Great Union Pty Ltd v Sportsgirl Pty Ltd [2021] VSCA 299

 

SUPREME COURT OF VICTORIA

COURT OF APPEAL

 

Great Union Pty Ltd v Sportsgirl Pty Ltd [2021] VSCA 299

 

Case Name: Great Union Pty Ltd v Sportsgirl Pty Ltd [2021] VSCA 299
File Number: S EAPCI 2021 0066
Before: McLEISH and KENNEDY JJA and MACAULAY AJA
Court: Supreme Court of Victoria
Judgment Date: 4 November 2021
Medium Neutral Citation: [2021] VSCA 299
Keywords: ARBITRATION – Application for stay and referral to arbitration – Claim for abatement of rent by reason of COVID-19 pandemic – Whether dispute is a matter which is the subject of an arbitration agreement – Proper construction of arbitration agreement – Only quantification of proportion of rent abatement to be decided by arbitrator – Appeal allowed – Commercial Arbitration Act 2011 s 8(1) – Hancock Prospecting Pty Ltd v Rinehart (2017) 257 FCR 442, discussed.

PRACTICE AND PROCEDURE – Pleadings – Whether rent abatement claim ought be struck out – No error established – Supreme Court (General Civil Procedure) Rules 2015 r 23.02.

Parties: GREAT UNION PTY LTD (ACN 053 452 387) AS TRUSTEE OF THE CENTREPOINT MELBOURNE TRUST   Applicant

v

SPORTSGIRL PTY LTD (ACN 090 049 415) Respondent

Representation: For the Applicant

Mr P J Bick QC with

Mr J P Tomlinson

Counsel

SBA Legal

Solicitors

&

For the Respondent

Mr P J Jopling AM QC with

Ms J Collins

Counsel

Arnold Bloch Leibler

Solicitors

McLEISH JA
KENNEDY JA
MACAULAY AJA:

  1. This is an application for leave to appeal in respect of two orders of a judge. The first order[1]referred the respondent’s claim for abatement of rent (‘the Rent Abatement Claim’) to arbitration pursuant to s 8(1) of the Commercial Arbitration Act 2011 (‘the CA Act’).  Such a referral encompassed all issues arising under that claim, including whether the respondent (‘Sportsgirl’) was entitled to rental abatement, as well as the quantification of that claim.  The second order[2] dismissed the applicant’s application to strike out the Rent Abatement Claim under r 23.02 of the Supreme Court (General Civil Procedure) Rules 2015 (‘the Rules’).

[1]          Paragraph 1 of the order of the Honourable Justice Riordan made 11 June 2021.

[2]          Paragraph 2 of the order of the Honourable Justice Riordan made 11 June 2021, as varied by paragraph 1 of order of the Honourable Justice Riordan made 2 September 2021.

  1. The applicant (‘Great Union’) claimed that the primary judge erred in construing the lease in question as providing for all issues arising under the Rent Abatement Claim to be referred to arbitration (proposed ground 1). In the alternative, it claimed that, even if the primary judge correctly construed the lease, he erred in failing to determine whether the claim for abatement of rent was a ‘matter’ which was the subject of the arbitration clause within the meaning of s 8 of the CA Act(proposed ground 2).  Great Union also alleged that the judge erred in making the second order, given alleged inadequacies in the way the Rent Abatement Claim was pleaded (proposed ground 3).
  2. For reasons which follow, we have determined that leave to appeal should be granted in respect of proposed ground 1, and that the appeal will be allowed.  It is therefore unnecessary to consider proposed ground 2, such that we will refuse leave to appeal.  We will also refuse leave to appeal in  respect of proposed ground 3.

Background

  1. On 12 December 2016, by a written ‘Deed of Renewal of Lease’ document and annexures (‘the Lease’), Great Union leased approximately 900.3 square metres of commercial shop space (including office and storage space) in the Bourke Street Mall (‘the Premises’) to Sportsgirl for a seven-year term, commencing on 1 March 2017, and expiring on 29 February 2024.  The commencing gross rental was $2,500,000 per annum plus GST, which has increased annually.
  2. The critical clause in relation to the present application was cl 37, which was entitled: ‘Damage to building,’ and provided as follows:

Landlord’s notice

37.1         Subject to the Landlord’s obligations under clauses 22 and 23, if the Building is damaged or the means of access altered so that:

(a)          all or part of the Premises are unfit for the Lessee’s occupation;  or

(b)           the Premises are completely or substantially inaccessible;

then the Landlord must give the Tenant a notice within 6 months after the damage or restriction of access occurs either:

(c)           terminating this lease on a date not less than one month after the date the Landlord gives the notice;  or

(d)           stating that the Landlord intends to make the Premises accessible to and fit for the Tenant’s use.

Nothing in this clause 37 obliges the Landlord to restore or reinstate the Building or the Premises.

