9 Default appointment of arbitrators

ISSUE

180 IN OUR PRELIMINARY PAPER we suggested that a difficulty could arise, as a result of the default provisions, where the parties are unable to agree on the choice of arbitrator. The problem we envisaged was that if one party served a default notice on the other, nominating his or her choice of arbitrator, then the other party would be compelled to accept that choice, with no possibility of recourse to the court. We set out the reasoning in our preliminary paper in full:

50 Article 11(2) of the First Schedule provides that the parties are free to agree on a procedure for the appointment of the arbitrator. Failing such agreement, article 11(3)(b) provides that a party may request the High Court to appoint the arbitrator.

51 Clause I of the Second Schedule sets out a default procedure, which, unless the parties agree otherwise, is deemed to be the procedure agreed under article 11. Subclauses (3), (4) and (5) provide:

(3) In an arbitration with—

(a) A sole arbitrator

...

the parties shall agree on the person... to be appointed as arbitrator.

(4) Where, under ... subclause (3) ...—

(a) A party fails to act as required under such procedure; or

(b) The parties ... are unable to reach an agreement expected of them under such procedure; or

...—

any party may, by written communication delivered to every such party, arbitrator or third party, specify the details of that person’s default and propose that, if the default is not remedied within the period specified in the communication (being not less than 7 days after delivered), a person named in the communication shall be appointed to such vacant office of arbitrator as is specified in the communication ...

(5) If the default specified in the communication is not remedied within the period specified in the communication,—

(a) The proposal made in the communication shall take effect as part of the arbitration agreement on the day after the expiration of that period; and

(b) The arbitration agreement shall be read with all necessary modifications accordingly.

52 The difficulty arises where the parties are unable to agree on the single arbitrator. Under subclause (4) this is a default. As a result, the party whose suggested arbitrator was rejected may then immediately send a default notice to the other party, stating that unless the default is remedied within seven days then the suggested arbitrator will be appointed. If the party receiving the notice does nothing, then the appointment will take effect in accordance with subclause (5). However, even if the party does respond, for example by suggesting an alternative arbitrator, arguably the first party’s choice will still take effect under subclause (5). This is because the second party, by suggesting an alternative arbitrator, has not remedied the default (that is, the failure to agree). The second party could also respond with his own default notice. But by the time it expires, the first party’s choice would already have taken effect.

53 Article 11 (4) of the First Schedule provides that any party may apply to the High Court where under an agreed procedure, they are unable to reach the “agreement expected of them”. However, the article does not apply where “the agreement on the appointment procedure provides other means for securing appointment”. Accordingly the article does not assist since clause 1 does provide another means for securing the appointment, that is, the default notice procedure.

54 In summary, on a plain reading of the schedules, a party who does not agree to the other party’s choice of arbitrator, for valid reasons, may find himself forced to accept that choice, with no recourse to the High Court.

181 We sought submissions as to whether any difficulties had, in fact, arisen in practice.

SUBMISSIONS AND SUBSEQUENT COURT DECISION

182 None of the submissions that we received identified a particular problem that had arisen in practice. But, the five submissions all acknowledged that the potential problem identified above existed. All submitters were of the view that the potential difficulties were sufficient to justify an amendment to the legislation.

183 The AMINZ, referring to the consultation on this issue carried out during the course of the New Zealand Law Society (NZLS) seminar conducted by Messrs David Williams QC and Fred Thorp suggested that there were two main reasons why, up to then, no specific problems had been identified. The AMINZ said:

First, in a significant proportion of cases, the parties nominate an appointing authority in case of disagreement. Second, even where there is no such provision the issue of the default procedure being invoked usually leads to agreed appointment.

184 Two submitters expressed the view that they would be surprised if a court would interpret the combined provisions in the way we had suggested. The most cogent reason put forward by one of the submitters was that our analysis assumed that failure to agree immediately on an appointment under clause 1(3)(a) meant that the parties were “unable to reach an agreement” for the purposes of clause 1(4)(b). We can see some substance in that view because the fact that two parties are initially in disagreement does not mean that they never will reach agreement. However, this appears to us to create a further problem. If that analysis is correct, at what point are the parties unable to reach an agreement for the purposes of clause 1(4)(b), so as to trigger the default notice procedure? The object of predictability in legislation of this type should be at the forefront of public policy considerations on this issue.

185 After receiving the submissions, the precise issue did in fact come before the High Court in Hitex Plastering Ltd v Santa Barbara Homes Ltd.²⁰⁶ In that case, Hitex and Santa Barbara had agreed that disputes between them would be resolved by arbitration. They were unable to agree, however, as to who should be appointed as arbitrator. (Importantly, there was no dispute that both had made genuine attempts to reach agreement; a point we return to later.) Eventually, Hitex sent a default notice to Santa Barbara requiring it to accept its choice of arbitrator within seven days. Santa Barbara did not agree, and Hitex then sent a further notice saying that its nominee had now been appointed pursuant to the default provisions in the Arbitration Act. Santa Barbara did not participate in the arbitration and an award was made against it. The issue reached the High Court when Hitex sought judgment on its award, which Santa Barbara opposed on the grounds that the arbitrator had not been validly appointed.

