SUPREME COURT OF WESTERN AUSTRALIA
ERIEZ MAGNETICS PTY LTD
DURO FELGUERA AUSTRALIA PTY LTD
CORAM: Martin CJ
HEARD: 12 September 2017
DELIVERED: 12 September 2017
FILE NO: CIV 2075 of 2017
CATCHWORDS: Arbitration – Application to stay proceedings and refer to arbitration – Construction of dispute resolution clause – Turns on own facts
- MARTIN CJ: (This judgment was delivered extemporaneously on 12 September 2017 and has been edited from the transcript.)
- This is an application brought by the defendant pursuant to s 7(2) of the International Arbitration Act 1974 (Cth) for the stay of proceedings that have been commenced in the court and for an order that the dispute be referred to arbitration. It is appropriate to commence with the history of the proceedings, starting with the writ which was issued on 29 June 2017.
- The proceedings were commenced by Eriez Magnetics Pty Ltd (Eriez) against Duro Felguera Australia Pty Ltd (Duro Felguera). The indorsement of claim contained on the writ seeks relief in the form of declarations as to the proper construction of a subcontract dated 24 April 2014 between Eriez and Duro Felguera, as well as payment plus interest for goods and services provided pursuant to that subcontract, restitution and interest for wrongful conversion of a bank guarantee delivered pursuant to the subcontract and damages for breach of the subcontract.
- A statement of claim was served simultaneously with the writ. Salient provisions of the statement of claim relevant to the issue before the court include pars 1 and 3, which plead that Eriez and Duro Felguera are each corporations registered pursuant to the Corporations Act 2001 (Cth).
- Paragraph 2 pleads that Eriez is and has at all material times been engaged in the business of supplying equipment for use in the mining industry for the separation of mineral ores from other materials by use of magnets.
- Paragraph 4 pleads that Duro Felguera is and was at all material times engaged as a contractor to Samsung C&T Corporation to provide services including, but not limited to, the procurement of minerals processing equipment for the Roy Hill mining project in Western Australia.
- Paragraph 5 of the statement of claim pleads the subcontract, which was asserted to have been made between Eriez and Duro Felguera on or about 1 May 2014, but backdated to 24 April 2014. That paragraph of the statement of claim contains particulars of the documents which are said to comprise the subcontract.
- Paragraph 8 pleads that Eriez delivered to Duro Felguera the four tramp metal magnets and the documentation which were required to be delivered pursuant to the subcontract. Paragraph 9 pleads that pursuant to the formal instrument of agreement Eriez invoiced, and Duro Felguera paid, instalments of the subcontract price totalling 90% of the subcontract sum. The paragraphs then following set out the various disputes that have arisen between the parties. It is unnecessary to particularise those disputes and sufficient to adopt the characterisation of counsel for the applicant, who characterised the disputes as being disputes of an ordinary commercial character relating to provisions of the subcontract.
- Paragraphs 29 and 30 of the statement of claim are also relevant. By par 29, Eriez pleads that it served a notice of dispute on Duro Felguera pursuant to cl 42.1 of the general conditions to the subcontract in respect of the various disputes previously particularised. Paragraph 30 pleads that it was an express requirement of cl 42.2 that representatives of the parties with authority to resolve the dispute would confer. Paragraph 31 pleads that, in breach of that clause, Duro Felguera refused to confer on the dates proposed by Eriez and has failed to nominate any available dates for conferral. By par 32, Eriez claims damages for Duro Felguera’s alleged failure to confer in breach of cl 42.2.
- The prayer for relief included within the statement of claim enunciates more particularly the relief foreshadowed in the indorsement, and seeks payment of a debt in a specified amount and a declaration to the effect that a particular clause of the formal instrument of agreement is void and unenforceable as a penalty. In the alternative, there is a claim for an alternative sum. The prayer also contains a claim for restitution, damages for breach of contract, and another claim for a declaration, relating to the lack of any entitlement of Duro Felguera to set‑off. There is also a claim for costs.
The application of the International Arbitration Act
- On 14 August 2017, Duro Felguera brought this application seeking orders pursuant to s 7 of the International Arbitration Act that the whole of these proceedings be stayed and that the dispute be referred to arbitration. As I have noted, the statement of claim asserts that both parties are Australian incorporated entities and so a question arises as to how it is that the International Arbitration Act is invoked.
