Sino Dragon Trading Ltd v Noble Resources International Pte Ltd (No 2) [2016] FCA 1169 (29 September 2016)

FEDERAL COURT OF AUSTRALIA

SINO DRAGON TRADING LTD
(Applicant)

V

NOBLE RESOURCES INTERNATIONAL PTE LTD
(Respondent)

FILE NO: NSD 1333 of 2016
BEFORE: Beach J
DATE OF JUDGMENT: 29 September 2016
CATCHWORDS: ARBITRATION – international commercial arbitration – indemnity costs – whether there is or should be a rule requiring costs to be assessed on an indemnity basis other than in special circumstances, where a party unsuccessfully challenges an arbitral award under article 34 of the UNCITRAL Model Law on International Commercial Arbitration – considerations of public policy – whether indemnity costs should be awarded – indemnity costs ordered as to part

THE COURT ORDERS THAT:

  1. In relation to paragraph 3 of the orders made on 13 September 2016, the applicant pay two-thirds of the costs ordered to be paid on an indemnity basis and the remaining one-third on a party/party basis.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

BEACH J:

  1. On 13 September 2016, I dismissed the originating application of Sino Dragon seeking to set aside the Final Award of the arbitral tribunal pursuant to article 34(2) of the UNCITRAL Model Law. On 16 September 2016, I published my reasons for that dismissal (Sino Dragon Trading Ltd v Noble Resources International Pte Ltd [2016] FCA 1131). The present reasons should be read with my earlier reasons using the same defined terms.
  2. I also ordered that Sino Dragon pay Noble Resources’ costs on a party/party basis, but gave liberty to Noble Resources to seek indemnity costs, with a timetable for written submissions. Noble Resources has so applied, and the parties have filed written submissions.
  3. In my view, Sino Dragon should pay a substantial part of the costs of the proceedings on an indemnity basis. In order to explain my reasoning, it is necessary to address the following questions:

(a) First, is there a special rule in terms of indemnity costs that ought to be applied to proceedings which have unsuccessfully sought to set aside an arbitral award under article 34(2) of the UNCITRAL Model Law? If so, what is it?
(b) Second, if there is no such special rule, how are the principles discussed in Colgate-Palmolive Company v Cussons Pty Ltd [1993] FCA 536; (1993) 46 FCR 225 and s 43 of the Federal Court of Australia Act 1976 (Cth) to be applied to a failed article 34(2) challenge and specifically to the case before me?

IS THERE A SPECIAL RULE?

  1. Noble Resources contends for a special rule in the following terms: absent special circumstances, indemnity costs should be ordered where a party unsuccessfully challenges an arbitral award under article 34 of the UNCITRAL Model Law. Now this is a reversal of the usual position and effectively provides for a rebuttable presumption in favour of indemnity costs, rather than the usual converse where party/party costs are ordered absent special circumstances to justify an order on an indemnity basis (see Colgate-Palmolive Company at 232 to 234 per Sheppard J). I am using the phrase “special circumstances” in terms of the usual position not as a prescriptive proviso, but rather as a convenient label to describe any and all relevant circumstances that might justify an indemnity costs order, recognising that the Court’s discretion is at large. Now it will be appreciated that Noble Resources’ formulation effectively shifts the onus. Under its formulation the unsuccessful party must establish special circumstances as to why an indemnity costs order ought not be made. Under the usual position, it is for the successful party to establish special circumstances as to why an indemnity costs order ought be made.
  2. What is the justification for Noble Resources’ formulation and its reverse onus? Noble Resources says that it is justified by the character and context of international commercial arbitration, the “exceptional nature” of an article 34 challenge, public policy and international precedent. Although Noble Resources’ contentions have force, I do not accept them.
  3. First, the UNCITRAL Model Law and the International Commercial Arbitration Act 1974 (Cth), which gives it domestic force, are silent on how costs are to be dealt with in an article 34 challenge. So, one is not in the territory of the desirability of a uniform or universal interpretation or application of an international instrument. The present question is a matter both in form and in substance exogenous to such an instrument.
  4. Second and relatedly, what can be gleaned from this silence is that it was intended that it would be the law of the forum where the article 34 challenge was being pursued that would determine the principles to be applied to any indemnity costs question.
  5. Third and relatedly, if it be accepted as it must be that underlying indemnity costs questions are questions of public policy, it is the public policy of the forum, not something nebulous and internationalised. Indeed, in a related but different context, both the Act (s 8(7)(b)) and the UNCITRAL Model Law (article 34(2)(b)(ii)) recognise the significance of the public policy of the forum, albeit for assessing other questions. Accordingly, as the law of the forum dictates the principles to be applied in assessing the indemnity costs question, with public policy underpinning such principles, it is not inconsistent with any international instrument or precedent that the public policy of the forum, ie Australia, be considered and applied. I will put to one side for the moment what that public policy is in the light of the Act and the UNCITRAL Model Law.
  6. Fourth, what I have said is consistent with international precedent. For example, Colman J in A v B (No 2) [2007] 1 Lloyd’s Rep 358 and Reyes J in A v R [2009] HKCFI 342; [2009] 3 HKLRD 389 were applying their respective laws of the forum, supported by the public policy of each such forum. Accordingly, any rule that they were propounding was justified in that setting. Indeed Colman J was not applying the UNCITRAL Model Law or even s 9 of the Arbitration Act 1996 (UK). So, the question in the present case is not whether there should be some uniform international approach, but rather whether the law of the forum that I am applying in relation to indemnity costs, with reference to the public policy of this forum, justifies modification taking into account considerations of the type discussed by Colman J and Reyes J or more generally such public policy considerations as can be gleaned from ss 2D and 39 of the Act and the UNCITRAL Model Law.
  7. There is one other matter that fortifies this conclusion. 72 States with a total of 102 jurisdictions have incorporated the UNCITRAL Model Law into their domestic law but it can hardly be said that there is a uniform public policy underpinning costs or even a “costs follow the event” approach. For example, some jurisdictions in the United States of America (California, Connecticut, Florida etc) that have adopted the UNCITRAL Model Law have quite different public policy considerations underlying costs questions. I am only aware of the position in Hong Kong and Singapore (in addition to A v R, see also Gao Haiyan v Keeneye Holdings Ltd (No 2) [2012] HKCA 43; [2012] 1 HKC 491 at [11] to [14] per Tang VP, Pacific China Holdings Ltd (in liquidation) v Grand Pacific Holdings Ltd (No 2) [2012] HKCA 332; [2012] 6 HKC 40 at [4], [5], [15] to [22] per Tang VP and Tjong Very Sumito v Antig Investments Pte Ltd [2009] SGCA 41; [2009] 4 SLR 732 at [19] and [71] per V K Rajah JA).
  8. Generally, I do not consider that any modification is justified or necessary to the extent of expounding a new rule which carries a reverse onus. There are a number of reasons for this, some of which are elucidated by Hammerschlag J in John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd (No 2) [2015] NSWSC 564 at [31] to [40] and Colin Joss & Co Pty Ltd v Cube Furniture Pty Ltd [2015] NSWSC 829 at [4] to [6], with further elaboration by Edelman J in the setting of article 13(3) in Sino Dragon Trading Ltd v Noble Resources International Pte Ltd (No 2) [2015] FCA 1046 at [15] to [24]. It is convenient to set out my own discussion of these and other themes.
  9. First, there is no legislative intent manifested on the face of the Act to recognise any special category for an award of indemnity costs; and it is not as if the legislature chose not to speak on any costs question at all relating to arbitration (cf s 27). Moreover, the legislature can be taken to have adopted the UNCITRAL Model Law (s 16) with knowledge that it was a matter to be dealt with by legislative or common law principles exogenous to the Act and the UNCITRAL Model Law.
  10. Second, there is no special reason why failed article 34 challenges should have any favoured rule on costs for the successful party with a reverse onus operating against the unsuccessful party, as compared with any other non-arbitration context where there are limited rights of review or appeal in challenging the primary decision and where such a challenge has failed. I will put to one side for the moment the different question as to whether the different context may justify a different application of current principles.
  11. Third, and relatedly, much has been made of the argument that arbitration takes place under contractual arrangements and that collateral challenges are inconsistent with, if not in breach of, such arrangements. Such an argument breaks down at various levels:

(a) If one has a case where it is not reasonably in doubt that there is an arbitration agreement between party A and party B, and party B in breach of the agreement has pursued or seeks to pursue court proceedings, then on a stay application at the suit of party A or an anti-suit injunction one can perhaps appreciate an arguable foundation for a special costs rule. But that is not the present context. One is here dealing with an article 34 challenge to set aside an arbitral award. That involves no inconsistency with the arbitration agreement let alone any breach thereof. The parties to the arbitration agreement can be taken (applying objective contractual theory) to have contracted in the knowledge of and with an awareness that either party was entitled to pursue an article 34 challenge that had reasonable prospects of success. After all, the arbitration agreement would have been entered into within the setting of the UNCITRAL Model Law, including the non-derogable rights contained therein. An analogous point may be made in relation to the mirror image provisions of s 8 of the Act dealing with any opposition to the enforcement of a foreign arbitral award. Another way to describe the same point is to say that the parties can be taken to have contracted on the assumption that any arbitral award made in accordance with the contractual arrangements would not suffer from the vices or deficiencies described in article 34(2) but that if it did, either party was entitled to reasonably exercise its rights under article 34(2).
(b) Further, in the context of a stay application or anti-suit injunction, I agree with both Hammerschlag J and Edelman J that such a scenario still does not justify a special rule. There is no compelling reason to create a special rule for costs flowing from a breach of an arbitration agreement as compared with, say, a breach of a contractual release or a covenant not to sue, as Hammerschlag J explained in John Holland at [33]. Further, an award of costs should not be a proxy for damages, as Edelman J explained in Sino Dragon at [18] to [20]. Further, if damages are in substance what is sought to be recovered, then this should be pursued in a separate action rather than positing and promulgating a special costs rule.

  1. Fourth, sections 2D (a), (b), (c) and (e) of the Act are not inconsistent with present cost principles and do not justify any special rule with a reverse onus. But they may justify a different application of existing principles in the present context. A similar point may be made concerning s 39(2).
  2. Fifth, if there is to be such a special rule, when is it to be applied? The stay context (s 7) is quite different to proceedings resisting enforcement (s 8) or the mirror image article 34 challenge. Different again is the article 13(3) challenge discussed by Edelman J. Is it suggested that the special rule is to apply to all such diverse contexts? And how is this justified? But if it is not justified so that any special rule only applies to some of these contexts, that makes any such rule even less attractive. To posit a special rule for only some of these contexts lacks conceptual coherence or harmony. It is better to use the present principles with no reverse onus, and to deal with the different contexts through different applications of those same principles.
  3. Sixth and relatedly, it has been suggested that a special rule should apply because of the “heavy burden” on a party seeking to establish that enforcement of an arbitral award would be “contrary to public policy” (s 8(7)(b)) or seeking to set aside an award on the analogous ground under article 34(2)(b)(ii) including endeavouring to establish real unfairness or real practical injustice. But assuming that there is such a heavy burden, that does not justify a special rule, but it would be a matter to take into account in the application of existing costs principles. The successful party to a failed challenge on such a ground may more readily contend that the challenge had no reasonable prospects of success, given that the bar was so high (see Hammerschlag J’s analysis in Colin Joss at [7] to [12]). If such a contention was accepted, that may be relevant to an indemnity costs order applying current principles as modulated by my observations in the next section. In any event, there is something even more conceptually unattractive about suggesting a special rule for only some grounds of challenge but not others (cf article 34(2)(a)). Adopting such a suggestion leads to fragmentation and conceptual incoherence. It is preferable not to formulate a different rule, but rather to deal with these matters as different applications of existing principles.
  4. Seventh, it has not been demonstrated that the existing principles cannot accommodate the above considerations as matters relevant to the application thereof as is discussed in the next section.
  5. Eighth, the Victorian Court of Appeal in IMC Aviation Solutions Pty Ltd v Altain Khuder LLC [2011] VSCA 248; (2011) 38 VR 303 at [55] to [58] and [335] to [337] has also eschewed any special rule with a reverse onus. But as to their application of existing principles to the case before them as discussed in [336], I would not express the matter in the same terms as will become apparent from the next section of my reasons, save for the first sentence. It is convenient to set out [336] so that it can be contrasted with what I have said below:

In proceedings under the Act, as in other civil proceedings, costs will ordinarily be awarded against the unsuccessful party on a party and party basis unless the successful party can establish special circumstances. The principles for determining the existence of special circumstances are well established. Special circumstances, if they exist, are found in the facts of the case at hand, and the exercise of the judicial discretion is not otherwise conditioned on whether those facts are comprehended by a category of case or cases in which a special order has been made. The fact that an award debtor fails to establish a ground for resisting enforcement of a foreign arbitral award cannot, of itself, constitute special circumstances. Nor can a finding that the award debtor’s case was “unmeritorious” if all that is meant by that expression is that the award debtor failed to persuade the court to accept his or her evidence and submissions.

  1. For the above reasons, I do not accept Noble Resources’ contention as to the existence of a special rule, which in effect reverses the onus by requiring the unsuccessful party to establish special circumstances as to why an indemnity costs order ought not to be made.

APPLICATION OF CURRENT PRINCIPLES

  1. It is convenient to begin with the following general observations.
  2. First, the Court has a broad discretion on costs under s 43 of the Federal Court of Australia Act 1976 (Cth). The general position, as Edelman J explained in Sino Dragon at [25], is that party/party costs are usually ordered except where circumstances otherwise warrant. The justice of the case might require departure from the usual position, or some special or unusual feature may be present that justifies such a departure.
  3. Second, the types of categories which usually justify a favourable exercise of discretion to order indemnity costs are not closed. It may be accepted that there are well-established categories, but such categories do not constitute the complete set.
  4. Third, it is not attractive to suggest that the exercise of discretion has boundary constraints and content that may only be found in the facts of the case at hand, and that the exercise of discretion cannot be informed by the category of case in question. There are a number of reasons for this. Indemnity costs orders are often based upon the category of case, for example, where payment of the costs of litigation may come out of a fund or assets controlled by a trustee, liquidator or receiver. Contempt proceedings are another example of such a category of case where indemnity cost orders are usually made. These examples are sufficient to negate the unqualified suggestion that the category of the case cannot be looked at or that it only has secondary significance at most. Further, to separate the facts of the case at hand from its category gives rise to unreal distinctions. The facts of any case can only be assessed in the light of its relevant category. Further, and more generally, given that the justice of the case can be looked at with the relevant discretionary universe not closed, the fact that well-established categories may have only focused on the facts of the individual case including egregious conduct of the unsuccessful party, rather than the category, does not foreclose looking at the category and elevating its significance for some types of cases such as an article 34 challenge.
  5. Fourth, and relatedly, it is deficient not to look at article 34 proceedings (and the costs consequences that should attend them) by reference to public policy considerations. After all, public policy considerations underlie costs principles including indemnity costs; see Allsop CJ, “Public Policy in the New York Convention and the Model Law”, paper presented to an Australian Maritime and Transport Arbitration Commission seminar on 10 November 2014 at [56] to [74]. There is no good reason why indemnity costs questions in the context of article 34 proceedings and what the justice of the case requires in litigation of this type should not be informed by:

(a) the objects set out in s 2D and the considerations set out in s 39(2) of the Act;
(b) the limited grounds for challenge under article 34;
(c) the fact that the parties’ dispute has been resolved under contract with the arbitral award being the contractually provided for outcome (Ye v Zeng (No 5) [2016] FCA 850 at [23] per Allsop CJ); and
(d) in the context of (a) to (c), the public policy of discouraging article 34 challenges (and the mirror s 8 proceedings opposing enforcement) that have no reasonable prospects of success, particularly where it may be said that such challenges that do not have such prospects are discordant with the agreed contractual setting for the relevant dispute resolution mechanism.

  1. In my view, a category of circumstances justifying an order for indemnity costs is where an unsuccessful article 34 challenge is made which has been found not to have reasonable prospects of success, whether or not the unsuccessful party knew or ought to have known this at the inception of the challenge; what I mean by “reasonable prospects” is more than “real prospects” and resonates with the analogous concept in s 31A of the Federal Court of Australia Act 1976 (Cth). Of course, if the unsuccessful party knew at inception that it had no reasonable prospects of success, then an indemnity costs order may be justified as falling within a pre-existing category in any event. As to whether the unsuccessful party “ought to have known” at inception, I do not consider that this needs to be shown to justify an indemnity costs order. A party launching an article 34 challenge should take positive steps to ensure that at inception it does have reasonable prospects of success taking into account both the law and the evidentiary foundation available to it. It should bear the risk accordingly, whatever actual or constructive knowledge it has at inception.
  2. Let me make a related point that I have touched on earlier. The narrower the particular ground of challenge under article 34 and the higher the bar set to succeed on such a challenge, the higher the probability of failure and accordingly the higher the likelihood of establishing that the particular ground had no reasonable prospects of success (cf Hammerschlag J in Colin Joss at [7] and [11]). Another way to express the point is to take the protean concept of “reasonable” in the phrase “reasonable prospects of success” and to say that the narrower the ground and the higher the bar, the greater the strength of the argument needed to support the particular ground of challenge to be then characterised as having “reasonable prospects of success”.
  3. There are some other observations that should be made:

(a) First, the successful party would still bear the onus of establishing no reasonable prospects of success.
(b) Second, what I have posited would discourage the bringing of unmeritorious article 34 challenges.
(c) Third, it may be accepted that in ordinary litigation an unsuccessful party’s failure to surmount the summary disposition threshold is not of itself a basis for an indemnity costs order. But article 34 challenges are not ordinary litigation. And by reason of the public policy considerations that I have referred to earlier and as analysed by Allsop CJ extra-judicially in the paper cited informing what the justice of the case requires, what I have posited in [26] is apposite.

  1. There is one further observation that should be made before applying what I have said in [26] to the case before me. Reyes J in A v R at [70] was influenced by the consideration that “(i)f the losing party is only made to pay costs on a conventional party-and-party basis, the winning party would in effect be subsidising the losing party’s abortive attempt to frustrate enforcement of a valid award”. But the phrase, “frustrate enforcement of a valid award” is contestable in an article 34 challenge. After all, its purpose is to show that there is no valid award and that, accordingly, nothing is being frustrated. Moreover, given that the arbitration agreement was by definition entered into within the contextual setting of the UNCITRAL Model Law, including the parties’ rights under article 34, the objectively ascertained intention of the parties can be taken to have contemplated and condoned an article 34 challenge by one party, providing that it had at least reasonable prospects of success. Further and in any event, the subsidisation point has less force once it is appreciated (as I have said earlier) that the successful party can separately pursue a damages claim for breach of contract if it chooses. Finally, it is not appropriate to subject a party to the potential for an indemnity costs order so as to create a disincentive to pursue an article 34 challenge where the challenge has reasonable prospects of success. Public policy may require creating a disincentive, but the proportionate disincentive is to discourage challenges that have no reasonable prospects of success.
  2. In accordance with what I have said, the question is whether any, and if so which, of Sino Dragon’s grounds of challenge lacked reasonable prospects of success.
  3. In my view, the first ground of challenge dealing with the Pang email did not have reasonable prospects of success. It seemed to me to be a confected jurisdictional issue when in reality it was a contractual merits question. Moreover, Sino Dragon’s contractual arguments were wrong. But in any event, there was no free-standing ground of challenge to the Final Award based on legal error available to Sino Dragon. Finally, the arguments raised on the Pang email before the arbitral tribunal were not ultimately pressed as a jurisdiction question before that tribunal.
  4. As to the third ground of challenge concerning the impartiality of the arbitrators, this also lacked reasonable prospects of success. There were numerous failed earlier challenges. Further, Sino Dragon confused the legal tests. But in any event, whatever legal test was applied, Sino Dragon still failed.
  5. As to the second ground of challenge dealing with the technical issues in respect of the video conference facilities, I am not prepared to say that it had no reasonable prospects of success.
  6. In all the circumstances, I consider that the justice of the case requires that Sino Dragon should pay two-thirds of Noble Resources’ costs on an indemnity basis. Although much of the time at the hearing was taken up with the second ground of challenge, Noble Resources had to prepare written submissions and an affidavit addressing all issues and to appear at trial to deal, if necessary, with all of these issues. As it transpired, at trial I did not require counsel for Noble Resources to address me on the first and third grounds of challenge.
  7. I will make an appropriate order to reflect these reasons.

Jemena Gas Networks (NSW) Ltd v AGL Energy Limited [2017] NSWCA 266 (18 October 2017)

COURT OF APPEAL
SUPREME COURT
NEW SOUTH WALES

JEMENA GAS NETWORKS (NSW) LTD
(Applicant)

V

AGL ENERGY LIMITED
(Respondent)

 

BEFORE: Basten JA, Payne JA
FILE NO: 2017/212192
HEARING DATE: 18 October 2017
DATE OF DECISION: 18 October 2017
DECISION: (1) Refuse leave to appeal.
(2) Order that the applicant pay the respondent’s costs.
CATCHWORDS: APPEAL – application for leave to appeal – construction of commercial contract – whether agreement is an arbitration agreement – whether judgment below attended by sufficient doubt to warrant leave to appeal
ARBITRATION – “arbitration agreement” – Commercial Arbitration Act 2010 (NSW), s7

 

JUDGMENT

  1. THE COURT: This is an application for leave to appeal from a judgment of Hammerschlag J delivered on 14 June 2017. The primary judge refused to stay proceedings for a breach of contract brought by the respondent, AGL Energy Ltd, against the applicant, Jemena Gas Networks (NSW) Ltd. The stay had been sought to allow an arbitration commenced by the applicant to proceed.
  2. The applicant is the principal gas distributor in New South Wales and is responsible for reading and maintaining natural gas meters. The respondent is a gas retailer. Together they are the parties to two “Reference Services” agreements which set out the terms and conditions on which the applicant agreed to provide services to the respondent. Both agreements are relevantly in the same terms, although one applies for the period from 1 July 2010 to 30 June 2015 and the other for the period from 1 July 2015 to 30 June 2020. (The agreements will be referred to as “the Agreement.”)
  3. The respondent contends that since January 2015 the applicant has failed to provide the respondent with details of meter readings within the prescribed timeframes of the Agreement. It claims total damages of approximately $3.5 million from the applicant. The applicant claims that the Agreement contains an “arbitration agreement” within the meaning of s 7 of the Commercial Arbitration Act 2010  (NSW). The applicant seeks to enforce that arbitration agreement pursuant to s 8 by an order staying the court proceedings pending arbitration.
  4. The applicant’s claim depends on the effect of cl 30 of the Agreement and in particular the language of subcl 30.5(a). Clause 30 is entitled Dispute Resolution and, so far as relevant, reads (with the key words italicised):

30.1 Application
(a) The Parties acknowledge and agree that this clause 30 does not, and is not intended to, limit or exclude in any way the provisions in the National Gas Law in relation to dispute resolution.
(b) The Parties agree that where a Party refers any matter in connection with this Agreement or its performance to be dealt with in accordance with the dispute resolution provisions set out in the National Gas Law:
(i) if an access determination is made by the dispute resolution body in respect of the access dispute, the Parties must comply with that access determination;
(ii) neither Party can subsequently utilise this clause 30 in respect of the same dispute.
30.2 Notification of Dispute
If a Party claims that there exists:
(a) any dispute or difference of opinion between the Parties; or
(b) the absence of agreement by the Parties,
about a matter which arises out of or relates to this Agreement, or the breach, termination, validity or subject matter thereof, or as to any related claim in restitution or at law, in equity or pursuant to any statute (Dispute), then that Party must notify the other Party of the Dispute.
30.3 Nomination of Representative
As soon as practicable after a notice is given under clause 30.2, each Party must nominate in writing a representative authorised to settle the Dispute on its behalf.
30.4 Good Faith Discussions 
Each Party must enter into discussions in good faith, to resolve the Dispute or to agree on a process to resolve all or part of the Dispute. Unless the parties otherwise agree, discussions between the Parties’ representatives under this clause 30.4 must continue for 7 Business Days after notice of the Dispute was given under clause 30.2.
30.5 Mediation
(a) In the event that discussions under clause 30.4 fail to resolve the Dispute, each Party expressly agrees to endeavour to settle the Dispute by mediation administered by the Australian Commercial Disputes Centre (ACDC) before having recourse to arbitration or litigation.
(b) The mediation shall be conducted in accordance with the ACDC Guidelines for Commercial Mediation (Guidelines) which are operating at the time the matter is referred to ACDC.
(c) The Guidelines set out the procedures to be adopted, the process of selection of the mediator and the costs involved.
(d) The terms of the Guidelines are hereby deemed incorporated into this Agreement.
(e) Clause 30 shall survive termination of this Agreement.
30.6 Urgent relief
Nothing in this clause 30 will prevent a Party from seeking urgent declaratory or injunctive relief.

  1. On 29 July 2016, the respondent gave the applicant written notification of a “dispute” within the meaning of cl 30.2 by reason of alleged breaches of the Agreement. The parties underwent mediation. The dispute remained unresolved.
  2. On 28 March 2017, the applicant wrote to the respondent stating, inter alia, that it had referred the dispute to arbitration, and that a notice had been served on the respondent under the Commercial Arbitration Act 2010 (NSW).
  3. On 12 May 2017, the respondent commenced proceedings in the Supreme Court seeking damages. The applicant filed a motion in those proceedings seeking a stay and a referral of the dispute to arbitration.
  4. On 14 June 2017, the primary judge dismissed the applicant’s motion for a stay and referral to arbitration: AGL Energy Limited v Jemena Gas Networks (NSW) Ltd [2017] NSWSC 765.

Relevant legal principles

  1. The applicant submitted that cl 30.5(a) of the Agreement constitutes an arbitration agreement within s 7 of the Commercial Arbitration Act. That section relevantly provides:

7 Definition and form of arbitration agreement 
(1) An arbitration agreement is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
(3) The arbitration agreement must be in writing.

  1. The applicant further submitted that s 8 of the Commercial Arbitration Act affords primacy to arbitration whether arbitration is commenced before or after litigation, so long as the request for arbitration is made by the defendant to the Court proceedings prior to their first substantive statement in the dispute. Section 8 provides:

8 Arbitration agreement and substantive claim before court 
(1) 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.
(2) Where an action referred to in subsection (1) has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.

  1. In PMT Partners Pty Ltd (In Liquidation) v Australian National Parks and Wildlife Service the High Court noted that an arbitration agreement under s 7(1) must make binding provision for compulsory arbitration whether as a consequence of an election by a party or otherwise.
  2. The primary judge considered two cases where it was held that the agreements were “arbitration agreements” and an election for arbitration by one party would prevail over an election for litigation by the other, namely Manningham City Council v Dura (Australia) Constructions Pty Ltd and Mulgrave Central Mill Co Ltd v Hagglunds Drives Pty Ltd.
  3. In Manningham the Victorian Court of Appeal found that there was an arbitration agreement within the meaning of s 4(1) of the Commercial Arbitration Act 1984 (Vic) in a building contract which the parties intended would be adopted if either party elected to do so. The primary judge noted that this section was “materially indistinguishable” from s 7(1) of the New South Wales Act: [33]. In that case cl 13 stipulated that if a dispute arose, the parties were to give written notice identifying the dispute and that the provision of such notice was a condition precedent to commencement of proceedings (by way of litigation or arbitration).
  4. In Mulgrave the Queensland Court of Appeal considered a contract with terms which were “almost identical” to two of the three terms relied on in Manningham. The Court followed Manningham. Summarising the analysis of McPherson JA in Mulgrave, the primary judge said at [38]:

“His Honour considered that when compared with each other, the effect of the two provisions was the same in that both provided for the giving of an initial notice of dispute, followed by a negotiation phase, and then by a second notice by either party referring the dispute to arbitration or to litigation. He observed that in both cases it is a function of that second notice to signify to the other party that the negotiation phase is at an end and in both the consequence of including in it a notice of election to arbitrate is to refer the dispute to arbitration.”

  1. The primary judge concluded that unlike the contracts under consideration in Manningham and Mulgrave, the agreement does not contain any provision outlining how either party is to refer to the dispute to arbitration or litigation, “let alone any indication that arbitration has primacy”: [40]. Contrary to the applicant’s submissions, this conclusion did not rely on the reasoning in either case. As neither party sought to rely on either decision on this application, it is unnecessary to set out the terms of the agreements or the relevant statutory provisions. The application of the reasoning in those cases would not arise on any appeal.
  2. The primary judge held that the words in cl 30.5(a) are words of “limitation, not of expansion” and create the precondition that mediation occur before any arbitration or litigation but do not disclose any agreement for compulsory arbitration. There is “no justification in language or logic” to read them as creating a contractual right: [29] His Honour held that cl 30.5(a) finds content and utility in this construction as, following a contractually mandated mediation, an arbitration agreement may result. However, that does not transform this clause into an arbitration agreement: [30].
  3. The primary judge concluded at [45]:

“It would be surprising if a reasonable person in the position of the parties, who had in cl 30 agreed to a Dispute Resolution process, including mediation, for which they comprehensively legislated, would have understood from the bare language of limitation in cl 30.5(a) that it was committing itself to compulsory arbitration at the instance of its counterparty.

The application for leave to appeal

    1. In its draft notice of appeal, the applicant submitted that the primary judge erroneously:
    1. found that cl 30.5(a) did not constitute an arbitration agreement under s 7 of the Commercial Arbitration Act in circumstances where s 7 does not impose those requirements;
    2. failed to consider the surrounding circumstances that s 8 of the Commercial Arbitration Act gave primacy to arbitration. The National Gas (NSW) Law provided for arbitration in rules disputes under Chapter 8, Part 5A of the Law and arbitration‑like procedures and access disputes under Chapter 6 of the Law, and the Act provides the jurisdiction and procedural requirements for the conduct of an arbitration;
    3. found that there was no critical provision for either party to refer the dispute to arbitration or litigation when each party had a right to have recourse to arbitration by cl 30.5(a);
    4. found the reference to “arbitration or litigation” in cl 30.5(a) was given content and utility by reason of the possibility that the parties may agree to arbitration pursuant to cl 30.4 where there was no evidence for that finding and it was speculative and not more likely than not when considered in light of the text of the clause;
    5. failed to consider the following in construing cl 30:
    1. use of the word “recourse” when prefaced with “each party agrees” indicates a right to turn or resort or refer to arbitration vesting in each party; and
    2. it provides procedural requirements for a mediation recognising that no law mandates such requirements.
  1. Proposed grounds 3, 4 and 5 address the language of cl 30.5(a); ground 2 identifies a contextual element, and ground 1 is generic.
  2. Ordinarily, leave to appeal is granted only in matters which involve issues of principle, questions of general public importance or an injustice which is reasonably clear: see Carolan v AMF Bowling Pty Ltd. Where legal error is alleged, it is necessary to demonstrate more than arguable error.
  3. It is by no means clear that any issue of principle or matter of general public importance is involved. The key issue in the proposed appeal is whether cl 30.5(a) constitutes an “arbitration agreement” within s 7 of the Act. There is no suggestion that the Agreement is in the standard form or that the terms of s 7 require explication.
  4. The principles of contractual construction relevant to the present case are not controversial. The legal meaning of the critical clause is discovered by reference to the contractual text construed in the light of its context and purpose: see Electricity Generation Corporation v Woodside Energy LtdMount Bruce Mining Pty Ltd v Wright Prospecting Pty LtdVictoria v Tatts Group Ltd.
  5. The applicant’s argument in this Court is basically that arbitration being consensual, any reference to arbitration in an agreement will result in an “arbitration agreement” and thus satisfy the definition in s 7(1). However, that is not so unless the reference constitutes a written agreement to arbitrate pursuant to s 7(3). The applicant said that the absence of machinery provisions is understandable given the provision in s 21 of the Act as to the effect of a reference to arbitration being received by the respondent. However, s 21 provides for no more than the effect of a request. The absence of a provision of referral in the agreement is relevant to construing a contract which contains no express agreement to arbitrate. Further, the reference to arbitration in cl 30.5(a) may, as the trial judge said, be read as an acknowledgement of the possible result of a mediation, or one might add, of good faith discussions referred to in cl 30.4 which might create an agreement to arbitrate. The reference to arbitration has work to do if the applicant’s argument is not accepted. Thus the clause may assume a right but not create one.
  6. The applicant submitted that a construction that the parties might agree to engage in arbitration after the mandatory mediation is incongruous with the wording of the clause which refers to “each Party”, not the parties jointly. The applicant also submitted that the word “recourse” in that clause is the “embodiment of a right”. The applicant submitted that Manningham and Mulgrave involved different statutory contexts and should not have been applied by the primary judge. As the respondent submitted, it was the applicant which brought Manningham and Mulgrave to the attention of the primary judge, so nothing turns on the last point raised by the applicant. In any event, Manningham and Mulgrave do not assist the applicant here for reasons already noted. In those cases it was tolerably clear that the parties had agreed upon arbitration in the event of a dispute; here, there is no such clear agreement.
  7. The effect of cl 30.5(a) is merely to recognise that arbitration and litigation are options available once mediation has failed. The provision for arbitration under the National Gas (NSW) Law (in relation to disputes which do not include the present dispute) takes the matter no further, although it may possibly provide a reason why there was a reference to arbitration in cl 30.5(a). Those provisions do not pick up and apply to the Agreement principles relating to arbitration of “access disputes” under that law so as to incorporate it into the dispute resolution scheme provided by cl 30 generally, as argued by the applicant below. Nor does the provision under the National Gas (NSW) Law for arbitration of access disputes (which does not include the present dispute) provide assistance in construing cl 30, except to the limited extent just noted.
  8. The use of the term “recourse” in cl 30.5(a) does not lead to any different conclusion. In context that term refers to the availability of arbitration or litigation once mediation has failed; it does not create an obligation to arbitrate, nor a right to require arbitration.
  9. While there may be some doubt as to what is meant by the reference in s 7(1) of the Commercial Arbitration Act to an agreement to submit “certain disputes” to arbitration, that phrase should not be read to refer to an agreement which merely identifies the possibility of arbitration without any express or implicit agreement to submit all disputes or any class of disputes to arbitration, as opposed to litigating. The purpose of s 8 of the Act is to provide a mechanism to ensure that an agreement to arbitrate is enforceable and excludes the power of the court to permit litigation to proceed in the face of such an agreement. It would not assist that purpose to accept that any contractual arrangement which contemplated the possibility of arbitration, without any express agreement in writing to submit a particular category of disputes to arbitration, should result in the unilateral power to enforce arbitration in relation to all disputes.

