ICT Pty Ltd v Sea Containers Ltd

[2002] NSWSC 77

CITATION:	ICT Pty Ltd v Sea Containers Ltd [2002] NSWSC 77
FILE NUMBER(S):	SC 55007/02
HEARING DATE(S):	13 February 2002
JUDGMENT DATE:	22 February 2002
PARTIES :	ICT Pty Ltd Sea Containers Ltd
JUDGMENT OF:	Gzell J at 1

COUNSEL :	Mr P L G Brereton SC & Mr D R Stack for the Plaintiff Mr A Street SC, Mr G Nell & Mr E Cox for the Defendant
SOLICITORS:
CATCHWORDS:	removal of arbitrators - pressure to agree to cancellation fees - whether arbitrators should be represented - court power over costs of abortive arbitration - power to appoint new arbitrators
LEGISLATION CITED:	Commercial Arbitration Act 1984 Arbitration Act 1989 Arbitration Act 1950 Arbitration Act 1996
CASES CITED:	K/S Norjarl A/S v Hyundai Heavy Industries Co Ltd [1992] 1 QB 863 Amec Constructions Pty Ltd v Coal & Allied Operations Pty Ltd (Cole J, 27 April 1993, unreported) Turner v Stevenage Borough Council [1998] Ch 28 Gas & Fuel Corporation of Victoria v Wood Hall Ltd & Leonard Pipeline Contractors Ltd [1978] VR 385 Williams v Wallis and Cox [1914] 2 KB 478 Melbourne Harbour Trust Commissioners v Hancock (1927) 39 CLR 570 Doran Constructions Pty Ltd v Health Administration Corporation of NSW (1994) 12 BCL 59 Johnson v Johnson (2000) 201 CLR 488 Gascor v Elliot [1997] VR 332 Emanuele v Australia Securities Commission (1996-1997) 188 CLR 114 Oshlack v Richmond Rover Council (1988) 193 CLR 72 In Re Preeble and Robinson [1892] 2 QB 600 Stannard v Spurway Constructions Pty Ltd [1990] VR 673
DECISION:	See para 50 and 51

- 1 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

55007/02

GZELL J

22 February 2002

ICT Pty Ltd v Sea Containers Ltd

Judgment

1 His Honour: In 1988 and 1989 the plaintiff as ship builder and the defendant as owner entered into contracts for the construction of four wave piercing catarmarans. The vessels were delivered, disputes arose and, in accordance with the contracts, those disputes were referred to arbitration by the defendant as claimant. The arbitrators have entered upon the references. The plaintiff seeks an order that they be removed.

2 Each of the contracts provides that the arbitration is to be in accordance with the ‘NSW Arbitration Act’ which, pursuant to s3(2) of the Commercial Arbitration Act 1984 (‘Act’) is to be construed as a reference to that Act. The plaintiff seeks relief under s44 of the Act which is in the following terms:

‘Where the Court is satisfied that -
(a) there has been misconduct on the part of an arbitrator or umpire or an arbitrator or umpire has misconducted the proceedings;
(b) undue influence has been exercised in relation to an arbitrator or umpire; or
(c) an arbitrator or umpire is incompetent or unsuitable to deal with the particular dispute,
the Court may, on the application of a party to the arbitration agreement, remove the arbitrator or umpire.’

3 The plaintiff alleges that the arbitrators’ demands that the parties agree to pay them a cancellation or commitment fee in the event that the arbitration did not proceed to which the defendant assented in the face of the plaintiff’s opposition, constituted misconduct in terms of s44(a) of the Act and unsuitability on the basis of the appearance of bias in terms of s44(c).

4 The facts are not in issue: it is their characterisation which is. In August 1998 the plaintiff appointed Michael Thompson, a barrister of Melbourne, as arbitrator and the defendant appointed Mr Anthony de Fina in place of an earlier nominee who had resigned. In September 1998 Messers Thompson and de Fina appointed the Honourable Kenneth Carruthers QC, a retired New South Wales judge, as third arbitrator and chairman pursuant to the arbitration clauses in each contract. About the time of their respective appointments the arbitrators stated that their daily fees would be $3,000.00 for Mr Carruthers QC, $1,900.00 for Mr Thompson and $3,200.00 for Mr de Fina. The Arbitrators entered upon the references soon after the appointment of Mr Carruthers QC. On 21 December 1999 Mr Thompson stated that his fees had increased to a daily rate of $3000.00. At a preliminary conference on 21 February 2000 the arbitrators informed the parties that each would charge $3000 per day. The parties agreed to this. The matters were listed for hearing for 4 weeks commencing on 9 October 2000.

5 On 17 April 2000 the solicitors for the defendant wrote to Mr Carruthers QC proposing arrangements for payment of the arbitrators’ fees including a non-refundable booking fee of $750.00 per day for the period for which the arbitrations were set down with an instalment regime for its payment prior to the hearings, the balance of $2,250.00 per day being payable at the conclusion of the arbitrations. The plaintiff had not agreed to this proposal. The response of Mr Carruthers QC of 9 May 2000 included the following:

‘5. The members of the Tribunal will require payment of the agreed per diem rates for all hearing time set aside and being from and including Monday 9 October through Friday 3 November 2000.
6. The Tribunal requires the lodgement by the parties of the total sum of $250,000.00 in an escrow account (preferably the Institute of Arbitrators & Mediators Security Trust Fund) as security for fees, costs and expenses as might be incurred by the Tribunal in this arbitration and reserves the right to order further security should circumstances at the prevailing time justify such order.’