Tenant’s notices

37.2

(a)          Subject to clause 37.4, if the Landlord fails to give a notice on time under the previous clause, the Tenant may give the Landlord a notice terminating this lease on a date not less than one month after the date the Tenant gives the notice.

(b)           If the Landlord has given a notice under clause 37.1, but does not make the Premises fully accessible to and wholly fit for the Tenant’s use within a reasonable time, the Tenant may give the Landlord a notice stating that the lease will terminate on the date which is one month after the date the Tenant gives the notice if the Landlord does not make the Premises fully accessible and wholly fit within that time.

Abatement of payments

37.3

(a)           The Tenant may reduce its payment of Base Rent under this lease for the period from and including the date the damage or interference with access occurs to and including the date this lease is terminated or to but excluding the date the Premises are made fully accessible to and wholly fit for the Tenant’s use. Any reduction must be proportionate to the loss of amenity caused by the damage or interference with access.

(b)           If the parties do not agree on the reduction to apply under the previous clause, within seven days after the damage or interference with access occurs, then the proportion must be decided under the Commercial Arbitration Act 1984.

(c)           On the first day of the month after the proportion is agreed or decided, the Landlord must credit the Tenant with any difference between what the Tenant has paid under this lease and what the Tenant should have paid for the period from and including the date the damage or interference with access occurs to but excluding that day.

Limitation of Tenant’s rights

37.4         The Tenant may not terminate this lease or reduce payments under this clause 37 if:

(a)           the damage is caused or substantially contributed to by;  or

(b)           rights under an insurance policy in connection with the Building are prejudiced or a policy is cancelled or payment of a premium or a claim is refused by the insurer because of

the act, negligence or default of the Tenant or of the Tenant’s Employees and Agents. This clause 37.4 does not affect rights the Landlord may have in connection with the events specified in this clause 37.4.

Extension of Term

37.5         If the Premises are made fully accessible to and wholly fit for the Tenant’s use, the Landlord may elect by notice given to the tenant to extend the Term by the time expired between the date the damage occurred to but excluding the date the Premises are made fully accessible to and wholly fit for the Tenant’s use.

Compensation

37.6         Except for abatement of payments, the Tenant is not entitled to receive compensation from the Landlord for loss, cost, damage, liability or other detriment arising from damage to the Premises or interference with access, unless the Landlord is proven to have deliberately or negligently caused such detriment.

  1. From around March 2020, community transmission of the novel coronavirus (COVID-19) was detected and reported in Australia and, from that time, various governmental announcements were made, and various regulatory restrictions were put in place by the Victorian State Government.  The fact of those governmental statements, announcements, and regulatory restrictions was not in dispute before the primary judge, although the relevant effect of those matters was, and is, a matter of dispute in the proceedings.
  2. From 1 April 2020, Sportsgirl has not paid the prescribed rent provided for in the Lease, but instead has made payments in respect of rent, contended to be equivalent to eight per cent of gross turnover at the Premises (which Sportsgirl justifies on grounds set out in its defence and counterclaim).
  3. On 9 December 2020, Great Union issued and served a writ and statement of claim against Sportsgirl, claiming outstanding rent from 1 April 2020 to December 2020 in a principal sum of $2,307,409.09, and interest thereon.
  4. On 29 January 2021, Sportsgirl filed and served a defence and counterclaim, by which it denied that it had failed to pay rent in breach of the Lease, and further sought relief by way of set-off and counterclaim  for:

(a) damages for unconscionable conduct in contravention of s 22 of Schedule 2 of the Competition and Consumer Act 2010 (Cth) and breach of an implied term of good faith;

(b)              damages for breach of Great Union’s obligation to provide quiet enjoyment (‘the Quiet Enjoyment Claim’);

(c)               a declaration that the Lease was terminated by frustration arising from the COVID-19 pandemic;  and

(d)              a stay of proceedings pending the determination of the Rent Abatement Claim.

  1. Sportsgirl’s Rent Abatement Claim relied on cl 37 of the Lease, as was set out under the heading: ‘E Entitlement to rent abatement’ in its defence and counterclaim.  The ultimate form of the claim considered by the primary judge was as follows:[3]

[3]          On 26 April 2021, Sportsgirl provided the Court and Great Union with a form of proposed amended defence and counterclaim.  This was the form of the pleading which was placed before the primary judge when considering matters the subject of this application for leave to appeal.  Sportsgirl was later given leave to file an amended pleading in substantially the same terms, which amended pleading was filed on 22 June 2021.

4B       Further or alternatively to paragraph 4A[4] above, it says that:

[4]          Paragraph 4A set out a number of events (including extensive government press releases and statements) which were defined as the ‘COVID-19 Pandemic’ and which formed part of Sportsgirl’s frustration claim (the subject of part D of the defence and counterclaim).