- The answer to that question is found in cl 42.3 of the general conditions which form part of the agreement between the parties. That clause provides that an arbitration between the parties (for which provision is made in cl 42.2) is to be administered by the Singapore International Arbitration Centre in accordance with the UNCITRAL Arbitration Rules. The clause also provides that the appointing authority is to be the Singapore International Arbitration Centre and that the place of arbitration is to be Singapore.
- It follows that the law of the forum is Singapore. Although there is no evidence that Singapore is a Convention country, I do not think the parties contest that proposition. It follows, therefore, that as the procedure in relation to any arbitration under the agreement between the parties is governed by the law of a Convention country, that is, by the law of Singapore, accordingly s 7(1)(a) of the International Arbitration Act renders s 7(2) (which is the provision pursuant to which this application is brought) applicable to any arbitration agreement.
- Neither party disputed that the International Arbitration Act is the law governing this application. I note that since the passage of the uniform state and territory laws relating to domestic commercial arbitration, not much turns upon the distinction between international and domestic commercial arbitration.
- The application is supported by an affidavit of Mr Paul Graham, who is a solicitor acting for Duro Felguera. The main purpose of that affidavit is to annex the subcontract between the parties.
- The subcontract comprises a number of documents, including the formal instrument of agreement between Eriez and Duro Felguera. The instrument of agreement defines Duro Felguera Australia Pty Ltd as the contractor and Eriez Magnetics Pty Ltd as the subcontractor. Clause 2 identifies the subcontract documents which include the formal instrument, the general conditions of subcontract and several other documents. Clause 3 provides the order of precedence in the event of any inconsistency, which includes at the top of the chain of precedence the formal instrument of agreement and, next, the general conditions of subcontract. Neither party contends that there is any inconsistency between the formal instrument of agreement and the general conditions of subcontract, and so the question which the court is required to determine turns critically upon the proper construction of the general conditions of subcontract, to which I now turn.
- It is useful to start with the definition provisions of those general conditions. In those general conditions, the client is defined to mean Samsung C&T Corporation (Samsung). The contractor is defined to mean the company stated in the formal instrument of agreement, which it is agreed is Duro Felguera. The contract is defined to mean the contract signed between the contractor and the client, that is to say, between Duro Felguera and Samsung.
- A claim is defined inclusively to include, inter alia, any claim for payment of money under, arising out of or in any way in connection with the subcontract. The subcontract is defined to mean the agreement between the contractor and the subcontractor set out in the formal instrument of agreement. Accordingly the subcontract is the contract between Eriez and Duro Felguera, and the contract is the contract between Duro Felguera and Samsung.
- The definition of a pass through claim is significant to the issue which the court must determine. That expression is defined to mean circumstances in which:
(a) the Contractor is in breach of this Subcontract to the extent such breach is caused by a breach of the Contract by the Client;
(b) the Contractor has a right or remedy under the Contract, referenced to a Claim of the Subcontractor under this Subcontract;
(c) the Subcontractor has rights against the Contractor under this Subcontract and the Contractor has corresponding rights against the Client under the Contract; or
(d) the Subcontractor has a Claim against, or Dispute with, the Contractor and the Contractor has a Claim against, or Dispute with, the Client based on the same or substantially similar events or circumstances.
- I digress to observe that each of these provisions has the same common characteristic, that is, it is a circumstance in which the claim between Eriez and Duro Felguera corresponds with an equivalent claim between Duro Felguera and Samsung.
- The definition of a pass through claim has a number of exclusions. Relevantly excluded is any matter in which the subcontractor has a claim, entitlement or right against the contractor but the contractor does not expressly have an equivalent claim, entitlement or right against the client under the contract. That exclusion is entirely consistent with the characterisation of a pass through claim that I have just given, namely, it excludes a circumstance in which there is not a correspondence between the rights which Eriez asserts as against Duro Felguera and rights which Duro Felguera asserts as against Samsung. The significance of the definition of pass through claim arises in the pass through provisions which are contained in cl 2A of the general conditions.
