COMMERCIAL ARBITRATION - Jurisdiction of arbitral tribunal - Applicant entitled to royalty in respect of gross value of hydrocarbons produced and recovered within designated area - Disputes as to amount of royalty payable resulted in settlement agreement providing methodology for calculation of royalty amount - Settlement agreement providing that aspects of methodology not capable of modification by arbitration - Agreement providing that terms to be interpreted and applied in accordance with New York law - Agreement providing that disputes to be determined by arbitration in accordance with Commercial Arbitration Act 1984 - Further dispute arising concerning calculation of royalty amount - Applicant instituted proceeding seeking declaration that dispute not capable of arbitration - Judge granted stay sought by respondents on basis that issues as to scope of arbitration agreement a matter within jurisdiction of arbitral tribunal - Whether judge erred in holding court can grant stay without determining whether arbitral proceedings involve determination of matter falling within scope of arbitration agreement - In determining whether dispute fell within scope of arbitration agreement judge correctly applied 'light touch' approach contemplated by authorities involving formation of 'general view' on question - Arbitrators empowered to apply competence (Kompetenz-Kompetenz) principle to determine authority to arbitrate - No error in judge's approach.

COMMERCIAL ARBITRATION - Jurisdiction of arbitral tribunal - Whether dispute about scope of arbitration agreement capable of settlement by arbitration where parties having agreed such disputes to be determined by court - International Arbitration Act 1974 (Cth) s 7(2), sch 2 art 16 - UNCITRAL Model Law on International Commercial Arbitration - Scope dispute not a 'matter' in sense contemplated by s 7(2) - Competence principle having force of law in Australia as result of International Arbitration Act ss 16, 21; Model Law, art 16 - International Arbitration Act not allowing parties to opt out of application of competence principle - Notwithstanding agreement for court to determine scope of arbitrators' jurisdiction arbitrators retain power to determine scope themselves pursuant to competence principle embedded by statute - No error in judge's approach.

COMMERCIAL ARBITRATION - Whether settlement agreement adopts law of New York in respect of authority of arbitrators to decide scope of own jurisdiction - Settlement agreement applying New York law to interpretation and application of agreement 'except as otherwise required' by Australian law - Australian law requiring application of Model Law including competence principle in art 16 - Clause in settlement agreement making Melbourne seat of arbitration confirms curial law applicable to arbitral proceeding is Australian law - No error in judge's approach.

COMMERCIAL ARBITRATION - Whether application of New York law in settlement agreement had effect of requiring court to determine question of scope of arbitration agreement - Applicant advanced expert evidence of position under New York law that parties to arbitration agreement presumed to agree that court to decide questions of scope absent clear and unmistakeable evidence to contrary - Application of New York law by settlement agreement confined to interpretation and application of agreement - Competence principle applying by force of statute - No question of interpretation or application of settlement agreement arising - No error in judge's approach.

COMMERCIAL ARBITRATION - Whether agreement inoperative within International Arbitration Act s 7(5) - Dispute as to engagement of s 7(5) a dispute within scope of art 16 that may be resolved by arbitral tribunal - While court may determine question under s 7(5) in appropriate case legal and factual complexity attending present question justify determination by arbitral tribunal - No error in judge's approach.

COSTS - Indemnity costs - Judge found applicant's opposition to stay application had no reasonable prospects of success because submissions of applicant at odds with authority and terms of settlement agreement - Arguments raised in opposition to stay application complex and novel - Not reasonably open to find no real prospects of success - Application for leave to appeal granted - Appeal dismissed except as to costs.

International Arbitration Act 1974 (Cth) ss 7, 16, 21, 39; UNCITRAL Model Law on International Commercial Arbitration, art 16.

Hancock Prospecting Pty Ltd v Rinehart [2017] FCAFC 170; (2017) 257 FCR 442; Comandate Marine Corp v Pan Australia shipping Pty Ltd [2006] FCAFC 192; (2006) 157 FCR 45; Greater Union Pty Ltd v Sportsgirl Pty Ltd [2021] VSCA 299; Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332, applied.

