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Court of Appeal of New Zealand |
Last Updated: 8 December 2011
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IN THE COURT OF APPEAL OF NEW ZEALAND
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CA57/00
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BETWEEN
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GOLD AND RESOURCE DEVELOPMENTS (NZ) LIMITED
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Appellant
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AND
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DOUG HOOD LIMITED
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Respondent
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Hearing:
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6 June 2000
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Coram:
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Richardson P
Henry J Thomas J Keith J Blanchard J |
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Appearances:
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M R Camp QC and T G Stapleton for Appellant
E D Wylie and W J Palmer for Respondent |
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Judgment:
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18 July 2000
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JUDGMENT OF THE COURT DELIVERED BY BLANCHARD
J
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Introduction
[1] This appeal is about whether an application made under clause 5 of the Second Schedule to the Arbitration Act 1996 (“clause 5”) for leave to appeal on questions of law from a decision of an arbitral tribunal was properly refused by McGechan J in the High Court at Wellington. The questions which arise are:
(1) In what manner should the High Court exercise its discretion under clause 5 to grant leave?
(2) Did the alleged errors of law in this case merit the grant of leave?
Background
[2] In 1992, the appellant, Gold and Resource Developments (NZ) Ltd (“GRD”), formerly called Macraes Mining Company Limited, had engaged the respondent, Doug Hood Ltd (“DHL”), to carry out work at an open cast hard rock gold mine at Macraes Flat, Otago. DHL was to excavate the ore, interburden and overburden, and truck them as directed. The engagement was on a “measure and value” contract; meaning that quantities were measured in situ and previously agreed contract rates applied. There was a detailed written engineering contract, consisting of several documents, including amended New Zealand Standard Conditions of Contract for Building and Civil Engineering Construction (“the New Zealand Standard Conditions”).
[3] After a disagreement on price review, and as permitted by the contract, GRD gave notice of termination to DHL, effective 27 June 1995. DHL worked out the six-month period of notice. The present dispute between the two parties concerns payment for the work carried out over this period. GRD had imposed a considerable increase in required extraction rates from August 1994, and took the view that, because of this, the work done over the termination period was a variation of contract, to be valued in accordance with the variation provisions of the contract. DHL disagreed, arguing that the work should be valued in accordance with the termination provisions.
[4] The resolution of the dispute turned upon the correct interpretation of the contract and was referred to arbitration before an eminent panel consisting of the Hon Sir Ian Barker QC, an experienced Wellington legal practitioner, Mr SS Williams, and a senior engineer, Mr D C Tennent. The arbitrators found largely in favour of DHL, deciding that the increase in quantity under such a measure and value contract did not constitute a variation, and that the work done over the termination period was to be paid for in accordance with the termination provisions of the contract. GRD sought leave under clause 5 to appeal to the High Court, claiming that there were errors of law contained in the arbitrators’ decision.
[5] Clause 5 states (relevantly):
5. Appeals on Questions of Law-
(1) Notwithstanding anything in articles 5 or 34 of the First Schedule, any party may appeal to the High Court on any question of law arising out of an award-
(a) If the parties have so agreed before the making of that award; or
(b) With the consent of every other party given after the making of that award; or
(c) With the leave of the High Court.
(2) The High Court shall not grant leave under subclause (1) (c) unless it considers that, having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties.
[6] In the High Court, in a reserved decision delivered on 17 December 1999, McGechan J found that the determination of the questions of law concerned could substantially affect GRD’s rights in terms of clause 5(2). However, he rightly considered this to be only a precondition, and not enough in itself to justify the granting of leave. The Court still had to exercise its discretion. McGechan J considered that for the Court to exercise its discretion in favour of granting leave, the party appealing an arbitrator’s decision had to show a degree of doubt about the decision. The level of doubt which had to be shown would vary with each case along a spectrum between, at one end, “real doubt” that the arbitrator’s decision was right and, at the other end, a view that the arbitrator’s decision was “obviously wrong”. The appropriate standard to be applied on the facts of this case, he said, was close to the “obviously wrong” end of the spectrum. The errors of law alleged by GRD had not been sufficiently established to raise this level of concern. Accordingly in the exercise of his discretion under clause 5(2) McGechan J declined to grant leave.
The appellant’s submissions
[7] GRD submitted that the approach taken by McGechan J was erroneous. It argued that a broad discretionary approach should be taken to clause 5 applications and, if there is to be any fettering of the High Court’s discretion under clause 5, it should be legislative and not judicial. In accordance with a broad discretionary approach, it should suffice for the applicant for leave to appeal to show that there was a “real possibility of error” in the arbitral decision. If this can be shown, it was said, then the Judge’s discretion should be exercised in the applicant’s favour.
[8] GRD submitted that the errors of law in the arbitrators’ decision do satisfy its “real possibility of error” test.
The respondent’s submissions
[9] In response, DHL submitted that McGechan J’s approach to the exercise of his discretion was correct, and that a broad discretionary approach to clause 5 would be inappropriate. The discretion must not be exercised so as to frustrate the purposes of the Arbitration Act, which include clarifying the limits of judicial review of arbitral awards and facilitating the recognition and enforcement of awards.
[10] In addition, counsel for DHL argued that, if GRD is correct in its submission that once the test was satisfied and the precondition in clause 5(2) was met the Judge must exercise his or her discretion in the applicant’s favour, then clause 5(2) would have provided that the High Court “shall” grant leave. But it did not: it contains a negative direction, that the High Court “shall not” grant leave unless the determination of the question of law could substantially affect rights. There must be a residual discretion left to the Court, and the approach taken by McGechan J to exercising this discretion was, in DHL’s submission, correct.
QUESTION (1): IN WHAT MANNER SHOULD THE HIGH COURT EXERCISE ITS DISCRETION UNDER CLAUSE 5(2) TO GRANT LEAVE?
