Construcciones y Auxiliar de Ferrocarriles S.A. v CPB Contractors Pty Limited

The IAA

1. The IAA gives effect to Australia's obligations under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 330 UNTS 3, adopted in 1958 by the United Nations Conference on International Commercial Arbitration and applies in Australia the UNCITRAL Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law on 21 June 1985.
2. Section 7 of the IAA relevantly provides: (2) Subject to this Part, where: (a) proceedings instituted by a party to an arbitration agreement to which this section applies against another party to the agreement are pending in a court; and (b) the proceedings involve the determination of a matter that, in pursuance of the agreement, is capable of settlement by arbitration; on the application of a party to the agreement, the court shall, by order, upon such conditions (if any) as it thinks fit, stay the proceedings or so much of the proceedings as involves the determination of that matter, as the case may be, and refer the parties to arbitration in respect of that matter. … (5) A court shall not make an order under subsection (2) if the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed.

The issues

1. It is common ground that the arbitration agreement contained in the Contract is an arbitration agreement to which s 7 of the IAA applies. CPB advances two contentions in support of its application for a stay under s 7. Its primary contention is that this proceeding is itself a Dispute within the meaning of the Contract which is capable of settlement by arbitration in pursuance of the Contract. Consequently, s 7(2) requires the Court to stay the proceeding and refer the matter to arbitration. In the alternative, CPB submits that, if the relevant matter is the underlying dispute in relation to the CAF Equipment Claim, then that too is a matter that is capable of settlement by arbitration in accordance with the Contract.
2. In response, CAF contends that there is only one matter that is currently in dispute between the parties - that is, the dispute in relation to the CAF Equipment Claim. The arbitration agreement contained in the Contract is inoperative or incapable of being performed in relation to that dispute because CPB has refused to satisfy a condition precedent to that agreement - that is, the referral of the dispute to expert determination. In doing so it has waived its rights under the agreement or has made an election not to exercise them.
3. Accordingly, two issues need to be addressed. The first is whether this proceeding itself is a Dispute (distinct from the CAF Equipment Claim) that, in pursuance of the Contract, is capable of settlement by arbitration. The second is whether, if it is not a distinct Dispute, the arbitration agreement is inoperative or incapable of being performed in relation to it.

Is there a separate dispute?

1. In my opinion, this proceeding and the Dispute that was the subject of the notice given under section 9.3(b) of Schedule 5 of the Contract are the same dispute for the purposes of the Contract.
2. "Dispute" is defined in the Contract to mean relevantly any dispute between the parties arising in connection with the Contract, including its existence, meaning, validity or termination. What distinguishes one Dispute from another is its subject-matter. That is how the included examples referred to in the Contract ("questions concerning this Deed's existence, meaning, validity or termination") are described. Clauses 50 to 53 of the Contract set out a tiered approach for resolving a Dispute. A dispute is the same Dispute irrespective of the stage reached in the dispute resolution process. Similarly, if one party or the other commences court proceedings in relation to the same subject-matter, those proceedings form part of the same Dispute.
3. In the present case, the Dispute is the dispute concerning whether CPB is entitled to be paid the amount the subject of the CAF Equipment Claim. That was the Dispute that was (in part) the subject of the adjudication determination and was the Dispute that CPB referred to expert determination pursuant to section 9.3(b)(ii) of Schedule 5 of the Contract. The subject-matter of the dispute, and therefore the Dispute for the purposes of cl 50.1(a), does not change simply because CAF seeks in court proceedings repayment of an amount it was required to pay in respect of the CAF Equipment Claim as a result of the operation of the SOP Act. The outcome of the proceedings still turns on the resolution of the CAF Equipment Claim. That is made plain by the paragraphs of the list statement quoted earlier, which assert in effect that CPB has not demonstrated a contractual entitlement to make the CAF Equipment Claim.
4. The conclusion of the previous paragraph is not altered by the fact that the claim is a restitutionary one by CAF and that CAF only seeks to recover the amount that it has paid. The underlying contractual dispute remains the same. The fact that it is now CAF that seeks relief and the fact that the relief it seeks does not relate to the whole of the amount the subject of the CAF Equipment Claim is an incidence of the exercise of rights conferred by the SOP Act. Section 32 of the SOP Act makes it clear that those rights do not affect the underlying rights conferred by the relevant construction contract; and it is those underlying rights that were referred to expert determination and which CAF now seeks the Court to resolve.
5. Had the parties agreed on expert determination and then subsequently referred the Dispute to arbitration, the same issues would have arisen as those that CAF seeks to raise in these proceedings. But it could not be suggested that that arbitration would have related to a different Dispute. Such a suggestion would lead to the absurd conclusion that that different Dispute would itself have to be resolved in accordance with the dispute resolution mechanism set out in the Contract, leading to an infinite regress of Disputes which could never be arbitrated. The Dispute is not turned into a different Dispute simply because CAF seeks to have it resolved by court proceedings rather than arbitration.
6. Nor is the Dispute a different Dispute because CAF claims interest and costs. Those claims are ancillary rights to those that are the subject of the Dispute and to the court proceedings. An assertion of an entitlement to those rights does not alter the nature of the Dispute. Again, that point is illustrated by the fact that interest and costs could be sought in an arbitration, but for the reasons given, that would not result in there being a different Dispute.
7. In the circumstances of this case, I do not think that the claim for rectification alters the position. At most, it would introduce a second Dispute into the proceedings. However, it remains unclear whether there really is a dispute about whether the error identified by CAF is an error.

