Westport Insurance Corporation & Ors v Gordian Runoff Limited

[2010] HCATrans 233

[2010] HCATrans 233

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S110 of 2010

B e t w e e n -

WESTPORT INSURANCE CORPORATION (ABN 48 072 715 738)

First Applicant

ASSETINSURE PTY LIMITED (ABN 65 066 463 803)

Second Applicant

MUNICH REINSURANCE COMPANY OF AUSTRALASIA LIMITED (ABN 51 004 804 013)

Third Applicant

XL RE LIMITED (ABN 54 094 352 048)

Fourth Applicant

SCOR SWITZERLAND LTD (ABN 92 098 315 176)

Fifth Applicant

and

GORDIAN RUNOFF LIMITED (ABN 11 052 179 647

Respondent

Application for special leave to appeal

GUMMOW J
HEYDON J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 3 SEPTEMBER 2010, AT 10.19 AM

Copyright in the High Court of Australia

__________________

MR B.W. WALKER, SC:   May it please the Court, I appear with my learned friend, MR T.M. MEHIGAN, for the applicants.  (instructed by Allens Arthur Robinson Lawyers)

MR I.M. JACKMAN, SC:   May it please the Court, I appear with my learned friend, MR T.M. FAULKNER for the respondent.  (instructed by Mallesons Stephen Jaques)

GUMMOW J:   Yes, Mr Walker.

MR WALKER:   Your Honours, may I take you to the terms of the – I will call it substantive statute, page 72 of the application book, section 18B of the Insurance Act.

GUMMOW J:   That is the State statute.

MR WALKER:   Yes.  The matter which divided the parties comes about in the foot of subsection (1) on the page – it is about line 25 or thereabouts - where in order to open the gateway to what I will call the discretionary relief ‑ ‑ ‑

GUMMOW J:   Now, I just want to make it quite clear.  There was no point in this case, was there, as to the application of the federal statute, the International Arbitration Act 1974?

MR WALKER:   No.

GUMMOW J:   Yes.

MR WALKER:   About line 25, just thereafter, one of the ways to open the gateway for the reinsured was to be able to show on the balance of probability that the loss in respect of which the insured, meaning the reinsured here, seeks to be indemnified was not caused or contributed to by the happening of those events or the existence of those circumstances, the antecedents being, of course, the events or circumstances first mentioned in paragraph (1)(a) at about line 15 above on the page.

Now, in this case the circumstance was the writing of indemnity policies, D&O runoff indemnity policies, with a seven‑year reporting term, whereas the reinsurance treaty stipulated that there would be attachment of reinsurance only in relation to policies with no more than three year reporting from inception.  So there are a number of issues raised, but in relation to what I will call the non‑causation issue, one can see that there required in order for our friends to obtain victory they needed to satisfy the relevant tribunal that there was this lack of causation.

Now, in fact, according to the Court of Appeal’s reasons, they should have failed in that attempt.  One sees that at page 107 of the application book starting at line 20 in paragraph 180, concluding at that part of the reasons in paragraph 182.  In terms of what was necessary for the Commercial Arbitration Act leave his Honour Justice Allsop there says:

It can be accepted that it was arguable that the arbitrators erred.

It goes beyond that.  If one goes to page 129, paragraph 258, and there is a conclusion by his Honour of error, that is, beyond arguable and looking to our Commercial Arbitration Act point, beyond strongly arguable but correct, not merely arguable, not merely strongly arguable, but in fact, correct. 

In our submission, if one had got to this point at all, and there is a threshold question as your Honours have seen to which I will come back in a moment, if one had got to that point at all it can be seen that not only is there an important matter under the Insurance Act, but there is a very important matter raised under the Commercial Arbitration Act because the Court of Appeal seems to have held that where something is arguable but does not deserve the adverbial force of being strongly arguable for a reason which appears contradicted by the course of events in the Court of Appeal, there cannot be leave, even if it is of importance, et cetera, et cetera.  The importance is not gainsaid in this case.

In our submission, there is a contradiction which shows the correct route to the leave question for appeal from arbitral award in the very passages I have taken your Honours to.  To find that something is arguable at first to say it is not strongly arguable because there are meritorious arguments worthy of anxious consideration to be put on the other side of the point is, in our submission, not the proper way in which to approach the matter where the court considering the grant of leave, as the Court of Appeal was vicariously in this case, in fact decides not merely that a point was arguable, but decides that it was correct.

