Natural Justice v Party Autonomy
Consideration of the challenge grounds in art 12, sch 1, of the Arbitration Act 1996.
Article completed as a requirement of Law 421: Commercial Arbitration
In Bidois v Leef[1] the Court of Appeal was concerned that by deeming art 12(2), sch 1, of the Arbitration Act 1996 to be mandatory, a party who failed to challenge an arbitrator appointment under arts 12 and 13 could proceed without fear of the right to challenge being deemed waived under art 4. The party could subsequently raise the grounds in art 12 as the basis to challenge an award under art 34[2] – the so-called “heads I win, tails you lose” issue.[3]
The issue for consideration in this article is whether the grounds for challenge requiring the independence and impartiality of an arbitrator in art 12(2) constitute a non-derogable provision that would preclude waiver under art 4.
In analysing the issue this article will consider the tension between two fundamental principles: the natural justice principle requiring an unbiased decision-maker, and the arbitration principle of party autonomy allowing parties to determine their own process for dispute resolution.
Background to the Act
The Act is derived from the UNCITRAL[4] Model Law on International Commercial Arbitration (1985)(the Model Law), and in interpreting the Act reference may be made to documents relating to the Model Law or the Model Law working group (Working Group).[5]
Article 12(2) provides two distinct grounds for challenge: in circumstances where there is doubt about the “arbitrator’s impartiality or independence” (the bias ground); [6] or where the arbitrator does not “possess qualifications agreed to by the parties” (the qualification ground).
Construction
Understanding the issue requires interpretation of the relevant article ‘from its text and in the light of its purpose’.[7]
Reading art 12(2) for natural meaning reveals no mandatory language, therefore in order to deem the article mandatory a court would need to infer that meaning.
Rather than list the mandatory provisions, the Working Group’s intention was that non-mandatory provisions be drafted to indicate their non-mandatory nature, with the expectation that the mandatory provisions would be obvious by the lack of non-mandatory language. According to Holtzmann and Neuhaus:[8]
While there was some support for the view that it should be left to arbitrators and judges to determine the character of the provisions which did not express their non-mandatory character, the prevailing view, adopted by the Working Group, was that it was desirable to express the non-mandatory character in all provisions of the final text which were intended to be non-mandatory. [9]
Using this logic the lack of non-mandatory language in the bias ground implies its status to be mandatory. Born’s analysis of the Model Law reinforces this, stating that the bias grounds are implicitly mandatory by the omission of opportunity for parties to contract out of them.[10]
The Law Commission, in choosing not to amend art 4 to clarify which provisions were mandatory, believed that the mandatory provisions would be clear in “virtually all cases from the language used”. [11]
Non-mandatory language is found in the qualification ground where the ability for the parties to agree the arbitrator’s qualifications is clearly a provision able to be derogated from, demonstrating the fundamental arbitration principle of party autonomy.
Accordingly, from reading the text of art 12(2) the bias ground can be interpreted as mandatory and the qualification ground as non-mandatory.
Purpose
Parliament’s express intentions are clearly stated in s 5 Purposes of Act. These include promoting international consistency of arbitral regimes based on the Model Law, and clarifying the limits of judicial review of the arbitral process and awards. These intentions are further clarified in the introductory remarks to the final reading of the Bill:[12]
Court intervention to challenge an award will be possible only on grounds to do with the jurisdictional basis of the arbitration, compliance with the arbitration agreement, natural justice, and public policy.
This intention is expressed in arts 34(6)(b) and 36(3)(b), which both reinforce the requirement for natural justice in satisfying public policy, and provide grounds for challenging or refusing recognition of an award respectively.
The requirement for an unbiased decision-maker is one of the fundamental principles of natural justice,[13] and is seen as “an essential underpinning of democratic society and vital to the integrity of the administration of justice”.[14]
A final consideration is the drafting of the Arbitration Act 1996 (UK), which requires arbitrator impartiality to be mandatory,[15] reasoning non-bias to be essential, regardless of independence or otherwise.[16]
Bidois v Leef
The Court in Bidois v Leef referred to its own decision in Banks v Grey District Council to leave open the question of whether challenge time frames meant the bias ground could not be the basis of an art 34 application to set aside an award.[17] While the Court in that case was not concerned with whether the bias ground is mandatory, it did describe the arbitrator’s “fundamental duty” to act impartially as “the essence of arbitration”.[18] It has been suggested that the original judgment recognised this by recommending the arbitrator voluntarily withdraw.[19]
In this case the Court acknowledged relevant authority which held that fundamental principles of natural justice were entrenched[20] but subsequently over-ruled this authority, reasoning by analogy using examples from New Zealand and UK case law where fundamental principles in other parts of the relevant Acts were deemed to be waived.[21]
Interpretation of the bias ground as mandatory, and the consequences of the time bar in art 13 proposed by Williams and Kawharu[22] were considered[23] but discounted to address concerns that the effectiveness of the provisions of arts 12 and 13 would be undermined[24] leading to inefficiency and uncertainty.
