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Australia – International Arbitral Award Not Inconsistent With Public Policy.

15 May, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

 

Emerald Grain Australia Pty Ltd v Agrocorp International Pte Ltd [2014] FCA 414


In the recent decision in Emerald Grain Australia Pty Ltd v Agrocorp International Pte Ltd [2014] FCA 414, the Federal Court held that an arbitral award in favour of Agrocorp should not be set aside on public policy grounds. The Court considered whether there had been a breach of the ‘no evidence rule’ and ‘no hearing rule’. 


It Started With An Agreement To Buy Canola 


Australian based Emerald Grain entered into a contract with Singapore based Agrocorp under which Emerald Grain agreed to provide 40,000 metric tonnes (t) of canola ±10% at Agrocorp’s option, to be delivered to Bangladesh. 


A dispute arose concerning Agrocorp’s entitlement to require delivery of 44,000t of canola (as Emerald Green only delivered 40,000t), and as to responsibility for delays in loading the canola caused by issues with import permits. Agrocorp’s claim was primarily for demurrage associated with the delayed loading and dead-freight and for lost profit on the 4,000t of canola that was not delivered. 


The parties used the standard Grain Trade Australia FOB contract for grain and oilseeds. According to this agreement, a dispute arising out of the contract must first be referred to arbitration in accordance with the Grain Trade Australia Dispute Resolution Rules. The matter was therefore referred to arbitration before Grain Trade Australia’s arbitration tribunal. The tribunal  largely found in favour of Agrocorp. 


The Breach Of Natural Justice Claims 


Emerald Grain applied to the Federal Court seeking to have the award set aside. It claimed a breach of the rules of natural justice had occurred in connection with the making of the award as: 


1. there was no evidence of probative value for the tribunal to make certain findings (no evidence claim); and
2. the tribunal made findings based on its own opinions without giving Emerald Grain adequate notice to respond to those views (no hearing claim). 


Natural Justice And Public Policy 


The arbitral award was made under the International Arbitration Act 1974 (Cth) (the Act).
Section 16 of the Act gives force of law to the UNCITRAL Model Law on International Commercial Arbitration (the Model Law). Article 34(2)(b)(ii) of the Model Law provides that an arbitral award may be set aside if a court finds the award is in conflict with public policy. Section 19 of the Act clarifies that if a breach of natural justice has occurred in connection with the making of an award, the award is in conflict with the public policy of Australia. 


Relying upon Uganda Telecom Ltd v Hi-Tech Telecom Pty Ltd [2011] FCA 131, Pagone J noted that:

 

a court which is asked to set aside an award must be vigilant not to treat a challenge to an arbitral award on the grounds of it being in conflict with the rules of natural justice like an appeal challenging the facts found by a first instance tribunal from which an appeal may lie.


That is, the role of the court is not to consider the correctness of facts found by a tribunal. Rather, the court must determine whether the tribunal, in finding these facts (whether correctly or not), did so in breach of the rules of natural justice. 


Further, Pagone J noted that the content of the rules of natural justice depends upon the circumstances of thecase. In the context of an arbitration governed by the Act and the Model Law, a relevant consideration is that the parties to an arbitration are entitled to expect that the relevant provisions of the Model Law will be applied with some uniformity in convention countries. Accordingly, Pagone J considered that decisions in other countries as to whether an award is in conflict with public policy may provide some guidance to the courts in Australia.


The “No Evidence” Claim 


In Haider v JP Morgan Holdings Aust Ltd [2007] NSWCA 158, the court held that a breach of natural justice arises if there is no relevant and probative evidence capable of supporting a particular finding of fact. 


Pagone J went to great lengths to distinguish a breach of the ‘no evidence rule’ from a complaint that facts were found incorrectly. In particular, his Honour referred to a number of authorities that support the position that a decision based on demonstrably flawed logic or a wrong finding of fact is not a denial of natural justice. The task for the court, therefore, is to determine whether it was reasonably open to the arbitral tribunal to make the findings it did on the material before it, rather than to determine whether it found the facts correctly.
Pagone J considered that he was also required to take into account the context of the case in assessing the challenge on the ‘no evidence’ basis. Relevant factors included that:

 

  • the parties had agreed that the arbitration would proceed ‘on the papers’ without an oral hearing; and 
  • the decision was one of an arbitral tribunal that is not required to give the same level of detail as reasons of a court, and should not be reviewed in the same way (see Westport Insurance Corporation v Gordian Runoff Ltd [2011] HCA 37).

This case also highlights the difficulty in succeeding on a ‘no evidence’ challenge to an arbitral award. As noted by Pagone J, the essential distinction between a permissible error of fact and a breach of the ‘no evidence rule’ is very difficult to maintain in practice. Notwithstanding this difficulty, it is essential that the applicant precisely identifies what is being challenged and the reasons that this demonstrates an absence of probative evidence to support a finding, rather than merely a complaint that a finding of fact was incorrect or not as the losing party had wished. 


