Focus: High Court untangles the Gordian knot
10 October 2011
In brief: A recent High Court decision is significant for all parties involved in arbitrations or whose contracts contain arbitration clauses, and for reinsurers whose contracts are subject to New South Wales law. Partner Michael Quinlan , Lawyer Mitch Riley and Paralegal Ashleigh Shand explain.
How does it affect you?
- The decision Westport Insurance Corp v Gordian Runoff Ltd  HCA 37 extends the scope of judicial review of an arbitral award under section 38 of the Commercial Arbitration Act 1984 (NSW) (the Arbitration Act). It confirms that complex questions of statutory interpretation and an arbitrator's failure to provide adequate reasons can give rise to an award being appealed.
- The judgment found that the nature and complexity of a dispute, and the level of formality in which an arbitration is conducted will impact on the standard of reasons required. Where reasons are required, arbitrators must deal with the major issues in their reasons.
- The judgment means that s18B of the Insurance Act 1902 (NSW) cannot operate to extend the scope of coverage of a reinsurance treaty to cover claims made on insurance policies that fall outside the treaty.
In 1999, Gordian Runoff Ltd wrote a seven-year directors' and officers' runoff policy for FAI Insurance Ltd (the FAI policy) and entered into reinsurance treaties with reinsurers. In 2001, claims were made under the FAI policy and Gordian made a claim on its reinsurers. The reinsurers refused to cover the claim, on the basis that their treaties only covered underlying policies with a term not exceeding three years and the FAI policy, being cover for a seven-year term, was outside the protection of the treaties.
The terms of the reinsurance treaties required the dispute to be arbitrated. In the arbitration, Gordian relied on s18B of the Insurance Act.1 That section provided that if an insurer excludes or limits liability, the insured shall not be disentitled to be indemnified if the loss was not caused by, or contributed to, by the excluded or limited events or circumstances, unless in all the circumstances it is not reasonable for the insurer to be bound to indemnify the insured.
The arbitrators agreed with the reinsurers that the treaties only covered underlying policies with a maximum duration of three years. However, they found that s18B operated to cover claims made within three years, even where the policy Gordian had written went for a longer term.
In order to appeal the award, s38(5)(b) of the Arbitration Act required the reinsurers to demonstrate that there had been a 'manifest error of law on the face of the award' or that there was 'strong evidence that the arbitrator or umpire made an error of law'. The matter came to the High Court following the reinsurers successfully appealing to the Supreme Court and Gordian having that result overturned in the Court of Appeal.2
The High Court found for the reinsurers and allowed the appeal. It found that the words 'manifest error on the face of the award' in the Arbitration Act meant that the existence of the error must be apparent to the reader of the award. The court rejected previous approaches in which the word 'manifest' had been treated as requiring the error to be very quickly identifiable.3 The High Court found that the arbitrators' construction of s18B was a 'manifest error on the face of the award' even though it might have taken some time to explain or understand the error.
The High Court found that s18B could not operate to require the reinsurers to meet a claim made on the FAI policy because that policy was outside the scope of the reinsurance treaties. The treaties did not cover all claims made on any policy within three years but only claims made on policies that were covered by the treaties.
The court also found that providing inadequate reasons could be a 'manifest error'. It stated that the standard of reasons for the making of an arbitral award will depend on the nature and circumstances of the dispute, and reasons of a judicial standard will not necessarily be required.4 Having relied on s18B as a critical element in reaching their decision, the arbitrators had to explain why each of the elements of that provision was satisfied. They failed to explain how it could be reasonable for the reinsurers to be required to indemnify Gordian for a claim made on a policy which was not covered by the treaties. This constituted a manifest error.
On 1 September 2009, after the arbitration and the hearing at first instance, the New South Wales Government excluded reinsurance from the operation of ss 18, 18A, 18B and 19 of the Insurance Act. While the High Court did not consider whether s18B applies to reinsurance treaties written or claimed upon before 1 September 2009, it is now certain that s18B cannot be used to require reinsurers to meet claims made on policies that fall outside the scope of cover provided by a reinsurance treaty.
Since the arbitration that was the subject of this case, New South Wales has passed the Commercial Arbitration Act 2010 (NSW). Other states have followed or are expected to follow suit. For arbitrations conducted under the 2010 Act, appeals may be available if the arbitrator's decision on a question of law is 'obviously wrong'5, rather than there being a 'manifest error' as required by the Arbitration Act. Of course, an appeal under s34A of the new Commercial Arbitration Act is only available if both parties consent although consent can be given in advance of the dispute arising. It remains to be seen whether courts will interpret 'obviously wrong' in the same way as 'manifest error'.
It will be interesting to see whether the New South Wales Government (and the Federal and other state governments) seek to amend their current arbitration legislation as a consequence of the decision.
- The arbitration proceeded on the basis that the Insurance Act could apply to policies of reinsurance: HIH Casualty and General Insurance Ltd (in liq) v R J Wallace (2006) 68 NSWLR 603;  NSWSC 1150.
- See Annual Review of Insurance & Reinsurance Law 2010 at 74 for more information.
- Natoli v Walker (1994) 217 ALR 201 is an example of such a case.
- Oil Basins Ltd v BHP Billiton Ltd (2007) 18 VR 346;  VSCA 255.
- Commercial Arbitration Act 2010 (NSW), section 34A(3)(c)(i).
- Louise JenkinsPartner,
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