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Can you avoid an arbitration agreement for ‘convenience?

Disputes arising from construction and infrastructure projects typically involve multiple contractual relationships, often triggering separate disputes between principal and head contractor, principal and superintendent and head contractor and subcontractor (amongst others).

While the most efficient way of resolving inter-related disputes may be to have them all resolved in the same proceeding, what happens if the dispute resolution procedures between each set of parties don’t consider this approach?

In a recent decision, the Supreme Court of Queensland in Bulkbuild Pty Ltd v Fortuna Well Pty Ltd  Ors [2019] QSC 173 considered this issue.

The proceeding arose out of a ‘design and construct’ contract for the development of serviced apartments (Contract), under which:

  • the plaintiff, Bulkbuild Pty Ltd, was contractor (Contractor)
  • the first defendant, Fortuna Well Pty Ltd, was principal (Principal)
  • the second and third defendants, Anthony Mark Fendt and Project and Retail Management Pty Ltd, respectively, had each been appointed by the Principal to act as superintendent at various times (Superintendents).

The Contract contained a fairly typical tiered dispute resolution procedure involving issue of a notice of dispute, following by a conference of the parties and, ultimately, final resolution by referral of the disputes to arbitration (Arbitration Agreement).

Disputes arose under the Contract concerning claims by the Contractor against the Principal for payment for works alleged to have been performed by it, and the Superintendents’ assessments of its claims.  Despite the Contract containing the Arbitration Agreement, the Contractor commenced proceedings in the Supreme Court of Queensland against both the Principal and Superintendents (Proceeding). The Contractor’s claims against the Principal arose out of the Contract, whilst its claims against the Superintendents arose in negligence (there being no direct contractual relationship between the Contractor and the Superintendents).

Principal’s application for stay

The Principal applied for a stay of the Proceeding pursuant to section 8 of the Commercial Arbitration Act 2013 (Qld) (Act), primarily on the basis that the Contract contained the Arbitration Agreement.  Section 8 provides that:

‘A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party’s first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.’

There was no dispute that the Contract contained the Arbitration Agreement or the claims against the Principal in the Proceeding fell within the broad ambit of the Arbitration Agreement. However, the Contractor argued the Arbitration Agreement was ‘incapable of being performed’ because (in essence), in circumstances where its claims against the Principal were the subject of the Arbitration Agreement, but its claims against the Superintendents were not, there was a risk that an arbitral tribunal tasked with determining the Contractor’s claims against the Principal might reach different conclusions than a Court in determining the Contractor’s claims against the Principal.

The Court rejected this argument. Her Honour, Boskill J, held that ‘mere inconvenience’ in having claims against related parties resolved in separate forums did not render the Arbitration Agreement ‘incapable of being performed’. Her Honour observed incapability for the purposes of section 8 related to situations in which there are obstacles which preclude the relevant arbitration agreement from being performed (for example, where an arbitration agreement nominates a particular arbitrator who is unable to accept appointment and there is no default mechanism for appointment of an alternative arbitrator).

Orders were made staying the Proceeding against the Principal and referring the disputes to arbitration.

Superintendents’ applications for stay

The Superintendents also applied for a stay of the Proceeding, but on a different basis.

Whilst the Superintendents were not parties to the Arbitration Agreement itself, section 2(1) of the Act more broadly defines ‘party’ as:

‘…a party to an arbitration agreement and includes –

(a) any person claiming through or under a party to the arbitration agreement; and

(b) in any case where an arbitration does not involve all of the parties to the arbitration agreement, those parties to the arbitration agreement who are parties to the arbitration.’  

The High Court of Australia in Rinehart v Hancock Prospecting & Ors [2019] HCA 13 recently affirmed the meaning of a ‘person claiming through or under’ a party to an arbitration agreement, for the purposes of the Act.  In Bulkbuild, Her Honour considered that the Superintendents satisfied that meaning because the claims against them were closely related to the Contractor’s claims against the Principal and depended upon findings about the same factual matters.  Due to this overlap, Her Honour considered any defence by the Superintendents to the Contractor’s claims would rely upon rights vested in the Principal under the Contract and could, therefore, be said to have made ‘through or under’ the Principal. On this analysis, the Superintendents would fall within the expanded definition of “party” under the Act, and the referral to arbitration would apply to them also, notwithstanding there was no arbitration agreement between the Contractor and the Superintendents.

