Sydney Jacobs, Barrister at 13 Wentworth Chambers and Vikram Misra, Barrister at Clarence Chambers continue their series into arbitration and mediation. In Part 4, they focus on the requirement for a valid arbitration agreement. Follow their series here.
In our previous article we dealt with the issue of ‘fragmentation’ and its impact on an application to stay proceedings pending arbitration. In this article we will explore the broader considerations that apply to applications to stay proceedings pending arbitration, focussing on the requirement for a valid arbitration agreement.
Power to refer a dispute to arbitration
Section 8(1) of the Commercial Arbitration Act 2010 (NSW) (‘the Act’) states:
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.
Section 8 of the Act represents a significant shift from the regime that applied under predecessor legislation[1]. Under the earlier regime, the court retained the discretion, even in the face of an arbitration agreement, to decline to refer the parties to arbitration if it was satisfied that there was sufficient reason to take that course: John Holland Pty Limited v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451 at [74].
Under the new regime, the court does not retain this discretion. Unless the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed, the court must refer the parties to arbitration: Bulkbuild Pty Ltd v Fortuna Well Pty Ltd & Ors [2019] QSC 173 at [12][2].
The requirements to satisfy s 8 of the Act are therefore:
- Is there a valid ‘arbitration agreement’?
- Do the proceedings include matters that are within the scope of the arbitration agreement?
- Has the request by a party to the arbitration agreement been made at the appropriate time, that is, before and certainly not later than when submitting the party’s first statement on the substance of the dispute?
- Is the arbitration agreement null and void, inoperative or incapable of being performed?
For the purposes of this article we will deal with the first requirement.
Is there a valid ‘arbitration agreement’?
Section 7 of the Act states:
(1) An arbitration agreement is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
(3) The arbitration agreement must be in writing.
The High Court of Australia has opined that, to be an arbitration agreement under s 7(1), the agreement must make binding provision for compulsory arbitration, whether as a consequence of an election by a party or otherwise: PMT Partners Pty Ltd v Australian National Parks & Wildlife Service (1995) 184 CLR 301; applied in AGL Energy Limited v Jemena Gas Networks (NSW) Ltd [2017] NSWSC 765, [22] (‘Jemena Gas’).
As such, the question to be asked is, “do the words which the parties chose, objectively assessed with regard to the commercial purpose or objects to be secured by the agreement, make provision [for binding compulsory arbitration]?”: Jemena Gas [2017] NSWSC 765, [23]. Much turns therefore, on the legal meaning of the critical clause, which is interpreted in accordance with ordinary principles of contractual construction; i.e. assessed objectively, given a business commonsense interpretation and construed in light of its context and purpose: Jemena Gas Networks (NSW) Ltd v AGL Energy Limited [2017] NSWCA 266 at [22], citing Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392, [51]-[75].
The case of Jemena Gas [2017] NSWSC 765 illustrates the importance of clearly drafting the arbitration agreement to avoid falling short of the requirements in section 7 of the Act.
The relevant clause in question, clause 30.5(a) stated:
30.5 Mediation
(a) In the event that discussions under clause 30.4 fail to resolve the Dispute, each Party expressly agrees to endeavour to settle the Dispute by mediation administered by the Australian Commercial Disputes Centre (ACDC) before having recourse to arbitration or litigation.
His Honour, Hammerschlag J, held that the dispute resolution clause provided no binding agreement to arbitrate as there was no critical provision in the agreement for either party to refer the dispute to arbitration or litigation, let alone any indication that arbitration had primacy.[3] Further, the clause in question contained no words of election and certainly none giving one party a right to compel the other in one direction. It contemplated that there might be arbitration or litigation, but embargoes both until after mediation.[4]
His Honour distinguished the clause from the clauses contained in the cases of Manningham City Council v Dura (Australia) Constructions Pty Ltd [1999] 3 VR 13 (‘Manningham’) and Mulgrave Central Mill Company Ltd v Hagglunds Drives Pty Ltd [2002] 2 Qd R 514 (‘Mulgrave’), cases in which the clauses were considered valid arbitration agreements in circumstances involving election, stating at [42] – [43]:
Absent provision for referral, the basis upon which the Court both in Manninghamand Mulgravegave primacy to arbitration falls away. One is left only with an inhibition on recourse to arbitration or litigation with no provision, let alone a clear one, that in certain events the parties must arbitrate rather than litigate.
Nothing in cl 30.5(a) indicates primacy of arbitration over litigation or that the party who moves first prevails over the party who moves last. In order to be read as giving a right to force arbitration, it would either have to operate on a first past the post basis with the person calling for the arbitration beating the party opting for litigation, or arbitration has to prevail even if the other party litigates first. I have difficulty in attributing an intention to the parties that this should be the case, because both are unsatisfactory. The first encourages a race and the second results in the unsatisfactory consequence that the party choosing litigation would have taken a step it was entitled to take at the time but then be penalised if the other later chose arbitration; see InfraShore Pty Ltd v Health Administration Corporation [2015] NSWSC 736.
In Jemena Gas Networks (NSW) Ltd v AGL Energy Limited [2017] NSWCA 266, the Court of Appeal, in refusing to grant Jemena leave to appeal, held at [27]:
The purpose of s 8 of the Act is to provide a mechanism to ensure that an agreement to arbitrate is enforceable and excludes the power of the court to permit litigation to proceed in the face of such an agreement. It would not assist that purpose to accept that any contractual arrangement which contemplated the possibility of arbitration, without any express agreement in writing to submit a particular category of disputes to arbitration, should result in the unilateral power to enforce arbitration in relation to all disputes.
As illustrated by the above case, the requirement for satisfying the criteria for a valid arbitration agreement should not be overlooked or underestimated. The key takeaway is to draft the arbitration clause with specificity to ensure that arbitration is compulsory. Be clear on the process if it includes a tiered alternate dispute resolution process.
[1] Commercial Arbitration Act 1984 (NSW).
[2] Dealing with the equivalent Queensland domestic arbitration legislation.
[3] Jemena Gas [2017] NSWSC 765, [40].
[4] Jemena Gas [2017] NSWSC 765, [41].
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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