Bifurcation of Proceedings – Be Careful What You Wish For – A Cautionary Tale

INTRODUCTION

1. Proceedings (be they curial or arbitral) are traditionally determined in their entirety on a once and for all basis, in the interests of finality and certainty. However, Courts and Arbitrators alike^[1] have an armoury of procedural tools at their disposal to optimise procedural efficiencies in hearings. These include: submitting a case stated on specific question(s) of law, identifying specific preliminary issues for advance determination,^[2] or bifurcating (or splitting) the proceedings. In the latter case, the split is often (but not always) between either jurisdiction and merits, or between liability and quantum.
2. There are sound commercial reasons to seek a split of proceedings – including efficiencies of time and costs. This is especially so in complex cases where determining legal issues, which bear on liability and are not dependant on contested facts,^[3] may be dispositive of the entire dispute. However, while the objectives of bifurcation are laudable, caution is nonetheless warranted in determining whether to seek bifurcation at all, and if so of which issues, to avoid unexpected ramifications.
3. The decision to seek an order splitting the hearing raises a number of issues and principles. Some principles operate directly on the disputing parties, such as the so called “preclusionary estoppels” (issue estoppel and Anshun estoppel)^[4] which preclude a party from advancing arguments, adducing evidence, or disputing the accuracy of a determination in subsequent proceedings. Some principles operate on and bind the ‘entire world’, including strangers to the proceedings (such as res judicata). Other principles operate directly on the jurisdiction of the ultimate arbiter /determining body (such as “functus officio“), to exhaust the arbiter’s power/jurisdiction to hear and determine some or all of the issues in question.^[5]
4. This paper will focus on the bifurcation option, and how it affects the position of the parties and the jurisdiction of the arbiter, in the context of the recent case of CBI Constructors Pty Ltd v Chevron Australia Pty Ltd. ^[6]

CBI Constructors Pty Ltd v Chevron Australia Pty Ltd – Court of Appeal’s decision

5. The case was bifurcated on the basis broadly of liability and quantum. Relevantly, the Procedural Order (somewhat curiously) provided:
   • “all issues of liability in respect of [CKJV’s] claim and [Chevron’s] counterclaim” to be heard first; and
   • a further hearing will be held addressing “all matters outstanding in issue between the parties including all
     quantum qualifaction [sic] issues not dealt with in the First Hearing.”^[7] (emphasis added)
6. The principal (but not only) issues raised by the case included:
   • the application and operation of “preclusionary estoppels” to prevent parties (and their privies) from re-litigating an issue of law or fact which was determined in a final judgment or award, and
   • the effect of an interim “liability” award in a bifurcated hearing to render the arbitral tribunal “functus officio” on “all liability issues“, including any which the parties sought to raise after delivery of the first interim award.
7. The Western Australian Court of Appeal dismissed an appeal against the first instance decision of Justice Kenneth Martin, which set aside the second interim award as it purported to determine a liability issue^[8] that was belatedly raised after the first interim award which was to deal with “all issues of liability“. In short, the first interim award, which was said to deal with and finally dispose of “all liability issues“, rendered the tribunal “functus officio” on all liability issues.
8. Facts
9. A payment dispute arose between Chevron and contractors (CKJV) engaged to work on the Gorgon Oil and Gas Project. The dispute concerned the correct method of calculating CKJV’s entitlement to reimbursement for staff costs: the contractor contended it was on a “rates” basis, whereas Chevron contended it was on an “actual cost” basis, and that CKJV had overcharged it.
10. Arbitration proceedings were commenced, and the Tribunal made a Procedural Order bifurcating liability and quantum (see paragraph 5 above). Chevron counterclaimed alleging that CKJV had overcharged it. In its defence to counterclaim, CKJV argued that if it had overcharged Chevron (which it denied) then it could off-set, against that amount, costs that CKJV had actually incurred. Liability was heard in phase 1 of the arbitral process. The Tribunal delivered its first interim award on liability, dismissing CKJV’s primary claim, and finding that CKJV was not entitled to reimbursement of staff costs on a “rates” basis. The Tribunal allowed CKJV to prove in defence of Chevron’s counterclaim the actual staff costs incurred by it, which it had billed to Chevron.
11. Thereafter, CKJV repleaded its case to seek reimbursement of staff costs on the basis of a “Contract Criteria Case“. Chevron applied to strike out the repleaded case, arguing that CKJV was estopped (by reason of issue estoppel, res judicata, and Anshun estoppel) from raising a new liability issue in phase 2 of the arbitration, and the Tribunal was “functus officio” on all issues of liability. The Tribunal dealt with Chevron’s objections together with the merits of CKJV’s repleaded Contract Criteria Case. In its second interim award, a majority of the three-member Tribunal^[9] rejected Chevron’s jurisdictional objections, and upheld CKJV’s repleaded case.
12. Chevron challenged the validity of the second interim award in the Western Australian Supreme Court. Kenneth Martin J allowed Chevron’s challenge, setting aside the second interim award, finding it was “too late to raise more liability issues” and that on delivery of the first partial award the Tribunal became “functus officio” on all issues concerning liability. The Court of Appeal noted that the Procedural Order provided for “all issues of liability” to be the heard and determined in phase 1 of the arbitration.
13. CKJV appealed Martin J’s decision to the Western Australian Court of Appeal. The Appeal was dismissed, with the Court of Appeal upholding Martin J’s decision to set aside the second interim award. This case note focuses on the Court of Appeal’s decision.
14. Issues on Appeal
15. The principal issues for determination by the Court of Appeal in essence included whether the Primary judge erred in:
    • finding that functus officio is a “self-supporting” doctrine that applied irrespective of the operation of estoppel (whether issue estoppel, res judicata, or Anshun estoppel);^[10]
    • his construction of the phrase “all issues of liability” in the Procedural Order (as per [5] above), and in finding that the “Contract Criteria Case” was a liability issue, and hence fell within the phrase “all issues of liability” in the Procedural Order;^[11] and
    • setting aside the second interim award on the basis that the Tribunal was relevantly functus officio.