[11] Clause 5(2) is, as the respondent submits, framed in a negative way: that the Court shall not grant leave unless the determination of the question of law concerned could substantially affect the rights of parties to the arbitration agreement. The substantial affecting of rights is but a precondition to the granting of leave under clause 5, designed to ensure that disputes will not be referred to the High Court if, as between the immediate parties, the matter is largely academic (Ipswich Borough Council v Fisons PLC [1990] Ch 709, 721). There remains however an important discretion to be exercised by the Court in determining whether, once this precondition is met, leave to appeal should then be granted.
[12] In determining how to approach this discretion, the starting point, as McGechan J pointed out, is that it is to be exercised so as to promote the objects of the legislation by which it is conferred.
The purposes of the Arbitration Act 1996
[13] The purposes of the Arbitration Act 1996 (“the 1996 Act”) are set out in section 5:
5. Purposes of Act-
The purposes of this Act are-
(a) To encourage the use of arbitration as an agreed method of resolving commercial and other disputes; and
(b) To promote international consistency of arbitral regimes based on the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law on the 21st day of June 1985; and
(c) To promote consistency between the international and domestic arbitral regimes in New Zealand; and
(d) To redefine and clarify the limits of judicial review of the arbitral process and of arbitral awards; and
(e) To facilitate the recognition and enforcement of arbitration agreements and arbitral awards; and
(f) To give effect to the obligations of the Government of New Zealand under the Protocol on Arbitration Clauses (1923), the Convention on the Execution of Foreign Arbitral Awards (1927), and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (the English texts of which are set out in the Third Schedule). [Emphasis added]
[14] From this section, it is apparent that in passing the Act, Parliament intended to encourage the use of arbitration to resolve disputes between parties, and to limit the High Court’s involvement in reviewing and setting aside arbitral decisions. This conclusion is reinforced by a perusal of the debates on the Arbitration Bill in the House of Representatives (1996 NZPD 14245-14246):
New Zealand needs an arbitration regime that ... grants parties the flexibility to arrange the processes of their arbitration so it best fits their needs and limits the scope for litigation. (Mr P Hilt, Chairperson of the Government and Administration Committee considering the Arbitration Bill)
[15] Similar sentiments were expressed by the Select Committee in its report on the Arbitration Bill, stating:
This bill aims to facilitate the use of arbitration in New Zealand by:
...
Limiting the scope for litigation about arbitration. (Commentary of the Government Administration Committee on the Arbitration Bill No.117-2, p.i)
The overseas experience
[16] Assistance in formulating the Court’s approach to the exercise of its discretion under clause 5 can also be gained by considering the experience of other common law jurisdictions. In particular, New Zealand’s new Arbitration Act mirrors legislation enacted in England and Australia, though in both cases changes have subsequently been made.
(a) England
[17] In England the Arbitration Act 1979 (now replaced by the Arbitration Act 1996) provided in s1 for an appeal to the High Court on a question of law by agreement or consent of the parties or with the leave of the Court. It then provided:
(4) The High Court shall not grant leave under subsection 3(b) above unless it considers that, having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties to the arbitration agreement ...
This is exactly the wording now contained in New Zealand’s clause 5(2).
[18] In Pioneer Shipping Co v BTP Tioxide (The Nema) [1982] AC 724 (“the Nema”), the House of Lords considered s1, and discussed the approach the Courts should take in applying it. The principal judgment on this question was delivered by Lord Diplock. The arbitrator’s award concerned a question arising in relation to a charterparty, namely whether The Nema was bound to proceed forthwith to a certain port and wait there until a strike at the port ended or for seasonal reasons loading became impossible or whether, on the other view, the owners’ contractual obligations had been dissolved by frustration. Obviously this was a matter which called for urgent adjudication. Their Lordships were very critical of the granting of leave by the High Court in such circumstances and of some preceding interlocutory delay. The need for a quick decision was in itself said to be sufficient to make a grant of leave to appeal “an unjudicial exercise of the discretion”. Added to this, the terms of the charterparty were “unique” – a “one-off” case, a description Lord Diplock in his usual style referred to as a convenient neologism.
[19] Lord Diplock contrasted such one-off cases with standard terms which have to be given a uniform construction and where
...an authoritative ruling of the court as to their construction which is binding also upon all arbitrators under the sanction of an appeal from an award of an arbitrator that has resulted from his departing from that ruling performs a useful function that is lacking in that performed by the court in substituting for the opinion of an experienced commercial arbitrator its own opinion as to the application of a “one-off” clause to the particular facts of a particular case. (p737-8)
[20] Earlier, speaking of a one-off contract, his Lordship had remarked that it was
...not self-evident that an arbitrator or arbitral tribunal chosen by the parties for his or their experience and knowledge of the commercial background and usages of the trade in which the dispute arises, is less competent to ascertain the mutual intentions of the parties than a judge of the Commercial Court, a Court of Appeal of three Lords Justices or even an Appellate Committee of five Lords of Appeal in Ordinary. (p736)
[21] His Lordship saw indications in the 1979 Act of a parliamentary intention to give effect to the turn of the tide in favour of finality in arbitral awards where there had been no departure from settled principles of law. He noted the abolition of any power of review for error of law on the face of the record and the abolition of any ability of a party to request an arbitrator to state a special case. He also noted the absolute bar, even in respect of a standard-form contract document, upon the grant of leave to appeal unless the point of law “would” (sic) substantially affect the rights of one or more parties to the reference. And there were also stringent conditions relating to any further appeal to the Court of Appeal. All of these features of course are present in New Zealand’s 1996 Act. (Special leave is required for an appeal to this Court which is likely to apply very much the same test as it does for applications under s67 of the Judicature Act 1908 (Waller v Hider [1998] 1 NZLR 412)).
[22] In the following well-known passages, which have come to be called the Nema guidelines, Lord Diplock gave guidance on how the English Courts should approach leave applications:
Where, as in the instant case, a question of law involved is the construction of a “one-off” clause the application of which to the particular facts of the case is an issue in the arbitration, leave should not normally be given unless it is apparent to the judge upon a mere perusal of the reasoned award itself without the benefit of adversarial argument, that the meaning ascribed to the clause by the arbitrator is obviously wrong. But if on such perusal it appears to the judge that it is possible that argument might persuade him, despite first impression to the contrary, that the arbitrator might be right, he should not grant leave; the parties should be left to accept, for better or for worse, the decision of the tribunal that they had chosen to decide the matter in the first instance.