A further difficulty is that to prove a negative (ie the absence of probative evidence), the applicant will often need to identify the evidence relied on by the tribunal that it says is inadequate. In doing so, the applicant will often defeat its own case. 


Pagone J considered that many of Emerald Grain’s complaints were really that the tribunal’s findings of fact were wrong, rather than there being an absence of probative evidence. His Honour held that there was (often ample) evidence upon which the tribunal could have made the challenged findings and so rejected Emerald Grain’s challenge. 


For instance, in relation to Agrocorp’s claims for lost profits, the tribunal had decided that an appropriate value for the differential between what Agrocorp undertook to pay for the canola and its market value when the canola was unloaded was USD 39 per tonne, as this was a mid-range value between Agrocorp’s claim of USD 45 per tonne and Emerald Grain’s contention that the correct differential was USD 32.32 per tonne. Emerald Grain claimed there was no probative evidence for the tribunal to have reached this conclusion. 


Pagone J noted that the tribunal had been presented with emails, letters and other documents relevant to determining the market value of canola at the relevant time. Neither party contended that USD 39 per tonne was the appropriate differential. However, even if incorrect, it could not be said the tribunal’s determination of an amount within a range of figures, and considering market fluctuations in the price of canola, were not based on probative evidence. 


The “No Hearing” Claim 


The “no hearing” claim is based on the principles from Trustees of Rotoaira Forest Trust v Attorney-General [1999] NZLR 452 (Rotoaira Forest Trust) which were adopted in Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd (No 2) [2012] FCA 1214. These principles require each party to an arbitration to be given a full opportunity to present its case, to rebut its opponent’s case and to respond to the arbitrator’s own opinions if these were not reasonably foreseeable from the opinions and ideas raised during the hearing. 


Emerald Grain’s challenge was on the basis that:

 

  • certain findings of the arbitral tribunal were not reasonably foreseeable and, as a consequence, it was denied the opportunity to make submissions in respect of those findings; and 
  • the arbitral tribunal had ignored critical submissions that Emerald Grain had made.

Relying upon Rotoaira Forest Trust, Pagone J stated that in order to succeed, Emerald Grain was required toestablish that it would not have foreseen the possibility of the tribunal’s reasoning and to demonstrate that it might have been possible to persuade the arbitral tribunal otherwise if it had been given adequate notice of these matters. Emerald Grain failed to establish either of these matters.


For example, in the arbitration, Agrocorp asserted that Emerald Grain’s failure to ship the additional canola exposed it to liability to the shipowners. Emerald Grain claimed this was irrelevant to the rights of the parties under the contract. On this point the tribunal found in favour of Agrocorp. 


In its application to the Federal Court, Emerald Grain claimed that it had been denied a hearing on this issue as the tribunal’s decision had come as a surprise. Pagone J rejected Emerald Grain’s claim of a breach of the ‘no hearing rule’, noting that it could not have been a surprise to Emerald Grain that the arguments of one party had been accepted over the claims of the other, particularly when both arguments had been clearly articulated in submissions. 


Making A Claim For Breach Of Natural Justice 


Rule 8.05 of the Federal Court Rules 2011 (Cth) requires that an application to set aside an arbitral award be accompanied by either a statement of claim or an affidavit. The statement of claim or affidavit must carefully and precisely set out the material facts and grounds relied upon by the applicant. 


In this case, Emerald Grain commenced proceedings by an originating application accompanied by an affidavit that set out the grounds for Emerald Grain’s claim that the arbitral award was contrary to public policy. Emerald Grain had sought to leave open the possibility of adding further grounds for challenge later in the proceedings by describing the grounds relied upon in the affidavit as some “among other things …”. The affidavit was later supplemented by written submissions that included grounds for challenge that were not connected to the grounds within the affidavit. 


Pagone J held that a party was not permitted to raise new grounds which were not previously raised on a fair reading of the originating application. This was the case notwithstanding the inclusion of the words “among other things …” in the affidavit. To decide otherwise would potentially allow parties to raise new grounds outside the three month limitation period provided for challenging an arbitral award under Article 34(3) of the Model Law. 


What Does This Mean For Practitioners? 


This decision reinforces the finality of arbitral awards and the difficulties in establishing that an award should be set aside as a consequence of a breach of natural justice in connection with the making of the award. It also reinforces Australia as a safe arbitral seat where the courts will not simply raise public policy as a ground for setting aside arbitral awards. 


It is also a helpful reminder of the importance of properly articulating the basis for a claim in an originating process as, subject to obtaining leave to amend, this will set the boundaries of the case that can be advanced in court proceedings.

 

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For further information, please contact:

 

Georgia Quick, Partner, Ashurst 
georgia.quick@ashurst.com

 

Peter Ward, Partner, Ashurst
peter.ward@ashurst.com

 

Adam Firth, Ashurst
adam.firth@ashurst.com

 

Ashleigh Vumbaca, Ashurst
ashleigh.vumbaca@ashurst.com

 

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