In brief 5 min read
In the recent decision of the Court of Appeal of New South Wales, Inghams Enterprises Pty Ltd v Hannigan [2020] NSWCA 82 (Inghams) the court held that a dispute was improperly referred to arbitration because the claim for unliquidated damages was not a dispute that fell within the scope of the arbitration agreement. This decision highlights the importance of precise drafting for all dispute resolution clauses.
How does it affect you?
- Dispute resolution clauses, particularly multi-tiered clauses that require certain steps to be taken, must be clearly drafted.
- Particular care needs to be taken when drafting the provisions that determine which types of disputes the parties agree will be referred to arbitration, and which ones fall outside the scope of any agreement to arbitrate.
- Although dispute resolution clauses will usually be interpreted liberally under Australian law, this is not a panacea for poor drafting. If the parties intend that all disputes under an agreement will be referred to arbitration, this needs to be clear.
What happened in Inghams?
In Inghams, the parties had a 'chicken growing' agreement whereby Inghams would provide one-day-old chicks to Mr Hannigan, who would then raise the chicks to adulthood before returning them to Inghams. Mr Hannigan had certain responsibilities regarding the upbringing of these chicks, including feeding them to a certain standard.
Applicable dispute resolution clause
The dispute resolution clause in the underlying contract established that 'a party must not commence court proceedings in respect of a dispute arising out of this Agreement…until it has complied with this clause 23'. The clause then set out a relatively common tiered process by which the parties had to first engage in negotiations and a mediation in an attempt to resolve the dispute.
If a dispute was not resolved after mediation, then the relevant provision provided that 'if the Dispute concerns any monetary amount payable and/or owed by either party to the other under this Agreement, including without limitation matters relating to determination, adjustment or renegotiation of the Fee' then the parties must submit the dispute to arbitration.
As explained below, the central issue in the proceeding was the scope of the disputes that the parties had agreed to refer to arbitration.
Dispute
A dispute arose in August 2017 when Inghams refused to supply further chicks to Mr Hannigan, allegedly due to Mr Hannigan's failure to properly feed the chicks. Mr Hannigan sought (August 2017) and won (March 2019) a declaration from the Supreme Court that Inghams' termination of the contract was wrongful. At the time he did not seek damages, reserving his rights to seek them at a later time in the interest of being able to resume raising chicks as quickly as possible.
In May 2019, after winning the declaration in court, Mr Hannigan issued a Notice of Dispute to commence arbitration for loss of profits arising out of Ingham's failure to provide chicks in that period. Central to Mr Hannigan's claim was an assertion that his claim for loss of profit was a dispute that concerned a 'monetary amount payable and/or owed by either party to the other under this Agreement'
Inghams took a contrary position and commenced proceedings in court to seek a stay of the arbitration. Central to its position was an assertion that a claim for damages (such as loss of profit) was not a claim for a 'monetary amount payable and/or owed' under the agreement.
The decisions at first instance and on appeal
Supreme Court upheld referral to arbitration
The Supreme Court of New South Wales upheld the referral to arbitration. In doing so, Justice Slattery accepted that the provision which dictated the nature of disputes to be referred to arbitration should be construed broadly. He also considered the commerciality of the construction of the clause, finding that a narrow interpretation of the clause to only refer a dispute to arbitration under limited circumstances did not make sense.
Court of Appeal separates its eggs
Inghams successfully appealed the decision.
The Court of Appeal agreed that the decision rested on a question of construction regarding the phrase 'concerns any monetary amount payable and/or owed by either party'. However, different approaches were taken in the majority and dissenting judgments.
Meagher and Gleeson JJA's majority started from a position that the parties had intended that some disputes would be referred to arbitration and others would not. The disputes that would be referred to arbitration were those that concerned 'any monetary amount payable and/or owed by either party to the other under this Agreement, including without limitation matters relating to determination, adjustment or renegotiation of the Fee'.
Ultimately Meagher and Gleeson JJA's held that the ordinary meaning of the words 'payable or owed under the Agreement' did not include a claim for damages. They also noted there was an insurmountable distinction between a primary obligation to pay an amount under an agreement (such as a debt arising under the contract or an obligation to pay liquidated damages) and an obligation to pay unliquidated damages for breach of contract, which arose under the common law (and not under the contract).
On this basis the majority held that Mr Hannigan's claim for loss of profits was not a claim for an amount payable and/or owed under the Agreement and, therefore, was not within the scope of the arbitration agreement.
President Bell took an entirely different approach. His Honour traversed the large number of authorities that support a proposition that dispute resolution provisions should be construed liberally, such that the word used in the contractual submission to arbitration should be given 'flexibility'. He also noted the authorities for a proposition that, where the words used to submit to arbitration were sufficiently 'elastic' it should be assumed that it is unlikely the parties intended to 'divide' their disputes such that some were referred to arbitration and others were not.
On this foundation, His Honour then reasoned that damages payable for breach of contract could be considered amounts 'payable or owing' under the Agreement, notwithstanding the fact that they are secondary obligations. His Honour concluded that the dispute concerning a claim for loss of profit was within the scope of the arbitration agreement.
Conclusion – clarity is the name of the game
This decision highlights the need to carefully draft dispute resolution clauses, and in particular provisions that prescribe the scope of disputes to be referred to arbitration. The drafting should be abundantly clear whether the parties intend to refer all disputes to arbitration, or only a subset. If the latter, the subset of disputes referred to arbitration needs to be very clearly defined.
In this case it is unlikely the parties, at the time of contract, subjectively intended that their agreement to arbitrate would include debts that arose under the Agreement, but would not include claims for damages arising from a breach of the same Agreement. However, the lack of clarity in the drafting led to the matter proceeding to litigation, no doubt at significant expense.
The decision also makes it clear that, while there is a large body of authority to support a proposition that dispute clauses will be construed liberally, and often broadly, this is not a panacea for imprecise drafting.