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• Introduction
• Background Issues
• The Role Of Umpires
• Conflict Of Authority On Interpretation Of Section 19(3)
• Statutes That Require The Appointment Of Umpires
• Should Arbitrations Started After The Commencement Of The 1996 Act Be Conducted Exclusively Under That Act?
• Recommendation

7 Transitional issues

INTRODUCTION

126 SECTION 19 of the Arbitration Act 1996 contains transitional provisions. It provides, in full:

19 Transitional provisions

(1) Subject to subsections (2) and (3),—

(a) This Act applies to every arbitration agreement, whether made before or after the commencement of this Act, and to every arbitration under such an agreement; and

(b) A reference in an arbitration agreement to the Arbitration Act 1908, or to a provision of that Act, shall be construed as a reference to this Act, or to any corresponding provision of this Act.

(2) Where the arbitral proceedings were commenced before the commencement of this Act, the law governing the arbitration agreement and the arbitration shall be the law which would have applied if this Act had not been passed.

(3) Where an arbitration agreement, which is made before the commencement of this Act, provides for the appointment of 2 arbitrators, and arbitral proceedings are commenced after the commencement of this Act,—

(a) Unless a contrary intention is expressed in the arbitration agreement, the 2 arbitrators shall, immediately after they are appointed, appoint an umpire; and

(b) The law governing the arbitration agreement and the arbitration is the law that would have applied if this Act had not been passed.

(4) For the purposes of this section, arbitral proceedings are to be taken as having commenced on the date of the receipt by the respondent of a request for the dispute to be referred to arbitration, or, where the parties have agreed that any other date is to be taken as the date of commencement of the arbitral proceedings, then on that date.

(5) This Act applies to every arbitral award, whether made before or after the commencement of this Act.

127 In paragraph 29 of our preliminary paper we identified two issues, which we proposed to address, arising out of the transitional provisions contained in section 19 of the Act. They were:

• Does the interpretation to be given to the words “provides for the appointment of two arbitrators” in section 19(3) include agreements that provide for the appointment of two arbitrators and an umpire?
• Is the transitional provision, in any event, appropriate? The long tale for arbitrations which could be conducted under the Arbitration Act 1908 is the concern that we address.

128 Another matter raised was the issue of statutes that provided that where parties agree to arbitrate their disputes, they are each required to appoint an arbitrator; with the arbitrators then to appoint an umpire. There had been suggestions that this may lead to difficulties because the 1996 Act makes no provision for umpires.

129 The general thrust of the submissions received is that all arbitrations commenced after the 1996 Act came into force should now be conducted under that Act. Accordingly, the real issue for our consideration in this report is how to deal with arbitration agreements or statutes which require arbitrations to be conducted either before two arbitrators or before two arbitrators and an umpire.

130 We deal with that issue in the following sequence:

• First, under the heading of “Background issues” we outline the role of umpires under the 1908 Act, consider the conflict of authority over the proper interpretation of the words “provides for the appointment of two umpires”, and comment on statutes that require the appointment of umpires.
• Second, we explain why we consider it desirable that all arbitrations commenced on or after 1 July 1996 are heard and determined under the 1996 Act.
• Third, we consider how reform can best be achieved and set out our recommendations.

BACKGROUND ISSUES

The role of umpires

131 Under the Arbitration Act 1908 there was an ability for each party to appoint an arbitrator if they could not agree on the appointment of a single arbitrator. Those two arbitrators then appointed an umpire. If the two arbitrators agreed on the result their award would be binding on the parties. In those circumstances the umpire would not even be involved in the decision-making process. But, where the two arbitrators could not agree they were relieved of the need to make a decision. The decision-making power then passed solely to the umpire. This caused practical difficulties because while, as a matter of practice, it was necessary for the umpire to sit at the hearing of the arbitration (so that he or she could hear evidence and observe the demeanour of witnesses) that person could not participate in discussions with the arbitrators on the issues raised and, in many cases, never made a decision. The cost effectiveness of such a procedure is questionable.¹⁷⁷

132 The Act of 1996 is designed to apply either where a sole arbitrator is appointed or where a panel of arbitrators sit. When a panel is appointed majority decision prevails.¹⁷⁸

Conflict of authority on interpretation of section 19(3)

133 Section 19(3) of the Act provides:

19 Transitional provisions

...

(3) Where an arbitration agreement, which is made before the commencement of this Act, provides for the appointment of 2 arbitrators, and arbitral proceedings are commenced after the commencement of this Act,—

(a) Unless a contrary intention is expressed in the arbitration agreement, the 2 arbitrators shall, immediately after they are appointed, appoint an umpire; and

(b) The law governing the arbitration agreement and the arbitration is the law that would have applied if this Act had not been passed.

