Australia - Guidance On The Enforceability Of Arbitration Agreements.
Legal News & Analysis - Asia Pacific - Australia - Dispute Resolution
16 August, 2019
Bulkbuild Pty Ltd v Fortuna Well Pty Ltd & Ors  QSC 173
What you need to know
- The Supreme Court of Queensland recently stayed litigation involving separate claims against a principal and superintendents (who were not parties to the relevant arbitration agreement) in favour of arbitration.
- The Court rejected the contractor's contention that the arbitration agreement was "incapable of being performed" because of the "mere inconvenience" that an arbitration against the principal might run concurrently with litigation against the superintendents regarding substantially the same issues.
- The Court also indicated that it would stay the litigation against the superintendents even though they were not parties to the arbitration agreement.
- The decision demonstrates that arbitration agreements will only be found to be "incapable of being performed" in very limited circumstances and that, in construction disputes, superintendents may in some circumstances be able to enforce arbitration agreements.
The background to the disputes in Bulkbuild Pty Ltd v Fortuna Well Pty Ltd & Ors  QSC 173 is commonplace in the construction industry.
The contractor and principal entered into a contract for the design and construction of serviced apartments.
A payment disputes arose: the contractor alleged that the principal breached the contract by failing to pay for the work that it had performed. The contractor also alleged that the superintendents were negligent in performing their duties (including in issuing payment certificates and assessing variations). The superintendents were not parties to the design and construct contract.
The contract was based on an Australian Standard. Clause 41 of the contract was a tiered dispute resolution clause that ultimately provided for disputes to be referred to arbitration.
Notwithstanding the dispute resolution clause, the contractor commenced litigation against the principal and the superintendents in the Supreme Court of Queensland.
The principal and the superintendents sought an order staying the litigation in favour of arbitration pursuant to section 8 of the Commercial Arbitration Act 2013 (Qld) (Act) (that is based upon the uniform domestic arbitration legislation), or otherwise in accordance with the Court's inherent discretion to stay litigation proceedings.
Section 8(1) of the Act provides:
|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.|
The contractor contended that the litigation should not be stayed as the arbitration agreement was "incapable of being performed" within the meaning of section 8(1) of the Act because:
|[the contractor's] respective claims against [the principal], on the one hand, and [the superintendents], on the other, will require the court to determine a number of similar factual matters, and there is a risk that if the claim against [the principal] is determined at arbitration, and the claim against the [superintendents] is determined by a court, the two different forums may reach different factual conclusions.|
The arbitration agreement was not "incapable of being performed"
The Court rejected the contractor's contention, held that the arbitration agreement was not "incapable of being performed" and stayed the litigation in favour of arbitration in accordance with section 8 of the Act.
In doing so, Bowskill J, noted that "there is no discretion" under section 8(1) of the Act: "if the action brought by the plaintiff is in a matter which is the subject of an arbitration agreement, 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".
Her Honour found that the "mere inconvenience" that an arbitration against the principal might run concurrently with litigation against the superintendents did not render the arbitration agreement "incapable of being performed". Adopting the words of High Court of Singapore in the decision in Sembawang, which Her Honour cited in support of her finding, this was not a situation involving:
|…‘something more than mere difficulty or inconvenience or delay in performing the arbitration’ (at p 465). There has to be ‘some obstacle which cannot be overcome even if the parties are ready, able and willing to perform the agreement’ (id at p 465).|
The urgent relief clause and the Court's inherent discretion
Her Honour also rejected the contractor's argument that clause 41.4 of the contract preserved its right to bring court proceedings.
Clause 41.4 provided:
Nothing herein shall prejudice the right of a party to institute proceedings to enforce payment due under the Contract or to seek injunctive relief or urgent declaratory relief.
Bowskill J did not consider the effect of clause 41.4 in detail, finding that:
|Whatever the scope of clause 41.4 might be… section 8 of the [Act] is clear in its terms. Where the circumstances apply, and the arbitration agreement is not found to be null and void, inoperative or incapable of being performance, the court must refer the parties to arbitration|
Her Honour further reasoned that it was unnecessary to address question of whether the Court should exercise its inherent discretion to grant a stay because the Court retained no such discretion in light of section 8 of the Act.
The superintendents were a "party" to the arbitration agreement
Although no order was made, her Honour firmly indicated that she would stay the litigation against the superintendents in favour of arbitration even though they were not parties to the arbitration agreement.
Boskill J noted that a "party" for the purposes of the Act includes "any person claiming through or under a party to the arbitration agreement". Her Honour said that: "when read with section 8, this definition enables a person claiming through or under a party to an arbitration to be referred to arbitration, even if they themselves are not a party to the agreement".
It was common ground between the parties that the contractor's claims against the principal and the superintendents were closely related and depended upon findings about the same factual matters. It followed that, unless the contractor could succeed in its claim against the principal, then it could not succeed in its claim against the superintendents: "it [was] essentially the same claim against all parties".
Accordingly, her Honour accepted that it was likely that the superintendents would rely upon the rights vested in the principal under the contract to defend the claim against them and, in that sense, the superintendents could be said to claim "through or under" the principal. In support of this finding, Bowskill J cited the recent High Court of Australia decision in Rinehart:
"whether a party to proceedings is advancing a defence through or under a party to an arbitration agreement is necessarily to be answered by reference to the subject matter in controversy rather than the formal nature of the proceedings or the precise legal character of the person initiating or defending the proceedings".
In any event, her Honour said that, even if the superintendents were not a "party" for the purposes of the Act (such that the claims against them were not required to be stayed under section 8) it would be appropriate for the Court to exercise its inherent discretion to stay the litigation.
The decision demonstrates that arbitration agreements will be readily enforced under the Act, its domestic equivalents that have been enacted in each State and Territory and its international equivalent in the International Commercial Arbitration Act 1974 (Cth). Each of these is based upon the UNCITRAL Model Law on International Commercial Arbitration from which section 8 of the Act derives.
The Court reiterated, as previous decisions have, that referrals to arbitration under section 8 of the Act are mandatory and that courts are bound to make such referrals where the circumstances in section 8 apply. In this case, however, the Court said that a referral to arbitration should be made even when the parties have expressly sought to preserve their right to bring court proceedings in some instances, particularly for "injunctive relief or urgent declaratory relief". This finding seems to take a different approach to previous decisions concerning preserved rights to bring court proceedings: for example, see our previous update here. It remains to be seen whether, in an appropriate case, a court may give more detailed consideration to the effect of section 8 (or its equivalents) on an urgent relief clause such as clause 41.4.
Specifically in relation to section 8 of the Act, the decision also demonstrates that arbitration agreements will only be found to be "incapable of being performed" in very limited circumstances. Most relevantly, an arbitration agreement is unlikely to be found to be "incapable of being performed" because of the "mere inconvenience" that an arbitration might run concurrently with a litigation.
Importantly for those in the construction industry, the decision demonstrates the operation of the expansive definition of "party" for the purposes of the Act and the likelihood that, in appropriate cases, superintendents may be able to enforce an arbitration agreement even though they are not a party to the arbitration agreement itself.
This means that, in such circumstances, industry participants will not be faced with parallel litigation and arbitration proceedings that might reach different determinations of the same issue.
For further information, please contact:
Georgia Quick, Partner, Ashurst