6 At the directions hearing on 21 February 2000 the matters had been adjourned for further directions by telephone link-up at 4.30 pm on 29 May 2000. On that day the defendant’s solicitors informed the plaintiff’s solicitors that Mr Carruthers QC had adjourned the hearing to 4:30 pm on the following Tuesday because the arbitrators’ fee arrangement had not been accepted, one member of the tribunal was not prepared to proceed without agreement and their proposal was put on a ‘take it or leave it basis.’ On 5 June 2000 the defendant agreed to the terms proposed by the arbitrators subject to an amendment requiring each party to pay half of the deposit amount of $250,000.00. On 6 June 2000 the solicitors for the plaintiff sought an adjournment of the directions hearing due to take place that day. Mr Carruthers QC rejected that application. On 7 June 2000 the plaintiff was directed to respond to the arbitrators’ fee proposal of 9 May 2000 by 2.00 pm on 9 June 2000.

7 On 9 June 2000 the plaintiff’s solicitors objected to the above quoted paragraphs 5 and 6 on the basis that it would be unjust and unreasonable to require the plaintiff to make any contribution towards a commitment or cancellation fee. The solicitors submitted that payment and security had not previously been required by the arbitrators, the arbitrators had no power under the Act or otherwise to direct the parties to make such payment or security and even if the arbitrators had such power it would be unjust and unreasonable to require the payment and no grounds existed for the payment of the security.

8 On 29 June 2000 the arbitrators assented to an application by the plaintiff to vacate the hearing dates upon the ground of the defendant’s delay. In the course of the directions hearing Mr de Fina said:

‘This arbitration, as all arbitrations, is before a Tribunal chosen by the parties and a Tribunal that sets aside time to deal with the matter based upon the submissions made to it by the parties or the agreement with the parties and once having set aside time it’s not generally open to the Tribunal, either as a whole or individually, to walk away from it and come back at some later intermediate time running arbitral proceedings as curial proceedings is not the way it should be.’

Later in the proceedings he said

‘Mr Chairman, it’s my application that the claimant be ordered to pay the costs thrown away upon the basis that the costs are occasioned by the vacation of the hearing date upon the basis that this has arisen solely by reason of the claimant’s failure to comply with the earlier orders.’

After argument Mr de Fina continued, addressing counsel for the defendant:

‘The position that the arbitral Tribunal is adopting is based upon the directions order made in February which set down the date. Now at that time there was a lot of discussion and accommodation of times, notwithstanding the objections raised by the respondent as to inadequate response time in setting down that date and it was made quite clear that in allocating that time the arbitrators were doing so on the basis of a firm commitment made at that time. There is precedent in the United Kingdom which you will find, might care to look at, in respect of cancellation fees, the circumstances in this matter from the arbitral Tribuna’ls point of view are different in that a hearing time had been established and agreed and in so accepting that agreement the arbitral Tribunal locked that time out. So that I have no difficulty, and it’s a matter for the Chairman, but I have no difficulty with you seeking instructions. It’s appropriate you should do, but it should be made quite clear to your client that this agreement was made in February and it formed part of directions order which was not subsequently challenged’.

It is clear that Mr de Fina is referring to hearing dates appointed at the preliminary conference of 21 February 2000. There had not been any agreement with respect to cancellation or commitment fees or security for their payment. At the conclusion of the directions hearing on 29 June 2000 Mr Carruthers QC said:

‘The Tribunal is also of the view that the appropriate order in relation to the arbitrators’ fees is that the claimant pay by the 1st of December 2000, which would be the termination date of the four weeks set aside, the sum of $60,000.00 to each of the arbitrators. However, the arbitrators are prepared to allow the claimant to serve written submissions on any question of law insofar as any asserted legal impediment to such order being made …….’

9 The defendant lodged written submissions with the arbitrators on 17 July 2000 submitting that there was no agreement for the payment of any sum in the nature of a cancellation or commitment fee and in the absence of such agreement the tribunal had no power to order that such a payment be made and that, even if the tribunal had power, its exercise would constitute a miscarriage of any discretion vested in the tribunal sufficient to amount to misconduct. It was also submitted that for the tribunal to make the order in purported exercise of a power to tax and settle its fees, in the absence of any entitlement to the fee in the first place, the order would be beyond power and even if it were not, taxation and settlement of such a fee would be a miscarriage of any discretion, again, sufficient to amount to misconduct. The attention of the arbitrators was drawn to a number of authorities including K/S Norjarl A/S v Hyundai Heavy Industries Co Ltd [1992] 1 QB 863, Amec Construction Pty Ltd v Coal & Allied Operations Pty Ltd (unreported), Cole J, 27 April 1993 and Turner v Stevenage Borough Council [1998] Ch 28 to which I will return. On 9 August 2000 the arbitrators resolved that the determination of the matter should be deferred until resolution of the substantive issues in the arbitrations.

10 On 6 November 2000 the solicitors for the defendant again proposed payment of a non-refundable booking fee of $750.00 per day for the period for which the arbitrations were set down with an instalment regime for payment prior to the hearings, the balance of $2,250.00 per day being payable only for such days as the arbitrators might actually sit to hear and determine the disputes under reference. Again, the plaintiff had not agreed to this proposal. On 15 November 2000 at a directions hearing the arbitrators fixed the hearing for 4 weeks from 21 May 2001 to 16 June 2001 and directed each of the parties to pay $125,000.00 to secure payment of the arbitrators’ fees to an escrow account. Mr Carruthers QC further directed:

‘….. on this question of cancellation fee, the order will be that the parties forthwith confer in the attempt that they can if possible reach agreement as to a joint proposal in relation to a cancellation fee should the matter be settled prior to 21 May 2001, such cancellation fees to cover the period 21 May 2001 to 16 June 2001. In the event that complete unanimity is unable to be reached then within 14 days the respective parties make submissions in relation to any aspect of the matter that is not the subject of agreement.’

In the course of the directions hearing Mr de Fina had said;

‘The claimant has put forward a proposal of a booking fee with various payments over time. The Tribunal considers that that is an understandable proposal but it is not in the context reasonable. From the Tribunal’s point of view…..it’s single position is that it should be paid for the time set aside at the agreed rates in the event that the matter does not proceed, but because to impose that unilaterally upon the parties is not an option for this Tribunal. The Tribunal recognises that it should give the legal advisers the facility of speaking to their clients but the Tribunal’s position is that for the time set aside, used or not used, it should be paid.’