But, even if the Superintendents were not ‘parties’ for the purposes of section 8, Her Honour considered that it nonetheless made sense to stay the Proceeding as against the Superintendents pending conclusion of the arbitration proceeding as between the Contractor and the Principal, on the basis that the outcome of the arbitration would be determinative of the claims against the Superintendents.

What does this mean for inter-related disputes?

The statutory provisions considered by the Court in Bulkbuild are based on the UNCITRAL model law and in identical terms to those enacted by all states and territories in Australia as part of their equivalent versions of the Act.

The mere fact there is potential inconvenience or inconsistency in having disputes to which an arbitration agreement applies resolved in arbitration, whilst related disputes are required to be resolved in Court (or some other forum) is not, of itself, sufficient to undermine the application and enforceability of an arbitration agreement. The Bulkbuild decision reinforces the role of the Courts in preserving the sanctity of arbitration agreements by declining to exercise jurisdiction over disputes the subject of those agreements, except in the limited circumstances prescribed by the Act.

That said, if a dispute relating to a dispute the subject of an arbitration agreement can be said to involve a party claiming ‘through or under’ a party to an arbitration agreement, that related dispute may be capable of forming part of the subject of the arbitration agreement, and being referred to arbitration. At the very least, Courts may (where appropriate) be prepared to ‘stay’ related disputes pending the outcome of arbitral proceedings – thus resolving any perceived potential for inconvenience or inconsistency in another way.

AUTHOR
Anna Scannell | Partner
+61 3 9258 3352
anna.scannell@maddocks.com.au
Lauren Barci | Lawyer
+61 3 9258 3648
lauren.barci@maddocks.com.au

Disputes arising from construction and infrastructure projects typically involve multiple contractual relationships, often triggering separate disputes between principal and head contractor, principal and superintendent and head contractor and subcontractor (amongst others).

While the most efficient way of resolving inter-related disputes may be to have them all resolved in the same proceeding, what happens if the dispute resolution procedures between each set of parties don’t consider this approach?

In a recent decision, the Supreme Court of Queensland in Bulkbuild Pty Ltd v Fortuna Well Pty Ltd  Ors [2019] QSC 173 considered this issue.

The proceeding arose out of a ‘design and construct’ contract for the development of serviced apartments (Contract), under which:

  • the plaintiff, Bulkbuild Pty Ltd, was contractor (Contractor)
  • the first defendant, Fortuna Well Pty Ltd, was principal (Principal)
  • the second and third defendants, Anthony Mark Fendt and Project and Retail Management Pty Ltd, respectively, had each been appointed by the Principal to act as superintendent at various times (Superintendents).

The Contract contained a fairly typical tiered dispute resolution procedure involving issue of a notice of dispute, following by a conference of the parties and, ultimately, final resolution by referral of the disputes to arbitration (Arbitration Agreement).

Disputes arose under the Contract concerning claims by the Contractor against the Principal for payment for works alleged to have been performed by it, and the Superintendents’ assessments of its claims.  Despite the Contract containing the Arbitration Agreement, the Contractor commenced proceedings in the Supreme Court of Queensland against both the Principal and Superintendents (Proceeding). The Contractor’s claims against the Principal arose out of the Contract, whilst its claims against the Superintendents arose in negligence (there being no direct contractual relationship between the Contractor and the Superintendents).

Principal’s application for stay

The Principal applied for a stay of the Proceeding pursuant to section 8 of the Commercial Arbitration Act 2013 (Qld) (Act), primarily on the basis that the Contract contained the Arbitration Agreement.  Section 8 provides that:

‘A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party’s first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.’