In our submission, whatever one may think about “quick look” detections of error and the magnitude or the likelihood of error, à la Lord Diplock’s approach in The Nema, whatever variants of those approaches may be taken, once a court considering the question of leave from an arbitral award has actually reached the conclusion, as the court does in this case, that the argument in question is a correct one then it has already superseded, transcended, gone beyond and exceeded what is necessary for the grant of leave.  That, in our submission, is an important point in relation to the control or rationing of leave to appeal from arbitral awards.

If one states the proposition as follows, then the importance of it, we hope, is self‑evident.  It seems to have been said that a point which is correct will not achieve the status of there being the requisite evidence of error if there has been a decision contrary to the correct point.  That, with respect, is illogical.

Your Honours, that highlights, we submit, the great importance, both from the point of view of the substantive statute, the Insurance Act and, what might be called the rather more pervasive statute, the Commercial Arbitration Act which governed whether there could be an appeal at all.

I mentioned a threshold point under the Insurance Act.  That, of course, turns on the question whether you get to these non‑causation and other issues at all when the reinsurance treaty in question defines the risk, being the subject of future policies that the reinsured may write, in terms which include a limit, in this case, three year’s reporting. 

A limit can also be imposed territorially from activities in the southern hemisphere.  A limit could be by reference to the nature of an industry in the steel industry.  Those matters of definition are, in our submission, most unlikely, on the face of things, as a matter of legislative policy to have become the subject of a case‑by‑case decision, in many cases by arbitrators and, in this case, by reason of section 22 of the Commercial Arbitration Act according to ex aequo et bono, extension of cover in a substantive fashion by reference to what is reasonable or not reasonable between the parties.  When one comes to the actual wording of paragraph 18B(1)(a) about which the nub of the case turned in both courts below, one sees ‑ ‑ ‑

GUMMOW J:   With the arbitrators, too.  They gave anxious consideration to this.

MR WALKER:   They did.  We have a complaint about their reasons but not on this point, with great respect.  One sees that the cases that are posited for the operation of the section turn importantly upon these operative words.  They are the ones that immediately follow (b):

the insured shall not be disentitled to be indemnified -

Those are the words at the heart of the provision, the core of the matter, and as was observed, in our favour, but not sufficiently so for our success in the Court of Appeal, those are words which on any reading indicate that there is in play, at some stage, in some circumstances, an entitlement to be indemnified.  That is why there is, with respect, a real “chicken and egg” problem here which is best served, we would submit, by asking about the nature of the operation of an insurance policy which 18B is meant to ameliorate.

The operation of an insurance policy which is simply the decision of an insurer to cover X but not not X is surely not one of those.  Parliament would not likely be read as conscripting people into taking on business of risk which they have not undertaken and, indeed, plainly decided not to undertake.  One is driven back then to the words in subsection (1)(a) and one sees a reference to the happening of particular events and the existence of particular circumstances.  The epithet “particular” ‑ ‑ ‑

GUMMOW J:   The trouble is 18B is not drafted positively.  It uses this - this…..shall not be disentitled.

MR WALKER:   Your Honour will not entice me in to praise of the drafting, but we have to work with what we have.  At the end of paragraph (a) there is the reference to the existence of “particular circumstances”.  That repeated epithet “particular” surely would have left out of the scope of this ameliorating provision the general circumstance that you simply are not within the defined scope of covered risk.  So greater than three years is not a particular circumstance. 

It is the general fact that you are not within the scope of cover.  It is all and anything which is greater than three years, just as if one said “I will cover only for accidents within the territory of the Commonwealth of Australia”, it would not be to the point to say New Zealand might have been part of that and is pretty close.  That would not be the existence of particular circumstance.  It would simply be the general proposition, if you like, the general circumstance that New Zealand is not within the territory of the Commonwealth of Australia.

It is for those reasons, in our submission, that there is a very important and, in the events which have happened so far as decision is concerned, rather dubious outcome in relation to the threshold issue.  In the circumstances of this case could there be in relation to the terms defining the scope of cover an amelioration by resort to provisions which are to be triggered by people becoming disentitled on the happening of particular events or the existence of particular circumstances.  As a matter of English it would be odd to say that someone becomes disentitled on the happening of a particular circumstance because ‑ ‑ ‑

GUMMOW J:   You might be right about all of that, Mr Walker, but Mr Jackman says this is an historical matter now, given the repeal of this provision.

MR WALKER:   Well, it is obviously of ongoing importance for all matters which are still covered by it.

GUMMOW J:   Yes.

