Icon Si (Aust) Pty Ltd v Australian Nuclear Science and Technology Organisation

Supreme Court of NSW|2024-03-21|Before: Ball J

Introduction

By a notice of motion filed on 12 February 2024, the defendant, Australian Nuclear Science and Technology Organisation (ANSTO), seeks orders under s 8(1) of the Commercial Arbitration Act 2010 (NSW) (the CA Act) referring the dispute the subject of these proceedings to arbitration and staying these proceedings. The plaintiff, Icon Si (Aust) Pty Ltd (Icon) resists those orders.

Clause 42.2A(i) provides: The determination of the expert will be final and binding unless: (i) the amount in dispute exceeds $500,000; and (ii) a party serves a notice of appeal on the other party or parties within 14 days of notification of the determination.
Clause 42.4 provides: Arbitration If: (a) a notice complying with clause 42.2A(i)(ii) is served by a party; or (b) Item 32 of Annexure Part A states that clause 42.2A does not apply, the dispute shall be resolved by arbitration in accordance with the ACICA Arbitration Rules. The seat of arbitration shall be Sydney, Australia. The language of the arbitration shall be English. The number of arbitrators shall be one.
In October 2021, in connection with the resolution of a prior dispute between the parties, the parties entered into a deed amending the Contract (the Amendment Deed). Clause 2 of the Amendment Deed provides: 2 Amendment 2.1 Amendment to Building Contract With effect from the Effective Date, the Building contract is amended as set out in this Deed. 2.2 Effect of Amendment The Building Contract, as amended by this Deed, is to be read as one single integrated document incorporating the amendments effected by this Deed.
Clause 3 of the Amendment Deed provides: Confirmation and precedence 3.1 Confirmation Each party confirms that, other than as expressly set out in this Deed (and its Schedules) the Building Contract remains in full force and effect. 3.2 Precedence To the extent of any inconsistency between the terms of this Deed and the terms of the Building Contract, the terms of this Deed take precedence.
Clauses 4 and 5 of the Amendment Deed contain provisions setting out the terms on which the earlier disputes were resolved. Clause 6 contains a number of general terms including two clauses both of which are numbered 6.2. They are in the following terms: 6.2 Governing Law This Deed is governed by the law in force in New South Wales. The parties irrevocably submit to the non-exclusive jurisdiction of the courts of New South Wales, subject to clause 42.4 of the Building Contract. 6.2 Expert Determination Waived The parties agree to waive the application of Expert Determination (clause 42.2A) to any dispute (including a dispute arising out of or connected to this Deed).

