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Focus: Third parties are no bar to arbitration: A win for arbitration?

7 May 2015

In brief: The Supreme Court of New South Wales has confirmed in a recent case that the impact of any dispute on third parties will generally not determine its arbitrability, which rather will be determined on the proper construction of the arbitration agreement. Partner Nick Rudge (view CV), Senior Associate Alex Price and and Lawyer James Waters report.

How does it affect you?

  • This decision confirms Australian courts' pro-arbitration stance. It also confirms that courts will typically construe parties' arbitration agreements widely so that parties to arbitration agreements will be bound by their submission to arbitration notwithstanding the impact of the dispute on third parties or strangers.
  • Broadly, this decision highlights the risk of fragmentation of multiparty disputes where different dispute resolution provisions are included in parallel or up/down stream contracts.
  • As a consensual process, only the parties to an arbitration agreement can be referred to arbitration. Third parties involved in a dispute cannot be compelled to join an arbitration without their consent.
  • In multiparty transactions and projects, parties should consider whether their dispute resolution provisions should be consistent up and down the contractual chain so as to facilitate consolidation or joinder of arbitral proceedings where appropriate. Without the ability to consolidate or join parties, it is likely that the dispute may become fragmented or may result in multiplicity of proceedings.
  • Adopting institutional rules governing the procedure of arbitration that permit joinder or consolidation of proceedings, such as the London Court of International Arbitration (LCIA), International Chamber of Commerce (ICC), International Centre for Dispute Resolution (ICDR) rules (and the proposed Australian Centre for International Commercial Arbitration (ACICA) rules, if implemented), allow parties to arbitration agreements to join consenting third parties to their proceedings, or to consolidate parallel proceedings.

Summary

In John Holland Pty Limited v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451, Justice Hammerschlag held that where parties to an arbitration agreement have commenced court proceedings, whether the dispute should be referred to arbitration under the Commercial Arbitration Act 2010 (NSW) depends only on the proper construction of the parties' arbitration agreement and not whether reference to arbitration would result in fragmentation or multiplication of proceedings due to claims involving third parties.

Background

John Holland was engaged to design and construct a rail facility called the Auburn Maintenance Centre, part of the Reliance Rail Project in New South Wales. In 2007, John Holland engaged engineering and construction company, KBR, to design storm water facilities for the Maintenance Centre, and in 2008, John Holland engaged the water management company, Atlantis (the second defendant in the proceedings), to design, manufacture, supply and certify storm water facilities for the Maintenance Centre.

In 2013, around three-and-a-half years after the Maintenance Centre was completed, the carpark was observed to be subsiding. The cause of the subsidence was not known, but was thought to be either due to defects with the storm water design and facilities of the maintenance centre or due to construction work on an adjoining site. As KBR certified its design for the storm water facilities on 29 August 2008, under the Limitation Act 1969 (NSW) John Holland would have until 29 August 2014 to bring a claim for breach of contract based on KBR's certification. Accordingly, on 28 August 2014, John Holland commenced proceedings against both KBR and Atlantis for damages arising from breach of contract, negligence, under the Trade Practices Act 1974 (Cth), and for an indemnity from both parties.

However, the contracts between John Holland and KBR and John Holland and Atlantis each contained arbitration agreements in substantially the same terms that referred disputes or differences arising out of, or relating to, the performance of the contract, through various dispute resolution processes to arbitration. Each arbitration was to be conducted under the Institute of Arbitrators and Mediators Rules, which at that time, did not provide for joinder of third parties (unlike the 2014 IAMA Rules) nor consolidation of proceedings. On 5 March 2015, both KBR and Atlantis filed Amended Notices of Motion seeking to have John Holland's proceedings permanently stayed and referred to arbitration pursuant to Section 8(1) of the Commercial Arbitration Act 2010 (NSW) (the Act).

Section 5 of the Act provides:

In matters governed by this Act, no court must intervene except where so provided by this Act.

Section 8 of the Act provides:

(1) A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party’s first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.
(2) Where an action referred to in subsection (1) has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.

The dispute

John Holland commenced proceedings to preserve its position in relation to the time bar in the Limitation Act. It argued that the dispute against KBR and Atlantis should be heard in court (despite it being party to arbitration agreements with those parties), because court proceedings would allow all parties that it considered relevant to be joined and the dispute to be heard in one forum. John Holland considered that it had reached agreement with KBR and Atlantis to have the dispute heard in court, rather than through arbitration.

John Holland submitted that its dispute with KBR and Atlantis, in each case, was not 'a dispute or difference arising out of or relating to the performance of the Agreement or the breach…thereof' within the meaning of each respective arbitration agreement.1 John Holland submitted that the dispute involved strangers to the arbitration agreements, including Atlantis (in relation to the John Holland – KBR agreement) and KBR (in relation to the John Holland – Atlantis agreement), and possibly other third parties, such as the builder working on the site adjacent to the carpark that suffered subsidence. John Holland argued for a narrow construction of each arbitration agreement: that the disputes or differences referred to in the arbitration agreements were limited to those between John Holland and KBR, and John Holland and Atlantis in each case.

In addition, John Holland asserted that the arbitration agreements should be construed in light of a commercial presumption against having the disputes heard in multiple places, effectively an argument against fragmentation of disputes.

John Holland sought support from the decision in Paharpur Cooling Towers Ltd v Paramount (WA) Ltd [2008] WASCA 110, where a majority of the Western Australian Court of Appeal held that a dispute should not be referred to arbitration, from court litigation, as the claims involved a third party.

