in reduction of the Refund Amounts referred to in paragraph 3 such amount if any as may be found due by the claimant to the first respondent for damages for the Warranty Claims under clause 16;
(c)the second respondent is not entitled under the SSA or in equity or otherwise to set off against such of the Refund Amounts, if any, as may hereafter be found due by the second respondent to the claimant such amount if any as may be found due by the claimant to the Buyer for the Working Capital Adjustment Amount under clause 12.4 of the SSA or for damages for the Warranty Claims under clause 16;
(d)the question referred to above in paragraph 2(b) in relation to the second respondent is reserved to a further hearing, whether the final hearing or otherwise;
(e)the question of the first and third respondents’ entitlement to set off against the Refund Amounts the loss and damage alleged in paragraph 77S of the first respondent’s amended statement of defence dated 1 July 2015 is reserved to a further hearing, whether the final hearing or otherwise.
5.The claim that the Refund Amounts were or are held for the claimant is dismissed.
6.The costs of and incidental to the Preliminary Hearing including the second respondent’s application for a partial award are reserved for future determination.
On 15 September 2016 the arbitrator made a further partial award (the second partial award) dismissing Hui’s application that he withdraw.
(g) Federal Court proceedings
Relevantly to the proceedings before me, on 7 October 2016, Hui filed an originating application (VID 1192 of 2016) seeking to set aside parts of both the first partial award and the second partial award, and an order for the removal of the arbitrator. On 12 October 2016, UDP and 5 Star Foods filed an originating application (VID 1220 of 2016) seeking similar relief.
On 11 and 12 October 2016, Hui and Esposito indicated by email to the arbitrator that the proceedings in the Federal Court should operate as a stay of the arbitration until the hearing and determination of those proceedings. Contrastingly, by email dated 20 October 2016, UDP and 5 Star Foods made an application to the arbitrator for further programming directions in the arbitration. UDP and 5 Star Foods took the view that the Federal Court proceedings did not operate as a stay of the arbitration. By email dated 24 October 2016, Esposito made an application to the arbitrator to stay the arbitration until the hearing and determination of the Federal Court proceedings. On 27 October 2016, the arbitrator delivered reasons in respect of the stay application. He determined not to formally stay the arbitration until the hearing and determination of the Federal Court proceedings but to defer making directions generally in the arbitration until after directions had been made in the Federal Court proceedings. In the arbitrator’s view, there was no good reason why pending the hearing and determination of the Federal Court proceedings, the parties could not take steps in the arbitration that could reasonably expedite the final hearing, whoever might constitute the arbitral tribunal at that time.
On 2 December 2016, a directions hearing was held in this Court before the docket judge, who set down both proceedings for trial on 23 and 24 March 2017, being dates acceptable to the parties’ convenience.
On 16 February 2017, the arbitrator made directions on the papers for the production of further documents and the filing of lay and expert evidence in the arbitration.
RELEVANT LEGISLATIVE FRAMEWORK AND OTHER INSTRUMENTS
It is appropriate to set out relevant provisions of the Act and the UNCITRAL Model Law. I will also at this point make some general observations concerning art 34 of the UNCITRAL Model Law.
(a) The Act
Section 2D provides:
Objects of this Act
The objects of this Act are:
(a)to facilitate international trade and commerce by encouraging the use of arbitration as a method of resolving disputes; and
(b)to facilitate the use of arbitration agreements made in relation to international trade and commerce; and
(c)to facilitate the recognition and enforcement of arbitral awards made in relation to international trade and commerce; and
(d)to give effect to Australia’s obligations under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted in 1958 by the United Nations Conference on International Commercial Arbitration at its twenty-fourth meeting; and
(e)to give effect to the UNCITRAL Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law on 21 June 1985 and amended by the United Nations Commission on International Trade Law on 7 July 2006; and
(f)to give effect to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States signed by Australia on 24 March 1975.