- Clause 2A.1 provides that the purpose of the pass through provisions is to set out the contractor’s (Duro Felguera’s) role and responsibilities in pursuing pass through claims; to set out the subcontractor’s (Eriez’s) rights or remedies under the subcontract in respect of pass through claims pursued by the contractor in accordance with the pass through provisions; and, to limit Eriez’s rights and remedies against Duro Felguera in respect of pass through claims pursued by Duro Felguera in accordance with the pass through provisions by reference to Duro Felguera’s rights and remedies under or in connection with the contract between Duro Felguera and Samsung.
- Clause 2A.1(b) provides that the parties acknowledge and agree that the purpose of the pass through provisions is not to reduce, disentitle or otherwise affect the validity of any claim by Duro Felguera against Samsung under, arising out of or in connection with the contract. Clause 2A.2 provides that, notwithstanding any other provision of the subcontract, Eriez will not be entitled to receive from Duro Felguera any amount greater than the compensation payable or relief or remedy allowable by Samsung to Duro Felguera in respect of a pass through claim.
- Clause 2A.2(b) also provides that Eriez will not be entitled to have any pass through claim determined before the compensation payable or relief or remedy allowable by Samsung to Duro Felguera has been determined under the head contract between Samsung and Duro Felguera. That provision is of particular significance to the issue which the court is to determine in a manner which I will explain.
- Clause 2A.3 provides that, in respect of all pass through claims, Duro Felguera will pass through to Eriez the proportion of the right or remedy to which Duro Felguera is entitled under the contract with Samsung to the extent referable to Eriez, determined by reference to the right or remedy that is actually paid or otherwise granted by Samsung under the contract between Samsung and Duro Felguera.
- The same clause provides that Eriez’s entitlement to receive any right or remedy from Duro Felguera in relation to a pass through claim is satisfied and discharged by Duro Felguera conferring on Eriez the right or remedy that has been agreed or determined under the contract between Samsung and Duro Felguera.
- The same clause provides that, if Samsung is not liable to Duro Felguera, Eriez’s entitlement to receive any right or remedy from Duro Felguera is deemed to be satisfied and discharged, except to the extent that the right or remedy available under the head contract is less than the entitlement to which Eriez would otherwise have been entitled by reason of (1) a breach of the head contract by Duro Felguera; (2) Duro Felguera’s failure to comply with the time periods relevant to a pass through claim under the head contract; or (3) any set‑off, deduction, abatement, counterclaim or similar right made or exercised under or in connection with the head contract, except to the extent that Duro Felguera has a corresponding right under the subcontract, provided that Eriez’s entitlement is not caused or contributed to by Eriez, or by Duro Felguera making an agreement, admission or concession to Samsung in relation to a pass through claim with the prior written consent of Eriez.
- Clause 2A.3 also provides that Eriez’s entitlement to a right or remedy under the pass through provisions will not be extinguished, satisfied, discharged or reduced to the extent to which a right or remedy with respect to a pass through claim under the head contract is extinguished, satisfied, discharged or reduced due to Duro Felguera’s breach or failure to comply with the contract with Samsung or the pass through provisions to the extent not caused by Eriez.
- So in other words, the general effect of the provisions is to provide that Eriez receives, in satisfaction of its claim against Duro Felguera, that which Duro Felguera has received in satisfaction of its claim against Samsung, unless Duro Felguera’s claim against Samsung has been reduced by reason of its default under the head contract.
- There are other provisions in the clause which provide, for example, that any settlement or final determination of a pass through claim under the contract will be final and binding on Eriez under the subcontract. The clause also provides that any right or remedy to which Eriez is entitled under the pass through provisions must be paid or granted by Duro Felguera by the later of the date 40 business days after the date of settlement or determination of the pass through claim, and the date by which such right or remedy must be paid or granted in accordance with the subcontract. Further, cl 2A.5 provides that Duro Felguera must keep Eriez informed as to the progress of any pass through claim.
