A recent decision reiterates the courts’ pragmatic approach to ordering a stay of proceedings in favour of the parties’ dispute being determined by arbitration. In CPB Contractors Pty Ltd v DEAL S.R.L. [2021] NSWSC 820, Rees J held that practicality dictates when a court should: (i) determine whether a dispute falls within the scope of an arbitration agreement and should be stayed; and (ii) when conditions should be imposed upon that stay.
Background
The dispute concerned the widening of the WestConnex M4 toll road between Silverwater Road and Parramatta (Project). On 4 December 2014 CPB Contractors Pty Ltd (CPB) and Rizzani de Eccher Australia Pty Ltd, (trading as the Rizzani Leighton Joint Venture) (the JV), entered into a Design and Construct Deed with WCX M4 Pty Ltd to deliver the Project. The defendant to the proceedings, DEAL S.R.L (DEAL), had provided designs and advice for bridge and viaduct structures on the Project during the tender stage. On 27 July 2015 the JV and DEAL executed a Services Contract for design services, which contained the following arbitration clause:
Any dispute, controversy or claim arising out of, relating to, or in connection with this Agreement, including any question regarding its existence, validity or termination must be resolved by arbitration to be conducted in accordance with the Rules of the International Chamber of Commerce. The seat of the arbitration will be Singapore.
The JV failed to complete the Works in time or at cost. The Project was delayed by a year and the JV suffered a loss AU$122 million. Six years after the submission of the tender, but one day before the limitation period expired, CPB commenced proceedings against DEAL in the NSW Supreme Court, alleging that DEAL’s designs and advice provided during the tender process were false representations on which CPB had relied upon when finalising and entering into the Design and Construct Deed. CPB sought damages under the Australian Consumer Law (ACL) or, alternatively, damages for negligence.
Issues
DEAL applied to the Court for a stay pursuant to s 7(2) of the International Arbitration Act 1974 (Cth) (the IAA). Section 7(2) provides that where proceedings are instituted by a party to an arbitration agreement regarding a dispute capable of settlement by arbitration, the court shall, on application by the other party and subject to such conditions the court thinks fit, stay the proceedings and refer the parties to arbitration in respect of that dispute.
In determining whether a stay was appropriate, Rees J considered two key issues arising from DEAL’s application:
Determination
Key to her Honour’s decision on the first issue was the application of the competence-competence (or kompetenz-kompetenz) principle in Australia. The principle is enshrined in art 16(1) of the UNCITRAL Model Law, which provides:
The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.
Her Honour considered that the stay provisions ought to be read in light of the competence principle. The decisions of the Full Court of the Federal Court in Hancock Prospecting Pty Ltd v Rinehart (2017) 257 FCR 442 (Hancock), and of Beach J in Dialogue Consulting Pty Ltd v Instagram, Inc [2020] FCA 1846 distinguish between a ‘prima facie’ approach and a ‘full merits’ approach to determining whether a dispute falls within the scope of an arbitration clause and therefore whether a stay pursuant to s 7(2) (or equivalent provisions) ought to be ordered.
Considering these authorities, her Honour determined (at [60]) that:
…the arbitrator has jurisdiction to determine whether the dispute falls within the scope of the arbitration clause and whether the arbitration agreement exists and is operative. This Court can determine such questions but, generally speaking, should leave these matters to the arbitrator unless the context in which these questions arise make it preferable for the Court to determine such matters. The question is what the context dictates in this case. (Her Honour’s emphasis)
Rees J determined that there was nothing unusual about the context of the case, such that the prima facie approach should be followed (at [65]):
These proceedings, for practical purposes, have just commenced. The evidence before the Court on this application appears incomplete. There is no question of law arising which, if disposed of by this Court, will dispose of the proceedings. It is not necessary to hear and determine the dispute in order to determine whether it falls within the arbitration clause. The prima facie approach should be followed here.
In determining whether the dispute prima facie fell within the scope of the arbitration clause, Rees J afforded the arbitration clause a broad and liberal construction (Lepcanfin Pty Ltd v Lepfin Pty Ltd (2020) 102 NSWLR 627 at 648) and ordered that the proceedings be stayed pursuant to s 7(2). Her Honour declined to read down the scope of the arbitration clause by reference to other provisions of the Services Contract, before stating (at [88]):
Nor do I think it can be said that there is no sustainable argument that the dispute falls within the arbitration agreement such that this Court should refrain from staying these proceedings and referring the matter to the arbitrator.
Her Honour declined to impose the conditions on the stay which would have operated to prevent DEAL from raising a limitation defence in the arbitration, or from arguing that the ACL did not apply. Her Honour did so because the limitation condition was ‘not incidental or ancillary to the achievement of the main purpose of s 7(2) but will distort the agreement initially entered into between the parties’ and would affect the substantive rights of the parties in the arbitration (at [115]). Her Honour further considered that the ACL condition was not appropriate and that the application of the ACL to the dispute was a matter for the arbitrator.
Consideration
The decision reinforces the courts’ pro-arbitration stance for the arbitrator to determine whether a dispute falls within the scope of the arbitration clause (i.e. to take the ‘prima facie’ approach). Her Honour’s decision sets out clearly two steps in the process: (i) determining whether there is any novelty or practical reason requiring the court to determine the question; and (ii) whether the dispute does in fact ‘prima facie’ fall within the scope of the arbitration clause.
For the second limb, her Honour’s decision sets a low bar for referral to arbitration, being that there is a ‘sustainable argument’ that the dispute falls within the arbitration agreement. This is consistent with the approach taken by courts in the past decade favouring resolution of disputes by arbitration (see e.g. Hancock at [177], [193]; Transurban WGT Co Ltd v CPB Contractors Pty Ltd [2020] VSC 476 at [133]; Feldman v Tayar [2021] VSCA 185). However Rees J noted whether a stay is appropriate is ultimately a practical matter focusing on which forum is best placed to determine whether the dispute falls within the scope of the arbitration agreement.
Arbitration is a commercial and contractual process. Thus, commercial pragmatism will inform all aspects of the courts’ approach to the stay, including when it is appropriate to impose conditions. Justice Rees’ decision reflects the acknowledgement of Australian courts that parties are to be held to the bargain they strike, and further the reluctance of the courts to impinge upon the arbitrator’s jurisdiction or otherwise make a decision which may affect the parties’ substantive legal rights or positions in an arbitration.
Contracting parties should consider whether the language of their arbitration clause will cover pre-contractual representations. As this case demonstrates, while a broad arbitration agreement carries the benefit of having disputes determined by a single forum, it can expose contracting parties to claims arising from their pre-contractual relationship.
