Queensland Court Of Appeal Confirms Non-party Liability Under Arbitral Award

In KGLNG E&P Pty Ltd v Santos Toga Pty Ltd [2025] QCA 114, the Queensland Court of Appeal determined that the appellants were contractually bound to pay amounts determined by an arbitral award, despite not being a party to the arbitration. While the outcome had the effect of binding a non-party to a determination under an award, this was held to be consistent with the parties' contractual bargain. When construing contractual payment obligations, courts will consider the contract as a whole, including any references to arbitration with third parties. However, this case also demonstrates that, absent shared legal interests and identity, courts will be reluctant to bind a non-party to an award under the privity of interest doctrine.

Background

The parties were involved in an unincorporated joint venture for the upstream component of a coal seam gas project in Queensland, which was governed by a suite of deeds. Prior to the appellants acquiring their interest in the project, the respondents had separately agreed to pay a royalty to a third party, Tri Star, on the gas produced from the project. While the appellants were not parties to this royalty agreement, the appellants had agreed in the deeds to assume a proportionate share of the respondents' royalty obligations to Tri Star and were aware that any disputes over the royalty would be resolved through arbitration in Texas.

After the appellants acquired their interest in the project, Tri Star succeeded in an arbitration (in Texas) against the respondents relating to the royalty amount payable. The respondents then issued invoices to the appellants to make their share of additional payments as determined by the Award. These invoices were not paid by the appellants, and the respondents commenced proceedings.

At first instance, the primary judge held that the appellants agreed under the deeds to pay or discharge the respondents' royalty obligations under the Award in proportion to their joint venture interest, rather than a notional amount. On appeal, the Court was asked to determine (among other things) whether:

(a) the appellants were contractually bound to pay their proportion of the royalty determined by the Award; or

(b) alternatively, whether they were estopped from denying liability due to privity or a sufficiently shared identity with the respondents in the arbitration.

The Decision

Interpretation of deeds and appellant's obligation to pay

Challenging the primary judge's interpretation of the deeds, the appellants argued that their liability was limited to a percentage of the royalty calculated under a 'valuation provision' in one of the deeds, rather than the amount determined by the Award. They submitted that agreeing to pay royalties under that provision did not amount to an agreement to be bound by the determination of an arbitrator under a separate arbitration agreement, invoking the principle of separability in support.

The Court of Appeal rejected these arguments. It clarified that the doctrine of separability "goes no further" than an acceptance that the arbitration agreement may function as a separate agreement. It "says nothing about the proper construction of the main contract". Since the valuation provision itself cross-referred to the arbitration agreement between the respondents and Tri-Star, there was no reason in principle to ignore the arbitration agreement when determining the appellants' liability. Further, as the agreement between the respondents and Tri-Star had been disclosed to the appellants, they were taken to have understood that any dispute as to the royalty calculation could be resolved by arbitration. It was therefore held that the resulting amount would be the amount "actually payable" by the respondents – of which, the appellants had agreed to pay their share, without recourse to any other method of calculation.

The appellants further argued that the primary judge's construction bound them to an award issued in a process they were not a party to, analogising with a line of authorities in the context of guarantees. According to these authorities, an arbitral award will not bind a guarantor who is not a party to the arbitration in the "absence of a special agreement" unless "explicit words" are used to that effect. However, the Court held that the appellants were not bound to the arbitration itself, but rather, their contractual promise to pay their percentage of the royalty. The principle relied upon was therefore found to have "no application where a party has otherwise agreed to be bound by the outcome of a process to which they are not a party".

Estoppel and Privity

The respondents argued that the appellants should be estopped from denying liability for their share of the royalty because there existed a shared legal interest and sufficient degree of identification in the outcome of the arbitration. However, both at first instance and on appeal, the respondents failed to establish the requisite shared interest and identity.

Shared interest

To establish a privity in interest, the respondents were required to prove that the appellants claimed under or through the respondents. While the appellants had an economic interest in the outcome of the arbitration and a potential contingent liability to contract with Tri Star at the respondents' request, no "present legal interest" was established. Further, that the appellants would have enjoyed the benefits of the Award were the respondents to have succeeded "did not substantiate the existence of a legal interest".

Shared identity

To succeed on this ground, the respondents had to demonstrate that the appellant was exercising such a level of control that they were effectively acting as their agent in the arbitration. In circumstances where the parties had no shared legal interest, the appellants had no substantive input during the arbitration, and the appellants were contractually restrained from interacting with Tri-Star, this was plainly not established.

Comment

This decision reinforces the importance of clear contractual drafting in joint ventures involving third-party obligations. Parties may well become bound by the outcome of an arbitration in which they did not participate if their contracts incorporate or refer to that arbitration process. Despite the doctrine of separability, an arbitration agreement may be construed just like any other contractual provision to give effect or meaning to other contractual obligations, including obligations to pay or indemnify.

However, the Court of Appeal also drew a firm line under the principles of estoppel and privity of interest in the context of arbitration. Absent a shared present legal interest or agent-like relationship between the parties, non-parties will not be bound to an arbitration under the privity doctrine.

The authors would ike to thank Lachlan Ewers for his assistance with this post.

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