Conclusion and orders

  1. There is insufficient doubt attending the decision of the primary judge to warrant a grant of leave to appeal.
  2. The Court orders:
    (1) Refuse leave to appeal.
  3. (2) Order that the applicant pay the respondent’s costs of the application.

 

Z v A and Others [2015] HKCFI 228; [2015] 2 HKC 272; HCCT 8/2013 (30 January 2015)

IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO 8 OF 2013

Z
(Applicant)

V

A & 3 Others
(1st, 2nd, 3rd, 4th Respondents)

 

BEFORE: Hon Mimmie Chan J in Chambers
DATE OF HEARING: 6 January 2015
DATE OF DECISION: 30 January 2015

 

Background

1. This is an application made by Z (“Applicant”) to this Court under s 34 of the Arbitration Ordinance (“Ordinance”) and Article 16 of the Model Law, for a declaration that Mr Gavin Denton (“Arbitrator”) has no jurisdiction to hear and deal with the issues in dispute in ICC Arbitration Case No 18228/C YK (“Arbitration”), and on that basis to set aside the Arbitrator’s Partial Award dated 19 February 2013 (“Award”).

2. The history of the matter is that the Applicant entered into 2 separate contracts (“collectively “Agreements”) with A (“1st Respondent”) and AGEMA, respectively dated 20 April 2007 and 2 June 2007. The 1st contract is referred to as the CKD and Agency Agreement (“CKD Agreement”), and the parties therein are described as the Applicant on the one part, and the 1st Respondent “and/or any of its affiliated companies or subsidiaries and/or AGE (under formation)” of the other part. The 2nd contract is referred to as the Technical Cooperation Agreement (“TC Agreement”), and the parties are described as the Applicant on the one part, and “AGEMA (a company under formation) … and also with its affiliated company A” on the other part.

3. The CKD Agreement contains an arbitration clause, which provides as follows:

“In case of breach of any of the Articles of this agreement by either of the parties, both Parties agree to put best efforts to remedy by negotiations. Otherwise, those Parties agree to arbitration as per the International Chamber of Commerce and held in CHINA? ..(sic)” (emphasis added)

4. The TC Agreement also provides for arbitration, in the following terms:

“Any dispute, controversy or difference which may arise between the parties out of or in relation to this Agreement or for the breach thereof shall be settled amicably by the parties, but in case of failure, it shall be finally settled in CHINA by arbitration pursuant to the Rules of the International Chamber of Commerce whose award shall bind the parties hereto.” (Emphasis added)

5. Clause 2.3 of the CKD Agreement further provides as follows:

“Both parties reached the agreement in accordance with Chinese laws…”

6. Clause 19 of the CKD Agreement provides:

“The Agreement shall be governed and construed under and in accordance with the Laws of the People’s Republic of China.”

7. The TC Agreement is silent on the governing law of the contract, but the parties do not dispute that its governing law is the law of the People’s Republic of China (“PRC”).

8. Dispute arose between the parties under the Agreements, and on 11 October 2011, the 1st Respondent and companies associated or affiliated with the 1st Respondent (together referred to hereinafter as “Respondents”) commenced the Arbitration. A Request for Arbitration (“Request”) was filed by the Respondents with the International Court of Arbitration (“ICC Court”) of the International Chamber of Commerce (“ICC”), pursuant to the arbitration clause in the CKD Agreement, and seeking relief in respect of the Applicant’s breach of the CKD Agreement and the TC Agreement. The Applicant was named as the respondent in the Arbitration.

9. In paragraph 28 of the Request, the Respondents submitted that the place of arbitration shall be Hong Kong SAR, on the basis that Hong Kong SAR is part of and within China, an arbitration award made in Hong Kong by the ICC Court can be enforced in Mainland China, and further, that the Arbitration should be governed by the laws of the PRC.

10. In response to the Request, the Applicant stated:

“The main purpose of ‘Place of Arbitration’ is to determine the nationality of an arbitration award, and it had been determined that the arbitration shall be held in China and the nationality of this arbitration award shall also be China according to the CKD and Agency Agreement and Technical Cooperation Agreement, there is no need to fix another place of arbitration by ICC International Court of Arbitration.”

11. On 16 December 2011, the Secretariat of the ICC notified the parties that the ICC Court fixed Hong Kong SAR as the place of arbitration, pursuant to Article 14 (1) of the ICC Rules.

12. Article 14 (1) of the ICC Rules states:

“The place of arbitration shall be fixed by (the ICC Court) unless agreed upon by the parties.”

13. On 30 December 2011, the Applicant stated in its letter to the ICC Secretariat that it was the intention of the parties that the place of arbitration should be Mainland China, and not Hong Kong. The ICC Secretariat responded in its letter to the parties of 10 January 2012, as follows:

“We remind the parties that the Court’s decision to fix Hong Kong, PR China as the place of arbitration was done in accordance with Article 14 of the Rules, after the Court took into consideration of all comments received from the parties at the time. Unless otherwise advised, we understand that (the Applicant) has not provided any new information in this regard.”

14. On 12 January 2012, the ICC Court appointed the Arbitrator as the sole arbitrator, upon the recommendation of the Australia National Committee of the ICC.

15. In the Terms of Reference drawn up by the parties dated 26 June 2012, paragraph 24 states as follows:

“Both the CKD Agreement and the TC Agreement, state the place of arbitration is China…

As the parties could not agree, on 15 December 2011 (in accordance with Article 14 (1) of the ICC Rules), the ICC Court fixed the place of arbitration as Hong Kong, PR China.”

16. The issues framed for determination by the Arbitrator included the following (stated to be subject to Article 19 of the ICC Rules):

“(a) Whether the Arbitral Tribunal has jurisdiction to deal with the issues in dispute in the present arbitration?

(e) Whether the 2nd, 3rd and 4th Claimants are parties to the applicable agreements and eligible to participate in these proceedings?”

17. On 11 July 2012, the Arbitrator issued his Procedural Order No 2, that the 1st hearing was to take place on 12 September 2012, the place of any hearing held in relation to the matter was to be held in Hong Kong, and that the hearing would deal with all of the issues identified by the parties. The 1st hearing took place on 12 and 13 September 2012, and on 19 February 2013, the Arbitrator handed down the Award, in which he stated:

“In accordance with Article 14 (1) of the ICC Rules, the ICC Court fixed the place of arbitration as Hong Kong, PR China. Therefore, in accordance with the reasons set out below, the procedural laws applicable to this arbitration are the laws of Hong Kong SAR, PR China.”

18. The Arbitrator referred to the CKD Agreement and the TC Agreement which state the place of arbitration to be China. At paragraph 44 of the Award, the Arbitrator states:

“As the Parties could not agree on a city in China as the place of arbitration, on 15 December 2011 (in accordance with Article 14 (1) of the ICC Rules), the ICC Court fixed the place of arbitration as Hong Kong, PR China.”

19. The Arbitrator went on to rule on the applicable law to determine the jurisdiction of the tribunal, at paragraph 69 of the Award:

“Given that the ICC Court validly determined Hong Kong SAR, PR China as the seat of the arbitration, the applicable arbitration law to be applied in determining whether or not the tribunal has jurisdiction to hear this matter is Hong Kong law.”

20. At the hearing before this Court, the Applicant relies on s 34 of the Ordinance, in seeking the Court’s decision on the question of the Arbitrator’s jurisdiction. According to Mr Dawes, counsel for the Applicant, the merits of his application hinges upon the correctness of the decision of the ICC Court, upheld by the Arbitrator, to fix Hong Kong as the place of the Arbitration, as it goes to the crux of the matter of the Arbitrator’s jurisdiction. According to Mr Dawes, it is not open to the ICC Court to rule on Hong Kong as the place of the arbitration, when the place of arbitration had already been agreed upon by the parties as China, and “China” is a reference to Mainland China.

Applicable legal principles

21. This being a jurisdiction challenge under s 34 of the Ordinance and Article 16 of the Model Law, it has been established that the Court has to decide on the correctness of the ruling by the arbitral tribunal of its own jurisdiction (Dallah Real Estate and Tourism Holding Co v Ministry of Religious Affairs of the Government of Pakistan [2010] UKSC 46; [2011] 1 AC 763). Notwithstanding the fact that the Court decides this on a de novo basis, it is important to bear in mind that the reviewing Court recognizes its limited and narrow role, of confining the scope of the review and its intervention to true questions of pure jurisdiction only. In the case of The United Mexican States v Cargill Incorporated 2011 ONCA 622 (Court of Appeal for Ontario), the Canadian court highlighted these matters:

“44. It is important, however, to remember that the fact that the standard of review on jurisdictional questions is correctness does not give the courts a broad scope for intervention in the decisions of international arbitral tribunals. To the contrary, courts are expected to intervene only in rare circumstances where there is a true question of jurisdiction.

45. In the domestic law context, courts are warned to ensure that they take a narrow view of what constitutes a question of jurisdiction and to resist broadening the scope of the issue to effectively decide the merits of the case …

46. This latter approach is magnified in the international arbitration context. Courts are warned to limit themselves in the strictest terms to intervene only rarely in decisions made by consensual, expert, international arbitration tribunals, including on issues of jurisdiction. In my view, the principle underlying the concept of “powerful presumption” is that courts will intervene rarely because their intervention is limited to true jurisdictional areas. To the extent that the phrase “powerful presumption” may suggest that a reviewing court should presume that the tribunal was correct in determining the scope of its jurisdiction, the phrase is misleading. If courts were to defer to the decision of the tribunal on issues of true jurisdiction, that would effectively nullify the purpose and intent of the review authority of the court under art 34(2)(a) (iii).

47. Therefore, courts are to be circumspect in their approach to determining whether an error alleged under art 34(2)(a)(iii) properly falls within that provision and is a true question of jurisdiction. They are obliged to take a narrow view of the extent of any such question. And when they do identify such an issue, they are to carefully limit the issue they address to ensure that they do not, advertently or inadvertently, stray into the merits of the question that was decided by the tribunal.

48. One challenge for a reviewing court is to navigate the tension between the discouragement to courts to intervene on the one hand, and on the other, the court’s statutory mandate to review for jurisdictional excess, ensuring that the tribunal correctly identified the limits of its decision-making authorityUltimately, when deciding its own jurisdiction, the tribunal has to be correct. …

50. The second challenge for the court is to limit its review to determining whether the award ‘contains decisions on matters beyond the scope of the submission’ and not to review the merits of the decision itself. …

53. The role of the reviewing court is to identify and narrowly define any true question of jurisdiction. The onus is on the party that challenges the award. Where the court is satisfied that there is an identified true question of jurisdiction, the tribunal had to be correct in its assumption of jurisdiction to decide the particular question is accepted and it is for the court to determine whether it was. In assessing whether the tribunal exceeded the scope of the terms of jurisdiction, the court is to avoid a review of the merits.” (Emphasis added)

22. Hence, it is necessary and important that the present challenge should be confined to the sole question of whether the Arbitrator has jurisdiction to deal with the dispute and the issues submitted to him in the Arbitration, and the Court should not review the Arbitrator’s decision which goes to the merits of the dispute. As Mr Manzoni, SC for the Respondents rightly pointed out, it is only at the stage where any party seeks (under s 81 of the Ordinance and Article 34 of the Model Law) to set aside or to resist enforcement of the final award, that issues such as whether the procedure in the Arbitration was not in accordance with the agreement of the parties, should be determined.

The challenge as to the place of the Arbitration

23. The significance of the place or seat of the Arbitration is not, and cannot be, disputed. It has direct and indirect ramifications as to the procedural law and rules applicable to the Arbitration, the composition of the tribunal, the identity of the supervisory court and the enforcement of the final award.

24. It is well recognized that for contracts and arbitrations involving foreign elements, several legal systems may be involved. As Mustill J observed in Black Clawson International Limited v Papierworke Waldhof-Aschaffenburg SA [1981] 2 Lloyd’s Rep 446, 453: “In the great majority of cases, [the lex causae, the law applicable to the arbitration agreement and the lex fori] will be the same. But this will not always be so. It is by no means uncommon for the proper law of the substantive contract to be different from the lex fori; and it does happen, although much more rarely, that the law governing the arbitration agreement is also different from the lex fori”.

25. There is also the law applicable to the agreement between the parties to the reference and the members of the tribunal, which is not identical to the law applicable to the arbitration agreement. Neither the law of the reference nor the law of the arbitration agreement needs be the same as the law applicable to the contract containing the arbitration clause (the lex causae). Equally, they need not be the same as the curial law which governs the conduct of the reference (sometimes called the lex fori) which is often determined by the choice of the seat of the arbitration.

26. Where the parties did not make express provision for the governing law of the arbitration agreement, there is usually debate as to whether the governing law of the arbitration agreement should, by implication or by its closest and real connection, be the law of the underlying matrix contract, or the law of the place where the parties have chosen to arbitrate. In the present case, there is no real conflict in the parties’ express choice of the law of the underlying contract, and their express choice of the place where the arbitration is to be held. Both are expressed to be “Chinese” law and “China”. The issue between the parties (when it arises and becomes relevant) is whether “Chinese law” refers to the law of the Mainland or Hong Kong law, and whether China means Mainland China or Hong Kong.

27. In the evidence filed in support of the Article 16 challenge by Originating Summons issued on 21 March 2013, the Applicant initially raised issues as to the validity of the arbitration agreement comprised in clause 14.1 of the CKD Agreement and clause 10 (4) of the TC Agreement, and whether all the Respondents were parties to the CKD Agreement and TC Agreement which contained the arbitration clauses. Elaborate expert evidence on Chinese law, Egyptian law and French law affecting these issues was filed. It was only at the commencement of the hearing before this Court, that Mr Dawes confirmed that the Applicant would no longer pursue these issues. Such concessions rendered much of the evidence filed and arguments raised on the challenge to jurisdiction irrelevant and immaterial.

28. Questions as to the validity of the arbitration clauses, and whether the Respondents are parties to the CKD Agreement and TC Agreement may well affect whether the Arbitrator has jurisdiction. Without being a party to an agreement whereby a party submits itself to arbitration, it is of course doubtful whether the arbitral tribunal has jurisdiction over the party. However, with these issues cast aside, the only remaining question for determination is whether the tribunal in this case, constituted by the Arbitrator appointed by the ICC Court, has jurisdiction over the dispute as to the alleged breach of the CKD Agreement and the TC Agreement. Mr Dawes submits that the place of the Arbitration being determined to be Hong Kong is erroneous, and that this takes the Arbitration outside the jurisdiction of the Arbitrator.

29. As the starting point, and to state the obvious, arbitration is consensual and the power of the arbitrator derives from the parties’ agreement to submit their dispute to arbitration. Parties are free to choose the precise manner of resolving their disputes, and if they agree to dispute resolution by arbitration, they are free to choose the law governing their arbitration agreement, the institution to resolve the dispute, the location of the arbitration hearing and the procedure for the arbitration. Having agreed upon these matters, they should be bound by their choice and the Courts would hold them to their agreement.

30. In this case, the Applicant, the 1st Respondent and the other entities named as parties to the CKD Agreement and the TC Agreement agreed, and are bound, to have their dispute under the CKD Agreement and the TC Agreement to be arbitrated in China, “as per the ICC”, and “pursuant to the ICC Rules”. By agreeing to refer their disputes to a specified institutional arbitral body, the parties must be deemed to have agreed to abide by the rules and procedures of that body. So much is clear, and cannot be disputed.

31. Whatever “China” means, the Applicant has not disputed that it had agreed that the Arbitration was to be governed by and be held pursuant to the ICC Rules (in this case, the 1998 ICC Rules in force at the time arbitration was commenced). The Respondents submitted the dispute to the ICC Court on 11 October 2011. In response to the Request, the ICC Court appointed the Arbitrator pursuant to Article 9 (3) of the ICC Rules, as the ICC Court was entitled so to do. Articles 7 to 9 of the ICC Rules govern the appointment and constitution of the arbitral tribunal, and it has not been suggested by the Applicant that the ICC Court did not follow these provisions, or that the appointment of the Arbitrator was not in accordance with any of the provisions of the ICC Rules affecting, for example, the independence or nationality of the Arbitrator. Counsel has not referred me to any provision in the ICC Rules which expressly restricts the appointment of an arbitrator by reference to the location of the arbitration (other than his availability), or the governing law of either the arbitration agreement or the underlying contract.

32. The constitution of the tribunal is governed by the proper law of the arbitration agreement (Mustill & Boyd: Commercial Arbitration , 2nd edition, p 62). Whether the law of the arbitration agreement is Mainland Chinese law, or Hong Kong law, or French law (being the place of the location or establishment of the ICC Court), there is no evidence that the appointment of the Arbitrator and the constitution of the tribunal in this case is invalid or defective in any way under any of the relevant law.

33. Article 14 (1) of the ICC Rules provides for the place of the arbitration to be “fixed by the (ICC Court) unless agreed upon by the parties”. Mr Dawes argued that the parties already agreed upon “China” and the ICC Court and the Arbitrator should not have fixed Hong Kong as the place of the Arbitration.

34. The arbitration clauses in the CKD Agreement and the TC Agreement state that the arbitration is to be “in China”. The parties agreed upon this when the CKD Agreement and the TC Agreement were made. However, there is and has been dispute between the parties as to whether the clauses mean that the Arbitration should take place in Mainland China only (as the Applicant contends), or if the Arbitration should take place in Hong Kong (as the Respondents contend).

35. In view of this very dispute as to the meaning of “China” as used in Clauses 14.1 and 10 (4), it cannot be said that the parties agree upon the place of the Arbitration as provided for in the Agreements. (A dispute exists between parties unless there has been a clear and unequivocal admission of liability and quantum: see Louis Dreyfuss v Bonarich International (Group) Limited [1997] HKCFI 312; [1997] 3 HKC 597; Tai Hing Cotton Mil Limited v Glencore Grain Rotterdam BV [1995] HKCA 626; [1996] 1 HKC 363, at 375A-B.)

36. Since China’s resumption of sovereignty over Hong Kong in 1997, Hong Kong has retained its own legal system but it is part of China. It was argued that for arbitration, Hong Kong and Mainland China are separate in their procedural law and that awards made in Hong Kong and in Mainland China are enforced and supervised by different courts. To that extent, the arbitration clauses in the Agreements are not clear in their expression of where the Arbitration is to be held.

37. In either of the circumstances described in paragraphs 35 and 36 above, the ICC Court is in my view entitled and indeed bound to determine the place of the Arbitration under Article 14 of the ICC Rules – which the parties have expressly agreed to submit to and be bound by for the purpose of the Arbitration.

The construction of the arbitration clauses and the Agreements

38. The Applicant argued that the Arbitrator, in confirming and following the ICC Court’s determination of Hong Kong as the place of the Arbitration under Article 14, had erred in failing to take into account the parties’ designation of “China” as the place of the Arbitration, or had mistakenly construed the arbitration clauses and the meaning of “China” as used in the clauses. The Applicant argued that, properly construed, the arbitration clauses provided for, and were intended to provide for, the seat of the Arbitration to be in Mainland China.

39. On the question of the construction of contracts, the courts have made it clear that the judge should put himself in the place of the reasonable man, or as Lord Hoffman made it clear in Fiona Trust & Holding Corporation v Privalov [2007] EWCA Civ 1329;[2007] 4 All ER 951 HL in the context of construction of arbitration clauses, of rational businessmen. In construction, what the Court attempts to ascertain is not the subjective, and at times non-existent, intention of the parties themselves, but to consider what would have been the intention of ordinary, reasonable and sensible businessmen in the position of the actual parties to the contract, as ascertained from the language they have used, and considered in the light of the surrounding circumstances and the object of the contract. This, again, is trite.

40. In the much cited passage of Lord Hoffman’s judgment in Investors Compensation Scheme v West Bromwich Building Society [1998]1 WLR 896, he explained that “interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”. He clarified the meaning of the background factual matrix in BCCI v Ali [2001] 1 AC 251: as anything which a reasonable person would have regarded as relevant, and that it is not confined to the factual background “but can include the state of the law (as in cases which one takes into account that the parties are unlikely to have intended to agree to something unlawful or legally ineffective) or proved common assumptions which were in fact quite mistaken.” The learned author of The Interpretation of Contracts by Lewison (3rd edition) also highlighted at p10 that although the admissible background may include the law, the English Court of Appeal in Zoan v Rouamba [2000] 2 All ER 620 had refused to attribute to a hirer of a motor car a detailed knowledge of consumer credit legislation.

41. Although the ascertainment of the meaning of a written contract is a question of law, it has to be borne in mind, as pointed out by the learned author of The Interpretation of Contracts by Lewison (3rd edition) (at para 4.01 on p 96), that many steps in the process of ascertaining that meaning are classified as questions of fact. In particular, Lord Reid explained (in the case of Brutus v Cozens [1972] UKHL 6; [1973] AC 854 cited by the author of The Interpretation of Contracts) that “the meaning of an ordinary word of the English language is not a question of law”, and in Chatney v Brazilian Submarine Telegraph Co Ltd [1892] 1 QB 79, Lindley LJ explained the process succinctly, as follows:

“The expression ‘construction’, as applied to a document, at all events as used by English lawyers, includes two things: first the meaning of the words; and secondly their legal effect, or the effect to be given to them. The meaning of the words I take to be a question of fact in all cases, whether we are dealing with a poem or a legal document. The effect of the words is a question of law.”

42. The legal background against which a contract was made is of course a relevant consideration in the construction of the meaning and effect of the Agreements and the language used. In construing a contract, it may be proper to take into account the substantive law which may form part of the surrounding circumstances. It is in this context, that the courts often conclude, when considering the parties’ intentions, that the parties intended to produce a result that is legal, rather than illegal, and if a contract admits of 2 interpretations, one of which is legal and the other illegal, the courts will prefer that which leads to a legal result.

43. Construed as a whole, it is admittedly relevant that the CKD Agreement is stated to be governed by “Chinese laws”, and refers to obligations with regard to “Chinese government institutions”, and to the Applicant (a Mainland company) as a party being a “Chinese registered company” with registered office “in China”. The Applicant contends that the parties must have objectively intended to choose Mainland China as the place of arbitration, and Mainland Chinese procedural law to apply to the Arbitration.

44. In this case, the Agreements are made between Egyptian companies and Mainland Chinese companies for the manufacture, sale and purchase of goods in Mainland China. The parties claim that they were not represented by lawyers when the Agreements were negotiated and prepared. As reasonable, rational businessmen, I would accept that they must have been aware at the time the Agreements were made that China had resumed sovereignty over Hong Kong, and that legally as well as geographically, Hong Kong is a part of China. It would be artificial in my view to hold that the parties had intended the relevant provision, with reference to the location where the Arbitration is to be held, to mean either “China excluding Hong Kong”, or “China including Hong Kong”. Where the parties in this case had chosen to use “China” as the place where the Arbitration is to be held, it must, on a plain and ordinary reading of the expression used and of the Agreements, mean just that. It cannot, in my view, be incorrect for the ICC Court to decide, on a plain reading of the arbitration clauses, that the Arbitration should be held in Hong Kong, which is geographically and legally a part of China.

45. By the time of the hearing before this Court under Article 16 of the Model Law and s 34 of the Ordinance, the parties have filed expert evidence on PRC law. The expert for the Applicant (Professor Zhang) takes the view that an arbitration held on the Mainland and administered by ICC is not a domestic award and may not be enforced by the courts on the Mainland, since ICC is not an arbitration institution which is registered with the authorities on the Mainland under the Mainland Civil Procedure Law. In fact, the Applicant’s expert takes the view that the arbitration clause, in the TC Agreement at least, is not even valid and enforceable under PRC law: since the clause does not specify the arbitration institution, but only the application of the ICC Rules.

46. The Respondents’ expert on PRC law (Professor Gao) does not agree with the expert evidence of the Applicant. Professor Gao has referred to the Longlide case decided by the Supreme People’s Court, in which the Supreme People’s Court ruled that an arbitration clause providing for ICC arbitration on the Mainland is valid. Professor Gao also referred to a Ningbo case in which a Mainland court enforced an ICC award made on the Mainland under the New York Convention, although such an award was not considered by the court as a domestic award on the Mainland. Professor Zhang maintains the view that enforcement of such an ICC award made in Beijing under the New York Convention (in the Ningbo case) goes against the reciprocity reservation made by China when signing the New York Convention: as the award in Ningbo was not made by another signatory nation. The Arrangement on Mutual Enforcement of Arbitration Awards between the Mainland and HKSAR was made precisely because Hong Kong and China are not different contracting nations under the New York Convention. In any event, Professor Zhang pointed out that there is no system of binding precedents under Mainland law, and that the Ningbo case is not only problematic, but has no binding effect on the Mainland courts.

47. The Courts have emphasized (see Lord Hoffman’s observations in BCCI v Ali, supra) that parties to a contract are unlikely to have intended to agree to do something legally ineffective, and in the construction of a contract or a clause, the Courts will lean in favor of and prefer a construction which renders the contract enforceable, and legal. Rational and reasonable businessmen would not have intended by their agreement to refer their dispute to arbitration by an institution, or in a place, which would render the arbitral award unenforceable, or otherwise than binding and effective.

48. On the face of the expert evidence, there is a risk that an ICC award made in Mainland China may not be enforceable in Mainland China, and that the ICC Arbitration and award might not be supervised by the Mainland court under the Civil Procedure Law or the Arbitration Law. The experts are, on the other hand, in agreement that an ICC award made in arbitration proceedings conducted in Hong Kong would be enforceable in Hong Kong, and on the Mainland, as well as in other countries which are parties to the New York Convention. On such basis, and bearing in mind that the object of an arbitration agreement must be to have the dispute resolved by a process which would result in a final, binding and enforceable award, I would agree with the Arbitrator that the Arbitration between the parties in this case should be conducted in Hong Kong.

Conclusion on jurisdiction

49. This decision covers only the issue of whether the Arbitrator has jurisdiction over the Arbitration. It does not affect the parties’ position as to whether the Arbitrator applies the proper law in the determination of the dispute submitted to the Arbitration or, in the event that the procedure to be adopted in the Arbitration is not in accordance with the parties’ agreement, such that it results in prejudice, whether there are grounds for a party to apply to set aside the final award under s 81 of the Ordinance and Article 34 of the Model Law.

50. It is regrettable that the arbitration clauses in the Agreements were not drafted in more precise terms, but on the facts and evidence in the present case, I prefer the construction that the Arbitration is to take place in Hong Kong, instead of Mainland China. My conclusion is that the tribunal is properly constituted, and the Arbitrator has jurisdiction over the dispute submitted by the parties.

The Sales Contracts issue

51. In answer to the claims made by the Respondents in respect of the supply and delivery of parts and after-sale services under the CKD Agreement, the Applicant alleges that whereas the CKD Agreement requires the Applicant to replace any supplies that were defective pursuant to a “CKD Parts Service Agreement”, that agreement was never signed. Instead, the Applicant entered into 4 sales contracts with “AGE” (“Sales Contracts”), and the Sales Contracts provide for resolution of disputes by CIETAC arbitration. The issues framed by the parties for submission to the Arbitration include the question of “whether the claims against supply and delivery of CKD Parts and After-sale Services … shall be submitted to the China International Economic and Trade Arbitration Commission for arbitration”. Having determined that the Arbitrator has jurisdiction to deal with the Arbitration and the issues submitted to him for determination in the Arbitration, questions as to whether the Respondents can have remedies under the CKD Agreement in respect of the Applicant’s alleged breach, and whether some of these claims should be referred to CIETAC arbitration in accordance with the parties’ agreement, all go to the merits of the claims made in the Arbitration, and should be determined by the Arbitrator.

Orders made

52. The application to set aside the Award is dismissed, with the order nisi that the Applicant is to pay to the Respondents the costs of the application, on an indemnity basis.

Siam Steel International PLC v Compass Group (Australia) Pty Ltd [2017] WASC 137 (24 May 2017)

SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

SIAM STEEL INTERNATIONAL PLC
(Claimant)

V

COMPASS GROUP (AUSTRALIA) PTY LTD
(Respondent)

 

CORAM: Martin CJ
DATE OF HEARING: 24 May 2017
DELIVERED: 24 May 2017
FILE NO: ARB 8 of 2016
CATCHWORDS: Costs of arbitration proceedings – Where arbitrator ordered costs to be taxed if not agreed – Whether court has jurisdiction to make special costs orders – Consideration of O 66 Rules of the Supreme Court 1971 (WA)

 

MARTIN CJ:

Summary

1 The claimant in these proceedings, Siam Steel International PLC (Siam), was also the claimant in arbitral proceedings commenced against Compass Group (Australia) Pty Ltd (Compass) which is also the respondent to these proceedings. The dispute the subject of the arbitral proceedings was settled by agreement and the parties to those proceedings consented to the arbitrator making what was described as a ‘Final Award’ in which the arbitrator dismissed the arbitral proceedings and ordered Compass to pay Siam’s costs of those proceedings, including the counterclaim by Compass, ‘to be taxed if not agreed’.

2 Subsequent to that award, Siam commenced proceedings in this court seeking an order that the costs which the arbitrator ordered Compass to pay be assessed without reference to the limits provided in respect of certain specified items in the scale apparently presumed to be applicable to the taxation of those costs – namely, the Legal Profession (Supreme Court) (Contentious Business) Determination 2014 (WA) and Legal Profession (Supreme Court) (Contentious Business) Determination 2016 (WA). After the proceedings were referred to me for case management, I became concerned with respect to the source of the court’s jurisdiction to make the orders sought, given that the order awarding costs in favour of Siam and directing that those costs be taxed if not agreed had been made by an arbitrator and not the court. With the concurrence of the parties, I made directions for the exchange of affidavits and submissions limited to the question of whether the court had jurisdiction to make the orders sought by Siam. The parties have exchanged submissions and affidavits in accordance with those directions and have further agreed that the question of jurisdiction should be determined by me on the basis of those affidavits and submissions and without an oral hearing.

3 For the reasons which follow, I have concluded that none of the sources of jurisdiction identified by Siam in the course of its submissions provide the court with jurisdiction to make the orders sought by Siam in these proceedings. However, again for the reasons which follow, I will invite Siam to advise the court and Compass whether reliance is placed upon s 280(2) of the Legal Profession Act 2008 (WA) (the LPA). If so, I would invite Siam to provide submissions in support of that proposition and to also address the question of whether, if that section does provide the court with jurisdiction to make the orders sought, the court has a discretion with respect to the exercise of that power and, if so, as to the manner in which that discretion should be exercised generally in cases in which an order for costs has been made by an arbitrator and in the particular circumstances of this case.

The evidence

4 These proceedings were commenced by originating summons filed on 1 December 2016. The summons was supported by a substantial affidavit sworn by the solicitor responsible for the conduct of the arbitral proceedings on behalf of Siam, which was also filed on 1 December 2016. That affidavit addresses the contract between Siam and Compass by which Siam was engaged by Compass to design, manufacture and deliver 1139 double storey accommodation modules in South Hedland and which gave rise to the dispute the subject of the arbitral proceedings. The affidavit also addresses briefly the course of those proceedings, including the fact that the matter was listed for a hearing which was to commence on 31 August 2016 and to occupy up to five weeks. The affidavit establishes that, approximately two weeks before the hearing was due to commence, the parties agreed to settle their dispute and, on 1 November 2016, the arbitrator, with the consent of the parties, made the orders to which I have referred – namely, dismissing the arbitral proceedings and ordering Compass to pay Siam’s costs of those proceedings, including the counterclaim, to be taxed if not agreed. A copy of that document, headed ‘Final Award’, is annexed to the affidavit.

5 The remainder of the affidavit is concerned with the work performed by the solicitors and counsel engaged by Siam in the arbitral proceedings and the costs charged by those solicitors and counsel to Siam in respect of the work performed. That portion of the affidavit is directed to the substantive merits of the orders sought by Siam in these proceedings and is not appropriately considered in any detail unless and until Siam has established that the court has jurisdiction to make the orders sought.

6 The parties have also exchanged affidavits with respect to the events and communications which preceded the award of the arbitrator. Although, for reasons which I will explain, those matters are not relevant to the jurisdictional issue as presently formulated, they are relevant to the consideration of submissions advanced by Siam in support of its jurisdictional argument. Those matters might also be of considerable relevance if Siam seeks to rely upon a source of jurisdiction which is discretionary in character.

