AUSTRALIAN COURT PROVIDES GUIDANCE ON DRAFTING OF ARBITRATION AGREEMENTS AND REASONING OF AWARDS

In a recent post, we discussed Australia’s pro-enforcement approach to foreign arbitral awards. A recent case of the Victorian Court of Appeal (VCA) affirms this approach in relation to domestic awards.

In Pinchus Feldman and Yosef Feldman v Corey Stephen Tayar [2021] VSCA 185, the VCA considered an appeal from a decision to order enforcement of a domestic arbitral award. The grounds of appeal were (1) a challenge to the validity of the arbitration agreement; and (2) a challenge to the adequacy of the arbitrators’ reasons. The VCA dismissed the appeal, upholding the primary judge’s decision to partially enforce the award pursuant to the Commercial Arbitration Act 2011 (Vic) (the Act).

Through this case, the VCA has provided instructive guidance on the drafting of arbitration agreements and the standard of reasons required of an arbitral tribunal, drawing upon the jurisprudence of domestic and international arbitration.

The arbitration

The Applicants operated the Yeshivah Centre in Sydney, where the Respondent worked. Between 2008 and 2013, the Respondent lent the Applicants various sums of money for the purpose of meeting expenses of the Centre. The Respondent claimed the majority of the money had not been repaid.

On 4 March 2013, the Applicants and the Respondent entered into a written arbitration agreement (the Arbitration Agreement). The Recitals to the Arbitration Agreement provided that:

“A. Disputes have arisen between the Parties concerning certain transactions between them during the period from 2007 to date, including certain loans, rents, salary payments, the ownership of properties and other matters.

B. Pursuant to this Agreement, an Arbitral Panel will be appointed to determine the Disputed Matters in accordance the processes set out in this Agreement.”

“Disputed Matters” was defined as “the matters described in Schedule 1 to be determined by the Arbitral Panel and made subject of an Award.” Schedule 1, in turn, defined “The Disputed Matters” as “The matters to be determined by the Arbitral Panel are to be determined by the Statement of Claim, Statement of Defense [sic] and Cross Claim (if any) and the Reply and Deference [sic] to Cross Claim (if any) to be filed in the arbitration as directed by the Arbitral Panel.”

The parties agreed that the Disputed Matters would be determined by reference to principles of Orthodox Jewish Law (“Halacha”) and that the Arbitration Agreement was governed by the law of Victoria.

The arbitration commenced on 4 March 2013. None of the documents referenced in Schedule 1 were ever created. Instead, the parties and the arbitrators agreed that the parties would make their claims orally, with the disputes the subject of the arbitration being also identified orally. All of the claims fell within the “Disputed Matters” identified in Recital A above. There was no evidence that the Applicants opposed this procedure or sought further identification of the claims.

On 9 May 2013, the arbitral tribunal published its award (the Award) and the reasons for the Award, recording its decision on the Respondent’s 5 claims for monetary sums or property. Claim 1 was partially successful and the arbitral tribunal ordered a monetary sum in lieu of the Respondent’s claim to certain properties (based on non-payment of the principal). Claims 2 to 4 were successful, and Claim 5 was unsuccessful.

The enforcement proceedings before the primary judge

On 6 May 2019, the Respondent commenced enforcement proceedings pursuant to section 35 of the Act, in respect of Claims 1, 2 and 4. On 11 September 2019, the Applicants issued an application for refusal of enforcement under section 36. In March 2020, the primary judge made an enforcement order in respect of the monetary component of Claim 1: the Applicants were ordered to pay the Respondents the sum of $1,515,402.02.

Relevantly, the primary judge held that:

• the Arbitration Agreement was valid and enforceable. It was in writing and sufficiently identified the disputes submitted to arbitration, therefore satisfying sections 1(3)(b) and 7 of the Act. It was sufficient that the parties were aware precisely what “Disputed Matters” were referred to arbitration even without a written statement of claim;
• regarding Claim 1, the reasons were adequate as they “set out the relevant arguments, the Halachic principles upon which they rely, and the conclusions arrived at consequential to those facts”; and
• regarding Claims 2 and 4, the Reasons did not satisfy the requirements to give reasons as required by section 31(3) of the Act. Consequently, the primary judge refused enforcement in respect of those claims.

