FEDERAL COURT OF AUSTRALIA

Hebei Jikai Industrial Group Co Ltd v Martin [2015] FCA 228

THE COURT ORDERS THAT:

1.    The originating application for relief under the Model Law is dismissed.

2.    The retained funds, as defined in clause 8 of the Deed executed by, inter alia, the applicant/cross-respondent and the first respondent/cross-claimant on 24 November 2012, are to be released to the first respondent/cross-claimant in accordance with clause 10.2 of the Deed.

3.    The applicant/cross-respondent is to provide all such approvals, consents and authorities required to ensure that the retained funds are released in accordance with Order 2.

4.    The applicant/cross-respondent is to pay the costs of the first respondent/cross-claimant in relation to the application and cross-claim as agreed or assessed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    In 2012, Hebei Jikai Industrial Group Co Ltd (HJI) and Mr Vincent Martin were, together with various other parties, embroiled in a commercial dispute. Both HJI and Mr Martin were shareholders in RUS Holdings (Australia) Pty Ltd (RUS Holdings). Mr Martin was a director of RUS Holdings. Proceedings were on foot in the Supreme Courts of New South Wales and Queensland. The New South Wales proceedings included claims that HJI had engaged in oppressive conduct against Mr Martin as a minority shareholder of RUS Holdings and counter-claims that Mr Martin had breached his statutory and general law duties as a director of RUS Holdings.

2    In late 2012 the parties agreed to settle their dispute and discontinue all proceedings. A Deed of Settlement was executed (Deed). The Deed provided, amongst other things, for a procedure or mechanism to be followed to finally resolve the dispute concerning whether Mr Martin had breached his duties as a director and thereby caused loss to RUS Holdings or its subsidiary RUS Mining Services Pty Ltd (RUS Mining). That procedure involved appointing an auditor who would provide a report to HJI and Mr Martin. If the report disclosed “a basis” for a breach of duty by Mr Martin, Mr Martin was able to dispute that finding and refer the matter to a “binding arbitration.” The arbitration was to determine if a breach occurred and, if so, the amount of any loss incurred by RUS Holdings or RUS Mining. The amount of any loss so found was to be subtracted from retained funds of $500,000, with the balance to be paid to Mr Martin. If the report disclosed no “basis” for a breach, the retained funds were to be released to Mr Martin without deduction.

3    As events transpired, an auditor was appointed, the auditor produced a report, Mr Martin disputed the report and an arbitrator was appointed. That is when, according to HJI, matters went awry. A question arose whether the report produced by the auditor in fact disclosed a basis for a breach of duty on the part of Mr Martin. In circumstances more fully described later, the arbitrator went ahead and determined this “threshold issue” as a final award. He determined that the audit report “on its face” did not disclose a basis for a breach of duty by Mr Martin and that it accordingly could not be said that Mr Martin caused any loss. That finding effectively brought the arbitration to an end.

4    HJI now applies for an order setting aside this arbitral award. In the alternative, it seeks a declaration that the report produced by the auditor is not an audit report for the purposes of the Deed. Mr Martin, on the other hand, seeks an order that the retained funds be paid to him in accordance with the terms of the Deed.

Background

5    The relevant background and facts are not in dispute.

The Deed

6    It is unnecessary to say anything further about the commercial dispute that was settled by the Deed.

7    The Deed was executed on 24 November 2012. The parties to the Deed are HJI, Mr Martin, RUS Holdings, RUS Mining, two other shareholders in RUS Holdings (Valzan Pty Limited and Yeahnaah Pty Limited), Mr Christopher Laffey (a director and shareholder in Yeahnaah and a director of RUS Holdings) and Australian Mining Machinery Group (AMM) Pty Ltd.

8    HJI named each of the parties to the Deed as respondents to these proceedings, along with the auditor and the arbitrator. Other than Mr Martin, none of the respondents played an active role in the proceedings. The majority of the other respondents filed submitting appearances.

9    The basic structure of the settlement effected by the Deed was that HJI would purchase the shares in RUS Holdings held by Mr Martin, Valzan Pty Limited and Yeahnaah Pty Limited for agreed sums. Mr Martin and Mr Laffey would resign as directors of RUS Holdings and RUS Mining and Mr Martin would resign as general manager of RUS Mining. The parties agreed to discontinue the Supreme Court proceedings in New South Wales and Queensland.

10    The Deed also provided that various other sums were to be paid or offset against amounts that were otherwise payable under the terms of the Deed. Relevantly, clause 8 provided that $500,000 was to be retained from monies otherwise payable to Mr Martin under the Deed. These retained funds were to be held in trust pending the outcome of the agreed mechanisms to determine claims or disputes concerning whether Mr Martin had breached his duties as a director of RUS Holdings or RUS Mining and, if so, whether those breaches had caused any loss to either company. Those agreed mechanisms were set out in clauses 9 and 10 of the Deed.

11    Clauses 9 and 10 of the Deed provide as follows:

9.    Audit of RUS Holdings and RUS Mining

HJI, Mr Martin, RUS Holdings, RUS Mining agree that any claim, dispute or cause of action by HIJ, RUS Holdings and RUS Mining in respect of or in connection with any alleged breach of duty by Mr Martin in his capacity as a director of RUS Holdings or RUS Mining and any alleged consequential loss, is to be determined solely and in accordance with mechanisms as set out in this clause and clause 10 below.

9.1    Appointment of Independent Auditor

HJI will appoint, at its own costs, an Independent Auditor to perform an audit of RUS Holdings and RUS Mining in the period for which Mr Martin held appointments as director of RUS Holdings and RUS Mining.

9.2    Provision of audit report

The Independent Auditor is to provide HJI and Mr Martin with the audit report within seven (7) Business Days of that report being completed, but in any event, within twelve (12) months of the exchange of this Deed.

10.    Right to Set-Off

10.1    Findings of audit report

In the event that at the conclusion of the audit undertaken, the audit report prepared discloses a basis for a breach of a legal duty by Mr Martin to RUS Holdings and RUS Mining and that such breach has caused loss to RUS Holdings or RUS Mining, then:

(a)    Mr Martin will be entitled to dispute any finding contained in the audit report that discloses a basis for a breach of a legal duty or that he has breached his duties as a director, or that any such alleged breach has caused loss to RUS Holdings or RUS Mining. In the event that Mr Martin disputes any such finding(s) contained in the audit report, HJI will not be entitled to any offset alleged loss from the Retained Funds until such time as the dispute resolution procedure identified in clauses 10.1(c) to 10.1(e) is completed;

(b)    if no dispute is raised by Mr Martin in respect of any finding contained in the report completed by the auditor, then HJI will be entitled to offset any losses identified by the auditor in that report that are referrable to any alleged breach or basis for breach by Mr Martin of his duties as a director of RUS Holdings or RUS Mining from the Retained Funds. Any remaining balance after such deduction is to be immediately paid to Mr Martin and HJI agrees that it will immediately provide any approval, consent or authority required to ensure that Mr Martin is paid the balance of any monies that remain in the Trust Fund established in accordance with clause 8.2(a) above;

(c)    in the event that Mr Martin disputes an alleged breach, basis for a breach or loss which is identified in the audit report, then the matter will be referred to a binding arbitration which will, among other matters, determine whether a breach occurred and if so, whether RUS Holdings or RUS Mining have incurred loss as a result of the alleged breach or basis for breach and if so, what the quantum of the alleged losses are;

(d)    without limitation, the audit report is to be tendered in such arbitration proceedings;

(e)    in the event that the arbitration proceedings determine that RUS Holdings or RUS Mining have suffered loss as a result of any alleged breach or basis for breach of Mr Martin’s duties as a director as identified in the audit report, then the quantum of that loss as determined in those arbitration proceedings, is to be offset from the Retained Funds and the balance, if any, is to be immediately paid to Mr Martin;

(f)    any arbitration proceedings is to be initiated within fourteen (14) days of the provision of the audit report by the Independent Auditor to Mr Martin;

(g)    any arbitration initiated will be conducted in accordance with: The Institute of Arbitrators & Mediators Australia Rules for the Conduct of Commercial Arbitrations.