The settlement of the dispute and the arbitrator’s award

7 The evidence establishes that the dispute the subject of the arbitral proceedings was settled by the exchange of correspondence between the solicitors for the parties, including a letter from Siam’s solicitors dated 11 August 2016 in which Siam offered to settle the dispute on terms which included a provision that Compass pay Siam’s costs of the arbitral proceedings to be taxed if not agreed. That offer was accepted by Compass by an email sent by its solicitors on 17 August 2016.

8 On 22 August 2016 the solicitors for Siam sent to the solicitors for Compass a draft Deed of Settlement and Release and a draft minute of consent orders substantially in the terms of the award ultimately made. On 12 September 2016, the solicitors for Siam wrote to the solicitors for Compass recording the fact that their clients had been unable to reach agreement with respect to the amount payable by Compass to Siam in respect of Siam’s costs of the arbitral proceedings and proposing that the minute of consent orders include a provision for ‘an uplift’ in the scale items which generally correspond to the items specified in the orders sought in these proceedings. On 20 September 2016 the solicitors for Compass responded to that proposal by letter in which it was asserted that the dispute had been settled on terms which required Compass to pay Siam’s taxed costs without any special costs orders and opposing any order uplifting any item in the relevantly applicable scale of costs.

9 On 29 September 2016 Siam’s solicitors sent a letter to the solicitors for Compass enclosing an amended minute of consent orders which included an order giving Siam liberty to apply for an uplift on the limit of costs fixed by the relevantly applicable scales pursuant to s 280(2) of the LPA. On 4 October 2016 the solicitors for Compass responded to that letter reiterating their assertion that the dispute had been settled on terms reflected in the first version of the minute of consent orders and rejecting any proposal to consent to orders in anything other than those terms.

10 On 5 October 2016 the solicitors for Siam sent the Deed of Settlement and a minute of consent orders in the terms initially proposed to the solicitors for Compass for execution by their client. In that letter the solicitors for Siam asserted that neither the terms of the settlement agreement nor the applicable law relevant to costs prevented their client from subsequently applying for any special costs orders considered appropriate and purported to reserve their client’s rights in that regard.

11 A minute of consent orders in the terms initially proposed at the time the dispute was settled was executed by the parties and sent to the arbitrator by the solicitors for Compass on 17 October 2016. By email dated 28 October 2016 to the arbitrator the solicitors for Siam requested the arbitrator make a further order to the effect that Siam have liberty to apply to either the arbitrator or to the Supreme Court of Western Australia for any special costs orders. On the same day (28 October 2016) the solicitors for Compass sent an email to the arbitrator opposing the additional order sought on the ground previously enunciated – namely, that the dispute had been settled on terms agreed by the parties and that it was not now open to Siam to attempt to unilaterally vary the terms upon which the matter was settled.

12 On 31 October 2016 the solicitors for Compass sent an email to the arbitrator reiterating that Siam was not proposing that the arbitrator amend the limits applicable to any particular item in any applicable costs determination, but merely that Siam have liberty to apply for such an order as part of the process for determining what the taxed costs should be.

13 By email of the same date to the parties, the arbitrator expressed the view that he was being asked to make an award by consent, and if there was disagreement as to the basis upon which costs should be taxed, then the parties must return to the negotiating table. He further expressed the view that he could not assume that Compass intended to settle the substantive matters in issue and agreed to pay Siam’s costs while leaving the basis on which the costs were to be calculated still to be argued.

14 In that email the arbitrator also raised a question as to the power and capacity of the court to make an order to the effect that costs be taxed on a special basis. He expressed no concluded view on the point but observed that it was sufficient for him to conclude that an award giving Siam liberty to apply for a special costs order would be inconsistent with the terms of settlement as communicated to him, stating that if the solicitors for Siam were correct in their submissions with respect to the power of the court, the order sought would not add anything to the final award.

15 On 1 November 2006 the arbitrator signed and issued a document under the heading ‘Final Award’ in the following terms:

With the consent of the parties I make the following award:

(1) the arbitral proceedings are dismissed; and

(2) the respondent is to pay the claimant’s costs of the arbitral proceedings, including the counterclaim, to be taxed if not agreed.

The legal framework

16 In previous proceedings between these parties Siam contended that the International Arbitration Act 1974 (Cth) did not apply to govern the arbitral proceedings because the contract between the parties expressly provided that it was to be governed and construed by reference to the laws for the time being in force in Western Australia and that any arbitration should be effected in accordance with the rules for the conduct of commercial arbitration  under the Commercial Arbitration Act 1985  (WA). However, that submission was rejected and it was held that the International Arbitration Act applied and governed the arbitral proceedings.

The International Arbitration Act (Cth)

17 Section 27 of the International Arbitration Act provides:

(1) The costs of an arbitration (including the fees and expenses of the arbitrator or arbitrators) shall be in the discretion of the arbitral tribunal.

(2) An arbitral tribunal may in making an award:

(a) direct to whom, by whom, and in what manner, the whole or any part of the costs that it awards shall be paid;

(b) tax or settle the amount of costs to be so paid or any part of those costs; and

(c) award costs to be taxed or settled as between party and party or as between solicitor and client; and

(d) limit the amount of costs that a party is to pay to a specified amount.

(2A) An arbitral tribunal must, if it intends to make a direction under paragraph (2)(d), give the parties to the arbitration agreement notice of that intention sufficiently in advance of the incurring of costs to which it relates, or the taking of any steps in the arbitral proceedings which may be affected by it, for the limit to be taken into account.

(3) Any costs of an arbitration (other than the fees or expenses of an arbitrator) that are directed to be paid by an award are, to the extent that they have not been taxed or settled by the arbitral tribunal, taxable in the Court having jurisdiction under Article 34 of the Model Law to hear applications for setting aside the award.

(4) If no provision is made by an award with respect to the costs of the arbitration, a party to the arbitration agreement may, within 14 days after receiving the award, apply to the arbitral tribunal for directions as to the payment of those costs, and thereupon the tribunal shall, after hearing any party who wishes to be heard, amend the award by adding to it such directions as the tribunal thinks proper with respect to the payment of the costs of the arbitration.

18 In this case, the costs that were directed to be paid by the award have not been taxed or settled by the arbitrator, nor does it ever appear to have been contemplated by either the parties or the arbitrator that he would tax those costs.

19 Accordingly, s 27(3) applies to render the costs taxable in the court which would have jurisdiction under Article 34 of the UNCITRAL Model Law on International Commercial Arbitration  (Model Law) to hear applications for setting aside the award.

20 Article 34 of the Model Law provides that an award may be set aside by the court specified in Article 6 of the Model Law. Article 6 in turn refers to a court to be specified by each State enacting the Model Law. In the case of Australia, that specification is contained in s 18 of the International Arbitration Act which provides that, in relation to the power to set aside an award to which reference is made in Article 34 of the Model Law, if the place of arbitration is, or is to be, in a State, the Supreme Court of that State is specified and in any case the Federal Court of Australia is also specified. As the place of arbitration was to be in Western Australia, pursuant to s 27(3) of the International Arbitration Act, the costs which the arbitrator ordered Compass to pay to Siam can be taxed in either the Supreme Court of Western Australia or the Federal Court of Australia.

21 The evidence does not suggest that any proceedings for the taxation of the costs ordered to be paid by the arbitrator in this case have been commenced in the Federal Court of Australia. In the Supreme Court of Western Australia, rule 25 of the Supreme Court (Arbitration) Rules 2016 (WA) provides that if the court is required to tax or assess the costs of an arbitration (other than the fees or expenses of an arbitrator), O 66 of the Rules of the Supreme Court 1971 (WA) applies ‘with any necessary changes’.

Order 66

22 Order 66 governs the taxation of costs in this court. As I have noted, the Order is to be applied ‘with any necessary changes’ when the court is required to determine the costs payable pursuant to the award of an arbitrator. Proceedings for taxation of such costs are commenced by the lodgement of a bill of costs in accordance with Div 2 of O 66. Although the affidavit filed in support of these proceedings refers to and annexes a draft bill of costs, no bill of costs has yet been filed with the court pursuant to the provisions of O 66. If and when such a bill is lodged for taxation, O 66 r 11 will come into play. That rule relevantly provides:

(1) For the purposes of this Order –

any relevant scale means any costs determination, as defined in the Legal Profession Act 2008 section 252, that relates to the costs that may be charged by law practices in respect of business before the Court carried out by practitioners.

(2) Except when otherwise ordered, solicitors are, subject to these rules, entitled to charge and be allowed the fees set forth in any relevant scale in respect of the matters referred to in that scale and higher fees shall not be allowed in any case, except such as are by this Order otherwise provided for.

(3) Subject to the provisions of the Legal Profession Act 2008 permitting legal practices to make costs agreements with their clients, and to the provisions of these rules, the fees allowed under any relevant scale shall apply both as between party and party, and solicitor and client; but where additional costs (including expenses and counsel fees) have been incurred which in the opinion of the taxing officer are not properly recoverable against the party liable under the judgment or order to pay costs, but have nevertheless been properly incurred, or where costs have been incurred at the special request of the client, or in contesting and reducing a claim, those costs shall be recoverable from the client; and the taxing officer is hereby authorised to fix such sum as he thinks reasonable to cover the additional costs.

The relevant scale of costs

23 These proceedings have been commenced and continued on the implicit assumption that the Legal Profession (Supreme Court) (Contentious Business) Determination is a ‘relevant scale’ for the purposes of O 66 r 11. Each of the determinations in respect of that scale said to be applicable, namely the 2014 and 2016 determinations, is stipulated to apply in respect of contentious business carried out by legal practitioners in or for the purpose of proceedings before the Supreme Court and the District Court. Accordingly, both O 66 r 11 and the relevant determinations assumed to be applicable to the arbitral proceedings expressly provide that they apply only to ‘business before the court’ and therefore do not, by their express terms, apply to the work performed by Siam’s legal representatives in connection with the arbitral proceedings. It would appear to follow that the assumption upon which these proceedings are based, and which has not been challenged by either party, must depend upon r 25 of the Supreme Court (Arbitration) Rules having the effect that O 66 must necessarily be changed so as to incorporate and apply to its provisions the most analogous scale of costs determined pursuant to the provisions of the LPA, being, in this case, the Legal Profession (Supreme Court) (Contentious Business) Determination. As that view of r 25 is clearly open, and as the assumption upon which these proceedings depend has not been challenged by either party, it is appropriate to proceed upon the assumption that r 25 has that effect.

24 Alternatively, it may be that the assumption derives from reasoning analogous to the views expressed by Parker J in Fletcher Constructions Australia Ltd v Newman as Trustee of the Property of Edward Alexander Littlejohn and Jennifer Lillian Littlejohn. In that case, after concluding that a provision in the determinations made by the Legal Costs Committee (constituted by the then applicable Legal Practitioners Act 1893 (WA)) which purported to apply the scale of costs applicable to work done in the Supreme Court to work done in connection with arbitral proceedings went beyond the powers conferred by the legislation and was therefore invalid, Parker J expressed the following view:

The consequence of this invalidity for the taxation of costs in an arbitration pursuant to the Commercial Arbitration Act  by a taxing officer of this Court, would appear to be that, as there is no binding scale, the costs to be allowed are in the discretion of the taxing officer. Accordingly, on a party and party taxation, the taxing officer will no doubt allow what the taxing officer considers to be reasonable charges in respect of work reasonably undertaken, subject of course to any particular directions of the arbitrator. On such a taxation the taxing officer in the exercise of discretion may well find it convenient in respect of some or all items in the bill of costs to tax by way of analogy with a scale such as the Supreme Court Scale of Costs.

25 If this is the basis for the parties’ assumptions with respect to the applicable scales, it might support the proposition that the orders sought in these proceedings are unnecessary, because the costs are to be taxed in the general discretion of the taxing officer. However, any such proposition would appear to be inconsistent with the view expressed earlier in the reasons of Parker J to the effect that it was entirely consistent with the legislative scheme then in place (and which is analogous to the current legal framework) that the arbitrator may give specific directions in the award as to the manner by which a taxation of costs is to proceed, which directions may go so far as to direct taxation on a basis other than the scale of costs which would normally be applicable under the Rules of Court or by giving directions specifically varying the application of the ordinary scale. In this case the arbitrator has expressly declined to make any order which would vary the upper limits in the scale which the parties assumed would govern any taxation of Siam’s costs.

26 Other rules within O 66 cover a circumstance in which there is no relevant scale of costs, in which case the court may direct the taxing officer to tax or allow costs by analogy to a scale, and for the circumstance in which no provision is made for an item within a relevant scale. As I have noted, neither party contends that either circumstance applies to this case. To the contrary, these proceedings have been conducted on the common assumption that there is a relevant scale with relevantly applicable items, the upper limit of some of which Siam seeks to have lifted by order of the court.

27 As Siam places reliance upon r 23 and r 51 of O 66, it is appropriate to set those rules out in full:

  1. Certain fees in scales may be increased if inadequate

If it is shown to the satisfaction of the taxing officer that by reason of special circumstances, a fee in any relevant scale which includes the drawing or settling of a pleading or other document is inadequate, the taxing officer may allow such additional sum as he thinks proper, whether the pleading or document has been drawn or settled by counsel or by the solicitor.

  1. When Court may fix costs

(1) Where in any action or matter taxation of costs is not ordered, or any special costs are by these rules or by any order reserved for the consideration of the Court at trial, the Court may fix the amount of costs payable, or the amount of such special costs, and in every judgment or order of the Court where the question of costs is not specifically dealt with there shall be deemed to be reserved to any party interested liberty to apply within 30 days.

(2) Where under these rules a party is required to obtain some special certificate for costs, there shall be deemed to be reserved to such party liberty to apply within 30 days.

Siam’s submissions

28 In its initial submissions Siam places principal reliance upon O 66 r 51. As these proceedings were commenced within 30 days of the final award, Siam submits that they fall within the liberty ‘deemed to be reserved’ to a party pursuant to that rule. In that context Siam draws attention to observations made by EM Heenan J in Geneva Finance Ltd (Receiver and Manager Appointed) v Resource and Industry Ltd to the effect that O 66 r 51 provides a remedy for injustice which can arise because:

It is not at all uncommon that the need for special orders is sometimes overlooked when judgment is entered.

In that context Siam submits that ‘at the time of the Final Award, the need for special costs orders was not in contemplation’. Plainly that submission is not correct. To the contrary, Siam’s desire to have the capacity to raise the limits applicable under certain items in the scales of costs assumed to be applicable was recognised by Siam’s solicitors and canvassed in the correspondence with the solicitors for Compass and the arbitrator to which I have referred.

29 The initial submissions provided by Siam also make assertions with respect to the legal framework governing the taxation of costs in which reference is made to Rules of Court now repealed. It is unnecessary to deal with those submissions as clearly they have no current application or relevance. It is perhaps sufficient to observe that there is nothing in Siam’s submissions that is specifically inconsistent with the legal framework which I have set out above.

30 Siam’s submissions do not descend to an explanation of why either provision of O 66 r 51 is said to apply to the circumstances of the present case. Clearly par (1) of the rule can have no application because an order for costs was made by the arbitrator. Although par (2) of the rule applies where ‘under these rules a party is required to obtain some special certificate for costs’, Siam’s submissions do not identify any rule which requires a party to obtain a special certificate for costs which applies to the circumstances of this case. Nor have I been able to identify any such rule.

31 That may well be the consequence of the changes in the legal regime relating to costs implemented when the Legal Practice Act 2003 (WA), the predecessor to the LPA came into force. Section 215 of that Act was in substantially similar terms to s 280 of the LPA, which provides:

  1. Effect of costs determination

(1) Subject to any costs agreement made in accordance with Division 6 or the corresponding provision of a corresponding law, section 306 and the Legal Aid Commission Act 1976 section 14 –

(a) the taxation of bills of law practices; and

(b) any other aspect of the costs charged by law practices,

is regulated by an applicable costs determination.

(2) Despite subsection (1), if a court or judicial officer is of the opinion that the amount of costs allowable in respect of a matter under a costs determination is inadequate because of the unusual difficulty, complexity or importance of the matter, the court or officer may do all or any of the following –

(a) order the payment of costs above those fixed by the determination;

(b) fix higher limits of costs than those fixed in the determination;

(c) remove limits on costs fixed in the determination;

(d) make any order or give any direction for the purposes of enabling costs above those in the determination to be ordered or assessed.

(3) Nothing in subsection (1) is to be construed as limiting the power of a court, a judicial officer or a taxing officer of a court to determine in any particular case before that court or judicial officer the amount of costs allowed.

(4) If a costs determination is in force in respect of any business referred to in section 275(1), any other subsidiary legislation fixing or purporting to regulate the remuneration of law practices in respect of that kind of business is of no force or effect.

32 So, since the Legal Practice Act 2003 (WA) came into force, one legal mechanism by which a party might obtain an award of costs in excess of any relevantly applicable scale has been by way of an application under that Act, and its successor, the LPA, rather than by way of an application under O 66. Consistently with that regime, O 66 r 12, which previously authorised the making of orders lifting the maximum amount of an applicable item, was removed from the Rules of Court. Further, given the abandonment of any procedure for certifying for second counsel in more recent costs determinations, and the scope of s 280 of the LPA, it seems reasonable to infer that the second paragraph of O 66 r 51 may well be a relic of a bygone costs era with little or no current application.

33 Siam submits that O 66 r 12 was repealed and replaced with O 66 r 11. However, that submission is plainly not correct. There is nothing in O 66 r 11 relating to the making of special orders for costs. To the contrary, as I have already noted, the effect of that rule is to require taxation to be undertaken pursuant to the scale provided in any relevant costs determination. Paragraph (3) of r 11 is not concerned with any order for special costs, but is only concerned with the difference between party and party costs on the one hand, and solicitor and client costs on the other. To the extent that Siam’s submission might be construed as a submission to the effect that O 66 r 11 provides a source of jurisdiction for the orders which it seeks in these proceedings, that submission must be rejected.

34 However, if, contrary to the view I have expressed, O 66 r 51 does apply to the circumstances of this case, the question which Siam would then have to address is whether the liberty to apply which is deemed to have been reserved is a liberty to apply to the arbitrator or to the court. That question has to be addressed in a context in which the rule has no direct application to arbitral proceedings, but only applies by virtue of r 25 of the Supreme Court (Arbitration) Rules, and then only with ‘any necessary changes’.

35 In its application to substantive proceedings in the court, the effect of O 66 r 51 is to reserve liberty to apply, within the time specified, to the court seized of jurisdiction to make the relevant costs order. In my view it inevitably follows that if the rule is to be applied to costs awarded in arbitral proceedings, it must be applied in such a way that the liberty to apply which it confers is a liberty to apply to the entity seized with jurisdiction to make the relevant order for costs, which is the arbitral tribunal. That view follows clearly from the observations made by Parker J in Fletcher Constructions. In that case Parker J observed that the provision of the then Rules which rendered O 66 applicable to the taxation of costs incurred in arbitral proceedings ‘with such modifications as are necessary’ required that the powers which the court has in respect of proceedings before the court must be exercised by the arbitrator in respect of proceedings before the arbitrator, including any power to make special costs orders.

36 Although the particular provisions of O 66 considered by his Honour in that case did not include r 51, and O 66 was rendered applicable by provisions of the Commercial Arbitration Act 1985  (WA) rather than by s 27 of the International Arbitration Act read with the Supreme Court (Arbitration) Rules, the structure considered by his Honour in that case is directly analogous to the legal framework which I have set out above. Accordingly, I can see no reason why I should depart from the clear effect of his Honour’s earlier ruling.

37 This conclusion is also supported by the decision of the High Court of Australia in Minister for Home and Territories v Teesdale Smith in which Isaacs ACJ and Starke J considered that the court acted, in effect, as the delegate of the arbitrator in assessing the quantum of the costs which the arbitrator had ordered to be paid, and it was therefore for the arbitrator to determine the rules and principles which were to be applied in the assessment of those costs. In H.G. Perkins Ltd v Best-Shaw Kerr J took the same approach, describing the taxing master as ‘merely the delegate of the arbitrator’.

38 For these reasons, Siam’s reliance upon O 66 r 51 is misplaced. That rule does not apply to this case, and even if it did, any powers conferred by the rule would be conferred on the arbitrator, not the court.

39 However, these reasons also point to the possibility that such a source of jurisdiction may be found in s 280 of the LPA. I should make it abundantly clear that I say nothing more than there is some prospect that the section might provide a source of jurisdiction if its terms can be found to apply to the circumstances of the present case. I have an entirely open mind on that question, which has not been addressed by either party in the course of their submissions. As foreshadowed, however, I will provide Siam with the opportunity to present further submissions on that question. If Siam wishes to take advantage of that opportunity it should also address the question of whether any jurisdiction conferred upon the court by that section is discretionary in character and, if so, whether that discretion should be exercised by the court in circumstances in which an order for costs has been made by an arbitrator either generally, or in the particular circumstances of this case, having regard to the facts established by the evidence to which I have referred.

Functus officio

40 In the passage above I have expressed the view that if, contrary to my view, O 66 r 51 has any application to the present circumstances, the liberty to apply which it would confer upon Siam would be a liberty to apply to the arbitral tribunal. That tentative view must be read subject to the qualification that the arbitrator’s power to make any further order for costs would depend upon the arbitrator not having completely exhausted the powers and functions conferred upon him or upon the existence of some relevantly applicable equivalent to the ‘slip rule’ in either the arbitration agreement or the law governing the arbitration. As none of those questions have been addressed by the parties in their submissions, I express no view upon them. I would, however, observe that they are important considerations in a case such as this where an arbitrator has issued a document described as a ‘Final Award’.

Order 66 r 23

41 In Siam’s submissions in response to the initial submissions of Compass, reliance is placed upon O 66 r 23 which I have set out above. Siam asserts that the rule ‘provides the court with the jurisdiction to increase the fee in any relevant scale, if it is necessary in the circumstances’. That submission must be rejected for two reasons. First, O 66 r 23 is only concerned with an item in a relevant scale which includes the drawing or settling of a pleading or other document. Although the items in the relevant scales in respect of which Siam seeks orders include items of that kind, they also go well beyond items of that kind and include, for example, the item relating to getting up a case for hearing. Further, O 66 r 23 only applies if a taxing officer is satisfied of certain matters in the course of conducting a taxation. As I have already observed, no taxation proceedings have yet been commenced. It follows that O 66 r 23 cannot provide the court with jurisdiction to make the orders now sought by Siam.

42 Also in its written submissions in reply to the submissions of Compass, Siam submits that if the court determines that it lacks jurisdiction to make the orders sought by Siam, the court should remit the matter to the arbitrator to allow him to determine the issue of special costs. However, in that submission Siam does not identify any source of power for the court to ‘remit’ proceedings commenced in the court to the arbitrator. Nor does Siam address the question of whether the arbitrator retains any powers or functions with respect to the arbitral proceedings which would provide him with a source of jurisdiction to make such an order – an issue to which I have already referred. If the arbitrator does retain such functions and powers, there is nothing to prevent Siam requesting that the arbitrator exercise those powers and functions and it does not need a remitter from the court to enable it to do so.

Compass’ submissions

43 Although the views I have expressed in relation to the submissions made by Siam are sufficient to sustain the conclusion that Siam has not presently established any basis upon which the court could exercise jurisdiction to make the orders which it seeks, it is desirable to deal briefly with some submissions advanced on behalf of Compass, for the sake of completeness.

44 Compass submits that the proceedings commenced by Siam are ‘a nullity and of no effect’. I must confess that it is not at all clear what that submission is meant to convey. Doing the best I can to comprehend the submission, it appears to proceed on the assumption that there must be some other proceeding to which the current proceedings can ‘attach’ before the court has jurisdiction to entertain these proceedings, and there are no such proceedings on foot, because no proceedings for taxation of Siam’s costs have been commenced.

45 If I correctly understand the submission, it does not appear to me to correspond with the legal framework which I have set out above. Pursuant to that framework, the Supreme Court (Arbitration) Rules apply the provisions of O 66 to the costs of arbitral proceedings ‘with any necessary changes’. In that framework, the only questions are whether the orders sought come within the jurisdiction conferred upon the court pursuant to O 66 ‘with any necessary changes’, or whether there is some other source of jurisdiction to make the orders sought. In my respectful view, the proposition that these proceedings must ‘attach’ to some other proceedings or that they are ‘only a bare proceeding, and therefore a nullity’ does not assist in the consideration of the jurisdictional question.

46 Next, Compass submits that O 66 r 51 has no application to this case. It will be apparent for the reasons I have already given that I accept that submission. Further, Compass submits that if there is any jurisdiction to make special orders with respect to costs, that jurisdiction rests with the arbitral tribunal, not the court. It will also be apparent from the reasons I have already given that I accept that submission.

47 Compass also submits that the settlement agreement has extinguished any right to apply for a special costs order, in the alternative to its submissions with respect to jurisdiction. In my view that submission goes to the exercise of the court’s jurisdiction rather than its existence. It is not therefore a matter appropriately considered at this stage of the proceedings. That is the reason why the evidence adduced with respect to the settlement agreement and the issue of the final award is not directly relevant to the jurisdictional issues addressed in these reasons.

Summary and conclusion

48 For the reasons I have given, Siam has failed to establish that the court has jurisdiction to make the orders sought in these proceedings. However, as foreshadowed, I will provide Siam with the opportunity to make submissions with respect to the possible application of s 280 of the LPA. If Siam wishes to take advantage of that opportunity, any submissions and evidence dealing with the matters I have identified must be filed and served within 21 days of the date of publication of these reasons. If Siam takes that course, Compass will have 21 days from the date of service of Siam’s submissions and evidence within which to file and serve any submissions and evidence in response. Siam will then have 10 days within which to file and serve any submissions or evidence in reply to the submissions and evidence filed by Compass. I will then proceed to determine the issues raised on the papers unless either party notifies me that an oral hearing is required.

Dalian Huarui Heavy Industry International Co Ltd v Duro Felguera Australia Pty Ltd [2018] FCA 905 (15 June 2018)

FEDERAL COURT OF AUSTRALIA

DALIAN HUARUI HEAVY INDUSTRY INTERNATIONAL CO LTD
(Applicant)

V

DURO FELGUERA AUSTRALIA PTY LTD
(Respondent)

 

FILE NO: WAD 577 of 2016
JUDGE: Barker J
DATE OF HEARING: 9 April 2018
DATE OF JUDGMENT: 15 June 2018
CATCHWORDS: COSTS – where leave granted to discontinue proceeding – dispute concerning costs – where respondent contends applicant should pay its costs – where Rule 26.12(7) of the Federal Court Rules 2011(Cth) creates a presumption that the discontinuing party will pay the other party’s costs unless good reason to the contrary shown – where presumptive rule not displaced on facts and contentions presented – applicant to pay respondent’s costs

 

THE COURT ORDERS THAT:

  1. The applicant have leave to discontinue the proceeding.
  2. The applicant pay the respondent’s costs of the proceeding, to be assessed if not agreed.

 

REASONS FOR JUDGMENT

BARKER J:

  1. The applicant, Dalian Huarui Heavy Industry International Co Ltd (DHHI), has applied for leave to discontinue this proceeding on the basis that there be no order as to the costs of the proceeding.
  2. There is no dispute concerning the granting of leave to discontinue, and I will give that leave, but there is a dispute between DHHI and Duro Felguera Australia Pty Ltd ACN 164 834 753, the respondent, concerning costs.
  3. Duro contends that DHHI, having brought Duro into the litigation, should pay its costs following discontinuance.
  4. Thus, the sole question of substance dealt with in this judgment is whether or not costs should be ordered against DHHI upon its discontinuance of the proceeding.
  5. Duro submits that it is for DHHI to demonstrate a good reason for departing from the general or usual rule that the discontinuing party is liable for the costs of the other party to the proceeding.
  6. In that regard, the parties accept that R 26.12(7) of the Federal Court Rules 2011 (Cth) is relevant in that it provides:

Unless the terms of a consent or an order of the Court provide otherwise, a party who files a notice of discontinuance under subrule (2) is liable to pay the costs of each other party to the proceeding in relation to the claim, or part of the claim, that is discontinued.

  1. The Rule creates a presumption that the discontinuing party will pay the costs of the other side, unless for a good reason shown, the Court orders otherwise. See, for example, WA Property Holdings Pty Ltd v Colliers International (WA) Pty Ltd [2016] FCA 1089 at [11] (Gilmour J).
  2. DHHI commenced the proceeding by way of an originating application dated 9 December 2016, seeking a freezing or asset preservation order against Duro. DHHI also sought ancillary orders that Duro provide certain specified information and documents about its financial affairs to DHHI.
  3. According to DHHI’s draft penal notice (issued to Duro but not filed with the Court), DHHI proposed to seek orders to prevent Duro from removing from Australia or in any way disposing of, dealing with or diminishing the value of any of its assets in Australia.
  4. Duro observes that at the time of the commencement of this proceeding:

(1) DHHI had already obtained an asset preservation order from a court in the People’s Republic of China (PRC); and
(2) DHHI intended to apply for similar orders from an international arbitral tribunal upon its constitution, namely, “interim preservation orders over the proceeds of the demand on the Performance Guarantee not being taken outside … Western Australia”.

  1. Duro notes that DHHI says that it commenced this proceeding to fill a perceived “gap” during which “the arbitral tribunal (for whatever reason) cannot attend to urgent interim relief in an appropriate time”. Duro says that, in reality, that “gap” only opened because DHHI voluntarily relinquished its asset preservation order in the PRC court. Commencing this proceeding was an unnecessary intermediate step taken by DHHI between the proceedings before the PRC court and the arbitral tribunal. DHHI, it says, could and ought to have left the PRC court’s order in place until the tribunal had been constituted, and saved Duro the trouble and expense of this proceeding.
  2. Duro contends that the order obtained from the PRC court served the same purposes as the substantive relief sought by DHHI in this application. This application had no utility while the PRC court’s order remained in effect. It is therefore inexplicable, it contends, that DHHI voluntarily terminated the order it obtained from the PRC court on about 14 December 2016.
  3. Duro says that prior to and after commencing this proceeding, Duro attempted to initiate conferral with DHHI by means other than written communication. Duro noted to DHHI that the “duelling correspondence” was not serving to narrow the parties’ respective issues.
  4. Duro says that on 16 December 2016, the money under the performance guarantee was paid to Duro. However, on 19 December 2016, DHHI wrote to this Court asking it to make orders to adjourn the originating process and interlocutory application indefinitely. Duro consented to DHHI’s proposal.
  5. Duro draws attention to DHHI’s allegation in [45] of its Statement of Facts filed in support of its application to the arbitral tribunal for provisional relief, that its decision to write to the Court to stay the proceeding was due to the constitution of the tribunal, which DHHI alleges occurred on 20 December 2016 (that is, the day after DHHI wrote to this Court). However, Duro says, it was clear from at least 8 December 2016, when Sir Vivian Ramsey QC confirmed his appointment as chairman, that the tribunal was to be constituted in short order. Nothing substantive had occurred with respect to the appointment of the tribunal in the interim.
  6. On 20 December 2016, this Court notified the parties that DHHI’s interlocutory application had been adjourned until 7 July 2017. Duro says DHHI did not object to an eight month adjournment and, until making this application for leave to discontinue, had not taken any further steps in this proceeding.
  7. Duro says that by letters dated 23 and 29 November 2016 and 2 and 5 December 2016, Squire Patton Boggs (SPB) on behalf of DHHI requested Duro to provide information about its financial position, including “what the asset position (and expected receivables) of [Duro] is at present”; records of an intercompany loan between Duro and Duro Felguera SA (DFSA); records of payments to DFSA; Duro’s balance sheet and draft accounting records; and documents showing Duro’s assets.
  8. It says that SPB did not attempt to justify the basis for its requests, other than to say that they were precursors to a possible application for interim asset preservation orders under Art 17J of the UNCITRAL Model Law on International Commercial Arbitration 1985, neither did SPB articulate why its client was supposedly entitled to such orders.
  9. Duro submits that the information requested comprises confidential and sensitive financial and other information to which DHHI had no legal right of access. Duro acted reasonably in refusing to provide such information, in contrast to DHHI’s inappropriate and unreasonable conduct in making such requests. On the face of it, DHHI was not entitled to interim orders as requested, given that:

(1) at the time of making those demands, payment of the proceeds of the security to Duro was prevented by the preservation order obtained by DHHI in the PRC court, and Duro had no knowledge that DHHI would take steps to lift that order. Therefore, DHHI’s demands appeared to Duro to lack any practical purpose;
(2) those circumstances and DHHI’s commencement of court and arbitral proceedings against Duro provided reasonable grounds for Duro to suspect that DHHI might use such information for a collateral purpose; and
(3) DHHI had expressly agreed not to seek to enjoin or restrain Duro from using money received under security provided under the supply contract.

  1. Duro notes DHHI also requested Duro to provide certain undertakings, including to maintain assets of a specified value in, and not take certain steps to transfer assets out of, Australia. Duro submits it was entitled to deal with the proceeds of the security pending the resolution of the dispute as it saw fit, and accordingly Duro declined DHHI’s request.
  2. Duro submits that contrary to DHHI’s assertion, none of the relief claimed in this proceeding was so urgent that it could not wait to be dealt with by the arbitral tribunal when it was constituted.
  3. Duro submits that on 9 December 2016, when DHHI commenced this proceeding, it was clear that the arbitral tribunal would be constituted and competent to determine any application for interim or conservatory measures within a matter of days:

(1) the two party appointed arbitrators had been nominated (on 24 October and 11 November 2016);
(2) the parties had jointly nominated the presiding arbitrator (on 7 December 2016); and
(3) the presiding arbitrator had confirmed that he was willing and able to accept the appointment (8 December 2016).

