Case Note – Ku-ring-gai Council v Ichor Constructions Pty Ltd
Dr Vicky Priskich
Barrister and Arbitrator, Melbourne, Australia
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A Introduction
Section 27D of the Commercial Arbitration Act 2010 (NSW) (CA Act) recognises arb-med in the context of domestic arbitration in Australia. The case of Ku-ring-gai Council v Ichor Constructions Pty Ltd (Ku-ring-gai),[1] highlights the importance of compliance with the procedural requirements of s 27D when an arbitrator seeks to settle a dispute by putting forward a proposal for settlement to the parties. In Ku-ring-gai that occurred at a very late stage in the arbitration proceedings, namely, the last day of a final hearing
In particular, Ku-ring-gai confirms that if one of the parties has not consented in writing to the arbitrator resuming the arbitration proceedings once the arbitrator’s attempt to settle the dispute by mediation is unsuccessful, the arbitrator’s mandate will terminate. A substitute arbitrator will be appointed.
The statutory procedure allows parties to gauge for themselves whether an arbitrator who seeks to facilitate settlement by mediation should be permitted to resume the arbitration proceedings. Parties and their legal advisors should carefully consider the possible consequences of embarking on an arb-med process under the CA Act.
B Background
The parties were in the final day of hearing when the arbitrator asked the parties whether they would consent to the arbitrator putting forward a proposal for settlement. The parties signed a handwritten document consenting to the arbitrator doing so, the arbitration hearing was adjourned, the parties met with the arbitrator in a ‘breakout room’, the arbitrator put the settlement proposal to the parties, both parties rejected the proposal and the hearing resumed. The parties overlooked the requirements of s 27D(4) set out below. Instead, they continued with the hearing although they had not signed any document consenting to its recommencement. One of the parties asserted several days after the hearing concluded that as it had not consented to the arbitrator continuing with the hearing, the mandate of the arbitrator was terminated under s 27D(6).
It is useful to set out the terms of sub-sections 27D(4) and 27D(6):
(4)
An arbitrator who has acted as mediator in mediation proceedings that are terminated may not conduct subsequent arbitration proceedings in relation to the dispute without the written consent of all the parties to the arbitration given on or after the termination of the mediation proceedings.
(6)
If the parties do not consent under subsection (4), the arbitrator’s mandate is taken to have been terminated under section 14 and a substitute arbitrator is to be appointed in accordance with section 15.
One of the parties, the Ku-ring-gai Council, commenced proceedings in the Supreme Court of NSW contending that the arbitrator was entitled in the circumstances to proceed with the arbitration after the arbitrator’s attempt to settle the matter was unsuccessful.
C Supreme Court Proceedings
There were a number of issues raised before McDougall J.[2] The main issues were:
- Whether what occurred in the breakout room were “mediation proceedings” to which s 27D(4) of the CA Act applied.
- Whether by continuing with the hearing the defendant waived its rights to object to the arbitrator resuming the conduct of the arbitration.
- Whether conventional estoppel or estoppel by representation prevented the defendant from asserting that the requirements of s 27D(4) were not met.
Mediation proceedings?
Justice McDougall held that the arbitrator’s attempt to settle the dispute by placing a settlement proposal to the parties, which was rejected by both parties was a mediation proceeding. The terms of the written consent signed by the parties showed that the parties considered the process that they were embarking on was a ‘mediation’ for the purposes of s 27D of the Act.[3] Moreover, McDougall J observed that as the arbitrator was attempting to bring about a settlement by compromise he was acting in a non-arbitral capacity.[4] The judgment by McDougall J also considers what is the core function of an arbitrator – to hear and determine the dispute by giving parties an opportunity to present their cases – and contrasts that with the core function of a mediator, which is to bring the parties to an agreement.[5]
Waiver
Section 4 of the CA Act (based on Art 4 of the UNCITRAL Model Law on International Commercial Arbitration) provides for a statutory waiver. Relying on the travaux to the UNCITRAL Model Law as an aid to interpretation, McDougall J concluded that s 4 of the CA Act requires actual knowledge of the failure to comply with a provision.[6] In the instant case, the defendant was unaware of the requirement for written consent to continue with the arbitration proceedings until after the arbitration hearing concluded. In the absence of knowledge of the requirement there was, in his Honour’s view, no possibility of a statutory waiver operating.[7]
Estoppel
The plaintiff relied on both conventional estoppel and estoppel by representation. Conventional estoppel was alleged to be based on the common assumption of the parties that if the arbitrator’s attempt to settle the dispute failed, the arbitration would proceed. Justice McDougall found that this did not overcome the need for written consent, which the parties were unaware of. That is, for a conventional estoppel to be effective the common assumption would need to be that the arbitration could proceed without the need for their written consent.[8]
As to estoppel by representation, if an estoppel were to succeed in preventing the defendant from raising the point when it did, the representation would need to be to the effect that no matter what might be said or done in the breakout room, if the attempt at settlement failed the defendant would agree to the arbitrator continuing to act as arbitrator. Justice McDougall found that no representation was alleged to this effect nor proven by reference to the evidence of what occurred.[9]
D NSW Court of Appeal Proceedings
The Court of Appeal dismissed an application for leave to an appeal from the judgment of McDougall J on the basis that s 14(3) the CA Act states that the decision of the Supreme Court is “final”.[10]
That conclusion was dependent on the basis for the power of the Supreme Court to hear and determine the matter being founded upon s 14(2), not s 17J of the CA Act. The relevant sections provide:
s 14 Failure or impossibility to act
(1)
If an arbitrator becomes in law or in fact unable to perform the arbitrator’s functions or for other reasons fails to act without undue delay, the arbitrator’s mandate terminates if the arbitrator withdraws from office or if the parties agree on the termination.