10.2    Release of Retained Funds or balance thereof after set-off

(a)    If, at the expiration of twelve (12) months of the exchange of this Deed, no audit has been undertaken of RUS Holdings and RUS Mining, then:

(i)    the Retained Funds are to be immediately released to Mr Martin and HJI will provide any approval, consent or authority required to ensure that Mr Martin is paid the Retained Funds;

(ii)    it is acknowledged by Mr Martin and Mr Laffey that the Retained Funds released to Mr Martin will be dealt with by agreement between Mr Martin and Mr Laffey and that Mr Laffey is not entitled to and will not make any claims for the Retained Funds against HJI;

(iii)    RUS Mining and RUS Holdings will release Mr Martin from all claims, allegations or causes of action past or future arising out of or in connection with his directorship of RUS Holdings and RUS Mining, except for claims arising as a result of Mr Martin breaching the terms of this Deed;

(iv)    HJI will release Mr Martin from all claims, allegations or causes of action past or future that it may have had against him but for this Deed, except for claims arising as a result of Mr Martin breaching the terms of this Deed.

(b)    At the conclusion of arbitration proceedings contemplated in clauses 10.1(c) to 10.1(e), or where an audit is undertaken, but the audit report does not disclose a basis for a breach of legal duty by Mr Martin to RUS Holdings and RUS Mining, then:

(i)    the Retained Funds are to be immediately released to Mr Martin; and HJI will provide any approval, consent or authority required to ensure that Mr Martin is paid the Retained Funds;

(ii)    it is acknowledged by Mr Martin and Mr Laffey that the Retained Funds released to Mr Martin will be dealt with by agreement between Mr Martin and Mr Laffey and that Mr Laffey is not entitled to and will not make any claims for the Retained Funds against HJI;

(iii)    RUS Mining and RUS Holdings will release Mr Martin from all claims, allegations or causes of action past or future arising out of or in connection with his directorship of RUS Holdings and RUS Mining, except for claims arising as a result of Mr Martin breaching the terms of this Deed;

(iv)    HJI will release Mr Martin from all claims, allegations or causes of action past or future that it may have had against him but for this Deed, except for claims arising as a result of Mr Martin breaching the terms of this Deed.

12    It can be seen that the agreed mechanisms essentially involve four possible steps or stages: the appointment of an auditor; the audit report; an arbitration (depending on the findings in the report and any dispute raised by Mr Martin); and the release of the retained funds or any balance after any offset.

Appointment of the auditor

13    The first step of the agreed mechanism was the appointment of an Independent Auditor by HJI. The term “Independent Auditor” is defined in clause 1.1 of the Deed as “an ASIC registered auditor who has not previously undertaken work for either of the parties”. The Deed does not prescribe the precise terms of the appointment other than that the auditor is to perform an audit of RUS Holdings and RUS Mining in the period when Mr Martin was a director (clause 9.1 of the Deed).

14    There is no dispute that this first step was carried out or engaged. By letter dated 5 August 2013, Mr Peter Chi Hung Tsang confirmed his engagement to perform an “operational audit” of RUS Holdings and RUS Mining for the period when Mr Martin was a director of those two companies. The engagement letter stated that the “audit review” would be conducted “as per” the Deed and quoted clause 10.1 of the Deed. The letter was signed by a director of HJI on 12 August 2013 under an acknowledgement that the letter was “in accordance with our understanding of the arrangements for the operational audit” of RUS Holdings and RUS Mining.

The audit report

15    The second step in the agreed mechanisms was the provision of an audit report. There is no dispute that Mr Tsang produced a report on 21 November 2013. HJI contends, however, that it is not an “audit report” within the meaning of the Deed. In these circumstances, the contents of the report, which is in the form of a table, should be set out in full:

The arbitration

16    Under the terms of the Deed, the third step of the agreed mechanism, the institution of arbitration proceedings, only arose if the audit report disclosed “a basis for a breach of a legal duty by Mr Martin to RUS Holdings and RUS Mining and that such breach has caused loss to RUS Holdings or RUS Mining” (clause 10.1). If the report disclosed those matters, Mr Martin was entitled to dispute either finding (clause 10.1(a) of the Deed). If he did, that dispute was to be referred to a “binding arbitration” (clause 10.1(c) of the Deed). Any arbitration proceedings were to be instituted within fourteen days of the provision of the report (clause 10.1(f) of the Deed). Importantly, any arbitration proceedings were to be conducted in accordance with the IAMA Rules for the Conduct of Commercial Arbitrations (IAMA Rules) (clause 10.1(g) of the Deed).

17    It is important to note that the agreed mechanism in the Deed did not provide any right, on the part of HJI, to dispute a finding by the auditor that there was no basis for a breach of a legal duty by Mr Martin or any consequential loss to either RUS Holdings or RUS Mining. Nor, for that matter, is there any agreed procedure or mechanism for dealing with the situation where the audit report makes no finding either way.

18    By deed executed on 13 December 2013 (Variation Deed), HJI and Mr Martin agreed to vary clause 10.1(f) of the Deed by replacing the fourteen day period within which any arbitration proceedings were to be initiated with a twenty-eight day period. The terms of the Variation Deed are of some importance, if only because Mr Martin claims that, as a result of executing it, HJI is estopped from denying that Mr Tsang’s report is an audit report for the purposes of the Deed. That is said to flow from the recitals to the Variation Deed, which state that on “22 November 2013, the audit report was provided to Mr Martin.”

19    On 19 December 2013 Mr Martin, through his lawyers, initiated arbitration proceedings by writing to the Institute of Arbitrators and Mediators Australia (IAMA). There is no dispute that the institution of the arbitration was within time (given the terms of the Variation Deed) and was otherwise in accordance with the Deed. The letter made it clear that Mr Martin reserved the right to challenge whether Mr Tsang’s report was an audit report for the purposes of the Deed, or disclosed a breach of legal duty by Mr Martin, either by way of institution of proceedings in the Supreme Court of NSW, or as a preliminary issue for determination by the appointed arbitrator.

20    An arbitrator was appointed by the IAMA on 20 December 2013.

relevant law and rules

21    Before turning to consider the conduct of the arbitration and the arbitral award, it is necessary to refer to the law and rules pursuant to which the arbitration was conducted.

The International Arbitration Act 1974 and the Model Law

22    In Australia, the conduct of international arbitrations is governed by the provisions of the International Arbitration Act 1974 (Cth) (the IA Act). Section 16 of the IA Act provides that the Model Law has the force of law in Australia. The Model Law is defined in s 15 of the IA Act to mean “the UNCITRAL Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law on 21 June 1985 and amended by the United Nations Commission on International Trade Law on 7 July 2006, the English text of which is set out in Schedule 2” to the IA Act.

23    Article 1(1) of the Model Law provides that it applies to international commercial arbitration. An arbitration is international if, inter alia, the parties to an arbitration agreement have their places of business in different States: article 1(3)(a) of the Model Law. Article 7(1) defines “arbitration agreement” as follows:

“Arbitration agreement” is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

24    It is common ground that the Deed is an “arbitration agreement” as defined in article 7(1) of the Model Law, and that the parties to the Deed had their places of business in different States. HJI’s place of business was in China. There is accordingly no dispute that the Model Law applied to the arbitration.

25    Article 5 of the Model Law provides that in matters governed by the Model Law, “no court shall intervene except where provided in this Law”.

26    Article 16 of the Model Law deals with the competence of an arbitral tribunal to rule on its own jurisdiction and the circumstances in which a court may be asked to decide that matter. It provides as follows:

Article 16.    Competence of arbitral tribunal to rule on its jurisdiction

(1)    The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

(2)    A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence. A party is not precluded from raising such a plea by the fact that he has appointed, or participated in the appointment of, an arbitrator. A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. The arbitral tribunal may, in either case, admit a later plea if it considers the delay justified.

(3)    The arbitral tribunal may rule on a plea referred to in paragraph (2) of this article either as a preliminary question or in an award on the merits. If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court specified in article 6 to decide the matter, which decision shall be subject to no appeal; while such a request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award.