  1. It says that as at 9 December 2016, DHHI could not reasonably have thought that it might still take “some weeks” to constitute the tribunal.
  2. Duro contends that nothing substantive happened between then and 20 December 2016, when DHHI says the tribunal was constituted.
  3. Duro observes that on 9 December 2016, when DHHI filed the originating application in this matter, DHHI alleged that the tribunal had not been constituted. Duro submits this statement must be reconsidered given the matters above. The application was not made on any basis of urgency.
  4. In short, Duro submits DHHI had no urgent need for relief from this Court that could not have awaited the constitution of the tribunal. DHHI’s primary contention as to urgency appears to be that any delay in making a preservation or freezing order would allow Duro to dissipate the proceeds of the security, which ought to be rejected.
  5. Duro submits that any risk of asset dissipation could only arise upon DHHI withdrawing its preservation order before the PRC court, and the Bank of China paying Duro the proceeds of the security. The timing of those events was within DHHI’s control and therefore was not a rationale for DHHI to commence this proceeding.
  6. Duro says that DHHI, quite properly, did not seek for its application to the Court to be set down urgently.
  7. Duro observes that it was not until over a month after this proceeding was commenced, on 19 January 2017, that DHHI made an application to the tribunal for provisional relief, seeking (among other things):

… a freezing or asset preservation order preventing the Respondent until further order from removing assets out of Australia and from disposing of, dealing with or diminishing the value of any of its assets and money held in Australia up to the unencumbered equivalent value of the Secured Sum …

  1. Duro draws attention to what the tribunal noted in dismissing DHHI’s application:

The background to this application shows that Huarui had sought provisional relief elsewhere which, for whatever reason, it had decided to discontinue. Whilst Tribunal accepts that time is needed to prepare the Application, the length of time taken by Huarui indicates that this is not a case where there are compelling reasons for urgent relief.

  1. Duro submits that in circumstances where:

(1) the relief sought from this Court would have no utility whatsoever, but for DHHI inexplicably abandoning the preservation order it obtained from the PRC court;
(2) DHHI always intended to seek substantially the same relief from the arbitral tribunal; and
(3) awaiting the constitution of the tribunal before making its application would have resulted in neither material delay nor other prejudice to DHHI, as is obvious from DHHI’s decision to make a delayed rather than “immediate” application to the tribunal,

this application could never have had any utility, and was futile from the outset.

  1. While generally the Court ought not make a prediction as to the outcome of the case, Duro also submits that this is a case where the Court can “feel confident” that Duro “was almost certain to have succeeded if the matter had been fully tried”, based on Court’s lack of jurisdiction.
  2. Duro submits this Court lacks jurisdiction to make ancillary orders to facilitate the taking of evidence in support of arbitral proceedings seated outside Australia: see Samsung C&T Corporation, in the matter of Samsung C&T Corporation [2017] FCA 1169. It follows that DHHI’s claims for such ancillary orders would necessarily fail.
  3. Duro says that by seeking such orders as a precursor to its claim for interim measures, DHHI in effect admits that it lacked a sufficient evidentiary basis upon which to seek interim measures. Duro therefore says that the Court’s lack of jurisdiction to grant the ancillary orders sought by DHHI is fatal to the application as a whole.
  4. Thus, Duro submits that is a factor that ought way heavily against any departure from the usual rule that the party discontinuing an action pays the other party’s costs.
  5. DHHI submits that it, in fact, acted reasonably in bringing the proceeding and acted reasonably after the proceeding was brought and should not be penalised now by way of a costs order for discontinuing the proceeding.
  6. It says that the proceeding lost its utility soon after it was commenced, something it had foreshadowed to Duro beforehand was possible, in the event that it was obliged to bring the proceeding.
  7. DHHI says the proceeding was brought, at the time it was, because:

(1) although the underlying dispute between DHHI and Duro had been referred to arbitration by three arbitrators, the third arbitrator had not been formally appointed, and hence the arbitral tribunal could not exercise any interim powers;
(2) there had been a previous occasion where the appointment of an identified and agreed third arbitrator appeared likely to occur, only for that not to take place;
(3) Duro had failed, despite extensive conferral initiated and engaged in by DHHI, over approximately two weeks, to provide any information or undertakings reasonably requested by DHHI to avoid the need to bring proceedings;
(4) the provision of such information or undertakings may have allowed such application for interim relief to be brought instead before the arbitral tribunal in an orderly fashion, when that tribunal was constituted, or not brought at all; and
(5) in particular, Duro:

(a) failed, despite request, to provide any (reasonably requested) information as to its financial circumstances;
(b) failed to provide this information in circumstances where there were legitimate misgivings about Duro’s financial position and assets within the jurisdiction;
(c) failed to confirm its intentions concerning its assets within or to be within Western Australia generally including (but not limited to) a major potential identifiable asset that was prone to dissipation outside the jurisdiction – being the proceeds from a performance guarantee with the Bank of China that Duro had called upon (security); and
(d) failed to provide, despite reasonable request, any comfort or undertakings to DHHI as to the dissipation of its assets outside the jurisdiction – even at least until the arbitral tribunal had been constituted and an application could be brought therein.

  1. DHHI claims that Duro could have avoided the need for the proceeding by providing either the information requested, or the assurances or comfort sought, but instead refused to provide any such assistance in circumstances where:

(1) DHHI was (reasonably and legitimately) concerned about the dissipation of assets including, but not limited to, the proceeds of the call upon the security;
(2) there was a degree of urgency as far as DHHI was concerned as it could not run the risk of a dissipation of assets and in particular the security without having the capacity to apply to, at short notice, an arbitral or judicial body to restrain such dissipation of assets outside the jurisdiction;
(3) there was no arbitral tribunal formally convened at the time that the application had to be brought; and
(4) there was, unlike some arbitral regimes which provide for an interim single arbitrator to exercise an emergency power to make interim orders, no such provision in the arbitral regime in this case.

  1. DHHI says it made it clear at all times that its application was brought in this Court under the provisions of the International Arbitration Act 1974 (Cth) (IAA) because the information and undertakings requested had not been provided and also because the tribunal had not been convened and could not entertain any application for interim orders.
  2. Once the arbitral tribunal was convened, DHHI says, it made it clear that the proceeding could be adjourned, did not press ahead with the proceeding, and instead would apply in the arbitral proceeding for interim orders (which it in fact did).
  3. DHHI submits that in fact the provisions of the IAA are designed and apt for precisely this type of situation.
  4. That is, to fill a gap where the arbitral tribunal (for whatever reason) cannot attend to urgent interim relief in an appropriate time.
  5. DHHI says it was prudent for it to have the proceeding lodged and before this Court so that it could more easily have the matter listed before the Court for an urgent application, if need be.
  6. DHHI says that the application having outlived its usefulness (as had in fact been foreshadowed and made clear by DHHI may be the case) it should be discontinued and DHHI should not suffer any costs penalty in all the above circumstances.
  7. Indeed, DHHI claims, it is making a significant concession in not seeking its costs of the action.
  8. DHHI addresses the factual dealings between the parties in more detail. It says it initiated conferral with Duro by letter dated 23 November 2016 wherein SPB wrote to Duro’s solicitors, Jones Day (JD), setting out DHHI’s concerns regarding the proceeds of the security not being retained in the jurisdiction of Australia, and requesting urgent confirmation that Duro would not seek to move any proceeds of the security that it might obtain outside Australia until DHHI was provided with the opportunity to restrain the same, whether in the arbitration or before an Australian court.
  9. Crucially, in that letter, DHHI says:

(a) it was made clear that the ability to bring an application for interim relief in the arbitration was currently hampered “because the arbitral tribunal has not yet been convened in full”;
(b) DHHI referred to the right to bring an application in an Australian court under the provision of the UNCITRAL Arbitration Rules and the Model Law;
(c) the undertaking as to not dissipating assets outside Australia was subject to Duro’s “regular and ordinary business activities or current commitments”; and
(d) the undertaking sought, in respect of the moneys from the security, and implicitly as to dissipation of assets generally, was “until our client [DHHI] has had an opportunity to being an application to restrain the same, whether under the Arbitration (when properly convened) or to an Australian Court”.

  1. It says that:
    • Duro did not respond to that letter so, on 29 November 2016, SPB again wrote to JD stating DHHI’s concerns about Duro’s lack of confirmation that it would not remove from Australia any proceeds of the security, and asking Duro to clarify its position with respect to its requested confirmations.
    • Under the terms of the security it would be paid in to the Perth branch of Duro’s bank, HSBC.
    • Duro had called upon the security on 7 April 2016. In proceedings commenced by DHHI in the PRC court on 19 April 2016, an order for asset preservation in the nature of injunctive relief had been obtained, restraining the release of the funds to Duro.
    • However, following on from negotiations between the parties, arising from actions taken by Duro, there was a prospect at the time that the funds would be released to Duro. Hence, DHHI’s correspondence.
    • On 30 November 2016, JD responded to SPB’s letters of 23 and 29 November 2016 but did not respond substantively to any aspect of the letters and declined to provide DHHI with confirmation of the matters requested.
    • On 2 December 2016, SPB wrote to JD rejecting Duro’s asserted basis for not responding substantively and simply declining to provide the requested assurances without further information. That letter asked for an urgent response by 5 December 2016 as to whether Duro would be prepared to reconsider its position.
    • That letter also (see [9] of the letter) set out the general matters that DHHI relied upon to justify its enquiries and any foreshadowed application. This included that Duro’s operations in Australia (upon the Roy Hill Project) had concluded and there was no disincentive to the repatriation of funds and assets outside the jurisdiction.
    • On 5 December 2016, JD wrote to SPB advising it would not be in a position to respond to its 2 December 2016 letter by noon that day, though would endeavour to respond that day.
    • On 5 December 2016, SPB wrote to JD making an urgent request for discovery relating to matters about Duro’s assets and financial position, as relevant to the question of whether a freezing order should be made. No further correspondence was received from the Duro’s solicitor on 5 December 2016.
    • On 6 December 2016, JD wrote to SPB saying it was taking instructions upon SPB’s letters of 2 and 5 December 2016, and would respond to both in the same response.
    • No response to SPB’s letters of 2 and 5 December 2016 was received from JD on 6 December 2016.
    • By letter dated 7 December 2016, JD wrote to SPB asserting, inter alia, that no basis had been set out by DHHI to justify the freezing orders or discovery in aid, that these requests were an impermissible attempt to deny Duro then benefit of the security, and that the undertakings sought were a severe sanction on Duro’s business activities.
    • Later on 7 December 2016, SPB’s Mr Cureton spoke with JD’s Mr Riethmuller and explained the basis for the proceeding, including that discovery was sought in order to determine also whether a freezing order should be made.
    • SPB also wrote to JD on 7 December 2016, rejecting its assertions.
    • In a letter dated 8 December 2016, DHHI provided Duro with express detail (such as it could without further information known to Duro) of the grounds which DHHI apprehended may justify a freezing order, and which would be included as evidence in any application including:

(a) From publically available information, principally the 2015 financial report, that Duro had one ordinary share issued for one dollar, beneficially owned by DFSA.
(b) Duro had made a loss after tax of $1.28 million at the end of the 2015 calendar year, as compared to a profit of $4.08 million after tax at the end of the 2014 calendar year.
(c) There was an intercompany loan given by Duro to DFSA on 31 March 2015 which was scheduled to be repaid with interest by 31 March 2016.
(d) As at 31 December 2015, Duro had outstanding trade and other payables of $59.83 million.
(e) It was expected that Duro would need to have paid down the trades and other payables in 2016 upon the substantial completion of the Roy Hill Project, reducing its cash balance.
(f) As at 31 December 2015, Duro had cash receivables of $20.47 million, though it was expected that Duro would have been paid some of these cash receivables in 2016 upon the substantial completion of the Roy Hill Project, increasing its cash balance.
(g) In addition, the 2015 financial report and balance sheet further identified that Duro made provision for $64.15 million in performance bonds or guarantees issued by AIG Australia and CGU Insurance in favour of Samsung and $82.4 million in further performance bonds or guarantees pursuant to the construction agreements entered into by Duro and Samsung as the principal contractor of the Roy Hill Project.
(h) The $64.15 million in performance bonds were called upon by Samsung. Samsung’s entitlement to be paid its demand upon the performance bonds was determined by a decision of the Supreme Court of Western Australia in a decision of Le Miere J dated 16 December 2015. Similarly, with respect to the disclosed $82.4 million in further performance bonds or guarantees, on 18 February 2016 Samsung made demand of two performance bonds each of $38,143,767.20 (together $76.29 million). On 15 April 2016, the Supreme Court of Western Australia in a further decision of Le Miere J found that these amounts were also to be paid.
(i) Unless Duro had entered into substantial new contracts other than on the Roy Hill Project in 2016, the performance bond/guarantee provisioning in the 2015 balance sheet discloses that nearly all of the performance bonds and guarantees issued by Duro related to the Samsung contracts on the Roy Hill Project. The provision of the performance bonds discloses that only the potential amount of $6.11 million of the performance bonds/guarantees had not been demanded and may, potentially, relate to other contracts on different projects.
(j) The net effect of the calls made on Duro’s performance bonds by Samsung would be a potential or accrued liability of Duro to AIG Australia, CGU Insurance and any other bond issuers in the sum of $140.44 million.
(k) Additionally, from press reports and further decisions of the Supreme Court of Western Australia, DHHI was informed that Duro has been pursuing payment claims against Samsung and Duro had sought to enforce a number of adjudication applications in the Supreme Court of Western Australia, that had given judgment for enforcement of approximately $12 million of the total of $57.8 million claimed in adjudications.
(l) Property searches in Western Australia disclose that Duro does not own any real property in Western Australia.

  1. DHHI contends that a number of these grounds and issues had been raised with Duro by SPB’s letter dated 2 December 2016 described above.
  2. Further, it argues, it is clear that it is legitimate to seek discovery of information relating to assets relevant to the freezing order or prospective freezing order and to determine whether the freezing order should be made.
  3. Also, the undertaking and assurances that DHHI was seeking were only up to a reasonable amount (being to the value of the security) and expressly carved out transactions that had already been agreed and also regular day to day business transactions.
  4. Despite this, DHHI observes, Duro had still refused to provide the requested undertakings and information.
  5. SPB and JD continued to trade correspondence over 8 and 9 December 2016. However, such correspondence did not result in any further information or undertakings being offered or provided. Indeed, JD’s correspondence was mostly criticising SPB’s correspondence and fencing with SPB without providing any of the requested material or assurances. Further, JD’s complaints that inadequate conferral had taken place were, in the circumstances described above, unfounded.
  6. At the time the proceeding was brought, on 9 December 2016, the third member of the arbitral tribunal had been agreed – but not yet appointed.
  7. Indeed, formal appointment did not occur until 20 December 2016.
  8. There had been a previous episode of a third arbitrator being agreed (Mr Pryles) and seemingly soon to be appointed, which did not occur.
  9. After the proceeding had been filed, DHHI says, it continued to confer with Duro, through its solicitors and in the course of which:

(1) tried to reach a sensible accommodation to resolve the proceeding by the provision of information or undertakings;
(2) made it clear that it did not wish to unnecessarily proceed with the proceeding if the matter could be brought before the arbitral tribunal; and
(3) agreed that, once the arbitral tribunal had been constituted on or about 20 December 2016, that the directions hearing on 22 December 2016 should be vacated and adjourned.

  1. DHHI rejects Duro’s assertions, in JD’s letters of 8 and 9 December 2016 (and in its response to DHHI’s Genuine Steps Certificate dated 19 December 2016) and says they are, in respect to the bringing of the proceeding, disingenuous.
  2. DHHI says it did, in fact, subsequently bring an interim application in the arbitration proceedings.
  3. Notably, DHHI observes, Duro did not provide to DHHI any information about its financial circumstances as requested by Duro until that application had been brought before the tribunal and such further information was only provided in the course of the arbitral proceedings (but were only put as assertion and not on affidavit).
  4. DHHI moved for subsequent directions hearings in this Court to be adjourned and foreshadowed its intention to discontinue the proceeding on 6 July 2017.
  5. In short, DHHI submits that it brought the proceeding reasonably and reasonably maintained it after the arbitral tribunal was constituted and:
    • as foreshadowed by DHHI, it brought an application before the arbitral tribunal as soon as was reasonably practicable;
    • indicated at an early stage the intention not to proceed in this Court;
    • brought this proceeding in circumstances that were apt given why the power for the Court to determine interim applications is granted under the IAA;
    • had to bring this proceedings due to the unreasonable conduct of Duro; and
    • the proceeding no longer had any utility.
  6. DHHI submits that it ought to be granted leave to discontinue the proceeding upon the basis that there be no orders as to costs and any costs orders made be vacated.
  7. I have set out the detailed submissions of the parties which include a blowby-blow account of the commercial circumstances and correspondence that flew between the parties’ solicitors so that the ruling on costs I now make can be appropriately understood.
  8. I am not satisfied that the presumptive rule, that the discontinuing party should pay the costs of the other party, has been displaced on the facts and contentions presented to me.
  9. It is not necessary for me to decide the jurisdictional question advanced on behalf of Duro, concerning the jurisdiction or power of this Court to make the types of orders, including the ancillary orders, that DHHI initially sought.
  10. It is sufficient for me to observe that DHHI took the calculated step, having allowed the dissolution of the PRC court order that protected it, to commence this proceeding to fill a perceived “gap” in its protection regime pending a similar application to the arbitral body. It is understandable that it might have thought it appropriate to take this step. It has to be said, however, that on the facts the constitution of the arbitral tribunal was, at all material times, imminent.
  11. In my view, the strategic decision taken by DHHI, while explicable, was always one that, if it were not to be proceeded with, would likely result in DHHI having to meet any associated costs thrown away as a result of Duro being joined as a party to the proceeding.
  12. While DHHI submits that it made it clear that, in effect, the proceeding was to be a holding action, that is not a factor on its own that justifies this Court displacing the presumptive costs rule on leave being granted to discontinue the proceeding.
  13. Rather, if there is any dispute about quantum of costs incurred by Duro, having regard to how little work was required on its part in relation to the conduct of its joinder in the proceeding, that is an issue that can be resolved at an assessment of costs.
  14. For these reasons, I would make the following orders:

(1) The applicant have leave to discontinue the proceeding.
(2) The applicant pay the respondent’s costs of the proceeding, to be assessed if not agreed.

Kawasaki Heavy Industries, Ltd v Laing O’Rourke Australia Constructions Pty Ltd [2017] NSWCA 291 (17 November 2017)

COURT OF APPEAL
SUPREME COURT
NEW SOUTH WALES

KAWASAKI HEAVY INDUSTRIES LTD 
(Appellant)

V

LAING O’ROURKE AUSTRALIA CONSTRUCTION PTY LTD
(Respondent)

 

FILE NO: 2017/79847
HEARING DATES: 21-22 August 2017
DATE OF ORDERS: 17 November 2017
DECISION DATE: 17 November 2017
BEFORE: Meagher JA, Payne JA, White JA
DECISION: (1) Leave to appeal granted;
(2) Appeal dismissed;
(3) Appellant pay the respondent’s costs of the
application and appeal.
CATCHWORDS: CONTRACT – construction – construction contracts – performance bonds – injunction – serious question to be tried – balance of convenience
INTERNATIONAL ARBITRATION – interlocutory relief where underlying dispute to be determined by arbitral tribunal

 

headnote

[This headnote is not to be read as part of the judgment]

The appellant (Kawasaki) and the respondent (Laing O’Rourke) are parties to a contract with JKC, the head contractor of a cryogenic tank project near Darwin (the Subcontract). Under the Subcontract, the parties agreed to provide project services to JKC. The Subcontract also required Kawasaki and Laing O’Rourke to provide performance bonds and advance payment bonds to JKC.

To regulate their joint and several obligations under the Subcontract, Kawasaki and Laing O’Rourke entered into a Consortium Agreement. This agreement outlined the scope of work each party was responsible for under the Subcontract. By clause 14, Kawasaki agreed to take responsibility for providing the performance bonds and advance payment bonds to JKC. In the same clause of the Consortium Agreement, Laing O’Rourke agreed to provide surety bonds to Kawasaki.

By a third agreement (the LORAC Subcontract), Laing O’Rourke agreed to perform some of the work allocated to Kawasaki by the Consortium Agreement. The LORAC Subcontract in Article 6 also provided for the procurement of bonds on behalf of Laing O’Rourke to Kawasaki.

Under the Consortium Agreement, Laing O’Rourke and Kawasaki agreed to a regime for the determination of all disputes between them by international arbitration in Singapore. However, that regime allowed for interlocutory relief to be sought from a court of competent jurisdiction.

Following a dispute, Kawasaki made a call on the bonds. Laing O’Rourke applied to the Supreme Court of New South Wales restrain Kawasaki from calling on the bonds on the basis that there was a serious question to be tried about whether Kawasaki was entitled to call on the bonds in circumstances where JKC had yet to call on the corresponding bonds provided to JKC under the Subcontract. The primary judge ordered the continuation of the interlocutory injunction.

The main issues on appeal were:

(i)    whether there was a serious question to be tried that, on the proper construction of the Consortium Agreement and the LORAC Subcontract, Kawasaki was not entitled to call on the surety bonds until JKC had called on the Kawasaki bonds;

(ii)    whether the primary judge should have determined the proper construction of the Consortium Agreement and the LORAC Subcontract “as if on a final basis”; and

(iii)    whether the primary judge erred by finding that the balance of convenience favoured the continuation of the interlocutory injunction.

The Court (Meagher, Payne and White JJA) dismissing the appealheld:

In relation to issue (i), at [86]:

There was a serious question to be tried about whether Kawasaki was entitled to call upon the performance bonds issued on behalf of Laing O’Rourke under the Consortium Agreement and the LORAC Subcontract in circumstances where JKC had not made a call upon the Kawasaki bonds.

Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136; (2008) 249 ALR 458; Lucas Stewart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 and Simic v NSW Land and Housing Corporation [2016] HCA 47; (2016) 91 ALJR 108 considered.

In relation to issue (ii), at [95], [102]:

(2) The primary judge was not asked to determine this case “as if” on a final basis. The primary judge’s conclusion that he should determine the case on the basis of a serious question to be tried was correct.

Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66; Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 987 considered.

In relation to issue (iii), at [111], [115], [118], [120], [123], [125]:

(3) The primary judge did not err in determining that the balance of convenience favoured the continuation of the interlocutory injunction. In particular, it was not shown that the primary judge gave insufficient weight to the matters relied upon by Kawasaki in opposition to the grant of the injunction.

Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98; (2015) BCL 407; RCR O’Donnell Griffin Pty Ltd v Forge Group Power Pty Ltd (Receivers and Managers Appointed) (in liq)[2016] QCA 214; (2016) 32 BLC 406 considered.

Judgment

  1. THE COURT: This is an application for leave to appeal from the decision of the primary judge, Stevenson J, delivered on 5 May 2017, continuing an interlocutory injunction against the calling of certain bonds: Laing O’Rourke Australia Construction Pty Ltd v Kawasaki Heavy Industries, Ltd [2017] NSWSC 541.

Overview

  1. The rights and obligations of the parties are governed by three contracts. By the first (the JKC Subcontract), the applicant (Kawasaki or KHI) and respondent (Laing O’Rourke or LORAC) jointly and severally agreed to perform services in relation to a liquefied natural gas project as subcontractors for JKC Australia LNG Pty Ltd (JKC). The second contract (the Consortium Agreement), which was aptly described by the applicant as a “rather unusual agreement”, regulates the rights and obligations as between the two subcontractors, including by allocating the scope of work to be performed under the JKC Subcontract. By the third (the LORAC Subcontract), Laing O’Rourke agreed with Kawasaki to perform in addition some of the work allocated to Kawasaki by the Consortium Agreement.
  2. The JKC Subcontract requires the two subcontractors to provide performance bonds and advance payment bonds to JKC. By clause 14 of the Consortium Agreement, Kawasaki agreed to take responsibility for providing those performance bonds and advance payment bonds to the head contractor. By the same clause, Laing O’Rourke agreed to provide surety bonds to Kawasaki. These bonds related either to performance of work obligations or to repayment of advance payments.
  3. Following a dispute concerning the project, Laing O’Rourke applied to restrain Kawasaki from calling on the bonds which the former had provided. Under the Consortium Agreement, Laing O’Rourke and Kawasaki agreed to a regime for the determination of all disputes between them by international arbitration in Singapore. However, that regime allowed for interlocutory relief to be sought from a court of competent jurisdiction. In that context, the principal question before the primary judge was whether there was a serious question to be tried that, properly construed, the Consortium Agreement and the LORAC Subcontract prevented Kawasaki from calling on the bonds provided by Laing O’Rourke for the benefit of Kawasaki unless JKC had called on the corresponding bonds provided by Kawasaki for the benefit of JKC.
  4. In a careful and thorough judgment, the primary judge continued an interlocutory injunction restraining Kawasaki from calling on the surety bonds provided by Laing O’Rourke. For the reasons which follow, we would grant leave to appeal but dismiss the appeal from his Honour’s orders.

Background Facts

The JKC Subcontract

  1. JKC is the head contractor in relation to a project run by Inpex Operations Australia Pty Ltd for the construction of four cryogenic tanks used to store liquefied natural gas at a site near Darwin.
  2. On 26 April 2012, Laing O’Rourke and Kawasaki entered into the JKC Subcontract under which they as a consortium agreed to provide project management, engineering and other services to JKC in relation to the cryogenic tanks project.
  3. Article 2.1 of the JKC Subcontract defines JKC as the “Contractor”, and Kawasaki and Laing O’Rourke as the “Subcontractor”. Under Article 8.1, Kawasaki and Laing O’Rourke are “jointly and severally liable to the Contractor for the performance of the Project in accordance with the JKC Subcontract.”
  4. The JKC Subcontract also requires that the JKC Subcontractor provide:
  1. an unconditional and irrevocable performance bond, described as Bank Guarantee(s), initially equal to 10 per cent of the JKC Subcontract Price, comprising an Initial Bank Guarantee and a Warranty Bank Guarantee, with each equal to five per cent of the JKC Subcontract Price (Article 35.1); and
  2. an Advance Payment Guarantee to secure the obligation of the Subcontractor to repay an advance payment made by JKC to the consortium by way of an interest-free loan (Article 34.9).

Consortium Agreement

  1. To regulate their joint and several obligations, Kawasaki and Laing O’Rourke entered into the Consortium Agreement on 26 April 2012. An important feature of that contract was the agreement that Kawasaki alone would provide the bonds referred to immediately above for JKC’s benefit on behalf of both itself and Laing O’Rourke (the Kawasaki Bonds). While those bonds are not in evidence, this agreement is reflected in clause 14 of the Consortium Agreement, on the construction of which the present application turns:

“Clause 14 – Security

Security

(a) KHI must provide Security in respect of the Subcontract (to the extent required by the Subcontract), and must bear itself the costs and obligations associated with the Security.

(b) If a call is made on the Security such that it results in the Parties not contributing to the call in proportion to their liability pursuant to this Agreement, then the Party or Parties that have contributed less must, on demand, pay the difference to the Party or Parties that have contributed more.

(c) Where a call is made on the Security and it is not possible to determine at the date of such call which Party is liable for the event which led to the call on the Security, then such call will be borne by KHI until it is determined by the Steering Committee.

(d) The Parties must use their best endeavours to mitigate any loss suffered as a result of a call on any KHI.

(e) Laing O’Rourke must provide surety bonds to KHI in the following amounts:

(i) 10% of the value of the relevant portion of the Subcontract Price which relates to LORAC’s Allocated Scope of Work and the LORAC Subcontract Works, for securing Laing O’Rourke’s due performance of its obligations under the Subcontract; and

(ii) that portion of the Advance Payment which relates to the LORAC Allocated Scope of Work and the LORAC Subcontract Works, for securing payment to Laing O’Rourke of its portion of the Advance Payment in accordance with the Subcontract.

(f) The surety bonds in clause 14(e) must be provided by Laing O’Rourke to KHI at the same time when KHI is obliged to submit the Security under the Subcontract, and Laing O’Rourke must bear itself the costs and obligations associated with the surety bonds. Any other conditions of the surety bonds submitted by Laing O’Rourke to KHI shall, unless otherwise agreed by the Parties before submission, be the same as the Security submitted to by KHI in accordance with the Subcontract.

(g) The surety bonds will be required for the same duration as the relevant Security is required under the Subcontract, and must be released by KHI at the same time that the Security is released by the Contractor under the Subcontract. KHI must provide Laing O’Rourke with immediate notice of a call on KHI’s Security.”

  1. Clause 19 of the Consortium Agreement provides that all disputes between Kawasaki and Laing O’Rourke are to be determined by international arbitration under the International Chamber of Commerce Rules. The seat of the arbitration is to be in Singapore. The governing law of the arbitration is Singapore law. For present purposes, the only part of clause 19 (the dispute resolution clause) which should be noted is clause 19.1:

“Clause 19 – Dispute resolution

“19.   Dispute Resolution

19.1   No proceedings

A Party must not start court proceedings (except proceedings seeking    interlocutory relief) in respect of a dispute arising under or in    connection with this agreement unless it has complied with this clause   19. ….”

  1. In relation to performance of the JKC Subcontract work, the Consortium Agreement provides that:
  1. Laing O’Rourke would be responsible for the civil works (the LORAC Allocated Scope of Work); and
  2. Kawasaki would be responsible for mechanical, piping, equipment and electrical and instrumentation works as well as tests and commissioning (the KHI Allocated Scope of Work).
  1. The parties also agreed that Laing O’Rourke would be responsible for performing certain obligations which were within the KHI Allocated Scope of Work. To reflect this, they entered into a separate agreement, referred to as the “LORAC Subcontract”, and described at [15]-[18] below.
  2. At the outset, the following features of the surety bond obligation in clause 14 of the Consortium Agreement may be noted:
  1. if JKC made a call on the Kawasaki bonds, then both Kawasaki and Laing O’Rourke would have to contribute to the call in proportion to their liability pursuant to the Consortium Agreement (sub-clause 14(b));
  2. in that event, if it could not be determined or agreed as between Kawasaki and Laing O’Rourke which party was “liable for the event which led to the call” on the Kawasaki bonds, then such call would “be borne by KHI until it is determined by the Steering Committee”, a body created under the dispute resolution provisions of the Consortium Agreement (clause 10 and sub-clause 14(c));
  3. Laing O’Rourke would provide “surety bonds” to Kawasaki:
  1. in the amount of 10 per cent of the value of the relevant portion of the JKC Subcontract Price which relates to LORAC’s Allocated Scope of Work and the LORAC Subcontract Works; and
  2. in the amount of the portion of the Advance Payment from JKC which relates to the LORAC Allocated Scope of Work and the LORAC Subcontract Works, “for securing payment to Laing O’Rourke of its portion of the Advance Payment in accordance with the Subcontract” (sub-clause 14(e)); and
  1. the surety bonds must be on the same conditions as the Kawasaki bonds unless otherwise agreed, for the same duration as the Kawasaki Bonds are required under the JKC Subcontract, and released by KHI at the same time that the Kawasaki Bonds are released by JKC under the JKC Subcontract (sub-clauses 14(f) and (g)).

LORAC Subcontract

  1. The second of the relevant agreements between Kawasaki and Laing O’Rourke is the LORAC Subcontract, which includes a “Purchase Order” and “Special Terms and Conditions”. An earlier draft purchase order had been issued by Kawasaki to Laing O’Rourke pursuant to Special Conditions (g) to (l) of the Consortium Agreement. However, the parties proceeded on the basis that the relevant Purchase Order was that dated 12 June 2012.

  2. That Purchase Order provides in Article 1 that the following documents constitute “an integral part” of it and that, in the event of conflict between the LORAC Subcontract documents, their “order of precedence” is as follows:
  1. the Purchase Order itself;
  2. the Special Terms and Conditions attached to the Purchase Order;
  3. the Consortium Agreement;
  4. another document related to the technical specifications for erection works which is not relevant for present purposes;
  5. the General Terms and Conditions attached to the JKC Subcontract; and
  6. the EPC-Cryogenic Tanks Instructions to Tenderers.
  1. By Article 2 of the Purchase Order, Laing O’Rourke agreed to perform the following obligations which, under the Consortium Agreement, were within the KHI Allocated Scope of Work:

“LORAC shall provide materials and equipment, and shall perform all the works whatsoever nature or description, as set forth in TECHNICAL SPECIFICATIONS and as required under LOCAL SUBCONTRACT (hereinafter called “LORAC SUBCONTRACT WORKS”).”

  1. Another key provision of the LORAC Subcontract is the requirement in sub-Article 2.1.1 of the Special Terms and Conditions that a 10 per cent “Advance Payment” be paid within 30 days of Kawasaki receiving the bonds stipulated in Article 6 of the same document. Article 6 reads:

““Article 6: BONDS

LORAC shall deliver to KHI surety bonds in the form set out in Annexure 1A of SUBCONTRACT GENERAL TERMS & CONDITIONS pursuant to Article 35.1 ‘Bank Guarantees’ of SUBCONTRACT GENERAL TERMS & CONDITIONS and Article 16 [it is common ground this should be read as Clause 14] ‘Security’ of CONSORTIUM AGREEMENT.