Casaceli v Natuzzi SpA (2012) 292 ALR 143; [2012] FCA 691; Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCA 172; Recyclers of Australia Pty Ltd v Hettinga Equipment Inc [2000] FCA 547; (2000) 100 FCR 420; Robotunits Pty Ltd v Mennel [2015] VSC 268; (2015) 49 VR 323; Transurban WGT Co Pty Ltd v CPB Contractors Pty Ltd [2020] VSC 476; Tianqi Lithium Kwinana Pty Ltd v MSP Engineering Pty Ltd [No 2] [2020] WASCA 201; (2020) 56 WAR 169; Rizhao Steel Holding Group Co Ltd v Koolan Iron Ore Pty Ltd [2012] WASCA 50; (2012) 43 WAR 91; TCL Air Conditioner (Zhongshan) Co Ltd v Judges of the Federal Court of Australia (2013) 251 CLR 533; Tesseract International Pty Ltd v Pascale Construction Pty Ltd (2024) 98 ALJR 880; [2024] HCA 24; Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13; (2019) 267 CLR 514, referred to.

Mr NJ Young KC with Mr M Costello KC, Mr M Roberts and Mr D Heaton

Mr B Walker SC with Mr G Harris KC and Ms F Hudgson

1. On 12 March 2025 a judge in the Trial Division made orders under s 7 of the International Arbitration Act 1974 (Cth) ('IAA') staying a proceeding commenced by the applicant, Oil Basins Ltd ('OBL'). The applicant seeks leave to appeal from those orders.
2. The applicant's proposed grounds of appeal 1 to 5 call for consideration of whether a dispute between the parties concerning the scope of an arbitration agreement is itself a matter capable of resolution by arbitration so as to attract the application of s 7 of the IAA. Ground 6, argued in the alternative, concerns whether the arbitration agreement in the present case was inoperative within the meaning of s 7(5) of the IAA. Ground 8 concerns costs.[1]
3. For the reasons that follow, leave to appeal should be granted but the appeal must be dismissed, except in respect of the indemnity costs order made by the judge.

1. The parties' competing arguments were diverse, complex and wide-ranging. To assist the reader, we commence by stating the conclusions we have reached on the key matters raised.

(1) The Court is not always required to determine the construction of an arbitration agreement in deciding whether s 7(2)(b) of the IAA is satisfied in an application for a stay. We reject the applicant's contention that the primary judge erred in granting a stay without first determining whether the proceedings involved the determination of a matter falling within the scope of the arbitration agreement. The judge's 'light touch' approach to this question was appropriate in this case and consistent with the authorities. He was satisfied that the dispute between the parties had the requisite connection with the arbitration agreement. There was no error in his conclusion that the determination of the complex factual and legal issues involved in this task should properly be deferred for consideration by the arbitrators.[2]

(2) Even where parties agree that disputes about the scope of an arbitration agreement are to be determined by a court, such disputes are not incapable of settlement by arbitration for the purposes of s 7(2)(b) of the IAA. Parties to an arbitration agreement are unable to exclude the operation of art 16(1) of the Model Law and the competence[3] principle under the IAA. This means that arbitrators retain the power to determine the scope of their jurisdiction pursuant to the competence principle, even though the parties have made an agreement that the court will determine the scope of the arbitrators' jurisdiction. A dispute about the scope of an arbitration agreement is therefore capable of settlement by arbitration within the meaning of s 7(2)(b).[4]

(3) The law of the arbitration agreement in this case, and specifically whether it is the law of New York, is unnecessary to determine in light of our second finding that the dispute as to the scope of the arbitration agreement is capable of settlement by arbitration. We observe, however, that the arbitration agreement applies New York law to a limited extent only. New York law does not govern the arbitral agreement or the arbitration. The curial law of the arbitration remains Australian law, including the Australian statutory provision that the Model Law applies.[5]

(4) It is unnecessary to determine whether the parties agreed that questions concerning the scope of the arbitration agreement were to be decided by a court instead of arbitrators in light of (2) above. We observe, however, that the choice of Melbourne as the place of arbitration confirms the applicability of the competence principle (as a statutory requirement) and that the application of this principle is not simply the outcome of the parties' agreement.[6]

(5) In most circumstances, the question who should determine issues pertaining to s 7(5) of the IAA is a practical one depending on the nature of the relevant issue, including its legal and factual complexity. The judge was justified in determining that the question in this case was a matter for the arbitral tribunal.[7]

(6) Having fully reviewed the substance of the matter, we do not think it was open to the judge to find that the application for a stay had no reasonable prospects of success. Accordingly, the exercise of the costs discretion based on that conclusion miscarried.[8]

