9 May, 2018
CPB Contractors Pty Limited v Celsus Pty Limited (formerly known as SA Health Partnership Nominees Pty Ltd) [2017] FCA 1620
What you need to know
The Federal Court of Australia has reinforced the effectiveness of agreements to arbitrate, ordering mandatory and discretionary stays for separate claims in favour of arbitration.
In doing so, the Court considered when an arbitration agreement will be "inoperative" such that a mandatory stay will not be available under the UNCITRAL Model Law on International Commercial Arbitration (which applies across Australia under the uniform domestic Commercial Arbitration Acts).
The decision also provides guidance as to the grounds for a discretionary stay under the Federal Court of Australia Act 1976 (Cth).
Parties should nevertheless be careful to ensure that they conduct themselves in a way that is consistent with the continued operation of their arbitration agreements.
Royal Adelaide Hospital dispute
The Federal Court of Australia recently ordered mandatory and discretionary stays of separate claims in favour of arbitration.
The claims arose out of a complex but common contractual structure for the construction of the new Royal Adelaide Hospital.
The Hospital was designed and constructed as part of a public-private partnership by CPB Contractors Pty Ltd (CPB). CPB entered into a contract with a special purpose vehicle (SPV) that was created for the delivery of the Hospital (Construction Contract). In turn, the State of South Australia entered into a contract with the SPV (SPV Contract). Each contract provided for broad arbitration agreements that were intended to capture all potential disputes arising in relation to the Hospital.
Various disputes arose between CPB and the SPV under the Construction Contract. Corresponding disputes arose between
the SPV and the State under the SPV Contract.
In 2016 and 2017:
- the State commenced two arbitration proceedings against the SPV under the SPV Contract in respect of a number of defect claims;
- the SPV commenced two corresponding arbitration proceedings against CPB under the Construction Contract;
- the same single arbitrator was appointed to each arbitral proceeding; and
- the arbitrator made directions that the respective arbitrations be heard in parallel.
In 2017, CPB commenced litigation against the SPV and the State in respect of various claims in addition to the defect claims.
The State then commenced further arbitration proceedings against the SPV under the SPV Contract in respect of the additional claims. The SPV commenced corresponding arbitration proceedings against CPB under the Construction Contract.
The SPV and the State each made separate applications for CPB's litigation to be stayed in favour of arbitration pursuant to their respective contracts, the Commercial Arbitration Act 2010 (NSW) (CAA) and the Federal Court of Australia Act 1976 (FCAA).
The Court relevantly considered that the stay applications were to be determined in circumstances where "there is a broad and substantial factual overlap between the allegations made by [CPB] in [the litigation] and the factual matters that need to be determined in the arbitrations".
The SPV's stay application
The Court ordered a mandatory stay of CPB's claims against the SPV under section 8 of the CAA. Lee J identified four essential requirements that must exist before a mandatory stay is ordered under section 8:
- an action is brought before a court;
- the action is in a "matter" that is the subject of an arbitration agreement;
- no later than when submitting its first statement on the substance of a dispute, a party to the action requests that the parties be referred to arbitration; and
- the arbitration agreement is not null and void, inoperative, or incapable of being performed.
CPB argued that the arbitration agreement in the Construction Contract was inoperative because it alleged that the SPV had entered into inconsistent arrangements to resolve its outstanding disputes with the State in a streamlined and consolidated way that did "not contemplate [CPB's] participation in the consolidated or streamlined dispute process [and was] in breach… of the Construction Contract".
CPB relied upon two arrangements entered into by the SPV and the State (but not CPB). Together these arrangements sought to establish and implement "a single arbitration process" to deal with all of the disputes. CPB argued that this was inconsistent with the arbitration agreement in the Construction Contract such that it was rendered inoperative.
Lee J rejected this argument and concluded that the proposal to enter into (or the entry into) the relevant arrangements did not cause the arbitration agreement in the Construction Contract to "cease to have effect" (CPB had the onus of establishing that the arbitration agreement was inoperative).