27    Chapter V of the Model Law deals with the conduct of arbitral proceedings. Relevantly it includes articles 18 and 19 which provide as follows:

Article 18.    Equal treatment of parties

The parties shall be treated with equality and each party shall be given a full opportunity of presenting his case.

Article 19.    Determination of rules of procedure

(1)    Subject to the provisions of this Law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings.

(2)    Failing such agreement, the arbitral tribunal may, subject to the provisions of this Law, conduct the arbitration in such manner as it considers appropriate. The power conferred upon the arbitral tribunal includes the power to determine the admissibility, relevance, materiality and weight of any evidence.

28    Chapter VI of the Model Law deals with the making of an award by the arbitral tribunal and the termination of arbitral proceedings. Relevantly, paragraphs (1) and (4) of article 28 provide, in summary, that “the arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties” and “in accordance with the terms of the contract”. Article 32 provides that arbitral proceedings are terminated by, amongst other things, the “final award”.

29    The terms of article 34 of the Model Law are critical to the outcome of these proceedings. Article 34 specifies the exclusive recourse to a court that a party has against an arbitral award. It relevantly provides as follows:

Article 34.    Application for setting aside as exclusive recourse against arbitral award

(1)    Recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with paragraphs (2) and (3) of this article.

(2)    An arbitral award may be set aside by the court specified in article 6 only if:

(a)    the party making the application furnishes proof that:

(i)    a party to the arbitration agreement referred to in article 7 was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of this State; or

(ii)    the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iii)    the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside; or

(iv)    the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law; or

(b)    the court finds that:

(i)    the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State; or

(ii)    the award is in conflict with the public policy of this State.

(3)    An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the award or, if a request had been made under article 33, from the date on which that request had been disposed of by the arbitral tribunal.

(4)    The court, when asked to set aside an award, may, where appropriate and so requested by a party, suspend the setting aside proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the arbitral tribunal’s opinion will eliminate the grounds for setting aside.

30    Article 34 must be read together with article 5 and article 16, reference to which has already been made. The obvious intention of these articles, read together, is to provide certainty, finality and limited scope for judicial intervention in international commercial arbitrations.

31    In relation to the ground in article 34(2)(b)(ii), s 19(b) of the IA Act provides that, amongst other things, an award is in conflict with, or is contrary to, the public policy of Australia if a breach of the rules of natural justice occurred in connection with the making of the award.

32    Article 6 of the Model Law makes provision for each State to specify the court or courts that are competent to perform the function under article 34. Section 18(3) of the IA Act provides that this Court is competent to perform the functions in article 34. This section accordingly provides the basis for this Court’s jurisdiction to entertain HJI’s application.

33    One of the grounds of challenge specified in paragraph (2) of article 34 is that the arbitral procedure was not in accordance with the agreement of the parties (subparagraph (2)(a)(iv) of article 34). In considering this ground it is relevant to have regard to article 2(e), which provides, relevantly, that where a provision of the Model Law refers to an “agreement of the parties, such agreement includes any arbitration rules referred to in that agreement.”

34    It will be recalled that clause 10.1(g) of the Deed provides that the arbitration was to be conducted in accordance with the IAMA Rules. Article 2(e) of the Model Law confirms that the IAMA Rules are therefore included in the agreement between HJI and Mr Martin in relation to the arbitration.

The IAMA Rules

35    A number of the rules in the IAMA Rules are relevant to the resolution of the issues in these proceedings.

36    Rule 1 outlines the overriding objective of the IAMA Rules. The overriding objective is that the arbitration is conducted fairly, expeditiously, cost effectively and in a manner proportionate to the amount of money involved and the complexity of the issues. Rules 14 and 15 provide, in substance, that both the arbitrator and the parties must conduct the arbitration and conduct themselves in accordance with the overriding objective.

37    Subrule 7 of rule 9 provides that in accepting the appointment and entering the reference, the arbitrator may rule on his or her jurisdiction.

38    Rule 16 specifies certain circumstances where a party may be deemed to have waived any right to object to jurisdictional rulings or other aspects of the conduct of the arbitration. It is in the following terms:

RULE 16     Waiver of Right to Object

1.    If a party to an arbitration takes part, or continues to take part, in the arbitration without objecting within a reasonable time that:

a.    the Arbitrator lacks jurisdiction;

b.    the arbitration has been improperly conducted;

c.    there has been a failure to comply with the Agreement; or

d.    there has been any other irregularity affecting the Arbitrator or the arbitration,

then that party shall be deemed to have waived its right to make such objection later, before the Arbitrator or a Court, unless it shows that, at the relevant time it did not know and could not with reasonable diligence have discovered the grounds for the objection.

2.    Where:

(a)    the Arbitrator makes a ruling as to jurisdiction; and

(b)    a party to the arbitration who could have challenged that ruling in a Court does not do so within any time fixed by the Arbitrator (or if no time is fixed, within a reasonable time and not later than the conclusion of any hearing),

then that party shall be deemed to have waived any right to object later to the Arbitrator’s jurisdiction on any ground which was the subject of that ruling, and shall be deemed to have submitted to the Arbitrator’s jurisdiction.

The conduct of the arbitration

39    On 16 January 2014, the arbitrator convened a directions conference. Both HJI and Mr Martin were legally represented at the conference: HJI by Mr Colin Oi and Mr Martin by Mr Glenn Crisp. Importantly, one issue ventilated at the directions conference was the arbitrator’s jurisdiction to enter on the reference and whether, in that context, the arbitrator was empowered to make a preliminary finding as to whether or not Mr Tsang’s report was an audit report for the purposes of the arbitration agreement.

40    The minutes of the conference record the following in relation to this issue (at paragraph 1.6):

1.6    Does either party dispute the jurisdiction of the Arbitrator to enter on the reference?

    The Claimant [Mr Martin] answers No. Glenn Crisp made reference to his arguments as set out in recent correspondence with the Respondent [HJI], copied to the Arbitrator. He also referred to the judgments of Hammerschlag J in teleMates (previously Better Telecom) Pty Ltd v Standard Solutions Pvt Ltd and Stevenson J in Ashjal Pty Ltd v Alfred Toepfer International (Aust) Pty Ltd.

    The Respondent’s recent correspondence with the Claimant, copied to the Arbitrator, said that, inter alia and in summary:

•    For the Arbitrator to determine whether or not the document served 22 November 2013 was an “audit report” for the purposes of clauses 9 and 10 of the Deed would require the Arbitrator to recite himself into power and would be inappropriate as being a question which bears directly on the validity of the Arbitrator’s appointment

•    The Court is therefore the appropriate forum for determining that question.

Colin Oi in conference said that the words of S 5 of the CAA – “In matters governed by this Act, no court must intervene except where so provided by this Act.” –did not prevent the Respondent from asking the Court to intervene at the point where the Arbitrator had not entered the reference and made a ruling on jurisdiction.

Colin Oi went on to say that the Respondent does not dispute that the Arbitrator is empowered to make a decision as to entering the reference and making a preliminary finding as to whether or not the Independent Audit Report is an audit report for the purposes of the arbitration agreement.

If so, the Arbitrator’s ruling is as set out in paragraph 4.2 below of these Minutes.

(Emphasis added)

41    Critical, for present purposes, is the fact that HJI, through its solicitor, did not dispute that the arbitrator was empowered to make a preliminary finding as to whether or not Mr Tsang’s report was an audit report for the purposes of the Deed. Notwithstanding this agreement or concession, the arbitrator formally ruled that he had the power to rule on jurisdiction in this matter. The minutes record the arbitrator’s reasons for so finding. In the circumstances it is unnecessary to consider them. That is because HJI does not challenge that decision by the arbitrator. Nor, given the terms of rule 16 of the IAMA rules, could that decision now be challenged.

42    It is clear from the minutes that when the arbitrator referred to ruling on jurisdiction, he meant ruling on whether Mr Tsang’s report was an audit report for the purposes of the Deed. That, in turn, involved ruling on the question whether the report disclosed a basis for a breach of legal duty by Mr Martin and any consequential loss to the companies. If no such “basis” was disclosed, there was essentially nothing to arbitrate.

