Client Update

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Max Bonnell  
Partner
T +61 2 9296 2079

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Peter Megens  
Partner
T +61 3 9643 4253

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Sydney
Mark Darian-Smith  
Peter Pether  

Melbourne
Joanne Cameron  

Brisbane
John Swinson  

Canberra
Ian Johnson  

Hong Kong
David Bateson  (炳辰)
Paul Starr  (保羅仕達)

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The defendant in these proceedings entered into two separate agreements with two different parties concerning a related transaction, one of which was governed by an arbitration agreement. When the plaintiff commenced proceedings against the defendant, the defendant joined the third party to the proceedings and sought orders from the court that the entire proceedings be referred to arbitration.

In refusing to grant these orders, His Honour Justice Barrett highlighted the differences between the process of international arbitration governed by the International Arbitration Act 1974 (Cth) and the process of arbitration under the Civil Procedure Act 2005 (NSW).

WesTrac’s claims

WesTrac, the plaintiff in these proceedings, was a company incorporated in Western Australia that sold heavy mining equipment. As part of its business, WesTrac purchased six large second-hand radial tyres for mining dump trucks from Eastcoast, the first defendant and a company incorporated in New South Wales. Upon delivery of the tyres, WesTrac claimed that the tyres were defective and brought proceedings against Eastcoast alleging various breaches of the Trade Practices Act 1974 (Cth) and a breach of an implied condition as to quality or fitness under s 19 of the Sale of Goods Act 1923.

Eastcoast’s claims

Eastcoast acquired the tyres that were supplied to WesTrac from Fordberry, a company incorporated in England and Wales. The invoice for the sale of tyres from Fordberry to Eastcoast contained a valid arbitration agreement.

In response to WesTrac’s claim against it, Eastcoast cross-claimed against Fordberry alleging that Fordberry had breached the contract and had engaged in misleading and deceptive conduct in contravention of the Trade Practices Act by representing that the tyres were in good condition. In addition, Eastcoast sought to have both its claim against Fordberry, and WesTrac’s claim against it, heard together to avoid duplication of costs and the possibility of inconsistent concurrent findings in relation to claims that Eastcoast viewed as inextricably connected.

Pursuant to that application, Eastcoast requested that the court make an order that the whole of the proceedings be referred for determination by an arbitrator under section 38 of the Civil Procedure Act 2005 (NSW). In doing so, Eastcoast indicated that it would agree to submit its cross-claim against Fordberry to arbitration, provided that WesTrac’s claim against it was dealt with in the same way.

Fordberry’s claims

In response to Eastcoast’s applications, Fordberry filed a motion requesting:

• a declaration that the court had no jurisdiction over them in respect of the proceedings or, in the alternative, and

• a stay of Eastcoast’s cross-claim against Fordberry pursuant to section 7 of the International Arbitration Act 1974 (Cth) (the “Act”).

Decision in relation to s7 of the International Arbitration Act 1947 (Cth)

Barrett J first addressed Fordberry’s application on the basis that section 7 of the Act is mandatory. That is, if conditions to which section 7 refers are found to be satisfied, then the court must act. In contrast, Barrett J found that section 38 of the Civil Procedure Act 2005 (NSW) confers a discretion upon the court, and as such, the court should only apply section 38 once it has made a decision under the non-discretionary International Arbitration Act.

Section 7(2) of the Act relevantly provides that where proceedings instituted by a party to an arbitration agreement are pending in a court and the matter is capable of being settled by arbitration, the court shall, upon application by a party, stay the proceedings and refer the parties to arbitration.

Fordberry is a company incorporated in England and Wales, the United Kingdom is a convention country as defined in the Act and it was not in dispute that there was a valid arbitration agreement between Fordberry and Eastcoast. Therefore, Barrett J concluded that Eastcoast’s cross-claim against Fordberry, was caught under section 7(2)(a) of the Act.