Is the arbitration agreement inoperable or incapable of being performed?

1. The Court was taken to a number of authorities dealing with the question whether an arbitral tribunal had power to determine whether parties who have agreed to a tiered dispute resolution process ending in arbitration (such as cls 50 to 53 of the Contract) have complied with that process and, if so, whether the Court should leave that question to the arbitrator or decide it itself: see, eg, WCX M4-M5 Link AT Pty Ltd v Acciona Infrastructure Projects Australia Pty Ltd (No 2) [2022] NSWSC 505; Siam Steel International plc v Compass Group (Australia) Pty Ltd (2014) 293 FLR 260; [2014] WASC 415; John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451; CPB Contractors Pty Ltd v DEAL SRL [2021] NSWSC 820; C v D [2022] 3 HKLRD 116; HKCA 729.
2. It is not necessary in this case to examine those authorities in any detail. The authorities establish, and it is accepted by the parties, that the question whether an arbitral tribunal has jurisdiction to determine issues concerning the proper interpretation of, and compliance by the parties with, a dispute resolution procedure contained in the contract between them turns on the proper construction of the contract in accordance with the usual principles of construction that are applied by Australian courts: see Rinehart v Welker (2012) 95 NSWLR 221; [2012] NSWCA 95 at [120] per Bathurst CJ; Hancock Prospecting Pty Ltd v Rinehart (2017) 257 FCR 442; [2017] FCAFC 170 at [156]-[157] per curiam; Rinehart v Hancock Prospecting Pty Ltd (2019) 267 CLR 514; [2019] HCA 13 at [18] per Kiefel CJ, Gageler, Nettle and Gordon JJ. However, a court will normally require clear words in the contract before concluding that the parties did not intend to have all their disputes resolved by one tribunal: see TCL Air Conditioner (Zhongshan) Co Ltd v Judges of Federal Court of Australia (2013) 251 CLR 533; [2013] HCA 5 at [16] per French CJ and Gageler J; Comandate Marine Corporation v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45; [2006] FCAFC 192 at [165] per Allsop J; Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160; [1996] NSWSC 104 at 165 per Gleeson CJ.
3. There is a question whether this second principle is to be seen simply as the outcome of the normal constructional process, or whether it represents a presumption that operates in respect of arbitration clauses. That question has received extensive attention in the cases and academic literature: for a recent discussion see Inghams Enterprises Pty Ltd v Hannigan (2020) 379 ALR 196; [2020] NSWCA 82 at [56]ff per Bell P. But again, it is unnecessary to consider that issue. In the present case, the wording of the Contract is clear. Clause 50.1(a) of the Contract relevantly states that "any dispute … arising in connection with … [the Contract] (including questions concerning this Deed's existence, meaning, validity or termination) … must be resolved in accordance with this clause 50 and clauses 51 to 53". Those words are plainly sufficiently broad to cover a dispute concerning the meaning and validity of those clauses themselves.
4. Section 7(2) of the IAA requires the Court to stay the proceedings if they are capable of settlement by arbitration in pursuance of the agreement. Section 7(5) of the IAA states that the Court shall not make an order under subsection (2) if relevantly the Court finds that the arbitration agreement is inoperative or incapable of being performed. Despite those provisions the Court has a discretion under s 67 of the CPA to stay the proceedings. Relevant to the exercise of that discretion is the reason the arbitration agreement is inoperative or incapable of being performed.
5. It does not appear to be seriously contested that the current proceedings are, in principle, capable of settlement by arbitration in pursuance of the Contract. The Contract contemplates that all disputes between the parties concerning the Contract will be settled in accordance with the dispute resolution clauses, which have as their final step arbitration. The CAF Equipment Claim clearly falls into that category.
6. CAF submits that the arbitration agreement is inoperative or incapable of being performed because CPB has made an unequivocal choice not to comply with the dispute resolution mechanism set out in the Contract in respect of the CAF Equipment Claim by refusing to procure the President of ACICA to appoint an expert.