43    Having ruled that he had power to rule on jurisdiction, the arbitrator proceeded to make procedural directions in relation to the resolution of that issue. It is clear that those directions were made with the agreement of the parties, or at the very least were not opposed. The minutes record the following (at paragraph 5.1):

5.1    With the agreement of the parties, the Arbitrator made procedural directions as follows:

(a)    For purposes of minimising potential costs, the Arbitrator will determine, with the assistance of short submissions, as a final award whether or not the audit report on its face discloses a proper basis for establishing, in respect of all or in the alternative some of the purported findings numbered 1 to 7 (the parties agree that numbered item 8 is not of a loss nature) in that report, a breach of a legal duty by Mr Martin to RUS Holdings (Australia) Pty Ltd and RUS Mining Services Pty Ltd and that such breach has caused loss or damage to those companies. To that end, the following timetable is to be followed:

(i)    The Claimant is to serve his written submissions, on which he intends to rely, by no later than 7 February 2014.

(ii)    The Respondent is to serve its written submissions, on which it intends to rely, by no later than 28 February 2014.

(iii)    The Claimant is to serve his written submissions in reply, on which he intends to rely, by no later than 7 March 2014.

(iv)    The Arbitrator is to provide his determination as soon as possible thereafter and preferably by 14 March 2014.

(b)    Should the Arbitrator find in his determination as mentioned at paragraph (a) above that any one or more of the 7 items in the audit report does meet the threshold test as set out at paragraph (a) above, then in respect of any such item the arbitration proceedings will reconvene to determine procedures to deal with those matters prior to any further determination or award by the Arbitrator.

44    The wording of the issue set out in paragraph 5.1(a) of the minutes was the subject of specific correspondence and agreement between the parties. HJI does not dispute that the minutes are an accurate record of the directions conference.

45    It is clear that the arbitrator had power to make these procedural directions in relation to the conduct of the hearing to determine the issue whether the report disclosed a basis for breach of duty and loss: rule 17 and Schedule 1 of the IAMA rules. In any event, the parties, including HJI, agreed, or at least did not oppose, these directions as to the conduct of the hearing into that issue. Given the terms of rule 16 of the IAMA rules, HJI may now be taken to have waived any claim it might have had that, in determining this issue in this manner, the arbitrator conducted the arbitration improperly or otherwise not in compliance with the agreement between the parties.

46    The parties complied with the procedural directions and provided lengthy and detailed written submissions dealing with the issue for determination. The arbitrator determined the issue in an award dated 24 March 2014.

The award

47    The arbitrator resolved the preliminary or threshold issue adversely to HJI. He found that the report did not “disclose a basis for, in respect of any of the purported findings numbered 1 to 7 in [Mr Tsang’s] report, a breach of legal duty by Mr Martin” to RUS Holdings and RUS Mining and that accordingly “it cannot be said that Mr Martin has caused loss or damage to those companies.”

48    It is, with respect, difficult to understand some parts of the arbitrator’s reasons. That is not intended to be a criticism. It perhaps simply reflects the fact that the arbitrator was not legally qualified and that the relevant terms of the Deed that he was required to consider were somewhat obscure.

49    The essence of the arbitrator’s reasoning was that to meet the “threshold test” in clause 10.1 of the Deed, the “minimum requirement” was that the report identify, with some degree of precision, the basis for the alleged breach and link that alleged breach to a consequential loss to one or both of the companies. The identification of the basis for the alleged breach and the link to the consequential loss was required to be sufficiently clear to allow Mr Martin to make an informed decision, within a relatively short period of time, whether or not to dispute the report (paragraph 6.4(d) of the award). The identification also had to be such that the report could “set the content” of any subsequent arbitration. In both respects, it was not sufficient for the audit report to merely “flag possible irregularities for the Arbitrator to reach findings and for [Mr Martin] to dispute should he wish” (paragraph 6.4(b) of the award).

50    Having determined these “minimum standards” or “minimum obligations” of the audit report, the arbitrator then applied them to the findings and conclusions contained in the first seven items of the audit report. HJI did not contend that the eighth item disclosed a basis for a breach by Mr Martin.

51    It is not necessary to set out the arbitrator’s findings in respect of each of the seven items. It is sufficient to say that in the case of each item, the arbitrator found that the report failed to identify, to the required standard, a basis for a breach of a legal duty by Mr Martin or any link to any consequential loss.

HJI’s challenge to the award under Article 34 of the Model Law

52    Neither HJI’s originating application nor its supporting affidavit disclosed the grounds upon which it claimed the award should be set aside. HJI was subsequently directed to file points of claim. It did so. It is fair to say, however, that the points of claim do not greatly assist in particularising HJI’s challenge, though they do at least identify that HJI relies on article 34(2) of the Model Law and that it contends that the award “involved a breach of natural justice” and that the arbitrator “failed to conduct the arbitral procedure in accordance with the agreement of the parties.”

53    Mr Martin submits that because the points of claim do not adequately identify the claims founded on article 34 of the Model Law, the Court should not entertain HJI’s submissions on that article. This pleading point is addressed later in the reasons.

54    In its written submissions and in its submissions at the hearing, HJI submitted that it was “unable to present [its] case” (article 34(2)(a)(ii) of the Model Law), that the “arbitral award was not in accordance with the agreement of the parties” (article 34(2)(a)(iv) of the Model Law) and the award is in conflict with the public policy of Australia because a breach of the rules of natural justice occurred in connection with the making of the award (article 34(2)(b)(ii) of the Model Law and s 19(b) of the IA Act).

55    In relation to HJI’s contention that it was “unable to present [its] case”, HJI submits, in substance, that the arbitrator misconstrued the terms of the Deed dealing with the arbitration and, as a result, erroneously failed to conduct an arbitration in respect of the merits of the claim. The arbitration agreement in the Deed, properly construed, was, in HJI’s submission, to the effect that the role of the auditor was simply to provide a “jurisdictional foundation” for the arbitral proceedings by broadly identifying areas of possible breach. It was not for the auditor to determine whether any breaches or loss actually occurred. That was to be the role of the arbitrator. The determination by the arbitrator was to be made following arbitral proceedings which included pleadings, witness statements, expert reports, bundles of documents and, if appropriate, oral hearings and cross-examinations. HJI points out that none of those procedures occurred in this case.

56    HJI submits that the arbitrator’s erroneous construction of the Deed led the arbitrator to find he had no jurisdiction. It was thereby denied a full hearing on the merits. It was unable to present its case because it was unable to present witness statements, expert reports and other evidence at an arbitral hearing on the merits.

57    Essentially the same argument underlies HJI’s submission that the arbitral procedure was not in accordance with the agreement of the parties. The agreement of the parties, in HJI’s submission, envisaged that the arbitrator, not the auditor, would determine if there was a breach and any consequential loss. The arbitrator would do so after conducting an arbitration which included, amongst other things, evidence, in the form of witness statements, expert reports, a bundle of documents and, potentially, oral evidence. That did not occur. HJI submits that there was no hearing at all. Rather, all that occurred was “a hearing de novo of the audit.”

58    The same basic argument also essentially underlies HJI’s ground based on natural justice. HJI contends that a breach of the rules of natural justice occurred because, as a result of the arbitrator’s erroneous jurisdictional finding, it was denied a hearing on the merits. Therefore, the award was in conflict with the public policy of Australia.

Mr Martin’s pleading point

59    Mr Martin contends that the Court should not entertain HJI’s submissions founded on article 34 of the Model Law because neither the supporting affidavit nor the points of claim adequately identify the basis of HJI’s claims. In this regard, HJI relies on the decision of Pagone J in Emerald Grain Australia Pty Ltd v Agrocorp International Pte Ltd (2014) 314 ALR 299; [2014] FCA 414 (Emerald Grain).

60    In Emerald Grain, the applicant applied to set aside an award under article 34(2)(b)(ii) of the Model Law on the basis of a denial of natural justice. The originating application identified the grounds relied upon as those stated in an affidavit accompanying the application. The supporting affidavit identified some grounds relied upon by the applicant in support of its claim that there had been a denial of natural justice. When the matter was heard, however, the applicant sought to rely on detailed written submissions which included grounds that went well beyond the grounds set out in the affidavit. Pagone J held that the written submissions that went beyond the grounds contained in the supporting affidavit should be disregarded.