MR WALKER:   That will include policies up to and including last year.  So if it is a closed class, it is not one whose numbers can be with any confidence treated as unimportant for commercial litigation in this country for, we would submit, decades to come.  Long‑tail insurance is aptly so called.  The experiences of the courts in relation to a number of industrial exposures, not least of which is asbestos, shows just how long such matters can continue.

All legislation, I suppose, is subject to closed‑class objection because no legislation is forever.  These, in our submission, have a particular claim not to be treated as mere historical oddities, bearing in mind their continued very vital affectation of a number of very important financial interests for a long time to come.

Your Honours, that then brings me to, having dealt with the non‑causation question and the oddity of it being not sufficiently strongly arguable, although it is correct, having dealt with the threshold problem of is this really a provision, it enables arbitrators or court to write a risk that was never undertaken at all, not subject to exclusions or events or particular circumstances, just never undertaken at all.

We then come to what in the Court of Appeal was regarded as the cure or the antidote to the objections of the kind I have voiced here, to the reading which the court preferred of section 18B.  It was said, in effect, the cure comes because there is a requirement that this outcome not be unreasonable and one sees that at the very end of subjection (1). 

Now, of that we say that is scarcely to be read as a provision by which the acceptance of commercial risk, the disposition of funds by way of being on a hook for a long time, is to be at the behest of a court or arbitrator at large with respect to the definition of “scope of cover”.  I have to add that last bit because it is clear that Parliament did intend that arbitrators or courts would order the position so that some insurers would not become disentitled to be indemnified.  What has happened here is that the reading brings about people becoming entitled for the first time to be indemnified.

So there was real weight on the question why was it not unreasonable, according to the arbitrators, for this statutory amelioration to be essayed.  The more important for a reading of the statute and the application to cases such as this is this curative provision, this safeguard of a requirement for something to be not reasonable, the more obviously it is appropriate for the parties, particularly the party who is going to lose the point, to be told why.

Now, in relation to the reasons why, could I take your Honours back please to page 72 of the application book at its foot in paragraph 71 where his Honour quotes the whole of the reasoning, the whole of the statement, I should say, of reasons from paragraph [88] of the reasoned award for this all‑important satisfaction as to the safeguard.  The very learned and experienced gentlemen on the panel said:

we see no reason to doubt that s 18B applies in relation to the 3‑year claims if the requirements of ss 18B(1)(a) are met.  In particular, we are comfortably satisfied that it would be reasonable –

That obviously stands for a finding that it would not be unreasonable -

within the meaning of s 18B(1), and entirely consistent with ‘considerations of general justice and fairness’ –

That is section 22 of the Commercial Arbitration Act -

within the meaning of the reinsurance treaties, for the reinsurance treaties to apply in relation to the 3‑year claims.

That was it.  What that is doing, of course, is simply placing a tick rather than a cross in the box provided, so to speak, by the closing words granting the safeguard in subsection 18B(1).

KIEFEL J:   Is this your adequacy of reasoning?

MR WALKER:   It is indeed.

KIEFEL J:   Ground 7.

MR WALKER:   It is indeed.

KIEFEL J:   Is ground 8 then, the reference to unreasonableness, really only a lead in to this ground and a background to it, rather than a stand‑alone ground?

MR WALKER:   Yes, it is.  We would seek, were we to get special leave, a conclusion in this Court that they are not able to succeed on that point.  That is the role of that ground.  In our submission, giving full weight to all that has been said, not only in these reasons in the Court of Appeal, but in the many, many, many writings on and off the bench, that are assembled by Justice Allsop concerning the duty to give reasons and the nature of appropriate reasons, particularly in these arbitral contexts, particularly as required by the statute, giving full weight to all of that, this was a statement so exiguous that it cannot be imagined how it could have been less informative as to why it was reasonable – why it was not unreasonable.

There is a statement that they are comfortably satisfied.  The fact that there is more or less confidence in the conclusion that they have reached is something that might provide comfort to a reader if one could know why.  The fact that they are comfortably satisfied provides no clue as to why they were satisfied, let alone comfortably so.  When one gets rid of those words, all one has is simply the conclusion, as I say, the tick in the box.

Whatever may be said about the issue dividing the Court of Appeal in New South Wales and the Court of Appeal in Victoria about the nature of the standard to be expected from arbitral tribunals such as this in answering the statutory requirement to give reasons, these reasons could not have been adequate.

HEYDON J:   Paragraph 88 of the reasons is succeeded by paragraphs 89 and 90, obviously enough.

MR WALKER:   Yes.

