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Focus: Supreme Court of WA sends EPC contractor back to arbitration

13 July 2016

In brief: In Samsung C&T Corporation v Duro Felbuera Australia Pty Ltd [2016] WASC 193, the Supreme Court of Western Australia had to carefully consider the role that Australian courts play when there is a dispute over the existence and scope of an arbitration agreement. The key issue was whether a jurisdiction clause in a term sheet was inconsistent with there being an agreement to arbitrate disputes arising under the term sheet. However, the court was also required to consider the extent to which it should determine whether an arbitration agreement existed, and whether a dispute fell within its scope, in circumstances where an arbitral tribunal had already been asked to rule on its own jurisdiction to hear the same dispute. Partner Jeremy Quan-Sing (view CV) and Law Graduate Lily Hands report. 

 
 

How does it affect you?

  • Justice Le Miere adopted a broad construction of the relevant agreements to find that an agreement to arbitrate existed. In this sense it was an arbitration-friendly decision, indicating that, where possible, courts will construe commercial agreements and arbitration agreements consistent with a presumption that parties intend all disputes arising from the same subject matter or legal relationship to be resolved in the same forum.
  • Nonetheless, there are numerous recent decisions where much angst has been caused because of ambiguity around whether disputes arising under supplemental agreements and term sheets are covered by existing arbitration agreements. If you are drafting a supplemental agreement or deed, and you want an arbitration agreement to apply, then you should include express terms to that effect.
  • In circumstances such as in this case, there is a tension between the court's power to make declarations as to the existence and scope of an arbitration agreement and the power of an arbitral tribunal to rule on its own jurisdiction. This decision indicates that the Supreme Court of Western Australia, while supportive of international arbitration, considers its power to grant declarations unfettered by the International Arbitration Act 1974 (Cth) and that it will take a narrow view of whether there is a risk of its decision being inconsistent with the decision of an arbitral tribunal.
  • A party seeking a stay of proceedings under section 7(2) of the International Arbitration Act will need to establish that an arbitration agreement exists on the balance of probabilities (not the lower 'prima facie case' threshold that is suggested on some authorities). 

Background

The relevant agreements

Samsung is the EPC contractor on the Roy Hill iron ore project in Western Australia. It had subcontracted various works to an unincorporated joint venture consisting of Duro Felbuera and Forge Group Construction Pty Ltd (the Subcontract). However, in February 2014, Samsung terminated the Subcontract on the basis that an administrator had been appointed to Forge.

Samsung and Duro entered into a new agreement by way of a term sheet (the Interim Subcontract). The Interim Subcontract essentially provided for Duro to perform the works that Forge and Duro had agreed would be performed by Duro under the original Subcontract. The term sheet was binding, but provided that the parties would negotiate in good faith to agree a more detailed substitute contract in due course. The parties' rights and obligations remained governed by the Interim Subcontract because no such detailed substitute subcontract was ever entered into.

The original Subcontract contained an arbitration agreement that provided for disputes between the parties arising from or in connection with the subject matter of the Subcontract to be resolved by arbitration administered by SIAC under the UNCITRAL Rules.

The Interim Subcontract was stated to be on the same terms as the Subcontract, as modified by the term sheet. The term sheet did not contain an arbitration provision. It had a governing law and jurisdiction clause which provided that each party 'irrevocably submits to the non-exclusive jurisdiction of courts exercising jurisdiction in Western Australian courts and courts of appeal from them in respect of any proceedings arising out of or in connection with this agreement' (the Jurisdiction Clause).

The dispute

In March 2016, Samsung initiated an arbitration against Duro under the Subcontract. Duro responded by making counterclaims in the arbitration, some of which arose under the Interim Subcontract.

Samsung applied to the Supreme Court for a declaration that the proper forum for Duro's claims was the Supreme Court of Western Australia, arguing that the existence of the Jurisdiction Clause meant that the arbitration agreement in the Subcontract was not part of the Interim Subcontract.

Duro sought to stay the Supreme Court proceeding under s7(2) of the International Arbitration Act on the basis that there was an arbitration agreement between the parties and that it applied to its claims under the Interim Subcontract.

The decision

Did the Interim Subcontract contain an arbitration agreement on the same terms as the Subcontract?

The core issue in the proceeding was whether the Interim Subcontract contained an arbitration agreement in the same terms as the arbitration agreement in the Subcontract.

This was a question of the proper construction of the relevant agreements. The Interim Subcontract was stated to be on the same terms as the Subcontract (which contained an arbitration agreement); as modified by the terms of the Interim Subcontract. Did the Jurisdiction Clause mean that the arbitration agreement in the Subcontract was not adopted in the Interim Subcontract?