In essence, Justice Hammerschlag was faced with two options: the dispute could be heard in court with John Holland, KBR and Atlantis joined in the proceedings - although this would be contrary to the parties' arbitration agreements. Alternatively, the parties could be held to their agreements to arbitrate - though this would result in fragmentation of proceedings (due to the impossibility of joining non parties to arbitral proceedings) and the attendant issue of overlap between arbitral proceedings.

The decision

Determining whether a dispute is arbitrable

In determining whether a dispute is arbitrable, Justice Hammerschlag observed that section 8(1) of the Act requires courts to consider whether the rights or liabilities in controversy fall within the ambit of controversies that the parties have agreed to refer to arbitration on the proper construction of parties' arbitration agreement.

Where court proceedings have been commenced and there is a question whether some, but not all, matters in dispute should be referred to arbitration, courts must consider each party's pleading to determine the extent of any overlap.2

Whether the disputes between John Holland and KBR and Atlantis, respectively, were capable of being referred to arbitration depended on the construction of each arbitration agreement in the circumstances of the dispute. His Honour held that there are no special rules in the construction of arbitration agreements,3 other than that

…words such as 'arising out of', 'arising under', 'in connection with' or 'connected with' have a wide ambit and that when commercial parties choose a forum for the resolution of disputes which may arise between them, such provisions should be liberally construed so as to further their ultimate intent, namely, that their disputes should be susceptible to the forum which they have chosen.4

Were the disputes referable to arbitration?

Justice Hammerschlag rejected John Holland's narrow construction of each arbitration agreement and held that there was no concluded agreement between the parties to refer the dispute to litigation in place of arbitration. As John Holland's proceedings against KBR and Atlantis sought damages for each party's alleged negligence and breach of contract, his Honour considered that the disputes between John Holland and KBR and Atlantis 'patently [arose] out of or relate[d] to performance of the [KBR and Atlantis contracts] or breach thereof…' and accordingly, were susceptible to their respective arbitration agreements.5

Addressing John Holland's attempts to seek support from Paharpur, Justice Hammerschlag held that the decision was plainly wrong, and that in any event there is no longer judicial discretion whether to refer a dispute to arbitration from litigation under section 8(1) of the Commercial Arbitration Act, regardless of the possible effect on third parties. His Honour made clear that '…whether a dispute is arbitrable or not cannot depend on a plaintiff party to an arbitration agreement decision to claim not only against the counterparty, but also a third party stranger.'6

Conclusion and comment

As a result of his Honour's construction of the arbitration agreements between John Holland and KBR and Atlantis, the KBR dispute was referred to arbitration. The Atlantis dispute would likely have been similarly referred to arbitration, although his Honour held that necessary contractual dispute resolution preconditions must be met before such an order could be made.

Although it does not form the ratio of the case, Justice Hammerschlag observed that sections 70 and 72 of the Limitation Act 1969 (NSW) would have allowed John Holland to preserve its claim by commencing arbitration without falling foul of the six year limitation period.

Justice Hammerschlag's decision makes clear that where court proceedings are commenced between parties to an arbitration agreement, court proceedings will be stayed and the parties will be referred to arbitration. However, observing the parties' arbitration agreements in this case resulted in reference to arbitration in which many of the same issue in dispute would be raised in the parallel proceedings. While it is clear that judges have power to stay court proceedings to avoid abuses of process, it is not clear whether an arbitral tribunal could stay a hearing until another hearing governed by an entirely separate arbitration agreement was completed.

Internationally, courts have grappled with the issues of privity in arbitration agreements that bar third parties and with the avoidance of multiplicity of proceedings. In Danone Asia Pacific Holdings Pte Limited v Nutricia Limited [2014] NZCA 536, court and arbitral proceedings were commenced simultaneously in circumstances where an arbitration agreement existed between companies within corporate groups, but not their respective holding companies. New Zealand's Court of Appeal held that the court proceedings should be stayed in favour of arbitration, despite there being no arbitration agreement between the holding companies of the entities, to the dispute to avoid duplication of proceedings.

Practical implications

  • If court proceedings are commenced where parties have agreed to arbitrate disputes, state and Commonwealth legislation will require disputes to be referred to arbitration.
  • Parties considering arbitration should be aware that third parties cannot be joined to arbitration proceedings without their consent. Such third parties may not be known at the time of contracting and once a dispute erupts, are unlikely to willingly join an arbitration.
  • Most procedural rules governing arbitration, such as the LCIA, ICC and ICDR rules, provide for joinder of third parties and consolidation of arbitral proceedings but only where all parties involved consent to the joinder or consolidation. Similarly, if the changes proposed in the 2014 Exposure Draft to the ACICA rules are implemented, parties utilising the ACICA rules will be able to join third parties and consolidate proceedings where they raise issues and have arbitration agreements that are common to the parties. The consent of all parties is required for joinder or consolidation.
  • Third parties present a number of issues to arbitration of disputes. In our Construction Year In Review 2014 we referred to Flint Ink NZ Limited v Huhtamaki Australia Pty Ltd and Lion-Dairy & Drinks Pty Ltd [2014] VSCA 166 where a third party was successful in its claim in negligence 'through or under a party' to an international arbitration agreement.
Footnotes
  1. John Holland Pty Limited v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451, [57].
  2. John Holland Pty Limited v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451, [65] – [68] (Hammerschlag J).
  3. Rhinehart v Welker [2012] NSWCA 95 at [114] – [122] cited in John Holland Pty Limited v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451, [82].
  4. John Holland Pty Limited v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451, [69].
  5. John Holland Pty Limited v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451, [71].
  6. John Holland Pty Limited v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451, [88].

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