6.1 Advance Payment Bond

A surety bond for the Advance Payment Bond shall be issued and submitted to KHI for a sum equal to ten per cent (10%) of LORAC SUBCONTRACT PRICE within thirty (30) days after the Effective Date of LORAC SUBCONTRACT.

The Advance Payment Bond must be valid from the Effective Date of LORAC SUBCONTRACT until the full amount of the Advance Payment has been repaid.

6.2 Initial Bond

Surety bonds for the Initial Bond shall be issued and submitted to KHI within thirty (30) days after the Effective Date of LORAC SUBCONTRACT.

The amount of the Initial Bond must be equal to ten per cent (10%) of LORAC SUBCONTRACT PRICE and must be provided separately as two (2) bonds, each equal to five per cent (5%) of LORAC SUBCONTRACT PRICE.

One of Initial Bond must be valid from the Effective Date of LORAC SUBCONTRACT until thirty (30) days after the date of the last Provisional Acceptance Certificate stipulated in Article 19.3 ‘Provisional Acceptance Certificate’ of SUBCONTRACT GENERAL TERMS & CONDITIONS.

The other one must be valid from the Effective Date of LORAC SUBCONTRACT until thirty (30) days after the date of the Final Acceptance Certificate stipulated in Article 21 ‘Final Acceptance” of SUBCONTRACT”.

[Emphasis in original]

The surety bonds

  1. There are eight bonds relevant to these proceedings, which have a total value of AUD$49,415,052.00. They may be organised into the following three categories:

  1. four bonds to cover 10 per cent of the portion of the JKC Subcontract Price that related to the LORAC Allocated Scope of Works (the Allocated Work Bonds):
  1. Bond No. 201205-0079 (AUD$14,507,781.00), which expires, inter alia, 30 days after the date of the Provisional Acceptance Certificate;
  2. Bond No. 201205-0080 – (AUD$14,507,781.00), which expires, inter alia, 30 days after the date of the Final Acceptance Certificate;
  3. “Top up” Bond No. SL002/102 (AUD$2,302,841.00), which expires, inter alia, 30 days after the date of the Final Acceptance Certificate; and
  4. “Top Up” Bond No. SL002/103 (AUD$2,302,841.00), which expires, inter alia, 30 days after the date of the Final Acceptance Certificate;
  1. two bonds to cover 10 per cent of the price of the LORAC Subcontract works (the LORAC Subcontract Work Bonds):
  1. Bond No. 201205-0081 (AUD$6,317,523.00), which expires, inter alia, 30 days after the date of the Provisional Acceptance Certificate; and
  2. Bond No. 201205-0082 (AUD$6,317,523.00), which expires, inter alia, 30 days after the date of the Final Acceptance Certificate.
  1. two bonds to cover the portion of the Advance Payment from JKC that related to the LORAC Subcontract works (the Advance Payment Bonds):
  1. Bond No. 201205-0128 (AUD$1,895,257.00), which expires, inter alia, when the full amount of the advance payment has been repaid by Laing O’Rourke; and
  2. Bond No. 201205-0129 (AUD$1,263,505.00) which expires, inter alia, when the full amount of the advance payment has been repaid by Laing O’Rourke.
  1. In addition, bonds were issued to cover the portion of the Advance Payment from JKC that related to the LORAC Allocated Scope of Works. However, these have been returned.
  2. The parties agreed that the Allocated Work Bonds were provided under sub-clause 14(e)(i) of the Consortium Agreement. However, they disagreed as to the basis for the other bonds. Laing O’Rourke submitted that the LORAC Subcontract Work Bonds were also provided under sub-clause 14(e)(i) and the Advance Payment Bonds under sub-clause 14(e)(ii). Kawasaki submitted that the LORAC Subcontract Work Bonds were provided under sub-Article 6.1 and the Advance Payment Bonds under Article 6.2 of the Special Terms and Conditions to the LORAC Subcontract.

The dispute between Kawasaki and Laing O’Rourke

  1. There have been significant delays in the completion of the cryogenic tanks project in Darwin. The time for performance of the JKC Subcontract has long passed. Kawasaki and Laing O’Rourke have fallen out and each has identified claims against the other asserting responsibility for the failure of the project.
  2. On 31 January 2017, JKC asserted an entitlement to damages from Laing O’Rourke and Kawasaki in excess of AUD$102 million. Despite that claim, JKC has not called on the Kawasaki Bonds.
  3. Laing O’Rourke has stopped work on the project site. Kawasaki says it is trying to complete all of the work under the JKC Subcontract. It was asserted by Kawasaki at the hearing that the bonds identified above at paragraph [19] in (1)(a) and (2)(a), being those referable to the Provisional Acceptance Certificate, will likely expire at the end of 2017 and those identified in (1)(b), (c), (d) and (2)(b) referable to the Final Acceptance Certificate, will likely expire at the beginning of 2018.
  4. On 14 March 2017, Kawasaki issued notices of call to the financial institutions that had issued the surety bonds at the request of Laing O’Rourke under clause 14(e) of the Consortium Agreement and Article 6 of the LORAC Subcontract. Notice of the calls was not given to Laing O’Rourke. The quantum of the eight surety bonds remaining as the subject of this dispute is AUD$49,415,052.00 (see [19] above).
  5. On 15 March 2017, Kawasaki gave notice to Laing O’Rourke that it purported to terminate the Consortium Agreement and the LORAC Subcontract.
  6. Later on 15 March 2017, Laing O’Rourke commenced proceedings in the NSW Supreme Court seeking an interlocutory injunction to restrain Kawasaki from calling on the surety bonds without the consent of Laing O’Rourke or an order of the arbitral tribunal constituted under the ICC Rules as contemplated by clause 19 of the Consortium Agreement. The originating process sought an order under s 7(2) of the International Arbitration Act 1974 (Cth) that “so much of these proceedings as involves the determination of a claim for final relief is stayed”.
  7. On 15 March 2017, upon the giving of the usual undertaking as to damages by Laing O’Rourke, Ball J granted Laing O’Rourke an ex parte injunction preventing Kawasaki from calling on the bonds. Later the same day, Kawasaki informed Laing O’Rourke that it already had made a call on the surety bonds. Ball J thereupon made further ex parte orders requiring Kawasaki to withdraw the call. Later that day, Kawasaki withdrew the call on the bonds.
  8. On 4 April 2017, Laing O’Rourke gave written notice to Kawasaki of a dispute within the meaning of clause 19 of the Consortium Agreement (see [11] above) about Kawasaki’s right to call on the “surety bonds” and gave notice that if the matter was not resolved within 20 days, Laing O’Rourke would refer the matter for international arbitration pursuant to that clause.

Decision of the primary judge

  1. On 13 and 28 April 2017, the primary judge heard Kawasaki’s application to discharge the interlocutory injunction granted by Ball J. It is important to note at the outset that both parties invited the primary judge to consider the question before him on a “serious question to be tried” basis, and not on a final or “as if final” basis.
  2. Before the primary judge, Kawasaki submitted that there was not a serious question to be decided as to whether clause 14 fettered its entitlement to call on the bonds. In support of that position, it principally relied on the following statement in the decision of the Full Court of the Federal Court (French, Jacobson and Graham JJ) in Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2008] FCAFC 136; 249 ALR 458 at [83]:

“[83] Clear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where a breach is alleged in good faith, that is, non-fraudulently.”

  1. Rejecting that submission, the primary judge concluded:
  1. that the Full Court’s observations were directed to contracts under which a condition precedent to a call on the performance bond by the beneficiary was breach of the contract by the party that established the bond: [35];
  2. that the unconditional nature of the bonds is merely one factor to be considered when looking at all of the relevant circumstances, and does not give rise to a requirement of “clear words” or a presumption in favour of a construction permitting recourse to the bonds by Kawasaki: [39]; and
  3. that the question of construction is to be determined “in the usual way” by reference to the familiar principles of construction stated by the High Court in Simic v NSW Land and Housing Corporation [2016] HCA 47; (2016) 91 ALJR 108 at [78]: [40].
  1. His Honour also noted that the correctness of the decision in Clough had been doubted by Macfarlan JA (with whom Campbell JA agreed) in this Court in Lucas Stewart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 at [37]-[43]: [34].
  2. In relation to the contractual basis for the LORAC Subcontract Work Bonds and the Advance Payment Bonds, the primary judge held that all are governed by clause 14 of the Consortium Agreement: [48]. His Honour also concluded from the language of Article 6 of the Special Terms and Conditions that it was intended to confirm and, to a limited extent, supplement clause 14 of the Consortium Agreement; it did not modify or expand the circumstances in which Kawasaki could call the surety bonds: [57].
  3. Whilst noting that clause 14 does not state those circumstances expressly, the primary judge held that its provisions suggest “very strongly” that it was the intention of the parties that Kawasaki could only call on the surety bonds if a call had been made on it by JKC under the Kawasaki Bonds: [60]. After examining the proper construction of clause 14 at [61]-[75], his Honour concluded that there was a serious question to be tried as to whether clause 14 should be construed as making Kawasaki’s entitlement to call on the surety bonds conditional upon JKC first calling on the Kawasaki Bonds – that is, that they are to be seen as “back to back” bonds: [82].
  4. As JKC had not called on the Kawasaki Bonds, his Honour held that he “would go further” than to say there is a serious question to be tried as to whether Kawasaki is entitled to call on the surety bonds, and say that “it is strongly arguable that [Kawasaki] is not” entitled to do so: [83]-[85].
  5. The primary judge gave six reasons for his conclusion that the balance of convenience favoured the continuation of the injunction granted by Ball J:
  1. the “better view” is that Kawasaki is not at the moment entitled to call on the surety bonds: [87];
  2. Kawasaki did not point to any substantial prejudice to it if the existing restraint is continued: [88];
  3. no arbitral tribunal has yet been established to deal with the underlying dispute. Laing O’Rourke could not at this time approach the arbitral tribunal to seek an order restraining Kawasaki from calling on the bonds. A dissolution of the injunction in these circumstances would see Laing O’Rourke “forever lose” the right to restrain a call on the surety bonds: [89];
  4. it appears likely that Laing O’Rourke may suffer significant prejudice if Kawasaki calls on the surety bonds in circumstances where it would be very difficult for Laing O’Rourke to prove, in monetary terms, what damage it has suffered; thus, damages may not be an adequate remedy in the circumstances: [90];
  5. specifically, there was evidence to suggest that if Kawasaki was able to call on the surety bonds this might place Laing O’Rourke, or a related company, in breach of minimum cash requirements under a number of finance facilities: [93]; and
  6. also, there is the possibility of reputational damage to Laing O’Rourke in the industry in which it operates if it became known that a performance bond has been called upon: [94].
  1. On 5 May 2017, the primary judge declined to discharge the interlocutory injunction. The orders made were:

“1. Orders made in chambers accordance with the Short Minutes of Order, initialled by Stevenson J, dated today and placed with the papers.

2. Stand the matter over for directions before me at 9.30am on 9 May 2017.

SHORT MINUTES OF ORDER

1 Upon the Plaintiff by its counsel giving the usual undertaking as to damages, ORDER that, until the further order of this Court and subject to any order to the contrary by the Arbitral Tribunal, the Defendant is restrained from calling upon the following surety bonds or any of them without the consent of the Plaintiff:

a. 201209-0070 dated 4 June 2012 issued by Swiss Re International SE;

b. 201209-0080 dated 4 June 2012 issued by Swiss Re International SE;

c. 201209-0081 dated 4 June 2012 issued by Swiss Re International SE;

d. 201209-0082 dated 4 June 2012 issued by Swiss Re International SE;

e. 201209-0128 dated 4 June 2012 issued by Swiss Re International SE;

f. 201209-0129 dated 4 June 2012 issued by Swiss Re International SE;

g. SL0002/102 dated 9 December 2016 issued by CGU Insurance Limited; and

h. SL0002/103 dated 9 December 2016 issued by CGU Insurance Limited.

2 ORDER the Defendant to pay the Plaintiff’s costs of and incidental to paragraph 1 of the Plaintiff’s summons filed 15 March 2017.

In these orders,

“Arbitral Tribunal” means an arbitral tribunal appointed as contemplated by clause 19 of the Consortium Agreement.

“Consortium Agreement” means the document entitled ‘Ichthys Onshore TNK-1 EPC Cryogenic Tanks Consortium Agreement” dated 26 April 2012 and signed by the parties.

This matter is listed for Directions on 9 May 2017 9:30 AM before the Supreme Court – Civil at Supreme Court Sydney.”

Issues on appeal

  1. By its amended notice of appeal, Kawasaki advanced the following grounds:

  1. the primary judge erred in failing to conclude that clear words were required to support a construction which inhibited or prevented Kawasaki from calling upon the bonds (Ground 1);
  2. the primary judge erred by not taking into account the contractually required terms of the bond in construing the contracts for the purpose of determining whether those contracts inhibited or prevent Kawasaki from calling upon the bonds (Ground 2);
  3. the primary judge ought to have held that there were no clear words in the contracts between the parties to support a construction which inhibited or prevented Kawasaki from calling upon the bonds (Ground 3);
  4. in the alternative to Grounds 1 – 3, the primary judge should have held that on a proper construction of the contracts, Kawasaki was not inhibited or prevented from calling upon the bonds (Ground 4);
  5. the primary judge should have reached the conclusion in Ground 3 or Ground 4 on either premise (that the contractually required terms of the bonds formed part of the terms of the contract or they did not form part of the contract) (Ground 5);
  6. the primary judge ought to have determined, on a final basis, the proper construction of the contracts in relation to the right to call upon the bonds (Ground 6); and
  7. the primary judge miscarried in exercising his discretion in determining where the balance of convenience lay because (Ground 7):
  1. the primary judge did not take into account the prejudice to Kawasaki if the interlocutory injunction were granted, namely, that there was a risk that the bonds would expire before final determination of the underlying dispute between the parties and therefore erred in concluding that there would be no substantial prejudice to Kawasaki if the existing restraint continued;
  2. in the case of the Purchase Order, the primary judge failed to take into account Laing O’Rourke’s agreement to waive any right that it may have to obtain an injunction or other remedy or right against Kawasaki in respect of Kawasaki having recourse to the bonds;
  3. the primary judge erred in concluding that it appears likely that Laing O’Rourke may suffer significant prejudice if Kawasaki calls on the bonds;
  4. the primary judge ought to have concluded that, in providing the bonds, Laing O’Rourke assumed the risk that Kawasaki could have recourse to the bonds pending final determination of the dispute;
  5. there was no finding or evidence that Laing O’Rourke would suffer prejudice if some, but not all, of the bonds were called upon;
  6. the primary judge incorrectly concluded that Laing O’Rourke could not seek the interlocutory orders sought from an arbitral tribunal, and incorrectly took that conclusion into account as a factor weighing in favour of Laing O’Rourke on the question of balance of convenience; and
  7. the primary judge erred in finding or inferring that if the bonds were called upon there was a possibility of reputational harm to Laing O’Rourke.

Leave to appeal

  1. Because the primary judge’s decision was interlocutory, Kawasaki requires leave to appeal under s 101(e) of the Supreme Court Act 1970 (NSW).
  2. In our view, the issues raised are of sufficient public importance to warrant a grant of leave to appeal.

Grounds of appeal 1 – 5

  1. The parties approached grounds 1 – 5 as involving similar and overlapping issues. It is convenient to deal with those issues together.

Appellant’s submissions

  1. Kawasaki submitted that the weight of authority in Australia was to the effect that a court will prevent a party who is the beneficiary of performance bonds from calling on a bond in very limited circumstances. Specifically, it contended that the primary judge erred in not applying the statement of principle in Clough at [83], extracted at [31] above. That principle was said to be binding on this Court absent a finding that it is “plainly wrong”.
  2. Kawasaki submitted that bonds such as those in these proceedings are “the life-blood of international commerce”, and accordingly that it is sensible that “clear words” are required to prevent a party from having recourse to them. In this respect, it also relied on the following statement of Gageler, Nettle and Gordon JJ in Simic at [88]:

“[88] Under the latter form of security, the issuer (here, ANZ) is not required or intended to be concerned with the terms of the underlying contract (here, the Construction Contract) or, subsequently, with whether the construction contractor (here, Nebax) has sufficiently performed its obligations under that contract. The issuer’s sole concern is to provide security in accordance with its contract with its customer (here, Nebax) and, when the security is issued, to see whether there has occurred the event stipulated in the instrument on which the issuer’s obligation to pay arises. In effect, such securities “create a type of currency” and are treated as being “as good as cash”. Instruments of this nature are essential to international commerce and, in the absence of fraud, should be allowed to be honoured free from interference by the courts.”

  1. In order to “be as good as cash”, Kawasaki submitted, the surety bonds must be able to be called as and when the person who holds them seeks to have the cash, subject only to a good faith restriction. Any restriction on the right to call absent the clear words required by the Full Federal Court in Clough was said to deprive the bonds of their intended cash-like quality.
  2. Kawasaki also submitted that neither the Consortium Agreement nor the LORAC Subcontract contain a negative stipulation preventing it from calling on the bonds, let alone “clear words” to that effect. In support of this, it submitted that “[i]t’s not enough just to focus on paragraphs (a), (b) and (c) of clause 14”, which instead needed to be viewed side by side with the terms of the bonds themselves.
  3. Kawasaki submitted that sub-clauses 14(a), (b) and (c) of the Consortium Agreement regulate the parties’ rights and obligations in the event of JKC making a call on the Kawasaki Bonds in relation to an alleged breach of their joint and several obligations to JKC. In that event, it accepted that sub-clause 14(c) would prevent it from calling on the surety bonds until the mechanisms provided for by Articles 6, 8 and 19 were undertaken to determine who was liable to pay and in what amount. Where JKC had not made such a call (as in the present case), those sub-clauses were said to be irrelevant.
  4. Accordingly, Kawasaki contended that clause 14 addresses two subjects: sub-clauses 14(a), (b) and (c) concern the rights and obligations of the parties with respect to the Kawasaki Bonds provided to JKC; and sub-clauses 14(d), (e), (f) and (g) concern a separate matter, namely the surety bonds provided by Laing O’Rourke to Kawasaki. In relation to the former, the parties agreed that, in the event of a call by JKC, Kawasaki would initially bear responsibility for meeting that call (absent contrary agreement). However, in relation to the latter, Laing O’Rourke was obliged to meet a call made by Kawasaki without recourse to the elaborate dispute resolution mechanism the parties had agreed. It was submitted that, other than a possible connection via sub-clause 14(c) in a case where JKC had made a call on the Kawasaki Bonds, the bonds were otherwise addressing and securing different subject matters.
  5. As to the LORAC Subcontract Work Bonds and Advance Payment Bonds (see [19]-[21] above), Kawasaki’s principal submission was that those bonds were issued under Article 6 of the LORAC Subcontract and that the JKC Subcontract and clause 14 of the Consortium Agreement were irrelevant. In the alternative, Kawasaki submitted that, if clause 14 and the JKC Subcontract were relevant to the determination of the parties’ rights and liabilities under the LORAC Subcontract, the effect of sub-Article 35.3(b) of the JKC Subcontract was that Laing O’Rourke had promised not to seek interlocutory relief in relation to the surety bonds. That sub-Article provides:

“(b)   Subcontractor waives any right that it may have to obtain an injunction    or any other remedy or right against any party in respect of Contractor    having recourse to the Bank Guarantee(s).”

  1. It was submitted that this provision and sub-clause 14(c) of the Consortium Agreement are not inconsistent because they deal with different subject matters. Kawasaki accepted, if both sub-Article 35.3(b) and sub-clause 14(c) are engaged and there is an inconsistency between them, that clause 14 would prevail.

Respondent’s submissions

  1. Laing O’Rourke submitted that there is no special rule of construction for contracts involving surety bonds to the effect that “clear words” are required before a contract will be construed as prohibiting a call upon the bonds in certain circumstances or absent the satisfaction of some condition. The contrary position was said to arise from a “misreading” of Clough.
  2. It was submitted that nothing in Clough would prevent this Court from upholding the construction that it advances:

“…properly understood, the reasoning in Clough serves to confirm that the task for a court considering an application to restrain an apprehended call on a performance guarantee is to ‘constru[e] the terms of the contract’ in the ordinary way. Where – on the proper construction of the parties’ contract – there is an agreed allocation of risk as to who is to be out of pocket pending resolution of the dispute about breach”, the court should not favour a construction which is inconsistent with [that] agreed allocation of risk absent clear words requiring such a course.”

  1. Further, Laing O’Rourke submitted that these proceedings involve a different question from that in Clough. In Clough, the court was required to consider the question whether the contract there under consideration should be construed as prohibiting a surety bond being called upon in the absence of an objective non-compliance with the contract or whether it was sufficient for the party making the call to allege in good faith a non-compliance with that contract. Here, this Court is considering a quite different question: namely, whether the Consortium Agreement should be construed as prohibiting the surety bonds from being called in the absence of a call by JKC on the Kawasaki Bonds under the JKC Subcontract.
  2. In the alternative, the respondent submitted that, if this Court accepted Kawasaki’s submission that Clough is to be read as creating a special rule of construction applicable to contracts for the provision of surety bonds, it should not be followed on the basis that it would be inconsistent with the authorities. Specifically, the respondent relied on the consideration of the authorities conducted by White J (as his Honour then was) in Universal Publishers v Australian Executor Trustees [2013] NSWSC 2021 at [28]-[58]. It submitted that his Honour correctly concluded in that case at [58]:

“In my view, the decision in Lucas Stuart Pty Limited v Hemmes Hermitage Pty Limited is inconsistent with the suggestion that Clough Engineering lays down principles applicable to all contracts that where an unconditional performance bond, or a like instrument, is provided as security for a party’s obligations, express words will be needed to preclude a beneficiary of such security from calling on it if a breach is alleged in good faith.”

  1. The respondent also submitted that any such special rule of construction would be contrary to the reasoning of the High Court in Simic (per Gageler, Nettle and Gordon JJ at [77]-[78]).
  2. It was said that this Court should construe the relevant provisions in this case, as did the West Australian Court of Appeal in CPB Contractors v JKC Australia (No 3) [2017] WASCA 132, on the basis that there is no special rule of contractual construction in relation to performance bonds.
  3. Alternatively, Laing O’Rourke submitted that, even if this Court did find that Clough created such a special rule, it should prefer the “better” construction that the primary judge found. That is said to be sufficient to give rise to a serious question to be tried – namely whether Kawasaki is not entitled to call on the surety bonds in the absence of a call by JKC on the Kawasaki Bonds – that warrants the interlocutory relief granted by the primary judge.

Consideration of grounds 1 – 5

Preliminary observations

  1. The Consortium Agreement, as Senior Counsel for Kawasaki observed, is a “rather unusual agreement”. The parties have devised their own prescriptive internal dispute resolution mechanism in Articles 6, 8, 14 and 19 of the Consortium Agreement. The question is whether that agreement, in describing the parties’ obligations with respect to the provision of the surety bonds, supports the grant of an interlocutory injunction pending determination of a dispute between Kawasaki and Laing O’Rourke by international arbitration in a forum agreed by the parties.
  2. Much of the debate on the appeal started from the premise advanced by Kawasaki that a performance bond, by its very nature, is a “risk allocation device”. That description expresses a conclusion after a process of construction has been worked through and does not, of itself, provide any real assistance in addressing the question here. The answer to that question requires a consideration of the rights and obligations of the parties under the JKC Subcontract, the Consortium Agreement, the LORAC Subcontract and the performance bonds themselves.

Clough and a suggested special rule of construction

  1. Clough does not stand for the proposition that there is a special rule of construction relating to all contracts in which there is a reference to a performance bond.
  2. At [82]-[83] of Clough, the Full Federal Court said:

[82]   Notwithstanding the importance of commercial practice, the statements in these authorities do not suggest that the Court should depart from the task of construing the terms of the contract in each case. What the authorities emphasise is that the commercial background informs the construction of the contract. In particular, as Callaway JA said in the passage quoted above, the Court ought not too readily favour a construction which is inconsistent with an agreed allocation of risk as to who is to be out of pocket pending resolution of the dispute about breach.

[83]   It follows that clear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where a breach is alleged in good faith, ie, non-fraudulently. This view is also supported by the remarks of Charles JA in Fletcher Construction [1998] 3 VR at 820-821. There, his Honour analysed and placed some doubt upon the correctness of decisions such as Pearson Bridge (NSW) Pty Ltd v State Rail Authority of New South Wales (1982) 1 Australian Construction Law Reports 81 at 86.”

  1. The first sentence of paragraph [83], in the context of the sentence which immediately preceded it at the end of [82], makes clear that what is said in [83] applies when, on the correct construction of the contract between the parties, it may be concluded that there is “an agreed allocation of risk as to who is to be out of pocket pending resolution of the dispute about breach”.
  2. This understanding of Clough is consistent with the judgment of Macfarlan JA in Lucas Stewart Pty at [37]-[43] and the decision of White J in Universal Publishers at [58]-[61], in passages with which we agree. It is also consistent with the decision of the West Australian Court of Appeal in CPB Contractors v JKC Australia (No 3) at [87]-[89]:

“[87] A number of cases have suggested that the widespread commercial practice that performance bonds are treated as the equivalent of cash is a significant factor in construing a provision of a construction contract regulating recourse to a performance bond. Some cases appear to start from a presumption arising from the nature of a performance bond that the beneficiary has an unfettered right to call upon the bond, and frame the question of construction in terms of whether the provisions of the contract qualify the right to call upon the performance bond. Some of what was said on this topic in Clough Engineering has been doubted in two recent appellate decisions. In these recent cases it has been suggested that the unconditional nature of the financial institution’s promise to pay the principal has ‘limited relevance’ to the construction of the underlying contract and could be seen as serving merely the purpose of protecting the principal from the risk of the contractor’s insolvency.

[88] Counsel for the subcontractor submits that this appeal raises an important point of general principle arising from this difference of approach. That is not how we view this appeal. While we accept that some differences of view have emerged in recent appellate decisions, in our view the resolution of this appeal lies in the proper construction of the provisions of the Subcontract, rather than in attempting to state general principles of broad application or in reconsidering the questions of construction of the different contractual provisions in the other decisions.

[89] The subcontractor rightly accepts that when, as here, the Subcontract annexes and approves the form of the performance bond, in construing the terms of the Subcontract, the unconditional nature of the performance bond, and its terms generally, can be taken into account. That is an application of the basic principle that in construing a term of a contract, regard must be had to the terms of the contract as a whole. However, the terms of the performance bond do not control the question of construction of the Subcontract. The significance of the terms of the performance bond in the process of construction of the underlying contract will fall to be assessed in the light of all of the particular terms of the underlying contract.” (footnotes omitted)

  1. Any suggestion that Clough stands for a broader proposition that there is a special rule of construction relating to all contracts in which there is a reference to a performance bond would be inconsistent with the decision of the High Court in Simic at [78], where the construction of various performance bonds themselves was addressed:

“[78] There was also no dispute about those principles of construction. The proper construction of each Undertaking is to be determined objectively by reference to its text, context and purpose. As was stated in Electricity Generation Corporation v Woodside Energy Ltd at [35]:

[T]he objective approach [is] to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean… [I]t will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. As Arden LJ observed in Re Golden Key Ltd [[2009] EWCA Civ 636 at [28]], unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption ‘that the parties…intended to produce a commercial result’. A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.” (footnotes omitted).

  1. The fact that the undertakings in Simic were addressed by the High Court using the same rules of construction as govern commercial contracts stands against Kawasaki’s submission that Clough establishes a separate rule of construction about contracts which provide for the issue of performance bonds.
  2. We do not consider that these conclusions are inconsistent with the observations of Nettle ACJ in CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] HCA Trans 147 to which Kawasaki referred. His Honour expressed no concluded view as to whether Macfarlan JA’s view in Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd at [43] was inconsistent with the weight of authority. We accept that the terms of the bonds in this case are relevant to the construction of the Consortium Agreement and the LORAC Subcontract.
  3. That is not to deny that the typical language of a performance bond may be a powerful reason for concluding that the underlying contract between the parties should have the consequence that the bond is to operate as a “risk allocation device”. In every case, however, that description must be justified by an orthodox process of construction of the relevant language.

Construction of clause 14 of the Consortium Agreement

  1. Kawasaki’s submission that the surety bonds are a “risk allocation mechanism” assumes the answer to the crucial question of construction. The ultimate issue raised by grounds 1 – 5 is whether, at least at the level of a serious question to be tried, Kawasaki is or is not entitled to call on the bonds issued at the request of Laing O’Rourke in circumstances where JKC has not called on the corresponding bonds issued for its benefit at the request of Kawasaki. That in turn depends upon the obligation or liability of Laing O’Rourke intended to be secured by the surety bonds and whether, by reason of the nature of that obligation or liability or the terms of the parties’ agreement, Kawasaki’s entitlement to call on the bonds is necessarily qualified or subject to the satisfaction of any condition. As the authorities, including most recently Simic make clear, a bona fide claim to breach of that obligation or engagement of that liability (whatever it is) will permit Kawasaki to make a call on the surety bonds. Accordingly, Kawasaki’s submission that the surety bonds are a “risk allocation mechanism” assumes the answer to the crucial question of construction – namely, the identification of the “risk” against which the bonds are intended to protect Kawasaki.
  2. That issue resolves to whether, as Kawasaki submitted, the bonds secure performance of Laing O’Rourke’s contractual obligations in relation to the LORAC Allocated Scope of Work, the LORAC Subcontract works and the Advance Payment, or whether, as Laing O’Rourke submitted, the surety bonds secure Laing O’Rourke’s obligation to reimburse Kawasaki for part of the liability arising from a call by JKC on the Kawasaki Bonds. The amount of that reimbursement would be determined in accordance with Articles 6, 8, 13.4 and 14 of the Consortium Agreement, by which the parties distributed the ultimate incidence of a call by JKC on the Kawasaki Bonds (see [73]–[75] below).
  3. In relation to the Allocated Work Bonds, Kawasaki emphasised the provision in sub-clause 14(e)(i) that they were “for securing Laing O’Rourke’s due performance of its obligations under the [JKC] Subcontract” [emphasis added]. Kawasaki submitted that those words identified the intention of the parties as being that Kawasaki would be entitled to call on the surety bonds if Laing O’Rourke was (at least arguably) in breach of any of its obligations to Kawasaki under the Consortium Agreement (and not only if JKC had made a call on the Kawasaki Bonds). Laing O’Rourke retorted that there was no corresponding promise from Kawasaki to Laing O’Rourke to secure its obligations to Laing O’Rourke under the Consortium Agreement.
  4. However, sub-clause 14(e)(i) must be understood in the context of clause 14 as a whole. That sub-clause provides that Laing O’Rourke must procure “surety bonds” to Kawasaki in the amount of 10 per cent of the value of the relevant portion of the JKC Subcontract price which relates to LORAC’s Allocated Scope of Work and the LORAC Subcontract works “for securing Laing O’Rourke’s due performance of its obligations under the Subcontract”. In the context of the clause, the preposition “for” is capable of describing either the function of the Allocated Work Bonds or the occasion in response to which they were provided. If the former, the bonds would be provided to secure LORAC’s performance of its obligations to JKC. If the latter, they would be provided in consideration of Kawasaki having secured Laing O’Rourke’s joint and several obligation to JKC, in part by providing bank guarantees.
  5. At least at the level of a serious question to be tried, this ambiguity is resolved by consideration of the parallel phrasing in sub-clause 14(e)(ii), which requires the JKC Advance Payment Bonds to be provided “for securing payment to Laing O’Rourke of its portion of the Advance Payment in accordance with the Subcontract” [emphasis added]. That language fixes on the benefit to Laing O’Rourke flowing from Kawasaki’s provision of the Kawasaki Bonds, namely Laing O’Rourke’s receipt of its portion of the Advance Payment. There is a serious question to be tried that “securing” is used in sub-clause 14(e)(ii) as a synonym for “procuring”. Such a comparison serves to confirm the sense of “for” in sub-clause 14(e)(i) contended for by Laing O’Rourke. At least as a serious question to be tried, this favours Laing O’Rourke’s position in relation to the Allocated Work Bonds. It does so because it indicates that Laing O’Rourke is to procure the issue of the Allocated Work Bonds to Kawasaki as the provider of the Kawasaki Bonds, and in return for its doing so. The alternative construction would require reading the words in clause 14(e)(ii) “… securing payment to Laing O’Rourke of its portion of the Advance Payment” as meaning “securing payment by Laing O’Rourke of its portion of the Advance Payment”.
  6. The former construction is consistent with a coherent operation of clause 14. In substance, on this construction, the provision of bonds under sub-clause 14(e) secures Laing O’Rourke’s obligation, following a demand made by Kawasaki under sub-clause 14(b), to contribute to liability resulting from a call on the security provided to JKC, the issue of which had been procured by Kawasaki under sub-clause 14(a).