Justice Le Miere reviewed the relevant authorities and found that they contained the following relevant principles:

  • There is a presumption that rational business people who are parties to contracts dealing with the same or a related subject matter intend all questions arising out of their legal relationship to be determined in the same forum.
  • Notwithstanding the above presumption, clear agreements must be given effect, even if this may result in a degree of 'fragmentation' in the resolution of disputes between the parties. (His Honour noted that such fragmentation produces increased expense and delay and gives rise to a risk of inconsistent findings between a court and an arbitral tribunal, which rational business people are likely to have intended to avoid).
  • Whether a jurisdiction clause in a subsequent agreement is inconsistent with and supersedes an arbitration agreement in an earlier agreement is a question of construction. The words of the subsequent agreement are to be given effect so far as it is commercially rational to do so.

Applying these principles, his Honour held that, when considering the text, context and purpose of the term sheet, it was possible to construe the Jurisdiction Clause and the clause in the Subcontract which created the arbitration agreement in a manner which was consistent. To do this, his Honour adopted a construction of the word 'proceedings' in the Jurisdiction Clause narrowly, such that it meant only those 'proceedings' which a party could institute in the courts of Western Australia under the terms Subcontract and the arbitration agreement contained within it. (For example, the Subcontract expressly provided that a party could commence 'proceedings' in a court to enforce payment due under the Subcontract or to seek injunctive or declaratory relief).

Justice Le Miere found that 'considerations of commercial convenience', namely that it would be inconvenient to have separate forums for dispute resolution for each of the Interim Subcontract and the Subcontract favoured such a construction. As a result, his Honour determined that the Subcontract's arbitration agreement was a term of the Interim Subcontract and that the proceeding should be stayed and referred to arbitration.

What standard of review should the court apply to the question of the existence and scope of a binding arbitration agreement?

As part of his decision, Justice Le Miere considered what standard of review a court must apply when asked to determine whether a binding arbitration agreement existed and, if so, its scope.

His Honour noted that there were two competing views on the authorities. The first being that a court needed only undertake a prima facie assessment and, if satisfied on a prima facie basis that there were the conditions for a stay, it should grant the stay and defer the matter to arbitration. The second line of authority supported a view that the court should make a determination on the balance of probabilities.

Ultimately, his Honour decided to apply the balance of probabilities approach. This Focus is not the forum for a detailed analysis of the significance of this decision. Suffice to say that adopting the balance of probability approach has two key consequences. It results in a greater burden of proof on a party seeking to stay proceedings and have a matter referred to arbitration as a prima facie case is much easier to establish. It also arguably derogates from an arbitral tribunal's ability to examine the existence and scope of its own jurisdiction (the principle of kompetenz-kompetenz), as a balance of probabilities/full merits approach by the courts of a 'governing law country' necessarily involves them taking a more substantive role in determining such questions.

Did it matter that the arbitral tribunal had already ruled on its jurisdiction to hear the dispute?

The arbitral tribunal had separately been asked to consider its jurisdiction to hear Duro's counterclaims. Its decision on jurisdiction was handed down after the hearing before Justice Le Miere, but before his Honour delivered judgment and Duro sought to have the application reopened so that the arbitral tribunal's decision could be adduced as evidence before the Supreme Court.

Justice Le Miere declined to consider the arbitral tribunal's decision, essentially finding that the tribunal's decision was not material to the application before him. A central issue in relation to the question of materiality was whether, if Justice Le Miere did not consider the arbitral tribunal's decision, there was the risk of his decision being inconsistent with the arbitral tribunal's decision. His Honour held that there was no risk of inconsistency as the Supreme Court was not being asked to determine the scope of the arbitral tribunal's jurisdiction but was considering the question of whether a separate arbitration agreement existed under the Interim Subcontract. This Focus is not the place for a detailed analysis of this decision, but it does seem to indicate that the Western Australian Supreme Court will take a narrow approach when considering whether a judgement of the court might be inconsistent with a decision of an arbitral tribunal.

International Arbitration Act does not derogate from the court's power to grant declarations as to the existence and scope of arbitration agreements

While his Honour did not grant the declaratory relief sought by Samsung, his Honour did consider the court's ability to grant such relief. His Honour concluded (in obiter) that the court did have the discretion to grant declaratory relief in relation to the existence and scope of an arbitration agreement and that nothing in the International Arbitration Act removed that discretion. As a result, the door remains open for parties wanting to resist the referral of a dispute to international arbitration to seek declaratory relief from the courts of Western Australia as to the existence and scope of any arbitration agreement.

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