1. Principles endorsed by the Court of Appeal

14. Before disposing of the Appeal, the Court of Appeal referred to the following principles:
    • by submitting their claims to arbitration, parties confer on the Tribunal the authority to determine the claims. The Tribunal’s award is final and conclusive, with the parties’ rights being discharged by “accord and satisfaction“;^[12]
    • res judicata, issue estoppel and Anshun estoppel (preclusionary estoppels) operate on the parties to preclude them and their privies from further litigating issues, based on the need for finality:^[13]
      • res judicata results in the parties’ rights merging in the judgment/award;
      • issue estoppel precludes parties from raising in subsequent proceedings ultimate issues of fact or law that were “necessarily resolved as a step in reaching the determination made” in the judgment/award; and
      • Anshun estoppel precludes parties from raising in subsequent proceedings issues which ought to have been, but were not, raised in earlier proceedings.
    • on issuing a final award, the jurisdiction of the Tribunal is spent – that is to say the Tribunal is “functus officio” in respect of those matters.^[14] An interim award is final, and renders the Tribunal functus officio with respect to the issues dealt with in the interim award – however, it retains authority to deal with other matters;^[15] and
    • estoppel and “functus officio” are “separate and distinct“. The former affects the rights of the parties, while the latter affects the jurisdiction of the Tribunal.^[16]
15. Section 34(2)(a)(iii) of the Commercial Arbitration Act 2012 (WA) enables a competent Court to determine (on a de novo basis) if the Tribunal has exceeded its jurisdiction. If the Court concludes the award purports to deal with disputes beyond the scope of the submission to arbitration, or to determine matters beyond that scope, it can set aside the award.^[17]
16. Court of Appeal’s decision
17. The Court of Appeal dismissed CKJV’s appeal, finding that the Tribunal had no jurisdiction to hear and determine CKJV’s belated “Contract Criteria Case” after it had finally and conclusively ruled on liability in the first interim award – it became functus officio on the issue of liability, and could not re-open its decision on liability. Based on the principles summarised above the Court of Appeal found:
    • on its face, the Procedural Order (at [5(a)] above) encompassed all issues of liability concerning Chevron’s liability to CKJV in respect of staff costs under the contract, and CKJV’s liability to repay Chevron for any overcharging;
    • on its face, the Procedural Order (at [5(b)] above) meant that all outstanding matters in dispute between the parties arising from the first hearing (assuming CKJV prevailed on liability) would be dealt in the second hearing. This “objectively“^[18] included quantification of claims in which CKJV prevailed, interest and costs on those claims, and quantification of Chevron’s counterclaim, and set-off;
    • hence, the Procedural Orders objectively meant: (i) all liability issues under the contract would be finally and conclusively determined in phase 1 (including both Chevron’s liability to CKJV, and CKJV’s entitlement to reimbursement); and (ii) all quantum issues would be dealt with in phase 2;^[19]
    • consistently with the bifurcation contemplated in the Procedural Orders, the first interim award dealt finally and conclusively with all issues in (c)(i). All of those issues were “litigated and determined” in the first interim award. CKJV’s “Contract Criteria Case“, which the Court of Appeal found was properly characterised as a liability issue, was not included in the issues dealt with in the first interim award (it was not raised until after that award);^[20]
    • there was no indication whatsoever^[21] that the Tribunal had reserved for further consideration any issue concerning CKJV’s entitlement to, or Chevron’s contractual liability for, staff costs;^[22]
    • the fact that evidence of the alleged overpayment was to be adduced in the phase 2 hearing did not mean that all issues of liability would be “at large” in the second hearing.^[23]