1. Under an agreement dated 28 December 1960 between Oil Basins Inc and BHP Group Limited ('BHP', the fourth respondent), Oil Basins Inc acquired the right to a royalty of two and a half per cent of the gross value of all hydrocarbons produced and recovered within a designated area in Bass Strait. On 22 September 1961, BHP assigned its rights and obligations under the agreement to Woodside Energy (North West Shelf) Pty Ltd, the third respondent. In 1964, Woodside Energy (North West Shelf) Pty Ltd agreed that Esso Australia Resources Pty Ltd, the first respondent, could 'farm into' the area the subject of the royalty agreement ('royalty agreement').
2. By agreements made in 1965 and 1972, the rights and obligations of Oil Basins Inc were acquired by OBL. On 1 June 1988, Woodside Energy (North West Shelf) Pty Ltd assigned its rights and obligations under the agreement to Woodside Energy (Bass Strait) Pty Ltd, the second respondent.
3. The result of these transactions is that the royalty to which OBL is entitled in respect of production of hydrocarbons in the designated area is payable by the first and second respondents. It is convenient to refer to them, along with the third respondent, as the 'Producers' (notwithstanding that this expression is elsewhere used to describe only the first and second respondents).
4. From time to time, the parties have been in dispute as to the amount of royalty payable. Numerous arbitral awards have addressed the various disputes. On 17 March 1994, OBL and the respondents entered into a Settlement Agreement, which has itself undergone successive amendments. The Settlement Agreement provides for a methodology derived by a special referee to calculate royalties and also provides for the modification of that methodology. Relevantly, for the purposes of this proceeding, cl 19 of the Settlement Agreement also provides that '[a]ny dispute ... in any way arising out of or related to or connected with [the Settlement] Agreement shall be determined by arbitration in Melbourne ... in accordance with the Commercial Arbitration Act 1984'.
5. In September 2023, OBL served a notice of dispute on the first and second respondents, stating that a dispute had arisen between them with respect to the treatment of GST in the calculation of the royalty. The following month, the first and second respondents served notices of dispute on OBL, stating that disputes had arisen with respect to the treatment of GST in the calculation of the royalty, and with respect to issues relating to depreciation and decommissioning (the 'D&D Issues').
6. In March 2024, the parties executed an Arbitrator Appointment Agreement appointing arbitrators pursuant to the Settlement Agreement. They agreed to refer the dispute concerning the treatment of GST in the calculation of royalty payable to OBL to the arbitrators. Further, they agreed that, 'subject to the resolution of OBL's objection to the competency of the Producers' Notices of Dispute insofar as they relate to [the D&D Issues]', the arbitrators should also determine the disputes about the D&D Issues.[9]
7. The parties disagree as to whether the disputes about the D&D Issues were arbitrable under the Settlement Agreement. Importantly for present purposes, they also disagree as to whether that disagreement should be resolved as part of a proceeding commenced by OBL in the Trial Division which the Producers sought to have stayed, or by the arbitrators.

1. Clause 5 of the Settlement Agreement provides as follows:

(a) Subject to clause 5 (b), the gross value of hydrocarbons for the past quarters and future quarters and the overriding royalty payable in respect thereof together with any interest thereon shall be determined in accordance with the Special Referee's modified methodology.

(b) No further modification may be made by arbitration under this Agreement to, or which is inconsistent with, the modifications to the Special Referee's methodology referred to in any of clauses 6(a), 6(b)(i)(aa), 6(b)(i)(bb), 6(b)(ii), 6(b)(iii), 6(h), 6A(a), 6A(b)(i)(aa), 6A(b)(i)(bb), 6A(b)(ii), 6A(b)(iii), 6A(f), 6B(a), 6B(b)(i)(aa), 6B(b)(i)(bb), 6B(b)(ii), 6B(b)(iii), 6B(b)(iv) and 6B(f) and the application of any of clauses 7, 8 and 9 of this Agreement.

(c) In the event that the Special Referee's modified methodology or any part thereof does not accommodate, is not applicable to or appropriate for any item which may affect the gross value of hydrocarbons for the purposes of clause 3 of the Royalty Agreement, then, subject to clause 5(b), the Special Referee's modified methodology may be further modified by arbitration under this Agreement.

The deduction for the cost of capital of eligible post LVO assets[10] to which commitment to investment was made on or after 1 July 1990 shall be calculated in accordance with the Special Referee's methodology applying the applicable cost of capital rate provided in sub-clause (f)(ii).