The CA Act

Section 8(1) of the CA Act provides: 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.
Section 16 of the CA Act provides: Competence of arbitral tribunal to rule on its jurisdiction (cf Model Law Art 16) (1) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. (2) For that purpose, an arbitration clause which forms part of a contract is to be treated as an agreement independent of the other terms of the contract. (3) A decision by the arbitral tribunal that the contract is null and void does not of itself entail the invalidity of the arbitration clause. Note - The Model Law provides that such a decision does not "ipso jure" entail the invalidity of the arbitration clause. (4) A plea that the arbitral tribunal does not have jurisdiction must be raised not later than the submission of the statement of defence. (5) A party is not precluded from raising such a plea by the fact that the party has appointed, or participated in the appointment of, an arbitrator. (6) A plea that the arbitral tribunal is exceeding the scope of its authority must be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. (7) The arbitral tribunal may, in the case of a plea referred to in subsection (4) or (6), admit a later plea if it considers the delay justified. (8) The arbitral tribunal may rule on a plea referred to in subsection (4) or (6) either as a preliminary question or in an award on the merits. (9) If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within 30 days after having received notice of that ruling, the Court to decide the matter. (10) A decision of the Court under subsection (9) that is within the limits of the authority of the Court is final. (11) While a request under subsection (9) is pending, the arbitral tribunal may continue the arbitral proceedings and make an award.
One question raised by s 8(1) of the CA Act (and the equivalent provision of the UNCITRAL Model Law on International Commercial Arbitration on which it is based) is what is meant by the expression "null and void, inoperative or incapable of being performed". Most of the focus in the cases is on the meaning of "inoperative". On one interpretation, an arbitration clause is inoperative if, owing to some supervening event, it no longer has any application. On a broader interpretation, an arbitration clause is inoperative if it has no application in the particular circumstances of the case. That might, for example, be because the dispute falls outside the scope of the clause or because a pre-condition to arbitration has not yet occurred, as in the case of a multi-tiered dispute resolution clause (such as cl 42 of the Contract) which has completion of a mediation or expert determination as a pre-condition to arbitration. In this case, it is unnecessary to address that issue, since, as will become apparent, Icon contends that, as a result of the Amendment Deed, cl 42.4 no longer has any application. It does not advance an alternative argument that the dispute should not be referred to arbitration because a pre-condition to referral has not been satisfied.
Another issue raised by ss 8(1) and 16 of the CA Act is whether and in what circumstances a court will leave the determination of the question whether an arbitration agreement is null and void, inoperative or incapable of being performed to the arbitral tribunal, since s 16 confers jurisdiction on the arbitral tribunal itself to determine that question. As the Full Court of the Federal Court explained in Hancock Prospecting Pty Ltd and Others v Rinehart and Others (2017) 257 FCR 442; [2017] FCAFC 170 at [141], courts have taken different approaches to that issue. One approach is for the court to form a prima facie view on the question whether the arbitration clause applies. If it forms the view that it does, it refers the matter to arbitration, leaving it to the arbitral tribunal to make a final decision on the question. Another approach is for the court to conduct a full merits hearing on the issue. Only if the court concludes that the arbitration clause does apply will it refer the dispute to arbitration. Commenting on the two approaches, the Full Court said this (at [145]): We think that any rigid taxonomy of approach is unhelpful, as are the labels "prima facie" and "merits" approach. How a judge deals with an application under s 8 of the CA Act will depend significantly upon the issues and the context. Broadly speaking, however, and with some qualification, aspects of the prima facie approach have much to commend them as an approach that gives support to the jurisdiction of the arbitrator and his or her competence, as recognised by the common law and by s 16 of the CA Act, whilst preserving the role of the Court as the ultimate arbiter on questions of jurisdiction conferred by ss 16(9) and (10), 34(2)(a)(iii) and 36(1)(a)(iii) of the CA Act. Broadly, the approach is consonant with the structure of the CA Act and the Model Law. However, it is difficult to see how the Court can exercise its power under s 8 without forming a view as to the meaning of the arbitration agreement. Further, it may be that if there is a question of law otherwise affecting the answer to the question of jurisdiction, especially one that is confined, which might be dispositive, it might be less than useful for the Court not to deal with it.
Certainly, in New South Wales it is common for the Court to resolve the scope of an arbitration clause itself if the issue comes before it: see, for example, Lepcanfin Pty Ltd v Lepfin Pty Ltd (2020) 102 NSWLR 627; [2020] NSWCA 155; and it is difficult to see how a Court can apply s 8(1) of the CA Act without reaching a conclusion on the issue that conditions its application.

What should the Court decide?

An arbitration clause should be construed like any other clause of a commercial contract. That requires the Court to construe the clause by reference to the language used by the parties, the circumstances known to them and the commercial purpose or objects to be secured by the contract: see Electricity Generation Corporation v Woodside Energy Ltd; Woodside Energy Ltd v Electricity Generation Corporation (2014) 251 CLR 640; [2014] HCA 7 at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [47].
Although it was suggested in affidavit evidence that ANSTO may wish to lead evidence of the circumstances in which the Amendment Deed was executed in relation to the correct construction of cl 42 of the Contract and cl 6.2 of the Amendment Deed, both parties ultimately advanced their arguments by reference to the language of the Contract and Amendment Deed and the commercial purpose or objects to be secured by them that could be inferred from the nature of the agreements and the language in which they were expressed. Neither party suggested that there were other facts and matters that would have a bearing on the resolution of the dispute between them. Similarly, neither party suggested that the resolution of the dispute between them on whether s 8(1) of the CA Act was engaged depended on matters that were also relevant to the resolution of the substantive disputes between them so as to make it appropriate that the two issues be dealt with together. Moreover, in this case, no steps have been taken to appoint an arbitrator in accordance with the Contract. In those circumstances, it seems to me appropriate that the Court itself should determine the question of jurisdiction.

The issue

In the present case, Icon contends that the agreement to submit any dispute under the Contract to arbitration has become inoperative (or possibly incapable of being performed) as a result of the correct construction of cl 42.4 of the Contract and the waiver contained in cl 6.2 of the Amendment Deed. According to it, under cl 42.4 a dispute is only referred to arbitration if one of the two conditions set out in that clause is satisfied. However, "a notice complying with cl 42.2A(i)(ii)" cannot be served by a party because the parties have by cl 6.2 of the Amendment Deed waived their rights to expert determination under cl 42.2A, with the result that the first condition contained in para (a) cannot be satisfied. Item 32 of Annexure Part A states that cl 42.2(a) does apply, with the result that the second condition contained in para (b) is not satisfied. Accordingly, neither condition can be satisfied.
ANSTO, on the other hand, submits that cl 42 of the Contract provides for a three tier dispute resolution mechanism that was intended to apply to all disputes between the parties in connection with the Contract. The waiver contained in cl 6.2 of the Amendment Deed was only a waiver of the second tier (expert determination). It should not be interpreted as waiving the third tier (arbitration) as well. Reading cl 42 of the Contract and cl 6.2 of the Amendment Deed together, the parties must be understood to have agreed that cl 42.2(a) no longer applies.