(2)
Otherwise, if a controversy remains concerning any of these grounds, any party may request the Court to decide on the termination of the mandate.
s 17J Court-ordered interim measures
(1)
The Court has the same power of issuing an interim measure in relation to arbitration proceedings as it has in relation to proceedings in courts.
(2)
The Court is to exercise the power in accordance with its own procedures taking into account the specific features of a domestic commercial arbitration.
The argument on appeal was that McDougall J was exercising the power conferred by s 17J as the determination was made “in aid of the arbitral process” because it related to the “status of the arbitrator”.[11] Subsection 14(2) was argued to be inapplicable because there had to be some controversy before the arbitrator. However, the respondent had frustrated the arbitration process by telling the arbitrator that his mandate had terminated.[12]
The Court of Appeal rejected these submissions since the relief sought was final in nature, not an interim measure under s 17J. The proceedings involved the question of whether the arbitrator had become in law “unable to perform” the arbitration in circumstances where the arbitrator had not withdrawn and the parties had not agreed to termination of the arbitration. The Court held that these “were circumstances falling within s 14(1) as a result of which the Court’s power under s 14(2) to determine the question was enlivened upon the request of one of the parties.” [13]
E Reflections
Sub-section 27D(4) gives the parties in arbitration proceedings a ‘no questions asked’ veto mechanism to the recommencement of the arbitration proceedings where an attempt by the arbitrator to bring about a settlement between the parties has proven unsuccessful. There may be a range of reasons for a party to choose to exercise a right of veto following a conventional mediation process; concern over private caucuses with the mediator or disclosure of confidential information that may be considered on reflection to have harmed the party who has disclosed it.
Those kinds of concerns did not arise in the instant case. The parties were aware before entering the breakout room that the arbitrator would put a proposal for settlement to them and could be expected to be aware that the proposal may be one that either or both parties would consider unfavourable.
Parties who allow an arbitrator to act beyond the arbitrator’s role are exposed to a risk that the counter party in the dispute will veto resumption of the arbitration proceedings for any reason. The risks are higher the later in the arbitration proceedings any settlement proposal is made by an arbitrator. In Ku-ring-gai this occurred on the final day of the hearing.
The safer course is for a person other than the arbitrator to be appointed to try to bring the parties to a settlement. In the circumstances of Ku-ring-gai, this is likely to have been impractical.
Can parties waive the statutory right of veto by giving written consent prior to the commencement of the mediation? Or, if parties are aware prior to the mediation occurring of the requirements of s 27D(4) but make no objection when the arbitration resumes after the mediation fails, would such conduct alone be binding? These were not the circumstances that McDougall J was presented with.
Sub-section 27D(4) proscribes the permissible form of waiver;[14] an arbitrator who has acted as mediator shall not conduct subsequent arbitration proceedings unless written consent of the parties has been given on or after the termination of the mediation.
This raises an interesting question of law of whether or not the statutory right of veto in s 27D(4) may be waived in a manner other than in the form proscribed by s 27D(4),[15] and/or whether estoppel may overcome statutory formality requirements.[16] Ultimately, resolution of these questions turns upon the scope and policy of s 27D(4) of the CA and considerations of public policy.
Similarly, the question of whether the parties may by contract (i.e. for valuable consideration before any dispute arises) remove the statutory right of veto in s 27D(4) involves similar considerations.[17]
It is not a field that parties and their legal counsel should lightly enter.
[1] [2018] NSWSC 610 (first instance); [2019] NSWCA 2 (NSW Court of Appeal).
[3] Ibid [35], [43]-[44]. The document the parties signed acknowledged that the arbitrator was “acting as mediator pursuant to s 27D of the [CA Act]”.
[4] Ibid [28].
[5] Ibid [26]-[27].
[6] Ibid [69]-[72].
[7] Ibid [74].
[8] Ibid [84].
[9] Ibid [87]-[88].
[2019] NSWCA 2 [67]-[76].
[11] Ibid [58].
[12] Ibid.
[13] Ibid [65]-[66].
[14] ‘Waiver’ in the sense of non-insistence upon a right made by choice.
[15] Australian Horizons (Vic) Pty Ltd v Ryan Land Co Pty Ltd [1994] 2 VR 463, 498.
[16] Overmyer Industrial Brokers Pty Ltd v Campbells Cash & Carry Pty Ltd (2004) Aus Contract Rep 90-181 at [55].
[17] Australian Horizons (Vic) Pty Ltd v Ryan Land Co Pty Ltd [1994] 2 VR 463, 498.