7. In my opinion, that submission must be rejected. The dispute resolution clauses do not confer a right on CPB that CPB has waived or made an unequivocal election not to enforce. Rather, the dispute resolution clauses set out a mechanism for resolving disputes that must be followed by both parties.
8. CPB has taken the view that the dispute resolution mechanism cannot operate because the President of ACICA, due to a conflict, cannot appoint an independent expert, with the result that a precondition to arbitration cannot occur. Faced with CPB's position, it was open to CAF to invoke the dispute resolution mechanism and, for example, to seek an order from an arbitral tribunal that CPB procure the appointment of an expert (on the basis that any "conflict" the President had did not affect the power of appointment) or to seek a declaration that, in the circumstances, expert determination was not a precondition to arbitration of the Dispute in relation to the CAF Equipment Claim.
9. CAF's submission appears to rest on the false premise that disputes concerning the operation of the dispute resolution clauses are not themselves capable of arbitration in accordance with the Contract or somehow or another are to be treated differently from other disputes under the Contract. That is not so. As I have said, clause 50.1(a) makes it clear that all disputes must be resolved in accordance with that clause and cls 51 to 53. The general structure of those clauses is that the parties must attempt to resolve all disputes by negotiation. Some disputes may and some disputes must be referred to expert determination. If a dispute is not referred to expert determination, it must be referred to arbitration. Consequently, the dispute in relation to the operation of the dispute resolution mechanism was required to be referred to negotiation and if that failed was to be referred to arbitration unless either party sought to refer it to expert determination. The fact that that did not occur, does not mean that it was incapable of occurring. And if it can occur, it is difficult to see how it could be said that the arbitration agreement is inoperative or incapable of being performed. The fact that the parties to date have not acted in accordance with the agreement does not mean that it satisfies that requirement.
10. It is true that, as a consequence of the dispute between the parties, the agreement to submit the CAF Equipment Claim to arbitration was not capable of being performed immediately because it was first necessary to determine whether and how that dispute was to be referred to expert determination. But the fact that there are or were preconditions to an arbitration of the CAF Equipment Claim that needed to be resolved does not mean that the arbitration agreement was inoperative or incapable of being performed. It simply meant that its performance has been delayed pending the outcome of a dispute concerning the operation of the dispute resolution clauses themselves.
11. It is theoretically possible that, on the correct construction of the dispute resolution clauses and in the events that have happened, those clauses cannot operate because the precondition to arbitration cannot be satisfied, with the consequence that the clauses themselves are void and must be severed from the Contract. If that were the case, the arbitration agreement would clearly be inoperable. However, neither party advanced a contention to that effect in these proceedings, and such a contention would be a difficult one to make out. The dispute resolution mechanism set out in the Contract has obviously been the product of careful thought and drafting. It is apparent that the parties intended to adopt a tiered approach to the resolution of all disputes relating to the Contract ending in arbitration. In the circumstances any court or arbitral tribunal would strain to give the clauses an interpretation which meant that they could operate in this case. One way that could be achieved is to accept the contention originally advanced by CAF that, on the correct construction of the Contract, any supposed conflict on the part of the President of ACICA did not prevent her from exercising the power to appoint an independent expert. However, since the issue has not been raised, it is unnecessary to pursue it further.