Further, on this aspect of the matter, I should make some other associated points on theoretical themes:
(a)First, arts 18, 34(2)(a)(ii) and 34(2)(b)(ii) have overlapping themes. A breach of art 18 will usually establish the ground in art 34(2)(a)(ii), although whether a remedy will go may depend upon how egregious the breach is, although in some respects it may not be productive to segment the discussion of the ground from the exercise of the discretion. In other words, the ground itself may require establishing an egregious breach. As I have indicated, on any view there has been an egregious breach.
(b)Second, art 34(2)(b)(ii) may also apply, particularly given that s 19(b) of the Act brings within art 34(2)(b)(ii) a breach of the rules of natural justice. But the public policy ground under art 34(2)(b)(ii) must be construed narrowly, such that any breach of the rules of natural justice must be egregious and fundamentally offend principles of justice and fairness (TCL Air Conditioner at [111]). In other words, the breach must be exceptional. As I say, that is how I would describe the breach in the present case.
(c)Third, TCL Air Conditioner at [113] said that unfairness or practical injustice should be able to be “expressed shortly” and “demonstrated tolerably shortly”. But that observation was juxtaposed against that Court’s next observation dealing with eschewing a “detailed factual analysis of evidence” before the arbitrator. I have not engaged in that latter exercise but have found it necessary to elaborate in some detail on the procedural events that transpired, which is a different aspect.
(d)Fourth, I have also given consideration to art 34(2)(a)(iv) given that art 17, cl 1 of the UNCITRAL Arbitration Rules requires that “each party [be] given a reasonable opportunity”. But this adds nothing further to the operation of art 18 (as modified by s 18C of the Act) and art 34(2)(a)(ii) of the UNCITRAL Model Law.
(e)Fifth, at one point reference was made to art 34(2)(a)(iii) but I have put this to one side. The expression “beyond the scope of the submission to arbitration” is a broader concept than the narrower issue that I am dealing with concerning the scope of the preliminary hearing.
Esposito says that the context of this case demonstrates that a reasonable opportunity was afforded to all of the applicants as respondents to the arbitration. I disagree for the reasons that I have indicated earlier.
First, it says that everyone knew “a” if not “the” issue for determination at the preliminary hearing was whether the mere pleading of a set off would prevent the arbitrator making a partial award. That is true so far as it goes, but misses the real point.
Second, it says that to meet the case for such an award, not only were the arbitration respondents given a further opportunity to file defences demonstrating why such an award should not be made but they were also directed to file the evidence they relied upon to support such a contention. But again that misses the point that there were determinations made by the arbitrator on 25 September 2015 in relation to which the applicants had not been given a reasonable opportunity to present their case.
Third, it is said that it was only after all of these opportunities were afforded the arbitral respondents that the partial award was made, almost a year after the arbitrator published his reasons following the preliminary hearing. True, but there had been prejudgment and a denial of a reasonable opportunity well before then.
Esposito seems to contend that a reasonable opportunity was given because of circumstances that occurred after the publication of the first set of reasons on 25 September 2015 in which certain deficiencies concerning Hui’s position were somehow cured by the 15 April 2016 reasons. One could be forgiven for considering this to be counterintuitive. But let me put this to one side for the moment. As Hui’s counsel has correctly pointed out, the matter of the guarantee’s enforceability was only one of Hui’s defences. The others were defences of set off. Hui has suffered real unfairness by reason of the arbitrator’s determination (in [4] of the partial award) against the availability of the set off defences. He has not had a fair opportunity to present his case on those issues before they were decided. The unfairness and injustice to Hui has not been “cured” by the arbitrator’s acceptance that he erred in relation to the guarantee issue. As counsel pointed out, if Hui does not succeed with his allegations in relation to the discharge and unenforceability of the guarantee, he will be liable for the Refund Amounts without any reduction by way of set off, and without having been heard thereon. Relatedly, the decision that the other arbitration respondents were not entitled to a set off in relation to the Refund Amounts has deprived Hui of an opportunity to also argue that his liability under the guarantee was accordingly reduced. And whatever be the position concerning Hui, none of this addresses the inherent unfairness to UDP and 5 Star Foods in what has occurred.
