Finality and freedom: unappreciated risks of the arbitral process

Introduction

In Australia, resolving disputes through arbitration is, and has been for some time now, an attractive option for commercial parties.  Two commonly identified benefits to arbitration are:

1. flexibility as to how the dispute is run, with upsides including the potential to save time and costs, as well as potential strategic advantages arising from a more bespoke manner of case presentation; and
2. the general acceptance in Australia that arbitral awards should be presumptively enforced subject only to limited, specified exceptions in the Model Law such as fraud or improper due process.

However, flexibility has its limits, and strategic case management has its risks.  In the recent case of Chevron Australia Pty Ltd v CBI Constructors Pty Ltd [2021] WASC 323 (Chevron v CKJV), Justice Kenneth Martin of the Supreme Court of Western Australia was asked to consider the consequences of a deliberate procedural direction taken in an arbitration.  His Honour determined that, having regard to the legal doctrine of ‘functus officio’, the tribunal lacked jurisdiction to hear a substantial component of one party’s case. 

An award being set aside – for reasons which arise from the procedural pathway constructed within the arbitration process – is a  cautionary tale worth remembering.  In this article Corey Steel (Partner) and Michael Robbins (Special Counsel) examine the risks to parties in arbitration that arose in Chevron v CKJV.

Background

Chevron had engaged CKJV (a joint venture between CBI Constructors Pty Ltd and Kentz Pty Ltd) to perform construction and other services in relation Chevron’s Gorgon oil and gas project.  A dispute arose as to how CKJV was to be reimbursed for its labour; Chevron contended an ‘actual costs’ basis, whereas CJKV sought to rely on contract variations or principles of estoppel to assert it was entitled to be remunerated on a ‘rates’ basis.

Arbitration commenced in 2017.  The procedural pathway the parties took, recorded in a procedural order (PO 14), was to bifurcate all issues of liability and quantum in the dispute.  Bifurcation along such lines is not uncommon – it can save time and costs if resolving liability first will reduce what then needs to be addressed at the quantum stage.  It is not always suitable or helpful, as the factual and legal line between liability on quantum may be blurred.  However, as in this case, it remains an often-considered option when strategising how to pursue a formal dispute.

The parties’ case on liability was heard in November 2018 and a first interim award issued by the tribunal in December 2018 (First Interim Award).  While complex, a relevant result of the award was the triumph of Chevron’s ‘actual costs’ case over CKJV’s ‘rates’ based argument.   

With all liability issues resolved, the arbitration turned to the matter of quantum.  In that context CKJV was offered an opportunity to replead its case on quantum, and it did so by filing what it called an ‘Amended Case on Quantum’.  Chevron objected to the filing on the basis that:

• CKJV’s amended case was an attempt to recast its case on liability under the banner of ‘quantum’ where all issues of liability had been conclusively determined in the First Interim Award;
• once so determined, the functus officio doctrine holds that the tribunal’s official function and power to decide such matters then expires; and
• as a consequence the tribunal’s authority and jurisdiction to render any further determinations on liability issues had been exhausted – even if those issues had not been previously raised.

By a 2 to 1 majority in a second interim award, Chevron’s functus officio objection was rejected.  The Tribunal then proceeded to determine the merits of CKJV’s ‘Amended Case on Quantum’ in favour of CKJV (Second Interim Award).  Chevron applied to the Supreme Court to set aside the Second Interim Award.

The Supreme Court sets aside the Second Interim Award

While arbitral awards are intended to be final and binding, there is limited and discretionary scope set out in s 34(2) of the Commercial Arbitration Act 2012 (WA) (CAA) for a Court to intervene and set them aside.  Chevron’s application was brought on the grounds that, by application of the functus officio doctrine, the Second Interim Award addressed matters beyond the scope of what the parties could then submit to arbitration, in contravention of s 34(2)(a)(iii) of the CAA in particular.

Justice Kenneth Martin agreed.  His Honour found that:

• a cardinal principle of arbitration is that an arbitral award finally resolves a dispute referred to the tribunal by the parties;
• consistent with that approach, reasonable commercial parties to an arbitral agreement would not have agreed to their chosen arbitral tribunal acting beyond the scope of its authority by varying or revisiting a final, published determination in an award;
• the condition of functus officio is capable of being engaged by the statutory criteria under s 34(2)(a)(iii) of the CAA.  A decision taken by an arbitral tribunal may be viewed as beyond the terms of ‘the parties’ submission to arbitration’ where, by application of the functus officio doctrine, the tribunal’s jurisdiction to resolve the relevant aspect of the dispute (in this case liability), had come to an earlier end; and
• CKJV’s Amended Case on Quantum was, in fact and substance, a new pleading on liability which was impermissible because the tribunal was functus officio as regards matters dealt with in the Second Interim Award.

Conclusion and takeaways

Interim awards in arbitration are a common occurrence.  While not the final outcome of the entire arbitration,  they are still final and binding (and whether or not they contain errors of law) as to the matters which they consider and resolve.  The finality of even an interim award must be properly understood before a party chooses that path. 

His Honour noted that the jurisdictional issues that arose in this outcome could have been avoided if the parties had instead persuaded the tribunal to resolve only specifically isolated and identified issues (i.e., a preliminary issue).  But the procedural pathway was chosen and, in this instance, the presentation of CKJV’s case precluded it from then pursuing an alternative avenue to recovery.

The message then is one of caution and prudence.  It is incumbent on the parties to an arbitration to contemplate all possible outcomes of a particular path before committing to an exercise from which there may be no going back.