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Arbitration Act 1996 – Reconstructing the Agreement to Arbitrate

Written by Alan Sherlock and Shukti Sharma on July 9th, 2014.

The recent stream of alternate dispute resolution methods is part of the zeitgeist where disputants are shying away from Courts and attempting to settle their differences outside the Courtroom steps. Consistent with that theme, the Arbitration Act 1996 (“the Act”) limits the right of appeal to questions of law. The case of Ewan Robert Carr and Brookside Farm Trust Limited v Gallaway Cook Allan [2014] NZSC 75 is an example of the import of contract law principles on the question of whether an arbitration agreement is held to be valid.

Background
 
This case stems from an underlying dispute about the cancellation of a purchase contract.  The appellants contended that a solicitor of the Gallway Cook Allan was negligent in handling the purchase contract, which led to the cancellation of the agreement.  In an effort to resolve the dispute, the parties agreed to enter into an arbitration agreement (“the Agreement”). 
 
According to the terms of the Agreement, the agreement of the parties to submit the dispute to arbitration was explicitly made subject to a right of appeal.  This right to appeal was captured in cl 1.2 of the Agreement, which incorporated cl 5 of sch 2 of the Act, but amended the provision to apply to both “questions of law and fact.”  The issue in the Supreme Court was therefore whether the award made by the arbitrator could be set aside because the illegality of cl 1.2 made the entire arbitration agreement void. 
 
Provisions of the Act
 
The Arbitration Act 1996 embodies a general principle against court intervention when there is an arbitration agreement in place.  Art 34 (2) of the Act describes the limited grounds available to parties who wish to have the arbitration award set aside.  The optional provision in cl 5 of sch 2 of the Act, if elected, provides a right of appeal to the High Court on matters of law.  However, neither of these provisions create a right of appeal on a question of fact.  In New Zealand, the right to appeal is based on jurisdiction created by statute.  As a consequence, the parties could not agree to create a right of appeal where no such statutory authorisation existed and as a result, the variation in cl 1.2 of the Agreement was illegal.
 
Decision
 
The appellants contended that the right to appeal on questions of law and fact was central to the appellants agreeing to arbitrate the dispute.  On that basis, the words “questions of law and fact” were not severable from cl 1.2 and the resulting invalidity of cl 1.2 made the entire agreement unenforceable.  On the other hand, the respondents argued that because cl 1.1 of the Agreement stated that the award made by the arbitrator was final and binding on the parties, cl 1.2 and any deficiencies within that clause did not form part of the Agreement. 
 
Requirements for a valid arbitration agreement
 
The Agreement to arbitrate between the parties forms the contractual basis upon which the statutory regime is founded.  The Court held that “arbitration agreement” as defined in s 2 of the Act includes the both the formal submission of disputes to arbitration and any matters related to procedure on which the parties agree.  In considering the various provisions under the Act, the Court held that the drafting language of the provisions relating to procedural matters such as the powers of the tribunal, confidentiality and privacy, contemplated that procedural matters would form part of the arbitration agreement.  As such, it was not possible to use the doctrine of separability in art 16 (1) of sch 1 of the Act to mean that illegal or invalid procedural matters relating to the arbitration could be severed from the agreement to arbitrate.  Art 16 (1) was not designed to treat the agreement to arbitrate and the procedure governing the arbitration as separate agreements.  Instead, the provision was crafted to protect the integrity of the agreement to arbitrate and associated procedural matters in the event that the main underlying contract between the parties was found to be illegal or invalid.
 
Severance of the ineffective words
 
The Court turned to well established contract law principles in order to determine whether the offending words could be deleted from cl 1.2 and the remainder of the arbitration agreement enforced.  In order to reach a conclusion, the Court canvassed overseas English and United States approaches to the question of severability and recognised that no single test could be used as a blanket rule to determine whether a clause was severable.  However, the Court found that the overall approach evident from the caselaw was that the importance of the invalid contractual term should be evaluated in light of what the parties have agreed to, with reference to the particular words they had chosen to capture their agreement.  The Court reiterated previous caselaw and stated that only subsidiary promises were severable from the main contract.  It was not possible to sever a clause, the effect of which was to alter the nature and substance of what the parties had agreed to.  The Supreme Court also rejected the submission that the ascertaining the intention of the parties required a subjective inquiry into the intention of the parties. 
 
By applying the above principles, the Court found that the italicization of the words “questions of fact and law” with the notation of “emphasis added” in cl 1.2 evidenced the importance of the scope of the right to appeal.  A plain reading of the contractual terms made it clear that the right and scope of appeal was of fundamental importance to the parties. As a consequence, the offending words could not be severed from the entire agreement and the appellants successfully established that the arbitration agreement was void under art 34 (2)(a)(i) of sch 1 of the Act.
 
Setting aside the award
 
Art 34 sets out the limited set of circumstances where the Court may exercise its discretionary powers to set aside an arbitral award.  The Court recognised that the absence of a valid arbitration agreement undermines the very basis upon which an arbitrator makes an award.  As a consequence, it would rarely be appropriate to refuse to set aside an award where the agreement that gives the arbitrator his or her jurisdiction, was itself void. 
 

Arnold J dissented with the majority on this point.  In his view, the exercise of discretion under art 34 (2)(a)(i) also required a consideration of art 34 (2)(a)(iv), which sets out the principle that parties will not be entitled to have an award set aside on the basis of a failure to follow an agreed procedure, if the procedure is in conflict with a mandatory New Zealand law.  Thus, in cases where such a conflict exists and the arbitration agreement is held to be invalid, art 34 (2)(a)(iv) should be used to uphold an award.  The majority of the Supreme Court disagreed with this approach and held that a consideration of the travaux préparatoires clearly showed that art 34 (2)(a)(iv) could only be applied in cases where there was a valid arbitration agreement but the agreed procedure was not followed.  The article was a separate and distinct clause that could not be characterised as superseding art 34 (2)(a)(i).  For this reason, the absence of a valid arbitration agreement underpinning the award met the requirements under art 34 (2)(a)(i), which meant that the award could be set aside.

 
Comment
 
This case dispels the traditional idea that the agreement of the parties reigns supreme in arbitration agreements.  While it is the agreement of the parties that forms the foundation upon which the Arbitration Act applies, this judgment makes it clear that the parties are not free to dictate matters upon which the law gives them no control.  The case definitively clears the point that determining the appellate jurisdiction of Courts is outside the realm of private agreement.  In doing so, the case demonstrates the importance of ensuring that arbitration agreements are not only logical and internally consistent but also harmonious with any mandatory provisions of the Arbitration Act.  
 
 
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