- The temporal effect of these provisions is to, in the case of a pass through claim of the kind I have described, limit and postpone Eriez’s rights to the determination of the corresponding claim from Duro Felguera to Samsung. The provisions also ensure that Eriez is not entitled to receive a sum greater than that which Duro Felguera receives from Samsung; and render any settlement or final determination of the claim between Duro Felguera and Samsung final and binding on Eriez (subject to those provisions which preserve Eriez’s rights where the claim by Duro Felguera against Samsung is reduced by reason of Duro Felguera’s breach of the head contract).
- In that context I turn to cl 42 of the general conditions, which contains the dispute resolution provisions. Clause 42.1 provides that, if a difference or dispute between the parties arises in connection with the subject matter of the subcontract, including a dispute concerning a claim – and I have already referred to the definition of ‘a claim’ – then either party is required to give the other a written notice of dispute by hand or registered post. As I have noted, Eriez pleads that it gave a notice of dispute to Duro Felguera in relation to the issues which it has raised in these proceedings, pursuant to this clause.
- Clause 42.2 provides that within 14 days of receiving a notice of dispute, the parties are to confer with a view to resolving that dispute. Critically, the second clause of that paragraph provides:
If the Dispute has not been resolved within 28 days of service of the notice of Dispute or such longer period as the parties may agree in writing, that Dispute shall, subject to the Dispute being a Pass Through Claim and the operation of the Pass Through Provisions, be and is hereby referred to arbitration.
- Clause 42.3 makes provision for the arbitration in terms to which I have already referred. Clause 42.4 deals with joinder and consolidation of disputes. Clause 42.4(a) deals with the joinder of concurrent disputes between Duro Felguera and any separate contractors. Clause 42.4(b) deals with the resolution of disputes between Eriez and Duro Felguera which correspond to a dispute between Duro Felguera and Samsung, and provides for consolidation of those disputes by the arbitrator or the arbitrators, but only upon the application of Duro Felguera and with the consent of the principal of the project.
- Clause 42.5 is also significant to the issues to be determined by the court. It provides:
Nothing herein shall prejudice the right of a party to institute proceedings to enforce payment due under the subcontract or to seek injunctive or urgent declaratory relief.
- It is convenient, at this point, to summarise the contest between the parties. Eriez contends that the words ‘subject to the dispute being a pass through claim and the operation of the pass through provisions’ contained in cl 42.2 have the consequence that only pass through claims are referred to arbitration pursuant to that clause.
- Duro Felguera contends that these words mean that if any aspect of the disputes the subject of the cl 42 process are pass through claims, then they are subject to the pass through provisions and can only be referred to arbitration consistently with those provisions.
- Alternatively, Eriez contends that cl 42.5 expressly permits it to bring court proceedings to enforce its claim for payments under the subcontract, and that the other relief it seeks in the substantive proceedings is ancillary to those claims. By contrast, Duro Felguera contends that cl 42.5 is limited to the enforcement of rights to payment which are not in dispute or to applications for injunctive relief or for urgent declaratory relief, and these proceedings are not enforcement proceedings, nor seeking either injunctive relief or declaratory relief which is urgent.
- Both parties accept that these issues of contractual construction will determine whether the proceedings commenced by Eriez involve the determination of matters falling within the scope of the arbitration agreement contained within cl 42. If the matters the subject of the proceedings do fall within the scope of the arbitration agreement, both sides accept the court must grant a stay and refer the dispute to arbitration.
- If the matters the subject of the proceedings do not fall within the arbitration agreement contained within cl 42, both sides accept that there is no basis for a stay and the proceedings should be committed to continue. Neither side contends that this is one of those cases in which the arbitrability of the dispute might depend on matters to be determined by the arbitral panel, with the result that a stay should be granted pending determination of those matters by the arbitral panel.
- To the contrary, both sides accept and contend that the critical issues turn entirely upon the proper construction of the contractual provisions to which I have referred and, in particular, cl 42.2 and cl 42.5, and neither party asserts any reason why those matters should not be determined by the court.
- The principles of contractual construction relating to commercial contracts are relatively well established. Those principles dictate that the words used by the parties are to be construed objectively by asking what a reasonable businessperson would have understood the words of the contract to mean ‘by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.’ That question requires consideration of ‘the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.’