61    The critical considerations for Pagone J were the three month time limit for applications to set aside awards under article 34 of the Model Law and the policy of upholding arbitral awards. His Honour reasoned, at [8]:

Agrocorp contended, in my view correctly, that the written submissions of Emerald Grain may be disregarded to the extent that they raise matters which are not found in the affidavit accompanying the application. The application did attempt to leave open the possibility of adding to the grounds by describing in the affidavit the matters relied upon as being inclusive of those specified, namely, by describing the grounds relied upon as being some “among other things”. However, reliance upon such words as “among other things” is ineffective to incorporate grounds which are not sufficiently raised by a fair reading of the grounds as articulated in a statement of claim or an accompanying affidavit. Article 34(3) provides that applications to set aside awards are to be made within 3 months of the date of making the award and that limitation would be frustrated, and the policy of upholding arbitral awards would be compromised, if the party challenging an award was permitted to rely upon grounds at trial which were not sufficiently raised on a fair reading of the grounds in a statement of claim or in the affidavit accompanying an application made within time.

62    His Honour also observed that an affidavit that simply asserts legal conclusions, such as an assertion that the award was in error, or that the rules of natural justice were breached, is unlikely to be satisfactory.

63    The position in respect of article 34 challenges to arbitral awards is, in many respects, akin to applications to set aside statutory demands under s 459G of the Corporations Act 2001 (Cth) (Corporations Act). An application to set aside a statutory demand under s 459G of the Corporations Act can only be made if it is filed, together with a supporting affidavit, within 21 days after the demand is served. An applicant is limited to the grounds appearing from the supporting affidavit or affidavits filed within that 21 day period: Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 70 FCR 452. However, a ground is relevantly “raised” if the ground is evident from the supporting affidavit, even if only because it can be discerned from the content of documents annexed to the affidvait: Saferack Pty Ltd v Marketing Heads Australia Pty Ltd (2007) 214 FLR 393 (Saferack) at [25]; Hansmar Investments Pty Ltd v Perpetual Trustee Co Ltd (2007) 61 ACSR 321 at [28]-[33]; POS Media Online Ltd v B Family Pty Ltd (2003) 21 ACLC 533.

64    Here, the affidavit filed in support of the originating application specified no grounds of challenge. It merely provided a chronological recitation of the events relating to the execution of the Deed, the appointment of the auditor, the appointment of the arbitrator and the conduct of the arbitration. It exhibited documents relevant to that chronology. It is no doubt for this reason that HJI was directed to file points of claim.

65    HJI’s points of claim articulate its grounds under article 34 of the Model Law in the following terms (at [33] to [35]):

33.    The Award ought to be set aside because the arbitrator’s negative jurisdictional decision was mistaken and involved a breach of natural justice.

34.    By declining to exercise jurisdiction in accordance with the Deed and making the Award, the arbitrator failed to conduct the arbitral procedure in accordance with the agreement of the parties.

35.    The Award is a reviewable decision under section 18 of the International Arbitration Act 1974 (Cth) and article 34(2) of the UNCITRAL Model Law (the Model Law).

66    The articulation of the grounds in the points of claim is plainly deficient. The grounds are expressed as broad legal conclusions without any link whatsoever to the facts set out in either the supporting affidavit or the points of claim. The basis upon which it is contended that the award was “mistaken” or involved a breach of natural justice, or that the arbitral proceedings were not in accordance with the agreement of the parties, is not in any way spelt out. So much so was pointed out in Mr Martin’s points of defence. This situation was not remedied until the service of HJI’s written submissions.

67    In these circumstances, there is much to be said for Mr Martin’s complaint. Nevertheless, whilst both the supporting affidavit and points of claim are plainly unsatisfactory, when read together all the material facts upon which HJI relies are apparent. Whilst the precise grounds now articulated by HJI may not be clearly articulated in the points of claim, the general nature of the grounds is able to be discerned once one reads, in particular, the documents exhibited to the affidavit. Because the grounds are evident from this material, they are relevantly “raised”: cf: Saferack at [25].

68    It is plainly preferable to decide this matter on substantive, rather than procedural grounds. Whilst, for the reason given by Pagone J in Emerald Grain, there is good reason to insist on the proper articulation of the grounds of challenge in proceedings under article 34 of the Model Law, ultimately the circumstances of this case do not warrant shutting HJI out from presenting all of its arguments. It was not suggested by Mr Martin that he was in any way prejudiced in the presentation of his case by the deficient drafting of the points of claim. Accordingly, Mr Martin’s pleading point is rejected. HJI is not, and was not, restricted in any way from presenting its case under article 34 of the Model Law.

Article 34(2)(a)(ii) of the Model Law - was HJI unable to present its case?

69    The short answer to this question is “no”.

70    HJI’s submissions in respect of this ground of challenge are not directed to the correct question. HJI’s submission is, in effect, that it was unable to present its case in relation to the question whether Mr Martin breached his duty and caused a loss to RUS Holdings and RUS Mining. That is because there was no hearing on the merits where HJI was able to rely on witness statements, expert reports and other evidence. But the arbitration proceedings did not get to the stage where the arbitrator was called upon to consider that question. That is because the parties agreed, and the arbitrator ruled, that the arbitrator should first determine the threshold issue whether Mr Tsang’s report, to use the words in the chapeau to clause 10.1 of the Deed, “discloses a basis for a breach of a legal duty by Mr Martin to RUS Holdings and RUS Mining and that such breach has caused loss” to those companies.

71    It was open to the parties to agree to have this issue determined as a threshold or preliminary issue (see article 19 of the Model Law). It was also open to the arbitrator to rule accordingly (see rules 1 and 14 of the IAMA Rules). To the extent that the threshold issue determined the arbitrator’s jurisdiction, the arbitrator was able to rule on his jurisdiction (see article 16 of the Model Law and rules 9(7) and 16(2) of the IAMA Rules).

72    The arbitrator’s ruling that he was empowered to and should decide that question “as a final award” is not challenged. Nor could it now be challenged given that HJI agreed that the arbitrator could and should do so and continued to take part in the arbitration after this ruling without objection (see rule 16(1) of the IAMA Rules).

73    The correct question in respect of a challenge under article 34(2)(a)(ii) must be whether the party making the application was unable to present its case in relation to the award in question. The award in question here is the arbitrator’s determination, as a final award, that Mr Tsang’s report did not disclose a basis for a breach or a consequential loss. Accordingly, the correct question is whether HJI was unable to present its case in relation to that question and that award.

74    HJI was able to present its case in relation to that question and that award. The arbitrator determined, as he was entitled to do, the procedure to be adopted in determining the threshold issue (see rules 1, 16, 17 and Schedule 1 to the IAMA rules). That procedure involved the provision of written submissions and nothing more. Given that the question for determination turned largely on the construction of the Deed and the terms of Mr Tsang’s report, it was open to the parties to agree, and for the arbitrator to decide, that evidence was unnecessary. No party suggested that it was. The parties agreed with these directions, or at least did not oppose or challenge them. HJI may be taken to have waived its right to now object to that procedure (rule 16 of the IAMA rules).

75    HJI provided detailed and thorough written submissions in accordance with the directions. Those submissions presented HJI’s case on the issue that was the subject of determination in the award. Accordingly, there is no basis for concluding that HJI was unable to present its case.

76    It follows that HJI’s ground of challenge to the award based on article 34(2)(a)(ii) of the Model Law must be dismissed.

Article 34(2)(a)(iv) of the Model Law - was the arbitral procedure not in accordance with the agreement of the parties?

77    HJI’s submissions in relation to this ground of challenge are similarly misdirected.

78    It may be, as HJI submits, that the agreement of the parties envisaged that, when the dispute was referred to arbitration, the arbitrator would make his own findings and reach his own conclusions in respect of any relevant disputed findings disclosed in the audit report. By incorporating the IAMA Rules in the agreement, the parties agreed that the arbitral procedure may include the preparation of pleadings, the preparation of joint reports of experts, preparation of a joint bundle of documents, witness statements and oral evidence, including cross-examination (see rule 17 and schedule 1 of the IAMA Rules). It is undoubtedly correct that none of this occurred.