As I say, I reject Esposito’s contention that there is no real unfairness because the arbitration respondents were given a reasonable opportunity to correct the arbitrator’s prejudgment after the publication of reasons in September 2015 in which that prejudgment was made. The contention presupposes that prejudgment has already occurred. But if that is so, it is difficult to see how any so-called opportunity to correct could cure the difficulty. Further, by the time of the first partial award, there was no real or live The Kostas Melas issue even if there had been one at the time of the preliminary hearing. The amended defence and underlying PPB Advisory report were received by the arbitrator well before the partial award. Yet the partial award proceeds to implement the 25 September 2015 reasons by reference to the amended defence. The partial award is a pre-judgment, not a The Kostas Melas type exercise of discretion to defer. Further and generally, the issues the arbitrator ultimately decided on the face of the first partial award included issues first raised after the preliminary hearing via the amended defence and counterclaim on which no party had been heard. By making the first partial award, the arbitrator carried the prejudgment made in his 25 September 2015 reasons into effect.
Fourth, it is said that somehow Hui deliberately chose not to make submissions on the set offs at the preliminary hearing even though he was given the opportunity to do so at the preliminary hearing. That proposition is not seriously maintainable given the chronology of events that I have outlined.
Fifth, the fact that the arbitrator said on 19 March 2015 that it was a “live” question as to whether a partial award would be made was in the context where set off defences had not then been filed and it was agreed that the preliminary hearing would not concern set off defences. Moreover, it was not even clear on 19 March 2015 that there would be set off defences.
Sixth, Esposito raised before the arbitrator and indeed before me various allegations of impropriety and delay on the part of UDP and 5 Star Foods in relation to the filing of their arbitration pleadings. Counsel for Esposito risked putting his case too highly. But in any event none of this takes Esposito far. Esposito seems to contend that the arbitration respondents could have pleaded the set off defences much earlier. But in my view, that point goes nowhere even if it is assumed to be correct. The fact is that the arbitrator decided that the preliminary hearing would not deal with any set off defences. That position was adopted with the acquiescence if not encouragement of Esposito.
In my view, in the events that I have outlined, the grounds in arts 34(2)(a)(ii) and (iv) and 34(2)(b)(ii) have been made out in relation to the art 18 breach.
(f) Prejudgment – arts 12 and 34(2)(b)(ii)
Article 12 of the UNICTRAL Model Law confirms the established principle of arbitrator impartiality. The justifiable doubts standard is modified by s 18A(2) of the Act which imports the “real danger of bias” test. A real possibility of prejudgment can establish the real danger test. That test applies to both arts 12 and 34(2)(b)(ii). I repeat the observations I made in Sino Dragon at [191], [197] and [198] which were as follows:
First, I accept that the “bias rule” is an aspect of procedural fairness and it therefore falls within article 34(2)(b)(ii) as part of the public policy of the forum. That requirement for the purposes of the arbitration was prescribed by article 12(2) and requires justifiable doubts as to the impartiality or independence of an arbitrator. That in turn brings within it the “real danger” test (see s 18A of the Act). I reject the notion that “public policy” in article 34(2)(b)(ii) only brings within it the lower Ebner test. Such a result would be anomalous. The concept of “public policy” must, in the context of an international commercial arbitration, be informed by other provisions of the UNCITRAL Model Law and the Act. I also accept for present purposes, that article 34(2)(a)(iv) can be invoked as cl 39.2 of the Contract of Sale incorporates relevant provisions of the UNCITRAL Arbitration Rules dealing with the appointment and impartiality of arbitrators. But when one works this through, one is back to the “real danger” test.
[…]
Fourth and generally, in determining the content of “justifiable doubts” as to the “impartiality” or “independence” of an arbitrator under article 12(2) the test under the Act is not the same as the test at common law. The different test for arbitration is expressly provided for in s 18A of the Act. The explanatory memorandum to the Bill introducing that provision at [85] to [92] referred to the test stated in R v Gough [1993] AC 646 at 670. The R v Gough test incorporates notions of “real danger of bias” from the perspective of the Court as opposed to merely that of a reasonable lay person. I proceed on the basis that s 18A also incorporates the different perspective as well.
