Where the subject matter of a dispute is within an arbitration clause, then subject to certain requirements being met[1], a court must, if a party to the arbitration agreement applies, order a stay of the proceedings to enable the arbitration to take place[2]. This is so even if the dispute involves parties who are not privy to the arbitration agreement, i.e. where there is ‘fragmentation’ of actions, such that the action by or against the non-party must proceed in a forum other than the arbitration; raising the spectre of inconsistent findings and other procedural inconveniences.
This article will focus on the issue of ‘fragmentation’ and its effect on an applicant’s motion to stay proceedings pending arbitration. The issue of ‘fragmentation’ occurs where, for example, a plaintiff claims against defendant 1, who is party to an arbitration agreement; and also against defendant 2, who is not. Perhaps defendant 2 then cross-claims against defendant 3, who is also not party to the arbitration agreement. A good example is John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451 (‘John Holland’).
The facts in the John Holland case were, briefly, as follows: Rail Corp had engaged Reliance Rail Pty Ltd (‘RR’) to design and construct a rail facility in Auburn, Sydney. RR had in turn engaged Downer EDI Rail Pty Ltd (‘Downer’), which in turn retained the Plaintiff, John Holland Pty Ltd (‘John Holland’), to design and construct the rail works. This included the design and provision of storm water detention tanks.
John Holland then entered into two sub contracts, both of which had ADR/arbitration clauses, with the following entities, for each of them to deliver part of the storm water detention works; Kellogg Brown Root Pty Ltd (‘KBR’) and Atlantis Corporation Pty Ltd (‘Atlantis’).
The ADR clause required that disputes first be sought to be settled via negotiations. It contemplated further ADR processes; e.g. mediation, if the parties so agreed. It went on the proviso that if the dispute could not be settled by these processes, then a notice may be issued by one party to the other, requiring the dispute to be referred to arbitration. A mechanism was set out to appoint an arbitrator and for rules to govern any arbitration.
Some years after the facility was constructed, the pavement subsided, John Holland sued KBR and Atlantis, both of whom applied for a stay and for the dispute to be referred to arbitration. Hammerschlag J dealt first with KBR’s application for a stay, and then Atlantis’. For the purposes of this article we are confining our analysis to the KBR motion and the issue of ‘fragmentation’.
It was accepted that the arbitration clause was valid within s 7 of the Commercial Arbitration Act 2010 (NSW) (‘CAA’)[3]. John Holland’s primary argument, however, was that the dispute was, as a matter of construction of the agreement, not within the arbitration clause, which contemplated a “…. dispute or difference arising out of or relating to the performance of the Agreement or the breach… thereof.”
John Holland’s submission on its primary argument was that such a clause only contemplated disputes between itself and KBR alone; not between itself, KBR, Atlantis and Downer. Its essential point was that that the construction of the clause should be guided by a presumption that the parties did not intend the inconvenience of possible disputes from their dealings being fragmented amongst different forums.
Hammerschlag J characterised this argument as unsustainable. The possibility that Downer may have a claim against it for which it may seek indemnity against KBR and because KBR may have cross claims against others, did not mean the dispute between the parties to the arbitration clause was not arbitrable[4]. His Honour noted that s 8 of the CAA represented a significant shift from the previous regime[5], where the court retained a discretion not to refer the parties to arbitration if there was sufficient reason and whilst fragmentation might be a basis to refuse a stay in principle “whether a dispute is arbitrable or not cannot depend on a plaintiff party to an arbitration agreement deciding to claim not only against the counter –party, but also a third party stranger”[6]. His Honour referred the matter to arbitration[7], noting somewhat ruefully that, although the CAA does not specify what happens with actions which are referred “it cannot be furthered”[8].
Fragmentation, therefore, is not a valid ground for refusing to stay proceedings pending arbitration.
[1] I.e. if it can be established that the Arbitration agreement is null and void, inoperative or incapable of being performed. These will be canvassed in another article.
[2] See Commercial Arbitration Act 2010 (NSW) section 8 and Commercial Arbitration Act 2010 (Vic) section 8.
[3] John Holland [2015] NSWSC 451, [55].
[4] John Holland [2015] NSWSC 451, [72].
[5] Section 53(1) of the Commercial Arbitration Act 1984 (NSW), now superseded.
[6] John Holland [2015] NSWSC 451, [86] – [88].
[7] As regards the KBR motion.
[8] John Holland [2015] NSWSC 451, [132] – [133].
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 sjacobs@13wentworth.com.au 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 counsel@vikrammisra.com or LinkedIn
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