79    It does not follow, however, that the arbitral procedure that was adopted was not in accordance with the agreement of the parties. The parties were free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings (see article 19 of the Model Law). Here, as has been said, the parties agreed to have the question whether Mr Tsang’s report disclosed a basis for a breach of duty by Mr Martin determined by the arbitrator as a threshold or preliminary issue. They also agreed on the particular procedures to be adopted in determining that threshold issue.

80    Even putting those matters aside, by agreeing to incorporate the IAMA Rules in relation to the arbitral procedure, the parties agreed that the arbitrator could rule on his jurisdiction (see rule 9(7) of the IAMA Rules) and that the arbitrator was empowered to adopt procedures suitable to the particular case so as to provide a fair, expeditious and cost-effective process for determination of the dispute (rule 14 of the IAMA Rules). They also agreed that, if a party continued to take part in the arbitration without objecting, within a reasonable time, that the arbitration had been unfairly conducted, or there had been a failure to comply with the agreement, that party would be deemed to have waived its right to make such objection later (rule 16 of the IAMA Rules).

81    When regard is had to these rules, which are incorporated in the agreement between the parties, together with the fact that the parties agreed (and the arbitrator ruled) that the arbitration proceed in the manner it did, and the fact that HJI did not object to the procedure until after the threshold issue was decided adversely to it, there is no merit in HJI’s complaint that the arbitral procedure was not in accordance with the agreement. Whilst the arbitration may not, as HJI complains, have gone to a final hearing on the merits, that was because the threshold issue, which directly or indirectly went to the arbitrator’s jurisdiction, was determined adversely to HJI. It does not follow that the arbitral procedure was not in accordance with the agreement of the parties. For the reasons already given, it plainly was.

82    HJI also submits that, in deciding the threshold issue adversely to it, the arbitrator misconstrued the terms of the Deed and therefore the agreement between the parties. This led the arbitrator, so the argument goes, to fail or refuse to conduct a full hearing on the merits as required by the Deed and agreed by the parties.

83    Even if there is some merit in that submission, it is not to the point. It amounts to an impermissible attack on the merits of the award. These proceedings are not an appeal from the arbitrator’s award. Nor are they some form of judicial review at large. An award cannot be set aside simply on the ground that it contains errors of fact or law. The Court can only set aside an award if one of the grounds in article 34 of the Model Law is made out.

84    To make out the ground in article 34(2)(a)(iv) of the Model Law, HJI must relevantly furnish proof that the arbitral procedure was not in accordance with the agreement of the parties. The reference to “arbitral procedure” in article 34(2)(a)(iv) must, in the present context, be read as meaning the arbitral procedure adopted in arriving at the award under challenge. The award under challenge here is the arbitrator’s “final award” that determined that Mr Tsang’s report did not relevantly disclose a breach by Mr Martin. For the reasons already given, HJI has not furnished proof that the procedure adopted in arriving at the award was not in accordance with the agreement of the parties. Such proof as there is demonstrates that the arbitral procedure adopted in arriving at the award in question was in accordance with the agreement of the parties.

85    It may be accepted that in some circumstances an erroneous finding by an arbitrator that he or she has no jurisdiction to conduct an arbitration may give rise to a ground under article 34(2)(a)(iv) where the result is that the arbitrator fails entirely to give any effect to the agreed dispute resolution procedure at arbitration: see Gary B Bom, International Commercial Arbitration (Kluwer Law International, 2nd ed, 2014) at 1103. But this is not such a case. An arbitration was conducted. An agreed procedure was put in place to deal with an agreed threshold issue. That issue was determined adversely to one of the parties to the agreement in a final award. The effect of the determination in the award was to bring the arbitration to an end. It does not follow that the arbitrator failed entirely to give effect to the agreed dispute resolution procedure.

86    In any event, HJI’s contention that the arbitrator misconstrued the relevant terms of the Deed, and therefore mistakenly failed to conduct the agreed arbitration, has no merit in the present context and must be rejected.

87    The issue concerning the correctness or otherwise of the arbitrator’s award is by no means easy to resolve. The question of construction the arbitrator was required to consider and determine was and is difficult. The words the parties chose to use in clause 10.1 of the Deed (“discloses a basis for a breach of a legal duty”) are somewhat obscure if not opaque. To the extent that Mr Tsang’s report expresses any findings or conclusions in terms of clause 10.1, those findings or conclusions also lack clarity and certainty. The arbitrator was not a lawyer. It is in these circumstances perhaps not surprising that the arbitrator’s reasons are also at times somewhat unclear and difficult to understand.

88    Nevertheless, the interpretation of clause 10.1 arrived at by the arbitrator is one which the words used in clause 10.1 can reasonably bear. It is and was reasonable for the arbitrator to conclude that the words used in clause 10.1, read in context, meant that for clause 10.1 to be engaged, the audit report had to, at a minimum, identify, with some degree of clarity or precision, the basis of a breach and the link that the breach had to a consequential loss to one or both of the relevant companies. It was open to the arbitrator to find, on a proper construction of clause 10 of the Deed, that it was not enough for the report to simply flag areas of possible irregularity. The Deed gave Mr Martin a right to dispute any finding in the report that disclosed a breach or basis for a breach. It is difficult to see how one can dispute part of a report that simply “flags” a possible irregularity or a possible breach.

89    The arbitrator did not, as it appears to be submitted by HJI, find that the words used in clause 10.1 required the audit report to identify the legal elements of any alleged breach, together with the facts or evidence that tended to establish each element. Nor did the arbitrator suggest that clause 10.1 required that the audit report express legal views or conclusions. Rather, the arbitrator found only that the identification of the basis of the breach, and the link to any consequential loss, had to be sufficient to enable Mr Martin to make an informed decision whether or not to dispute the “alleged breach, basis for breach, or loss”. It also had to be sufficient to “set the content” of any arbitration. Contrary to HJI’s submission, in so finding, the arbitrator had regard to the context in which the words were used, including the commercial context.

90    HJI submits that the construction or interpretation arrived at by the arbitrator was too strict and failed to have regard to the surrounding circumstances. The surrounding circumstances were said to include correspondence between the parties’ solicitors in relation to the drafting of the Deed. That correspondence tends to reveal that clause 10.1 was ultimately worded as it was because HJI suggested (and Mr Martin ultimately agreed) that an auditor was unlikely to express legal views about whether or not there had been a breach. That context is said to inform the meaning of the words “basis for”.

91    Mr Martin objected to the admission into evidence of the correspondence on the basis of relevance and because the communications were privileged under s 131 of the Evidence Act 1995 (Cth) (Evidence Act). The admissibility of these documents was not determined at the hearing. Rather, it was indicated that the admissibility would be dealt with in the final judgment.

92    To a certain extent the question of the admissibility of the correspondence is somewhat academic. That is because, even if admitted, the correspondence is of very marginal relevance. The context provided by the correspondence does not greatly assist in resolving the question of construction of clause 10.1 of the Deed and ultimately does not establish that the arbitrator’s interpretation of clause 10.1 was erroneous.

93    Nevertheless, to avoid any doubt, it should be made clear that Mr Martin’s objection to the admissibility of the correspondence is overruled and the documents are admitted in evidence. The correspondence is potentially relevant to the surrounding circumstances, though for the reasons already given, ultimately it is of only marginal relevance and is to be afforded little weight. It should also be noted that the correspondence was, in any event, before the arbitrator. It is probably relevant and admissible on that basis alone. To the extent that the documents may fall within s 131(1) of the Evidence Act, the exception in s 131(2)(f) may be taken to apply. That paragraph should not be narrowly construed and can encompass proceedings where the interpretation of a settlement agreement is in issue.

94    HJI’s submission that the arbitrator erred in concluding that the findings in Mr Tsang’s report, such as they were, did not satisfy the minimum requirements of clause 10.1 also has no merit. It was open to the arbitrator to conclude that the report did not sufficiently disclose any “basis” for a breach by Mr Martin, or disclose a link to any consequential loss.