Conclusion and orders

1. The result is that it cannot be said that the arbitration agreement between the parties is inoperative or incapable of being performed in relation to the CAF Equipment Claim. A dispute has arisen between the parties concerning the operation of the dispute resolution clauses in the current circumstances. On one view, the result has been to broaden the CAF Equipment Claim so that it now concerns a dispute about precisely how that claim should be resolved in accordance with the Contract. But even if they are treated as separate disputes, the latter dispute is itself capable of being resolved in accordance with the dispute resolution clauses, with the result that it cannot be said that the arbitration agreement is currently inoperative or incapable of being performed in relation to the former dispute.
2. The question remains whether the proceedings should be stayed pending arbitration of the dispute concerning the operation of the dispute resolution clauses or whether the Court should facilitate referral of the substance of the dispute concerning the CAF Equipment Claim to arbitration now. One way to achieve that latter result is for the Court to impose a condition on the stay that CPB not raise as a defence in any arbitration of the subject-matter of these proceedings the argument that the arbitral tribunal does not have jurisdiction to deal with the dispute because the precondition requiring the dispute be referred first to expert determination has not been satisfied. Both parties accepted that it was open to the Court to impose such a condition consistently with s 7(2) of the IAA. Indeed, both parties saw merit in such a condition.
3. In my opinion, it is appropriate that a condition in those terms be imposed in this case. It is apparent that neither party wants to have the CAF Equipment Claim referred to expert determination. If it were, neither party would be bound by the determination, with the result that it is likely that the dispute will be referred to arbitration in any event. The parties should not be put to the expense and delay of engaging in a step in the dispute resolution process that neither wants to take. Moreover, having regard to the position it has taken, CPB should not be permitted to seek to have the operation of the dispute resolution clauses arbitrated as a means of delaying arbitration of the CAF Equipment Claim. Its position up until now has been that the dispute in relation to the CAF Equipment Claim should be referred to arbitration in accordance with the Contract.
4. The parties should be given an opportunity to make submissions in relation to costs, with the question of costs being decided on the papers.
5. Accordingly, the orders of the Court are: 1. Pursuant to s 7(2) of the International Arbitration Act 1974 (Cth) these proceedings be stayed pending the referral of the subject-matter of these proceedings to arbitration or until further order. 2. It is a condition of order (1) that the defendant not raise as a defence in any such arbitration that the arbitral tribunal does not have jurisdiction to deal with the dispute because a precondition requiring that the dispute be referred first to expert determination has not been satisfied; 3. If the parties can agree on the question of costs of these proceedings and the defendant's notice of motion dated 28 July 2022, the parties provide to my Associate within 14 days of the date of this judgment short minutes of order giving effect to that agreement. 4. If the parties cannot agree on costs: 1. the defendant serve and provide to my Associate within 28 days of the date of this judgment proposed short minutes of order setting out the orders they seek and written submissions not exceeding five pages in support of those orders; 2. the plaintiff serve and provide to my Associate within a further seven days of the date of this judgment proposed short minutes of order setting out the orders they seek in relation to costs and written submissions not exceeding five pages in support of those orders; 3. the question of costs be decided on the papers.

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