11 Craig Clifford, managing director of Incat Tasmania Pty Ltd, the ship building company within the group of which the plaintiff is a member swore an affidavit. He was informed of the events at this directions hearing. He said that the willingness of the defendant to agree to the arbitrators in circumstances where the plaintiff was offering a much less favourable arrangement and even that reluctantly and under pressure caused him to feel increased pressure to put forward a further proposal in order to preserve the plaintiff’s relationship with the arbitrators. In cross-examination, Mr Clifford and Mr Klotz of the plaintiff’s solicitors agreed that barristers seek cancellation fees, although Mr Klotz said that the practice was far less frequent now than it had been in the past. Mr Clifford recognised the fairness of compensation for time set aside. He said, however, that this was not his primary reason for agreeing to make an offer to the arbitrators. He was concerned with bias to the stance taken by the plaintiff and was worried how the plaintiff would be perceived by the arbitrators as a party. In re-examination Mr Clifford said the factors which led him to instruct the solicitors to offer a proposal to the arbitrators were that the matter had been set down for hearing and the cancellation fee had again been raised. He was loathe to take issue for fear of being on the wrong side of the arbitrators. He needed to keep on side and did not want to offend and hence he gave instructions for the proposal to be made.

12 On 13 December 2000 the plaintiff’s solicitors wrote to the arbitrators declining to pay a cancellation fee on the basis stated by Mr de Fina at the directions hearing on 15 November 2000 but offering an alternative arrangement for the payment of the full daily fee in respect of any reserved hearing day for which less than 4 weeks’ notice of the cancellation was given, subject to reduction for any remunerative work an arbitrator might have been able to obtain for any of the cancelled hearing days. On 20 December 2000 the defendant’s solicitors wrote to the arbitrators indicating that the defendant was prepared to accept the proposal put by Mr de Fina, namely, that the arbitrators’ fees for the entire period set aside from 21 May 2001 to 16 June 2001 be paid in the event of cancellation but provided that the plaintiff also agreed to the proposal. The letter also indicated that the alternative proposal put by the plaintiff was acceptable to the defendant. At a directions hearing on 23 January 2001 Mr Carruthers QC indicated that the proposal put by the plaintiff’s solicitors was not satisfactory to the arbitrators. At a directions hearing on 4 March 2001 the arbitrators made an order under s26 of the Act consolidating the four arbitrations. They also requested the plaintiff to make a further proposal with respect to cancellation fees.

13 On 8 March 2001 the plaintiff’s solicitors made a further offer extending the period of notice within which a full cancellation fee would be paid to 5 weeks before the hearing. On 13 March 2001 the plaintiff’s proposal for the arbitrators to give credit for remunerative work was rejected and the following counter-proposal was put to the parties by Mr Carruthers QC:

‘If a member of the Tribunal does derive income over the relevant period, which has the effect of mitigating the liability of the parties with regards to the cancellation fee, then he may, at his discretion, reduce the parties’ liability in respect of the cancellation fee, as he deems appropriate.’

14 Mr Clifford swore that he felt uncertain as to whether any credit would be given under the arbitrators’ counter-proposal because if they really were going to give credit they would simply have accepted the plaintiff’s proposal of 8 March 2001. He said that he was most concerned about instructing the solicitors to reject the arbitrators’ counter-offer because, whilst he believed the counter-offer to be unreasonable, he was concerned that by rejecting it they would see the plaintiff as having taken a stand against their interests and that in the hearing of the matter the plaintiff might suffer in the arbitrators’ assessment of the case. On 16 March 2001 the solicitors for the plaintiff rejected the arbitrators’ counter-offer and repeated the offer in the letter of 8 March 2001. On 9 April 2001 the defendant’s solicitors wrote to Mr Carruthers QC stating that, for the avoidance of any doubt, they confirmed that they did not have instructions from the defendant as to whether or not it agreed with the plaintiff’s proposal of 8 March 2001. The arbitrators were thereby put on notice that the plaintiff’s letter of 8 March 2001 did not constitute an offer by the parties. On 18 April 2001 Mr Carruthers QC wrote:

‘The Arbitral Tribunal has requested me to inform you that the Tribunal accepts the proposal regarding a cancellation fee contained in Deacon’s transmission of 8 March 2001 and repeated on 16 March 2001.’

15 On 19 April 2001 the solicitors for the defendant reiterated that they did not have instructions as to whether or not the defendant agreed with the proposal which, as they understood it, required their client’s agreement. At a directions hearing on 24 April 2001 Mr Carruthers QC said:

‘Now there’s one matter which I must raise as the Chair of the Tribunal and that’s my responsibility to protect so far as I can my co-arbitrators and that is it would be an absolutely intolerable situation, and I don’t make that statement lightly, if this matter were resolved between the parties without there being a prior agreement on the question of cancellation fee. Now a proposal was put by the respondent which the arbitrators have with reluctance for reasons which I won’t go into indicated their agreement to, although there was an earlier agreement by the claimant along the lines of that proposal that I recollect. We’re now in the situation of a claimant that seems to be having difficulty about getting instructions upon a matter which is now really a very significant outstanding question. For myself I find it difficult to see why there should be such delay in getting instructions upon that question. And I must take this up with the respective counsel that it’s a matter that I’m greatly concerned about and I’d like to know what the claimant’s position is at this point.’

When counsel for the defendant indicated that he had no instructions to convey, Mr Carruthers QC continued:

‘Well could you ask Mr James what the position is, I mean I’ve already expressed in the strongest terms my anxiety about this matter and my concern about my responsibility to my co-arbitrators.’

16 On 30 April 2001 the plaintiff’s solicitors withdrew the offer of 8 March 2001 reiterated on 16 March 2001. Mr Carruthers QC responded on the same day:

‘The Tribunal has asked me to inform you that it must not be thought that the Tribunal accepts that the offer referred to in the facsimile message, which has already been accepted, can now be withdrawn.’