  7. If JKC makes a call on the Kawasaki bonds, sub-clause 14(b) provides that each of Kawasaki and Laing O’Rourke must contribute to the call “in proportion to their liability”, as between themselves, under the Consortium Agreement. In this way, sub-clause 14(b) gives effect to the agreed position in the Consortium Agreement as to the ultimate allocation of responsibility in Articles 6, 8 and 13.4.
  8. That mechanism for repayment on demand is qualified by sub-clause 14(c), which defers recovery until a determination by the Steering Committee where “it is not possible to determine at the date of such call which party is liable for the event which led to the call”. Laing O’Rourke and Kawasaki have equal representation on the Steering Committee. Sub-clause 10.3(d) provides that, if there is a deadlock on the Steering Committee, the matter is to be dealt with under the “Dispute Resolution” provisions of the Consortium Agreement (at clause 19); that is, in effect, by arbitration. Thus, the parties agreed that if it was “not possible to determine” which of Kawasaki and Laing O’Rourke was, in effect, responsible for the event that led to the call by JKC on the Kawasaki Bonds, the dispute would be referred to arbitration. The fact that the parties agreed, pending a determination by the Steering Committee, that the burden of any call by JKC would be “borne” by Kawasaki tends in favour of Laing O’Rourke’s construction of clause 14 read as a whole.

  9. Kawasaki’s submission that clause 14 is to be understood as providing that the parties contracted on “two different bases” should be rejected, at least at the level of serious question to be tried. An important starting point towards that conclusion is that the parties chose to address those bonds in the same clause of the Consortium Agreement as the Kawasaki Bonds. That clause is structured to address, in order, Kawasaki’s obligation to provide the Security, the parties’ obligations to contribute to any call that is made, what is to happen until that ultimate liability is determined, and then the provision of security by Laing O’Rourke for that liability. The text of clause 14 also contains the following indications which support the construction urged by Laing O’Rourke:
  1. where JKC has made a call on the Kawasaki Bonds, Kawasaki cannot call upon the surety bonds until the elaborate internal dispute resolution procedures in the Consortium Agreement have been exhausted (sub-clause 14(c));
  2. the surety bonds provided to Kawasaki must be provided “at the same time” that Kawasaki was obliged to provide JKC with the Kawasaki bonds (sub-clause 14(f));
  3. unless otherwise agreed, those surety bonds must be “for the same duration” as the Kawasaki bonds (sub-clause 14(g));
  4. Kawasaki is required to provide Laing O’Rourke with immediate notice of any call made on it by JKC under the Kawasaki Bonds (sub-clause 14(g)); and
  5. Laing O’Rourke is to bear the incidental costs and obligations associated with the issue of those bonds, just as under sub-clause 14(a) Kawasaki bears the equivalent costs for the Kawasaki Bonds.
  1. But perhaps the strongest indication in the text in favour of Laing O’Rourke’s construction is that sub-paragraph (g) provides that the surety bonds “must be released” by Kawasaki at the same time as the Kawasaki Bonds are released by JKC, irrespective of whether any obligation of Laing O’Rourke to JKC or to Kawasaki remains unperformed.
  2. Kawasaki is correct that the terms of the performance bonds themselves are to be taken into account when considering the obligations of the parties. In this case, the terms of the performance bonds are unequivocal in relation to the issuing bank’s obligation. They are neutral as to the circumstances in which the beneficiary may make a demand upon the bank for repayment.
  3. For these reasons, we are not persuaded that the primary judge erred at the level of a serious question to be tried. Clause 14 of the Consortium Agreement points to the parties’ having intended that surety bonds be security for Kawasaki’s liabilities or obligations as the party having procured the Kawasaki Bonds. That potential liability is only engaged upon JKC making a call upon those bonds.

The LORAC Subcontract

  1. As already noted (see [21] above), there is a question as to whether the same or a different analysis applies to the LORAC Subcontract Work Bonds and the Advanced Payment Bonds, which Kawasaki contends were provided under Article 6 of the Special Terms and Conditions to the LORAC Subcontract.
  2. Some textual support for Laing O’Rourke’s construction is found in Article 6, which refers to surety bonds “for” the bonds issued on behalf of Kawasaki to JKC. This language is consistent with the bonds being security for LORAC’s obligation to contribute in the event of a call on the Kawasaki Bonds.
  3. Article 6.1 requires the LORAC Advance Payment Bond to be valid until the full amount of the Advance Payment has been repaid. There is a question as to whether the “Advance Payment” refers to the advance from JKC to the consortium under the JKC Subcontract, the benefit of which is transferred by Kawasaki to Laing O’Rourke, or whether it refers to a separate advance from Kawasaki to Laing O’Rourke under the LORAC Subcontract. Upon either amount being repaid, the LORAC Advance Payment Bonds would cease to be exercisable as they would either be invalid or incapable of being triggered. The Consortium Advance Payment Bonds would likewise be ineffective after JKC was repaid by reason of sub-clause 14(g) of the Consortium Agreement.
  4. Article 6 recites that the surety bonds are issued “pursuant to” provisions which include clause 14 of the Consortium Agreement. There is a serious question to be tried as to whether Article 6 of the LORAC Subcontract does any more than provide further details of the surety bonds required to be established by Laing O’Rourke under clause 14 of the Consortium Agreement. That it does not is also consistent with the Special Conditions in the Consortium Agreement which contemplate that surety bonds in relation to the LORAC Subcontract will be provided “under clause 14(e)” by Laing O’Rourke “on a preliminary basis” before the Purchase Order and the LORAC Subcontract are finalised.
  5. In these circumstances, there is a serious question to be tried as to whether Article 6 of the LORAC Subcontract was intended to change the circumstances in which the surety bonds might be called on by Kawasaki. The language used is consistent with that it being intended to confirm and, to a limited extent, supplement, clause 14, but not in a way that alters the basis on which those bonds are provided, namely as security for Laing O’Rourke’s liability to contribute in the event of a call on the Kawasaki Bonds.
  6. The reference in Article 6 to Article 35.1 of the General Terms and Conditions of the JKC Subcontract takes the matter no further. Article 35.1 deals principally with formal matters such as the duration of the relevant bank guarantees (and, in particular, provides that the guarantee would be unconditional and irrevocable). Article 35.1 does not deal with the circumstances in which a bank guarantee or bond may be called on by the beneficiary. There is nothing in Article 35 of those General Terms and Conditions that compels a conclusion that the parties intended Kawasaki to be permitted to call upon the surety bonds in broader circumstances than those contemplated by clause 14 of the Consortium Agreement.

Conclusion on grounds 1 – 5

  1. The primary judge did not err in deciding that there was a serious question to be tried as to whether the parties intended that Kawasaki only be entitled to call the surety bonds in circumstances where JKC had first called on the corresponding Kawasaki Bonds.

That the primary judge should have determined the proper construction of the contract “as if on a final basis” ground (ground 6)

Appellant’s submissions

  1. Kawasaki submitted that it is necessary for the Court to determine the proper construction of the relevant contractual provisions as if on a final basis, because to do otherwise would deprive the parties of the commercial bargain they made, as bonds are intended to function as risk allocation devices pending resolution of underlying disputes. In oral address, Kawasaki submitted that:

“…whether the final rights of the parties are to be determined in international arbitration, as in CPB and Clough, or whether at trial, it doesn’t affect this Court’s function, because the Court is required to make a determination of the interlocutory rights of the parties. Those rights, in particular, is who has the money pending final determination. It was certainly open to Laing O’Rourke at least after obtaining the ex parte interlocutory injunction to proceed to arbitration.”

  1. It was also submitted that this course was one adopted by the Victorian Court of Appeal in Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98 and should govern the Court’s exercise of discretion here.

Respondent’s submissions

  1. Laing O’Rourke contended that this Court should not determine the question as to the construction of the contractual arrangements between the parties on a final basis in circumstances where the primary judge had not been asked to do so. It also submitted that the primary judge was not required to determine that question on a final basis because the parties had entrusted the final determination of any disputes between them to international arbitration, by clause 19 of the Consortium Agreement.
  2. Indeed, it submitted that the primary judge could not have determined that question on a final basis. The primary judge was directed by the International Arbitration Act 1974 (Cth) and the UNCITRAL Model Law on International Commercial Arbitration (Model Law) not to “intervene” except where permitted by the Model Law. The practical consequence of this was that the primary judge was able only to issue an “interim measure” in aid of arbitration proceedings or to exercise the court’s ordinary powers to grant interlocutory relief, a right which appears in Article 9 of the Model Law, and clause 19.1 of the Consortium Agreement.
  3. Laing O’Rourke submitted that, in such an application for interlocutory relief, it is a matter for the discretion of the court to decide the extent to which it engages with questions of law in determining whether the balance of convenience supports a grant of interlocutory relief. Reference was made to the High Court’s statement in Cohen v Peko-Wallsend Ltd [1986] HCA 70; (1986) 61 ALJR 57 at 59:

“ … It is not right to say that it is always the duty of the Court on an interlocutory application to decide a question of law upon which the decision of the case depends. No doubt if the question is one susceptible of resolution without further evidence, and the urgency of the matter does not render it impracticable to give proper consideration to the question, the desirable course will be to decide it. Ultimately, however, the course which the Court takes lies within its discretion. …”

  1. Laing O’Rourke submitted that the relief it sought was “deliberately framed” to be of an interlocutory kind to avoid issues with the International Arbitration Act. The nature of the relief was framed so as, in effect, to grant a stay, but without having to grapple with the issue as to whether or not it was strictly an “order”. The form of the order ultimately made was not opposed by Kawasaki.

Consideration of ground 6

  1. The issues before the primary judge were, by reason of clause 14 of the Consortium Agreement and Article 6 of the Special Terms and Conditions to the LORAC Subcontract:
  1. whether there is a serious question to be tried that, on the proper construction of the Consortium Agreement and the LORAC Subcontract, Kawasaki was not entitled to call the surety bonds until JKC had called on the Kawasaki bonds;
  2. whether damages were an adequate remedy; and
  3. whether the balance of convenience favoured making the order.
  1. Despite Kawasaki’s oral submissions to the contrary to this Court, both parties now accept that the primary judge was never asked to determine questions about the construction of the Consortium Agreement on any basis other than whether there was a serious question to be tried. Mr M Christie SC, who appeared for Kawasaki with Ms N Simpson, made that point clear in a letter to the Associate to the Presiding Judge sent on 28 August 2017 (after the hearing of the appeal), sent with the approval of Mr R Dick SC, who appeared with Mr S Robertson for Laing O’Rourke.
  2. Kawasaki now accepts that the primary judge was not asked to determine this case “as if” on a final basis. Having regard to clause 19 of the Consortium Agreement, it was also common ground that the primary judge could not determine the case on a final basis. For that reason, the orders (set out at [38] above) made by the primary judge were by consent.
  3. The passages relied upon by Kawasaki drawn from Sugar at [31], [43]-[46] are distinguishable from the circumstances before this Court where the parties have agreed to submit their dispute to international arbitration. This plainly is not a case where a declaration can be made. Such a declaration of rights would be inconsistent with clause 19 of the Consortium Agreement, which entrusts an arbitral tribunal with the determination of all disputes.
  4. It is also important to note the Victorian Court of Appeal’s statement in Sugar at [67]:

“The primary judge did not decide whether GC 5.2 was intended to allocate risk pending the resolution of a dispute. In our view it was so intended and this in turn constitutes a consideration of fundamental importance in assessing whether the grant of an injunction carries with it the lower risk of injustice.” (italics added)

  1. In Sugar, the Court decided that the relevant clause was intended to allocate risk pending the resolution of the matter in dispute. Sugar is thus distinguishable. It does not follow, in a case where there is a serious question to be tried as to what obligation or liability is secured by a performance bond, that the court should determine that question of construction “as if” on a final basis.
  2. In the context of an agreement under which the parties have agreed to submit their disputes to international arbitration, Kawasaki also relied on Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66 at [26]-[28], where the Court identified a number of what it said were “significant difficulties” in the interim relief proposed by the primary judge in that case, namely, the power of an arbitrator “to modify any order of this court”, the comity between jurisdictions and the issue of the delegation of federal judicial power. Dealing with the last issue first, it does not arise in this case as the primary judge’s order terminates upon the making of an order by the arbitral tribunal. The Court of Appeal recognised as much in Cape Lambert:

“[28] … this is not to say that a court could not make orders which terminate upon the occurrence of an event, such as the appointment of an arbitrator. Such an order would not involve the delegation of judicial power – rather it would define the extent of its exercise.”

  1. As to the first and second issues, the caution expressed in Cape Lambert Resources Ltd does not apply in the present case. First, it is important to remember that the form of the order made by the primary judge was by consent. There is no question of the arbitrator making any order to modify any order of this Court. It is clear that a court can, as happened here, craft orders that terminate upon an order made by an arbitral tribunal, and Kawasaki consented to orders in that form. Secondly, the comity considerations referred to do not arise here, where the party seeking the injunction has made it clear on the record that they seek only to preserve the position until the dispute can be addressed by the arbitral tribunal. In those circumstances Laing O’Rourke could not be heard to complain that the arbitral tribunal proposed to exercise the power it undoubtedly has to grant interim relief.
  2. As Edelman J explained in Sino Dragon Trading Ltd v Noble Resources International Pty Ltd [2015] FCA 1028; (2015) 246 FCR 479 at [105] in a case such as the present, it is the arbitrators who will be required to determine any final dispute, as the parties agreed:

“[105] Fourthly, and independently of the scope of Article 17J, the power under that article “should be exercised very sparingly and in circumstances in which such orders were effectively the only means by which the position of a party could be protected until an arbitral tribunal was convened”: Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66; (2013) 298 ALR 666, 694 [96](Martin CJ; Buss JA agreeing) quoting from Cetelem SA v Roust Holdings [2005] ECWA Civ 618; [2005] EWCA Civ 618; [2005] 4 All ER 52.”

  1. In the way the present case was advanced by both parties before the primary judge, his Honour’s conclusion in favour of Laing O’Rourke’s position was sufficiently probable in the circumstances to support an interlocutory injunction: Australian Broadcasting Corporation v O’Neill [2006] HCA 46; (2006) 227 CLR 57; 80 ALJR 1672; 229 ALR 457 at [71]-[72] per Gummow and Hayne JJ. Ground 6 of the notice of appeal is rejected.
  2. Kawasaki does not challenge the primary judge’s finding at [90]-[92] that damages would not be an adequate remedy.

The discretion ground (ground 7)

  1. Kawasaki accepted that it must demonstrate error in the sense of House v R (1936) 55 CLR 499; [1936] HCA 40 to succeed on this ground. Kawasaki advanced seven sub-grounds, which are set out at [39] above. Each alleges that the primary judge’s exercise of discretion to grant the interlocutory relief miscarried.
  2. Kawasaki’s principal submission was that if the existing restraints on calling on the bonds are continued, there is a risk they will expire before an arbitral tribunal determines the underlying dispute between the parties, in which case, Kawasaki will suffer irreparable prejudice, namely, its security will be entirely lost and it will be “out of pocket with the cash”.
  3. Kawasaki submitted that the primary judge failed to take into account, or give sufficient weight to, this possibility. It submitted that the primary judge could not have been satisfied that the final determination of this matter at arbitration would take place before the expiry of the relevant bonds. As such, his Honour is said to have erred in concluding that there would be no substantial prejudice to Kawasaki if the existing restraint was continued.
  4. The submission ultimately advanced by Kawasaki was as follows:

“We simply say that both are very large corporations. This ultimately comes down to who is entitled to have the benefit of the proceeds or the security, pending the final determination of the dispute….”

  1. It was also submitted that it was possible that his Honour “overlooked” the submission made by Kawasaki that there is a risk the surety bonds will expire before the underlying dispute is determined in arbitration, and that this is a significant risk to Kawasaki.
  2. In our view the primary judge did not overlook the risk that the surety bonds might expire before the underlying dispute is determined. His Honour’s conclusion at [75]-[78] made clear that on his preferred construction of the Consortium Agreement, the parties had agreed that Kawasaki bore the risk of expiry of the bonds pending determination of an underlying dispute. That conclusion was responding, in part, to Kawasaki’s claim that the surety bonds may expire prior to the determination of the dispute by an arbitral tribunal. At least where JKC had made a claim on the Kawasaki bonds, sub-clause 14(c) of the Consortium Agreement could have that effect. As the primary judge found at [78]:

“[78] …the parties intended that the bond to be given by Kawasaki pursuant to cl 14(a) (the Kawasaki Bond) and the Laing O’Rourke Bonds be “back to back” bonds; the latter to provide security for Kawasaki’s liability under the former (subject to the regime in cl 14(c)).”

  1. Kawasaki also has the benefit of an undertaking as to damages. As Senior Counsel for Kawasaki accepted, it has the ability to obtain security for that undertaking if there is any apprehended risk of Laing O’Rourke not being in a position to make good that undertaking. Kawasaki has chosen, to date, not to seek security.
  2. It is correct to say that in the events that have transpired there is a risk that the surety bonds will expire prior to the conclusion of any determination by an arbitral tribunal of the dispute between the parties. However, in our view it has not been shown that the primary judge gave this matter insufficient weight in assessing where the balance of convenience lay, and thereby erred in the exercise of his discretion.
  3. Kawasaki next submitted that the primary judge failed to take into account, or gave insufficient weight to, Laing O’Rourke’s agreement to waive any right that it might have to obtain an injunction against Kawasaki in respect of the bonds provided under the LORAC Subcontract.
  4. Kawasaki submitted that the LORAC Subcontract incorporated, by reference in Article 1 of the Purchase Order, sub-Article 35.3(b) of the JKC Subcontract General Terms and Conditions. That sub-Article provides:

“Subcontractor waives any right that it may have to obtain an injunction or any other remedy or right against any part in respect of Contractor having recourse to the Bank Guarantee(s)”.

  1. This submission should be rejected. The primary judge took into account sub-Article 35.3(b) of the JKC Subcontract. In [46]-[48], his Honour said:

“In particular, Mr Christie submitted that the Laing O’Rourke Bonds referred to in Art 6 of the Purchase Order are governed by the General Terms and Conditions of the JKC Subcontract (document “(5)” in the “order of precedence” under the Purchase Order; see [42] above), rather than by cl 14 of the Consortium Agreement.

This is significant, Kawasaki contends, because the JKC General Terms and Conditions contain a “no injunction” clause pursuant to which the “Subcontractor” purports to waive any right to seek an injunction to restrain a call on the performance bond in question. There is no such clause in the Consortium Agreement.

In my opinion, on the proper construction of the Consortium Agreement and the Purchase Order, all of the Laing O’Rourke Bonds are governed by cl 14 of the Consortium Agreement; none are governed the JKC General Terms and Conditions. Thus, I do not accept the submission referred to at [46].”

  1. It has not been shown that the primary judge gave this matter insufficient weight in assessing the balance of convenience, and thereby erred.
  2. Kawasaki next submitted that the primary judge erred by failing to conclude that, in providing the bonds, Laing O’Rourke assumed the risk that Kawasaki could have recourse to the bonds pending final determination of the dispute. Kawasaki relied on the following statement of McMurdo JA in RCR O’Donnell Griffin Pty Ltd v Forge Group Power Pty Ltd (Receivers and Managers Appointed) (in liq) [2016] QCA 214; (2016) 32 BCL 406 at 424 (Applegarth J agreeing):

“…A court hearing an interlocutory injunction would have been alert to the risk that if the Principal was to be enjoined from having recourse to the security, pending resolution of the dispute as to whether it was entitled to do so, the benefit to the Principal of the security could be substantially diminished. In any way, I would endorse the statement by Osborn and Ferguson JJA in Sugar Australia Ltd v Lend Lease Services Pty Ltd that:

If a provision in a building contract requiring a performance bond is intended to operate as a risk allocation device pending the final determination of the dispute between the parties then that intention must be fundamental to a consideration of the justice of an application made to restrain recourse to such a bond pending final determination of the dispute.’ (italics added)

  1. This submission repeats, under the guise of the balance of convenience, the submission addressed above which assumes that the surety bonds are a “risk allocation device”. The statements from Sugar and Forge, extracted above, are each predicated on the bonds in those cases being found to be “intended to operate as a risk allocation device pending the final determination of the dispute between the parties”. The essence of the present dispute is different and is whether the bonds are intended to operate as a risk allocation device before any demand has been made by JKC under the Kawasaki Bonds.
  2. It has not been shown that the primary judge fell into House v R error in failing to conclude that, in providing the surety bonds, Laing O’Rourke assumed the risk that Kawasaki could have recourse to the bonds pending final determination of that dispute.
  3. Kawasaki next submitted that the primary judge failed to take into account, or give sufficient weight to, the fact that Laing O’Rourke would not suffer prejudice if some, but not all, of the bonds were called upon, and therefore the exercise of his Honour’s discretion miscarried. In its written submissions, Kawasaki submitted that:

“Kawasaki’s point is, quite simply, that in circumstances where Laing O’Rourke effectively accepts that a call on $10 million of bonds would not cause prejudice, then the Court would not restrain Kawasaki from calling upon bonds in (at least) that sum. The primary judge did not consider this submission in his reasons or otherwise make a finding that Laing O’Rourke would suffer any prejudice if some (say $10 million), but not all, of the bonds were called upon by Kawasaki.”

  1. It has not been shown that the primary judge erred in failing to conclude that Laing O’Rourke would not suffer prejudice if some, but not all, of the surety bonds were called upon. Kawasaki has at no time sought to call on some only of the bonds. In circumstances where the primary judge was not asked to rule on whether Kawasaki could call on some but not all of the bonds pending final determination of the dispute, his Honour did not fall into House v R error in failing to conclude that something he was not asked to do would not cause prejudice.
  2. Kawasaki next submitted that the primary judge erroneously concluded that Laing O’Rourke could not seek the interlocutory orders sought in the Supreme Court from an arbitral tribunal and took that erroneous conclusion into account in determining that the balance of convenience favoured the granting of the injunction. Kawasaki took issue with the following passage at [89] of the primary judge’s reasons:

“[89] … . Laing O’Rourke thus cannot, at the moment, approach the arbitral tribunal to seek an order from it restraining Kawasaki from calling on the Laing O’Rourke Bonds. If the current restraint is dissolved, Laing O’Rourke will, in substance, forever lose the right to restrain a call on the Laing O’Rourke Bonds.”

  1. Kawasaki submitted that the key question is whether the bonds were intended to operate as risk allocation devices. If they were intended to operate in this way, then “it is the continuation and not the dissolution of the injunction that is finally dispositive of rights, because the consequence of such an order would be that Kawasaki would forever lose its right to call upon the bonds pending the determination of the underlying dispute”.
  2. This issue was considered and rejected. It is based on the premise that the surety bonds were for a “risk allocation purpose”. We agree with the submission by Laing O’Rourke that “it was a matter for the primary judge to decide what weight (if any) to give to the consequences of a construction that his Honour regarded was wrong on “the better view”.
  3. Kawasaki next submitted that there were factors which precluded the primary judge from inferring damage to Laing O’Rourke’s reputation. The primary judge said at [94]:

“[94] … it is not difficult to infer that there would be damage to Laing O’Rourke’s reputation in the industry in which it operates if it became known that a performance bond had been called up, thereby carrying with it market concern about the perceived ability of Laing O’Rourke to perform its obligations under contract. I appreciate that it may be “notorious that disputes are commonly part and parcel of building contracts” (Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98 at [233] (Kaye JA)). However, I find that the possibility of reputational damage weighs, albeit perhaps only slightly, in favour of continuing the restraint.”

  1. Kawasaki relied upon a statement of Kaye JA in Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98; (2015) BCL 407 at [233]. This passage was quoted by the primary judge at [94]. Kawasaki’s complaint should be rejected. No House v R error was committed by the primary judge in determining that “reputational damage weighs, albeit perhaps only slightly, in favour of continuing the restraint”.

Conclusion and orders

  1. For the foregoing reasons, the appeal should be dismissed. The Court makes the following orders:
  1. Leave to appeal granted;
  2. Appeal dismissed;
  3. Appellant pay the respondent’s costs of the application and appeal.

W v P [2016] HKCFI 316; HCCT 55/2015 (19 January 2016)

IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO 55 OF 2015

W
(Applicant)

V

P
(Respondent)

 

BEFORE: Hon Mimmie Chan J in Chambers
DATE OF HEARING: 19 January 2016
DATE OF DECISION: 19 January 2016

 

DECISION

1. W (“W”) applies to set aside a Partial Final Award dated 17 November 2015 (“Award”) made by the arbitral tribunal in an arbitration (“Arbitration”) between W and P (“P”) subject to the HKIAC Rules. In its Originating Summons, W claims that it had been unable to present its case in the Arbitration, that the arbitral procedure was not in accordance with the parties’ agreement, that the Tribunal had dealt with a dispute not contemplated by or falling within the terms of the submission to arbitration, and that the Award contained matters beyond the scope of the submission. Before any evidence was filed in opposition to the application, P applied at the 1st hearing of the Originating Summons to strike out W’s application, on the ground that it discloses no reasonable cause of action, is frivolous or vexatious and otherwise an abuse of the process of the court.

2. Having reviewed the submissions made by Counsel, the affirmation filed on behalf of W, the Award which sets out the dispute and the arguments made before the Tribunal which led to the Award, I agree that it is plain and obvious that the application to set aside the Award is devoid of merit, and should be dismissed, without the need to proceed to a further hearing.

3. The substance of W’s complaint is that the Award which determined the Further Refund Claim did not fall within the terms of the reference to the Arbitration, and that the Further Refund Claim (as defined in the Award) should not have been disposed of by the Tribunal summarily, but should have been determined with the entirety of the claims made in the Arbitration, after discovery, the proper filing of witness statements and cross-examination of the relevant witnesses. Hence, it was argued, W had been deprived of the opportunity to present its case in the Arbitration.

4. The claim that W had been unable to present its case is without substance. P applied to the Tribunal on 30 June 2015 for a partial final award, pursuant to Article 34 of the HKIAC Rules and s 71 of the Arbitration Ordinance, in respect of its claim for the Total Refund (as defined in the Award), which was made on the basis of the price adjustment provisions in the underlying agreement between W and P (“Agreement”) for sale and purchase of iron ore lumps (“Cargo”), as distinct from its claim for damages in respect of W’s breach of the Agreement. W opposed the application, and the Tribunal issued directions for the parties to file submissions in writing. Submissions were so filed, and a hearing took place on 20 October 2015, when the Tribunal heard oral submissions made by the parties, who were represented by counsel.

5. It is clear from the Award that arguments had been presented on behalf of W and P, and that such arguments and submissions made by W had been duly considered, analyzed and determined by the Tribunal in the Award, when it allowed P’s claim for the Total Refund. The Tribunal pointed out that W did not challenge the power of the Tribunal to make a partial final award, that the Agreement, the loading port analysis and the discharge port analysis of the Cargo, containing figures relating to the weight of the Cargo, its iron content and its physical composition by size, were all admitted documents. Although W had initially challenged the authenticity of the CIQ certificates, such challenge was not pursued before the Tribunal at the hearing. On that basis, the Tribunal found that the relevant documents were authentic, that the calculations of price adjustments provided for under Clause 5 of the Agreement are correct (the calculations of which were not in fact disputed by W at the hearing, apart from its jurisdictional and procedural objections), and that W is liable to make the refund covered by the Award.

6. The Tribunal clearly has power under the Ordinance and the HKIAC Rules to make separate awards regarding different issues at different times. The Tribunal had given W the opportunity to make submissions in writing and orally, as to whether a partial final award should be given on the Total Refund Claim, after the Statement of Claim and the Statement of Defence were filed. Having had the fair opportunity, between 30 June 2015 and 20 October 2015, to prepare for and to present to the Tribunal its arguments as to whether a partial final award should be made on the Total Refund Claim, I fail to see how it can be claimed that W had been unable to present its case.

7. Significantly, W has failed to establish to this court what evidence it seeks to present and what further arguments it could have made, if it had been given the opportunity to fully present its case, which would have a material impact on the Award, or which can establish (after discovery, witness statements or cross-examination as W seeks) that P is not entitled to make the price adjustments under the Agreement. The authorities are clear, that even if W can establish a permitted ground to set aside the Award, the court may enforce the Award where there is no perceived injustice or serious prejudice sustained by W as a result of any inability on its part to present its case in the Arbitration.

8. Counsel for W sought to rely on P’s non-production of the agreement made between P’s purchaser and its purchaser (“Resale Agreement”), claiming that this was only discovered after the hearing for the Award. The facts relied upon are not referred to in the affirmation filed by W and served with its Originating Summons, as required under Order 73 rule 5 (4) RHC. No leave has yet been granted for the 2nd affirmation of W to be used for the Originating Summons. Even if I should be prepared to consider the contents of the 2nd affirmation, the point sought to be made is simply that W was prevented from arguing that inferences could be drawn from the non-production of the Resale Agreement, as to the authenticity of the CIQ certificate on which the Award was based.

9. As Counsel for P pointed out, W and its team of lawyers had the opportunity before October 2015 to inspect and challenge the CIQ Certificates put before the Tribunal, but had elected not to do so, choosing instead not to dispute the authenticity of any of the documents relating to the quality and specifications of the Cargo. I am not satisfied that the non-production of the Resale Agreement, and any inferences to be drawn therefrom, are either material to the Award or can constitute any prejudice to W.

10. The Tribunal had explained (paragraph 25 of the Award) that it was in the interests of efficiency and economy to deal with the Total Refund Claim by a Partial Final Award. It further explained in the Award (under paragraphs 68 to 75) why it was prepared to deal with the Total Refund claim in isolation from the “wider dispute” argued on behalf of W. The disputed facts as to whether the final invoice put forward by a Mr X on behalf of W were irrelevant, in the view of the Tribunal, as to the claims made for price adjustments under the Agreement. The Tribunal clearly took the view that there were no factual disputes which were relevant to and could have any impact on the Award.

11. As for the complaint on jurisdiction, I am satisfied, after reviewing the Notice of Arbitration, the Statement of Claim filed in the Arbitration, and the Award, that the Tribunal was clearly correct in its finding that P’s claims for price adjustments under Clause 5 of the Agreement, on the basis of the discrepancies in weight, content and specifications by physical composition and size of the Cargo, are all within the reference to the Arbitration. Claims that an award is outside the terms of the submission to arbitration are construed narrowly, to only include those decisions which are clearly unrelated to or not reasonably required for the determination of the issues that have been submitted to arbitration (Grant Thornton International Limited v JBPB & Co (A Partnership) unreported, HCCT 13/2012, 5 April 2013). The claim as to the adjustments made on the basis of the discrepancies as to the weight, content and physical composition by size of the Cargo, and the facts relied upon, are all referred to in the Statement of Claim filed in the Arbitration, and that is adequate (S Co v B Co [2014] HKCFI 1440; [2014] 6 HKC 421).

12. In short, there is nothing serious or egregious in any error in the conduct of the Arbitration, no prejudice to W established, and hence no ground to set aside the Award. The application is simply an attempt to revisit the merits of the decisions made by the Tribunal, and should be struck out, with costs on an indemnity basis.

Stockco Agricapital Pty Ltd v Sugarloaf Nominees Pty Ltd and Others [2019] NSWDC 12 (11 February 2019)

DISTRICT COURT
NEW SOUTH WALES

STOCKCO AGRICAPITAL PTY LTD
(Plaintiff)

V

SUGARLOAF NOMINEES PTY LTD AND ORS
(Defendants)

FILE NO: 2018/280229
HEARING DATE: 29 November 2018
DATE OF ORDERS: 11 February 2019
DATE OF DECISION: 11 February 2019
JURISDICTION: Civil
BEFORE: Scotting DCJ
DECISION: (1) The proceedings between the plaintiff and the first defendant are referred to arbitration.
(2) The proceedings between the plaintiff and each of the second to fifth defendants are stayed pending the resolution of the arbitration between the plaintiff and the first defendant or until further order of the Court.
(3) The plaintiff is to pay the costs of the defendants of the Amended Notice of Motion on the ordinary basis as agreed or assessed, if the defendants can establish an entitlement to recoverable legal costs.
CATCHWORDS: COMMERCIAL ARBITRATION – arbitration agreement – submission to arbitration – construction of submission or reference – stay of proceedings – severance of conciliation requirement – Civil Procedure Act not applicable in circumstances

 

Judgment

Introduction

    1. The plaintiff sues the first defendant (Sugarloaf) for breach of contract. On or about 12 September 2016 the plaintiff and Sugarloaf entered into a written agreement, referred to as the Master Livestock Agreement (MLA). Pursuant to the MLA the plaintiff provided funds to Sugarloaf for the purchase of cattle to be reared by it and then sold, with the plaintiff to be repaid with interest from the proceeds of sale. It was a term of the MLA that the parties may from time to time enter into supplementary agreements governed by the MLA.
    2. The plaintiff sues the second to fifth defendants on guarantees entered into to guarantee the performance of Sugarloaf in the MLA and supplementary agreements. Mark Andrew Stoney is a director of each of the defendants.
    3. The defendants move on an Amended Notice of Motion filed 16 November 2018 seeking a stay of the proceedings:
        (a) until the alternate dispute resolution mechanism provided for by clause 16 of the MLA has taken place, or
    4. (b) until related proceedings in the Supreme Court of Victoria (2017/04662) (the Related Proceedings) are concluded, or

 

      (c) on the basis that the Supreme Court of Victoria is the most convenient forum for the dispute.

    1. The plaintiffs resist the interlocutory orders sought on the following grounds:
        (a) clause 16 of the MLA is unenforceable,
    2. (b) the plaintiff is not a party to the Related Proceedings and they do not cover the same subject matter, and

 

    (c) the defendants have submitted in the MLA and related agreements to the jurisdiction of the New South Wales courts.

