An Australian arbitration first 4 min read
The Supreme Court of Victoria has, for the first time in an Australian court, considered a 'hybrid' arbitration clause—where the parties agree that one arbitral institution will administer an arbitration under a different institution's rules. Drawing on international jurisprudence, the court held that the clause in question could function (albeit with some minor amendments) despite the procedural and practical difficulties that arose.
The decision in Downer Utilities Australia Pty Ltd v Murra Warra Asset Co Pty Ltd [2026] VSC 48, which Justice Croft delivered in February, underscores the primacy of party autonomy in determining how an arbitration is to proceed. It also emphasises the general principle that beyond extreme or unworkable terms, the courts will hold the parties to the terms of the arbitration agreement that they agreed to, however illogical or procedurally difficult they may seem upon the commencement of a dispute and with the benefit of hindsight.
Key takeaways
- Respect for party autonomy in determining the terms of a bargain remains paramount, given how intrinsic it is to the arbitral process. In this case, party autonomy was considered to take precedence over:
- the International Chamber of Commerce (the ICC) and its rules, which state that no other institute can conduct an arbitration under the rules;
- the fact that the Resolution Institute may have indicated it would only take a limited role; and
- the fact that the ICC's Rules of Arbitration contained provisions that called on specific functions requiring its involvement.
- Sophisticated commercial parties will be deemed to know what they have agreed. The court considered it 'simply inconceivable that sophisticated commercial parties, advised by well-resourced lawyers' were not aware that the Resolution Institute could not precisely replicate all ICC functions contemplated by the latter's arbitration rules.
- Courts will favour an interpretation of arbitration clauses that allows them to function, rather than to do away with them entirely or give them an interpretation that is commercially inconvenient. The relevant clause (unlike some noted in international decisions) was capable of a 'plain and intelligent reading', sufficiently detailing the parties' intentions of how an arbitration was to be conducted. Even if they would be logistically difficult in practice, the court noted (echoing a Singapore High Court decision) that 'there is no rule of law that prevents the parties doing exactly what they did', when those were the terms they agreed to.
Background
The relevant agreement (the EPC contract) was between a Downer Group entity, Senvion (a German wind turbine manufacturer that had entered into administration in Germany), and a related entity of Squadron Energy. The EPC contract (among a suite of other documents) detailed the parties' agreement concerning the development of Stage 1 of the Murra Warra Wind Farm Project in Victoria.
The EPC contract appointed Downer and Senvion jointly as contractor (a separate consortium agreement governing the relationship between those two parties), with Squadron as the principal. Senvion's role as contractor encompassed the design, manufacture, supply, delivery, erection and commissioning of the wind turbines for the project, while Downer was responsible for the civil component of the works.
In 2019, Senvion entered into administration in Germany and, shortly thereafter, gave notice to Squadron and Downer that it would not perform the EPC contract. (The Federal Court recognised Senvion's insolvency in Germany in proceedings concerning the Cross-Border Insolvency Act 2008 (Cth). In June 2020, the works under the EPC contract were completed and a dispute subsequently arose (the details of which are not included in the court's decision, due to confidentiality).
The arbitration agreement within the EPC contract provided that arbitration was to be 'conducted' by the Resolution Institute (an Australian arbitration institution) but in accordance with the ICC's Rules of Arbitration. There was also an express mechanism for the Resolution Institute to assist with the appointment of the arbitral tribunal.
Both Downer and Squadron commenced separate arbitrations through different administering bodies, reflecting their respective positions on the proper application of the arbitration agreement:
- Squadron commenced an arbitration against Downer through the Resolution Institute as the administering body.
- One day later, Downer commenced an arbitration against Squadron, Senvion and the Insolvency Administrator of Senvion's assets, filing a Request for Arbitration with the ICC (which is the first step in any arbitration under the ICC Rules).
The decision
In the proceedings before the Supreme Court of Victoria, each party sought orders to, effectively, invalidate the arbitration the other had commenced (along with other orders concerning the relevant applicable statute and the confidentiality of the subject of the proceedings).
Downer's position, in summary, was that an arbitration under the ICC Rules could only be commenced by filing a Request for Arbitration under the ICC Rules and that the Resolution Institute's role should be limited to the appointment of arbitrators.
Relevantly, correspondence with the Resolution Institute suggested that it would only assist with the appointment of the tribunal. Its position in relation to the extent to which it would also 'conduct' the arbitration was not clear.
The court noted that few cases had considered such hybrid arbitration clauses and, to its knowledge, none were in Australia. Accordingly, the court provided a helpful overview of international jurisprudence on the matter.
It ultimately found in favour of Squadron's position, finding that it had validly commenced an arbitration under the arbitration agreement (and that the arbitration that Downer has purported to commence with the ICC was contrary to the arbitration agreement). The court made declarations to the effect that the Resolution Institute would assist with the appointment of arbitrators but that, after this, the arbitral tribunal should 'conduct' the arbitration in accordance with the ICC Rules insofar as they did not set out functions that only the ICC could fulfil (such rules effectively being carved out). The court found the ICC had no role to play in any arbitration under the arbitration agreement.
Final thoughts
This first foray by an Australian court into the topic of hybrid clauses took a similar approach to many of the international decisions—stressing the importance of party autonomy. The parties were bound by the arbitration agreement they agreed to, however impractical aspects of it might seem.
However, the court was not supportive of hybrid arbitration agreements in general and, quoting academic rhetoric on the concept, noted that '[h]ybrid arbitration is undoubtedly a bad choice, but parties are entitled to make bad choices'.
From a practical perspective, parties should keep in mind that:
- hybrid arbitration clauses are generally considered a bad idea;
- they will be nonetheless be bound by their arbitration agreement, even if its operation in practice is procedurally difficult; and
- when drafting arbitration agreements, it is important to contemplate how the process envisioned by the relevant provisions will work in practice (on the assumption that they will be enforced as agreed, even if they create impracticalities).