...
...[R]ather less strict criteria are...appropriate where questions of construction of contracts in standard terms are concerned...[I]f the decision of the question of construction in the circumstances of the particular case would add significantly to the clarity and certainty of English commercial law it would be proper to give leave in a case sufficiently substantial to escape the ban imposed by the first part of section 1(4) bearing in mind always that a superabundance of citable judicial decisions arising out of slightly different facts is calculated to hinder rather than to promote clarity in settled principles of commercial law. But leave should not be given even in such a case, unless the judge considered that a strong prima facie case had been made out that the arbitrator had been wrong in his construction; and when the events to which the standard clause fell to be applied in the particular arbitration were themselves “one-off” events, stricter criteria should be applied on the same lines as those that I have suggested as appropriate to “one-off” clauses. (p742-3)
[23] Evidently there was some reluctance to follow these guidelines on the part of High Court Judges who were used to the jurisdiction which prevailed before the 1979 Act. Some three years later their Lordships, again speaking through Lord Diplock in terms suggesting some irritation, took the opportunity of reinforcing what had been said in The Nema. In Antaios Compania Naviera S.A. v Salen Rederierna A.B. (The Antaios) [1985] AC 191 it was said that unless Judges were prepared to be “vigilant” in the exercise of the discretion they would allow to be frustrated the intention of parliament to promote speedy finality in arbitral awards. Lord Diplock spoke of the intention of parliament being “thwarted” by parties to an arbitration applying for leave to appeal from any award that involved a question that was even remotely arguable as to the construction of a contract and by some Judges granting leave, albeit on conditions as to security or payment into court. Later he made reference also to “the reluctance of the commercial Bar...to abandon the practices and modify those attitudes of mind which had the effect of breeding litigation and delaying finality on arbitral awards to which the Bar had become accustomed before the Act of 1979” (p203). His Lordship did, however, add the observation that, like all guidelines as to how judicial discretion should be exercised, the Nema guidelines were not intended to be all-embracing or immutable, but subject to adaptation to match changes in practices where these occurred or to refinement to meet problems of kinds that were not foreseen and were not covered by what was said in The Nema.
[24] Elias J pointed out in Trustees of Rotoaira Forest Trust v Attorney-General [1998] 3 NZLR 89, 102 that in The Nema and The Antaios the disputes entailed allegations of frustration and repudiatory breach and were classified as “one-off” not simply because they affected only the particular parties but also because they were concerned with historical breaches where the relationship between the parties did not continue.
[25] The House of Lords took the opportunity in The Antaios of affirming that the guideline given in The Nema that, even in a case that turns on the construction of a standard term, “leave should not be given...unless the Judge considered that a strong prima facie case had been made out that the arbitrator had been wrong in his construction,” was to apply even though there might be dicta in other reported cases at first instance which suggested that upon some question of the construction of that standard term there might among commercial Judges be two schools of thought. Lord Diplock said that this observation was confined to conflicting dicta, not decisions. “If there are conflicting decisions, the Judge should give leave to appeal to the High Court, and whatever Judge hears the appeal should in accordance with the decision that he favours give leave to appeal from his decision to the Court of Appeal” (p204). Later the English Court of Appeal said that where there are conflicting decisions by arbitrators a Judge should give favourable consideration to granting leave to appeal to the High Court, but not necessarily beyond it, in order that there might be a decision binding on all arbitrators and providing uniformity of decisions (Aden Refinery Co Ltd v Ugland Management Co Ltd [1987] 1 QB 650, 661.
[26] The Antaios also gave guidance on the manner in which a High Court Judge ought to hear and consider a leave application. It was said that the practice of the House of Lords on petitions should be followed. In accordance with that practice, reasons are not given. Lord Diplock pointed out that the Judge was not himself deciding at this stage the question of law arising out of the award but simply deciding whether the case was of a kind that was recognised, under the guidelines, as suitable to be admitted to appeal.
[27] Their Lordships also deprecated the practice of having a prolonged hearing in the High Court. Prolonged and costly arguments assisted in frustrating the policy of Parliament. Again, it was appropriate that the practice of the House in dealing with petitions should be followed. Adapting the words of Lord Diplock to an application for leave to appeal an award, the recommended practice is that the Judge should peruse the award and the grounds set out in the application for leave to appeal that are relied upon by the applicant as making the case one in which leave ought to be granted. Then there should generally be only a brief oral hearing inter partes (it was noted that the average duration of the hearing of a petition before the Appeal Committee was 10 to 15 minutes) in which the parties would not be allowed to use the hearing as an opportunity to argue the appeal, the only question being whether the case was of such a nature that it ought to be allowed to be argued. This recommendation can be contrasted with what occurred in the present case, where the application for leave to appeal was argued before McGechan J over three days and his typically thorough reserved decision extended to 41 pages and was delivered some three weeks or so after the hearing.
[28] In his judgment in Aden Refinery v Ugland Management Mustill LJ, an author of a well-known text on arbitration (Mustill & Boyd, Commercial Arbitration 2ed (1989)), warned against treating the guidelines “as if they constituted a complete and immutable code, converting the exercise of the discretion conferred on the judge by statute into a mechanical process yielding an answer which follows inexorably, once a dispute and the resulting award have been assigned to one of the various categories” (p668). The speeches in the House of Lords could not legislate for every situation.
[29] Some five years after The Antaios, when there had no doubt been time for practices in the Commercial Court to become adjusted to the guidelines, the Court of Appeal made some further helpful observations in Ipswich Borough Council v Fisons PLC [1990] Ch 709. Leave had been granted to appeal on a point of law in an award concerning the construction of a rent review clause in a lease. The Court commented that it would be a profound error to conclude that in The Nema their Lordships had intended their guidance to be confined to shipping disputes or indeed to the wider category of disputes in respect of which special provision was made in s4 of the 1979 Act, i.e shipping, insurance and commodity trade disputes.