134 In essence, section 19(3) provides that in a limited number of situations, the 1908 Act will continue to apply to arbitrations started after the commencement of the 1996 Act. We noted, in our preliminary paper, that there were conflicting decisions of the High Court as to the circumstances in which section 19(3) would be triggered. Master Venning, in Con Dev Construction Ltd v Financial Shelves No 49 Ltd¹⁷⁹ held that section 19(3) did not apply to an arbitration agreement, which expressly provided for the appointment of an umpire (that is, it provided for the appointment of two arbitrators, who were then to appoint an umpire.) The Master held this was so for two reasons:

• First, because section 19(3) was intended to ensure that where an agreement provides for two arbitrators, there would be no deadlock.¹⁸⁰
• Second, he relied on the Government Administration Committee’s Report on the Arbitration Bill, which had commented that section 19(3) was intended to apply to agreements providing for the appointment of only two arbitrators.¹⁸¹

135 A contrary view was put forward by Goddard J in Granadilla Ltd v Berben.¹⁸² In the course of her reasons for judgment, Goddard J noted:

(e) The practical implication of s 19(3) is that arbitrations commenced under agreements made prior to 1 July 1997 and providing for the appointment of two arbitrators will continue to be governed by the 1908 Act and associated common law rules, rather than the 1996 Act.
...
(g) The lease in this case provides ... [for] ... two arbitrators, who are to appoint a third person as umpire ... . Therefore s 19(3) applies, and the law governing that arrangement ... must be the law in existence before the 1996 Act came into force.¹⁸³

136 As noted in our preliminary paper, Goddard J did not refer to Con Dev; neither did she provide any reasoning to support the conclusion set out in paragraph (g) above. Because the point was not directly in issue it may not have been argued or, at least, fully argued. The decision of Goddard J in Granadilla was taken, on appeal, to the Court of Appeal. But, the Court of Appeal did not deal with the issue with which we are concerned.¹⁸⁴

137 In light of this conflict, in our preliminary paper we raised the possibility of amending section 19(3) to make the proper interpretation clear.

138 Subsequent to the publication of the preliminary paper, Elias CJ considered the issue in detail in Bowport Ltd v Alloy Yachts International Ltd.¹⁸⁵ Her Honour, agreeing with Master Venning, held that section 19(3) did not apply to agreements providing expressly for two arbitrators and an umpire. As with Master Venning, she said that section 19(3) was enacted for a specific purpose: to overcome the difficulty that may arise if parties to a pre-1997 agreement had agreed to two arbitrators in the expectation that the default procedures in the 1908 Act would resolve any deadlock. She considered that this difficulty does not arise where parties to such agreements provide expressly for an umpire, and the provision was not intended to cover that situation.¹⁸⁶

139 It was submitted that the interpretation in Con Dev gives the 1996 Act an undesirable retrospective effect; in particular, it was argued that the provisions of the 1908 Act may be necessary to deal with the position of umpires, since umpires are not provided for in the 1996 Act. Elias CJ rejected this argument. She considered that the 1996 Act did in fact cover the position of umpires,¹⁸⁷ on the basis that umpires fell within the meaning of arbitrators, and the parties were free to agree on the process by which the arbitrators determined the dispute; in particular, they were able to agree that a third arbitrator (described as an umpire) would decide the dispute in the event of disagreement by the other two.¹⁸⁸ More generally, Elias CJ stated that it was in fact desirable that pre-1997 agreements were determined under the 1996 Act:

The prevalence of the two arbitrator and umpire model in pre-commencement submissions would otherwise ensure that two systems under two Acts will have to be maintained for many years. I would come to such conclusion with reluctance.¹⁸⁹

Statutes that require the appointment of umpires

140 In the preliminary paper we raised the issue of statutes which provided that where parties agree to arbitrate their disputes, they are each required to appoint an arbitrator; with the arbitrators then to appoint an umpire. There had been suggestions that this may lead to difficulties since the 1996 Act makes no provision for umpires.¹⁹⁰ Examples of legislation under which this procedure is required to be followed are: the First Schedule of the Public Bodies Leases Act 1969, section 6 of the South Canterbury Catchment Board Act 1958, section 6 of the Tokoroa Agricultural and Pastoral Association Empowering Act 1968, section 39 of the Marine Farming Act 1971, section 5 of the Land Drainage Act 1908, section 109 of the Building Societies Act 1965 and section 6 of the Building Research Levy Act 1969. These are but examples of over 100 provisions located by us when researching this issue.

141 In our preliminary paper we indicated a provisional view that Article 10 of the First Schedule to the Arbitration Act may resolve problems with the appointment of an umpire. In paragraph 38 we said:

Under that article “the parties are free to determine the number of arbitrators to determine their dispute”. While the term “umpire” is not used, there is nothing to prevent parties from agreeing that two arbitrators shall hear the case and only if they disagree shall the umpire enter upon the reference and make the binding determination. The default rule contained in Article 10(2) of the First Schedule does, however, anticipate that a sole arbitrator will determine domestic arbitrations.

