INSIGHT

Multi-tiered dispute resolution clauses – when does an arbitration agreement become 'operative'?

By Jeremy Quan-Sing, Lucy Zimdahl, Samuel Leeson
Arbitration Dispute Resolution Infrastructure

A timely reminder of Australia's pro-arbitration stance 5 min read

A recent decision of the New South Wales Supreme Court considered a multi-tiered dispute resolution provision that required negotiation and expert determination before a party could refer a dispute to arbitration. In a move away from earlier authorities, the court found that the agreement to arbitrate in such a clause was 'operative' even if the negotiation and mediation steps had not yet been satisfied.

The decision takes a broad view of when Australian courts must refer disputes to arbitration.

Key takeaways 

  • Multi-tiered dispute resolution clauses are very common. This decision impacts the approach that courts will take when construing dispute clauses that have a number of steps (eg negotiation, mediation or expert determination) prior to arbitration.
  • Based on this decision, a party's failure to complete the preliminary steps in a multi-tiered dispute resolution clause containing an arbitration agreement will not render that arbitration agreement 'inoperative' for the purpose of the Commercial Arbitration Acts or the International Arbitration Act 1974 (Cth).
  • Such preliminary steps are now unlikely to be considered conditions precedent to the arbitration agreement coming into effect.
  • As a consequence, a party's ability to seek court intervention as the parties go through the steps prior to a referral to arbitration will be limited. Courts are now more likely to refer any disputes in these earlier stages of tiered dispute resolution clauses to arbitration.
  • The decision will be relevant to parties negotiating multi-tiered dispute resolution clauses, especially in relation to PPP projects.

Background

The dispute arose out of the WestConnex M4-M5 Link Tunnels project in New South Wales.

As is typical in PPP infrastructure projects, the agreement was structured with:

  • a Project Deed between Transport for NSW and the plaintiffs (the M4-M5 Link Group, including the Asset Trustee); and
  • a Design and Construction Deed (the D&C Deed) between the plaintiffs and the Contractor (which was essentially 'back-to-back' with the Project Deed in relation to risk allocation).

Both contracts included a multi-tiered dispute resolution clause which required that a Notice of Dispute be served, followed by negotiations, then expert determination and finally arbitration. The D&C Deed also included a 'Linked Claims' clause, pursuant to which the Contractor would be bound by an expert determination or arbitral award under the Project Deed if the underlying dispute under the Project Deed concerned the same or substantially similar issues and equivalent rights, benefits, entitlements or remedies as those invoked in a dispute under the D&C Deed.

A dispute arose on the project by reason of a contamination issue. The Asset Trustee provided the Contractor with copies of correspondence that Transport for NSW had sent to the Asset Trustee concerning the contamination issue. The Contractor asserted that the provision of this correspondence constituted directions to implement a solution to a contamination issue. The Asset Trustee disagreed and, as a consequence, the Contractor issued two Notices of Dispute in respect of the communications which it considered to be directions by the Asset Trustee (the Directions Dispute). In turn, the Asset Trustee notified the Contractor that the Directions Dispute was a Linked Claim (which would effectively need to be resolved at the Project Deed level).

The Contractor did not agree that the Directions Dispute was a Linked Claim. It progressed the Directions Dispute through the negotiation and expert determination stages of the tiered dispute resolution procedure under the D&C Deed.

The plaintiffs then issued a further Notice of Dispute in relation to the Linked Claims question. The plaintiffs contended that the issue of whether or not the claims were Linked Claims (the Jurisdiction Dispute) should be determined before the Directions Dispute.

Dispute before the court

There were two applications before the court:

  • The plaintiffs made an injunction application seeking to prevent the Contractor from referring the Directions Dispute to expert determination at the D&C Deed level before the Jurisdiction Dispute was finally determined through arbitration (the Injunction Application); and
  • The Contractor applied for a stay of the Injunction Application under section 8 of the Commercial Arbitration Act 2010 (NSW) (CAA) (the Stay Application).

The Stay Application was considered first. The plaintiffs argued that the stay should not be granted because the arbitration agreement was 'inoperative'. They submitted that, because a party was required to issue a notice of dissatisfaction at the conclusion of an expert determination before the matter could proceed to arbitration, it was only once the notice of dissatisfaction was issued that the arbitration agreement became 'operative'. As such, the plaintiffs contended that the court was not required by s8 of the CAA to refer the dispute to arbitration (that provision does not require a court to refer a dispute to arbitration if it finds the arbitration agreement is 'null and void, inoperative or incapable of being performed').

The Contractor argued that the plaintiffs' interpretation should not be accepted as it would effectively allow a party to flout the agreement to arbitration by commencing and prosecuting litigation before all of the preliminary steps in a dispute resolution clause had been satisfied.

The court's decision

Justice Rees rejected the plaintiff's argument that the arbitration agreement was inoperative, holding that:

  • While it is generally preferable for an arbitrator to determine whether a dispute falls within the scope of the arbitration agreement, and whether the arbitration agreement is operative (kompetenz-kompetenz), in certain circumstances – including where the parties agree to that course – it may be preferable for the court to determine those matters.
  • Section 8(1) of the CAA imports a presumptive validity of arbitration agreements and the onus lies on the party resisting a stay of proceedings to show that the arbitration agreement is inoperative. While earlier decisions, notably John Holland Pty Limited v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451, suggest that non-compliance with conditions precedent to arbitration in a tiered arbitration clause will render the arbitration agreement inoperative, that cannot be the case. Her Honour considered that such a construction would undermine the object of the CAA, depart from the broader interpretation of the term and enable a party to bypass their contractual bargain to submit dispute to arbitration by commencing proceedings before the conditions precedent were satisfied.
  • The arbitration agreement was therefore operative, despite the fact that the expert determination phase had not been undertaken. The court was therefore bound to refer the parties to arbitration.

Justice Rees therefore stayed the proceedings pursuant to s8 of the CAA. Her Honour refused to grant the urgent injunction sought by the plaintiffs, as her Honour considered that there was no urgency and the court should not grant interlocutory relief which interferes with, or modifies, the parties' contractually agreed disputes process.

The case serves as a timely reminder that Australia is a pro-arbitration jurisdiction whose courts will uphold parties to their contractual bargain to arbitrate. The court's decision is representative of a growing trend in arbitration matters reflecting an understanding that parties ought not be able to sidestep that bargain by commencing court proceedings outside the agreed contractual dispute resolution framework.