17 On 30 April 2001 the solicitors for the defendant informed the arbitrators that the parties had reached an agreement in principle and made a joint application to vacate the hearing dates commencing on 21 May 2001 and to otherwise stay the arbitration proceedings for a period of 60 days. A directions hearing was held by telephone link-up on 1 May 2001 when the joint application was reiterated. Mr Carruthers QC said:

‘Yes. Well the attitude of the Arbitrators is that firstly and I don’t want anyone to accept for one moment that any issue has been pre-judged. That is out of the question. There would never be any ruling by this Tribunal without the parties having the right to be heard but firstly, the Arbitrators take the view that there is a prima facie commitment on the part of both parties to a cancellation fee in respect of the period of 4 weeks as from the 21st May. The arbitrators are not minded to make any orders unless there is an acknowledgment by the parties that their obligation to provide a cancellation fee along the terms of the regime set out in what we all know to be Deacons facsimile……. I don’t propose to say anything more than the fact that the Arbitrators look upon this as an extremely serious matter and by serious, I mean serious. It has to be addressed by the parties and indeed, to say the least and speaking for myself, it surprises me that this application has been made without it being addressed.’

After a submission by counsel, Mr Carruthers QC went on:

‘Well, you understand it but nothing’s been resolved about it. I mean one member of this Tribunal has rejected it, with [inaudible] running into many more weeks than the four weeks covered by this trial and is apart from the legal obligation which we perceive the parties to have, there is a moral obligation here which the parties just seem to be absolutely refusing to acknowledge, and why should this Tribunal I ask, rhetorically make orders to suit the convenience of the parties when there’s a manifest refusal by the parties to accept the responsibility to the Arbitrators which they themselves appointed and in respect of which arbitration the Arbitrators have at all times acted in good faith. I mean why should they make the orders? …….. Without an acknowledgment by the parties that they are indebted, that they are obligated to the Arbitrators in respect of the four weeks set aside as from the 21st May 2001 to pay a cancellation fee in the terms as set out in Deacons regime, which is in a facsimile which was accepted by the Arbitrators. It’s as simple as that. And not only is there an obligation, a legal obligation, but clearly there is a moral obligation to these Arbitrators who are likely and in one case certainly, suffer very serious financial consequences as a result of this. Surely the parties and responsible solicitors are aware of that situation.’

Mr de Fina in the course of the directions hearing alluded to a loss of bargaining power if the consent orders were made without resolution of the question of the cancellation fee. He said:

‘Now whether the orders are made absent finalisation of the cancellation fee or not is a matter for the Tribunal as a whole. It appears to me that the cancellation fee is an integral part of it, but not an essential part of it. I suppose the best position the Tribunal can put is that it really believes this matter must be resolved and it sees its resolution as being part of this application, otherwise the Tribunal may very well concede to the application but it leaves it in limbo and given that this issue has been a live issue almost from the commencement of this arbitration it cannot now come as a surprise to either Counsel or to parties that the Tribunal is concerned about its position.’

In response to counsel for the plaintiff stating that he was bound by his instructions, Mr Carruthers QC said:

‘That doesn’t impress me I’m afraid. Your clients are a large organisation, as is the Claimant. They know, they’re talking about a multimillion dollar arbitration. They know the sort of issues that are involved here. They’re advised by their solicitors who were aware of what are the proper ethical and the appropriate legal considerations. I don’t really think, just to stonewall this extremely sensitive and difficult and a serious situation that has arisen by saying that you are bound by your instructions personally doesn’t impress me very much.’

When counsel for the plaintiff stated that the only way in which the disagreement between the arbitrators and the parties could be resolved was by some form of proceeding other than the arbitration, Mr de Fina said:

‘I fully understand your position and I fully understand and accept that you are acting on instructions however, I believe I speak for my colleagues to go on record as saying that this Tribunal is not minded to do other than protect its interests in this matter and I say no more than that.’

In response to a query from Mr Carruthers QC as to why the defendant would not accept an order in terms of the 8 March 2001 offer, counsel for the defendant said that there would be no submission from him that an order in those terms would be invalid. To which Mr Carruthers QC responded that they still did not have a similar response from counsel for the plaintiff. Mr Carruthers QC then addressed counsel for the plaintiff:

‘…..it must not be forgotten that the offer which was made to the members of the Tribunal or the proposal would be a more appropriate term was on the letterhead of Messrs Deacons and the response, the acceptance which was communicated to Deacons, was, and I’m sorry, from the Tribunal was communicated to Deacons, now if that was an effective acceptance and I’m at a loss to understand without hearing argument on it why it would not be, it was between the solicitors for the Respondent and it was between and the Tribunal, the solicitor obviously acting with complete authority of its client, how it can be said that this is a matter of instructions and your, you and your instructing solicitors are saying even though we made that offer as the solicitors for the Respondent on our letterhead as prominent commercial solicitors, and even by, and even though it was accepted by the Tribunal in a communication directed to us still clothed with the authority of our client, we can’t do anything about accepting responsibility for that because our client says he won’t give us instructions to accept responsibility. The proposition that I must say both from a legal and an ethical view I find it very difficult to accept and one which surprises me that commercial lawyers would advance, if I could say so with the greatest of respect and not meaning any offence.’

In response to the statement by counsel for the plaintiff that he had not been asked to advise upon the issue, Mr Carruthers QC responded:

‘But there’s such a thing as professional responsibility.’

Mr Thompson suggested;

‘…….is it not the position that the lawyers for the Respondent are in a position to raise this matter with their clients to indicate the Tribunal’s displeasure, to discuss the commercial, legal and moral obligations of the parties and to get back to us having held discussions of that type?’

When counsel for the plaintiff sought an order vacating the hearing dates Mr Carruthers QC said:

‘Well speaking for myself, I wouldn’t agree to any of the orders at this stage as I indicated at the outset, the parties have just got to accept their responsibilities about this matter and I think that the matter should be left as it is and adjourned to a reasonably short period of time.’