There was no dispute that the Contract contained the Arbitration Agreement or the claims against the Principal in the Proceeding fell within the broad ambit of the Arbitration Agreement. However, the Contractor argued the Arbitration Agreement was ‘incapable of being performed’ because (in essence), in circumstances where its claims against the Principal were the subject of the Arbitration Agreement, but its claims against the Superintendents were not, there was a risk that an arbitral tribunal tasked with determining the Contractor’s claims against the Principal might reach different conclusions than a Court in determining the Contractor’s claims against the Principal.

The Court rejected this argument. Her Honour, Boskill J, held that ‘mere inconvenience’ in having claims against related parties resolved in separate forums did not render the Arbitration Agreement ‘incapable of being performed’. Her Honour observed incapability for the purposes of section 8 related to situations in which there are obstacles which preclude the relevant arbitration agreement from being performed (for example, where an arbitration agreement nominates a particular arbitrator who is unable to accept appointment and there is no default mechanism for appointment of an alternative arbitrator).

Orders were made staying the Proceeding against the Principal and referring the disputes to arbitration.

Superintendents’ applications for stay

The Superintendents also applied for a stay of the Proceeding, but on a different basis.

Whilst the Superintendents were not parties to the Arbitration Agreement itself, section 2(1) of the Act more broadly defines ‘party’ as:

‘…a party to an arbitration agreement and includes –

(a) any person claiming through or under a party to the arbitration agreement; and

(b) in any case where an arbitration does not involve all of the parties to the arbitration agreement, those parties to the arbitration agreement who are parties to the arbitration.’  

The High Court of Australia in Rinehart v Hancock Prospecting & Ors [2019] HCA 13 recently affirmed the meaning of a ‘person claiming through or under’ a party to an arbitration agreement, for the purposes of the Act.  In Bulkbuild, Her Honour considered that the Superintendents satisfied that meaning because the claims against them were closely related to the Contractor’s claims against the Principal and depended upon findings about the same factual matters.  Due to this overlap, Her Honour considered any defence by the Superintendents to the Contractor’s claims would rely upon rights vested in the Principal under the Contract and could, therefore, be said to have made ‘through or under’ the Principal. On this analysis, the Superintendents would fall within the expanded definition of “party” under the Act, and the referral to arbitration would apply to them also, notwithstanding there was no arbitration agreement between the Contractor and the Superintendents.

But, even if the Superintendents were not ‘parties’ for the purposes of section 8, Her Honour considered that it nonetheless made sense to stay the Proceeding as against the Superintendents pending conclusion of the arbitration proceeding as between the Contractor and the Principal, on the basis that the outcome of the arbitration would be determinative of the claims against the Superintendents.

What does this mean for inter-related disputes?

The statutory provisions considered by the Court in Bulkbuild are based on the UNCITRAL model law and in identical terms to those enacted by all states and territories in Australia as part of their equivalent versions of the Act.

The mere fact there is potential inconvenience or inconsistency in having disputes to which an arbitration agreement applies resolved in arbitration, whilst related disputes are required to be resolved in Court (or some other forum) is not, of itself, sufficient to undermine the application and enforceability of an arbitration agreement. The Bulkbuild decision reinforces the role of the Courts in preserving the sanctity of arbitration agreements by declining to exercise jurisdiction over disputes the subject of those agreements, except in the limited circumstances prescribed by the Act.

That said, if a dispute relating to a dispute the subject of an arbitration agreement can be said to involve a party claiming ‘through or under’ a party to an arbitration agreement, that related dispute may be capable of forming part of the subject of the arbitration agreement, and being referred to arbitration. At the very least, Courts may (where appropriate) be prepared to ‘stay’ related disputes pending the outcome of arbitral proceedings – thus resolving any perceived potential for inconvenience or inconsistency in another way.

AUTHOR
Anna Scannell | Partner
+61 3 9258 3352
anna.scannell@maddocks.com.au
Lauren Barci | Lawyer
+61 3 9258 3648
lauren.barci@maddocks.com.au