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In a recent decision of the Victorian Supreme Court in Ansett Australia Limited v Malaysian Airline System Berhad [2008] VSC 109, her Honour Justice Hollingworth, in imposing a stay of court proceedings under section 7 of the International Arbitration Act (Cth) 1974 (IAA), made some interesting observations about the imposition of conditions by the court when ordering a stay.

Facts

Ansett Australia Limited (Ansett) entered into a contract with Malaysian Airline System Berhad (MAS) for provision of ground handling services at various airports in Australia. A dispute arose about alleged non-payment by MAS for services provided by Ansett.

Ansett commenced proceedings in the Supreme Court of Victoria in September 2007. An order was made for MAS to serve a defence to which MAS took no objection. However, no defence was filed. Subsequently, in October MAS indicated that it wished to apply for a stay of the proceedings under section 53 of the Commercial Arbitration Act. Later, in the middle of December 2007, MAS sought to amend its position to rely upon the IAA.

Ansett argued that the arbitration clause was restricted to disputes about the construction or meaning of the contract but not disputes arising from the contract. In addition, Ansett argued that there was no “matter” capable of settlement by arbitration (in accordance with the words of section 7(2)) as MAS had not filed a defence and particularised which of Ansett’s invoices it disputed.

In the event that a stay was imposed, Ansett argued that conditions should be imposed. In this regard, section 7(2) allows a court to impose “such conditions (if any) as it thinks fit” when ordering a stay. Ansett sought several conditions which included that: (i) the stay be terminated if MAS did not do everything necessary to proceed with the arbitration expeditiously; (ii) MAS give an undertaking that it not rely on certain limitation defences or raise a defence of set-off; (iii) the stay terminate if MAS did not comply with the undertakings; and (iv) the arbitration be conducted in Victoria.

Decision

Her Honour rejected both of Ansett’s arguments and imposed a stay. However, she did agree to impose one of the conditions sought by Ansett. In doing so, her Honour considered that the court has unfettered discretion in relation to what conditions to impose subject to that power being exercised judicially.

Comment

The substance of this decision is to be welcomed. It provides further evidence that Australian courts will adopt a robust approach to issues of construction of the arbitration agreement and take appropriate steps to enforce such an agreement. In this regard, her Honour noted that “as a matter of general principle, it is the duty of the court to give effect to the purpose which lies behind an arbitration agreement and to respect the intention of the parties as expressed in the agreement”.

The decision is also useful for its analysis of what has to be in issue for there to be “determination of a matter that…is capable of settlement by arbitration”. Her Honour declined to construe this section narrowly and, following the decision of the High Court in Tanning Research and several Federal Court decisions, found that it was sufficient for MAS to have clearly outlined a dispute in relation to ground handling agreement. It was not necessary to delinate issues in a manner equivalent to the court process by reference to the close of pleadings. Her Honour relied upon the words of Allsop J in Comandate Marine where he concluded, in relation to a similar issue, that the word “matter” was to be understood “at a level of generality by reference to the arbitration agreement”. It is respectfully submitted that her Honour’s approach was entirely correct.

However, what is of most interest in this case is the analysis her Honour undertook, and the conclusions she reached, in respect of the conditions on the stay.

The discretion to impose conditions under section 7(2) is an unusual feature of the IAA. Such a power is not available under Article 11(3) of the New York Convention 1958 and is not available in many foreign arbitration statutes (for example, under section 9 of the English Arbitration Act 1996). The theoretical support for such discretion lies primarily in the flexibility it gives to the court imposing the stay to calibrate the stay with any specific or peculiar features of the dispute. Nevertheless, such a discretion is, on one view, contrary to principle - at least insofar as it departs from the framework of the New York Convention - and leaves open the potential for undermining the effectiveness of what would otherwise be a mandatory stay by imposing conditions that affect the course of the arbitration or the powers of the arbitrator (depending on the nature of what is imposed).

Her Honour clearly took the view that her discretion was very wide. Perhaps more interesting is whether, bearing in mind the reasons for a stay and the nature of the arbitration agreement in question, such discretion should ever be applied in other than in a very narrow fashion. That issue of principle was left for another day but her Honour’s decision suggests a reasonably narrow approach to the exercise of the discretion. She rejected arguments that she should impose conditions making Victoria the place of arbitration or preventing MAS from raising arguments in relation to set-off. She concluded, rightly it is submitted, that these were matters which should be left for the arbitrator to determine.

Her Honour did impose conditions requiring MAS to proceed expeditiously and also preventing MAS from relying on certain limitation arguments. It is arguable whether such conditions were properly imposed. The correct approach ought to be that the court will not impose conditions that cut across or impinge upon what is properly a matter for the arbitrator. A party’s dilatory conduct or its ability to rely upon a particular defence would normally be issues that, in the first instance at least, should be determined by the arbitrator. A court, particularly in an international arbitration, should not seek to pre-empt that unless it is clear that an arbitrator would not have the power to deal with the issue in dispute.

In this regard, it is a rather strange result that a party’s dilatory conduct in an arbitration should be penalised by the other party being able to lift an otherwise mandatory stay and commence (or, in this case, re-commence) litigation in a court. The issue of the limitation period is slightly more complex as the facts of the case suggest that MAS was seeking to gain an advantage from the fact that the relevant limitation period did not apply to the proceedings but would, by virtue of the later commencement date, apply to the arbitration. But, again, it is not clear why an arbitrator would not have been in a position to reject such an argument if MAS had sought to rely upon it in the arbitration.