[30] It was said to be “settled law” that a decision on whether or not to grant leave to appeal to the High Court should be arrived at after only brief argument. It was not the function of the Judge to hear the putative appeal before deciding whether or not to grant leave. The Court referred to the “presumption in favour of finality”. Where there was nothing to rebut it, the application should be unceremoniously refused:
Rebuttal must always be based upon at least a suspicion that the arbitrator has gone wrong. Being left in the frame of mind that the arbitrator may or may not have been right - being left in real doubt in that sense - is not sufficient. But the degree of suspicion which is requisite may vary according to the seriousness of the consequences of error to the parties and to a wider public. (p724)
[31] The Court said that in most rent review disputes the “standard terms” approach will be justified: a strong prima facie case of error should be shown:
So how strong is strong? No meter can be applied or indeed devised. It is a matter of relative values. If the chosen arbitrator is a lawyer and the problem is purely one of construction, the parties must be assumed to have had good reason for relying on his expertise and the presumption in favour of finality or, to put it the other way round, the strength needed to rebut it will be greater. So too if the dispute really centres on an issue calling for non-legal expertise, albeit with some underlying question of law, and the chosen arbitrator has that expertise. But if the chosen arbitrator is not a lawyer and the whole dispute centres on a difficult question of law, less strength may be required.
Similarly, the degree of strength will be affected by whether the clause in question is one of a class commonly encountered, so that others would benefit from an authoritative decision on its meaning or application, and I see no reason why some account should not be taken of the seriousness of the consequences to the parties of the arbitrator’s error, if error there be. But the bottom line must always, I think, be that the judge concludes that there is a more or less strong, but still “strong”, prima facie case that the arbitrator has erred in law. To adopt any other approach would be to fly in the face of the legislative preference for finality. (pp724-5)
[32] Later the Court made the following helpful observation:
Nor, I would add, does it matter whether the arbitrator’s reasons may have been faulty, unless this cast doubt on his conclusions; it is always possible to arrive at the right answer for the wrong reasons and in such a case leave should never be given. If he was to give leave, he had, at least, to be satisfied that there was a more or less strong prima facie case for thinking that the arbitrator had erred on a question of law. (p726)
[33] Speaking in 1995 of the situation in England under the 1979 Act, Lord Mustill said that “the criteria for leave to appeal and the grounds on which the Court will interfere are so tightly drawn that successful appeals are rare” (Pupuke Service Station Ltd v Caltex Oil (NZ) Ltd (PC Appeal No 63 of 1994, judgment 16 November 1995)).
[34] When the 1979 Act was replaced with the Arbitration Act 1996 the restrictive approach taken by the English Courts was approved and reinforced by a specific legislative provision. The new statute continued to prohibit an appeal without the agreement or consent of the parties or the leave of the Court. Section 69(3) replaced s1(4) and is in the following terms:
Leave to appeal shall be given only if the court is satisfied
(a) that the determination of the question will substantially affect the rights of one or more of the parties,
(b) that the question is one which the tribunal was asked to determine,
(c) that, on the basis of the findings of fact in the award –
(i) the decision of the tribunal on the question is obviously wrong, or
(ii) the question is one of general public importance and the decision of the tribunal is at least open to serious doubt, and
(d) that, despite the agreement of the parties to resolve the matter by arbitration, it is just and proper in all the circumstances for the court to determine the question.
[35] It is to be noted that leave is to be given only if the question will substantially affect the rights of one or more of the parties (in the 1979 Act and in the New Zealand Act the equivalent word is “could”) and the award must be “obviously wrong” or raise a question of general public importance on which the decision of the tribunal is at least open to serious doubt and it must be just and proper in all the circumstances for the Court to determine the question. The Nema guidelines have therefore under the current English statute been translated into rules of law which must be applied.
(b) Australia
[36] It is instructive to consider the experience in Australia where there is uniform State legislation applicable to jurisdictions both large (New South Wales) and small (Tasmania and the Northern Territory), in terms of population and business communities. The uniform Commercial Arbitration Acts – dating from the mid 1980s – provided that the Court should not have jurisdiction to set aside or remit an award on the ground of error of fact or law on the face of the record (cf. Articles 5 and 34 of the First Schedule to New Zealand’s 1996 Act). But they provide for an appeal, with the consent of all parties or with the leave of the State Supreme Court, on any question of law arising out of an award. The same pre-condition appears in s38 of the uniform Acts as is to be found in Article 5(2) of the Second Schedule to the present New Zealand Act (see para [5] above). When originally enacted that was, as in the English 1979 Act and the New Zealand Act, the only statutory control. The Australian Courts thus had to decide whether, and to what extent, they should follow the Nema guidelines. In Qantas Airways Ltd v Joseland & Gilling (1986) 6 NSWLR 327 the New South Wales Court of Appeal said it was not convinced that Lord Diplock’s statements, “based as they are on a different background”, were applicable to the Australian Act, although they were “important factors in determining whether leave should be given”. But the exercise of the Court’s discretion did not depend on whether the claimant had made out a strong prima facie case or fulfilled the other requirements to which Lord Diplock had referred. “It is a discretion to be exercised after considering all the circumstances of the case” (p333). The same approach was taken in Victoria. In Leighton Contractors Pty Ltd v Kilpatrick Green Pty Ltd [1992] 2 VR 505 the Appeal Division of the Supreme Court observed that the view of the New South Wales Court in Qantas had been preferred in a number of other State jurisdictions. It considered that the discretion given by Parliament in unrestricted terms should not be subject to restrictions imposed by judicial decision.