HEYDON J:   There would be some attempt there to deal with the arguments advanced by the reinsurers.  I am just wondering whether your characterisation of paragraph 88 as being the sole statement of reasons is ‑ ‑ ‑

MR WALKER:   Your Honour, there is nowhere found an explanation separate from the non‑causation finding – the non‑causation finding, I suppose, is the closest – which explains why it is not unreasonable.  There are detailed findings in fact in consideration of what I will call the history of negotiation in relation to the cover.  That, with respect, cannot possibly inform or provide reasons for why, given the cover written, given the application of 18B in the manner held against us, it was not unreasonable for this substantive extension of cover.

GUMMOW J:   Do you want to say anything about Oil Basins and the view of the Court of Appeal that it should not be followed?

MR WALKER:   Yes.  In our submission, that is ‑ ‑ ‑

GUMMOW J:   Which, on the face of it, places courts in a third state in an invidious position.

MR WALKER:   Your Honour anticipates me.  That is a state of affairs which usually – there must be exceptions to this of course – but usually, with respect, would indicate an important instance for this Court’s role in making the law in the country or declaring the law in the country.  Exceptions to that usual case would no doubt come about if what I might call frank or obvious error by oversight, something amounting to per incuriam was identified by the second court in the first court’s approach. 

That clearly is not the case.  The anxious setting out in such detail of the setting, national and international, by Justice Allsop shows that there are important matters of what I might call policy of the law in a particular way and governed by a statute which is involved in his disagreement, his conviction of error on the part of the Victorian Court of Appeal.  That, in our submission, is the badge of an issue which is ripe and appropriate for this Court to attend to, otherwise, what is the position in the other States?

GUMMOW J:   Whereabouts is that in your grounds of appeal at page 151?

MR WALKER:   If your Honour would just excuse me for one moment.  Your Honour has defeated me, I am sorry.  On page 152, ground 7.

GUMMOW J:   Yes, thank you, Mr Walker.  Yes, Mr Jackman.

MR JACKMAN:   There are, I think, seven special leave questions put forward in the applicant’s written submissions, although the last two have not been touched upon.  They concern a refusal of leave to amend in order to bring into play something that had been common ground, namely, that 18B does apply to reinsurance, so I will not address that.

GUMMOW J:   Sorry, where are they reflected in the grounds of proposed appeal?  What you have just been putting to us, where would that be?

MR JACKMAN:   What I was drawing attention to was the applicant’s written submissions beginning at page 156.

GUMMOW J:   Yes.

MR JACKMAN:   Which sets out ‑ ‑ ‑

GUMMOW J:   I know.

MR JACKMAN:   Seven special leave questions.  The last two have not been the subject of any oral address and I will take those as not having been pressed.

HEYDON J:   They correspond to grounds 10 and 11 in the draft notice of appeal, I think.

MR JACKMAN:   Yes.

GUMMOW J:   Yes.

MR JACKMAN:   That is so.  Now, the first three of the special leave questions put forward concern what is a matter of historical interest, namely, the manner in which section 18B applies to reinsurance.

GUMMOW J:   Yes, well we are seized of that.  Mr Walker says there is a long tail.

MR JACKMAN:   Yes.  My learned friend acts for five of about eight Australian reinsurers.  One might expect that by now an inquiry would have been made by those five reinsurers as to the extent to which the primary insurers that they reinsure have been issuing non‑complying policies.  That is the context in which his 18B question operates.  They must have made that inquiry given the outcome of the arbitrator’s award and now of the Court of Appeal’s judgment.

Having made that inquiry, one would infer, they are unable to say anything more than there is a speculative possibility that there is going to be some long‑tail claim arising generated by a non‑complying policy.  Now, it is a matter of pure conjecture as to whether this issue will ever arise again and, if it is a likely matter to arise again one would have expected the reinsurers here to have come forward with some evidence as to the likelihood of that prospect. 

That being said, the matters that are raised in terms of the application of 18B in the context of reinsurance to non‑conforming policies are three.  The first is a new argument.  That is my learned friend’s proposition put with clarity in the written submissions that the reinsurers seek to distinguish between contracts for reinsurance, which is a treaty for reinsurance on the one hand, as distinct from what they call contracts of reinsurance, which are either facultative reinsurance or reinsurance treaties where there are complying policies.

Now, that is an entirely new argument and whatever one might think of the fineness of the distinction between the prepositions “for” and “of”, it is not a distinction which was embraced by the reinsurers when they embarked upon Supreme Court proceedings in this case.  That can be seen from application book pages 196 and 197 where they put forward in their pleading what were the errors ‑ ‑ ‑

GUMMOW J:   No, but we are not going to decide an estoppel.  What is your answer to the point?