1. Clause 18 of the Settlement Agreement provides that the Settlement Agreement 'shall be interpreted and applied in accordance with the law of the State of New York' except 'as otherwise required by the law of the place where the hydrocarbons are produced or as otherwise herein provided'.
2. As already noted, cl 19(a) of the Settlement Agreement provides for the determination of any dispute in any way arising out of or related to or connected with the Settlement Agreement by arbitration in Melbourne in accordance with the Commercial Arbitration Act 1984.
3. Clause 19(b) defines 'dispute':

For the purposes of clause 19(a) and subject to clause 5(b), a dispute means a dispute, difference or question in any way arising out of or related to or connected with [the Settlement] Agreement, including as to:

(i) its termination or breach; and

(ii) any further modification of the Special Referee's modified methodology.

1. Recital E of the Arbitrator Appointment Agreement states:

By letters dated 24 October 2023 and 12 December 2023, OBL has objected to the competency of the Producers' Notices of Dispute insofar as the Notices of Dispute purport to deal with Depreciation and Decommissioning Costs. Based on the information provided by the Producers to OBL to date, OBL contends that neither Depreciation nor Decommissioning Costs are amenable to arbitration under the Settlement Agreement or otherwise.

1. Clause 1 of the Arbitrator Appointment Agreement relevantly states:

(a) Pursuant to clause 19 of the Settlement Agreement, the GST Dispute, the Treatment of GST dispute, the WEBS GST Overpayment dispute, the EARPL GST Overpayment dispute and the OBL GST Underpayments dispute (collectively the Disputes) are to be heard and determined by the Arbitral Panel.

...

(c) Subject to the resolution of OBL's objection to the competency of the Producers' Notices of Dispute insofar as they relate to Depreciation and Decommissioning Costs, pursuant to clause 19 of the Settlement Agreement, the Depreciation and Decommissioning Costs disputes are to be heard and determined by the Arbitral Panel.

1. Clause 8 provides that the IAA 'will apply to the arbitration' and that the Arbitrator Appointment Agreement is 'governed by and must be construed in accordance with the laws in force in Victoria'.

1. On 22 April 2024, the day it commenced the proceeding, OBL sent a letter to the arbitral panel which relevantly stated:

OBL has taken the view that it is likely most efficient to have the arbitrability of the Depreciation and Decommissioning Costs issues (as those are defined in the Arbitrator Appointment Agreement) determined by the Supreme Court of Victoria.

...

OBL acknowledges that Article 16 of the Model Law permits the Arbitral Panel to rule on its own jurisdiction as a preliminary matter. OBL also acknowledges that, if the Arbitral Panel decides to rule on its jurisdiction as a preliminary matter, the party that is unsuccessful on the preliminary ruling is likely to appeal to the Supreme Court of Victoria, in accordance with its legal right to do so. Obviously, this means that regardless of the result of the preliminary ruling, a subsequent Supreme Court hearing is at least reasonably likely. OBL therefore feels that it would be most efficient to 'short cut' that process and approach the Supreme Court for declarations (and related relief) as to the scope of the arbitration agreement between the parties.

1. By its proceeding, OBL alleges, among other things, that the Producers' claims in their notices of dispute are not arbitrable because cl 5(b) of the Settlement Agreement, read with cl 6B(f), entrenches the existing approach to cost of capital and 30 year straight line depreciation and the special referee's modified methodology in respect of decommissioning costs. OBL alleges breach of the prohibition in cl 5(b) against the modification of that methodology 'by arbitration'.
2. OBL seeks declarations that the disputes about the D&D Issues are not capable of being arbitrated under the Settlement Agreement, and injunctive relief restraining the respondents from taking steps to progress such arbitration.
3. Specifically, OBL bases its claim for relief upon allegations that the disputes about the D&D Issues are not arbitrable, because:

(a) as explained above, by reason of cls 5(b) and 6B(f) of the Settlement Agreement, no modification can be made to the special referee's modified methodology by arbitration under the Settlement Agreement; and

(b) for the purposes of cl 5(c) of the Settlement Agreement, the respondents have failed to identify any item in relation to the D&D Issues which the special referee's modified methodology does not accommodate, or to which it is not applicable, or for which it is not appropriate.

1. It should be noted that OBL does not rely on the application of New York law to the Settlement Agreement as a basis for the relief sought in the proceeding. As explained later in these reasons, OBL does, however, rely on the application of New York law in resisting the Producers' stay application. In that regard, OBL submits that the effect of New York law is to deny the arbitrators the jurisdiction to decide whether the disputes as to the D&D Issues are arbitrable. As such, OBL submits, the proceeding does not involve a matter capable of settlement by arbitration in pursuance of the arbitration agreement, and the condition for a stay in s 7(2) is not met.