Fifth, even if one adopted the common law test propounded by Sino Dragon, no fair-minded lay observer would perceive any possibility of bias. The relevant test is whether a fair-minded lay observer might reasonably apprehend that the arbitrator might not bring an impartial mind to the relevant adjudication and determination (Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 at [6] to [8] per Gleeson CJ, McHugh, Gummow and Hayne JJ). And the question is “one of possibility (real and not remote), not probability”. But the present case goes nowhere near satisfying even that test. Indeed, even if that test were to be applied, Sino Dragon has an even weaker case than the stronger but unsuccessful challenge to the arbitrator in Gascor v Ellicott [1997] 1 VR 332.
I should note at this point that there has been some debate as to whether the perspective stated by Lord Goff of Chieveley in R v Gough [1993] AC 646 at 670, which in one sense did not endorse the Australian “reasonable bystander test”, has been implicitly enacted by s 18A. In Sino Dragon, I was prepared to accept that it had been. But after reflecting on the submissions of Mr Graeme Uren QC for Hui, the better view is that the correct perspective even for the English “real danger” test is that of the “reasonable bystander” or “reasonable man” where actual bias is not alleged. I am fortified in this conclusion by two points. First, s 18A is silent on perspective. Second, in English cases post R v Gough the perspective seems to have shifted from that stated by Lord Goff. But in any event this difference in perspective may not make much practical difference given the way Lord Goff expressed the matter at 670.
Lovell Partnerships (Northern) Ltd v AW Construction plc (1996) 81 BLR 83 illustrates the connection between a breach of the no hearing rule and the basis on which an arbitrator breaching that rule ought be removed for prejudgment. In my view, Mance J (as he then was) stated the correct test and made other observations which have some analogy to the present case. He said at 99 to 100:
The legal test is whether a reasonable person would no longer have confidence in the present arbitrator’s ability to come to a fair and balanced conclusion on the issues if remitted. The arbitrator has, in the instant case, drawn conclusions from and about documentation and reached decisions on a number of factual issues which would, in my judgment, make it invidious and embarrassing for him to be required to try to free himself of all previous ideas and to redetermine the same issues on fuller evidence.
As Miss Turner acknowledged, the present arbitrator is evidently conscientious and would, no doubt, apply every conscious effort to complete redetermination. But that exercise would, itself, in the circumstances, create its own undesirable tensions and pressures. Some costs will be wasted, although the respective statements of case will probably be capable of reuse.
Another observation of Mance J is also relevant in the present context (at 98):
The arbitrator went wrong at the time of, and immediately prior to, the issue of his interim award in three connected respects which constitute significant misconduct in proceedings:
(1)The first is that he failed to ensure that the nature and terms of the preliminary issues were crystallised and communicated to the parties. Had he ensured this, the parties would have been aware of them and had the opportunity to address them and their resolution specifically before the arbitrator actually determined them. Instead, after an exchange of correspondence in which he, Lovells and AWC all raised differing possibilities, he simply announced his decision to determine unspecified issues, the nature and scope of which only emerged in his interim award determining them.
(2)The second respect which arose from the first is that the arbitrator purported to determine by his interim award a number of issues which no one had previously suggested as fit for determination by interim award. This applies in particular to the issues raised by the counterclaim.
A slightly different point applies to the issues which had only been raised in or at the same time as AWC’s reply, since Lovells had not addressed them in any statement of case and they were, for that reason, in my judgment, inappropriate for determination by interim award.
(3)His decision to proceed to determine these issues was reached and implemented in the face of Lovells’ clear insistence at all material times upon the need for further evidence to be adduced (and also probably discovery) before any preliminary issues were determined. The proper resolution of at least a number of the issues did require the parties to be given an opportunity to adduce such further evidence in one form or another. This was particularly true of issues 8, 9 and 11 and of all five issues raised by the counterclaim. In the absence of such an opportunity, and in the face of Lovells’ request for appropriate directions, such issues could not be fairly resolved.