When counsel for the defendant pressed the joint application to make orders, Mr Carruthers QC responded:

‘Well why don’t the parties sign, why don’t the parties just draw up some terms and sign them and submit them to the Tribunal for its approval which would include an order as to a cancellation fee. That’s a simple enough matter.’

The only order made by the arbitrators was to stand the matter over for a further telephone link-up on 3 May 2001.

18 At the directions hearing on 3 May 2001 counsel for the plaintiff explained that the offer of 8 March 2001 was an offer only capable of acceptance if the defendant accepted it. It not having been accepted by the defendant, it was capable of being withdrawn. Notwithstanding acceptance by the arbitrators, there was no binding agreement. On 11 May 2001 the arbitrators vacated the hearing dates commencing on 21 May 2001.

19 On 18 July 2001 Mr de Fina sent an invoice claiming a cancellation fee of $60,000.00 in respect of the 20 vacated hearing days. On 25 July 2001 Mr Carruthers QC sent a memorandum of fees including $60,000.00 for the vacated hearing days reduced by a contra of $22,000.00. On 17 August 2001 Mr Thompson advised that he did not intend to render an account because he had earned professional fees. Neither the fees claimed by Mr de Fina nor the fees claimed by Mr Carruthers QC have been paid. On 16 August 2001 the solicitors for the plaintiff requested the Institute of Arbitrators and Mediators to undertake not to release any funds held in account unless authorised by the solicitors for the parties or ordered by a court. On 17 August 2001 the Institute gave the undertaking. On the same day Mr Carruthers QC wrote to the Institute:

‘Mr Carruthers and Mr de Fina wish to place on record that their position is that they are unequivocally and immediately entitled to payment in full of all outstanding accounts which they have rendered to the parties in this arbitration and will take such steps as are necessary to enforce that entitlement.’

20 Mr Clifford in his affidavit swore in summary that he perceived that the arbitrators became increasingly concerned to insure, and that it was a matter of great importance to them, that the parties agree to pay them a cancellation fee. The arbitrators displayed a high degree of antagonism towards the plaintiff and its legal representatives at the directions hearing on 1 May 2001 following the withdrawal by the plaintiff of its offer to pay a cancellation fee. Mr Carruthers QC and Mr de Fina were in open conflict with the plaintiff over their claimed entitlement to payment of a cancellation fee, that is, they asserted that the plaintiff denied that an agreement had been reached between the arbitrators and the parties, and that they would take legal proceedings to enforce the claimed entitlements. Mr Clifford said that he was particularly alarmed to receive a copy of the letter from Mr Carruthers QC to the Institute of Arbitrators and Mediators of 17 August 2001 which contained a direct threat of legal proceedings against the plaintiff. Mr Clifford believed that the arbitrators were prepared to place their own interests in securing the parties’ agreement to pay a cancellation fee before their obligation to properly discharge their duties as arbitrators by stating (at the directions hearing on 1 May 2001) that they were ‘disinclined to make any orders or take any further steps’ unless the parties acknowledged that they were indebted to the arbitrators, that is, that they were obligated to the arbitrators to pay a cancellation fee in respect of the 4 weeks set aside from 21 May 2001 and a year earlier by cancelling the directions hearing which was to have been held on 29 May 2000.

21 On 4 December 2001 Mr Carruthers QC wrote to the solicitors for the parties indicating that a directions hearing should be held before the end of the year and seeking an immediate response to one of the three nominated dates in December. The solicitors for the defendant responded on 5 December 2001 copying their facsimile transmission to the plaintiff’s solicitors. On 10 December Mr Carruthers QC asked the solicitors for the plaintiff to respond as a matter of urgency. On 14 December 2001 Mr Carruthers QC stated that in view of the failure to respond to correspondence by the solicitors for the plaintiff the implication was clearly open that the plaintiff had abandoned the arbitration. Mr Carruthers QC indicated that the arbitrators proposed to convene in early January 2002 to make appropriate orders to finalise outstanding matters and that the parties would be given seven days’ notice the date and venue. On 18 December 2001 the solicitors for the defendant responded seeking any date after 24 January 2002. On the same day the plaintiff’s solicitors apologised for not having responded earlier due to an oversight stating that no discourtesy was intended and nothing should be inferred from the oversight as to the abandonment of the arbitration or otherwise. On 22 January 2002 Mr Carruthers QC, noting that the solicitors for the plaintiff had still failed to respond to the tribunal’s letter dated 4 December 2001, stated:

‘In the circumstances the Tribunal has resolved that further delay cannot be justified and accordingly sets this matter down for hearing commencing at 10am on 12 February 2002, initially for a period of 2 weeks. Arrangements have been made for the hearing to take place at the rooms of the Institute of Arbitrators and Mediators, 233 Macquarie St, Sydney.
The parties are reminded of their duties under s37 of the Commercial Arbitration Act NSW (1984).’

Section 37 of the Act requires the parties to an arbitration agreement to do all things required by an arbitrator or umpire to enable a just award to be made and to refrain from wilfully causing any act to be done to delay or prevent an award being made.