1. Section 16(1) of the IAA provides that the UNCITRAL Model Law on International Commercial Arbitration, as amended (the 'Model Law') 'has the force of law in Australia'.
2. Article 16 of the Model Law provides:

Article 16. Competence of arbitral tribunal to rule on its jurisdiction

(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) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence. A party is not precluded from raising such a plea by the fact that he has appointed, or participated in the appointment of, an arbitrator. A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. The arbitral tribunal may, in either case, admit a later plea if it considers the delay justified.

(3) The arbitral tribunal may rule on a plea referred to in paragraph (2) of this article either as a preliminary question or in an award on the merits. If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court specified in article 6 to decide the matter, which decision shall be subject to no appeal; while such a request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award.

1. In the Model Law, 'arbitration agreement' means 'an agreement by the parties to submit to arbitration all or certain disputes which have arisen or may arise between them in respect of a defined legal relationship, whether contractual or not'.[11] An arbitration agreement is required to be in writing, and may be in the form of an arbitration clause in a contract or a separate agreement.[12]
2. Article 5 provides:

Article 5. Extent of court intervention

In matters governed by this Law, no court shall intervene except where so provided in this Law.

1. Article 28 is headed 'Rules applicable to substance of dispute'. Article 28(1) provides:

The arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute. Any designation of the law or legal system of a given State shall be construed, unless otherwise expressed, as directly referring to the substantive law of that State and not to its conflict of laws rules.

1. On 20 May 2024, the respondents filed an application for a stay of OBL's proceeding pursuant to s 7 of the IAA, which relevantly provides:
   1. Enforcement of foreign arbitration agreements

(1) Where:

(a) the procedure in relation to arbitration under an arbitration agreement is governed, whether by virtue of the express terms of the agreement or otherwise, by the law of a Convention country;

(b) the procedure in relation to arbitration under an arbitration agreement is governed, whether by virtue of the express terms of the agreement or otherwise, by the law of a country not being Australia or a Convention country, and a party to the agreement is Australia or a State or a person who was, at the time when the agreement was made, domiciled or ordinarily resident in Australia;

(c) a party to an arbitration agreement is the Government of a Convention country or of part of a Convention country or the Government of a territory of a Convention country, being a territory to which the Convention extends; or

(d) a party to an arbitration agreement is a person who was, at the time when the agreement was made, domiciled or ordinarily resident in a country that is a Convention country;

this section applies to the agreement.

(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.

1. Section 3 of the IAA defines 'arbitration agreement' for these purposes to mean 'an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration'.
2. Section 2D sets out the objects of the IAA:

2D Objects of this Act

The objects of this Act are:

(a) to facilitate international trade and commerce by encouraging the use of arbitration as a method of resolving disputes; and

(b) to facilitate the use of arbitration agreements made in relation to international trade and commerce; and

(c) to facilitate the recognition and enforcement of arbitral awards made in relation to international trade and commerce; and

...

(e) to give effect to the [Model Law];

...

39 Matters to which court must have regard

(1) This section applies where:

(a) a court is considering:

...

(vi) performing any other functions or exercising any other powers under this Act, or the Model Law as in force under subsection 16(1) of this Act; or

(vii) performing any function or exercising any power under an agreement or award to which this Act applies; or

(b) a court is interpreting this Act, or the Model Law as in force under subsection 16(1) of this Act; or

(c) a court is interpreting an agreement or award to which this Act applies; or

...

(2) The court or authority must, in doing so, have regard to:

(a) the objects of the Act; and

(b) the fact that:

(i) arbitration is an efficient, impartial, enforceable and timely method by which to resolve commercial disputes; and

(ii) awards are intended to provide certainty and finality.

(3) In this section:

arbitral award has the same meaning as in the Model Law.

...