MR JACKMAN:   Our answer to the point is that the argument has always turned on the question whether 18B distinguishes between clauses specifying the scope of cover and clauses specifying exclusions or limitations.  The arbitrators in the Court of Appeal said it does not turn on that distinction at all.  Rather, within the framework of 18B, one can find an exclusion or limitation within the definition of “cover” itself.  That is the answer.  On the text of 18B, one can find the exclusion or limitation within the definition of “cover”.  One need not point to a separate clause called ‑ ‑ ‑

GUMMOW J:   Explain that again, Mr Jackman.  Looking at 18B ‑ ‑ ‑

MR JACKMAN:   Looking at 18B, that applies where in:

(a)the circumstances in which the insurer is bound to indemnify

the insured are so defined as to exclude or limit the liability of the insurer to indemnify –

and so on.  The argument that has always been put by the reinsurers is that that distinguishes between clauses specifying the scope of cover, on the one hand, and clauses specifying exclusions or limitations on the other hand.  That was rejected by the arbitrators and by the Court of Appeal.  In essence, their reasoning was that one can find the substantive exclusion or limitation within the definition of “cover” itself. 

So, for example, if one defines the scope of cover as D&O policies with a reporting period of no more than three years, then the exclusion or limitation over the temporal period of reporting is within the scope of cover clause and 18B operates.  One need not find a separate exclusion or limitation outside the scope of cover clause.  One sees that reasoning set out in the arbitrator’s award at page 74 in paragraph [92] where the arbitrators point out that:

The reinsurance treaties do not cover the 3-year claims under the FAI D&O run‑off policy although they were made within 3 years –

That is because the reinsurance treaties were limited to policies which covered claims -

made and notified to Gordian within 3 years from inception and/or excluded policies which covered claims which were made and notified to Gordian more than 3 years from inception.

In other words, one can find the exclusion or limitation within the definition of “cover” itself.  Section 18B does not proceed on a dichotomy between clauses specifying the scope of cover, on the one hand, and exclusion or limitation clauses on the other, and on the way in which the argument is now put in this Court, namely that this was only ever a contract for reinsurance not a contract of reinsurance, that is the opposite of the way in which the case has always been put by the reinsurers and one does see that from the pleading and the pleading has particular importance here because this is an application for leave to appeal in which the applicant for leave to appeal from an arbitrator’s award must specify the errors of law that are relied upon.

So when we come to look at the pleading at page 197, paragraph 8(c) makes the opposite point from the point that has now been sought to be made by my learned friend because it is accepted in paragraph 8(c) on page 197 that these always were contracts of reinsurance, not merely contracts for reinsurance.  That is why your Honours will not find any reasoning in either of the courts below going to what is now being put by my learned friend on the inapplicability of section 18B.  It is an entirely fresh argument raised for the first time in this Court.

On the question of leave to appeal, my learned friend says that - I am sorry.  I should deal first perhaps with the question of non‑causation, as my learned friend puts it.  That is the third special leave question.  The issue here turns on the arbitrator’s finding that the circumstance by which cover was excluded or limited was the fact that the FAI D&O policy not only covered claims reported within three years, but also covered claims made after three years. 

The Court of Appeal expressed two views on that:  first, that there was no strong evidence of error of law and, therefore, leave to appeal should not be granted.  It did so for a number of reasons.  One was the point was finely balanced.  Another was it was not a question of law at all.  It is merely a question of causation of loss and even in their written submissions here, the reinsurers shy away from the characterisation of error of law and say that it is a mixed question of fact and law.  Now, a mixed question of fact and law is not good enough to get within the parameters of leave.

GUMMOW J:   That is a category of indeterminate reference, Mr Jackman - of some embarrassment it seems to me to any cogent examination of these questions.

MR JACKMAN:   One can readily accept that these distinctions between questions and fact and questions of law are fairly slippery but, nonetheless, to get leave to appeal against an arbitrator’s decision one needs to show either a manifest error of law or strong evidence of error of law on a point which could add substantially to the certainty of commercial law.

GUMMOW J:   The section just says:

an appeal shall lie . . . on any question of law arising out of an award.

MR JACKMAN:   Is your Honour looking at section 38?

GUMMOW J:   Yes.

MR JACKMAN:   Your Honour needs to go down to subsection (5).

GUMMOW J:   Yes, that is right.  It talks about “manifest error of law on the face of the award”.

MR JACKMAN:   Yes, and it was accepted all around that this was not a manifest error of law.  That was common ground.  The argument that was put by the reinsurers was that there was strong evidence the arbitrator made an error of law.