- The decisions dealing with the construction of arbitration agreements in particular establish that the courts should adopt a broad, liberal and flexible approach to the construction of such agreements without, of course, usurping or ignoring the language used in the particular provisions. There is also reference in the authorities to the significant change in the relationship between the courts and arbitral proceedings in the last quarter of a century or so. But, of course, none of those principles have the consequence that the court can ignore the plain and clear language of the arbitration agreement, which is the starting point and the ending point of any issue with respect to construction.
- In its written submissions, Duro Felguera contends that cl 42.1 is drafted in the ‘broadest possible terms’, as it renders cl 42 applicable to any dispute between the parties that arises ‘in connection with’ the subcontract. Whilst it is clear from the authorities that the words ‘in connection with’ are words of wide import, it does not seem to me that the breadth of the matters covered by cl 42 is particularly significant to the resolution of the issue which I must determine under cl 42.2. That is because it is clear that the portion of cl 42.2 to which I have referred carves out or makes specific provision for a particular class of dispute, that being the class of dispute that falls within the definition of pass through claims. Accordingly, the question is what provision have the parties made for that category of dispute, and I do not think answering that question is particularly assisted by the breadth of the broader class of disputes which are the subject of the dispute resolution clause.
- It is, however, in my view, clear that the critical words in cl 42.2, namely ‘subject to the dispute being a pass through claim and the operation of the pass through provisions’, are ambiguous. They are capable of meaning, as Eriez contends, that only pass through claims are referred to arbitration. The words are also, in my view, capable of meaning that, if the dispute is a pass through claim, it is to be referred to arbitration subject to the operation of the pass through provisions.
- In order to ascertain the intention properly attributed to the parties to this contract, it is necessary to understand how pass through claims operate, what they cover, and how the pass through provisions operate. When it is understood, as I have endeavoured to explain, that pass through claims are claims which are essentially determined as between Duro Felguera and Samsung, rather than as between Eriez and Duro Felguera, the meaning of the words in cl 42.2 becomes clear.
- That is because there would be little point or purpose in arbitrating a dispute as between Eriez and Duro Felguera if Eriez’s rights turned critically upon some other event, namely, the resolution of the dispute between Duro Felguera and Samsung. In that context, it would be perverse for the parties to contract that the only disputes which are to be referred to arbitration are disputes which cannot be resolved as between Eriez and Duro Felguera, being the parties to the arbitration, but which are only capable of resolution as between Duro Felguera and Samsung.
- There may be disputes with respect to the operation of the pass through provisions, for example, as to the reasonableness of any settlement as between Duro Felguera and Samsung. Those matters could be referred to arbitration pursuant to cl 42.2. However, to restrict the operation of the arbitration clause to disputes which constitute pass through claims would be, in my view, entirely contrary to any sensible commercial construction to be applied to this contract, because it would refer to arbitration only that category of dispute in respect of which there is the least point to refer to arbitration.
- Both parties rely upon cl 42.4 in support of their respective propositions. Duro Felguera contends that cl 42.4(a) sustains its proposition because it enables the joinder or consolidation of disputes between it, Eriez, and other subcontractors where there are common issues. That provision, it says, is consistent only with a broad approach to the operation of the arbitration provisions as it would otherwise be rendered redundant if only pass through claims could be consolidated, being claims that are determined, essentially, by the resolution of the dispute between Duro Felguera and Samsung.
- By contrast, Eriez refers to and relies upon cl 42.4(b) which provides that where there is a dispute referred to arbitration in accordance with cl 42 and there is a related dispute between Duro Felguera and Samsung, then those two disputes may be consolidated. Eriez submits that this shows why cl 42.2 is limited to pass through claims – as this process is the means by which Eriez has an entitlement to be heard in relation to the resolution of the dispute between Duro Felguera and Samsung.
- It seems to me that each of those arguments is credible and, on that basis, cl 42.4 does not add a great deal to the resolution of the construction issue which I must determine. However, I do not accept Eriez’s submission that cl 42.4(b) manifests an intention that Eriez is entitled to be heard in the determination of any dispute between Duro Felguera and Samsung relating to a pass through claim made by Eriez. That construction of the clause is inconsistent with the pass through provisions themselves, which give no right to Eriez other than the right to be informed of the progress of the pass through claim.