[37] The following passage from the judgment of Fullagar J provided support for the present appellant’s argument:
If the legislature leaves that which is expressed as an absolute and unfettered discretion to a court, it is in my opinion not for the court to set restrictions upon the discretion for future cases; far less is it for an appellate court to purport to bind every single judge of the donee court in all future cases as to how the discretion is to be exercised in various stipulated kinds of case, that is to say, stipulated by the court. In the first place, to do so amounts purely and simply to judicial legislation. Secondly, it is judicial legislation of a most objectionable kind, for the judiciary is on the very face of things saying the very opposite to that which the parliament has enacted; what the two have respectively said are irreconcilable; where the parliament has said in virtually the plainest terms available to it that the discretion is to be unfettered, the appellate court is saying in the plainest terms that court-stipulated fetters and boundaries must be placed upon the discretion in the hands of the judge who is the donee of the discretion. The objectionable character does not lie merely in the unwarranted usurpation by the judiciary of the legislative function, with all that this entails, with the affairs of the citizens ruled by judicial officers whom the citizens cannot elect or dismiss. It lies also in the unspoken assumption that the court laying down the guidelines for all further cases is not merely wiser than any future exerciser of the discretion but is also prescient and omniscient. Thirdly, to lay down restrictions seems to me to be at once a yielding to temptation and a sign of weakness, as if the court does not have enough confidence in the court, or in those who sit at first instance, to allow so potent an instrument of justice as a general discretion to be wisely and justly wielded or used. It is one thing for an appellate court to exercise sparingly or restrictively its own discretion – to allow appeals to itself – according to its own “guidelines” so as to protect from the floodgates, because it is at liberty to depart from its own guidelines; it is however quite another thing to enact judicially guidelines binding as rules of law upon a judge who is by the legislature empowered to grant leave to the court. (pp512-513)
(Fullagar J also said that it ought to be a general practice not to give reasons for refusing leave.)
[38] If this were the last word in Australia this Court might have a difficult choice to make between differing approaches and it might reasonably be argued that New Zealand judicial practice should align itself with that of its major trading partner. There would perhaps also have been some force in Mr Camp QC’s submission that commercial conditions and the types of disputes which are the subject of arbitration in this country (and in Australia) are very different from those in the United Kingdom in general, and London in particular, which gave rise to the Nema guidelines and the 1996 Act in that country.
[39] But the looser approach taken by the Australian Courts was quickly found to be quite unsatisfactory. All the States and the Territories have now amended s38 of their Commercial Arbitration Acts so that each now prohibits the Supreme Court from granting leave to appeal a question of law arising out of an award unless the Court considers that:
(a) having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of 1 or more parties to the arbitration agreement; and
(b) there is –
(i) a manifest error of law on the face of the award; or
(ii) strong evidence that the arbitrator or umpire made an error of law and that the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law.
[40] The New South Wales Court of Appeal has said in Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203 that a “manifest error” is something evident or obvious rather than arguable. It quoted (at p221) from the speech of the New South Wales Attorney-General in the debate leading to the enactment of the amendment in that State:
If arbitration is to be encouraged as a settlement procedure and not as a dry run before litigation, a more restrictive criterion for the granting of leave is desirable and the parties should be left to accept the decision of the arbitrator whom they have chose to decide the matter in the first place. (New South Wales Parliamentary Debates, 22 November 1990, 10376 at 10378)
[41] In the leading judgment in Promenade, Sheller JA accepted that the legislature intended to reject the broad discretionary approach prescribed by the judgment in Qantas and to constrain the exercise of court control over arbitral awards in the manner described by the House of Lords in The Nema.
[42] In a later case the same Court described the approach taken in Qantas as “too tender to the achievement of justice and insufficiently attentive to the needs of finality in this class of litigation”. This case was Natoli v Walker (unreported, CA40351 of 1993, judgment 26 May 1994) which was an attempt to appeal an award in an arbitration about a contract to perform alterations to a house, the contract sum being about $175,000 – a dispute very typical of the New Zealand scene. The Court said that the clear preference of Parliaments throughout Australia has been for the “more robust and narrow approach” favoured in The Nema. The “lonely dissent” of Meagher JA did not impugn the principles applied by the majority. He detected a manifest error in the particular award.
Reform and reaction in New Zealand
[43] Even under the Arbitration Act 1908 in this country, where the bases upon which a Court could embark upon an examination of an award were not constrained as they are by Article 34 of the First Schedule of the 1996 Act, a bias towards finality had already emerged. It is enough to refer only to Manukau City Council v Fencible Court Howick Ltd [1991] 3 NZLR 410, 412 in which Cooke P said that where parties have agreed to arbitration rather than Court proceedings, even where their contract has been dictated by a statutory regime (in that case the Public Bodies Leases Act 1969), the Court should not allow the finality of the award to be destroyed except for truly compelling reasons. In relation to an error of law, he said that the view should not be overlooked that a party who can show that there has been a truly significant error of law has a justifiable grievance for which the law should provide a remedy, unless he or she has freely contracted out of that right (p413), a comment quoted by the Law Commission in its Report on Arbitration (1991) NZLC R20 which is the genesis of New Zealand’s 1996 Act.
[44] The purposes of the 1996 Act found in s5 have been quoted in full above (para [13]). Importantly, they include:
(a) To encourage the use of arbitration as an agreed method of resolving commercial and other disputes; and
...
(e) To redefine and clarify the limits of judicial review of the arbitral process and of arbitral awards;...