Removal followed because of the prejudgment and embarrassment that resulted. Modern Engineering (Bristol) Ltd v C Miskin & Son Ltd [1981] 1 Lloyd’s Rep 135 is authority for this approach. Lord Denning MR said at 138:
The Judge put this test to himself in his judgment: Are the circumstances such as to demonstrate that the arbitrator is not a fit and proper person to continue to conduct the arbitration proceedings? I do not think that was the right test. I would ask whether his conduct was such as to destroy the confidence of the parties, or either of them, in his ability to come to a fair and just conclusion.
The question is whether the way he conducted himself in the case was such that the parties can no longer have confidence in him. It seems to me that if this arbitrator is allowed to continue with this arbitration one at least of the parties will have no confidence in him. He will feel that the issue has been pre-judged against him. It is most undesirable that either party should go away from a Judge or an arbitrator saying, “I have not had a fair hearing”.
I know the inconveniences to which the removal of the arbitrator may give rise – the delay, the extra expense, and the like. But it seems to me that it is far more important that this Court should see that arbitrations are properly conducted so that the arbitrator can have the confidence of those who appear before him. Arbitration is now one of the most important spheres of activity in the system of administering justice in this land. The Courts, I feel, must show an example and see that arbitrations are properly conducted so as to earn and deserve the confidence of those who appear before them. I am afraid that the conduct of this arbitrator was such as to lose that confidence – at least of one of the parties.
The test as expounded was whether a reasonable person would no longer have confidence in the arbitrator’s ability to come to a fair and balanced conclusion on the issues if remitted.
Now Esposito says that there is no real danger of bias based on the arbitrator having prejudged various questions, given what it says to be the following matters:
(a)First, it is said that the arbitration respondents have made no allegation that the arbitrator is actually biased. I am not sure where this goes as the point does not address an appearance of a lack of impartiality or the “real danger” test.
(b)Second, it is said that the arbitration respondents have made no allegation that the arbitrator will not come to a fair and balanced conclusion on the issues if it is remitted to him. In any event, it is said that the arbitrator has positively established, by the terms of his 15 April 2016 reasons, that he is willing to change his mind, and is not wedded to decisions he has taken. But the first part of this submission is not accurate. And as to the second part of this submission, some aspects of the arbitrator’s 15 April 2016 reasons raise legitimate concerns relating to the arbitrator’s objectivity.
(c)Third, it is said that the determination in issue was not based on findings of credit in respect of contested issues of fact. That is true so far as it goes, but this point is not a complete answer. In my view, significant disquiet has arisen where the predetermination concerned many legal questions including questions of contractual construction. Moreover, that disquiet has not been diminished by some aspects of the 15 April 2016 reasons which manifest an ex post facto rationalisation. The question is one of degree, but in my view the “real danger” test is well satisfied in the present case. Esposito appears to suggest that the present situation is little different to an appellate court remitting questions to a trial judge found to be in error. But that is not an appropriate analogue where parties have not been heard by the primary decision maker before his determination. Confidence in the impartiality of the former may be lacking in the latter.
(d)Fourth, it is said that simply deciding issues in the context of whether a set off is available, as it is said the arbitrator did regarding the set off issues, is no bar to then inconsistently determining them as counterclaims (The Kostas Melas). But in the present case, in my view the arbitrator went further in his declarations than deciding whether or not they were reasonably arguable. And to decide that they were not available set offs was to deny a defence.
(e)Fifth, it is said that even where the procedure has significantly miscarried, in the context of a commercial arbitration, remitter is likely to be the appropriate course. That proposition is unacceptably broad.
In my view, the arbitrator has conducted himself in such a manner that the applicants can no longer have confidence in him. I say this for reasons which include the following:
(a)The arbitrator stepped well outside the bounds of the preliminary hearing.
(b)The arbitrator decided various substantive questions in a final manner without giving some of the parties an opportunity to be heard.
