Misconduct and majority rules: Can a finding against one member of an arbitral tribunal invalidate a majority decision?
Structural Monitoring Systems Ltd v Tulip Bay Pty Ltd  WASCA 16
Acceptable minimum standards require all arbitrators to actively engage and participate in an arbitration. However, even when a breach of these standards is established, it may not be enough to set aside a majority arbitral award.
In February 2018, we wrote about a case in the Supreme Court of Western Australia in which the Court refused to infer misconduct or overturn an arbitral tribunal’s award, even though one arbitrator did not actively participate in proceedings.  Following the recent appeal from that decision in Structural Monitoring Systems Ltd v Tulip Bay Pty Ltd  WASCA 16, the Western Australian Court of Appeal has provided further guidance on when a majority arbitral award may be set aside for misconduct.
Although the Court of Appeal held the arbitrator’s failure to actively participate constituted a breach of natural justice and was misconduct, the Court declined to set aside the award in the absence of prejudice or a substantial miscarriage of justice.
A quick refresher of the facts
Structural Monitoring Systems Ltd (SMS), Tulip Bay Pty Ltd (Tulip) and Kenneth Davey were parties to a licence agreement that provided for disputes to be “heard and determined” by three arbitrators unless the parties all agreed on a single arbitrator. Decisions and awards were to be made by majority.
A dispute arose in 2012 and each party appointed an arbitrator, but only two arbitrators actively participated in proceedings. The arbitrator appointed by Tulip allegedly maintained infrequent contact from March 2013 did not contribute to procedural decisions and did not sign the final awards.
The decision at trial
In November 2016, before the final amended award was delivered, SMS pre-emptively commenced proceedings in the Supreme Court of Western Australia on three grounds; including the alleged misconduct of Tulip’s appointed arbitrator.
At first instance, Chief Justice Martin dismissed all grounds and held that SMS failed to establish the dispute was not “heard and determined” by all arbitrators. Central to this decision was a reluctance by the Court to infer from the available evidence that Tulip’s appointed arbitrator had not turned his mind to, or independently considered, the evidence and submissions of the parties.
The appeal: is concurrence meaningful participation?
The Court of Appeal held the trial judge had overlooked circumstances critical to the case. The Court of Appeal inferred from that conduct that Tulip’s appointed arbitrator had not meaningfully participated in the arbitration. The Court of Appeal held that the arbitrator’s disengagement for three years post-2013 was contrary to the arbitration agreement and constituted misconduct and a breach of natural justice.
The Court of Appeal acknowledged that Tulip’s appointed arbitrator had provided the parties with a signed letter stating he concurred with the final reasons prepared by the other arbitrators. However, the Court of Appeal noted the letter was issued in December 2016 after SMS commenced proceedings on grounds including misconduct. Similarly, the other arbitrators indicated in November 2016 that their reasons were final, prior to Tulip’s appointed arbitrator issuing his letter of concurrence. The Court of Appeal held the letter was an attempt by the arbitrator, after the fact, to “rectify” his breach and did not show meaningful participation.
However, as there was no obvious misconduct on the part of the other two arbitrators, and the agreement specifically provided for majority decisions, the award was not set aside. The Court of Appeal held the misconduct could not have caused prejudice or a substantial miscarriage of justice as there were no issues on which the other arbitrators diverged where the third arbitrator may have helped form a majority perspective.
Implications for the Model Law and enforcing arbitral awards
This case was decided under the superseded Commercial Arbitration Act 1985 (WA) but still provides useful guidance for the Commercial Arbitration Act 2012 (WA) (Act) and identical legislation in other Australian states based on the UNCITRAL Model Law.
Misconduct itself is no longer grounds to set aside an arbitral award under the Act. However, the failure of an arbitrator to actively participate could arguably be contrary to public policy under section 34(2)(b)(ii). Although the Act does not have an equivalent provision, section 19(2) of the International Arbitration Act 1974 (Cth) defines an award as being contrary to public policy if the rules of natural justice have been breached in the making of the award.
The Court of Appeal also emphasised that a majority decision will not by itself be a licence to disregard the involvement of a minority of arbitrators. It is therefore important that all arbitrators in multiple member tribunals genuinely engage and participate in the arbitration process to meet the minimum standards and reduce the risk that a majority award might be set aside where the conduct of any one or more of the arbitrator panel has prejudiced a party, or there is a substantial miscarriage of justice. 
 Structural Monitoring Systems Ltd v Tulip Bay Pty Ltd  WASC 379.
 Note: The above material provides a summary only of the subject matter covered, without an assumption of a duty of care by Resolution Institute or Clayton Utz. The material is not intended to be nor should it be relied upon as a substitute for legal or other professional advice. Copyright in the material is owned by Clayton Utz.
We thank the authors of this legal update Karen Ingram (Partner) and Justin Kardi for their contribution to Pulse.