[45] In its commentary on the draft provision which became clause 5 of the Second Schedule, the Law Commission said that it closely followed s38 of the uniform Australian Acts. The Commission was aware however of the Working Group Report in Australia which had made the recommendations leading to the subsequent amendment to s38 mentioned above. The Commission was also aware that in New South Wales amending legislation had already been introduced and that it was expected in other State legislatures. The Law Commission concluded (para 433) that a number of factors weighed against adoption of the additional stipulation which is now s38(5)(b) (see para [39] above):
First, as Lord Diplock made clear in The Nema, the observations set out in that case were guidelines rather than absolute rules; indeed, in certain categories of cases, the English courts have determined that the guidelines are not applicable. Second, there are reservations about resurrecting such concepts as “the face of the award”. And, thirdly, no difference of judicial opinion over the application of The Nema guidelines has yet arisen in New Zealand and, given the advantages to New Zealand of access to the English jurisprudence on a similar provision, we would expect that the English approach to appeals on questions of law, including The Nema guidelines as modified from time to time, will be adopted by the New Zealand courts. Accordingly, there is no policy difference between what is sought to be achieved by the amending legislation in Australia, and by clause 5 of our draft statute. Should the difficulties encountered in the New South Wales jurisprudence and recorded in the [Australian Working Group] report occur in New Zealand, this issue might require further legislative attention. [Emphasis added]
[46] What the Commission was saying is that it might not be necessary for our legislature to enact the Australian amendment provided that the New Zealand Courts were found to be following the Nema guidelines; the approach in this country might therefore be slightly less rigid than was intended to be the case in Australia, but not much more so, and certainly there ought not as a matter of policy to be the fully discretionary approach which had been taken in Australia in Qantas and Leighton.
[47] There has, however, since the commencement of the 1996 Act been a variety of approaches by the High Court Bench as can be seen from the 15 decisions to which counsel referred us. Some Judges have adhered to the spirit of the Nema guidelines, as envisaged by the Law Commission; but some have appeared to take a looser approach, one judgment granting leave merely because the Court had not been able to conclude that the award in a building arbitration was “clearly right” on the question of law and was thus “left in doubt” (Seath Construction Ltd v Ruler Holdings Ltd, High Court, Tauranga Registry, judgment 4 August 1999, M17/99).
[48] It would serve no good purpose to survey all of these decisions. Two more only need be mentioned. In Rotoaira Forest Trust Elias J considered that English and Hong Kong case law suggested that there was a “spectrum of possibilities”, at one end the one-off event and at the other the interpretation of a standard form. In between, as in the Rotoaira case, was a point of law which would regulate future rent reviews between the parties. She was of the view that the appropriate test in such a case was whether there was “real doubt” whether the arbitrator was wrong in law. That formulation seems practically indistinguishable from the Nema guideline for standard terms (a strong prima facie case that the arbitrator was wrong). It would seem an appropriate test to have applied where there would be many further (five yearly) reviews in a lease between the parties not due to terminate until about 50 years after the then current review date.
[49] In Weatherhead v Deka New Zealand Ltd [1999] 1 NZLR 492 Baragwanath J provided a comprehensive analysis. The dispute concerned clauses in a long-term lease. After referring to the history of the 1996 Act and to The Nema, the Judge said that he did not doubt that in the type of case Lord Diplock had in mind it would be appropriate for New Zealand Courts to adopt a similar approach, but the resolution of commercial disputes by an experienced maritime arbitrator was “a far cry from a domestic arbitration conducted by an arbitrator selected for reasons of experience in a particular trade and for cost efficiency rather than for legal knowledge” (p505).
[50] Baragwanath J concluded:
Given CER there is good reason to adopt the Nema principles in New Zealand in comparable cases, such as international legally experienced arbitrators or those where arbitrators are dealing with a dispute between two or more commercially experienced parties; there is no reason to believe that Parliament expected the Courts of New Zealand to strike out in a different direction. To do otherwise would put us unnecessarily out of step, although it is to be noted that New Zealand has not adopted the 1990 [sic] restrictions.
But the Nema guidelines are not a statute. Where a lay arbitrator is engaged in a domestic case the strict Nema principles are unlikely to be seen as applicable, even though the public interest in securing finality which is an attraction of arbitration is to be preferred to that of scrupulous accuracy. Ours is a smaller society in which it is not yet necessary to control a flood of international arbitrations; the interest of protection of a citizen from misapplication of the law by an arbitrator of limited experience may warrant weighing against the cost and delay of litigation. (p506-7)
With respect to the Judge, the second of these paragraphs perhaps may not have been written with an appreciation of what has occurred in all the Australian jurisdictions.
The test which should be applied in New Zealand
[51] There are of course arguments which can be made in favour of a wider scope for judicial review of arbitral awards for error of law. Arbitrators do not always have legal knowledge, and may apply the law incorrectly. The parties will expect a fair and reasonable result, and may consider that they should have a right of recourse if such a result is not forthcoming because the law has been incorrectly stated or applied. And there is a public interest in ensuring that appropriate standards are met in arbitrations.
[52] But our Parliament, like those in the United Kingdom and Australia, has chosen to favour finality, certainty and party autonomy over these considerations. It intended to encourage arbitration as a dispute resolution mechanism. By enacting a statute with the express purpose of redefining and clarifying the limits of judicial review of arbitral awards, Parliament has made clear its intention that parties should be made to accept the arbitral decision where they have chosen to submit their dispute to resolution in such manner. It plainly intended a strict limitation on the involvement of the Courts where this choice has been made. This makes inappropriate a broad approach to the discretion, such as that proposed by counsel for the appellant in this case. (Of course, where both parties repent of their decision to choose arbitration over litigation and wish to submit their dispute over a question of law to the Courts, the 1996 Act makes provision for them to do so without leave: see clause 5(1)(b).)
[53] Most of the force of Fullagar J’s criticisms of the Nema guidelines, cited by Mr Camp QC (para [37] above), disappears when in Australia the wider discretion he favoured has proved so unsatisfactory, and when our Parliament has chosen to enact legislation based upon a Law Commission Report (published, coincidentally, the same month as the Leighton judgment was delivered) which endorses The Nema and that legislation itself indicates that judicial review is to be limited. The criticisms are also answered by pointing to the common practice of the courts in providing through caselaw the principles which are found to be necessary to guide the exercise of a broad discretion conferred by legislation in order to ensure the statutory interest is met.
[54] Once the statutory threshold has been passed, the Court should in each case exercise its discretion in a disciplined way. The following are factors to be considered. Other than the first, which is the most important, they are not listed in any particular order. As a matter of caution, it should be said that there may be other considerations which should be taken into account in the circumstances of a particular case. They are to be seen as guidelines to, rather than as governing, the exercise of the discretion.
