Beware of poorly drafted Arbitration Agreements

July 4, 2014

in Litigation & Dispute Resolution

iStock_000018766927SmallThis Supreme Court decision of Carr & Anor v Gallaway Cook Allan released this month has sent a clear message to take care from the outset when drafting an agreement to arbitrate.  Poorly drafted clauses in the agreement could invalidate it and result in a wasted arbitration.

The case involved a Dunedin law firm and a former client and arose out of a failed property transaction. The property transaction did not settle on the due date and the other party to the transaction cancelled the contract. Mr Carr contended this was as a direct result of the firm’s negligence and claimed they were liable for damages for professional negligence.  As a result of the claim, the parties agreed to attend arbitration subject to an agreement which provided the following;

The parties undertake to carry out any award without delay subject only to such rights as they may possess under Articles 33 and 34 of the First Schedule to the Arbitration Act 1996 (judicial review) and clause 5 of the Second Schedule (appeals subject to leave) but amended to, as to apply to questions of law and fact”[emphasis added]

Following arbitration, where a partial award was made in favour of the law firm, Mr Carr appealed to the High Court on matters of fact in accordance with the above provision.

The applicable rules for the conduct of arbitration under the Arbitration Act 1996 include an optional provision that permits an appeal to the High Court arising out of the arbitral award on questions of law only.   However in this case the parties purported to amend this provision by extending the right of appeal to apply to questions of fact as well as of law. It was accepted by the Court at each stage of appeal in this matter that this extension was not permitted by the Arbitration Act.

The Supreme Court looked at whether or not the ineffective words could be severed, leaving a valid agreement and if not, whether the initial arbitral award should be set aside.  In finding in favour of Mr Carr and holding the Agreement was invalid the Supreme Court held;

  •  In this case the agreement to arbitrate was contingent on a non-existent right of appeal and the unavailability of that appeal right invalidated the agreement as a whole;
  •  In some cases severance would be possible, provided that it did not do harm to the central purpose or substance of what has been agreed;
  •  The Court found that in this case the absence of a valid arbitration agreement was such a fundamental defect that the initial arbitral award in favour of the law firm should be set aside.

This case reminds us that extreme care should be taken when drafting legal documents and agreements to litigate or arbitrate.  Failure to do so could result in a significant disadvantage to you not to mention wasted costs and time.  We are specialists in litigation and arbitration and can assist you in this process.

If you require any advice or further information on the matters dealt with in this publication please contact the lawyer at Farry and Co who normally advises you, or alternatively contact:


Kirsten Maclean

(03) 477 8870 or (09) 379 0055



The information contained in this publication is intended as a guide only.  It does not constitute legal advice and should not be relied upon as such.  Professional advice should be sought before applying any of the information to particular circumstances.  While every reasonable care has been taken in the preparation of this publication, Farry and Co. does not accept liability for any errors it may contain. 

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