95    The conclusion that the arbitrator did not err in construing the Deed, or in finding that the audit report did not engage clause 10.1, is also fortified by the principle of judicial restraint that generally applies in relation to international commercial arbitrations. Section 39 of the IA Act relevantly provides, in effect, that where the Court is considering an application under article 34 of the Model Law (see s 39(1)(a)(v) of the IA Act) the Court must, in doing so, have regard to the objects of the IA Act and the fact that arbitration is an efficient, impartial, enforceable and timely method by which to resolve commercial disputes and the fact that awards are intended to provide certainty and finality.

96    Those considerations indicate that there should be a degree of judicial restraint in relation to challenges to international arbitral awards. Judicial restraint in this context is supported by both Australian and international authority: Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd (No 2) [2012] FCA 1214 at [34]-[35], [50] (Castel Electronics); Emerald Grain at [7]-[12]; Quintette Coal Limited v Nippon Steel Corporation 1990 CarswellBC 232, 50 BCLR(2d) 207, [1991] 1WWR 219 at [27]-[33] and the cases there referred to and cited. Although decisions of courts in other countries which give effect to the Model Law are not binding, there is an obvious importance in taking them into account to ensure uniformity in the interpretation of the Model Law: Castel Electronics at [36]; Hebei Import & Export Corp v Polytek Engineering Co Ltd [1999] 2 HKC 205 at 216.

97    Judicial restraint in this context would suggest both that arbitral awards should not be scrutinised upon by overzealous judicial review, and that the discretion to set aside awards should be exercised sparingly and only in clear cases. This is not such a case.

98    It follows that HJI’s challenge to the arbitral award under article 34(2)(a)(iv) of the Model Law has no merit and must be dismissed.

Article 34(2)(b)(ii) of the Model Law - was there a breach of the rules of natural justice in connection with the making of the award?

99    It is unnecessary to give detailed consideration to this question, which addresses HJI’s challenge under article 34(2)(b)(ii) of the Model Law. The arguments advanced by HJI in support of this ground are essentially the same as those advanced in relation to the ground under article 34(2)(a)(ii). The only breach of the rules of natural justice alleged by HJI is that HJI was unable to present its case because it was denied a full hearing on the merits. For the reasons already given, HJI was able to present its case in connection with the making of the relevant award; the relevant award being the award determining the threshold issue. There was no breach of the rules of natural justice and therefore no basis for concluding that the award is in conflict with the public policy of Australia. It follows that HJI’s attack on the arbitral award under article 34(2)(b)(ii) of the Model Law has no merit and must be dismissed.

Mr Martin’s submission based on article 16(3) of the Model Law

100    Before moving to consider HJI’s claim for declaratory relief, something should be said about one of Mr Martin’s submissions concerning the competence of HJI’s article 34 challenge. Mr Martin submits that, because the award in question was, in effect, a decision by the arbitrator that he did not have jurisdiction, the effect of article 16(3) of the Model Law is that the decision is final and binding. That is said to be the case because article 16(3) of the Model Law provides that a party may approach the relevant court to decide a jurisdictional question only if the arbitrator decides that he or she has jurisdiction. It does not provide any right to approach the court where the decision is that the arbitrator does not have jurisdiction.

101    Mr Martin relies in support of this submission on the decision of the Court of Appeal of the Supreme Court of Singapore in PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR 597; [2006] SGCA 41 (Pt Asuransi).

102    Given the conclusions that have been reached in relation to the merits of HJI’s article 34 challenge, it is strictly unnecessary to decide whether article 16(3) of the Model Law effectively bars HJI’s challenge under article 34. Having regard to the importance of the issue, and the possibility of an appeal, it is nonetheless prudent to give some consideration to this submission.

103    A careful reading of the judgment in PT Asuransi reveals that the Singaporean court’s finding that article 16(3) of the Model Law precluded recourse to the court because the arbitrator’s decision was that it did not have jurisdiction was based on the court’s conclusion that the relevant decision under challenge was not an “award”. That finding turned on the definition of “award” contained in the Singaporean Act which gave effect to the Model Law. That Act defined “award” as “a decision of the arbitral tribunal on the substance of the dispute.” Since a negative jurisdictional decision was not a decision on the substance of the dispute, the court found that the decision was not an award and therefore there could be no challenge to the decision under article 34. That is because article 34 applies only to recourse against awards.

104    The IA Act does not contain the same definition of “award” as the Singaporean Act considered in Pt Asuransi. Indeed, there is no definition of “award” for the purposes of Part III of the IA Act, which is the part of the IA Act that contains the provisions dealing with international commercial arbitrations. It follows that the reasoning for the Singaporean Court of Appeal in Pt Asuransi has no direct application to the circumstances of this case.

105    There is in any event, another basis upon which this matter may be distinguished from PT Ansuransi and another reason why HJI is not precluded by article 16(3) of the Model Law from challenging the award under article 34. That is essentially because here there can be no question that the arbitrator’s negative jurisdiction decision was an award.

106    Article 16(3) provides that where one of the parties pleads that the arbitrator does not have jurisdiction, the arbitrator may rule on the plea in one of two ways. First, it may rule on the plea as a “preliminary question”. If decided as a preliminary question, the parties have no recourse to the court unless the decision is that the arbitrator has jurisdiction. Recourse to the court in that circumstance is not recourse under article 34. Rather, it is recourse under article 16(3). If, on the other hand, the decision on the preliminary question is that the arbitrator does not have jurisdiction, one can readily see potential merit in the argument that there is no recourse to a court at all. There is no recourse under article 16(3). That is apparent from the terms of the article. The decision is also not subject to challenge under article 34. That is because article 34 only provides recourse to a court in respect of an arbitral award. If decided as a preliminary question, the decision would appear not to be an award for the purposes of article 34.

107    The second option available to an arbitrator under article 16(3) is to rule on the plea in an award “on the merits”. The Model Law does not define an “award on the merits.” One can readily see how an arbitrator who finds that he (or she) has jurisdiction could then proceed to determine the merits of the claim and incorporate his or her findings in relation to jurisdiction in the final award. There could be no question that the unsuccessful party would then have recourse to the relevant court under article 34.

108    But can a ruling that the arbitrator does not have jurisdiction ever be characterised on an “award on the merits”? If so, there would appear to be no reason why the unsuccessful party would not then have recourse to the relevant court under article 34. Nothing in article 16(3) suggests that there can be no article 34 challenge to such an award. The terms of article 16(3) indicate no more than that a party cannot request a court to “decide the matter” where the arbitrator has ruled, as a preliminary question (as opposed to an award on the merits) that he or she has no jurisdiction.

109    It is unnecessary, in the circumstances of this case, to decide the difficult question whether, in the absence of any agreement of the parties, a no jurisdiction finding can be made in, or can constitute, an award on the merits for the purposes of article 16(3). That is because the parties here decided that the threshold issue (which effectively determined the question of jurisdiction) would be decided as a “final award”. It was open to them to so agree. The threshold issue was accordingly not decided as a preliminary question, but as an award on the merits. In these circumstances, there could be no real question that HJI could challenge the ruling under article 34 despite the terms of article 16(3).

110    It should be emphasised, however, that the fact that a negative jurisdiction award may be able to be challenged under article 34 of the Model Law does not mean that the challenge is at large, or that the court entertaining the challenge is free to intervene simply on the basis that the award may contain errors of fact or law. To successfully challenge the award, the challenging party must make out one of the specific grounds in article 34(2) in relation to the award in question. There would appear to be Canadian authority to this effect: Bayview Irrigation District #11 v United Mexican States 2008 CanLII 22120 (ON SC).

111    For the reasons already given, HJI has not made out any ground in article 34(2) of the Model Law in relation to the award in question.

HJI’s claim for declaratory relief

112    HJI’s alternative claim for a declaration that Mr Tsang’s report was not an audit report within the meaning of the Deed is said to be within the accrued jurisdiction of the Court. Mr Martin does not dispute that the Court has jurisdiction to consider this alternative relief on the basis that it forms part of the whole controversy between the parties.

