Arbitration Deadlock: The Courts to the Rescue

A recent Supreme Court decision provides insight on how courts will approach a situation of deadlock in an arbitration proceeding, and highlights under what circumstances they can exercise their power to appoint arbitrators under the Commercial Arbitration Act 2012 (WA).

What is arbitration?
Arbitration is an alternative dispute resolution method where the parties involved present arguments to an independent third party, the arbitrator, who makes a determination on the matters before them. Arbitration is particularly useful where the subject matter is highly technical, or where parties want greater confidentiality than is offered in an open court. Arbitration may be voluntary, ordered by the Court, or required as part of a contract.

What problems can arise?
Consider the following question that was before the Court in Tulip Bay Pty Ltd v Structural Monitoring Systems Ltd [2019] WASC 223. A contract between two parties indicates arbitration will be used in the event of any dispute arising out of the contract. Where the parties cannot agree on the appointment of an arbitrator how can the deadlock be overcome?

In these proceedings before the Court Tulip Bay Ltd (Tulip Bay) were seeking that the Court appoint an arbitrator using its powers under the Commercial Arbitration Act 2012 (WA) in circumstances of the dysfunctionality of a clause in its Technology Agreement with the defendant, Structural Monitoring Systems Ltd (SMS).

The contract
The parties had a clause in their contract stating that where there was any dispute or disagreement, a single arbitrator would be appointed with unanimous consent of the parties to resolve the issue.

Where the parties could not agree on a single arbitrator, within 30 days of the submission of a notice of arbitration (Submission Date) the parties would each appoint a single arbitrator. These two arbitrators would themselves appoint a third and final arbitrator within 60 days of the Submission Date and the three arbitrators would decide the matter.

In the event the two arbitrators could not select a third, the President of the Australian Institute of Arbitration would be requested to make the appointment.

"Dysfunctionality" of the contract
There was a key problem with the contract. What if after the 30 days of the Submission Date one party simply refused to appoint an arbitrator. The process would be deadlocked.

In the case before the Court this is exactly what happened. A dispute arose between the parties about the payment of royalties from SMS to Tulip Bay and the parties could not agree on a single arbitrator. Following the terms of the contract Tulip Bay appointed a single arbitrator, however SMS refused to appoint an arbitrator.

The Court to the rescue
The Court has special powers pursuant to the Commercial Arbitration Act 2012 (WA) to appoint arbitrators in certain circumstances. The Court chose to exercise such powers in this case. The rationale for SMS refusing to appoint an arbitrator was that a prior opportunity had not been taken up by Tulip Bay to have pursued the unpaid royalty claims and had estopped themselves form seeking such royalties through arbitration.

Justice Kenneth Martin, the presiding judge, decided that this was no basis for refusing to appoint an arbitrator. An arbitral panel of three, once appointed, as sought by Tulip Bay, would have been capable of ultimately determining the merits or demerits of all SMS's estoppel arguments over royalty payment claims not being pressed for in earlier proceedings.

Following this, the Court exercised its powers under s11(4)(a) of the Commercial Arbitration Act 2012 (WA) and appointed an arbitrator on behalf of SMS.

There is an underlying policy importance of holding parties to their arbitration bargains. Moreover, where arbitration bargains are sought, they should be implemented speedily. The pathway to an arbitral resolution must not be allowed to be obstructed or delayed by technical roadblocks as one frequently encounters with litigation.

The Courts have a clear policy objective to do everything reasonably feasible to assist parties uphold and pursue their arbitral bargains and to make sure that an arbitration can proceed not only fairly, but efficiently.