Sydney Jacobs, Barrister at 13 Wentworth Chambers and Vikram Misra, Barrister at Clarence Chambers continue their series into arbitration and mediation. Following on from their previous article where they gave an overview of the court’s power to refer a dispute to arbitration, Sydney and Vikram examine the meaning of ‘null and void, inoperative or incapable of being performed’ as outlined in s 8(1) of the Commercial Arbitration Act 2010 (NSW).
Follow their series here.
In our previous article we outlined the framework as regards the court’s power to refer a dispute to arbitration pursuant to section 8(1) of the Commercial Arbitration Act 2010 (NSW) (‘the Act’):
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 [emphasis added].
This article fits within the taxonomy of parties seeking to avoid the arbitration process, but at a time prior to any award issuing. In the shifting sands of litigation, what seemed a good idea about the process for settling disputes, when the relationship was warm, and when details of the contracts were left to the lawyers to resolve, might change with hindsight.
A successful challenge to an arbitration clause on the ground here under discussion, has as its consequence that disputes are ventilated in open court, with all that comes with it, e.g. different (and possibly more direct) rules as to documentary discovery; the right to appeal & being open to the glare of the public (to name only a few differences).
In this article we will consider the meaning of “inoperative or incapable of being performed”.
The term “inoperative” was considered by Hammerschlag J in Broken Hill City Council v Unique Urban Built Pty Ltd  NSWSC 825.
Urban brought a motion for the matter to be referred to arbitration. The Council resisted on the grounds that the arbitration agreement was inoperative. The issues for determination were, what was meant by the term inoperative and whether cl 42.3 rendered the arbitration agreement inoperative.
The relevant contractual provisions were:
Within 14 days after receiving a notice of dispute, the parties shall confer at least once to resolve the dispute or to agree on methods of doing so. At every such conference each party shall be represented by a person having authority to agree to such resolution or methods. All aspects of every such conference shall be privileged.
If the dispute has not been resolved within 28 days of service of the notice of dispute, that dispute shall be and is hereby referred to arbitration.
If within a further 14 days the parties have not agreed upon an arbitrator, the arbitrator shall be nominated by the person in Item 32(a). The arbitration shall be conducted in accordance with the rules in Item 32(b).
Item 32 (a) referred to in cl 42.3 stated that the person to nominate an arbitrator was, if no-one was stated, the President of the Australasian Dispute Centre. No-one was stated. At the time of the contract, the Australasian Dispute Centre did not exist. There was no President. There had once been such an organisation, but it had become defunct.
Item 32(b) provided that if nothing was stated, the rules for arbitration were those of a particular institute (the Rules).
The Council claimed that because the appointor described in Item 32 (a) did not exist, the arbitration agreement was inoperative. It argued that the parties contemplated a single mechanism for appointment and that their agreement to arbitrate was dependent upon that mechanism not misfiring. It further argued that the Rules operated so as to govern arbitration procedure and had no role to play with respect to the initial appointment of the arbitrator. The Council also contended that the phrase ‘incapable of being performed’ contemplated a scenario where the parties had chosen a specific arbitrator in the agreement, who was, at the time of the dispute, deceased or unavailable (and in that regard, Council relied on a proposition from a Singapore case, which in turn had been cited without criticism by Vickery J in Nova West Contracting Pty Ltd v Brimbank City Council  VSC 679).
Urban’s first argument was that Article 8, which was incorporated into the Contract by cl 42.3 and Item 32 b), was the mechanism for the appointment of an arbitrator. Its second argument was that cl 42.2 was an arbitration agreement within the meaning of s 7(1) in its own right and was capable of standing alone. It argued that if cl 42.3 was ineffective as a mechanism for the appointment of an arbitrator by virtue of the non-existence of the named appointor in Item 32 a), it and the Council had failed to agree on a procedure of appointing an arbitrator, in which event, s 11(3)(b) empowered the court to appoint one.
His Honour held that s 8(1) of the Act did not apply to cl 42.3, rather only to cl 42.2 and accepted Urban’s argument. In finding that the arbitration agreement was effective even if cl 42.3 did not operate, his Honour opined:
 I take the term ‘inoperative’ in s 8(1) to mean having no field of operation or to be without effect. Whether an arbitration agreement is in this state is to be determined in the context of, and having regard to, provisions of the Act which may make it operative.
His Honour referred to the case of Lucky-Goldstar International (HK) Ltd v NG Moo Kee Engineering Ltd  HKCFI 14 (‘Goldstar’), in which the parties had agreed that arbitration would be in accordance with the rules of procedure of an association which did not exist. In Goldstar, Kaplan J noted that the phrase ‘inoperative or incapable of being performed’ had been taken from the New York Convention of 1958 and endorsed the following commentary of academic commentators:
“The word ‘inoperative’ can be deemed to cover those cases where the arbitration agreement has ceased to have effect. The ceasing of effect to the arbitration agreement may occur for a variety of reasons. One reason may be that the parties have implicitly or explicitly revoked the agreement to arbitrate. Another may be that the same dispute between the same parties has already been decided in arbitration or court proceedings (principles of res judicata …).
