Australia: Infrashore Pty Ltd v Health Administration Corporation [2015] NSWSC 736: Referral to arbitation

Construction Law Update - October 2015



One objective of the national revamp of the domestic commercial arbitration legislation has been to empower parties to agree on how their commercial disputes are to be resolved. The corollary of that shift is to limit the extent to which the courts can intervene, except where expressly provided by the legislation.

Where the decision concerns a choice between litigation and arbitration, discretionary considerations are no longer relevant, let alone determinative. The prescriptive nature of the enquiry under section 8(1) emphasises the objective construction of the parties' agreement. Indeed, in determining whether the parties must be referred to arbitration under the Act this will be the courts' focus.

As this decision illustrates, clarity of intention is essential in dispute procedures, particularly where one party to a contract might wish to avail itself of a right to arbitration. If a party wants to ensure that arbitration will prevail over other stated dispute resolution mechanisms, the contract should make this clear. Comprehensive terms governing the arbitration procedure may also assist in supporting the inference that arbitration was the parties' preferred dispute resolution procedure.

The facts

Note: Corrs acted for the plaintiff, InfraShore, in this proceeding.

InfraShore and the Health Administration Corporation were parties to a PPP Project Deed. The Deed included a detailed dispute resolution process that involved a multi-tiered process. That process involved the Project Coordination Group, a committee comprised of representatives from InfraShore and Health, agreeing to refer a dispute to arbitration, expert determination or "some other dispute resolution procedure". If the PCG could not agree, or if the dispute was not referred within a certain time, the PCG could request a nominated arbitral body to select the process.

The PCG agreed to refer the dispute to expert determination. The procedure in clause 40.2(e) of the Project Deed provided:

"Any determination made by the expert will be binding on all parties unless referred to arbitration or legal proceedings within 10 Business Days after the relevant decision."

On the day that the expert determination was issued, InfraShore commenced proceedings in the Supreme Court of New South Wales. Ten days later, Health sought to refer the dispute to arbitration and moved the Court for an order that the parties be referred to arbitration pursuant to section 8(1) of the Commercial Arbitration Act 2010 (NSW) (Act), which 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."

Health contended that clause 40.2(e) was an arbitration agreement under which each party had the right to refer the dispute to arbitration. Further, Health argued that the right of one party to refer the dispute to arbitration was not lost when the other party elected to commence legal proceedings.

InfraShore maintained that in the circumstances, and on the proper construction of the Project Deed, the dispute was not one which either party required to be arbitrated.

The decision

Commercial arbitration legislation that operates in most Australian States and Territories has removed the courts' discretion to allow a party to litigate in the face of an arbitration agreement that covers the dispute.

The parties conceded that the process in the Project Deed which allowed the PCG to refer disputes to arbitration or to have the dispute referred by a nominated arbitral body was an arbitration agreement within the meaning of section 7(1) of the Act.

The Court's inquiry focussed on the second limb of section 8(1) and held that it is met where, at the time a party makes the relevant request, the rights or liabilities in controversy fall "within the ambit of controversies which the parties have agreed will be referred to arbitration." Whether the Project Deed required the dispute under consideration to be referred to arbitration was a matter of contractual construction.

The Court held that there was no agreement for the referral of the present dispute to arbitration to which section 8(1) of the Act could attach.

First, the Court found that the ordinary meaning of the words in clause 40.2(e) did not confer on either party any right to require arbitration, nor did they give rise to such a right by necessary implication. Elsewhere in the dispute resolution clause, the Project Deed provided for two routes to arbitration (via the PCG or the nominated arbitral body). In the present case these routes were no longer available. The PCG had referred the dispute to expert determination and the procedure under clause 40.2 had been exhausted. Therefore, there was no other route by which either party could force arbitration.

Secondly, the Court held that clause 40.2(e) was simply a mechanism which gave the parties the option not to be bound by the expert determination. The expert determination would not be binding if the parties agreed to arbitrate or if a party commenced legal proceedings within 10 Business Days.

Thirdly, the Court observed that the comprehensive terms which were to govern the arbitration procedure and which were present in other sub-clauses in the Project Deed were absent from clause 40.2(e). The Court inferred that if the parties had contemplated forced arbitration, they would have legislated for that procedure, including a method for selecting the arbitrator. However, in the case of clause 40.2(e), they had clearly left this over for further agreement.

Fourthly, clause 40.2(e) also made no provision as to who prevailed if, as was the case, one party commenced legal proceedings and the other party subsequently sought to refer the dispute to arbitration. Health had argued that arbitration would prevail. However, the Court found that Health's construction of clause 40.2(e) was unsatisfactory. It would mean that the clause would either have to operate on a first past the post basis with the party calling for arbitration beating the party opting for litigation, or, arbitration would have to prevail even if the other party had litigated first. Both would be unpalatable outcomes because the first encourages a race and the second has 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 party later chose to arbitrate. Such a construction would encourage "games of cat and mouse" or brinkmanship.'

Fifthly, the Court held that a matter telling against Health's construction was that it would subject the parties to two compulsory alternative dispute resolution processes. The more commercial construction was one which contemplated only one ADR process, unless the parties agreed otherwise.

The Court also applied the fourth limb of section 8(1) finding, alternatively, that as far as the present dispute was concerned, the arbitration agreement was not operative. nsw/NSWSC/2015/736.html

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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