(1) The strength of the challenge/nature of point of law
The Court should consider in a preliminary way, as discussed in paras [56] and [57], the strength of the argument that there has been an error of law and the nature of that point. If it is a one-off point, in the sense that it is unlikely to occur again and cannot be seen as having any precedent value, either generally or to the parties on another occasion, then unless there are very strong indications of error leave should rarely be given. In other cases, the Court will be looking for a somewhat less stringent assessment. In those cases a strongly arguable case would normally be required for leave to be granted. The existence of conflicting decisions will also be relevant.
We have put the matter in this way not to indicate any basic departure from the Nema guidelines but because we are not comfortable with the conclusory way in which Lord Diplock expressed himself in stating when leave ought to be given in respect of an alleged one-off error of law. To say that the Judge must be persuaded that the award is “obviously wrong” seems to us, with respect, to be inappropriate. Plainly the House of Lords in The Nema considered that the granting of leave in respect of an alleged one-off error should not be a common event, but, while that can be accepted, we think it is better to say that what must be shown, on a preliminary view, is that the applicant has a very strongly arguable case that the arbitral tribunal has erred in law.
So, instead of speaking of a “strong prima facie case that the arbitrator was wrong” or “obviously wrong”, which are only labels intended to indicate that there is a high or very high threshold, we would, without intending any lowering of the barrier faced by an applicant for leave, substitute a test of a strongly or very strongly arguable case.
(2) How the question arose before the arbitrators
The Court should consider whether the question of law arose incidentally, or whether it was the very point of the arbitration. Although it may be undesirable for an arbitrator who is not legally qualified to deal definitively with the law, where the parties have chosen, with full knowledge that the dispute centres on a question of law, to submit that dispute to arbitration rather than asking a court to determine the question, they should generally be held to their choice. The parties in that situation clearly took the risk that the lay arbitrator would not get the law completely right. In such a case, it will be harder to obtain leave to appeal. But if only during the arbitral process has a legal issue emerged as crucial to the decision, rather than being at the forefront from the beginning, leave will be more readily granted.
(3) The qualifications of the arbitrators
Where the arbitrator chosen by the parties is legally qualified, it will be harder to obtain leave to appeal the arbitral decision on a question of law. As Lord Donaldson MR stated in Ipswich Borough Council v Fisons PLC [1990] Ch 709, 724, if the chosen arbitrator is a lawyer and the problem is purely one of law, the parties must be assumed to have had good reason for relying on that lawyer’s expertise.
(4) The importance of the dispute to the parties
Where the dispute has great significance to the parties, it may be easier to obtain leave to appeal, because the effect on them of an incorrect ruling will be all the greater. In this context it is to be remembered that some disputes referred to arbitration may involve more than just a question of money.
(5) The amount of money involved
Where a very substantial amount of money is involved in the arbitration, the cost of an arbitrator’s mistake is obviously much greater. In that situation, it may be somewhat easier for the parties to obtain leave to appeal in order to ensure that an injustice is not done by leaving intact an incorrect ruling.
(6) The amount of delay involved in going through the courts
This factor is to be balanced against the previous one. If the amount of money involved is not so substantial, and the delay likely to be occasioned by submission of the dispute to the court system is great, it may be that the cost of correcting the alleged error of law is disproportionate to the amount in dispute. In this situation, it will be more difficult for the applicant to get leave to appeal. A fortiore if the situation is one of urgency as in The Nema itself (see para [18]).
(7) Whether the contract provides for the arbitral award to be final and binding
Where there is such a clause, it will not be determinative, but it will be an important consideration. It will indicate that the parties did not contemplate becoming involved in litigation over the arbitral award. The High Court should lean towards giving effect to the stated preference of the parties for finality.
(8) Whether the dispute before the arbitrators is international or domestic
Under the Arbitration Act, parties to an international arbitration can opt in to clause 5; they can expressly choose to have clause 5 apply to their arbitration. If they do not opt in, then their recourse to the Court is limited to the setting aside of the arbitral award on the grounds set out in Article 34 of the First Schedule (covering things like incapacity of parties, irregularity of procedures or failure to follow the rules of natural justice). However, if they do opt in, then it is clear that they did intend the possibility of recourse to the Court in the event of an error by the arbitrator on a question of law.
“No Evidence”
[55] While not expressing a final view, we see some force in the argument that whether there was any evidence to support a particular finding of fact made by the arbitrator is not a question of law in the context of the 1996 Act. In Edwards (Inspector of Taxes) v Bairstow [1955] UKHL 3; [1956] AC 14, 29 Viscount Simonds said that findings of fact made by a tribunal could be set aside by a Court if it appeared that the tribunal had acted without any evidence, or upon a view of the facts which could not reasonably be entertained. The authors of Mustill & Boyd, Commercial Arbitration 2nd ed, (1989) assert at 592-3 and 596 that this principle cannot be applied to the review of arbitral decisions. To do so, they say, would be to broaden the basis on which arbitral awards can be appealed on questions of law. This would be contrary to the general principle that the arbitrator is master of the facts (now to be found in this country in Article 19(2) of Schedule 1 to the 1996 Act) and to the specific aims of the legislation, which include the promotion of finality in arbitral awards and the limiting of judicial intervention. See also DAR Williams QC, Arbitration and Dispute Resolution [2000] NZ Law Review 61, 77-8, citing Russell on Arbitration 21st ed (1997), para 8-057.
Procedure on application for leave
[56] The application for leave to appeal should state the alleged error(s) of law and concisely give reasons why the arbitral tribunal is said to be in error (citing, but not discussing, relevant authority). It should also indicate whether any error is said to be of general importance, supplying affidavit evidence where necessary to support that contention.
[57] The hearing of the application should be kept brief. It should be merely an opportunity for the Judge to ensure that he or she has a grasp of the arguments and so enabling a determination to be made of whether the applicant has, in light of the nature of the point of law and the factors to be considered, established a sufficiently strong case to justify the grant of leave. As Lord Donaldson MR said in Ipswich Borough Council v Fisons PLC [1990] Ch 709, 722:
...a decision on whether or not to grant leave to appeal to the High Court should be arrived at after only brief argument. It is not the function of the judge to hear the putative appeal before deciding whether or not to grant leave.