22 On 25 January 2002 the solicitors for the plaintiff requested the vacation of the hearing dates on the basis that they expected a directions hearing rather than the fixing of hearing dates, that the counsel in whom they had invested much preparation time was available for only one of the dates set down and that it was impossible to arrange at short notice for the attendance of expert witnesses and technical representatives during the hearing of the claimant’s evidence. Mr Carruthers QC responded on 29 January 2002 that Mr de Fina was overseas, Mr Thompson was interstate, the application for an adjournment would be time consuming and it was unrealistic to arrange a directions hearing prior to 12 February 2002. Mr Carruthers QC concluded that any application for an adjournment or, indeed, any other application might be made on 12 February 2002 and in view of the history of the matter it should be supported by an affidavit setting out grounds which would justify a further prolongation of the proceedings. On 5 February 2002 the solicitors for the plaintiff complained to the arbitrators that they had misconducted themselves by pressing, repeatedly for the agreement of the parties to pay cancellation fees. It was argued that the plaintiff apprehended that it could not expect a fair and impartial adjudication on the substantive issues in light of the pressure which the arbitrators had in the past applied to the parties and the controversy between the parties, in particular the plaintiff, and the arbitrators on the issue. The solicitors requested the arbitrators to offer their resignations. A response to the letter was sought by noon on 7 February 2002. On 6 February 2002 Mr Carruthers QC said that it was quite unreasonable to expect a considered response by that time. On 7 February 2002 the solicitors for the plaintiff reiterated their request for the arbitrators to tender their resignations stating that since the arbitrators had fixed the hearing on 12 February 2002 they could not delay filing a summons in the court any later than 10am on Monday 11 February 2002. A draft of the summons in this matter was enclosed. On 8 February 2002 Mr Carruthers QC stated that each of the arbitrators refrained from withdrawing from the arbitration and that unless directed by the court, the tribunal would convene at 10 am on Tuesday 12 February as previously directed.

23 In his affidavit Mr Clifford swore that he presently apprehended that in dealing with any adjournment application or the fixing of further dates for hearing the arbitrators would be motivated by a desire to force the parties to hearing in order to secure payment of fees without proper regard to the parties’ preparation and their ability to conduct the hearing; that the arbitrators were unwilling to accept the risk of cancellation and, in the absence of agreement about payment of cancellation fees, would force the case on for their benefit in terms of claiming fees; and given that the arbitrators or, at least, Mr Carrutrhers QC and Mr de Fina, were in open conflict with the plaintiff over cancellation fees, the arbitrators would not give the plaintiff a fair hearing on any interlocutory application or in the hearing on the substantive issues between the parties and in their adjudication on an award.

24 The matter came before the court on Tuesday 12 February 2002 and was stood over until 2 pm to enable the arbitrators to consider their position in light of the proceedings in the court. The arbitrators convened at 10 am and adjourned the matter until 10 am on Wednesday 13 February 2002. The matter came on before the court at 2 pm on 12 February 2002 and was adjourned to me for final determination on 13 February 2002. I was informed by counsel on 13 February 2002 that the arbitrators had that morning adjourned the proceedings to hear opening statements on Friday 15 February 2002 unless the court otherwise ordered.

25 Section 44 of the Act has its origins in United Kingdom legislation. While the section will apply to what would ordinarily be understood as misconduct, it also embraces situations disassociated from moral turpitude in which there is irregularity in the conduct of the reference sufficient to justify removal. The authorities are exhaustively considered by Marks J in Gas & Fuel Corporation of Victoria v Wood Hall Ltd & Leonard Pipeline ContractorsLtd [1978] VR 385 at 391-395. See also Mustill and Boyd, Commercial Arbitration, 2nd edition, at 529-533, 550-553. Thus in Williams v Wallis and Cox [1914] 2 KB 478 at 485 Atkin J said of the meaning of misconduct:

‘That expression does not necessarily involve personal turpitude on the part of the arbitrator, and any such suggestion has been expressly disclaimed in this case. The term does not really amount to much more than such a mishandling of the arbitration as is likely to amount to some substantial miscarriage of justice…..’

And in Melbourne Harbour Trust Commissioners v Hancock (1927) 39 CLR 570 at 588 Isaacs J said:

‘But the word “misconduct” as employed in this connection includes even a mistake in the procedure which has or may have unjustly prejudiced a party.’

26 In Mustill and Boyd at 550 it is said that little will be gained by attempting a complete definition of the behaviour which constitutes misconduct, a view endorsed by the Court of Appeal in Doran Constructions Pty Ltd v Health Administration Corporation of NSW (1994) 12 BCL 59. I will not attempt to do so.

27 The plaintiff puts its case for removal under s44(c) of the Act on the basis of a reasonable apprehension of bias. The High Court has recently reiterated that the test to be applied in this country in determining whether a judge is disqualified by reason of the appearance of bias is whether a fair minded lay observer might reasonably apprehend that the judge might not bring an impartial and unprejudiced mind to the resolution of the question the judge is required to decide (Johnson v Johnson (2000) 201 CLR 488 at 492). This general principle applies equally to arbitrators (Gascor v Ellicott [1997] VR 332).

28 Since an arbitrator’s fee is primarily a matter for tripartite contract between the arbitrator and the parties, there can be no impropriety in an arbitrator requesting a commitment fee or a cancellation fee. The issue in this case is as to the manner in which the arbitrators persisted in their request after rejection by one of the parties.

29 Three cases with respect to arbitrator’s fees were cited to me. They were also brought to the attention of the arbitrators in the written submissions of 17 July 2000. Amec Construction, supra, was an application by a court appointed referee. The parties had agreed with him a daily rate for hearing time and an hourly rate for other time spent on the case. The matter settled and the referee charged a cancellation fee at half the agreed daily rate for the days assigned to the hearing. Cole J, citing Mustill and Boyd at 243-244 for the proposition that in the absence of agreement an arbitrator is not entitled to a fee for premature termination of a reference, concluded that in the absence of agreement the referee was not entitled to a cancellation fee.

