Overturning arbitral awards — Australian courts maintain a high bar

Full Joy Foods Pty Ltd v Australian Dairy Park Pty Ltd [2020] VSC 672

A recent decision of the Victorian Supreme Court – Full Joy Foods Pty Ltd v Australian Dairy Park Pty Ltd [2020] VSC 672 – has reaffirmed the strict approach that Australian courts take towards challenges to arbitral awards. If a party makes a strategic choice not to engage with an issue in the arbitration, it cannot later complain if it loses the case on that basis.

Finality is a fundamental principle of arbitration. As we have shown in earlier case notes, there are limited grounds upon which an unsuccessful party may seek to apply to the courts to appeal an unfavourable arbitral award. One such ground is where that award is contrary to ‘public policy’. Importantly, a number of cases have held that Australian ‘public policy’ includes the fair and equal treatment of the parties.

What that standard requires, and the point at which an arbitral process will be sufficiently unfair to justify setting aside the award, were issues considered in Full Joy Foods.

What (allegedly) went wrong during the arbitral process?

The applicant, Full Joy Foods, contracted with Australian Dairy Park for the latter to deliver a large quantity of infant milk products to China. Unfortunately, some of those products did not successfully enter China as a result of Chinese import controls. The arbitrator was required to decide whether, as a result, Australian Dairy Park had breached the contract.

The contract between the parties stated that ‘the seller will be responsible for shipment from ADP to Tianjin Port according to CIF’. In their pleadings, neither party referred to the meaning of the term ‘CIF’. The arbitrator, however, thought this was an important issue: after the hearing, he wrote to the parties and requested submissions as to whether the products were ‘delivered, having regard to the applicable Incoterms (CIF)’. Incoterms are a set of widely-used commercial terms published by the International Chamber of Commerce. ‘CIF’ is a risk-allocation system where the risk associated with the goods passes to the buyer once the goods are placed on board.

Despite the arbitrator's request, Full Joy Foods did not refer to either the Incoterms or ‘CIF’ in its closing submissions. Nor did it respond to those aspects of Australian Dairy Park's closing submissions which did rely on those matters.

The arbitrator ultimately decided the case against Full Joy Foods, including by placing reliance on the Incoterms and the use of the word ‘CIF’ in the parties' contract. In challenging the award in the Victorian Supreme Court, Full Joy Foods complained that, in doing so, the arbitrator decided the matter on a basis that went beyond the parties' pleadings and therefore denied it procedural fairness such that the arbitral process and the resulting award was contrary to public policy.

What did the Court think?

Niall JA rejected the challenge.

In doing so, his Honour made clear that the law only requires that the parties are given a fair opportunity to present their case. Whilst the term ‘CIF’ was not discussed in the parties' pleadings, the arbitrator squarely raised it with the parties and requested submissions on that topic. As Full Joy Foods chose to not take advantage of that opportunity, it could not later complain that it was treated unfairly, or somehow say that it was surprised by the award. Whether the arbitrator was correct in his treatment of the term ‘CIF’ was irrelevant to the consideration of whether Full Joy Foods was denied procedural fairness such that the award was contrary to public policy.

His Honour also considered a subsidiary submission from Full Joy Foods relating to the fact that the Incoterms were not formally placed into evidence, and thus the arbitrator decided the case on a basis outside of the ‘four corners’ of the arbitral process. This submission was dismissed for several reasons, including because: (i) the arbitral process is not confined by the formal rules of evidence; (ii) the Incoterms were publicly available and not difficult to find; and (iii) the arbitrator had raised the substance of the relevant Incoterms. His Honour's treatment of this matter demonstrates that the courts will be uninterested with technical complaints of non-compliance intended to defeat the enforcement of an arbitral award where there is no substantive unfairness.

What does this mean for you?

Full Joy Foods re-affirms the pro-enforcement position taken by Australian courts. Commercial parties should be aware that if they sign up for arbitration, they will be bound by the arbitrator's decision in all but the most exceptional circumstances. A party's own strategic choices, or failures, will be insufficient.

More particularly, the decision (unsurprisingly) suggests that if an arbitrator raises an issue for submissions, the parties should treat that issue seriously. If the arbitrator gives the parties the opportunity to comment on an issue, and one party chooses not to take up that opportunity, they are unlikely to find much judicial sympathy if they later complain that they were unfairly treated.[1]

[1] 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.