1. At the hearing of the Producers' stay application, they submitted, among other things, that:

(a) there was no dispute that there was a valid arbitration agreement subsisting between the parties, and that an arbitral tribunal had been validly convened;

(b) the arbitration was governed by the IAA and the Model Law pursuant to cl 19(a) of the Settlement Agreement and cl 8(a) of the Arbitrator Appointment Agreement. Article 16(1) of the Model Law conferred authority on the arbitral tribunal to determine its own jurisdiction, including deciding questions as to the scope of the arbitration agreement (the so-called 'Kompetenz-Kompetenz' principle, to which we will refer as the 'competence principle'), and art 5 limited court intervention to instances specified by the IAA;

(c) the role of the Court was confined to that provided by the Model Law, including art 16(3), following the arbitrators' own jurisdictional determination;

(d) the question whether a matter was within the scope of an arbitration agreement was not to be determined on a final basis (save for a limited discretion to do so in matters concerning straightforward matters of pure law, which did not apply given OBL's reliance on more than 900 pages of contested factual evidence) and it would be wrong for a court to determine an application for a stay as it would determine a summary disposal application; and

(e) OBL's opposition to the stay was in any event premised on an incorrect interpretation of the Settlement Agreement. The correct interpretation was that:

(i) modification to the Settlement Agreement in respect of depreciation was not prohibited because cl 6B(e) addressed depreciation and was not a clause prohibited from amendment by arbitration in cl 5(b);

(ii) there was no inconsistency with cl 6B(f) in modifying how depreciation was addressed in the special referee's modified methodology, because cl 6B(f) was not directed towards depreciation, but rather to the rate to be applied when calculating the cost of capital deduction; and

(iii) the words 'subject to clause 5(b)' in cl 19(b) were not a carve-out of matters that may be referred to arbitration, but a limit on the relief that an arbitral tribunal may award in any disputes referred to it.

1. OBL's principal argument in opposition to the stay application was that:

(a) by providing that the Settlement Agreement, including cl 19, was to be interpreted and applied in accordance with New York law, the parties had agreed that disputes about the scope of the arbitration agreement would be decided by the Court, not the arbitrators;

(b) the proceeding in the Court raised only a dispute about the scope of the arbitration agreement; and

(c) accordingly, the proceeding did not involve a matter 'capable of settlement by arbitration' in pursuance of the parties' arbitration agreement within the meaning of s 7(2)(b) of the IAA, and so the conditions for a stay were not satisfied.

1. OBL's alternative argument was that it was open to the Court on the stay application to decide that the Producers' claims in relation to the D&D Issues were outside the scope of cl 19 of the Settlement Agreement, on the following basis:

(a) Clauses 5(b) and 6B(f) relevantly entrenched an approach to cost of capital deductions in calculating the value of hydrocarbons that included the following features:

(i) an allowance for the cost of capital invested in assets downstream of the place of production was permitted from the date those assets were 'ready for economic use' and thereafter used for activities downstream of the place of production;

(ii) cost of capital was calculated by applying the cost-of-capital rate to the depreciated asset value at the midpoint of each quarter, with the depreciated asset value being calculated using a 30 year straight-line depreciation method; and

(iii) there could be no carrying forward of excess costs and, conversely, no capitalisation of future costs as a deduction in a quarter before the quarter in which the costs were incurred.

(b) Clauses 5(b) and 6B(f) further entrenched an approach to depreciation whereby depreciation deductions must be calculated using the 30 year straight-line depreciation method.

(c) The modifications sought by the Producers in respect of depreciation and decommissioning costs were modifications to, or inconsistent with, cl 6B(f) and were thus:

(i) precluded from being arbitrated by cl 5(b); and

(ii) outside the scope of the arbitration agreement in cl 19.

1. In granting the stay sought by the Producers, the judge held that the position put by their submissions correctly reflected 'the current state of the authorities with respect to the operation of s 7 and other relevant provisions of the IAA and the Model Law'.[13]
2. The judge concluded that 'any issues as to the scope of the arbitration agreement', or 'its proper construction (as contained in the Settlement Agreement or otherwise)' were 'a matter within the jurisdiction of the arbitral tribunal and not the Court'.[14]
3. In respect of expert evidence that had been led regarding New York law, the judge held that it followed from the fact that the stay application was required to be heard and determined before the substantive proceeding that 'any evidence with respect to New York law as to the construction of arbitration agreements or otherwise' was 'entirely irrelevant' to the stay application.[15]

1. The judge subsequently ordered that OBL pay the Producers' costs of the stay application on the indemnity basis, to be taxed immediately in default of agreement. The judge rejected a submission by OBL that the application had been 'hard fought'.[16] He said that, once OBL's position that the dispute as to the D&D Issues was outside the competence principle was rejected, there was nothing left to resolve.[17] The judge applied the reasoning of Beach J in Sino Dragon Trading Ltd v Noble Resources International Pte Ltd [No 2], to the following effect:

In my view, a category of circumstances justifying an order for indemnity costs is where an unsuccessful article 34 challenge is made which has been found not to have reasonable prospects of success, whether or not the unsuccessful party knew or ought to have known this at the inception of the challenge; what I mean by 'reasonable prospects' is more than 'real prospects' and resonates with the analogous concept in s 31A of the Federal Court of Australia Act 1976 (Cth).[18]

1. The judge endorsed the position taken by Beach J that the party challenging an arbitral award should bear the risks of doing so and 'take positive steps to ensure that at inception it does have reasonable prospects of success taking into account both the law and the evidentiary foundation available to it'.[19] He said that Beach J had clearly contemplated that these principles extended to a party resisting a stay order.[20] The judge concluded that, 'applying usual costs principles, where a party ... has failed to resist an application under s 7 of the IAA to stay court proceedings in circumstances where the grounds of opposition had no reasonable prospects of success, it should be ordered to pay costs on [the] indemnity basis'.[21]
2. The judge found that OBL's grounds of opposition to the stay application had no reasonable prospects of success because:

(a) they were at odds with the current state of the authorities and the application of the competence principle as applied under the IAA and the Model Law;[22]

(b) OBL's submissions as to the application of the law of New York were 'inconsistent with the proper law of the ... arbitration agreement being the law of Victoria', and it followed that the attempt to introduce evidence as to New York law was 'entirely irrelevant' to the stay application;[23]

(c) OBL's submissions as to the 'Dell exception' (to which we refer briefly below) were 'plainly incorrect', given the complexity of the provisions;[24]

(d) OBL sought to introduce into evidence 'copious material which was not relevant'.[25]

1. OBL advances the following proposed grounds of appeal:

1. The primary judge erred in holding that, in an application for a stay under s 7(2) of the [IAA], the Court can grant a stay without determining whether the court proceedings involve the determination of a matter that falls within the scope of the arbitration agreement relied on by the stay applicant. 2. The primary judge should have held (in accordance with authority that bound him) that, under s 7(2) of the IAA, the first to third respondents needed to establish that the proceedings involved the determination of a matter that falls within the scope of the arbitration agreement in cl 19 of the [Settlement Agreement]. 3. The primary judge erred in failing to hold, and should have held, that where parties to an arbitration agreement have agreed that disputes (including as to the scope of the agreement) shall be determined by a court, such disputes are not capable of settlement by arbitration pursuant to the agreement within the meaning of s 7(2)(b) of the IAA. 4. The primary judge erred in:

1. holding in his primary judgment of 13 February 2025 and without any supporting reasons that evidence as to New York law is entirely irrelevant; 2. failing to consider and make findings as to the principles of New York law relevant to the construction of cl 19 of the Settlement Agreement; and; 3. failing to apply these to construe cl 19.

4A. The primary judge erred in holding in his judgment delivered on 14 May 2025 that the proper law of cl 19 of the Settlement Agreement is the law of Victoria; and, in any event, his Honour further erred in law:

1. by failing to accord the applicant an opportunity to address the proper law of cl 19 (where it was common ground or not disputed that this was New York law);
2. in failing to give any reasons (or any adequate reasons) for this finding in his judgment of 14 May 2025; and/or
3. in failing to make any reference to this finding in his earlier judgment of 13 February 2025, assuming that his Honour had considered making such a finding at that time and regarded it as relevant to his then conclusion that evidence of New York law was entirely irrelevant.

4B. The primary judge should have held that the proper law of cl 19 of the Settlement Agreement is the law of New York.

1. The primary judge should have found:

2. that under New York law, parties to an arbitration agreement are taken to agree that disputes about the scope of the agreement (including whether a dispute falls within it) are to be decided by a court, unless there is clear and unmistakable evidence of intent to the contrary;

3. that the Settlement Agreement does not provide clear and unmistakable evidence that the parties intended that arbitrators would decide disputes about the scope of the agreement; and

4. by reason of grounds 5(a) and (b), on the true construction of the Settlement Agreement, the parties have agreed that a court, not arbitrators, will decide disputes about the scope of the Settlement Agreement.

5. Further or alternatively, the primary judge erred in failing to hold that, on the proper construction and application of s 7(5) of the IAA, the arbitration agreement in cl 19 of the Settlement Agreement was inoperative in respect of the disputes in the court proceedings.

6. By reason of grounds 1-6:

7. the primary judge erred in granting a stay of the proceeding; and

8. the primary judge should have:

9. found that s 7(2)(b) of the IAA was not satisfied and/or that the arbitration agreement was inoperative under s 7(5);

10. dismissed the application for a stay; and

11. ordered that the first to third respondents pay the costs of the stay application.