142 In submissions made to us it was pointed out by Mr Tom Weston QC that the statutory overlay created by enactments of the type to which we refer in paragraph 140 above took the appointment of the umpire outside of the contractual arena. Accordingly, Mr Weston QC submitted that Article 10 did not resolve the issue and that legislation may be required, possibly treating the umpire as a third arbitrator.

143 While accepting the force of Mr Weston QC’s submission we think that there are two discrete issues arising. Some of the statutes¹⁹¹ impose the obligation to arbitrate through the use of two arbitrators and an umpire as an implied term of the agreement between the parties. If it is an implied term, it can, presumably, be amended by express agreement. But, there are other provisions that impose the obligation to arbitrate in this way as a matter of law.¹⁹² Therefore, a question of construction arises as to which category the dispute falls within.

144 We will consider the broad issue of statutes providing for umpires again in the context of considering how clauses providing for umpires can best be dealt with under the 1996 Act.

SHOULD ARBITRATIONS STARTED AFTER THE COMMENCEMENT OF THE 1996 ACT BE CONDUCTED EXCLUSIVELY UNDER THAT ACT?

145 As set out above, the submissions took the view that all arbitrations should now be carried out under the 1996 Act. We agree for the following reasons:

(a) The general thrust of section 19 of the Act is to ensure that all arbitrations, after 1 July 1997, are conducted under the 1996 Act. This is reinforced specifically by:

• The words of section 19(1)(b): that provision requires a reference in an arbitration agreement to the 1908 Act, or to a provision in that Act, to be construed as a reference to the 1996 Act or to a corresponding provision of the 1996 Act.¹⁹³
• The Act was intended to apply to every arbitral award whether made before or after 1 July 1997: see section 19(5).

Apart from the exception governing arbitration proceedings which had been commenced before 1 July 1996 (section 19(2)), the only remaining exception to that general transitional rule is section 19(3).

(b) The general rule, which is described in sub-paragraph (a) above, is plainly an erosion of the party autonomy principle. Parliament made it clear that, unless the case fell within narrow exceptions, the 1996 Act was to apply even though the parties, when making their agreement to arbitrate, could not have turned their minds to the provisions of the 1996 Act.

(c) The need to streamline the arbitral process in respect of domestic arbitrations is underscored by Article 10(2)(b) of the 1996 Act, which provides that unless the parties agree otherwise, a sole arbitrator shall act as arbitral tribunal in a domestic arbitration. Efficiency is enhanced by one arbitrator acting. Costs are also saved.

(d) It is desirable that repealed law should not apply any longer than it is absolutely necessary. As noted in the preliminary paper, the present section 19(3) could result in an extremely long transition period for some classes of contract (for example, perpetually renewable leases, contracts of supply, franchise agreements, partnership agreements and joint ventures.) This is unsatisfactory because it means that a law recognised as being outdated will continue to apply; and confusion may occur as to which Act is the correct one to apply.

RECOMMENDATION

146 Given our view that all arbitrations should now be conducted under the 1996 Act¹⁹⁴ we now consider how this can best be implemented where a submission to arbitration provides for an umpire, or for two arbitrators. It seems to us that there are two law reform options available:

• repeal the current section 19(3) and replace it with a provision which will state expressly that where parties have agreed upon resolution of their disputes by two arbitrators or by two arbitrators and an umpire they may continue to have their dispute resolved in that way; or
• repeal section 19(3) and replace it with a provision which provided that any reference to two arbitrators or to two arbitrators and an umpire would be deemed to be a reference to three arbitrators appointed under the 1996 Act.

147 The second option would need to be coupled with a provision making it clear that any reference to an umpire in other legislation would be construed as a reference to the appointment of a third arbitrator under the 1996 Act. This would overcome any potential difficulties identified in paragraphs 140 to 143 above.

148 Our preference is for the second option (that is, a provision which would treat both arbitrators appointed by parties and the umpire as arbitrators who would, together, comprise the arbitral tribunal). Our reasons for reaching this view are:

• The continuing problems caused by long transitional provisions are overcome and it is unnecessary to address the conflicting court decisions to which we have referred.
• It better reflects the desire evidenced by Parliament that all proceedings be under the 1996 Act unless they fell within legitimate exceptions. It is difficult to see any prejudice to parties caused by adopting this recommendation as the cost is effectively the same when an umpire has to sit through a hearing but may not participate in decisions. The only benefit which could, arguably, be lost to the parties is the possibility of saving deliberation time by the umpire if the two arbitrators agree. We do not think that consideration is enough to preserve the 1908 Act continuing to apply.
• There is merit in the two arbitrators discussing matters during the deliberation phase with the independently appointed umpire.