GUMMOW J:   This all assumes that we all know what the law is, that is the problem with this drafting, so that you can tell when someone has it wrong.

MR JACKMAN:   Well, maybe, but within (b)(ii) “strong evidence” of error of law and that the determination may add “substantially to the certainty of commercial law”.  The Court of Appeal first of all says on a leave application there is a two‑stage process.  The primary judge had erred in hearing the entire debate on the appeal as though leave had been granted before deciding whether leave to appeal should have been granted in the first place.  One sees that on the error ‑ ‑ ‑

GUMMOW J:   It just seems a bit odd – it takes 91 pages for the Court of Appeal to wrestle with all of this.

MR JACKMAN:   It is a very complete judgment and what the Court of Appeal says is it is quite unnecessary ‑ ‑ ‑

GUMMOW J:   I am not criticising them at all.  I am just saying the complexity of these issues arises in circumstances quite apart from the somewhat lower grade arbitration activity to which a lot of this legislation in New South Wales applies.

MR JACKMAN:   It is a lengthy judgment because of a number of factors, many of which are not in play in this Court.  There is considerable attention given, for example, to the question whether the leave to appeal process should be heard in two stages.  The primary judge made an error of hearing the entire appeal and at the end of it deciding whether leave should be granted.  The Court of Appeals says no, you do not do it that way.  That is why what my learned friend puts forward as a contradiction is not a contradiction because one hears on brief argument whether leave to appeal should be granted.  At that point, one asks oneself is there strong evidence of error of law.

GUMMOW J:   How do you have evidence of error of law when it is construction of a statute?

MR JACKMAN:   The evidence in the case is really the reasons given by the arbitrators.  We put in argument that evidence there means evidence in a fairly conventional sense, the fact that you are attempting to prove or the means by which you are attempting to prove those facts.  That was rejected and the Court of Appeal said the reasons themselves can constitute the evidence, but there is a two‑stage process. 

One asks first of all is there strong evidence of error on brief argument and that is where the Court of Appeal’s conclusion that this is finely balanced – arguable both ways, but finely balanced, is a perfectly conventional and proper basis on which to say leave should not have been granted.  Then the Court says “Be that as it may, for completeness we are going to go on and express an opinion as to what we would have found if we were in the arbitrator’s shoes”.  They say on this non‑causation point they would have come to a different decision had they recognised that it was a very finely balanced question and, therefore, it was wrong to give leave in the first place.

GUMMOW J:   Again, I am not criticising them, but that does not necessarily engender confidence in the community at large as to the operation of these processes under this Act.

MR JACKMAN:   Well, with respect, it does because one of the policy factors is to limit the ability ‑ ‑ ‑

GUMMOW J:   It is pretty hard to go to your client and say the Court of Appeal said if they had been doing it it would have been X but they could not because it was constrained by this arbitration system.

MR JACKMAN:   But there is an important policy at stake, namely, a policy enshrined by statute to limit the ability to appeal from arbitrators’ awards because of a perceived need for finality at the stage of arbitration which distinguishes the arbitration system from conventional curial litigation.

GUMMOW J:   That is why we are here in the High Court debating this question.

MR JACKMAN:   So the Court of Appeal, in our submission, has correctly applied a two‑stage test and said at the leave stage leave should not have been granted because there was no strong evidence of error.  They are not saying that either side’s position was not arguable.  They are saying it was too finely balanced for anyone to say there was strong evidence of error.  What is more, the other integer that has to be satisfied within 38(5)(b) is that the decision would add “substantially to the certainty of commercial law”.  The Court of Appeal said at paragraph 185 that that is not true of this dispute.  It is a question of non‑causational contribution on particular one‑off facts and a determination on that cannot add substantially to commercial law.  It is simply a single decision.

GUMMOW J:  Is this provision in 38(5) replicated in other States?

MR JACKMAN:   It is at the moment but we know that New South Wales has led the way on amendments to the Commercial Arbitration Act.  There is a new Commercial Arbitration Act in New South Wales which has received the royal consent.  The commencement date has not yet been proclaimed and that will change the test from strong evidence of error of law to a test expressed in terms of a matter that is at least open to serious doubt and one could debate for quite a while as to whether that is a higher or lower test than strong evidence of error of law.

But, at any rate, in New South Wales which is now following the International Arbitration Act that is to be the law when we know what the commencement date of the new Act is and we wait to see whether the other States will follow New South Wales in bringing their domestic arbitration Acts into line with both New South Wales and the International Arbitration Act, but one would expect they will.  So, in another respect, a decision on the Commercial Arbitration Act (NSW) as it now stands is again a matter of somewhat historical interest.