(a)           For the duration of the COVID-19 Pandemic, the means of access to the Building was altered in that public access and/or foot traffic to the Building was rendered unlawful and/or seriously constrained, so that:

(i)           all or part of the Premises were unfit for Sportsgirl’s occupation and use;  and/or

(ii)          the Premises were completely or substantially inaccessible by the public and/or employees and/or contractors of Sportsgirl.

Particulars

Sportsgirl refers to and repeats paragraph 4A above, including the particulars thereto.  The relevant laws, restrictions, directions, recommendations and guidelines are set out in the materials referred to in Sections A to C and items 117 to 154 of Section D of Annexure 1.

(b)           Pursuant to clause 37.3 of the Lease, Sportsgirl is entitled to reduce its payments of Base Rent under the Lease from about 1 March 2020 until such time (or times) as the Premises are made fully accessible to and wholly fit for Sportsgirl’s use.

(c)           Pursuant to clause 37.3(b) of the Lease, if the parties do not agree on the reduction to apply under clause 37.3(a), the dispute must be determined under the Commercial Arbitration Act 1984.

(d)           In the premises alleged in the preceding sub-paragraph, this proceeding should be stayed pending the determination of the arbitration.

  1. Also on 29 January 2021, Sportsgirl applied in the Practice Court for orders that its Rent Abatement Claim be referred to arbitration pursuant to cl 37 of the Lease, and that the proceeding be stayed pursuant to s 8 of the CA Act, pending the determination of the Rent Abatement Claim.[5]

[5]          Pursuant to orders made subsequently (on 5 March 2021), Sportsgirl filed a summons on 25 March 2021 seeking relief in the same terms.

  1. By summons filed 5 March 2021, Great Union, inter alia, applied for summary judgment in respect of the Quiet Enjoyment Claim (the subject of paragraph 13 of the defence and counterclaim). Great Union also sought orders under r 23.02 of the Rulesthat paragraphs 4B and 13 of the defence and counterclaim be struck out.

Primary judge’s reasons[6]

[6]          [2021] VSC 277 (‘Reasons’).

  1. The primary judge defined the three issues before him as follows:

(e) first, whether the Rent Abatement Claim is ‘a matter which is the subject of an arbitration agreement’, which must be referred to arbitration pursuant to s 8(1) of the CA Act;

(f)               secondly (and if yes to the first issue), whether the balance of the claims in the proceeding should be stayed pending the determination of the Rent Abatement Claim;  and

(g)              thirdly, whether summary judgment should be granted in favour of Great Union with respect to the Quiet Enjoyment Claim, or alternatively, whether the Quiet Enjoyment Claim or the Rent Abatement Claim should be struck out.[7]

[7]          Reasons [6].

  1. In dealing with the first issue, his Honour set out the terms of s 8(1) of the CA Actas follows:

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.

  1. The primary judge noted the submission of Sportsgirl that the ‘matter’ the subject of the arbitration agreement included both the proportion of the rent to be abated (‘the Quantification Issue’), and also whether Sportsgirl was entitled to rental abatement on the basis that the Premises were damaged, or the means of access altered within the meaning of the Lease (‘the Entitlement Issue’).[8]This was contrasted with the submission of Great Union, that the arbitration agreement did not relate to the Entitlement Issue.[9]

[8]          Reasons [7].

[9]          Reasons [10].

  1. His Honour then identified the relevant principles of construction:

Dispute resolution clauses are construed using the same principles that apply to other commercial contracts.  To determine the meaning of the terms of a commercial contract, the Court will ask the question: ‘What would a reasonable businessperson have understood those terms to mean?’  For the purpose of answering that question, ‘the reasonable businessperson [is] placed in the position of the parties’, and the Court applies the following principles:

(a)           The terms are construed objectively, and the subjective intentions of the parties are irrelevant.  A court ‘cannot receive … evidence from one party as to its intentions and construe the contract by reference to those intentions’.

(b)           The Court will consider not only the text and the ordinary meaning but also:

(i)           the context, being the entire text of the contract including matters referred to in the text of the contract; and

(ii)       the commercial purpose and object of the contract.

The identification of the commercial purpose and object of a contract ‘presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating’.  For this purpose, the Court may have regard to the surrounding circumstances known to the parties.

A court is entitled to assume ‘that the parties intended to produce a commercial result’, and will avoid a construction that renders it ‘commercial nonsense or working commercial inconvenience’. Although it does not rise to the level of a legal presumption, an application of this principle in the construction of arbitration agreements is that:

[A]rbitration clauses should be read against the sensible presumption (in effect a rational assumption of reasonable people) that the parties do not intend the inconvenience of having possible disputes being heard in two places.[10]

[10]         Reasons [11]–[13] (citations omitted).

  1. His Honour referred to cl 37.3(a) as the ‘Rent Abatement Clause’, and considered that it gave the tenant a stand-alone right to reduce the rent payable under the Lease, proportionate to the loss of amenity caused by the relevant damage or interference with access, from the date of the damage or interference up to the date the Lease is terminated, or the access is reinstated.[11]

[11]         Reasons [14(c)].