- Further, under those provisions, if Duro Felguera settles any dispute with Samsung then that settlement of the dispute is binding on Eriez, subject to certain exceptions relating to bad faith and other circumstances of that sort.
- Duro Felguera relies upon a number of other provisions of the subcontract in support of its application, including cl 32.5(c), cl 34.3, cl 33.4A(b), cl 34.5(a) and cl 34.9. It is not necessary to detail each of those clauses, because they have a common characteristic, namely that they are all expressed to be subject to the pass through provisions. So, in each of those provisions, the rights which Eriez might otherwise have are expressed as subject to the operation of the pass through provisions.
- Those provisions appear to me to shed considerable light upon the proper construction of cl 42.2, as the relevant portion of that clause is analogous to and consistent with those provisions. In effect, it seems to me to be clear that the words ‘subject to the dispute being a pass through claim and the operation of the pass through provisions’ were intended by the parties to perform the same function as the qualification in those other provisions, namely to specify that any rights which Eriez has are subject to the operation of the pass through provisions.
- Consequently, the words in cl 42.2 mean that if, and to the extent that, the dispute includes a pass through claim, then the dispute is to be referred to arbitration, but subject to the operation of the pass through provisions.
- What that would mean in practice is that if the dispute concerns a substantive right and it is a pass through claim, there would be little point or purpose in the arbitration proceeding until the dispute between Duro Felguera and Samsung had been determined, because Eriez’s rights turn critically upon the outcome of that dispute. However, if there was, for example, a dispute as to whether the claim was in fact a pass through claim or if there was a dispute as to the terms upon which Duro Felguera had settled that claim, then such a dispute could meaningfully be referred to arbitration.
- The contrary construction for which Eriez contends, which is to the effect that only those disputes that are pass through claims are referred to arbitration, would appear to me to produce a commercially perverse and entirely unreasonable outcome, because those are the disputes that are least appropriately referred to arbitration given the structure of the subcontract.
- Turning to Eriez’s alternative submission premised on cl 42.5, it does seem to me that the breadth of the disputes referable to arbitration is relevant to the proper construction of this clause. As I mentioned earlier, the breadth of disputes the subject of the dispute resolution clause is very wide, as it concerns any dispute arising in connection with, amongst other things, a claim. As I noted earlier, the expression ‘claim’ is defined to include any claim for payment of money under the subcontract. Consequently, any claim for payment of money under the subcontract is a dispute.
- In that context, it seems to me to be clear that when cl 42.5 preserves the right of a party to institute proceedings to enforce payment due under the subcontract, it cannot be referring to the payment of amounts which are disputed. Rather, the provision is directed to the enforcement by the court of payment of moneys due and owing and no longer disputed under the subcontract.
- That approach is consistent with, and supported by the other provisions of cl 42.5 which exempt from the operation of cl 42 proceedings seeking injunctive or urgent declaratory relief. A common characteristic, of course, of injunctive or urgent declaratory relief is that it is relief of a kind not easily or readily given by an arbitrator. Similarly, arbitrators are incapable of making orders enforcing payment of awards made by an arbitrator. So, cl 42.5 is directed to preserving the rights of parties to invoke the jurisdiction of the courts in circumstances in which an arbitrator could either not provide the relief sought, in terms of enforcement, or would have difficulty providing the relief sought, as is the case with urgent or injunctive declaratory relief. The clause has no application where there is a dispute, because otherwise its operation would entirely undermine all the provisions of cl 42 which precede it. As Eriez’s claims for payment are disputed, it seems to me that cl 42.5 does not apply, and it cannot be seriously contended that the relief sought by Eriez in these proceedings is either injunctive or declaratory relief which is urgent.
- For those reasons, it seems to me that both construction issues must be resolved in favour of Duro Felguera. The proceedings, therefore, involve the determination of matters falling within the scope of the arbitration agreement contained within cl 42 of the general conditions of subcontract, and cl 42.5 does not confer a right upon Eriez to commence these proceedings.
- It follows that the preconditions to the exercise of the obligation imposed by s 7(2) of the International Arbitration Act are satisfied. Consequently, pursuant to that provision, I must stay these proceedings, and refer the parties to arbitration.