Triple whammy: the high price of challenging arbitral awards through litigation that is 'destined to fail'

Common law courts in Australia, Singapore, Hong Kong and New Zealand have long set a high bar for parties seeking to challenge arbitral awards on the grounds of procedural fairness.  In following that line of authorities, the Supreme Court of Queensland has recently dismissed such a challenge and ordered indemnity costs against the challenging party on the basis that the litigation should not have been commenced and was throughout destined to fail.

The related decisions in Clarke Energy (Australia) Pty Ltd v Power Generation Corporation & Robert Holt KC [2025] QSC 64 and [No 2] [2025] QSC 111 provide a timely reminder and cautionary warning against unsuccessful parties in arbitration, doubling down by commencing litigation to have an arbitral award set aside. The detailed and comprehensive analysis set out in the primary decision of Justice Kelly also provides clear guidance, citing leading court of appeal authorities, on the approach taken by Australian courts in determining such challenges to arbitral awards.

The second decision on costs confirms that the price for running hopeless challenges can be an indemnity costs order against the losing party, thereby constituting a triple whammy for that party (in this case Clarke Energy) in: losing the arbitration; losing the challenge in court proceedings; and being liable for the opponent's costs of those proceedings on an indemnity basis.

These decisions reaffirm Australian courts' pro-enforcement stance toward arbitral awards and insistence on limited judicial interference in their finality.

 

Background

In December 2015, Clarke Energy (Australia) Pty Ltd entered into EPC contracts with Territory Generation (TGen) for the construction of two power stations located in the Northern Territory; the Owen Springs Power Station and Tenant Creek Power Station. Disputes arose under both contracts, which were in identical terms, over various claims for extensions of time and variations.

Clarke Energy issued notices of arbitration in July 2019 under both contracts to be conducted in accordance with the ACICA Arbitration Rules. Upon his appointment, the arbitrator (Mr Robert Holt KC) directed that the arbitrations be case managed together and, in July 2023, the arbitrator handed down a partial award, dismissing nearly all of Clarke Energy's extension of time and variation claims and awarding more than AUD8.5 million in liquidated damages to TGen for its counterclaims (Award).

Clarke Energy sought to have the Award set aside by commencing proceedings in the Queensland Supreme Court under section 34(2)(b)(ii) of the Commercial Arbitration Act 2013 (Qld) (Act), contending that the Award conflicted with Queensland public policy due to a denial of natural justice arising out of a breach of the 'hearing rule'. Clarke Energy argued that the arbitrator had failed to consider an alleged essential issue in the arbitration regarding the legal construction of the notice provisions concerning Clarke Energy's claims for extension of time (which Clarke Energy had defined as the Fairly and Reasonably Requirement Issue).

Before determining the challenge to the Award in question, Kelly J identified the following principles from leading authorities that recognise the framework and principles established by the UNCITRAL Model Law to deal with challenges to awards that are alleged to conflict with the public policy of the State in question (in this case, Queensland):

1. in this context 'public policy' is to be given a narrow meaning;¹
2. the public policy ground is limited to cases where the award is contrary to the fundamental conceptions of morality and justice of the forum;²
3. there must be such a denial of procedural fairness that a ground is established for setting aside the award;³
4. the ground is not concerned with mere procedural imperfections but with a negation of rights which the legal system recognises as being fundamental and therefore matters of public policy;⁴
5. in order to demonstrate “real unfairness or real practical injustice,”⁵ the applicant faces an "overriding requirement" to demonstrate that a reasonable litigant in its shoes would not have foreseen the possibility of reasoning by the arbitrator of the type that was revealed in the award;⁶
6. courts should not entertain a disguised attack on the factual findings or legal conclusions of an arbitrator "dressed up as a complaint about natural justice";⁷
7. the award is required to deal with all of the "essential issues" but not every argument on every point made in the arbitration;⁸
8. arbitral tribunals must be given fair latitude in determining what is essential and what is not;⁹ and
9. any real and substantial cause for concern should be demonstrably clear on the face of the record without the need to pour over thousands of pages of facts and submissions.¹⁰

In turning to the present dispute therefore, there were three key issues before the Court:

1. whether the Fairly and Reasonably Requirement issue arose for determination by the arbitrator;
2. if it did, whether the arbitrator had determined the issue; and
3. whether the arbitrator's alleged failure to determine the issue caused Clarke Energy to suffer real practical injustice as a result, such that the Award should be set aside.

 

The Court's Decision

The Court ultimately dismissed Clarke Energy's application to set aside the Award, finding that there was no real unfairness or practical injustice in the arbitration process or the arbitrator's determination of the 'essential issues' in dispute between the parties. In reaching that conclusion, Kelly J made three key findings.