CONCLUSION

17. The Court of Appeal’s decision sounds a salutary reminder for all litigants (be it in curial or arbitral proceedings) of the need for caution when pleading, and when applying for interlocutory/procedural orders that will impact the future conduct of the entire case. Caution is required at all stages, including:
    • when determining whether to apply for a bifurcated hearing, considering other options, e.g. proceeding on the basis of a case stated, or seeking a determination of identified questions of law, and assessing the comparative advantages and disadvantages of each;
    • if the decision is made to seek bifurcation, ensuring the issues to be heard and determined in each phase are clearly stated and understood. This will impact on both the parties (given the operation of the preclusionary estoppels), and on the arbiter’s jurisdiction (including by virtue of the functus officio doctrine);
    • to ensure that all issues which the parties may ultimately seek to raise are expressly and unambiguously pleaded, preferably before applying for bifurcation. This will ensure all issues which parties wish to contend are heard and determined. It will also enable the parties and the arbiter to assess the future long-term consequences of making an order for bifurcation, thereby reducing the risks of unintended consequences;
    • when drafting interlocutory or procedural orders, to ensure they are unambiguous, self-explanatory, and (if possible) self-contained. This will eliminate the risk of the orders later being interpretated in a manner which is unhelpful to a party’s case; and
    • considering whether the parties can or should expressly reserve their right to raise additional specified issues after the first determination, and the arbiter’s jurisdiction to hear and determine those issues, and the impact of such a reservation.^[24]
18. Failure to exercise caution at any stage may have significant adverse ramifications on the future conduct of the proceedings and on the prospects of a party’s success. A party may be estopped from raising a potentially meritorious issue on liability after the hearing and determination of the first hearing. Further, and in any event, the arbiter (being “functus officio” in respect of all matters dealt with in or captured by the first determination) may not have jurisdiction to hear and determine those additional issues.

_____________________________

[1] At least in countries that follow the UNCITRAL Model Law on International Commercial Arbitration (1985) (Model Law countries).

[2] E.g. Rules of the Supreme Court of Western Australia, Order 32.4.

[3] If the legal issues are intrinsically entwined in contested factual issues, it will be difficult to justify bifurcation.

[4] Consider also operation of res judicata.  In common law counties, estoppel applies equally to arbitration as it does to litigation: Fidelitas Shipping Co Ltd v V/O Exportchleb Pty Ltd [1966] 1 QB 630, pp. 642-643, CBI Constructors Pty Ltd v Chevron Australia Pty Ltd [2023] WASCA 1. The same is not necessarily the case in all civil law countries: Redfern and Hunter on “International Arbitration“, Oxford University Press, 6^th ed. [9.174]. The lex arbitri that governs the arbitral procedure will often be the place of the arbitration.

[5] Fidelitas Shipping Co Ltd v V/O Exportchleb Pty Ltd [1966] 1 QB 630, p. 644.

[6] [2023] WASCA 1.

[7] Each of the Procedural Orders referred to in paragraphs (a) and (b) when read in isolation is clear. However, when read together some ambiguity may arise, e.g. assuming all issues in the proceedings relate to either liability or quantum (and nothing else), then if (a) provided that all liability issues were to be in phase 1, why is (b) on its terms not limited to quantum issues only? Are the words “all matters outstanding… including” quantum otiose? If not, what do those words refer to, given there are no other issues aside from liability and quantum?

[8] The Court of Appeal found the “Contract Criteria Case” which was belatedly raised constituted a “liability” matter, not just a “quantum” matter. As such, it was, or ought to have been covered by the Procedural Order in [5(a)] above.

[9] The majority comprised Sir Robert Akenhead as Chair and Mr P Greenham, and the minority comprised Mr Pullin KC.

[10] In essence appeal grounds 1 and 2.

[11] In essence appeal grounds 3 and 4.

[12] [73]-[74], citing TCL Air Conditioner (Zhongshan) Co Ltd v Judges of the Federal Court of Australia [2013] HCA 5.

[13] [75]-[82], citing cases such as Tomlinson v Ramsey Food Processing Pty Ltd [2015] HCA 28, Blair v Curran [1939] HCA 23, Hoystead v Federal Commissioner of Taxation [1926] AC 155, Fidelitas Shipping Co Ltd v V/O Exportchleb [1966] 1 QB 630, Bass v Permanent Trustee Co Ltd [1999] HCA 9.

[14] [86], [88]-[91]. This is how the maxim “nemo debet bis vexari pro una et eddem causa” (no-one should be punished twice for the same offence) operates.

[15] [91].

[16] [89].

[17] [92]-[96], citing BTN v BTP [2020] SGCA 105 where the Court found the parties were prevented by issue estoppel from raising issues in a Malaysian Court.

[18] [106].

[19] [111], [113] and [115].

[20] [121] and [123].

[21] Neither in the first interim award, in the Procedural Order nor otherwise.

[22] [127].

[23] [127].

[24] Eg.  the reservation contained in Procedural Order 17, which expressly provided that a particular report (Mr Meredith’s) which proved Chevron’s alleged overpayment need not be adduced at the phase 1 (liability) hearing, but should instead be adduced in the phase 2 (quantum) hearing, [127], and Appendix [66].