30 In K/S Norjarl A/S, supra, a third arbitrator appointed by the arbitrators appointed by the parties accepted office on the understating that the hearing would take place by a specified date and would last for a specified period. Three years later the plaintiffs’ solicitors requested the arbitrators to fix a period for the hearing over twice as long and in two further years’ time. The third arbitrator replied that the tribunal was prepared to consider such a course but felt that the parties should consider fees which were likely to be incurred and he set out a statement of the fees chargeable including a non-refundable commitment fee payable in advance of the hearing. The defendants’ arbitrator took no part in the ensuing discussion of fees. The parties did not accept the proposal which the arbitrators were invited to withdraw, whereupon the third arbitrator and the plaintiffs’ arbitrator offered their resignations. The plaintiffs’ solicitors submitted a revised proposal which the arbitrators found satisfactory but sought an assurance that the defendants’ solicitors had no objection to the plaintiffs making the payments proposed. The defendants’ solicitors maintained that the two arbitrators had no entitlement to demand advance fees which, in their view, were excessive, that it was inappropriate for one party to pay the fees demanded to the two arbitrators. However, they did not allege partiality. They later wrote that the proper course was for both arbitrators to continue to act on the terms on which they were appointed while withdrawing the demand they had made in respect of fees. The plaintiffs sought declarations that the arbitrators were fit and proper persons to act and that their acceptance of the plaintiffs’ fee arrangements would not raise any imputations of bias. The defendants made a cross application for an order that the two arbitrators be removed. The Court of Appeal held that in default of agreement by all the parties, no commitment fee was payable and the insistence by an arbitrator on such a fee in the absence of agreement amounted to misconduct. However, the express disavowal by the defendants of any imputation of actual bias and their request that the arbitrators continue to act, precluded the exercise by the court of its discretion to remove them but, that the conclusion of an agreement between the arbitrators and the plaintiffs on the basis of the plaintiffs’ revised proposal would be improper. The majority took the view that by reason of the change in circumstances the request for a commitment fee was justified, that a mere request by an arbitrator for a commitment fee did not amount to misconduct and that, in any event, even if the entry by the arbitrators into separate negotiations with the plaintiffs for their fees amounted to misconduct, the express disavowal of bias and request of the arbitrators to continue to act precluded their removal.

31 In Turner, supra, the parties to an arbitration contemplated that it would be concluded within a number of months. Over a year later after lengthy correspondence and a number of preliminary hearings, the arbitrators suggested a timetable for the hearing and requested payment by each party of half his interim fees and expenses. The plaintiff objected and asked whether if payment were not made the arbitrator would not hear the arbitration. He responded to the contrary but stated that he hoped the parties would agree that it was reasonable that he should receive interim payment. The defendant paid the sum to the arbitrator who later, on legal advice, returned it. The plaintiff’s application to remove the arbitrator for misconduct failed, the majority of the Court of Appeal taking the view that in light of the circumstances prevailing when the arbitration agreement was made it was an implied term that the arbitrator might request an interim payment with the sanction of resigning if it was not met, provided it was made to both parties at a reasonable time before they were so committed to his services at a hearing that they would be in an inferior bargaining position to refuse.

32 I do not gain much assistance from these authorities. I agree with counsel for the defendant that they should not be regarded as establishing inflexible principles as to when a demand for a cancellation or commitment fee constitutes misconduct. So to regard them might constitute a reading into the words of the statute of limitations which are not there or applying an inflexible approach to the exercise of power (Emanuele v Australian Securities Commission (1996-1997) 188 CLR 114 at 137, Oshlack v Richmond River Council (1998) 193 CLR 72 at 81). What constitutes misconduct and apprehended bias will depend upon the facts in each case.

33 Section 34(1) of the Act provides that unless a contrary intention is expressed in the arbitration agreement, the costs of the arbitration, including the fees and expenses of the arbitrator or umpire, are in the discretion of the arbitrator or umpire. Section 34(2) provides that the costs of the arbitration, other than the fees and expenses of the arbitrator or umpire, directed to be paid by an award are, except so far as taxed or settled by the arbitrator or umpire, taxable in the court. Section 35(1) provides that if an arbitrator or umpire refuses to deliver an award except on payment of his fees and expenses, the court may order that the award be delivered and the fees and expenses be taxed in the court. Section 35(2) provides that fees or expenses of an arbitrator or umpire fixed by an award may be taxed in the court.

34 The defendant submitted that these provisions provide a statutory regime for taxation of an arbitrator’s fees and expenses and the question whether they are reasonable should be left to the taxing officer and not adjudicated upon by the court. It was submitted that the entitlement of an arbitrator to be paid such sums as are reasonable following taxation supported the absence of any merit in the allegation of misconduct. In addition to the three cases dealing with arbitrators’ fees mentioned above, reference was made to In Re Preeble and Robinson [1892] 2 QB 600 at 604-605 where reference is made to the position in the United Kingdom before the Arbitration Act, 1889 where, in the ordinary course, an arbitrator’s fee was taxable.

35 In the instant circumstances, however, no relief is presently available to the plaintiff under either of the above provisions. The arbitrators have not exercised a discretion in relation to the costs of the arbitration and s34(1) of the Act is inapplicable. S34(2) by it terms excludes taxation with respect to an arbitrator’s fees or expenses. There has been no refusal to deliver an award unless the fees be paid and s35(1) has no operation. Section 35(2) only applies where an award fixes an arbitrator’s fees and expenses. That has not happened in this case.

36 Counsel for the defendant also drew my attention to changes in the legislation in the United Kingdom. Section 19(1) of the Arbitration Act 1950 which is similar to s35(1) of the Act was replaced by s64 of the Arbitration Act 1996 which gives a general power to the court to determine any question as to the reasonableness of fees and expenses of an arbitrator. In my view, however, I gain more assistance from decisions with respect to s19(1) of the 1950 Act than I would with any discussion of the 1996 Act because of the similarity of the former to s35(1) of the Act.

37 Counsel for the defendant submitted that the arbitrators were doing no more than negotiating for a cancellation or commitment fee. In my view, however, the arbitrators went further than mere negotiation and sought to apply pressure to parties already committed to assigned hearing dates who, in consequence, were at a disadvantage. This case demonstrates the wisdom of an arbitrator reaching agreement with the parties as to his or her remuneration upon appointment. Here the arbitrators had not done so and their concern to have agreement upon a cancellation or commitment fee ultimately assumed such importance in their minds that they allowed themselves to be swayed by this concern to the detriment of their duty to maintain the appearance of acting in the interests of bringing down a just award.