186 Justice Rodney Hansen held that the arbitrator had been properly appointed and granted the application of Hitex that its award be enforced as a judgment. In doing so, he relied upon an analysis of the default provisions that was virtually identical to that set out in the preliminary paper. (Although he did not refer to the paper.) His Honour had sympathy for the argument of counsel for Santa Barbara that this analysis produced an “absurd result” which would result in “[t]he task of appointing an arbitrator [becoming] nothing more than a race to issue the first default notice”,²⁰⁷ saying:

There is merit in the concern voiced by the commentators and echoed in Mr Cooper’s submissions. It seems odd to characterise an inability to agree as a default. It might also be thought unlikely that the legislature should have intended to give an unqualified right to appoint an arbitrator to the first party to issue a notice. That would tend to foment disagreement contrary to a procedure which is designed to promote rational resolution of differences.²⁰⁸

187 Rodney Hansen J added that there was still a requirement that the parties must have made a “genuine attempt” to reach agreement, before a default notice could be issued.²⁰⁹ This is a similar point to the one that we developed in paragraph 184 above; that is, the parties will not be considered “unable to reach an agreement” unless they make some genuine attempt at doing so. However, this requirement gives rise to a similar difficulty to that we identified above: exactly when will a party be taken to have made a sufficiently “genuine attempt” to reach agreement?

188 The case indicates that the problems with the default provisions are more than hypothetical.

OPTIONS FOR REFORM

189 A variety of options for reform were suggested to us. We summarise those options as follows:

(a) Clause 1 of the Second Schedule to the Act could be restricted to cases where one party to the arbitration agreement is wholly refusing to participate in the arbitration and has taken no steps at all to make or to agree an appointment within the minimum notice period. This could be achieved by providing that if the recipient of the notice under clause 1 disagrees with the proposed default appointment then, if the parties cannot thereafter reach agreement within a specified time, the matter would go to the High Court for resolution; conversely if the recipient did nothing, then the proposed appointment would automatically take effect.

(b) A longer minimum length of time could be inserted into clause 1(4) within which a specified default must be remedied. The suggestion is that the minimum seven day deadline is unnecessarily tight given the time taken to serve documents and obtain legal advice. It is suggested that a minimum 14 day deadline would be more appropriate.

(c) Clause 1(4)(b) of the Second Schedule could be amended so that a failure by the parties to agree on an arbitrator does not constitute a default. This would leave the parties free to apply to the High Court for an appointment to be made under Article 11(4) of the First Schedule.

(d) Two submitters suggested that the legislation could be amended to enable default appointments to be made by the court (one suggesting the District Court as well as the High Court) or AMINZ.

(e) One submitter suggested insertion of a provision akin to section 7(2) of the 1908 Act, which empowered the High Court to set aside a default appointment.²¹⁰

ANALYSIS AND RECOMMENDATION

190 Appointment of an arbitrator or members of an arbitral tribunal is a fundamental element of the arbitral process. An important consideration is the need for the parties to repose confidence in either an arbitrator appointed by them jointly or in the appointing authority. It is for that reason that the High Court is the ultimate appointing authority if the parties have not agreed either on the arbitral tribunal or the appointing authority.

191 It is undesirable that there be any lack of clarity with regard to the procedure to be followed if parties cannot agree upon a sole arbitrator or upon a panel of arbitrators. We see the need for predictability in this regard as the most important consideration.

192 It seems to us that the problem identified has been caused by the procedure set out in clause 1(4) of the Second Schedule, because, once parties “are unable to reach an agreement expected of them”, a default procedure then arises. If the default procedure is defined precisely and the times within which it is to be applied are also clearly defined, the difficulties identified should be removed.

193 Our preference is for repeal of clause 1(4) in its current form. We suggest replacement of clause 1(4) with a provision which will:

Allow the parties to agree, in their arbitration agreement, upon a default procedure if they are unable to agree upon the appointment of an arbitral tribunal.
Entitle the parties to exercise the default procedure set out in Article 11(3) of the First Schedule if:

(a) the default procedure agreed between the parties has not been followed; or
(b) an appointing authority has failed to make an appointment as contemplated.
Such an approach provides the degree of predictability required by parties to an arbitration agreement while maintaining consistency between the approaches set out in Article 11(3) of the First Schedule and clause 1(4) of the Second Schedule.

194 The only disadvantage of this approach is that the default notice procedure outlined in clause 1(4) of the Second Schedule would be abolished. However, we think that it is preferable to proceed in the manner we have suggested because:

It is open to the parties to adopt a default notice provision which meets their particular needs (including times for response) if they so desire.
Submitters have suggested to us that the seven day period may be too short in any event; this may often depend upon the nature of the arbitrating party and its location.
The need for predictability must be paramount and the proposal we have made is entirely consistent with the approach evidenced in Article 11(3) of the First Schedule. And, Article 11(3) is based upon the UNCITRAL Model Law.

195 There will always be disadvantages to an arbitrating party who is forced to go to the High Court for an order appointing an arbitral tribunal because of the failure of the other party either to act in terms of agreed procedures or those procedures laid down by the Act. Ultimately, however, we think that those consequences can be adequately compensated by awards of costs made by the High Court where the High Court is satisfied that the defaulting party has not acted in a way which demonstrates a desire to proceed promptly with the arbitration.

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