  1. The primary judge then concluded:

In my opinion, cl 37.3(b) demonstrates an intention to refer all issues arising under the Rent Abatement Clause (including both the Quantification Issue and the Entitlement Issue) to arbitration, for the following reasons:

(a)           It is inherently unlikely that the parties to the Lease would have intended for the resolution of disputes with respect to rights under the Rent Abatement Clause to be bifurcated by:

(i)           a court determining the Entitlement Issue; and only then

(ii)       an arbitrator determining the Quantification Issue.

Such fragmentation would cause significant delays and additional costs to the resolution of disputes.

(b) Clause 37.3(b) provides for a reference to arbitration ‘[i]f the parties do not agree on the reduction to apply under [the Rent Abatement Clause]’. In my opinion, a reasonable businessperson would understand the expression ‘if the parties do not agree on the reduction’ to include disputes where the landlord contended that there should be no abatement because there was no Relevant Damage or Interference with Access.

(c)           On Great Union’s narrow construction, for the proportion to be determined under the Rent Abatement Clause, it would usually be necessary for:

(i)           a court to make a determination as to whether there was Relevant Damage or Interference with Access (ie the Entitlement Issue), which would require it to consider all of the evidence in relation to the alleged Relevant Damage or Interference with Access; and then

(ii)          the arbitrator to consider the same evidence for the purpose of determining the Quantification Issue.

Issues may arise where the arbitrator comes to different conclusions to the court. For example, where the arbitrator finds no Relevant Damage or Interference with Access and assesses the appropriate proportion of rental abatement as nil. In my opinion, it is unlikely that the parties would have intended the inconvenience associated with the narrow construction.[12]

[12]         Reasons [16].

  1. His Honour went on to deal with a further submission from Great Union that it was necessary for the Court to be satisfied that it was arguable, on the evidence in support of the stay application, that Sportsgirl was entitled to rental abatement under cl 37.[13] His Honour resolved this as follows:

As I have decided that both the Entitlement Issue and the Quantification Issue must be referred to arbitration, I do not accept that it is appropriate for the Court to examine, on a summary basis, whether Sportsgirl’s argument for rental abatement is so weak that it does not constitute a sustainable argument.

It is not for the Court to usurp the role of the arbitrator. The following statement of the Full Federal Court in Hancock Prospecting Pty Ltd v Rinehart, with respect to the primary judge’s reference to the need for a sustainable argument as to the existence of a matter the subject of the arbitration agreement, is instructive:

There is a further difficulty in the approach of the primary judge insofar as it proceeded beyond a characterisation of the nature of the matter and whether it fell within the arbitration agreement. The requirement of an assessment as to whether there was a ‘sustainable argument’ that the matter falls within the arbitration agreement has its dangers. Of course, if there is no sustainable argument that a matter of dispute can be characterised as falling within the agreement, it should not be referred to arbitration. But difficulties arise if this enquiry becomes one directed to the strength of the case raised by the issue or matter. … It is sufficient to say at this point that it would generally be wrong for the Court to examine an argument in a form of summary disposal application, and, if it were thought that an asserted case, in terms otherwise falling within the scope of the agreement, was sufficiently weak not to be ‘sustainable’, not to refer the matter to arbitration. That would be to usurp the role of the arbitrator. The Court’s role in s 8 is not to act as a court of summary disposal filtering the matters that are suitable for arbitration.[14]

[13]         Reasons [17].

[14]         Reasons [18]–[19] (citations omitted).

  1. His Honour therefore ordered that the Rent Abatement Claim be referred to arbitration.
  2. However, he did not order a stay of the other non-arbitral claims.[15]

[15]         Reasons [25].

  • Finally, although he ordered that the Quiet Enjoyment Claim should be struck out (with leave to replead[16]), the primary judge refused to order that the Rent Abatement Claim should be struck out, stating:

Sportsgirl’s claim for rental abatement on the basis that a Relevant Damage or Interference with Access has occurred principally relies on the allegation that the effects of the COVID-19 regulations imposed by the Victorian government, which restricted people’s movements, constituted the Relevant Damage or Interference with Access under cl 37.1 of the Lease.  The effects of the government’s COVID-19 regulations are notorious and I consider that the issue raised by paragraph 4B and its particulars give fair notice to Great Union about the case it must meet.

In any event, the issue with respect to the adequacy of the pleading of the Rent Abatement Claim in paragraph 4B of Sportsgirl’s defence and counterclaim is moot because I will refer the [Rent] Abatement Claim to the arbitrator for determination.[17]

[16]         The Quiet Enjoyment Claim was no longer pursued in the amended defence and counterclaim filed on 22 June 2021.

[17]         Reasons [28]–[29].