Resolution

I prefer the interpretation advanced by ANSTO.
The arbitration clause forms part of a detailed dispute resolution clause which itself is contained in standard terms that form part of the Contract. It is plain from the terms of cl 42.1B and the broad definition of "dispute" that the parties contemplated that all the disputes that might be expected to arise in connection with the Contract would be dealt with in accordance with the dispute resolution mechanism that they had chosen, which had the effect of referring to arbitration all disputes not finally resolved by negotiation or expert determination.
The standard terms gave the parties an option whether as part of the dispute resolution mechanism they would, following negotiations to attempt to resolve the dispute, submit the dispute to expert determination or refer it straight to arbitration. The mechanism by which they made a choice between those two options was to indicate in the Annexure Part A to the standard terms whether the clause providing for expert determination applied or not. The parties chose the former option.
After a number of disputes had arisen, the parties executed the Amendment Deed, which is stated in cl 3.2 to take precedence over the terms of the Contract. Although the Amendment Deed states in cl 2.2 that the two documents are "to be read as one single integrated document incorporating the amendments effected by this Deed", it is not entirely clear what that means in this context. The Amendment Deed does not purport to amend the language of the Contract. Rather, it addresses itself to the rights and obligations imposed by the Contract and modifies those rights and obligations. It seems plain that in agreeing in the second cl 6.2 of the Amendment Deed to waive the application of expert determination to any dispute, the parties were not also intending to waive the application of arbitration to any dispute. Clause 3.1 of the Amendment Deed states that "other than as expressly set out in this Deed … the Building Contract remains in full force and effect". The obligation to submit a dispute to arbitration is not expressly altered by the Amendment Deed. Clause 6.2 of the Amendment Deed states that the parties submit to the non-exclusive jurisdiction of the courts of New South Wales "subject to clause 42.4 of the Building Contract". But if Icon's argument is correct, cl 42.4 would have no operation.
The conclusion of the previous paragraph is supported by the context. As I have explained, before the Amendment Deed was executed, the parties had agreed ultimately to submit all their disputes to arbitration except to the extent that those disputes were finally resolved by expert determination. The intermediate step of expert determination was an option offered by the standard terms that formed part of their contract. Initially, the parties agreed to adopt that option through the mechanism provided in the standard terms of indicating in Annexure Part A that the option applied. When they subsequently agreed to "waive" that option, they must have intended to dispense with the option they had previously agreed to adopt. They could not have intended at the same time to dispense with their agreement ultimately to resolve all disputes by arbitration. That would involve a fundamental change to the dispute resolution mechanism they had agreed to adopt.
Icon's argument rests on a literal construction of cl 42.4 and, in particular, the condition contained in para (b). But the argument ignores the full effect of the Amendment Deed. As I have explained, although the language of the Contract has not been modified by the Amendment Deed, the rights and obligations it imposes have. Relevantly, the rights and obligations arising from the fact that Item 32 of Annexure Part A states that cl 42.2A does apply have been modified by an agreement to waive the application of that clause. An agreement to waive the application of the clause must be understood as an agreement that the clause no longer applies. To give effect to that agreement, the word "applies" in Item 32 of Annexure Part A must be read as "does not apply". Unless it is read in that way, priority would be given to the terms of the original Contract rather than the terms of the Amendment Deed, contrary to cl 3.1 of the Amendment Deed.

Conclusion and orders

It follows that these proceedings must be stayed and the parties referred to arbitration. ANSTO has been successful. No reason was advanced for why costs should not follow the event.
Accordingly, the orders of the Court are: 1. Pursuant to s 8(1) of the Commercial Arbitration Act 2010 (NSW) the parties be referred to arbitration for the resolution of the disputes the subject of these proceedings. 2. Pursuant to s 67 of the Civil Procedure Act 2005 (NSW) these proceedings be stayed. 3. The plaintiff to pay the defendant's costs of the notice of motion filed on 12 February 2024.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 April 2024

(2020) 102 NSWLR 627

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