Facts

  1. The MLA included the standard terms, set out below, that were put forward by the plaintiff at the time of its execution by Sugarloaf.
  2. Clause 16 of the MLA contains an arbitration clause in the following terms:

If any dispute or difference arises between you and us in connection with this Agreement that cannot be first settled between them by reference to conciliation by us then the matter will be referred to an arbitrator to resolve the dispute or difference. The arbitrator shall be a person with experience in the industry and if one cannot be agreed upon within 14 days, each party will choose its own experienced arbitrator and the two arbitrators will choose an umpire. The decision of the two arbitrators and umpire shall be binding on us and you. In all other respects, the provisions of the Civil Procedure Act 2005 (NSW), or any statutory re-enactment thereof shall apply.

  1. Clause 1 of the MLA provided that the term ‘You’ related to Sugarloaf and the term ‘us’ related to the plaintiff.
  2. Clause 19 of the MLA provides:

If at any time any provision of this Agreement is or becomes illegal, invalid or unenforceable in any aspect, that illegality, invalidity or unenforceability will not affect the enforceability of the remaining provisions of this Agreement.

  1. Clause 32 of the MLA provides:

32.1 You irrevocably submit to and accept generally and unconditionally, the non-exclusive jurisdiction of the Courts of New South Wales and the Courts of Appeal from them with respect to any legal action or proceedings which may be brought at any time relating in any way to this Agreement.
32.2 You irrevocably waive any objection you may now or in the future have to the venue of any such action or proceedings and any claim You may now or in the future have that such action or proceedings have been brought in an inconvenient forum.

  1. On 5 April 2018 the plaintiff sent a letter to the defendants terminating the MLA on the basis of alleged breaches by Sugarloaf for failing to deliver stock, make payments on time and parting with possession of stock (the letter of demand). The plaintiff demanded the payment of $468,513.29 on or before 5pm on 9 April 2018, plus interest accruing at 18% per annum if the demand sum was not paid before that deadline. The particulars of the alleged breaches of the MLA were not contained in the letter of demand.
  2. The parties thereafter entered into negotiations to resolve the dispute. In short the defendants sought a further period of time to allow the stock to be sold when it was more mature and thereby worth more at market.
  3. The plaintiff did not take any steps to attempt to invoke clause 16 of the MLA.
  4. On or about 17 November 2017, the Related Proceedings were commenced by Mr Stoney’s brother, Robert John Bigo Stoney claiming an equitable interest in various real property owned by the defendants. The plaintiff was put on notice of the Related Proceedings from about 12 June 2018. Mr Stoney alleges that the sale of the stock in June 2018 was necessary as a result of the issues arising from the Related Proceedings, and accordingly his brother is responsible for some of his losses. Mr Stoney deposed that he expected the Related Proceedings to go to trial in 2019.

Consideration

Choice of forum and the Related Proceedings

  1. It is convenient to deal with these matters first.
  2. Clause 32 of the MLA applies and in my view is enforceable. The parties agreed to submit to the non-exclusive jurisdiction of the Courts of New South Wales and Sugarloaf agreed to give up any right to argue that the proceedings should be held in a more convenient forum. I have not heard any argument to the effect that clause 32 of the MLA is unenforceable.
  3. It is irrelevant that it may be more convenient to have the matter heard in Victoria. Further, I am not satisfied that the Related Proceedings involve common questions of fact or common witnesses.

The Alternative Dispute Resolution Clause

The relevant law

  1. Section 67 Civil Procedure Act 2005 provides the power to the Court, subject the Rules of Court, to stay proceedings permanently or to a specified day.
  2. Section 7 Commercial Arbitration Act 2010 (the Act) provides that an arbitration agreement is an agreement between the parties to submit to arbitration all or certain disputes which may arise between them in respect of a defined relationship, whether contractual or not. An arbitration agreement may be in the form of an arbitration clause in a contract and must be in writing.
  3. Section 8(1) of the Act relevantly provides that in an action brought before a court that is the subject of an arbitration agreement, the court must refer a matter to arbitration unless the agreement is null and void, inoperative or incapable of being performed. It was common ground that the time stipulation in section 8(1) is satisfied in this case.
  4. If the requirements of section 8(1) of the Act are established there is no discretion to not refer the matter to arbitration: John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451.
  5. Section 11 of the Act provides that the parties are free to agree on the mechanism to appoint arbitrators and in the absence of such agreement a party may approach the Supreme Court to undertake the appointment. If there is an agreed appointment procedure and a party fails to act as required, the parties or arbitrators are unable to reach agreement on the matters required, or a third party fails to perform an act required, a party may request the Supreme Court to take the necessary measure, unless the appointment procedure provides an alternative method of appointment.
  6. The Act distinguishes between an arbitration agreement under section 7(1) and an agreement on the procedure to appoint an arbitrator contemplated by section 11(2): Broken Hill Council v Unique Urban Built Pty Ltd [2018] NSWSC 825 at [44]
  7. Arbitration clauses are generally to be approached on the basis that the parties have agreed to a ‘special bargain’ as to the resolution of any dispute between them and there should be a strong bias in favour of holding the parties to that special bargain: Huddart Parker Ltd v The Ship Mill Hill [1950] HCA 43; (1950) 81 CLR 502 per Dixon J.
  8. An arbitration agreement will be inoperative if it has no field of operation or is without effect. Whether an arbitration agreement is in this state is to be determined in the context of the provisions of the Act which may make it operative: Broken Hill Council v Unique Urban Built Pty Ltd [2018] NSWSC 825 at [31]. Examples of inoperative arbitration agreements include where the arbitral tribunal declines to proceed with the reference, the right to arbitrate has been waived or where a court has ordered that it cease to have effect: Administration of Norfolk Island v SMEC Australia Pty Ltd [2004] NFSC 1 at [100].
  9. The requirement that the arbitration is ‘incapable of being performed’ involves proof of more than delay or inconvenience and more than some procedural bar or the effect of a time bar. It is required that there exists some obstacle that cannot be overcome by parties who are ready and willing to perform the agreement: Administration of Norfolk Island v SMEC Australia Pty Ltd [2004] NFSC 1 at [100].
  10. To obtain a stay of proceedings on the basis of an alternative dispute resolution clause three conditions must be satisfied. First, the clause must not purport to oust the jurisdiction of the Court. Second, the dispute the subject of the proceedings must be within the scope of the contractual provision. Third, the agreed contractual process must possess such a degree of definition and certainty as to enable it to be meaningfully undertaken and enforced: Morrow v chinadotcom [2001] NSWSC 209 at [7]- [9].
  11. As to whether a provision that is void for uncertainty is severable from a contract is a question of determining the intention of the parties garnered from the instrument as a whole: Whitlock v Brew [1968] HCA 71; (1968) 118 CLR 445. Where the parties in purporting to make a contract leave some independent part incomplete and uncertain, that part cannot be severed if it is of substance and materiality in the whole bargain: Brew v Whitlock (No 2) [1967] 2 VR 803 at 817 and approved in Humphries v The Proprietors “Surfers Palms North” Group Titles Plan 1955 (1994) 179 CLR 579 at 621-2 per McHugh J.

The plaintiff’s submissions

  1. The plaintiff’s submissions can be summarised as follows.
  2. First, the arbitration agreement is inoperative or incapable of being performed because it is conditional on the dispute or difference first being referred to conciliation by the plaintiff. The plaintiff submitted that there was no guidance in the arbitration agreement as to the requirements of the conciliation or who would bear the costs of it and that the reservation of the referral to conciliation by the plaintiff should be construed as giving the plaintiff a discretion to refer the matter to conciliation and/or ultimately to arbitration.
  3. Second, there was no dispute or difference between the parties at the time of the termination of the MLA.
  4. Third, the appointment procedure for arbitrators contained in the arbitration agreement is uncertain. An arbitrator must have experience in ‘the industry’ but that industry is not specified. Failing agreement between the parties as to the appointment of a single arbitrator, an arbitrator appointed by each party is to appoint an umpire, with the decision of the two arbitrators and the umpire to be binding on the parties. The term ‘umpire’ is not one used in the Act and there is uncertainty as to the umpire’s role.
  5. Fourth, the arbitration agreement refers to the provisions of the Civil Procedure Act 2005, which contains no relevant provisions. The plaintiff contends that the reference to the Civil Procedure Act 2005 was intended to exclude any operation of the Act.

Determination

  1. The conciliation requirement in the arbitration agreement is uncertain because it lacks essential terms. Further matters require agreement before the matter can proceed to conciliation, the administrative processes required to select and renumerate a conciliator are not set out and there is no detail of the process provided to enable it to be sufficiently certain: Holloway v Chancery Mead Ltd [2007] EWHC 2495; [2008] 1 All ER (Comm) 653 at [81]. Accordingly, the requirement to submit a dispute or difference to conciliation in clause 16 of the MLA is unenforceable.
  2. This position does not change if the obligation to refer the dispute or difference to conciliation is a discretionary matter for the plaintiff. In any event, I would not interpret the agreement in this way. The intention of the parties is to have recourse to alternate dispute resolution methods to avoid the time and expense involved with litigation. That intention would be entirely defeated if the plaintiff could choose whether or not to have the alternate dispute resolution mechanisms apply to a particular dispute or difference.
  3. The next question is whether the conciliation requirement can be severed from the arbitration agreement. The parties have set out a dispute resolution clause that culminates in arbitration. In other words, the parties have constructed a regime to avoid litigation. The well-known perceived advantages of arbitration are unlikely to have been intended to have been linked to the legal enforceability of the conciliation requirement. If conciliation had taken place and did not result in a resolution of the matter, the parties clearly intended to proceed to arbitration. I am not satisfied that there is an unseverable nexus between the conciliation requirement and the referral to arbitration. For the reasons given, the conciliation requirement is unenforceable and should be severed from the arbitration agreement. The parties have agreed in clause 19 of the MLA that the remainder of the arbitration agreement contained in clause 16 of the MLA should continue to be enforceable.
  4. For these reasons, I would reject the plaintiff’s first submission.
  5. Clause 16 operates on ‘any dispute or difference’ arising between Sugarloaf and the plaintiff ‘in connection with’ the MLA. The phrase ‘in connection with’ is usually interpreted in a broad fashion. I am satisfied that in this context that it extends to whether the plaintiff was entitled to terminate the MLA and demand payment at the time and in the quantum that it did.
  6. In Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd [2011] NSWSC 268 at [93] Hammerschlag J approved the following passage from Merkin and Hjalmarsson, Singapore Arbitration Legislation (Informa, 2009) at p22, which I gratefully adopt:

There is much authority on the meaning of “dispute”. The general definition of dispute requires the making of a claim by one party and its rejection by the other. Whether this has occurred in the course of lengthy correspondence and negotiation between the parties is not always immediately obvious. The making of a formal claim with a time limit for response is perhaps the simplest method of requiring the other party to define his position, but even if this approach is not used a failure by the other party to respond to a claim does not necessarily deny the existence of a dispute particularly where there are clear unresolved disagreements following the conclusion of negotiations. A dispute may also be found to arise even though negotiations are still in progress, at least where it is clear that these are being protracted in an attempt to forestall proceedings.

  1. The plaintiff’s second submission is based on the premise that in the correspondence following the letter of demand that Sugarloaf did not deny that it had breached the MLA, but engaged in negotiations to resolve the matter. On my reading of the correspondence, Sugarloaf did not make any express admissions and the letter of demand did not set out sufficient particulars of the alleged breaches of the MLA to allow Sugarloaf to know the potential extent of any admissions it may make by silence. The position is that at the completion of the negotiations, the plaintiff commenced these proceedings against Sugarloaf which are being defended. Sugarloaf submitted in the argument on the notice of motion that the plaintiff failed to seek payment from the stock agent on an earlier sale of stock and that it was responsible for maintaining inventory numbers. These arguments may ultimately bear on whether or not the plaintiff had a right to terminate the MLA when it did.
  2. For these reasons, I would reject the plaintiff’s second submission.
  3. The plaintiff’s third submission calls into question the certainty of the appointment procedure in the arbitration agreement. The plaintiff’s first complaint is that the industry in which the arbitrator is to have experience is not specified. Sugarloaf’s response is that the MLA relates to the livestock industry and that the arbitrator should have experience in that industry. In my view, the proper construction of the MLA as a whole supports that view and it is hard to envisage any alternative industry. However, the resolution of that question has not yet arisen for determination, if it is to be disputed.
  4. The parties have not yet attempted to agree on a single arbitrator with experience in the industry. That option is still clearly open to them. It follows that the appointment procedure is capable of operating at least to the extent that parties could agree on the appointment of a single arbitrator within 14 days of the commencement of the appointment procedure.
  5. If the parties cannot agree on a single arbitrator, then each is required to nominate its own experienced arbitrator, with the two arbitrators to nominate an umpire. The Encyclopaedic Australian Legal Dictionary defines ‘umpire’ as:

In relation to an arbitration, a person who resolves a disagreement between arbitrators. An arbitration agreement may provide that, in the event of a disagreement between the arbitrators (usually two arbitrators, one nominated by each party), the dispute is to be referred to the decision of a third person, termed the ‘umpire’. The role of an umpire was prescribed in earlier domestic commercial arbitration legislation but now has no legislative basis under the domestic model commercial arbitration legislation.

    1. The appointment of the umpire is a matter for the appointed arbitrators. If the arbitrators do not perform a required function then the Supreme Court would have jurisdiction to do so: section 11(4) of the Act.
    2. Section 29 of the Act provides that in arbitral proceedings with more than one arbitrator, any decision of the arbitral tribunal must be made, unless otherwise agreed, by the majority of all its members. The arbitral panel contemplated by the appointment procedure is composed of more than one arbitrator and accordingly I can see no reason why section 29 would not operate.
    3. For these reasons I would reject the plaintiff’s third submission.
    4. Section 19 of the Act provides that the parties to an arbitration agreement are free to agree on the procedure to be followed by an arbitral tribunal in conducting proceedings. Failing such agreement the arbitral tribunal may, subject to the provisions of the Act conduct the arbitration in such manner as it considers appropriate.
    5. I interpolate by its fourth submission that the plaintiff contends that the procedure of the arbitration has been determined by the parties to be that provided for by the Civil Procedure Act 2005. It is apparent from the terms of the Civil Procedure Act 2005 that the procedure for court referred arbitrations set out therein are not suited to application in the present context and it follows that this part of the arbitration agreement would be unenforceable, if that was the intention of the parties.
    6. In Lucky-Goldstar International (HK) Ltd v NG Moo Kee Engineering Ltd [1993] HKCFI 14, the parties agreed that the arbitration would be in accordance with the rules of an association that did not exist. Kaplan J rejected the argument that this nullified the agreement to arbitrate, because it was clear that the parties intended to arbitrate any disputes that may arise and the arbitration was to be conducted according to the law of the place specified to be the seat of the arbitration. Kaplan J decided that the best way to deal with the reference to the non-existent rules was ignore it, because the parties could not have intended to place any importance on a set of non-existent rules. This reasoning was applied by Hammerschlag J in Broken Hill Council v Unique Urban Built Pty Ltd [2018] NSWSC 825 at [53]- [54].
    7. In my view, the parties’ clear intention in clause 16 of the MLA was to arbitrate any difference or dispute arising in connection with the MLA. I am not satisfied that the parties placed any reliance on a set of procedural rules that were obviously incapable of application.
    8. There is nothing in the MLA to support the construction that the reference to the Civil Procedure Act 2005 was intended to oust the operation of the Act.
    9. The plaintiff has accepted, by commencing these proceedings, that the law of New South Wales applies to the dispute and I see no reason why the Act would not operate.
    10. For these reasons I would reject the plaintiff’s fourth submission.
    11. Accordingly, the proceedings between the plaintiff and Sugarloaf should be referred to arbitration.
    12. The guarantees do not contain an arbitration agreement. However, Sugarloaf’s liability for breach of the MLA (if any) to the plaintiff and the quantum of any damages are governed by the arbitration agreement in clause 16 of the MLA. Accordingly, if the litigation on the guarantees is permitted to continue, it is likely to result in the duplication of proceedings as each guarantor would have a defence to the extent of establishing that Sugarloaf was not liable to the plaintiff or liable only to a limited extent. Alternatively, the outcome of the arbitration is likely to simplify the issues in the guarantee proceedings.
    13. In all of the circumstances, it is in the interests of justice to stay the proceedings against the second to fifth defendants pending the outcome of the arbitration between the plaintiff and Sugarloaf.
    14. As to costs the plaintiff has been wholly unsuccessful. Costs would ordinarily follow the event, however, Mr Stoney represented the defendants and is thereby not ordinarily entitled to claim costs unless they are legal costs properly incurred in the proceedings. The appropriate order is that the plaintiff pay the defendant’s costs, subject to those costs being recoverable legal costs.
    15. The orders I make are as follows:
        (1) The proceedings between the plaintiff and the first defendant are referred to arbitration.
    16. (2) The proceedings between the plaintiff and each of the second to fifth defendants are stayed pending the resolution of the arbitration between the plaintiff and the first defendant or until further order of the Court.

 

    (3) The plaintiff is to pay the costs of the defendants of the Amended Notice of Motion on the ordinary basis as agreed or assessed, if the defendants can establish an entitlement to recoverable legal costs.

 

Openyd Limited v Lawrence [2019] NZHC 46 (31 January 2019)

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2018-485-446
[2019] NZHC 46

OPENYD LIMITED
(Applicant)

V

GARY JOHN LAWRENCE, DIANE SHERYL LAWRENCE, KERRY MARK TRUBSHOE AND JASON PETER SILK
(Respondents)

 

UNDER:  section 261 of the Property Law Act 2007, Part 19 of the High Court Rules 2016
IN THE MATTER OF: an application for an order that the lessors renew the lease granted by Deed made on 5 April 2011
HEARING DATE: 21 November 2018
JUDGMENT: 31 January 2019

 

Introduction

[1] Openyd holds the lease over premises from which several dentists practice at Raumati Beach. The practice is known as the Raumati Dental Centre. The landlord is the respondent, the Lawrence Family Trust (the Trust). In response to the Trust’s refusal to renew the lease Openyd has filed this proceeding (the underlying proceeding). Openyd seeks an order requiring the Trust to renew the lease granted by deed on 5 April 2011.

[2] The Trust says an arbitration clause in the lease operates to exclude the High Court’s jurisdiction to hear and determine the underlying proceeding. The Trust has filed an interlocutory application for an order dismissing or staying the underlying proceeding to enable arbitration to take place. Openyd opposes the interlocutory application. Openyd says the arbitration clause is inoperative as the Trust waived compliance. Therefore, the High Court has jurisdiction to hear and determine the underlying proceeding.

[3] The contested interlocutory application gives rise to two primary issues:

(a) Did the Trust waive compliance with the arbitration agreement thereby rendering the agreement inoperative in terms of art 8(1) of sch 1 of the Arbitration Act 1996?

(b) If “yes” does the High Court have jurisdiction to hear and determine the underlying proceeding?

Background in overview

[4] This is the fourth proceeding filed in the past 12 months concerning disputes between dental practices operating as the Raumati Dental Centre at Raumati Beach. A brief description of the relevant background is all that is required in the context of this judgment. The narrative that follows is taken largely from the three previous decisions of the High Court.

[5] Dr Gary Lawrence is a director of G J Lawrence Dental Ltd (Lawrence Dental). Dr Lawrence established a dental practice at Raumati Beach in 1980. In 1996, he sold a third of the practice to each of two other dentists. Since that time the three-party arrangement has operated as the Raumati Dental Centre.

[6] Simon France J summarised the position:

[2] The operation model has generally been three individual entities with an association agreement between them covering matters such as organisation, staff and common costs. The three individual entities have for some time each formed companies through which to offer their professional services. When the practice became three, a joint company was formed, Openyd, as a holding and administration company. Ownership of one-third of Openyd, and directorship, generally transferred with each sale of a third. There were rules covering transfer of shares if one entity acquired two of the three units. Dr Lawrence has been a constant presence throughout the period. The other thirds have changed.

[3] In 2012 Dr Ibrahim bought out an existing third. Like others before her, she formed her own company. So, in 2012 there were four companies:

(a) Openyd – the administration company;

(b) G J Lawrence Dental Ltd (Lawrence Dental) – Dr Lawrence’s practice;

(c) Creative Dentistry Ltd (Creative) – Dr Al-Sabak’s practice;

(d) Alusi Ltd (Alusi) – Dr Ibrahim’s practice.

A fresh deed of association was entered into between the three practices.

[7] On 1 November 2017 Creative sold its practice to Alusi, and gave Alusi control of Openyd by way of a power of attorney over Openyd’s two-thirds shareholding.

[8] Lawrence Dental contested (and continues to contest) the transaction as being inconsistent with the deed of association which, it is said, requires Creative’s shares in Openyd to be transferred to Lawrence Dental and Alusi equally.

[9] Lawrence Dental gave notice of an intention to retire from the association. The notice triggered rights in the other entities (practically speaking, by this time, only Alusi as owner of two-thirds) to seek to purchase Lawrence Dental. Alusi chose not to do so.

[10] Lawrence Dental sought unsuccessfully to sell to a third party. Dr Lawrence says there was strong interest from three parties but a sale did not proceed because no party wished to be embroiled in the disputations within the association.

[11] At what Dr Lawrence describes as a “purported special meeting of Openyd shareholders” on 25 January 2018, and against his protest, he was removed as a director and the chair of Openyd. Mr Abdulah Abdulqadir (the son of Dr Ibrahim) was appointed as a director.

[12] On 14 February 2018 Lawrence Dental filed two sets of proceedings:

(a) CIV-2018-485-117 (CIV-117) — an application for declarations
concerning the status of the deed of association and an application that a receiver be appointed.

(b) CIV-2018-485-118 (CIV-118) — an application that Openyd be put into liquidation.

[13] Both proceedings were stayed. The stay was to allow CIV-117 to be resolved by arbitration. As well, Simon France J was satisfied the correct course was to stay 118 because of the link between the two proceedings.

[14] On 27 February 2018 Openyd gave notice to Lawrence Dental terminating its statutory tenancy at the premises. Lawrence Dental sought an interim injunction to prevent any further action by Openyd and Alusi. The application was heard by Grice J on 14 March 2018. The “substantial tensions” in the relationship between Lawrence Dental and Alusi were apparent to Grice J but she was not satisfied an injunction in the terms sought by the plaintiff should be granted. The defendants had provided an undertaking in the following terms:

The respondents, Openyd Limited and Alusi Limited, undertake that no steps will be taken to enforce the termination of the statutory tenancy of G J Lawrence Dental Limited pending the High Court’s determination of an application for an order for possession under the Property Law Act 2007.

[15] Weighing up all the factors, including the undertaking not to enforce termination of the statutory tenancy as well as an undertaking as to damages, Grice J assessed the balance of convenience and overall justice of the case as favouring refusal of the interim injunction as it had been framed.

[16] The third set of proceedings was commenced in April 2018 when Openyd filed an originating application against Lawrence Dental. Openyd’s central proposition was that it holds the lease granted by the Trust. Lawrence Dental has a sub-lease terminable at will under s 201(2) of the Property Law Act and can be required to leave. Lawrence Dental successfully applied to stay the proceeding to enable arbitration to take place.

[17] Openyd commenced this fourth proceeding, the underlying proceeding, by filing on 19 June 2018, an originating application for an order requiring the Trust to renew the lease, pursuant to s 261 of the Property Law Act 2007.

The present interlocutory application

[18] The Trust responded to Openyd’s originating application by filing a notice of appearance under protest to jurisdiction. The filing of that protest to jurisdiction on 6 July 2018 was followed, on 10 July 2018, by the filing of the present interlocutory application. Specifically, the Trust applies for orders:

(a) dismissing or staying the underlying proceeding to enable arbitration to take place on the basis the Court lacks jurisdiction to hear and determine the proceeding by virtue of r 5.49 of the High Court Rules and art 8(1) of Schedule 1 to the Arbitration Act 1996;

(b) alternatively, and without prejudice to the first order, staying the underlying proceeding until such time as the substantive issues in CIV- 117 and CIV-118 (the proceedings stayed by Simon France J) are determined.

[19] Openyd opposes the interlocutory application to dismiss or stay the underlying proceeding. Openyd contends the Trust waived the clause in the lease by which the parties agreed to submit their disputes or differences to arbitration. Consequently, the arbitration agreement is inoperative.

Did the Trust waive the arbitration clause?

The Trust’s position

[20] In support of its argument that the proceeding should be dismissed because the High Court lacks jurisdiction the Trust made the following submissions:

(a) Openyd made a request to renew its lease. By notice issued under ss 262 and 263 of the Property Law Act the Trust refused to renew on the grounds Openyd was in breach of the lease. Openyd disputed, and still disputes, the refusal.

(b) Clause 44.1 of the lease contains an arbitration clause requiring the dispute (unless it is resolved by mediation or other agreement) to be submitted to arbitration.

(c) A dispute between parties to a lease, in respect of the renewal of a lease, is arbitrable under s 261 of the Property Law Act.

(d) Unless an arbitration agreement is null and void, inoperative, or is incapable of being performed, or there is no dispute in fact between the parties, then a proceeding commenced in respect of matters which are properly the subject of an arbitration agreement must be dismissed under r 5.49(6)(a) of the High Court Rules for want of jurisdiction.

(e) In response to Openyd’s contention that the Trust waived compliance with the arbitration agreement the Trust submits the agreement is not inoperative, and the communication Openyd relies on in support of its contention cannot be construed as an unequivocal waiver of compliance with the arbitration agreement, nor as an election of the High Court as the forum for the dispute.

(f) Openyd cannot claim detrimental reliance because, once the dispute had arisen, the Trust made it clear the dispute should be referred to arbitration.

Openyd’s position

[21] Openyd’s opposition to the orders the Trust seeks is grounded in its assertion that the Trust waived the arbitration agreement. It is said that an email sent by the Trust’s solicitors on 5 February 2018, following Openyd’s request on 31 January 2018 for renewal of its lease, contained a “clear and unequivocal” communication constituting waiver. Citing Wang v Y & P New Zealand Ltd, Mr Griggs argued the only question is whether letters sent to Openyd’s solicitors on 13 and 15 June 2018 constituted a valid retraction of the waiver.

[22] Mr Griggs highlighted recent aspects of the backdrop to the parties’ disputes, namely, the unsuccessful settlement negotiations, and that the initial phases of two separate arbitrations are underway before the arbitral tribunal, Hon Paul Heath QC. Despite the availability to it of the waiver argument, Openyd says it elected to take a sensible and pragmatic approach by seeking (through counsel’s memorandum of 15 November 2018) to have the proceeding stayed to enable arbitration to take place and a direction that Openyd’s originating application be treated for all purposes, including s 262(b) of the Property Law Act “as having been made within the period prescribed in that provision”.

[23] Mr Griggs submitted that the Trust’s argument that the Court must dismiss the proceeding if it lacks jurisdiction, is contrary to precedent. Simon France J upheld a protest to jurisdiction yet entered a stay to allow the dispute to be resolved by arbitration. Accordingly, a stay is the proper order to be made if the arbitration agreement is found to be operative and capable of being performed.

[24] As to the question whether the arbitration agreement is capable of being performed, Mr Griggs highlighted aspects of natural justice entitlements under the New Zealand Bill of Rights Act 1990. Lawson v Gawith, upon which the Trust relies, fails to consider the impact of NZBORA and was wrongly decided on grounds which Mr Griggs elaborated.

Analysis

[25] Under a heading, “Arbitration” the following clauses appear in the lease:

44.1 Unless any dispute or difference is resolved by mediation or other agreement, the same shall be submitted to the arbitration of one arbitrator who shall conduct the arbitral proceedings in accordance with the Arbitration Act 1996 and any amendment thereof or any other statutory provision then relating to arbitration.

44.3 The procedures prescribed in this clause shall not prevent the Landlord from taking proceedings for the recovery of any rent or other monies payable hereunder which remain unpaid or from exercising the rights and remedies in the event of such default prescribed in clause 28.1 hereof.

[26] It is cl 44.1 which Openyd argues has been waived. The key facts, and the primary events leading to the communication said to constitute the waiver, are these:

(a) The lease (effective from 8 January 2011) was for a term of seven years with two rights of renewal on 8 January 2018 and 8 January 2025. Under the deed of lease renewal was to be effected by the tenant, at least three calendar months before the end of the term, giving to the landlord written notice to renew. Thus, if the lease was to be renewed after the first term of seven years, Openyd was required, no later than 8 October 2017, to give written notice of renewal to the Trust. Openyd did not do so.

(b) On 11 January 2018, the Trust’s solicitor, Mr Butler, wrote to Openyd. Much of the letter concerned the delivery of a courier pack to the Trust on Saturday 23 December 2017. The contents of the pack concerned a proposed shareholders’ meeting scheduled for 17 January 2018, the purpose being to remove Dr Lawrence as a director. Beyond Mr Butler’s discussion of the implications of that proposed move, Mr Butler observed Openyd occupied the premises at that point under a periodic tenancy terminable on 20 working days’ notice. Unless the proposal to remove Mr Lawrence as a director was immediately withdrawn, the Trust reserved its entitlement to issue a notice of intention to cancel the lease pursuant to the Property Law Act.

(c) On 12 January 2018, the Trust issued a notice of intention to cancel the lease on the grounds Openyd was in breach of the lease provision governing changes in legal or beneficial ownership of an unlisted corporate tenant. The particulars of the breach were detailed in the notice of intention to cancel. The breach could be remedied by Openyd satisfying the Trust any change in the legal or beneficial shareholding of Openyd had not altered the effective management or control of Openyd and that Dr Lawrence remained a director of Openyd. The notice stated that if the breach were not remedied within ten working days, the Trust may seek to cancel the lease in accordance with s 244 of the Property Law Act.

(d) On 31 January 2018 Openyd sought to renew the lease (or, as Mr Butler described the request to renew in subsequent correspondence, “the purported directors of Openyd Ltd” sought to renew the lease).

(e) On 2 February 2018, Openyd’s solicitor, Mr Reardon, wrote to Mr Butler:

It is now over a week since we wrote to you nominating Mr John Greenwood as the arbitrator for the renewal of lease arbitration. This dispute is based on your client’s position that there is a mere periodic tenancy and it reserves its right to terminate at any time: that is, it will not renew. We have had no reply, notwithstanding the receipt of a number of emails from you expressing you client’s opinions on other topics over that period. As you know, time [sic] the limitation period is tight. With respect we cannot see what the objection to Mr Greenwood could be.

Our client intends to approach the Law Society on Monday 5 February to make the appointment.

(f) Mr Butler replied on 5 February 2018. On Openyd’s case, it is this letter that contains the Trust’s “clear and unequivocal” waiver of the agreement to arbitrate. First, Mr Butler referred to his letter of 17 January in which he pointed out to Mr Reardon that Mr Reardon did not act for Openyd and that neither Mr Reardon nor his client was in a position to exercise the right of renewal; that Mr Reardon did not act for Openyd on 25 January 2018 when the request for arbitration was made, and there had been no request for arbitration since Mr Abdulqadir took control of the company through a change of directorship. Mr Butler continued:

…As late as Wednesday 31 January 2018 the purported directors of Openyd Limited sought to renew the lease… Although we do not recognise the authority of those presently acting for Openyd Limited that latest request, sent to Mr Gary Lawrence, has been forwarded to the trustees for consideration.

Against that background, the request for a renewal of lease made last week supersedes the unauthorised request purported to be made by you earlier. Questions of arbitration and the appointment of anyone including Mr Greenwood are prematureIn that regard

I note that in any event relief against forfeiture is for an application to the court and not to arbitration.

(g) Mr Reardon replied on Friday 9 February 2018. The letter concluded with the following paragraph:

You say that any application for relief should be in the High Court, and not pursuant to the arbitration clause. In reliance on your client landlord’s election of the High Court as the forum, Openyd Limited will be applying to the High Court.

[27] For the following reasons, I conclude that the 5 February 2018 letter did not communicate a waiver of the parties’ agreement to arbitrate or otherwise “elect” the High Court as the forum to which the parties should take their dispute.

[28] On its face, the 5 February letter contains no clear, unequivocal representation by the Trust that it does not insist on performance of the arbitration clause in the lease. The letter does not contain, or constitute, a waiver. The emphasised words communicate clearly the Trust’s view that discussing arbitration was premature. It was premature because:

(a) The request for renewal had only recently been received and forwarded to the Trust.

(b) The Trust had yet to respond to the request.

(c) As at 5 February 2018 (the date of the ostensible waiver) no dispute arose from the request to renew.

(d) Therefore, questions of arbitration were premature.

(e) And, in any event, relief against forfeiture was for application to the court not arbitration.

[29] In relation to the last point, Mr Skelton submitted that the Trust’s solicitor was stating no more than what is stated in the relevant provisions of the Property Law Act. I agree with the position the Trust takes: that the final sentence of the 5 February 2018 letter did not amount to an election of the High Court as the forum for a dispute.

[30] Returning to the waiver argument, two key points emerge:

(a) The penultimate sentence of the 5 February 2018 letter states only that “Questions of arbitration … are premature” not that the agreement to arbitrate is waived; and

(b) The rental renewal dispute had not, in any event, arisen at that stage.

