Hui v Esposito Holdings Pty Ltd

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FEDERAL COURT OF AUSTRALIA

Hui v Esposito Holdings Pty Ltd [2017] FCA 648

File numbers: VID 1192 of 2016
VID 1220 of 2016
Judge: 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…
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Details
Case
[2017] FCA 648
Decision Date

CaseChat Overview and Summary

In the case of Hui v Esposito Holdings Pty Ltd, the applicants, Hui, UDP, and 5 Star Foods, sought to set aside parts of the arbitral awards and to remove the arbitrator due to concerns about the arbitrator's conduct and decisions. The Federal Court of Australia was called upon to decide on these applications, which were grounded in the UNCITRAL Model Law on International Commercial Arbitration. The court had to determine whether the arbitrator exceeded his jurisdiction, denied the parties a reasonable opportunity to present their cases, caused real unfairness and practical injustice, or displayed prejudgment.

The court found that the grounds for setting aside the arbitral awards were established under arts 34(2)(a)(ii) and (iv) and 34(2)(b)(ii) of the UNCITRAL Model Law. The court considered the arbitrator's decision to bifurcate the proceedings and address incomplete issues, which led to the creation of article 34 grounds. The court held that the arbitrator's actions were not in line with the principles of procedural fairness and impartiality as required by articles 12 and 34(2)(b)(ii). The court also noted the risk of prejudgment under article 12 and the modified test for bias under section 18A of the Arbitration Act 1996 (Cth). The court concluded that the arbitrator's conduct did not meet the threshold for justifiable doubts regarding impartiality and independence.

The court granted the applications to set aside parts of the arbitral awards and to remove the arbitrator. The court ordered the parties to file proposed minutes of orders and limited their written submissions to three pages each. The precise form of orders was to be decided on the papers, and costs were reserved.

This decision highlights the importance of procedural fairness and impartiality in international commercial arbitration, and the need for arbitrators to adhere to the principles set out in the UNCITRAL Model Law and the Arbitration Act 1996 (Cth).

Orders

Orders of the court

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.

Background

Background to the litigation

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.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

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.

Ratio Decidendi

Legal Principle Established

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.