…[A]s for instance where the award has been set aside or there is a stalemate in the voting of the arbitrators or the award has not been rendered within the prescribed time limit. Further, he suggests that a settlement reached before the commencement of arbitration may have the effect of rendering the arbitration agreement inoperative, although he notes an American decision which left this issue to the arbitrators.
As to the phrase ‘incapable of being performed’, Professor van den Berg is of the view that this would seem to apply to a case where the arbitration cannot be effectively set in motion. The clause may be too vague or perhaps other terms in the contract contradict the parties’ intention to arbitrate. He suggests that if an arbitrator specifically named in the arbitration agreement refuses to act or if an appointing authority refuses to appoint, it might be concluded that the arbitration agreement is ‘incapable of being performed’. However, that would only apply if the curial law of the state where the arbitration was taking place had no provision equivalent to ss 9 and 12 of the Arbitration Ordinance and art 11 of the Model Law.”
Incapable of being performed
The phrase ‘incapable of being performed’ was considered in Bulkbuild Pty Ltd v Fortuna Well Pty Ltd & Ors  QSC 173 (‘Bulkbuild’).
Fortuna brought a motion to stay court proceedings pending arbitration pursuant to the arbitration agreement contained in the contract. Bulkbuild resisted the motion, claiming that the arbitration agreement was incapable of being performed on the grounds that there would be a risk of different factual findings being reached if its claims against Fortuna were determined by arbitration but its claims against another party to the proceedings (the Superintendents) were determined by a court. It was argued that the claim against Fortuna arose out of similar factual matters as its claims against the Superintendents.
The court, rejecting Bulkbuild’s argument, held at  that mere inconvenience, “such as might arise if the claims against the second and third defendants were permitted to be actively pursued in the court, at the same time as the arbitration of the claim against the first defendant”, does not render the arbitration agreement incapable of being performed. For more on the issue of ‘fragmentation’ see our previous article, here.
The court considered the meaning of the phrase ‘incapable of being performed’ in paragraph , from which the following points can be taken:
- Australian courts seek comity with our Asia-Pacific UNCITRAL Model jurisdictions, including Singapore and Hong Kong, and readily cite their leading decisions on issues such as the one at hand;
- the term would relate to the capability or incapability of parties to perform an arbitration agreement; the expression would suggest “something more than mere difficulty or inconvenience or delay in performing the arbitration”;
- there has to be “some obstacle which cannot be overcome even if the parties are ready, able and willing to perform the agreement”; and
- the focus in the practical examples canvassed by the court was on the administration of the arbitration itself rather than on the merits of what was to be referred to arbitration.
- When advising clients as to dispute resolution procedures to go into contracts that are to be on foot for a long time, it may be worth mentioning that the way things look in the rear view mirror, as to dispute resolution clauses, are not always the way they looked through the windscreen;
- The grounds for circumventing an arbitration clause are narrow, and we live in a pro arbitration age; nevertheless, if in the rear view mirror, there seems tactical advantage to have a dispute ventilated in open court, then the calculus will include matters such as; what is the advantage one perceives one will enjoy, by a stay of arbitral proceedings? How much will it cost to bring the application? What are the prospects? Will the point be able to be made surgically?;
- there is an ever-growing comity as to these types of applications, between Asia Pacific UNCITRAL Model jurisdictions, and thus cases in Singapore and Hong Kong for example, will or may have strong precedential value.
 There is an analogue to this in Sec 7 of the International Arbitration Act 1974 (Cth) (both Acts giving effect to the UNCITRAL Model Law).
 What considerations played on the minds of the parties in the cases below, in variously seeking and resisting relief, are obviously unknown to the authors.
 Note the case cited was the judgment of the senior Hong Kong Judge, Kaplan J. A theme we will develop in future articles is the growing judicial comity between Asia Pacific UNICITRAL Model jurisdictions.
 Kaplan J also referred to a case where the court refused to hold that the arbitration clause was null and void in circumstances where the default appointer named in the clause did not exist.
With over 20 years’ experience as a barrister, Sydney Jacobs practices in the areas of commercial law and equity, real property and building and construction law. He has acquired experience in the area of easements: he has obtained easements for applicants and otherwise appeared in the cases listed below, has a number of current matters in the NSW Equity Division Real Property List being case -managed to final hearing 2018 and is briefed in certain easement matters being worked up for filing in Court. Prior to being called to the Bar, Sydney was a solicitor in the well -known firms listed below, as a commercial litigator with a construction law focus. Sydney has experience in acting for clients seeking or opposing easements and clients whose rights of way have been impeded by neighbours. You may connect with Sydney via email firstname.lastname@example.org or LinkedIn
Vikram Misra was admitted as a solicitor in 2012 and called to the NSW Bar in 2015. He maintains a broad commercial practice and is regularly briefed in matters relating to taxation law, property law, construction law and equity. Vikram has completed a Graduate Diploma in Taxation Law at the University of Sydney in 2015 and a Master of Laws majoring in construction law and contract law at the University of Melbourne in 2016. You may connect with Vikram via email email@example.com or LinkedIn
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