The appeal to the VCA

The Applicants appealed the primary judge’s decision, alleging that:

1. in relation to the Arbitration Agreement, the primary judge erred in finding that there was a valid arbitration agreement. The parties did not agree in writing that any dispute that had arisen or may arise between them would be settled by arbitration; and
2. in relation to the reasoning of the award, the primary judge erred in not finding that the arbitrators failed to give reasons in respect of Claim 1. The primary judge should have exercised his discretion under section 36(1)(a)(iv) of the Act to refuse to enforce the award.

The Arbitration Agreement

Under section 7(1) of the Act, “arbitration agreement” is defined as “an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them”. The VCA noted that an arbitration agreement that submitted “all” disputes to arbitration would clearly satisfy section 7(1), notwithstanding the disputes would only be precisely identified during the arbitral process itself.

Consequently, the VCA held that “[t]here is no reason why a submission of ‘certain’ disputes should demand any greater specificity.” Rather, parties are allowed to agree in writing to a process to determine which disputes will be submitted to arbitration; they need not identify the particular disputes in the arbitration agreement. “As long as there is a process to determine with certainty which disputes are to be submitted, there is a valid and binding agreement.”

Here, Recital A sufficiently identified the subject matter of the disputes, even though the precise articulation and quantification of the claims was to be determined through pleadings as directed by the arbitral tribunal. The parties then agreed orally that identification of the disputes orally would suffice. It was not material that this gave the term “Disputed Matters” no work to do, because the pleadings identified in Schedule 1 were neither mandatory under the Arbitration Agreement nor required by the arbitral tribunal.

Therefore, the VCA rejected the Applicants’ arguments that nothing was submitted to arbitration and that there was no valid arbitration agreement. The first ground of appeal was dismissed.

Reasons

The VCA considered existing authorities (drawing upon the UNCITRAL Model Law and international arbitration practice) that emphasised the differences between arbitration and litigation. It noted that reasons for an arbitral award do not need to be of a judicial standard. Rather:

“All that is necessary is that the arbitrators should set out what, on their view of the evidence, did or did not happen and should explain succinctly why, in the light of what happened, they have reached their decision and what that decision is. That is all that is meant by a ‘reasoned award’.” (Gordian Runoff Ltd v Westport Insurance Corporation [2010] NSWCA 57, citing Bremer Handelsgesellschaft mbH v Westzucker GmbH [No 2] [1981] 2 Lloyd’s Rep 130).

The VCA further noted that “[t]he adequacy or sufficiency of reasons will depend on the evidence, the complexity and nature of the issue, and the relevant finding. The reasons must address why the arbitrators have reached a particular decision.”

Applying this standard, the VCA upheld the findings of the primary judge and held that the reasons were adequate. They had a “sufficient process of reasoning” because they set out (among other things):

• why the claim to the properties failed;
• the basis for the quantum of the Award; and
• relevant rival arguments.

Comment

The VCA’s decision is an instructive reminder for drafting arbitration agreements. Although an arbitration agreement need not precisely articulate the claims that are submitted to arbitration, it is necessary to identify the general nature of the disputes to be submitted to arbitration. As noted in a previous post, “the importance of carefully drafted arbitration agreements that capture the intended scope” should not be understated.

Additionally, that the VCA upheld the parties’ agreement to define their claims orally demonstrates the pro-enforcement approach of Australian courts and the importance of party autonomy and procedural economy. By disallowing retrospective challenges to an award where the parties had duly exercised their autonomy during the arbitration proceedings, the Australian judiciary has demonstrated it will hold parties to their commitments to arbitrate.

It is significant that the VCA affirmed that arbitral reasons need not be of a judicial standard, as long as they are adequate. Such clarifications suggest that, to resist enforcement, an award debtor must meet a relatively high threshold and establish some material defect or omission in the arbitrators’ reasons.

The Australian judiciary continues to support the rise of arbitration in Australia.

For further information, please contact Chad Catterwell, Partner, Guillermo Garcia-Perrote, Senior Associate, or your usual Herbert Smith Freehills contact.

The authors would like to thank Clarence Ma, Graduate for their assistance in preparing this blog post.