29 Mar 2012

Setting aside an arbitrator's award because of breaches of natural justice

by Phillip Coady

A recent Queensland decision is a reminder to arbitrators and parties alike of the importance of dealing with all the issues that arise in an arbitration.

In the recent Queensland Supreme Court decision of Sugar Australia Pty Limited v Mackay Sugar Ltd [2012] QSC 38 Justice McMurdo ruled in favour of an applicant who sought orders that the arbitrator's award be set aside pursuant to section 42 of the Commercial Arbitration Act 1990 (Qld) because the arbitrator had breached the rules of natural justice. This was because the arbitrator decided the case on the basis of a proposition that had not been addressed by either of the parties.

The facts

Sugar Australia Pty Limited was the manager of a joint venture (the JV) which operated a sugar refinery at Racecourse, Queensland. Mackay Sugar Ltd was a participant in the JV and owned and operated an adjacent sugar mill.

The JV was formed in 1998 prior to the deregulation of the scheme for compulsory acquisition of raw sugar that had existed pursuant to the Sugar Industry Act 1991 (Qld). The Joint Venture Agreement (JVA) anticipated that deregulation would take place by stating that if the scheme for compulsory acquisition was abolished, the provisions of Schedule 2 of the JVA would apply. Under Schedule 2:

"Subject to production limitations,Mackaywill sell to the Manager sufficient rawsugarto meet the Requirements using its best endeavours to meet the quality parameters of the Manager. Mackaywill at all time give preference of supply to the Participants."

After deregulation, Sugar Australia and Mackay Sugar entered into a Sale Contract in June 2007 under which Sugar Australia would purchase raw sugar from Mackay Sugar for three years. Clause 2 of the Sale Contract stipulated that:

"Mackay Sugarwill supply sufficient rawsugarto meet the rawsugarmelt requirements forSugarAustralia’s Racecourse Refinery provided that it is no more thanMackay Sugar’s total annual rawsugarproduction."

After the three-year period had expired, the parties met to discuss the renegotiation of a new Sale Contract and recorded in meeting minutes that the old Sale Contract would continue to apply for a period of three months while the parties engaged in those discussions. Despite being unable to agree a new Sale Contract after the three-year period had elapsed, the parties continued their relationship as previously arranged.

In April/May 2011, Mackay Sugar was unable to provide Sugar Australia with the amount of raw sugar it required. Sugar Australia claimed that this was a breach of clause 2 of the Sale Contract and that it was entitled to compensation. The parties agreed to arbitrate the dispute.

The arbitration

During the arbitration, both parties acknowledged that Mackay Sugar was obliged to provide Sugar Australia with an amount of raw sugar. The point of contention for the parties was the amount of raw sugar that was required to be provided.

Sugar Australia argued that the parties, by their conduct, continued to be bound by the terms of the Sale Contract and consequently clause 2 operated to identify the amount of raw sugar Mackay Sugar was required to provide Sugar Australia.

Mackay Sugar argued that the Sale Contract was not applicable at the time of the alleged breach and that Schedule 2 of the JVA applied. As Schedule 2 of the JVA stated that the supply of raw sugar would be subject to "production limitations", which Mackay Sugar argued was the cause of its inability to supply sufficient amounts of raw sugar, Mackay Sugar claimed that there had been no breach of contract.

The arbitrator found that Sugar Australia had not established that there had been a breach of contract. In particular, the arbitrator found that the parties did not mean for clause 2 of the Sale Contract to be effective during the three-month period after the Sale Contract ceased to operate because the reference to "annual raw sugar production" was inconsistent with the three-month period stated in the meeting minutes.

On this basis, even if the Sale Contract continued to be effective after the three-month period, this did not include clause 2 either because it had ceased to be an operative term of the Sale Contract after the expiry of three year period stated in the Sale Contract as a result of the reference to the three-month period stated in the meeting minutes.

Breach of natural justice by the arbitrator

Section 42 of the Act permits a court to set aside an award, in whole or in part, where there has been misconduct on the part of the arbitrator or where the arbitrator has misconducted the proceedings. Misconduct is defined in the Act to include breaches of the rules of natural justice.

The applicant argued that the arbitrator's reasoning in respect of the interpretation of "annual raw sugar production" had not been addressed by either party in the arbitration and that neither party had made any submissions as to the meaning of that wording and its effect on the parties' contractual relationship. This was accepted by Justice McMurdo.

Justice McMurdo further confirmed that natural justice included a party's entitlement to be given the opportunity to respond to a point, which, although had not been raised by it or its opponent, is considered by the arbitrator to be adverse to its case (Interbulk Ltd v Aiden Shipping Co Ltd (The "Vimeira") per Goff LJ).

In determining whether this is the case, it is always relevant for a court to inquire as to whether the party should have reasonably anticipated that the point in question was or would become a live issue relied upon by the arbitrator in making his award (Re Association of Architects of Australia; ex parte Municipal Offices Association per Gaudron J).

Justice McMurdo stated:

"A remarkable consequence of the arbitrator’s reasoning was that after the expiry of the three year contract in June 2010, there was no contract between the parties which contained any term which obliged the respondent, conditionally or otherwise, to supply any rawsugarto the applicant. That was not a position which was suggested by any of the respondent’s contentions or submissions. Its case accepted that it was subject to such an obligation, but with a proviso in the terms of that in Schedule 2 of the JVA. Therefore, the relationship between the parties, as determined by the arbitrator, was markedly different from that for which either party had contended."

Justice McMurdo found that based on the parties' submissions (ie. that there was an obligation to supply raw sugar but the extent of which was in dispute), it was not reasonable for the applicant to anticipate that the arbitrator would adopt the reasoning he ultimately did. The applicant should therefore have been given an opportunity to respond to the points raised in the arbitrator's reasoning.

Consequently, he found that the arbitrator had breached the rules of natural justice and was guilty of misconduct within the meaning of section 42. The award was set aside and the matter was remitted to the original arbitrator for reconsideration.

Care must be taken

The case is a timely reminder for parties and arbitrators alike to ensure that any issues that are or are likely to be determinative of a dispute are addressed during the arbitration. For arbitrators, if there are matters that he/she believes are relevant to his/her determination of the issues in dispute, these should be brought to the attention of the parties to allow them the opportunity to present their position on those issues.

Although not found to be the case here, it is equally important for parties to ensure that issues which are or are likely to be determinative of a dispute are addressed during the arbitration. Otherwise, it may be found that the arbitrator, in relying on a point that had not been addressed by the parties, is not guilty of breaching the rules of natural justice because the parties should have reasonably anticipated that the point in question would form part of the arbitrator's determination of the dispute.


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