[31] That no (relevant) dispute existed as at 5 February 2018 is confirmed by subsequent correspondence between the parties’ legal advisers. On 20 March 2018 Mr Reardon wrote to ask Mr Butler for confirmation of the Trust’s decision with respect to Openyd’s notice to renew. The dispute did not arise until 6 June 2018. The Trust issued a notice of refusal to renew dated 24 May 2018. The dispute crystallised on 6 June 2018 when Mr Reardon wrote to advise:

Your clients’ right to refuse the renewal of the lease is disputed and an application for relief will shortly be filed pursuant to sections 261, 262 and 264 of the Property Law Act.

… We seek your undertaking … that the lessor will not take any steps to evict or otherwise interfere with our client’s possession of the premises, other than filing an application for an order for possession, until our client’s application for relief has been finally determined.

[32] On 13 June 2018, the Trust replied through its solicitor (not Mr Butler). The Trust took the view that all matters, including the refusal to grant renewal of the lease, should be determined by a single arbitration. The Trust would give the undertaking Openyd sought in the 6 June 2018 letter if Openyd agreed to pay outstanding rent and agreed to refer to a single arbitration its foreshadowed application for relief, together with the proceedings filed in CIV 117, 118 and 267.

[33] The Trust’s solicitor wrote again on 15 June 2018 (in reply to a letter from Openyd on 14 June which was not before the Court) resisting the suggestion the issues arising from the various disputes were separate and distinct and restating the Trust’s view that all matters should be referred to a single arbitration for resolution. I regard the correspondence in June 2018 as putting beyond any doubt the Trust’s stance on arbitration.

Retraction of waiver

[34] If I am wrong in my conclusion and the 5 February letter did constitute a waiver, I am nevertheless satisfied that the June correspondence constituted a valid retraction of the waiver. Mr Griggs does not dispute the possibility of a party retracting a waiver at any time with reasonable notice, unless it would be inequitable to do so. In fact, Mr Griggs submitted that the only question before me is whether the Trust’s letters of 13 and 15 June 2018 constituted a valid retraction of the waiver. I am satisfied that the 13 and 15 June letters stated the Trust’s ambiguous preference for arbitration, and sought Openyd’s agreement to that course as a condition of granting the undertaking which Openyd wanted. Any previous waiver was validly retracted by those letters.

[35] One further matter must be addressed. To establish waiver Openyd must show the Trust’s representation induced Openyd to rely and act upon it.If Openyd relied on a representation by the Trust that it waived its legal rights, and that reliance was to Openyd’s detriment, then a retraction might not be available to the Trust. Openyd says it did rely on the Trust’s representation of waiver. In support, Openyd points to the final sentence of Mr Reardon’s letter of 9 February 2018 in which Mr Reardon stated:

In reliance on your client landlord’s election of the High Court as the forum, Openyd Limited will be applying to the High Court.

[36] I do not think the argument can stand. Notwithstanding that on 9 February Openyd foreshadowed an application to the High Court, no application was made until after 6 June when Openyd advised the Trust its refusal to renew the lease “is disputed and an application for relief will shortly be filed pursuant to sections 261, 262 and 264 of the Property Law Act”. Following Openyd’s notification of dispute on 6 June the Trust made it clear in its two letters of 13 and 15 June 2018 that any application for relief by the applicant should be made in arbitration proceedings in accordance with cl 44.1 of the lease.

[37] In the face of the Trust’s letters, Openyd commenced proceedings on 19 June 2018. Openyd cannot say it relied on a waiver given in February 2018 when it filed its application in the High Court in June 2018 in the face of the Trust’s clear communication, the preceding week, of its commitment to arbitration.

[38] I have concluded the Trust did not waive the arbitration clause by its communications in February 2018. If it did, there was no detrimental reliance on the waiver by Openyd and the waiver was validly retracted by the Trust’s 13 and 15 June letters. The result is that the dispute as to renewal of the lease is a dispute falling squarely within the terms of the arbitration clause.

[39] As there was no waiver (or, if there was, it was validly retracted) the arbitration clause is not, as Openyd argues, inoperable. The existence then, of a functioning arbitration clause, raises the next issue which concerns the jurisdiction of the Court in light of the parties’ agreement to arbitrate their disputes.

Jurisdiction?

[40] The question is whether the Court has jurisdiction to hear and determine the underlying proceeding. If the answer is “yes” it will then be necessary to go on to consider the second of the orders which the Trust seeks, namely, whether the proceeding should be stayed pending arbitration. That question will not arise if I find the Court lacks jurisdiction to hear the underlying proceeding.

[41] I have already set out the parties’ respective submissions. Mr Griggs relies on G J Lawrence Dental Ltd v Alusi Ltd as demonstrating the flaw in the Trust’s approach. Mr Griggs raises that decision as an example of the Court upholding a protest to jurisdiction yet entering a stay to allow the dispute to be resolved by arbitration rather than dismissing the proceeding.

[42] As Mr Griggs observed, Simon France J granted the application for a stay. It had been argued that, by participating in interlocutory proceedings prior to the hearing of the stay application, Alusi had thereby submitted to jurisdiction. Simon France J examined the steps which Alusi had taken and considered the authorities bearing on the issue of submission to jurisdiction. Consistent with the decisions which His Honour cited he did “not consider Alusi’s participation in the interim injunction proceedings constitute[d] submission to jurisdiction”. It was open to Lawrence Dental to claim the arbitration agreement applied and accordingly, pursuant to art 8(1) of sch 1 of the Arbitration Act, the matter required to be stayed.

[43] I am not concerned in this case with questions about whether or not a party has submitted, or purported to submit, to jurisdiction. Rather, I must assess the competence of the Court to decide the underlying proceeding. In Commissioner of Inland Revenue v Redcliff Forestry Venture Ltd the Supreme Court described r 5.49 of the High Court Rules as expressing an unqualified right to challenge a court’s jurisdiction to hear and determine proceedings and that the rule should be given its ordinary meaning. The Supreme Court quoted Diplock LJ’s classic expression of the meaning of “jurisdiction” in Garthwaite v Garthwaite:

In its narrow and strict sense, the “jurisdiction” of a validly constituted court connotes the limits which are imposed upon its power to hear and determine issues between persons seeking to avail themselves of its process by reference (1) to the subject-matter of the issue or (2) to the persons between whom the issue is joined or (3) to the kind of relief sought, or to any combination of these factors.

[44] There is also a wider sense in which jurisdiction is often used:

… that although the Court has power to decide the question it will not according to its settled practice do so except in a certain way and under certain circumstances.

[45] The House of Lords observed those comments were endorsed by Lord Diplock in Garthwaite v Garthwaite.

[46] Rule 5.49 permits a defendant, who objects to the jurisdiction of the court to hear and determine a proceeding, to file and serve an appearance stating the objection and the grounds for the objection instead of filing a statement of defence. One of the bases for protesting the Court’s jurisdiction is where jurisdiction is precluded by contract. An agreement between parties to refer disputes to arbitration is one such example. I do not see the resolution of this jurisdictional issue as lying within the terms of art 8(1) upon which the Trust relies for its dismissal application. Article 8(1) provides:

8 Arbitration agreement and substantive claim before court

(1) A court before which proceedings are brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting that party’s first statement on the substance of the dispute, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative, or incapable of being performed, or that there is not in fact any dispute between the parties with regard to the matters agreed to be referred.

[47] Applications such as the application before me, which assert the primacy of an arbitration clause, concern a critical balance between the courts and the arbitral process. On one side, it is national law that upholds the arbitration agreement and national courts are the enforcement agency for the arbitral process. On the other side is party autonomy and the principle of non-intervention. In choosing arbitration, parties have manifested their intention to create continuing legal relations.

[48] Lord Mustill (writing extrajudicially) emphasised the role of the courts as being to support, not supplant the arbitral process:

The balance is maintained by a recognition by the courts that just as arbitration exists only to serve the interests of the community, so also their own powers are conferred only to support, not supplant, the extra-judicial process the parties have chosen to adopt.

[49] I appreciate Lord Mustill was speaking of the role of the courts in the arbitral process and that the parties are not at that stage with regard to this particular dispute. The point is, the parties have contracted to refer their disputes to arbitration and it is the proper function of the court to support that election.

[50] I refer also to the authorities to which Cooke J referred in Openyd Ltd v G J Lawrence Ltd. In Marnell Corrao Associates Inc v Sensation Yachts Ltd Wild J referred to the general principle that:

… Courts should uphold arbitration, by striving to give effect to the intention of parties to submit disputes to arbitration, and not allow any inconsistencies or uncertainties in the wording or operation of the arbitration clause to thwart that intention. That is stated in Redfern & Hunters Law and Practice of International Commercial Arbitration (3rd ed), 1999, pp 172-173. To similar effect is Russell on Arbitration (21st ed) 1997, para 2-006, citing the Privy Council’s decision in Queensland Electricity Generating Board v New Hope Colleries Pty Ltd [1989] 1 Lloyds Reports 205. Their Lordships’ opinion was delivered by Sir Robin Cooke, who said (at p 210):

At the present day, in cases where the parties have agreed on an arbitration or valuation clause in wide enough terms, the Courts accord full weight to their manifest intention to create continuing legal relations.

[51] Cooke J referred also to the related principle of “one-stop adjudication” sourced to the decision of Lord Hoffmann in Fiona Trust & Holding Corp v Privalov. Lord Hoffmann was cited also by Simon France J in Tamihere v Media Works Radio Ltd:

[23] The second principle is the “one stop” idea, which takes as a starting point that parties to a commercial contract would not ordinarily be expected to submit only some of their disputes to the jurisdiction they have selected:

[13] In my opinion the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction.

[24] Ultimately the task is to interpret the scope of the arbitration agreement contained within the parties’ written contract. Consistent with my earlier conclusion, if there is a prima facie case to say the subject matter of these claims is covered by the agreement, a stay should be entered and the parties referred to arbitration.

[52] In this case, I consider that to accept jurisdiction to hear and determine the underlying proceeding would be to effectively render meaningless the arbitration clause in the lease by which the parties contracted to refer their disputes to arbitration. I note further that the arbitration clause is spectacularly wide. The parties have not confined or defined the dispute which is to be referred to arbitration but rather, “any dispute or difference … shall be submitted to [arbitration].”

[53] I do not consider that in this case it would be proper for me to exercise the court’s jurisdictional competence to hear and determine the underlying proceeding.

[54] Importantly, I am satisfied that my conclusion does not create issues of access to justice. In upholding the principle of party autonomy, and by recognising that the parties have chosen to resolve their dispute through private means, the parties are free to do so. I see no impediment to the parties pursuing the arbitration process to attempt to resolve the dispute raised by the underlying proceeding. Mr Skelton summarised the various disputes which have already been referred to the arbitration process. I see no impediment to the matters already within the jurisdiction of the arbitrator including this dispute.

[55] Section 262 of the Property Law Act requires an application for relief against refusal to renew a lease to be filed within three months of the refusal. That timeframe is immutable. But that timeframe applies to the commencement of proceedings in a court. There is no similar, immutable, timeframe for the reference of a dispute to arbitration unless, of course, the parties have agreed to any such restriction. I am not aware of any such limitation applying in this case.

[56] Importantly also, in terms of the “justice of the case”, although originally resisting arbitration, arbitration is the very means by which Openyd now wishes to resolve the dispute about renewal of the lease. And, for its part, the Trust’s alternative position was that if not dismissed, the underlying proceeding should be stayed to enable the parties to attempt to arbitrate their dispute.

Result

[57] The respondents’ interlocutory application for an order dismissing the underlying proceeding for want of jurisdiction is granted.

[58] The respondents have succeeded. Costs follow the event.

Pollard Construction Co Ltd v Lee Kwong & To Chun Yin t/a Hung Chong (Foundation) Construction Co [2017] HKDC 1335; DCCJ 5635/2016 (27 October 2017)

IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION
CIVIL ACTION NO. 5635 OF 2016

POLLARD CONSTRUCTION COMPANY LIMITED
(Plaintiff)

V

LEE KWONG KONG AND TO CHUN YIN T/A HUNG CHONG (FOUNDATION) CONSTRUCTION COMPANY
(Defendant)

CORAM: His Honour Judge KW Wong in Chambers (Open to public)
DATE OF HEARING: 20 October 2017
DATE OF DECISION: 27 October 2017

 

DECISION

1. This is the hearing of the Defendant’s summons dated 7 April 2017 for an order that the action herein be stayed and for arbitration pursuant to section 20 of the Arbitration Ordinance, Cap 609 (“AO”) in accordance with the parties’ prior arbitration agreement (“the staying summons”). The Defendant also asks for costs on indemnity basis.

Brief Background

2. The following background is basically not in dispute or believed not controversial unless otherwise stated. They can be gathered from the 2 affirmations filed by Mr To Chun Yin, the second-named Defendant, and the affidavit filed by Mr Tso Hung Chuen on the Plaintiff’s behalf.

3. The Defendant is the Plaintiff’s sub-contractor in the construction of a hotel development located at New Market Street and Tung Loi Lane, Hong Kong (“project”) responsible for the design, supply and installation of excavation and lateral support and piling works. The parties signed a contract dated 23 August 2013 in respect of the said works for the project (“Sub-contract’). The contract sum is $6,800,000.

4. Some of the Defendant’s workers for the project failed to receive wages, holiday pays and other terminal compensation from the Defendant. These workers lodged their claims with the Labour Tribunal under action number LBTC 466/2015 against, inter alia, the Plaintiff and Defendant in or about February 2015. From the claim forms of these workers, they were owed wages between September to November 2014. Despite the fact that the Plaintiff was not the workers’ employer, these workers sued the Plaintiff at the same time relying on section 43C of the Employment Ordinance, Cap 57 (“EO”). Section 43C(1)(a) of the EO provides:

“(1) Subject to this Part, if any wages become due to an employee who is employed by a sub-contractor on any work which the sub- contractor has contracted to perform, and such wages are not paid within the period specified in section 23,24 or 25, as the case may be, such wage shall be payable to the employee –

(a) where the sub-contractor has contracted with the principal contractor, by the principal contractor;”

5. By consent of the parties, an award was made in favour of the workers by the Tribunal against the Plaintiff and the Defendant jointly and severally in the total sum of $523,774, being the workers’ outstanding wages, on 8 April 2015. The Labour Tribunal award was eventually satisfied by the Plaintiff on 29 April 2015.

6. By the present action, the Plaintiff sues the Defendant for reimbursement of the said sum of $523,774. According to the Statement of Claim, the Plaintiff relies on section 43F(1) of the EO which stipulates:

“(1) If a principal contractor or superior sub-contractor pays to an employee any wages under section 43C, the wages so paid shall be a debt due by the employer of that employee to the principal contractor or superior sub-contractor, as the case may be.”

7. The Defendant filed no Defence but took out the staying summons on 7 April 2017.

8. The Defendant relies on Clause 20(i) of the Sub-contract. Since the Plaintiff also refers to Clause 20(ii) of the same contract, both sub-clauses are reproduced below:

“(i) If any dispute arises between the Contractor [i.e. the Plaintiff] and the Sub-Contractor [i.e. the Defendant] in connection with this Sub-Contract, it shall, subject to the provisions of this clause, be referred to the arbitration and final decision of a single arbitrator in accordance with and subject to the provisions of the Arbitration Ordinance or any statutory modification thereof for the time being in force and any such reference shall be deemed to be a submission to arbitration within the meaning of such Ordinance. For the avoidance of doubt, it is hereby agreed between the parties thereto that no legal proceeding, lawsuit or action shall be brought, filed, commenced or instituted in any court of any jurisdiction by any of the parties hereto in relation to the aforesaid dispute between the same parties unless and until an award shall have first be given by the aforesaid arbitrator regarding such dispute.

(Emphasis added by the Defendant)

(ii) If any claim arises or results from the dispute between the Contractor and the Sub-Contractor abovementioned in Clause 20(i) and the party to whom such claim is made denies liabilities thereto, then the party making such claim shall within twelve (12) calendar months from the date of such disclaimer refer the claim or dispute to arbitration under the provisions herein contained, failing which the claim shall for all purposes be deemed to have been abandoned by the party making it and shall not thereafter be recoverable.”

9. It is the Defendant’s case that Clause 20(i) is an arbitration agreement within the meaning of the AO. Mr Cheung, counsel for the Plaintiff, does not seek to dispute that. Section 20(1) of the AO provides that Article 8 of the Model Law has effect. Article 8(1) provides:

“A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his 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.”

10. Section 20(5) of the AO further states:

“If the court refers the parties in an action to arbitration, it must make an order staying the legal proceedings in that action.”

11. The Defendant’s case (obviously disputed by the Plaintiff) is that since the Plaintiff’s claim in the action arose from a matter within the ambit of the arbitration agreement, the Plaintiff’s claim should be stayed pursuant to section 20(1) and (5) of the AO. Briefly, the Defendant says that pursuant to the Sub-contract, the contract sum would be effected by way of monthly interim payments according to the work done. They commenced work around August 2013. The excavation works, which was part of the works of the Sub-contract, had been completed. However, their further work was suspended in October 2014 on the ground that certain pilings were built not at the right positions. Payment was stopped. As a result, they were unable to pay their workers’ wages. They say, so far, only $3,000,000 has been received from the Plaintiff under the Sub-contract. There remains unpaid contract sums which the Plaintiff is liable to pay to the Defendant. They do not admit that they are liable, in terms of liability and quantum, to reimburse the Plaintiff its claim in the present action.

12. The main grounds of the Plaintiff resisting the staying application are that the Defendant has never disputed liability and referred the matter to arbitration. There is therefore no genuine “dispute or difference” between the parties. Secondly, it is contested that the Plaintiff is basically exercising its statutory rights conferred upon it by the EO to recover payment of the Tribunal award as a debt which is an independent statutory claim outside the ambit of the arbitration agreement.

Discussion

13. Both counsel approach the summons by asking the questions formulated in Tommy CP Sze & Co v Li & Fung (Trading) Ltd & Anors by Ma J (as the Hon CJ then was). That case concerned an application under the AO to stay proceedings in favour of arbitration pursuant to an arbitration agreement. The learned judge proposed to ask the following 4 questions in order to determine whether to stay the proceedings in favour of arbitration :

i) 1st question: Is the clause in question an arbitration agreement? If the answer is No, a stay will not be granted;

ii) 2nd question: Is the arbitration agreement null and void, inoperative or incapable of being performed? If the answer is Yes, no stay can be ordered;

iii) 3rd question: Is there in reality a dispute or difference between the parties? If the answer is No, no stay will be ordered; and

iv) 4th question: Is the dispute or difference between the parties within the ambit of the arbitration agreement? This in turn will be a 2-stage analysis and involves firstly, analysing the nature of the dispute or difference between the parties and secondly, construing the arbitration agreement to see whether it comes within it. If the answer is No, a stay will not be ordered.

14. The approach in Tommy (supra) has in fact been widely adopted with approval in many cases, e.g. Chevalier (Construction) Company Limited v Universal Aluminium Industries LimitedBluegold Investment Holdings Limited v Kwan Chun Fun Calvin. Although, as correctly pointed out by Ma J in Tommy (supra) there are other ways to go about the question of stay, this Court will approach the dispute by asking the same Tommy’s questions as it is the parties’ common ground that such approach is to be adopted.

15. Mr Cheung, counsel for the Plaintiff, accepts, and I think sensibly and correctly, that the first 2 questions are answered in favour of the Defendant. He accepts Clause 20(i) of the Sub-contract a valid arbitration agreement. He, however, submits that the 3rd and the 4th questions should be answered against the Defendant.

3rd Question: Is there in reality a dispute or difference between the parties?

16. The gist of Mr Cheung’s argument is this. The Defendant has in fact unequivocally admitted both liability and quantum of the workers’ claims in the Labour Tribunal. As a result, an award in favour of the workers was made by the Tribunal with the parties’ consent. Further, almost 3 years have elapsed after the suspension of the Sub-contract. Yet the Defendant has never raised any claim or dispute with the Plaintiff in respect of the Sub-contract. Neither has the Defendant referred any claim or dispute to arbitration pursuant to the arbitration agreement. Any dispute, according to Clause 20(ii), should have been barred.

17. With respect, I disagree.

18. First of all, it is important to distinguish between the 2 disputes, namely, that between the workers and the parties herein as a whole on one hand, and that between the 2 parties herein on the other. It is true that the Defendant does not dispute the workers’ claims and as such it is correct to say that as between the workers and the parties in the Labour Tribunal there is no dispute. That may, perhaps, be the reason why the Tribunal award was made by consent.

19. However, the fact that the Defendant admits the labour claim does not mean that they admit their liability to repay the same to the Plaintiff, in light of their relationship under the Sub-contract. From the affirmation evidence summarized above, the Defendant is basically alleging that there are still payments under the Sub-contract due and owing to them by the Plaintiff. It is the Defendant’s case that because of the Plaintiff’s failure to effect Sub-contract payments, they became unable to settle wages of workers which were engaged to work on the project. Although the exact amount of the labour claim is not in dispute, it will be unrealistic to say the Defendant does not dispute the Plaintiff’s present claim in the context of the Sub-contract. The true nature of the dispute, considered against the background of the parties’ contractual relationship, is whether the Defendant is required to repay the Plaintiff the Tribunal award taking into account the Defendant’s overall rights and liabilities as alleged under the Sub-contract.

20. In any event, the Defendant does not admit the Plaintiff’s claim.

21. Mr Cheung submitted that the Defendant’s defence, if any, is indisputable and is of no substance at all and not amounting to any real dispute referable to arbitration.

22. Section 4 of the AO adopts the part of the provisions of the UNCITRAL Model Law that are expressly stated in the AO. Section 20 of the AO applies Article 8 of the Model Law. Article 8(1) provides:

“A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of thedispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”

23. What constitutes a dispute has been discussed in the Court of Appeal decision of Tai Hing Cotton Mill Ltd v Glencore Grain Rotterdam BV. Bokhary JA (as the learned PJ then was) had this to say when discussing what meaning the word “dispute” bears in Article 8(1) at p.372H – 373F:

“I gratefully adopt what Saville J said in Hayster v Nelson [1990] 2 Lloyd’s Rep 265 at 268:

The proposition must be that if a claim is indisputable then it cannot form the subject of a ‘dispute’ or ‘difference’ within the meaning of an arbitration clause. If this is so, then it must follow that a claimant cannot refer an indisputable claim to arbitration under such a clause; and that an arbitrator purporting to make an award in favour of a claimant advancing an indisputable claim would have no jurisdiction to do so. It must further follow that a claim to which there is an indisputably good defence cannot be validly referred to arbitration since, on the same reasoning, there would again be no issue or difference referable to arbitration. To my mind such propositions have only to be stated to be rejected – as indeed they were rejected by Kerr J (as he then was) in the M Eregli [1981] 2 Lloyd’s Rep 169, in terms approved by Templeman and Fox LJJ in Ellerine v Klinger. As Templeman LJ put it (at p 1383):

‘There is a dispute until the defendant admits that the sum is due and payable.’

Now the Model Law governs the position of parties … as I understand it, is to leave such parties to do what they agreed to do so, ie take their disputes to arbitration. That being so, it would be odd if the word ‘dispute’ where it appears in the Model Law were to receive a narrower meaning than it receives where it appears in an ordinary arbitration agreement.”

(Emphasis added)

24. Bokhary JA then concluded at p.373G-I:

“Under art 8(1) of the Model Law, the court is not concerned with investigating whether the defendant has an arguable basis for disputing the claim. If a claim is made against him in a matter which is the subject of an arbitration agreement and he does not admit the claim, then there is a dispute within the meaning of the article. And if he seeks a stay of the action, the court must grant a stay unless the plaintiff can show that the arbitration agreement is null and void, inoperative or incapable of being performed.”

(Emphasis added)

25. From the above, it is obvious that submission similar to that advanced by Mr Cheung has been expressly rejected by the Court of Appeal in Tai Hing Cotton Mill (supra). In fact, Ma J (as he then was) in Tommy (supra), which is the authority embraced by Mr Cheung, also applied the same approach and relied on Tai Hing Cotton Mill (supra). It was stated at [51] of Tommy (supra):

“…A dispute will exist unless there is a clear and unequivocal admission not only of liability but also of quantum…”

26. In the Court’s judgment, whether the claim of the Defendant, if any, will be time-barred by reason of Clause 20(ii) or whether there are provisions by virtue of which time can be enlarged depends on the construction of the agreement between the parties including the arbitration agreement. It will be a matter entirely for the arbitrator to whose jurisdiction the parties have expressly agreed to submit.

27. The 3rd question is therefore answered in the Defendant’s favour.

4th question: Is the dispute or difference between the parties within the ambit of the arbitration agreement?

28. The existence of a dispute is not enough to activate the arbitration agreement. It is necessary that the dispute is the sort of dispute intended to be covered by the arbitration agreement. As such, the scope of the arbitration agreement and nature of the dispute need be inquired into.

29. Mr Cheung submits that the dispute has a separate and distinct statutory origin and solely arose out of section 43F of the EO. It is not connected with the Sub-contract. He relies on 2 CFI decisions of Aggressive Construction Company Ltd v Data-Form Engineering Limited (per DHCJ To) and Lo Pui Fan & Anor v HongKong United Dockyards Limited & Keppel Fels Limited (third party) (per Hon L Chan J) in support of his argument.

30. Mr Chan, counsel for the Defendant, relies on Legend Interiors v Wing Mou Engineering Ltd & Anor and Chevalier (Construction) Co Ltd v Universal Aluminium Industries Ltd. In these 2 cases similar claims based on Labour Tribunal awards were considered and stayed by the CFI. It is also Mr Chan’s submission that on a proper construction, the dispute is within the ambit of the arbitration agreement.

31. Mr Chan also relied on PCCW Global Ltd v Interactive Communications Service Ltd to support his proposition that the matter should be stayed unless it is clear that the dispute does not so fall within the arbitration agreement. I think Mr Chan is correct in his approach when approaching the 4th question.

32. The full text of the arbitration agreement has been set out in [8] above. It is noted that the formulation of words “… any dispute arises between the [Plaintiff] and the [Defendant] in connection with this Sub-Contract, …” was employed. The choice of words is in fact very similar to Tommy (supra), in which similar words, namely, “… arising out of the Contract or in any way connected herewith …” were used. The question of constructive trust was raised in Tommy (supra).

33. It was held in Tommy (supra) words such as “arising out of … or … in any way connected therewith…” are wide words. In [57] of Tommy (supra) it was stated:

“Words like ‘in connection with’ or ‘connected therewith’ are wide in nature and will cover all disputes other than those entirely unrelated to the transaction covered by the contract in question: see Mustill & Boyd: Commercial Arbitration at p 119. These words are wide enough to cover claims in constructive trust as long as they are related to the transaction covered by the arbitration agreement.”

(Emphasis added)

34. Given the Court’s analysis of the nature of the dispute between the parties, this Court accepts that the arbitration agreement is sufficiently wide to cover a reimbursement claim of the Labour Tribunal award which arises out of the relationship of the parties created under the Sub-contract and the payment or otherwise is connected with it.

Chevalier (supra)

35. The recent decision by DHCJ Seagroatt in Chevalier (supra) is squarely on this issue. In that case the parties are parties to a contract with an arbitration agreement. The plaintiff sued the defendant to recover wages paid to the latter’s workers pursuant to a Labour Tribunal award. In the application by the defendant to stay the proceedings for arbitration, the plaintiff contested similarly that the claim for reimbursement was a statutory claim under the EO and had an independent a separate origin. The defendant contented the inability to pay wages was caused by, inter alia, the plaintiff’s failure to make payment under their contracts.

36. The learned deputy judge considered that the liability met by the plaintiff to satisfy its obligation under the EO is inextricably involved with the dispute between them arising out of their contracts. The learned deputy judge also stated that it was wholly artificial to seek to compartmentalize the plaintiff’s claim for reimbursement, when the principal live issues were subject of the arbitration: see [22] and [23] of Chevalier (supra).

37. This Court shares the above views of the learned judge.

Legend (supra)

38. Legend (supra) is another case relied on by Mr Chan. In brief, reimbursements under section 43C-H of the EO were sought by the main contractor against the sub-contractor, and the parties were related by contracts with arbitration agreement in which disputes should be referred to arbitration. The words “in connection with” and “in connection therewith” were employed. Reyes J held that the main contractor’s claim was within the terms of the arbitration agreement. He said at [12] of Legend (supra):

“… It seems to me on consideration that the claim does, because it arises in connection with the relation of main contractor and sub- contractor subsisting between Legend and Wing Mou. Insofar as essentially there is a dispute among the two as to the extent to which on a final account between them certain amounts (including all or part of the reimbursement paid by Legend under the EO) remain due and owing to Legend from Wing Mou, it seems to me that the claim for reimbursement should also go to arbitration.”

39. I respectfully agree to the observation of the learned judge.

40. Mr Cheung seeks to distinguish that in both Chevalier (supra) and Legend (supra), both defendants had a core dispute for arbitration. Further, in Chevalier (supra), the defendant had already initiated arbitration proceedings. Accordingly, the court saw fit to stay.

41. I cannot accept Mr Cheung’s submission for the simple reason that his submission does not sit in well with the reasoning of the judges in both cases. Further, there is no basis for the existence of a core dispute before one could activate the arbitration agreement. As said by Ma J in Tommy (supra) and set out in [25] above, a dispute will exist unless there is a clear and unequivocal admission not only of liability but also of quantum. In the present case, neither liability nor quantum have been admitted by the Defendant. The arbitration agreement employs words the meaning of which is wide enough to cover the labour claims arising from their relationship under the Sub-contract.

Aggressive Construction (supra)

42. It is a case in which the arbitration agreement contained in the parties’ building contracts provided that “… if any dispute in relation to [their contract] arises”, the said dispute should first of all determined by the main contractor. It would be a “… final determination in terms of contract and in law…” unless within a prescribed time after the determination the subcontractor referred the matter to arbitration. The main contractor sued the sub-contractor for reimbursement of wages paid to the subcontractor’s workers. The subcontractor filed a defence and counterclaim putting the contractual disputes between the parties at issue. The main contractor applied to have the counterclaim stayed in favour of arbitration. One of the issue before the court was whether the main contractor’s claim for reimbursement was within the relevant arbitration agreement.

43. DHCJ To (as he then was) held it was not. The judge apparently accepted the submission of counsel for the main contractor that determination by the main contractor, which is subject to arbitration, should only be restricted to the legal effect of the terms of the contract between the parties. The main contractor has no power to determine the effect of general law unrelated to the terms of the contract, such as the provisions of the EO which was not part of the terms of the contract between the parties. Essentially, the deputy judge was understood to mean that the arbitration agreement simply did not cover matters in which the main contractor did not have power to determine in the first place, and the claim for reimbursement is one of them.

44. It is noted that the arbitration agreement in Aggressive Construction (supra) is very different from that of the present case. The matters which are subject to arbitration in that case are qualified by the term “in terms of contract and in law’ which is absent in the present case. Further, the limitation caused by a lay party adjudicating on the effect of general law is also absent in the present case. In my judgment, the decision of Aggressive Construction (supra) should be confined to its own special facts and is distinguishable.

Lo Pui Fan (supra)

45. In this case, the plaintiffs were the adminstratrices of the estate of a deceased worker who was fatally injured in an accident. They sued the defendant who was the deceased’s employer. The defendant issued a third party notice against a third party for contribution and/or indemnity on the grounds that the fatal accident was caused by the latter’s defective design and use of inferior materials. The claim against the third party were based, inter alia, on the Civil Liability (Contribution) Ordinance, Cap 377 and/or Employees’ Compensation Ordinance, Cap 282. They were said to be statutory in origin.

46. The third party sought to stay the third party proceedings in favour of arbitration. There is an arbitration clause between its agreement with the defendant. The arbitration agreement provided:

“Any dispute arising under or by virtue of this Contract or any differences of opinion between the parties hereto concerning their rights and obligations under the Contract shall be resolved by arbitration.”

47. Hon Louis Chan J was referred to a number of English authorities and Aggressive Construction (supra). It was held by the learned judge at [26] of the said decision:

“… Clause 14.1 is an all-encompassing arbitration clause only for ‘dispute arising under or by virtue of this Contract or any differences of opinion between the parties hereto concerning their rights and obligations under the Contract’. It does not cover the statutory claims brought by the defendant under s.3 of the Civil Liability (Contribution) Ordinance and s.25(1)(b) of the Employees’ Compensation Ordinance.”

48. It is apparent that the learned judge considered the arbitration agreement in question not wide enough to cover the statutory claims. In my judgment, the learned judge in Lo Pui Fan (supra) is entitled to come to a narrower construction as he did because the apparently limiting words “…. concerning their rights and obligations under the Contract” were there. They were absent from the agreement in the present case. Further, it appears that only Aggressive Construction (supra) was cited to the learned judge. He did not appear to have the benefit of Legend (supra) when making the decision. In my judgment, Lo Pui Fan (supra) is also distinguishable.

Dispositions

49. For the reasons above, the proceedings here should be stayed pursuant to Clause 20(i) aforesaid. I therefore make an order that the present action be stayed and the plaintiff’s claims herein be referred to arbitration.

50. I also make an order that the Plaintiff do pay the costs of the Defendant’s application to stay these proceedings, with certificate for counsel, on District Court scale, on indemnity basis: see Chimbusco International Petroleum (Singapore) Pte Ltd v Fully Best Trading Ltd. It is an order nisi, and be made absolute if no application is made to have it amended within 14 days from today.