  • Accordingly, on 11 June 2021 his Honour relevantly ordered that:
  1. Pursuant to s 8(1) of the Commercial Arbitration Act 2011 (Vic) the defendant’s claim contained in paragraph 4B of the defence and counterclaim filed 29 January 2021 is referred to arbitration.
  2. Paragraph 13 of the defendant’s counterclaim is struck out.
  3. By email of 9 August 2021, Sportsgirl highlighted that these orders did not dispose of the strike out application directed towards paragraph 4B (ie the Rent Abatement Claim).  His Honour consequently delivered reasons on 1 September 2021 wherein he stated that ‘it is plain from the Reasons [of 24 May 2021] that I was proposing to refuse Great Union’s application for paragraph 4B to be struck out’.[18]Accordingly, on 2 September 2021, he ordered:
  4. Paragraph 2 of the order of the Honourable Justice Riordan made 11 June 2021 is varied to read as follows:

Paragraph 13 of the defendant’s counterclaim is struck out and the plaintiff’s application by summons filed 5 March 2021 is otherwise dismissed.[19]

[18]         [2021] VSC 542, [20].

[19]         In ‘other matters’ the primary judge recorded that the order was made pursuant to r 36.07 of the Rules, and the Court’s inherent jurisdiction.

Proposed ground 1: Alleged error in construction of arbitration clause

  1. Proposed ground 1 is as follows:

6.1.          In determining to refer the Rent Abatement Claim to arbitration, the learned primary judge erred in construing clause 37.3(b) of the Lease as demonstrating the parties’ intention that ‘all issues arising under the Rent Abatement Clause (including both the Quantification Issue and the Entitlement Issue) …’ were to be referred to arbitration under s 8(1) of the Commercial Arbitration Act 2011 (Vic) (CA Act).[20]

[20]         Particulars were given to this paragraph.

6.2.      The learned primary judge should instead have found that:

6.2.1.         the only disputes which are to be referred to arbitration under s 8(1) of the CA Act, are those disputes which the parties have agreed in writing (per s 7 of the CA Act) ‘must’ be referred to arbitration (not merely ones which could be);

6.2.2.         the ‘arbitration clause’ (clause 37.3(b) of the Lease) was unambiguous and limited in scope. It mandatorily required only those disputes concerning the ‘proportion’ of the ‘reduction to apply’ in abating rent, be referred to arbitration under s 8(1) of the CA Act;

6.2.3.        the threshold dispute, concerning whether the Respondent was entitled to rental abatement under cl 37.3(a) of the Lease, was not, as a matter of construction, a ‘matter which is the subject of an arbitration agreement’ (per s 8(1) of the CA Act) and was not a type of dispute that must be referred to arbitration by s 8(1) of the CA Act;

6.2.4.        as a result, the Respondent’s application to refer the Rent Abatement Claim to arbitration should have been dismissed.

  1. As is self-evident from this proposed ground, Great Union sought to advance its contention (which the primary judge rejected) that only the Quantification Issue was to be referred to arbitration under clause 37.3(b), and s 8 of the CA Act.  Sportsgirl, on the other hand, maintained that the primary judge’s construction was correct.
  2. In considering these competing constructions, it is important to first identify the applicable legal principles.

Legal principles

  1. The full terms of s 8(1) of the CA Acthave already been set out above.[21] The critical issue in this case was whether the Rent Abatement Claim was a ‘matter’ which was the subject of an arbitration agreement for the purposes of s 8(1). This issue, in turn, involved a two-step process requiring:

(h) the proper construction of cl 37.3(b) so as to determine what disputes are the subject of that clause; and

(i)                the characterisation of the nature of the dispute in this case to determine whether it involved the ‘matter’ which was the subject of the arbitration agreement, as properly construed.[22]

[21]         Above, paragraph [14].

[22]         Hancock Prospecting Pty Ltd v Rinehart (2017) 257 FCR 442, 481–2 [146]; [2017] FCAFC 170 (‘Hancock’).

  1. There is a suggestion in Hancockthat the characterisation step will come first.[23]  However, the precise order appears to be inconsequential given that (as is explained, below[24]) the Court also made clear that the construction of the agreement can affect the way the matter is characterised.[25]  Other cases have also considered the construction issue first.[26]

[23]         Ibid.

[24]         Below, paragraph [34].

[25]         Hancock (2017) 257 FCR 442, 487 [157]; [2017] FCAFC 170.

[26]         See, eg, Tianqi Lithium Kwinana Pty Ltd v MSP Engineering Pty Ltd (No 2) (2020) 56 WAR 169, 203, [127]–[128]; [2020] WASCA 201 (‘Tianqi’).