113    HJI relies on a number of authorities, mostly concerning expert valuations, that consider the circumstances in which a report or determination of an expert appointed under a contract may be challenged by a party and reviewed by a court. Those authorities include: Barescape Pty Limited v Bacchus Holdings Pty Limited (No 9) [2012] NSWSC 984 at [86]; McGrath v McGrath [2012] NSWSC 578 at [11]; TX Australia Pty Limited v Broadcast Australia Pty Limited [2012] NSWSC 4 (TX Australia) at [23]-[24]; AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173 at [51]; Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 at 335-336.

114    These cases establish that if the expert report is made honestly, impartially and in accordance with the contract, the parties are bound by it even if it is infected with mistake or error. If, however, the report is not made in accordance with the terms of the contract, or the expert asks himself (or herself) the wrong question, or misconceives his (or her) jurisdiction, or applies the wrong test, the report will be invalid and not bind the parties.

115    HJI contends that Mr Tsang was an expert appointed under the Deed. It submits that the contents of Mr Tsang’s report reveals that he misconceived his function, asked himself the wrong question and did not follow the requirements of clause 10.1 of the Deed. This is said to follow because it is apparent from the report that Mr Tsang did not attempt to identify or determine the losses caused by alleged breaches of duty by Mr Martin.

Is there a basis for the declaration?

116    HJI correctly submits that consideration of the question whether Mr Tsang’s report was in accordance with the Deed, or the question whether Mr Tsang misconceived his function, requires analysis of two issues: first, what was Mr Tsang’s task under the Deed; and second, what did he actually do: TX Australia at [24].

117    The answer to the first question depends on the proper construction of the Deed. Contrary to HJI’s submission, the key provisions of the Deed in relation to this question are clauses 9.1 and 9.2, not clause 10.1. Under clause 9.1, Mr Tsang was to be appointed “to perform an audit of RUS Holdings and RUS Mining in the period for which Mr Martin held appointments as director of RUS Holdings and RUS Mining.” Clause 9.1 says nothing about the nature or the scope of the audit to be performed. Clause 9.2 deals with the requirement that the auditor provide the “audit report” within a specified period of time. It says nothing about the nature or content of the report.

118    Clause 10.1 deals with what is to occur in the event that the report discloses a breach by Mr Martin and a consequential loss to the companies. Clause 10.2(b) of the Deed, on the other hand, deals with what is to occur if the report does not disclose a breach or loss. Whilst these clauses may hint at the matters that should be addressed in the report, they do not directly address the auditor’s task under the Deed.

119    In these circumstances, the answer to the first question is that Mr Tsang’s task under the Deed (and therefore his contractual task) was simply to perform an audit of RUS Holdings and RUS Mining for the relevant period and produce a report. This he unquestionably did.

120    It is true, as HJI points out, the Mr Tsang’s engagement letter states that the audit review was to be conducted “as per” the Deed and “as per” clause 10.1. Given the terms of clause 10.1, however, the precise contractual task to be performed by Mr Tsang was somewhat obscure.

121    In any event, even if Mr Tsang’s contractual task was defined by clause 10.1, there is no basis to conclude that Mr Tsang misconceived his function, or asked himself the wrong question, or did not perform the task contractually required of him. Mr Tsang appears to have performed an audit. He certainly produced a report stating findings and “audit conclusions” in respect of certain topics. Whilst the report did not (as the arbitrator found) “disclose a basis” for a breach by Mr Martin, or disclose that “any such breach” had caused a loss, it does not necessarily follow that Mr Tsang did not address his contractual task. It might equally simply reveal that Mr Tsang’s audit did not disclose any basis for a breach or loss. It might also be argued that the absence of any such finding was the product of mistake or error on the part of Mr Tsang. As the authorities relied on by HJI reveal, however, mere mistake or error in carrying out the contractual task does not invalidate the expert’s determination or report.

122    It follows that there is no basis for a declaration on the terms sought by HJI.

Discretionary Considerations

123    In any event, even if there was a basis for the making of a declaration, powerful discretionary considerations would militate against granting this relief.

124    There is no doubt that declaratory relief is a discretionary power. It is neither possible nor desirable to fetter the exercise of the discretion by laying down rules as to the manner of its exercise: Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 581-582. One circumstance where the relief may be refused, however, is where the declaration will produce no foreseeable consequences for the parties: Gardner v Dairy Industry Authority of New South Wales (1977) 18 ALR 55 at 69, 71; Aussie Airlines Pty Ltd v Australian Airlines Ltd (1996) 68 FCR 406 at 414.

125    The difficulty for HJI is that it did not contend before the arbitrator that Mr Tsang’s report was not an audit report for the purposes of the Deed. It proceeded before the arbitrator on the basis that the report was an audit report. The arbitrator accordingly also proceeded on that basis, but found, in his award, that the report did not engage clause 10.1 because it did not disclose a basis for a breach or loss. HJI has failed in its application to set aside the award. The award accordingly remains on-foot. In these circumstances, clause 10.2(b) of the Deed is enlivened in relation to the release of the retained funds.

126    In these circumstances, it is difficult to see what consequences the declaration sought would have for the parties. HJI submits that if the declaration was made, the parties would be required to go back to “square-one”, meaning that HJI would be able to appoint another auditor under clause 9.1. The new auditor would then report as required by clause 9.2. If any of the relevant findings in that report were disputed by Mr Martin, there could then be another arbitration under clause 10.1.

127    But that submission, even if it be correct, highlights the fundamental difficulty for HJI. This outcome would be manifestly incompatible and inconsistent with the fact that an arbitration has already occurred and the resulting award has been upheld. That consideration provides a powerful discretionary reason to withhold the relief.

128    This conclusion is also again fortified by the strong policy of judicial restraint in relation to disturbing international arbitral awards. The Court would be loath to make a declaration which was inconsistent or incompatible with an arbitral award that has not been successfully challenged under article 34(2) of the Model Law. That is the case here.

129    The case before the arbitrator proceeded on the basis that Mr Tsang had conducted an audit and reported accordingly. The only issue was whether that report engaged clause 10.1 of the Deed. The arbitrator ruled, in an award, that the report did not engage clause 10.1. That award has been upheld. In the circumstances, HJI’s application for declaratory relief can properly be seen as an impermissible collateral attack on the award, quite inconsistent with article 5 of the Model Law. That is another reason to refuse that relief sought.

130    Mr Martin submitted that HJI was estopped from denying that Mr Tsang’s report was an audit report for the purposes of the Deed by reason of the recital in the Variation Deed referred to earlier in these reasons. Given the conclusions that have already been reached, it is unnecessary to determine if the Variation Deed gives rise to an estoppel by deed. It is perhaps sufficient to note that the recital in the Variation Deed is consistent with the approach taken by HJI before the arbitrator, which was to treat the report as an audit report for the purposes of the Deed. As has already been said, that circumstance alone provides a powerful discretionary reason to refuse relief in any event.

Mr Martin’s cross-claim

131    At the hearing, HJI conceded that if it failed to set aside the award or have the Court make a declaration in relation to the audit report, Mr Martin’s cross-claim must be allowed. That concession was properly made. In circumstances where, as held by the arbitrator, the audit report does not disclose a basis for a breach of legal duty by Mr Martin, clause 10.2(b) of the Deed requires that the retained funds be immediately released to Mr Martin.

132    It is, however, unnecessary to make the declaration sought in paragraph 3 of Mr Martin’s cross-claim. It is sufficient to note that, given what has been found in these proceedings, Mr Martin would plainly be entitled to plead the release in clause 10.2(b)(iii) in answer to any claim that falls within that clause.

Disposition

133    For the reasons given, HJI’s application is dismissed. Mr Martin’s cross-claim is allowed to the extent that it concerns the retained funds.

134    The appropriate orders are:

1.    The originating application for relief under the Model Law is dismissed.

2.    The retained funds, as defined in clause 8 of the Deed executed by, inter alia, the applicant/cross-respondent and the first respondent/cross-claimant on 24 November 2012, are to be released to the first respondent/cross-claimant in accordance with clause 10.2 of the Deed.

3.    The applicant/cross-respondent is to provide all such approvals, consents and authorities required to ensure that the retained funds are released in accordance with Order 2.

4.    The applicant/cross-respondent is to pay the costs of the first respondent/cross-claimant in relation to the application and cross-claim as agreed or assessed.

Associate:

Dated:    17 March 2015