[58] If the Judge decides to grant leave, reasons should ordinarily not be given. It is undesirable that the Judge who is to hear the substantive argument should be embarrassed or influenced by the existence of written reasons.
[59] If leave is not granted, the Judge should deliver a short judgment for the benefit of the parties indicating, where necessary, whether the matter in issue is considered to be one-off, and why the case did not meet the required standard. A detailed analysis of the alleged error of law is not required.
[60] Since the hearing amendments to the High Court Rules have been promulgated to come into force on 1 August 2000. In a new Part 17 there are to be rules governing applications for leave to appeal under the Arbitration Act. They came to our attention after this judgment had been prepared but appear consistent with what is said in paras [56] to [59].
QUESTION (2): DID THE ALLEGED ERRORS OF LAW IN THIS CASE MERIT THE GRANT OF LEAVE?
[61] This is a one-off dispute: it is a question of the construction of several related contractual documents. Although one of them (the New Zealand Standard Conditions) is in general use, the particular relationship between it and the other contractual documents is not a matter of interest to anyone other than the present parties. The arbitrators were not required to construe one of the standard conditions, merely to say how it applied (or not) in the unique contractual setting. As McGechan J stated, “It is in large degree a one-off arbitration on some very particular contractual provisions ... It will be of limited utility to the arbitration world in general.” Because the parties are no longer contractually involved with one another, the resolution of the questions of law will not be of future application even to them.
[62] The other relevant factors in the present case are as follows:
[63] Balancing these factors in the context of a one-off dispute, it is clear that the Court should not disturb McGechan J’s exercise of discretion. In accordance with the Nema guidelines the Judge had to be satisfied, on a preliminary examination of the arguments, that the arbitrators were “obviously wrong” in law on a question which could have substantially affected the rights of GRD. There was nothing that called for the Judge, in his discretion, to depart from or modify the guidelines in this case. The dispute was important to the parties (more so, it would seem, to DHL than to GRD, the applicant) and involved a not inconsiderable sum. But the questions of construction of the documents were at the heart of the arbitration, not arising merely incidentally, and the arbitration panel to which they had been entrusted had been selected in large part for their legal expertise. Bearing in mind the Act’s bias in favour of finality, there was no reason to justify departing from the “obviously wrong” test, or, as we would now say, the test of a very strongly arguable case.
[64] Nor did McGechan J err in his application of this test to the errors of law alleged by the appellant. The appellant alleged, first, that the arbitrators had been wrong to say that clause 8.1.1(a) of the New Zealand Standard Conditions (as amended by the parties) did not apply to a measure and value contract such as the one in dispute here. Clause 8.1.1(a) allowed the appellant’s engineer to order variations to the contract work which increased or decreased the quantity of work. The arbitrators were of the opinion that the very nature of this measure and value type contract was that quantities may increase or decrease, and thus simply increasing the quantity of work did not amount to a variation. The appellant argued that such an interpretation was erroneous, and that, as a matter of law, an increase in quantity could amount to a variation. The appellant may be correct in arguing that there is no general principle that an increase in work can never be a variation in a measure and value type contract. But, as the arbitrators pointed out, in this particular contract there were specific provisions (particularly clause 9.2 of the Project Specification) setting out what was to happen when quantities of work increased, which took precedence over the New Zealand Standard Conditions. It therefore could not be said that there was even a strongly arguable case that the arbitrators had erred in concluding that an increase in the quantity of work in this contract was not a variation within the meaning of clause 8.1.1(a).
[65] Secondly, the appellant alleged that the arbitrators erred in law in concluding that clause 9.2 of the Project Specification applied to the work carried out by the respondent during the termination period. There were two parts to this argument. The appellant argued that clause 9.2 applied only to scheduled volumes, and as there were no volumes scheduled for the termination period the clause could not apply. The appellant also submitted that the arbitrators’ finding was contrary to a formal engineer’s decision which was accepted as being binding on both parties. The engineer’s formal decision was that the Project Specification applied to the termination period work except to the extent that its relevance had expired as a result of progress with the work. The appellant said that, due to the lack of schedules applying to the termination period, clause 9.2 of the Project Specification had become irrelevant. The arbitrators considered these arguments and were not convinced by them. They found that the termination provisions of the contract revived the scheduled volumes and thereby gave clause 9.2 applicability during the termination period. On a plain reading of the contract, the arbitrators’ view is a tenable one.
[66] The third alleged error of law was that the arbitrators applied wrong principles to the valuation of the variation work, in particular holding that the rates in the schedule must be assumed to have been reasonable and that in valuing the variation work it was necessary to have regard to the scheduled rates. It is far from a strong argument for the appellant to say that the arbitrators erred in assuming that scheduled rates agreed between two commercially knowledgeable contracting parties would have been reasonable rates. This was a perfectly reasonable assumption for the arbitrators to make. The method chosen by the arbitrators for the valuation (that is, having reference to the scheduled rates, the contractor’s costs and a reasonable margin for profit) is one that makes commercial sense.
[67] Finally, the appellant alleged that the arbitrators erred in law in fixing the total amount payable to the respondents, as the finding was unsupported by the evidence. But, as has been stated in para [56], it is doubtful that the question whether there was any evidence to support a finding of fact made by the arbitrator raises a question of law in the present context. In any event we consider that the point taken for the appellant is of no great strength and does not merit the granting of leave to appeal.
[68] Thus, the errors of law alleged by the appellant fall well short of the standard required for a grant of leave in this case.
Result
[69] Accordingly the appeal is dismissed and the appellant is ordered to pay costs of $5,000 to the respondent, together with its reasonable expenses of the appeal, including travel and accommodation costs of counsel, to be fixed if necessary by the Registrar.
Solicitors
Stapleton Stevens, Wellington for
Appellant
Buddle Findlay, Christchurch for Respondent
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