  1. In terms of the construction process (which was the focus in this case), the general principles are uncontroversial, and the parties generally accepted that they were accurately summarised by the primary judge.    A commercial contract should be construed by reference to the language used by the parties, the surrounding circumstances, and the purposes and objects to be secured by the contract.[27]

[27]         Rinehart v Hancock Prospecting Pty Ltd (2019) 267 CLR 514, 534 [44]; [2019] HCA 13.

  1. However, we would add two further matters.
  • First, while a court may approach the task of construction on the basis that the parties intended to produce a commercial result, this does not constitute a licence to alter the meaning of a term to achieve a result the court may think to be reasonable.[28] Indeed, some cases will be resolved largely, if not entirely, by reference to the language of the arbitral clause in question.[29]

[28]         Amcor Ltd v Barnes [2021] VSCA 6, [648]. See also Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544, 579–81 [98] (Nettle J); [2017] HCA 12.

[29]         Rinehart v Hancock Prospecting Pty Ltd (2019) 267 CLR 514, 529 [26]; [2019] HCA 13.

  • Secondly, insofar as the primary judge cited a passage from Hancockfor the ‘sensible presumption’ (or ‘correct general approach’[30]) that the parties do not intend the inconvenience of having disputes heard in two places, it is important to refer to the succeeding paragraph where the Full Federal Court also stated:

The existence of a ‘correct general approach to problems of this kind’ does not imply some legal rule outside the orthodox process of construction; nor does it deny the necessity to construe the words of any particular agreement. But part of the assumed legal context is this correct general approach which is to give expression to the rational assumption of reasonable people by giving liberal width and flexibility where possible to elastic and general words of the contractual submission to arbitration, unless the words in their context should be read more narrowly.[31]

[30]         See Hancock (2017) 257 FCR 442, 489 [166]; [2017] FCAFC 170, and cases cited therein.

[31]         Hancock (2017) 257 FCR 442, 489 [167]; [2017] FCAFC 170. See also Lepcanfin Pty Ltd v Lepfin Pty Ltd (2020) 102 NSWLR 627, 650 [93]; [2020] NSWCA 155.

  • Turning next to the characterisation process, a ‘matter’ may be defined as ‘some right or liability in dispute which is susceptible of settlement as a discrete controversy.’[32]However, the Full Court in Hancockalso said:

That said, any overly fine dissection of different ‘disputes’ within a wide-ranging and interlocking controversy may lead to overly refined categorisation or classification of disputes falling within and without the arbitration agreement in question.  When looked at holistically, the substance of a dispute in its interconnected character may well fall within the arbitration agreement.  It is fundamental to recall, however, that the proper construction of the arbitration agreement is relevant to the focus one applies to the meaning of the word ‘matter’ in any given circumstance.  If the proper construction of the agreement requires a focus on individual disputes or requires a certain connection between the necessary resolution of an issue with the operation of an operative document, then close attention will be required to each individual issue or dispute to identify that connection, and so to identify the ‘matter’.  If, on the other hand, the proper construction of the agreement requires a broader focus on the overall dispute more generally characterised, then the ‘matter’ will likewise be broader.[33]

[32]         Rinehart v Hancock Prospecting Pty Ltd (2019) 267 CLR 514, 541 [68]; [2019] HCA 13, citing Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332, 351–2; [1990] HCA 8.

[33]         Hancock (2017) 257 FCR 442, 487 [157]; [2017] FCAFC 170.

  1. Finally, consistent with the passage from Hancockcited by the primary judge, above,[34]the Court should not generally examine the matter in a form of summary disposal application as part of the process of characterisation as this would be to usurp the role of the arbitrator.   It is unnecessary to examine any ‘possible exception’[35] to this general proposition, since that issue only directly arises for consideration under proposed ground 2 (which it has not been necessary to determine).

Analysis

[34]         Above, paragraph [19].

[35]         See Tianqi (2020) 56 WAR 169, 191–2 [81]–[87]; [2020] WASCA 201.