1. Issue of 'Fairly and Reasonably Requirement' not duly raised

First, his Honour identified that where, as in this arbitration, a complex dispute is conducted by formal and comprehensive pleadings, those pleadings must define the issues which are within the jurisdiction and which are to be determined in the arbitration. To that end, the Court noted that the Fairly and Reasonably Requirement Issue had (a) not been included in the notices of arbitration; (b) not been pleaded; and (c) only been raised in written closing submissions in reply. The issue therefore fell outside the arbitrator's jurisdiction and did not arise for his consideration or determination.

2. No breach of the 'hearing rule'

Secondly, Kelly J noted that despite the issue not being one which the arbitrator was required to consider, the arbitrator had in fact adequately dealt with the issue of the construction of clause 38.4, which necessarily included an assessment of the Fairly and Reasonably Requirement Issue. Following the arbitrator's construction of that provision, he had in fact found against Clarke Energy, putting to bed any suggestion that there was a breach of the 'hearing rule' involving a failure of the arbitrator to consider an essential issue.

3. No practical injustice established

Finally, in determining whether there had been practical injustice on the part of Clarke Energy, his Honour held that there had been no failure to determine any essential issue. It was further held that Clarke Energy's failure in the arbitration through expert evidence to prove delay provided an independent reason for concluding that, had there been a breach of natural justice, Clarke Energy suffered no practical injustice warranting the setting aside of the Award.    

4. Decision as to costs

Following publication of the first decision in April 2025, Kelly J gave separate judgment in May 2025 in respect of the costs of the proceeding. There, his Honour adopted the reasoning of the NSW Supreme Court that "[t]he high threshold that the public policy exception demands brings with it the enhanced risk of an indemnity costs award because a failed challenge will be more easily identified as one which should not have been brought because it was throughout destined to fail. This enhanced risk is sufficient disincentive for the making of challenges lacking true substance, without the necessity for a presumption.”¹¹

In finding that Clarke Energy's case was, for all intents and purposes, devoid of merits and that the issues raised by Clarke Energy lacked substance, the Court found that Clarke Energy had pursued a proceeding which should not have been brought because it was throughout destined to fail and it was unreasonable for Clarke Energy to have started and pursued the proceeding. On that basis the Court ordered that Clarke Energy should pay TGen's costs on an indemnity basis.

 

Conclusion

These decisions in Clarke Energy (Australia) Pty Ltd v Power Generation Corp underscore the Australian judiciary's continuing commitment to upholding the finality and integrity of arbitral awards, and their general reluctance to interfere with, and re-evaluate, their merits.  The Court's reasoning highlights the importance of adhering to procedural requirements in arbitration (including the need to clearly identify the issues for determination at the outset of a proceeding and through pleadings where they apply), the limited grounds available for challenging arbitral awards, and the high threshold in setting aside an arbitral award due to a breach of natural justice.  

In practical terms, these decisions also give a telling example of the need for unsuccessful parties to arbitration to pause and consider carefully whether they have genuine grounds to set aside the award through litigation, knowing that to do so on the 'public policy' exception carries with it a risk of an indemnity costs order if genuine grounds do not exist and the litigation inevitably fails.

 

What does this mean for you?

This case is a timely reminder of the importance of clearly articulating all issues intended for determination at the outset of an arbitration proceeding. If you are pursuing or defending a claim in arbitration, it is essential to ensure that all issues are clearly identified and properly pleaded at the beginning of the proceeding. Attempting to introduce new arguments late in the process – particularly in closing submissions will likely be rejected by the court and may expose you to significant cost consequences.

If an arbitral award is unfavourable, it is equally important to work closely with your legal advisers to assess the award and reasons for the outcome. This includes understanding whether the issues were within the arbitrator's jurisdiction; if so, how the arbitrator interpreted the key issues; and whether any procedural irregularities genuinely amounted to a denial of natural justice. Without clear and compelling grounds, challenging an award in court may not only be unsuccessful but expose you to additionally onerous indemnity cost orders.

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¹ Mango Boulevard Pty Ltd v Mio Art Pty Ltd [2018] QCA 39, [103] – [104].
² TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd (2014) 232 FCR 361, [73].
³ Above n 1, [107].
⁴ Colin Joss & Co Pty Ltd v Cube Furniture Pty Ltd [2015] NSWSC 735, [46].
⁵ TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd (2014) 232 FCR 361, [54]-[55].
⁶ Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR(R) 86, [65(d)].
⁷ Sauber Motorsport AG v Giedo van der Garde BV (2015) 317 ALR 786, [8].
⁸ Ascot Commodities NV v Olam International Ltd [2002] CLC 277, 284.
⁹ TMM Division Maritima SA de CV v Pacific Richfield Marine Pte Ltd [2013] SGHC 186, [74].
¹⁰ Ibid, [126].
¹¹ At [5], citing Colin Joss & Co Pty Ltd v Cube Furniture Pty Ltd [2015] NSWSC 829, [11] and [12]. (Hammerschlag J).