The next question that the court considered was whether Eastcoast’s cross-claim was a matter that was capable of settlement by arbitration. In this regard, Barrett J widely interpreted the words “disputes arising out of or in connection with” in line with previous judicial reasoning, concluding that all of Eastcoast’s claims against Fordberry were matters capable of settlement by arbitration. In doing so, Barrett J referred to the decision of Comandante Marine Corp v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45, where the Federal Court held that pre-contractual representations were claims “arising out of” the contract.

As the court found that all of Eastcoast’s claims against Fordberry satisfied the requirements of section 7(2) of the Act, Barrett J was bound to make an order to stay the proceedings, in as much as they involved the determination of Eastcoast’s cross-claim against Fordberry, and to refer Eastcoast and Fordberry to arbitration in respect of those claims.

Eastcoast requested that certain conditions be attached to the order, namely that:

• the arbitration take place in Australia, and

• Eastcoast’s claims based on the Trade Practices Act were to be determined in the arbitration, and more generally that the arbitration between Eastcoast and Fordberry proceed in conjunction with an arbitration between Eastcoast and WesTrac.

In response to this request, Barrett J did not find it open to the court to impose conditions upon a section 7 stay which detracts from the integrity of the arbitration process mandated by the International Arbitration Act.

Decision in relation to Eastcoast’s claim under s 38 of the Civil Procedure Act 2005 (NSW)

Eastcoast’s claim that the whole of the proceedings (that is, WesTrac’s claims against Eastcoast and Eastcoast’s claims against Fordberry) be referred to determination by an arbitrator under section 38 of the Civil Procedure Act was rejected by Barrett J.

His Honour firmly resisted making such an order encompassing the entire proceedings, stating that the process of arbitration under the Civil Procedure Act and arbitration under section 7 of the International Arbitration Act were substantially different and separate processes. In particular, Barrett J noted that under the later process, the arbitrator must be of a nationality other than that of the parties and the award is final and binding. However, under the Civil Procedure Act, the arbitrator is a person in New South Wales and the award “may be displaced virtually at the whim of a party and replaced by a judicial process and a judicial determination”.

Due to the compulsory operation of the International Arbitration Act as between Eastcoast and Fordberry, His Honour found that there was no scope for a domestic court to shape international arbitration proceedings made obligatory by that Act so as to cause those arbitration proceedings to be compatible with the form of arbitration made available by the Civil Procedure Act. Conversely, Barrett J similarly found that the court did not have the ability to shape an arbitration under section 38 of the Civil Procedure Act so that it corresponds with the form of arbitration provided for in the International Chamber of Commerce (ICC) Rules.

Despite acknowledging the court’s willingness to avoid duplication of effort and expense, His Honour found that in this case, it was not possible to litigate the claims altogether. This was owing to the mandatory application of the International Arbitration Act to the claims between Eastcoast and Fordberry and the fact that there was no mechanism by which the court could order the remaining claims between Eastcoast and WesTrac to be dealt with under the same system. In doing so, the court confirmed that section 38 of the Civil Procedure Act could not be used to rectify inconsistencies between related dispute resolution mechanisms as the Civil Procedure Act was not all encompassing and was subject to the application of the International Arbitration Act.

Barrett J stated that the only way in which this would be possible was if Eastcoast and Fordberry were to agree to this course of action under the auspices of the ICC. However this was unlikely in the present proceedings as Fordberry had indicated that they did not wish to be involved in arbitration in Australia at all.

The court concluded by stating that Fordberry would not incur any liability to Eastcoast unless Eastcoast was found to have liability against WesTrac. This suggested that it was desirable to deal with WesTrac’s claims against Eastcoast in the first instance and that arbitration of Eastcoast’s claims against Fordberry should be deferred until the first proceedings had concluded. The court indicated that there was a possibility of deferring the arbitration proceedings between Eastcoast and Fordberry by way of a making a condition under section 7 of the Act, but declined to make any other comments.

What this means for you

To avoid multiple proceedings in a variety of jurisdictions, duplication of costs and any potential inconsistent findings, ensure that you have similar dispute resolution mechanisms in all associated commercial agreements. This is particularly relevant in cases where there are multiple yet connected commercial agreements concerning a related transaction.