(c)It was not wholly satisfactory for the arbitrator to try and repair the substantial problem after his reasons of 25 September 2015. He had by then decided key questions that he ought not to have decided.
(d)Further, his second set of reasons published on 15 April 2016 was a retrospective analysis and in some respects a questionable recounting of what had previously occurred. So, for example, in his 15 April 2016 reasons he said at [90] and [138] the following:
[90] There was no direction or determination that the arbitral tribunal would adjudicate the specified claims on the basis that any defence that was pleaded was not to be taken into account. To the contrary, any such defence or the availability of it needed to be taken into account in deciding whether there would be a partial award for a specified amount or amounts. If one outcome open was the making such a partial award, the other was the converse that, if the claims were not made out on the evidence, the arbitral tribunal could dismiss them. There was no agreement by the parties as to the directions made for the Preliminary Hearing.
[138] The discussion at the directions hearing on 19 March 2015 and the subsequent statement of defence filed by the first and third respondents dated 10 April 2015 suggested that those respondents defended the claims made by the claimant by alleging a set-off of claims for the Working Capital Adjustment amount and for damages for breach of warranties. These were raised by way of defence but were discrete in the sense that they could have been but were not framed as independent claims by the first respondent. The second respondent also raised those set-offs by way of defence although he could not have raised those set-offs as independent claims by him. The tribunal in its reasons took the approach of treating the set-offs as valid on their face but enquiring whether as a matter of law or equity they could be raised by way of a defence of set-off to the various claims made. That approach was signalled to the claimant and the second respondent during the Preliminary Hearing. As discussed below, it was an approach identified by Robert Goff J in The Kostas Melas as open to the tribunal.
(e)I do not consider his statements to accurately portray what occurred. He went beyond The Kostas Melas. Moreover, in my view it was no part of the preliminary hearing to determine in relation to any set off “whether as a matter of law or equity they could be raised by way of a defence of set-off to the various claims made” (see at [138]). Moreover, the idea of these matters being “signalled” is hardly an accurate picture in terms of demonstrating that the preliminary hearing embraced them.
(g) Consequences and form of relief
Article 34(4) of the UNICTRAL Model Law allows the Court to set aside or remit. But an arbitral tribunal should not be left to correct itself where inappropriate. As Akenhead J said in Secretary of State for the Home Department v Raytheon Systems Ltd [2015] EWHC 311 (TCC); [2015] 1 CLC 466 at [9] (after referring to Lovell Partnerships):
…where the court forms the view, following a finding of serious irregularity under section 68(2), that a reasonable person would no longer have confidence in the arbitrators’ ability to come to a fair and balanced conclusion on the issues if remitted, that view may well underpin a conclusion that it would be inappropriate to remit.
Akenhead J also observed at [20]:
A major criterion in the consideration of what it is appropriate to do must be whether justice can not only be done but can be seen to be done.
And further at [23(b)]:
Like Mance J on the Lovell case I can see that it would be “invidious and embarrassing [for the tribunal] to be required to try to free [itself] of all previous ideas and to re-determine the same issues” and that even for a conscientious tribunal seeking to re-determine such issues the exercise could well “create its own undesirable tensions and pressures”. Of course, it is not possible to predict what this tribunal would do if matters were remitted to them. If, however, albeit conscientiously and competently, the tribunal in effect reached exactly the same conclusions as before, that might well lead to a strong belief objectively that justice had not been or been not seen to have been done.
One aspect that was weighed up in Raytheon Systems was the costs of remission compared with the costs of a new tribunal (see at [11]). But in the present context, there is little wasted effort or cost. A new arbitrator will have to do no more than the present arbitrator should have done but has not, namely, receive evidence, hear argument and decide. Moreover, UDP, 5 Star Foods and Hui accept the arbitrator’s determination in relation to Esposito’s claims, which were properly the subject of the preliminary hearing. There is no wasted effort in that respect if there is no remittal. Moreover, any discovery given will be available in any further arbitration before a different arbitrator. But if there is wastage (and also taking into account the matters referred to at [47] of Esposito’s submissions), I do not consider that the balance weighs in favour of remittal to the present arbitrator.
