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Focus: Sidestepping arbitration clauses – a potentially explosive business!

28 January 2014

In brief: The Supreme Court of Western Australia has rejected a wide-ranging attack, by a contracting party preferring litigation to arbitration, on the operation of an arbitration clause. Partner Andrew Maher (view CV) reports.

How does it affect you?

  • Where commercial contracts contain arbitration clauses, courts are loath to interfere with the parties' apparent intention to arbitrate their disputes. Accordingly, they tend to take a dim view of arguments that arbitration clauses are void for uncertainty and do not survive the termination of the contracts in which they are contained.
  • Contracting parties can limit the risk of costly and time-consuming satellite disputes about the operation of arbitration clauses by drafting those clauses as clearly as possible. For example, care should be taken to specify whether an arbitration clause survives termination of the contract and to ensure that each step in the dispute resolution process is clearly connected to the next step in that process. Careful attention should be given to the requirements for the satisfaction of each of those steps. 

The facts

In Pipeline Services WA Pty Ltd v ATCO Gas Australia Pty Ltd1, Pipeline Services WA Pty Ltd had a contract with ATCO Gas Australia Pty Ltd for the installation of underground gas transmission pipelines in Western Australia. After Pipeline commenced work, it was told that 'unexploded ordnance' from previous armed services activities had been discovered and that this would substantially alter the scope of work. ATCO advised Pipeline that the contract was terminated and tenders for a new contract would be received. Pipeline's tender was unsuccessful and it stopped work. A dispute subsequently arose about the amount owing to Pipeline for the work that it had already completed.

Clause 25 of the contract comprised a dispute resolution or arbitration clause, which provided, among other things:

25.1 General

  1. Any party may, by written notice, notify the other of a dispute.
  2. Unless a party has complied with this Clause 25 that party may not commence court proceedings relating to any dispute under this Agreement ...

...

25.2 Escalation to Contract Manager

  1. Any outstanding dispute must initially be put forward to the Contract Manager for resolution.
  2. If a party considers that the matter is urgent a special meeting may be convened ....

25.3 Escalation to Chief Executive Officers

If resolution of the dispute ... cannot be achieved at the special meeting required by Clause 25.2, the dispute will be escalated to the Chief Executive Officers ... of the parties, who must endeavour to resolve the dispute.

25.4 Escalation to Arbitration

(a) If the dispute is still to be resolved within two weeks of having to be referred to the Chief Executive Officers then either party may refer the dispute to arbitration.

...

Pipeline sued ATCO in the Supreme Court of Western Australia for breach of contract. ATCO then applied for those proceedings to be stayed because Clause 25 required the dispute to be determined by arbitration, and for the matter to be referred to arbitration.

The issues

The court considered a range of arguments raised by Pipeline, which, in effect, sought to prevent the dispute being arbitrated.2 Relevantly, those arguments included that Clause 25:

  • did not survive the termination of the contract;
  • was void for uncertainty; and
  • did not apply because ATCO had waived its entitlement to insist on compliance with it.

The court's decision

Survival of termination

The court rejected Pipeline's argument that Clause 25 did not survive the termination of the contract. While the contract did not expressly provide that Clause 25 would survive termination (whereas other terms were expressed to do so), the court attributed to the parties an intention that Clause 25 would do so, based on:

  • the well-established principle that an arbitration agreement survives termination of the underlying contract, absent evidence of a contrary intention by the parties;
  • the general requirement in Australia and elsewhere that courts adopt 'a broad, liberal and flexible approach to the construction of [arbitration] agreements' and 'favour a construction which provides a single forum for the adjudication of all disputes arising from, or in connection with, that agreement'; 
  • the manifest inconvenience that would result from disputing parties to a terminated contract being required to go to court to determine whether the termination is valid before proceeding to arbitration to resolve their dispute;
  • Clause 26.14 providing that any clauses that 'need to survive in order to protect the presumed intention of the parties as expressed in this Agreement' are to survive termination, even where they are not expressed to do so; and
  • the absence of any expressed intention that Clause 25 would not survive termination.
Uncertainty

Pipeline's argument that Clause 25 was void for uncertainty was based on propositions, among other things, that:

  1. the requisite content of the 'written notice' of dispute was unclear;
  2. what was required to enable a dispute to be 'put forward' to the contract manager was uncertain;
  3. Clause 25.2 did not mandate the convening of a 'special meeting', but escalation to the chief executive officer and then to arbitration was conditional upon a special meeting having been convened;
  4. the requirement that the chief executive officer had to 'endeavour' to resolve the dispute was unclear; and
  5. the reference in Clause 25.4 that either party 'may' refer the matter to arbitration did not require either party to do so.

In deciding these questions, the court referred to well-established authority that the courts should prefer a construction that renders a commercial agreement certain to one that does not; and that, more specifically, courts should seek to construe arbitration clauses in a way that provides them with enforceable content, provided that can be done without rewriting them.

Applying these principles, the court rejected Pipeline's arguments. Regarding (a), (b), (d) and (e), the court decided that the relevant words and phrases were sufficiently certain according to their ordinary and contextual meanings. Regarding (c), the court accepted that a literal reading of Clause 25.2 supported Pipeline's argument, but decided that there was no need to interpret the provision so literally in light of the text and structure of Clause 25 (which indicated that a special meeting was mandatory) and the general approach to construction of arbitration clauses. 

Waiver

The court rejected Pipeline's argument that ATCO had, by its response to Pipeline's claims before the proceedings were commenced, waived its entitlement to insist on compliance with the arbitration clause. It examined the correspondence between the parties and concluded there was nothing in it that indicated ATCO would not rely on the contractual provisions. The court stated that '[a]s ATCO was not the claimant in the dispute, and had no intention of commencing legal proceedings to enforce any claims, its failure to invoke provisions of the clause cannot be relied upon as evidence of an election to abandon its rights under the clause, or to waive compliance by Pipeline with its requirements'.

Conclusion

For these and other reasons, the court ordered that Pipeline's proceeding be stayed and referred the matter to arbitration under section 8 of the Commercial Arbitration Act 2012 (WA). The decision reinforces the need for contracting parties to resolve their disputes according to their agreed dispute resolution or arbitration clauses unless there are good reasons not to. Courts are increasingly respectful of arbitration processes and favour constructions of arbitration clauses which render them enforceable. However, careful drafting of these clauses will limit the risk of costly and time-consuming satellite disputes about their operation. 

Footnotes
  1. [2014] WASC 10.
  2. The decision provides no insight into the rationale for Pipeline's preference to litigate rather than to arbitrate.

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