38 The arbitrators comprised a retired judge and a member of the bar. They must be presumed to have known that if they resigned or if the arbitration was settled, they were entitled to seek an order from the court in relation to the costs of the arbitration. S36 of the Act provides such power where, for any reason, an arbitration fails. Instead of taking this course when the plaintiff refused to agree to the payment regime twice proposed by the defendant, the arbitrators increased their pressure upon the parties and, in particular, the plaintiff, to agree. The arbitrators had been referred to the three cases on cancellation or commitment fees referred to above. Amec suggested that the court might be unlikely to include such fees in its determination of what constituted the costs of the arbitration. K/S Norjarl A/S raised the prospect that to persist in seeking agreement from the parties might constitute misconduct. The lawyer members of the tribunal must have understood that caution was called for: and yet they persisted in applying pressure.

39 The demand for payment of the per diem rates for time set aside made on 9 May 2000 came at a time well after the setting of the hearing dates for 4 weeks from 9 October 2000 at the preliminary conference on 21 February 2000. By that stage I may infer that the parties were committed to preparation for hearing with consequent cost implications if the matter did not proceed. The cancellation of the 29 May 2000 directions hearing because the ‘take it or leave it’ arbitrators’ fee arrangement had not been accepted, put more pressure on the parties. The order made on 15 November 2000 that the parties forthwith confer in an attempt to reach agreement with respect to the cancellation fees was made well into the preparation period leading up to the then hearing dates of 4 weeks commencing on 21 May 2001. The rejection on 13 March 2001 of the element in the plaintiff’s suggested regime that credit be given for other remuneration evidenced a determination to maintain the arbitrators’ demands at all costs. The 24 April 2001 directions hearing saw unrelenting pressure put on the parties. The refusal at the directions hearing of 1 May 2001 to make orders consented to by the parties unless an agreement to pay cancellation fees was acknowledged and the assertion that a legal obligation existed with respect to them constituted, in my opinion, the pitting of the power of the arbitrators against the parties. As Mr de Fina so aptly put it on that occasion: the tribunal was not minded to do other than protect its interests in the matter. The sending of the fee notes in July 2001 and the assertion that they would be enforced on 17 August 2001 constituted the furtherance of an adversarial contest between the arbitrators or, at least two of them, and the parties. The setting down of a complex matter acknowledged to require 4 weeks of hearing for 2 weeks without regard to the convenience of parties, witnesses and counsel, placed yet more pressure on the parties.

40 It was submitted that the lack of response by the plaintiff’s solicitors to correspondence from the arbitrators in December 2001 meant that it was perfectly reasonable for the arbitrators to bring matters to a head by nominating the 2 week period. The plaintiffs could, it was said, apply to have the dates vacated. What was contemplated by the arbitrators in December 2001 was a directions hearing. The plaintiff’s solicitors’ failures could easily have been cured by setting the February date as a directions hearing. From the history of the matter I regard the setting of the two week hearing in February 2002 as a deliberate step on the arbitrators’ part to put more pressure on the parties.

41 Mr Thompson did not send a fee note. He was, however, party to the discussions at directions hearings and he participated in those discussions and he did not demur to the statements made by Mr Carruthers QC or Mr de Fina.

42 On the evidence before me, I am satisfied that each of the arbitrators misused his position in applying pressure to the parties to agree to a cancellation or commitment fee and that constituted misconduct in terms of s44(a) of the Act.

43 Mr Clifford explained the basis for his apprehension of bias. The defendant has consistently agreed in the proposals of the arbitrators for payment of cancellation or commitment fees. The plaintiff had not agreed and had ultimately withdrawn its counter proposal. In addition, the transcript of the hearing on 1 May 2001 makes plain the manner in which the arbitrators reacted to counsel for the plaintiff’s stance that he was bound by his instructions.

44 Mr Clifford’s evidence is not determinative of the issue because the test is an objective one: would a fair minded lay observer reasonably apprehend that the arbitrators might not bring an impartial and unprejudiced mind to a resolution of the reference. In my opinion there is ample evidence to support such a conclusion, and I so find.

45 I raised with counsel for the parties my concern that the arbitrators were not represented before me and I had been asked to make serious findings of misconduct and appearance of bias against them. Counsel submitted that I should proceed in their absence. I was informed that the arbitrators had been served with notice of the application. The transcript of the proceedings before them on Tuesday 12 February 2002 was before me. It clearly indicates that the arbitrators were aware of the terms of the application.

46 In Stannard v Sperway Constructions Pty Ltd [1990] VR 673 at 681-682 Brooking J considers authorities with respect to the position of the arbitrators on an application to remove them for misconduct. He points out that the cases range from one extreme to another: no notice and no joinder as a party as against joinder as a party. In this case serious allegations of misconduct are levelled at the arbitrators and I was concerned that they should have an opportunity to be heard. Having been served with notice of the application the arbitrators had a choice to seek to be joined as a party, to file an affidavit setting out any facts they considered to be relevant, or to take no action. As I have said, the arbitrators include a retired judge and a barrister. I may assume that they understand these choices. I infer that the arbitrators have chosen the third course open to them and that they have no wish to do other than abide by the decision of the court.

47 Counsel for the defendant submitted that if I were minded to remove the arbitrators I should grant liberty to them to apply with respect to their remuneration and liberty to the parties to apply with respect to the appointment of new arbitrators.

48 I have already mentioned s36(1) of the Act which gives power to the court in relation to the costs of an abortive arbitration. In my view there is no need for liberty to apply with respect to the arbitrators’ remuneration.

49 S9 of the Act provides that unless otherwise agreed by the parties where a person has power to appoint an arbitrator the power extends to the appointment of a new arbitrator in place of an arbitrator who ceases to hold office. In my view liberty to apply with respect to new arbitrators is also unnecessary.

50 I order that the Honourable Kenneth Carruthers QC, Mr Anthony de Fina and Mr Michael Thompson be removed as arbitrators in relation to the references to arbitration under ship building contracts between the plaintiff and the defendant as follows:

Date of Contract	Yard No of Ship
16 September 1988	025
16 September 1988	026
31 October 1988	027
21 December 1989	028

51 I order the defendant to pay the plaintiff’s costs of the application.

ooOoo

Last Modified: 02/22/2002