Esposito has said that no prejudice can be suffered until it seeks to enforce the partial award. It is said that not only has that not happened but questions of whether any award made by the tribunal ought to be stayed had been repeatedly raised in the course of the arbitration. It is said that no such application has been made by Hui, UDP or 5 Star Foods in the arbitration. I do not consider that this assertion is any answer to the art 18 point or that it somehow ameliorates the art 34 grounds. The fact is that Esposito is not entitled to the present form of the first partial award. The fact that it has not yet sought to enforce it is not to the point.
Generally, Esposito contends that even if the Court found a relevant breach of the UNICTRAL Model Law, the appropriate course, particularly in the context of this arbitration, would be remitter rather than removing the arbitrator. Esposito cited Dalcon Constructions Pty Ltd v Chu [2002] WASCA 290 per Steytler J. But in Dalcon, an application was made under s 38 of the Commercial Arbitration Act 1984 (WA) (as it then was) to set aside an arbitral award, but there was no application made under s 44 to remove the arbitrator. Reference was also made to the observations of Stephen J in Tuta Products Pty Ltd v Hutcherson Bros Pty Ltd (1972) 127 CLR 253 at 290 but they should not be taken out of context. If there has already been prejudgment arising from not hearing one of the parties, remittal is inappropriate.
Finally, it is necessary to say something on characterisation.
Clearly, the two partial awards are final in one sense, but not in another. They have finally disposed of part of the parties’ claims and accordingly, particularly in relation to the first partial award, may be said to have preclusive effect. Indeed, the language of the first partial award is expressed in terms of “Declare that…” and resonates with the language of binding declarations. The fact that the declarations are in some respects conditional does not deny the force of their substantive effect and as binding on the parties. They are clearly not “interim measures”. Moreover, to describe them as “interlocutory declarations” is in one sense conceptually incoherent. Perhaps these partial awards may in a loose sense be described as “interim awards”, but I would prefer not to use the latter label. The adjective of “interim” suggests a temporal limitation. But the first partial award, in one sense, is final (albeit in some respects conditional). Why does any of this matter? Although these partial awards are final in one sense, they are not final in another. They are not final for the purposes of art 32 of the UNCITRAL Model Law because there are other claims that have not been adjudicated upon.
Article 34(4) of the UNCITRAL Model Law provides as follows:
The court, when asked to set aside an award, may, where appropriate and so requested by a party, suspend the setting aside proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the arbitral tribunal's opinion will eliminate the grounds for setting aside.
Article 34(4) applies to the awards even though they are partial (cf also art 34(2)(a)(iii)). But how does it operate in that context, ie where one only has a partial award rather than a “final award” of the type contemplated in art 32? It is apparent that the art 34(4) alternatives are disjunctive. I can either set aside an award or remit. But it would appear that I cannot do both (see AKN v ALC [2015] SGCA 63 at [34] and [39]). And if I do not remit, then a new arbitral tribunal will need to be constituted. But how does this operate if there has been no termination under art 32? In other words, how does art 34(4) operate where I have only a partial award?
If I had decided to remit, then there is no difficulty. But as I have decided to set aside part of a partial award, what then happens? One is left with the surviving part of a partial award. But how is the balance of the claims to be dealt with and by whom? Moreover, in context, art 32 has not been triggered as there is no “final award” within art 32(1).
I propose to set aside relevant aspects of the first partial award to accord with these reasons. I also propose to set aside part of the second partial award. I will hear further from the parties as to:
(a)the precise form of orders to give effect to these reasons;
(b)the precise form of order so that the balance of the claims subject to arbitration can be dealt with by a new arbitral tribunal; and
(c)associated with (b), the precise form of order to either terminate the present arbitration before the present arbitrator or to leave such arbitration on foot but to appoint a replacement arbitrator.
I certify that the preceding two hundred and fifty-nine (259) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beach. Associate:
Dated: 9 June 2017
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