In reaching his conclusion, Lee J accepted that an arbitration agreement may cease to have effect where there is no termination of the relevant contract for breach. His Honour principally relied upon two authorities from Singapore and Hong Kong to conclude that, in general, an arbitration agreement will be deemed to be inoperative:
- when it ceases to have contractual effect under the general law of contract (for reasons such as discharge by agreement, waiver, estoppel, etc);
- when it is explicitly or implicitly revoked by the parties; and
- when the same dispute between the same parties has already been decided in arbitration or court proceedings.
Accordingly, his Honour considered that the relevant arrangements contemplated by the SPV to resolve its outstanding disputes with the State did not render the arbitration agreement inoperative because:
- the arbitration agreement remained legally enforceable despite the arrangements; and
- the arrangements were not inconsistent with the continued operation of the arbitration agreement.
As an order for a mandatory stay was made, the Court was not required to consider whether a discretionary stay should be granted.
The State's stay application
The Court ordered a discretionary stay of CPB's claims against the State under section 23 of the FCAA despite finding that the State was not entitled to a mandatory stay under the CAA.
Lee J rejected the State's mandatory stay application because his Honour was not satisfied that it was made "not later than when submitting [its] first statement on the substance of the dispute" within the meaning of section 8 of the CAA.
Before making its stay application, the State had filed a document in the proceedings setting out its position in respect of CPB's additional claims, but purporting to reserve its right to make a stay application.
His Honour considered that the reservation was not effective and distinguished the CAA from the equivalent position under the International Commercial Arbitration Act 1974 (Cth) under which a right to apply for a stay may be waived:
- Under s 8 of the [CAA]… the issue is not whether a party seeking a stay may have abandoned its right to seek a stay by a failure to reserve its position or by its conduct in contesting or acquiescing to the conduct of the proceedings, but rather whether the statutory precondition has been satisfied of bringing an application not later than when submitting the party's first statement on the substance of the dispute.
His Honour relied upon authorities that characterised a "statement on the substance of a dispute" as being one which:
- although made in opposition to an interim injunction, is related to a "substantive question in dispute";
- is "beyond a mere acknowledgement of service of process by evincing an intention to participate in the court proceedings in preference to arbitration"; and
- is "specifically submitted by a party to the court which contains what that party says on the substance of the dispute".
However, despite finding that the State was not entitled to a mandatory stay under the CAA, the Court ordered a discretionary stay under section 23 of the FCAA.
Lee J noted that section 23 of the FCAA "confers upon the Federal Court a broad power to make orders of such kinds, including interlocutory orders, as it "thinks appropriate"", which includes the power to grant a stay independent of the power to grant a mandatory stay under the CAA.
His Honour considered that a discretionary stay should be granted for the reasons relied upon by the State. Those reasons reflected the matters that the relevant authorities indicated the Court should consider in determining whether to grant a discretionary stay:
- the claims made by CPB against the State were ancillary to the matters the subject of the SPV's stay;
- the arbitrator's award would be largely determinative of, at least, the factual assertions made in the proceedings against the State (given the close factual overlap between the issues in the litigation and the arbitration proceedings);
- there would be likely savings in time or cost should a stay be ordered; and
- the temporary stay would be unlikely to cause any significant prejudice to CPB.
Analysis
The decision serves as a reminder that parties to arbitration agreements should ensure that their conduct is consistent with the continued operation of their agreements both before and after a dispute has arisen (or litigation has been commenced). It is clear that pre-dispute conduct can mean that an arbitration agreement (like any agreement) may in certain circumstances "cease to have effect" such that it is inoperative for the purposes of the CAA. Likewise, post-dispute conduct, such as statements on the substance of the dispute, can mean that an arbitration agreement will be unenforceable (even if that was not the subjective intention of the parties).
Whilst a discretionary stay may be available under the FCAA in circumstances where a mandatory stay is not available under the CAA, whether a stay will be ordered will turn on the facts and circumstances of the particular arbitration agreement and the dispute.
The best approach, as always, will be to ensure that parties adopt a careful and considered approach to the resolution of their disputes.
For further information, please contact:
Georgia Quick, Partner, Ashurst
georgia.quick@ashurst.com