  • Each party highlighted various features of cl 37. Sportsgirl, in particular, noted that cl 37.3(a) conferred a stand-alone right to rent abatement, and that cl 37.3(b) provided for a swift referral to arbitration (within seven days after the relevant damage or interference).
  1. Save where we have indicated, the features highlighted were generally of limited utility. Instead, it is necessary to focus particular attention on the meaning of cl 37.3(b), which is the only clause which makes provision for an arbitration.
  2. Turning, then, to cl 37.3(b), the threshold requirements for a reference to arbitration are premised on the fact that the relevant damage or interference has already occurred. Thus, the expression ‘if the parties do not agree on the reduction to apply under the previous clause’ assumes an entitlement to a reduction, and does not carry with it an agreement that the arbitrator should determine whether such an entitlement exists or not. Moreover, a reduction will only have arisen ‘under the previous clause’ (cl 37.3(a)) where the relevant damage or interference has already occurred. The words ‘within seven days after the damage or interference with access occurs’ in cl 37.3(b) also assume that the damage or interference has already occurred.
  • Turning next to the operative part of cl 37.3(b), the sole issue to be decided under the CA Actis ‘the proportion’.  There is no reason why a reasonable businessperson would consider that the word ‘proportion’ was also intended to raise the issue of entitlement.  It would have been expected that the parties would have used very different language if this had been the intention, particularly given that the Lease was prepared with the assistance of lawyers.  This is made even clearer, when considered in context, by reference to the previous clause (cl 37.3(a)).  Thus, the determination of the correct ‘proportion’ involves a narrow focus on whether the reduction is ‘proportionate’ to the loss of amenity ‘caused by the damage or interference with access’.  This language again presupposes that the damage or interference with access has already occurred, and has caused a loss of amenity.  In other words, the conditions entitling the tenant to an abatement of rent have already been satisfied.  Notwithstanding, then, the ‘correct general approach’ referred to in Hancock, the language in cl 37.3(b) is not ‘elastic’, and can be readily distinguished from expressions such as ‘any dispute under this deed,’ or ‘all disputes hereunder’ (as considered in other cases).
  1. We are therefore respectfully unable to agree with the primary judge that the expression ‘if the parties do not agree on the reduction’ in cl 37.3(b) was intended to include disputes where the landlord contended that there should be no abatement because there was no relevant damage or interference with access.[36] As indicated already, those words define the threshold circumstances which must exist before the arbitrator is given anything to decide at all.

[36]         Cf Reasons [16(b)].

  1. This construction does not give rise to the possibility of conflicting determinations, because the arbitrator is intended to exercise a different function to that of a court (being confined to the narrowly defined Quantification Issue).  The Quantification Issue does not fall for consideration until the Entitlement Issue is agreed or determined.
  2. We are similarly not satisfied that the clause was ‘unworkable’ (as suggested by Sportsgirl) by reason of the separation of the Entitlement Issue and the Quantification Issue. Rather, while it was appropriate for the primary judge to be concerned about fragmentation and delay, we are not satisfied that a court hearing will ‘usually be necessary’, as he suggested. Whatever the precise scope of cl 37 (which arises in somewhat unusual circumstances in this case), cl 37 is likely to be more usually concerned with physical damage, or physical alteration of the ‘means of access’, in relation to particular premises. In such circumstances, the Entitlement Issue should be uncontroversial. Clause 37.3(b) will then readily serve the evident commercial purpose of providing for the expeditious determination of the Quantification Issue by an arbitrator with appropriate valuation expertise, and without recourse to the Court at all.
  • We are therefore satisfied that the proper construction of cl 37.3(b) is that only the quantification of the ‘proportion’ is to be decided by the arbitrator. The primary judge therefore erred in construing cl 37.3(b) as referring both the Quantification Issue and the Entitlement Issue to arbitration.
  1. The ‘characterisation’ process (or ‘step two’) is then, relatively straightforward in this case since the proper construction of cl 37.3(b) requires focus on a narrow individual dispute, namely, the Quantification Issue. Given that the parties are contesting the Entitlement Issue, and that no Quantification Issue has yet arisen, there is not yet a ‘matter’ which is the subject of the arbitration agreement, as properly construed. Senior counsel for Sportsgirl confirmed that no referral was sought of the Quantification Issue in these circumstances.
  • However, it remains to briefly deal with a further submission of Sportsgirl, based on its notice of contention.
  1. Sportsgirl’s contention was that, even if ‘the matter’ to be referred to arbitration was to be limited to the Quantification Issue, the referral of that ‘matter’ to arbitration necessarily included the power to determine the Entitlement Issue.[37]In so contending, Sportsgirl cited the ‘kompetenz-kompetenz’ principle, by which an arbitrator has power to decide facts upon which his or her own jurisdiction depends.[38] It also cited s 16(1) of the CA Act, which provides that the arbitral tribunal may rule on its own jurisdiction.

[37]         The notice of contention read:

Pursuant to section 16 of the Commercial Arbitration Act 2011 (Vic) and at common law, an arbitrator has power to determine questions of his own jurisdiction. Accordingly, even if (contrary to Sportsgirl’s position and the findings of the primary judge) the ‘matter’ referred to arbitration under clause 37.3(b) of the Lease is limited to the proportion of rent abatement (‘Quantification Issue’), the referral of that ‘matter’ to arbitration necessarily includes the power to determine the question whether, on the proper construction of the Lease, rent abatement is available at all (‘Entitlement Issue’).

[38]         Rinehart v Hancock Prospecting Pty Ltd (2019) 267 CLR 514, 526 [13]; [2019] HCA 13.

  1. Leaving aside the issue as to whether this matter is appropriate for a notice of contention,[39]the submission does not assist Sportsgirl.  Given that this Court has now ruled on the question of jurisdiction, any decision of the arbitrator to unilaterally extend his or her own jurisdiction to include the Entitlement Issue would be bad at law.