This concern is echoed by Robert Schultz in his consideration[25] of the Bidois v Leef decision and he reiterates the Court’s reasoning[26] that parties may rightfully choose to appoint an arbitrator with specialist knowledge at the expense of matters which might otherwise disqualify them.
In its simplest form, the Court of Appeal decision infers that the parties can agree to arbitrate contrary to the principles of natural justice. This approach would undermine the effects of the provisions in arts 34 and 36, each which expressly state natural justice as public policy grounds for resisting an award. To reason that giving mandatory effect to the grounds in art 12(2) and removing the waiver opportunity under art 4 undermines the effectiveness of arts 12 and 13 is therefore illogical.
Conclusion
If art 12(2) is mandatory each party has an immutable right to an impartial tribunal under 12(2) with mandatory time limits for challenge imposed under art 13. Where a party seeks to challenge outside the prescribed time limits there is no art 4 deemed waiver of the right to challenge. Therefore the composition of the tribunal may be considered under the discretion to challenge or refuse to enforce an award, respectively provided in arts 34(2)(b)(ii) and 36(1)(b)(ii) both on grounds of public policy.
This interpretation does not undermine the effectiveness of arts 12 and 13. It recognises the natural justice safety net the parties agree to when submitting themselves to the Act.
The Court in Bidois v Leef traversed the findings of unreported cases to support its interpretation that fundamental principles are waivable, over-riding the implicit intentions of the Model Law, express Parliamentary intention, explicit provisions in comparable jurisdictions, and the clear determination of multiple authoritative texts that the bias ground is mandatory. The reasoning appears to be to encourage efficiency in the arbitral process and give effect to the party autonomy principle.
Notwithstanding the attraction of self determination in that principle, where parties have agreed to judicial oversight under the Act they are required to submit to an overlay of legal principle and reasoning to ensure a fair and just outcome. Therefore at some point the Supreme Court ought to clarify whether the grounds of independence or impartiality in art 12 can be deemed non-derogable provisions precluding waiver under art 4.[27]
[1] Bidois v Leef [2015] NZCA 176, [2015] 3 NZLR 474.
[2] At [80].
[3] At [77] citing Gary Born International Commercial Arbitration (2nd Edition, Wolters Kluwer, The Netherlands, 2014) at 2614 – 2615.
[4] United Nations Commission on International Trade Law.
[5] Section 3.
[6] Space restricts analysis of the distinction between independence and impartiality, or the difference between apparent bias and actual bias. For the purposes of this article the differing grounds of impartiality “or” independence are considered as one ground.
[7] Interpretation Act 1999, s 5(1).
[8] H Holtzmann and J Neuhaus A Guide to the UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary (Kluwer, Deventer, 1989) at 1153.
[9] However, the Working Group in an earlier report stated this “did not mean that all those provisions of the model law which did not express their non-mandatory character were necessarily of mandatory nature”. Holtzmann and Neuhaus, at n 8, at 1120.
[10] Gary Born, above at n 3, at 1800.
[11] Law Commission Arbitration (NZLC R20, 1991) at 160.
[12] (21 August 1996) 557 NZPD 14246.
[13] Peter Spiller New Zealand Law Dictionary (8th ed, LexisNexis, Wellington, 2015) at 196.
[14] David Williams and Amokura Kawharu Williams and Kawharu on arbitration (LexisNexis, Wellington, 2011) at 145.
[15] Sections 4, 24, sch 1.
[16] Laws of New Zealand Arbitration (online ed) at [41].
[17] Banks v Grey District Council [2004] 2 NZLR 19 (CA) at [12].
[18] At [27].
[19] A A P Willy Arbitration in New Zealand (2nd edition, LexisNexis, Wellington, 2003) at 5.1.8(g).
[20] Methanex Motunui Ltd v Spellman [2004] 1 NZLR 95 (HC) at [44].
[21] At [73].
[22] Above at n 14, at 156
[23] At [72].
[24] At [78].
[25] Robert Schultz “Arbitrator bias and associated issues” (2015) NZLJ 369 at 369.
[26] At [71].
[27] Alluded to in Leef v Bidois [2015] NZSC 128, at [20].