## Facts

- Ewan Robert Carr and Brookside Farm Trust Ltd alleged their solicitors, Gallaway Cook Allan, negligently handled settlement of a commercial transaction, causing the counterparty to cancel.
- The parties agreed to arbitrate the negligence dispute under the Arbitration Act 1996.
- The arbitration agreement included (1) a submission clause referring disputes to arbitration and (2) an appeal clause stating the award was “final and binding” subject to a High Court appeal on “questions of law and fact.”
- The arbitrator issued a partial award dismissing the negligence claim.
- The appellants applied to set aside the award under sch 1, art 34(2)(a)(i), arguing the arbitration agreement was invalid because it purported to create an appeal on questions of fact, which the statute does not permit.
- The High Court set aside the award, treating the invalid appeal clause as rendering the arbitration agreement invalid.
- The Court of Appeal reversed, holding the appeal clause severable and reinstating the award.

## Issues

1. Whether “arbitration agreement” under the Arbitration Act 1996 includes procedural terms such as a contractual clause granting recourse to the courts by appeal.
2. Whether the impermissible appeal right “on questions of fact” could be severed so the remaining agreement to arbitrate stayed valid.
3. If the arbitration agreement was invalid, whether the court should nonetheless decline to set aside the award under the discretionary language of art 34.

## Decision

- The Supreme Court unanimously allowed the appeal and reinstated the High Court order setting aside the arbitral award.
- The Court held that “arbitration agreement” includes not only the submission to arbitrate but also agreed procedural terms, including the contractual appeal provision.
- Because the agreement purported to authorize an appeal on questions of fact, it conflicted with the Act and rendered the arbitration agreement invalid for purposes of art 34(2)(a)(i).
- The Court held the invalid appeal provision was not severable because it was central to the parties’ bargain regarding court recourse.
- The Court exercised its discretion under art 34 to set aside the award, concluding the arbitration conducted was not the process for which the parties had validly contracted.

## Legal Principles

- For purposes of setting-aside relief under sch 1, art 34(2)(a)(i), an “arbitration agreement” encompasses the parties’ procedural framework for arbitration, including provisions allocating the scope of court involvement.
- Parties cannot, by contract, create arbitral appeal rights beyond those authorized by the Arbitration Act; a purported appeal on questions of fact is ineffective.
- Severance is a matter of contractual construction: an invalid promise may be severed only if doing so does not alter the contract’s nature or defeat what the parties fundamentally agreed.
- Where an invalid procedural term is integral to the arbitration bargain, severance is unavailable and the arbitration agreement may be treated as invalid.
- Although art 34 uses discretionary language (“may” set aside), discretion should be exercised to set aside when enforcing the award would effectively enforce an arbitration process different from the one the parties validly agreed to under the statutory scheme.

## Conclusion

The Supreme Court held that a contractual appeal clause formed part of the arbitration agreement; because the clause impermissibly provided for appeals on questions of fact and was central to the bargain, it could not be severed, rendering the arbitration agreement invalid and requiring the award to be set aside under art 34.


Carr v. Gallaway Cook Allan, [2014] NZSC 75 (N.Z. 2014)