In terms of adequacy of reasons, my learned friend was wrong to say that the entirety of the reasoning on the proviso in the section is to be found in paragraph 88 of the arbitrator’s award.  Can I demonstrate that by first coming to the Court of Appeal’s reasoning at page 110?  In paragraph 196 the submission is recorded there:

that it was an error of law for the arbitrators to have failed to express their reasons –

and then it is pointed out what the submissions of the reinsurers were because, of course, the adequacy of reasons must be referable to the submissions put.  They:

focussed upon the unwillingness of the reinsurers to accept risks on underlying policies of greater than three years, and on the otherwise exceptional nature of the FAI D&O run-off policy –

Paragraph 197 points out:

that the reasons of the arbitrators reveal a comprehensive appreciation of the underlying factual material, including the matters upon which the reinsurers’ submissions focussed in this regard –

Can I ask your Honours to go to the award, paragraph 84?  This is a matter which may not be apparent to those who did not participate in the arbitration but in paragraph 84, there is reference there to an argument that we put on section 18 of the Insurance Act.  We did not press that argument in the Court of Appeal and that argument was:

founded on the premise that [the reinsurers] would have accepted the FAI run‑off policy . . . if Gordian had requested special acceptance of –

it in December 1998.  The arbitrators say that they are not going to discuss the range of submissions put in support of that proposition for a special acceptance if requested:

Such direct evidence as is available is substantially to the contrary.  At best for Gordian, the matter is conjectural.

That is a reference to all the matters that were put by the reinsurers on the question of reasonableness, namely that if they had been asked to accept this policy, they would have refused both because of the length of time and because of other concerns they had about FAI.  The reasonableness argument was put by way of cross‑reference by the reinsurers to their section 18 argument.  That is why it appears that way in the arbitrator’s award.  The reasons in the award simply reflect the structure of the submissions that were put by the reinsurers.  There was, as the Court of Appeal rightly said, full attention given to the matters upon which the reinsurers relied for the proviso to section 18(b).

Then going back to the Court of Appeal’s reasoning at page 111, the Court of Appeal says in effect that the Oil Basins question does not arise because:

even assuming that the arbitrators had an obligation to give reasons to the standard of a judge . . . it was open to the arbitrators to state an evaluative conclusion as they did –

particularly when their reasons addressed the very matters that had been put to the arbitrators.

Can I conclude the point about reasons by pointing out an oddity in the draft notice of appeal on page 153?  The Court of Appeal said repeatedly that if there was inadequacy in reasons, the appropriate order was simply remitter to the arbitrators – that is the conventional order.  The Court of Appeal said it would have been highly inappropriate for them to decide the matter themselves, but it is interesting to note on page 153 that the draft notice of appeal in paragraph 16 asks for a remitter to the Court of Appeal, the very thing that the Court of Appeal said it is open to serious doubt whether that order can be made.  In any case, it would be inappropriate and there is an alternative in 17 which has the matter going back to:

the Court of Appeal for the provision of an opinion as to the operation of, and the considerations appropriate to the proper application of, the proviso –

an essay on reasonableness.  Then, once you have the essay on reasonableness, you then go back to the arbitrators for them to give further reasons.  That kind of exercise is utterly futile.  There is no jurisdiction for it.  The Court of Appeal said even if there was jurisdiction, it is not appropriate and it shows the futility of any argument based upon lack of reasons, bearing in mind also that leave to appeal in section 38(5)(a) requires that:

the determination of the question of law could substantially affect the rights of one or more parties to the arbitration –

Having the matter go back to the arbitrators eventually for further reasons on an evaluative question is highly unlikely to affect anybody’s substantive rights.  May it please the Court.

GUMMOW J:   Now, what do you say about paragraph 224 in the Court of Appeal at page 121, in particular at line 30 - the view in Oil Basins, et cetera, “plainly or clearly wrong”.

MR JACKMAN:   If it is necessary for the point to be decided, then we would support the New South Wales Court of Appeal here in saying reasons do not have to be of the standard expected of a judge, but the point does not arise for the reason given in paragraph 198, that one is dealing with an “evaluative” conclusion in a set of reasons that referred expressly to the way in which the matter was put by the reinsurers and dealt with their submissions, so that the matter does not arise in any event and paragraph 224 is obiter. 

It is not an appropriate vehicle to test whether Oil Basins is correct or not because the question does not properly arise here.  That will have to be a matter for the further case where the matter really does arise and have a determinative significance in the proceedings.  May it please the Court.

