No going backwards on jurisdiction: Revisiting the ‘functus officio’ risks of strategic bifurcation

Introduction

Chevron Australia Pty Ltd (Chevron) recently successfully defended an appeal, heard in the Western Australia Court of Appeal, by CBI Constructors Pty Ltd and Kentz Pty Ltd (acting as the joint venture CKJV) and in doing so affirmed its success in overturning an interim arbitral award.

In this article Corey Steel (Partner) and Michael Robbins (Special Counsel) consider the lessons that can be learned from this decision.

 

Revisiting the cautionary tale

Last year we wrote about the Chevron’s success against CKJV in setting aside an interim arbitral award by deploying the legal principle of ‘functus officio.’ It was a cautionary tale of the risks of bifurcation and interim awards.

CKJV appealed, and in January 2023 the Court of Appeal handed down its decision. CKJV was unsuccessful, as the Court affirmed the important take-away lesson that when a party agrees to resolve all issues of liability, there’s no going back.

 

Background

The story of the arbitration the subject of this decision was briefly explained in our first article. In essence:

• CKJV had claimed an entitlement to be reimbursed, on a specific rates basis, for its “Staff” costs (and other services) on the Gorgon project.
• Chevron rejected the entitlement and argued that CKJV had, in fact, overcharged it.
• CKJV’s rebuttal included an argument that, if it had overcharged Chevron, then it could offset Chevron’s claim by tallying up the costs it could have, but had not, billed Chevron.

By procedural order of the tribunal, the dispute was bifurcated into two parts: liability and quantum, with liability to be resolved first. The Tribunal heard the case on liability, and then issued its First Interim Award.

While the details are somewhat complex, the Tribunal concluded that CKJV was not entitled to claim its costs on the asserted rates. However, the Tribunal also determined that CKJV was not precluded from defending Chevron’s counterclaims of overcharging by setting off the unbilled costs.

The issue arose when CKJV then amended its case on quantum to argue a new contractual basis for its unbilled costs (identified as the “Contract Criteria Case”). Chevron put to the Tribunal that: (a) this was an attempt to reargue liability in circumstances where all liability issues had, by the First Interim Award, been determined; and (b) by the principle of ‘functus officio’, the Tribunal was precluded from hearing this new argument.

In its Second Interim Award, the Tribunal (by majority) rejected Chevron’s position and allowed CKJV’s Contract Criteria Case. It was this Second Interim Award that was brought to the Court for review.

 

The Court’s review powers

There was no question that the Court has power, albeit limited, under s 34(2)(a)(iii) of the Commercial Arbitration Act 2012 (WA) (Act) to review an arbitral award. But the issue for review must be one of jurisdiction – to resolve if a party has gone beyond the agreed scope of the submission to arbitration.

The Court at first instance determined the principle of functus officio applied; the Tribunal was required by its own orders to resolve all issues of liability. Once liability was resolved the Tribunal’s jurisdiction was thereafter limited to the remaining issues (quantum).

 

CKJV’s appeal

Did the functus officio principle apply?

CKJV raised four grounds of appeal. The first three grounds dealt with whether the primary judge was able to conclude the principle of functus officio applied.

In essence, CKJV argued that the Tribunal’s refusal to accept it was functus officio was grounded on, and could not exist without, its anterior legal findings as to res judicata, issue estoppel or Anshun estoppel. The primary judge had not overturned (and, as they were merely decisions as to the law, could not overturn even if there were errors of law) those findings.

The Court of Appeal disagreed. It held that where a court, pursuant to s 34(2)(a)(iii) of the Act, reviews the issue of jurisdiction, then that is a de novo review (i.e., a clean-slate review). The court conclude for itself the question of jurisdiction. This allowed the Court to assess the Tribunal’s characterisation (or, rather, mischaracterisation) of the effect of the parties’ case and argument.

The Court concluded the Tribunal was not correct in respect of a number of factual and procedural grounds, all of which led it into error in assessing the limits of its jurisdiction following the First Interim Award.

Should the Contract Criteria Case have been argued as part of the liability case?

The fourth ground of appeal questioned the conclusion that the Tribunal’s resolution ‘all issues of liability’ included the Contract Criteria Case.

The Court dealt with this ground in short order. Ultimately the Court determined that none of the First Interim Award, the parties’ arguments, or the procedural orders, allowed for the possibility that the Tribunal had reserved for further consideration any issue as to CKJV’s entitlement to, or Chevron’s contractual liability for, the claimed staff costs beyond what had already been argued.

 

Conclusion and takeaways

The Court of Appeal has confirmed that an interim award, which seeks to resolve part of a case, can have a jurisdictional consequence on the rest of the arbitration. The cautionary tale remains the same – while strategic case management decisions to advance parts of a case (only) are typically made to exploit the potential upside, they may also come with a fairly severe downside.

This decision also serves as a useful reminder of a court’s power to address issues of jurisdiction, and the importance of properly framing the matters in dispute. The scope of an arbitration depends on the parties’ agreement, and thereafter what they put into issue. A casual approach to the scope of the arbitration, based on misguided confidence that a tribunal may be more likely than not to find jurisdiction, is not only wrong, but also dangerous. Even if a tribunal does rule favourably on its own jurisdiction, it cannot do so conclusively. That power remains the domain of the court, whose scope of review is broad.

Something to think about when drafting the next notice of dispute, notice of arbitration or procedural order.