[39]         Given that the notice of contention does not seek to affirm the decision of the primary judge as provided by r 64.32(1) of the Rules.

  1. For similar reasons, we also do not accept the submission of Sportsgirl that leave to appeal should not be given because Great Union would not suffer any substantial injustice, given that the arbitrator could deal with the question of his or her jurisdiction.  Absent leave to appeal being given, the primary judge’s ruling would bind the arbitrator, and enable an arbitration to be conducted contrary to the terms of the agreement made by the parties, as properly construed.
  2. For the reasons set out above, then, we are satisfied that proposed ground 1 is established, and that the primary judge erred in referring both the Entitlement Issue and the Quantification Issue to arbitration.   It follows that the order referring the dispute to arbitration must be set aside.

Proposed ground 2 

  1. Proposed ground 2 is relevantly as follows:

6.3.          Alternatively to Ground 1, the learned primary judge otherwise erred when determining to refer the Rent Abatement Claim to arbitration, because the learned primary judge was required to, but did not, first determine (or failed to provide reasons for so deciding) whether the Entitlement Issue dispute, as raised by the Respondent in the present case (namely, the Rent Abatement Claim), was in fact a ‘matter’ which was the ‘subject of’ the arbitration clause 37.3(b) of the Lease.[40]

6.4.      The learned primary judge should instead have found that (and the Court of Appeal should find on appeal without remitter that):

6.4.1.         The Respondent had failed to establish that there was an arguable basis for contending that the COVID-19 Pandemic restrictions had resulted in an alteration of the ‘means of access’ to the Premises such that: (i) all or part of the Premises were unfit for the Respondent’s occupation; or (ii) the Premises were completely or substantially inaccessible.

6.4.2.        In the circumstances, the Rent Abatement Claim, was not in fact a ‘matter’ which was the ‘subject of’ the arbitration clause 37.3(b) of the Lease in the present case.

6.4.3.         In those circumstances, the Respondent’s application to refer the Rent Abatement Claim to arbitration should have been dismissed.

[40]         Particulars were given to this paragraph.

  1. Great Union made clear that this proposed ground was only to be determined if proposed ground 1 was rejected — it only arose for determination if the Entitlement Issue was also to be referred to arbitration.  Given that proposed ground 1 has been upheld, it is unnecessary to consider this proposed ground.  Accordingly, leave to appeal on proposed ground 2 is refused.

Proposed ground 3:  Alleged error in refusing strike out

  1. The material part of proposed ground 3 reads as follows:

The learned primary judge erred in determining [that] paragraph 4B of the defence and counterclaim should not be struck out.[41]

[41]         Great Union was granted leave to amend proposed ground 3 to reflect this formulation pursuant to oral application made to the Court at the hearing on 15 October 2021.

  1. There were references in parts of Great Union’s materials which invited the Court to consider whether there was a ‘proper basis’, or ‘sustainable argument’, for the suggestion that the COVID-19 pandemic altered the ‘means of access’ to the Premises such that cl 37 could apply (as was raised by proposed ground 2).  It was submitted that, on its proper construction, cl 37 requires physical damage or a physical interference with the means of access, and none had been pleaded.  Sportsgirl contested this construction.
  • However, in oral submissions, senior counsel clarified that proposed ground 3 was solely concerned with a pleading argument, and not with an application for  summary judgment.[42] In support of this complaint, he further alleged that paragraph 4B did not plead how the means of access to the Premises was altered, nor how the events said to give rise to that alteration caused the means of access to the Premises to be altered.

[42]         This was consistent with the order sought in paragraph 7.3(2) of the application for leave to appeal, that ‘paragraph 4B of the defence and counterclaim dated 21 January 2021 be struck out’.

  1. We accept the submission of Sportsgirl that it is not appropriate to give leave to appeal in relation to this proposed ground.
  • First, the proposed ground is without merit, since the references to paragraph 4A and to the ‘COVID-19 Pandemic’ (which is a defined term) in paragraph 4B make clear which facts are relied upon, regardless of whether Sportsgirl’s construction of cl 37 is ultimately accepted.  Further, to the extent that Great Union complains of a lack of particulars, that is not a basis for striking out the paragraph.
  1. Secondly, it is inappropriate to give leave to appeal given that the decision (to refuse the strike out) involved a purely discretionary decision on a matter of practice and procedure.[43]

[43]         See Molonglo Group (Australia) Pty Ltd v Cahill [2018] VSCA 147, [96].

Conclusion

  1. Subject to the question of costs, the following orders will be made:
  2. Leave to appeal is granted in respect of proposed ground 1, but is refused in respect of proposed grounds 2 and 3.
  3. The appeal is allowed.
  4. Paragraph 1 of the order of the Honourable Justice Riordan made 11 June 2021 is set aside, and in its place it is ordered that the defendant’s summons filed 25 March 2021 is dismissed.