GUMMOW J:   Yes, Mr Walker.  What do you say about the relief that you would be seeking here?

MR WALKER:   There is nothing hypothetical about the relief, page 153, 15 or 16 and strictures in relation to paragraph 17 are such that I would rather concentrate on 15 and 16.  Certainly, both of those well and truly satisfy the possibility which is the test that could affect.  May I link that immediately to another matter of reply?  Paragraph 85 of the arbitral award is a paragraph in which conclusion is expressed in relation to matters of fact earnestly advanced on behalf of Gordian to the effect that we would have taken this risk on – the longer tail – if we had been asked, in effect, and that was rejected.  In our submission, that casts a very curious light indeed on the paucity of reasons for why it was not unreasonable that we should be lumbered with that long‑tail risk, in effect. 

In our submission, it is for those reasons that the combination of insufficiency of reasons and the possibility of a different outcome combine if one focuses on the fact that, in effect, the outcome under 18B is to inflict on us the acceptance of a cover which it had been held in almost the same breath we would not have taken, certainly raises questions which ought to be dealt with in a way we propose in orders 15 and 16 in the draft on page 153. 

Justice Gummow asked my friend about what the word “evidence” means in relation to the proposition that there had been an error of law made.  It surely must be more than simply the reasons otherwise there is a vanishing point of distinction between that and the face of the award.  The way in which the case was argued, with respect ‑ ‑ ‑

GUMMOW J:   One can see the problem if the law is purely case law.

MR WALKER:   Yes.

GUMMOW J:   A negligence case, for example.

MR WALKER:   Yes.

GUMMOW J:   Was there a duty of care?  One could see that sort of debate.

MR WALKER:   Yes.  The way in which the case was run, with respect, it seems appropriately, given that rather curious wording in the statute, is that it involves demonstration, we think, by argument as well as resort to authority as well as simply the reasons.  In a sense that goes without saying, I suppose, but that is another of these matters which renders this case an appropriate one for the Court to consider.

As to the New South Wales lead not actually yet taken, namely, the substitution of the phrase “open to serious doubt” in place of “strongly arguable”, et cetera, certainly if this case provides an appropriate vehicle to test such matters, we have here a finding that the proposition was incorrect.  It is difficult to see how, without casting doubt on the reasoning of this case, that it could not also, therefore, be open to serious doubt.

In relation to the point jurisdictional, we think, concerning law or fact or mixed law and fact, in our submission, this is a case where fully‑found facts are required to be attended to by reference to the proper understanding of a statutory test.  That, in our submission, is in most cases likely to raise a question of law.

With respect to the matter of reinsurance, whether it is able to be argued at all, could we simply remind your Honours in the record at page 343, line 45, you will see a passage during argument in the Court of Appeal where Mr Pembroke, as his Honour then was, at about line 42 or thereabouts in the Court of Appeal transcript raises that point.  It might be thought that the learned President’s reference at page 108, paragraph 183, to

authority is but only tangentially in the same area.  I do not have anything further to say concerning that matter which plainly is a new matter.

As to the point taken against us that there is not a special leave affidavit replete with detail concerning the insurance or reinsurance portfolio and its nature, it is of course not only matters of long, as opposed to short tail that might produce 18B problems.  That just happens to be the example that has arisen in this case.  There are all kinds of disentitling possibilities and, in our submission, there is no mere conjecture concerning the possibility of 18B as being an important matter in the calculus between insurer and reinsurer thereafter.  May it please the Court.

GUMMOW J:   We will take a short adjournment.

AT 11.13 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.18 AM:

GUMMOW J:   Mr Walker, this draft notice of appeal is something of an embarrassment to you.  At the moment we are minded to grant leave in respect of ground 7 and refer in to the Full Court further consideration of grounds 5 and 6 which, as we understand this narrative, sufficiently encapsulates the section 18B point.  The notice of appeal then would have to be reformulated and in that reformulation paragraph 17, dealing with this particular relief you seek, would be removed.

MR WALKER:   Yes.  Do I have leave, your Honours, to express slightly differently in particular 7 - 5, 6 and 7, to reorder them somewhat?

GUMMOW J:   Reorder them as you wish, but the grant will be as a grant in respect of the text of what is now 7 and the text of what is now 5 and 6 will be referred in and the relief must be reformulated as indicated so that it does not have the equivalent of 17.  Is that clear?

MR WALKER:   Yes.

AT 11.20 AM THE MATTER WAS CONCLUDED