12. In the alternative to grounds 1-7, if the primary judge did not err in granting a stay of the proceeding, the primary judge:

13. erred in holding that the applicant had no reasonable grounds on which to resist the application and should have held that it was not unreasonable for the applicant to oppose the stay application;

14. erred in holding that any specific principle applies in relation to stay applications and/or arbitration-related applications and should have applied the ordinary principles governing the award of costs;

15. erred in ordering that the applicant pay the costs of the stay application on an indemnity basis; and

16. should have ordered that the applicant pay the costs of the stay application on a standard basis.

1. The Producers submitted, by notice of contention, that the judge was correct to order the stay because of the mandatory provisions of the Model Law, including arts 5 and 16, as adopted by the IAA, and the terms of the Arbitrator Appointment Agreement.
2. It is convenient to divide the matters before the Court into the following issues, along the lines the parties suggested in their written summary:[26]

(a) In an application for a stay under s 7(2), is it necessary for the court to determine the proper construction of the arbitration agreement relied on by the stay applicant or can it leave that question to the arbitrators? (Grounds 1 and 2)

(b) If parties have agreed that disputes about the scope of an arbitration agreement shall be determined by a court and not by the arbitrators, does it follow that any such disputes are not capable of settlement by arbitration in pursuance of the agreement within the meaning of s 7(2)(b)? (Ground 3)

(c) Is the proper law of the arbitration agreement the law of New York? (Grounds 4A and 4B)

(d) Interpreting and applying the Settlement Agreement, including cl 19, in accordance with New York law, did the parties agree that disputes about the scope of the arbitration agreement would be decided by a court, not by arbitrators? (Grounds 4 and 5)

(e) Further or alternatively, if the parties agreed that disputes about the scope of the arbitration agreement would be decided by a court and not the arbitrators, does it follow that the agreement is inoperative in respect of those disputes within the meaning of s 7(5)? (Ground 6)

(f) If the primary judge did not err in granting a stay of the proceeding, did he nonetheless err in awarding indemnity costs? (Ground 8)

Construing the arbitration agreement (grounds 1 and 2)

1. OBL submits that only a dispute within the scope of the arbitration agreement can be said to be capable of determination 'in pursuance of the agreement', and a court hearing a stay application under s 7(2) must decide whether the dispute meets that description.[27] In order to decide that question, the Court must construe the arbitration agreement.[28] OBL submitted that this is to be done according to the governing law of the agreement.[29]
2. OBL submitted that the primary judge declined to construe the Settlement Agreement, treating the governing law of the agreement as irrelevant, and as a result failed to consider and decide whether the matters in OBL's proceeding were capable of settlement by arbitration in pursuance of the arbitration agreement as s 7(2) requires. OBL submitted that the judge had wrongly treated the decision in Hancock as requiring all questions of arbitral jurisdiction, including questions as to the scope of the arbitration agreement, to be decided by arbitrators, subject only to the court retaining a 'discretion' to answer simple legal questions.[30] It was submitted that the Full Court in Hancock had instead held that the Court was generally required to form a view as to the legal meaning of the arbitration agreement.[31] Accordingly, the Full Court gave detailed consideration to the questions of construction at issue in Hancock, as did the High Court on appeal.[32]
3. The Producers submitted that it was not for the Court to determine whether the dispute as to the arbitrators' jurisdiction to decide the D&D Issues was beyond the scope of the arbitration agreement. By art 16(1) of the Model Law and the IAA, that was the role of the arbitrators and the court should facilitate rather than usurp that role. It was submitted that the judge undertook a consideration of the construction of the arbitration agreement and the nature of the dispute as to jurisdiction to decide the D&D Issues, which was sufficient to engage the obligation to stay the proceeding under s 7(2). In that provision, matters 'capable of settlement by arbitration' were said to be merits disputes which the parties have decided, in pursuance of the arbitration agreement, are to be resolved by arbitration, not disputes as to the scope of the arbitrators' jurisdiction.[33] The Producers submitted that this was made clear by the Full Court's decision in Hancock.[34]
4. The Producers submitted that OBL's proceeding was really about the effect of the reference to cl 5(b) in cl 19 of the Settlement Agreement, and not the scope of the arbitrators' authority to decide. If the Court were to decide whether the effect of the reference in cl 19 of the Settlement Agreement to cl 5(b) was to deprive the arbitrators of jurisdiction in the substantive dispute about the D&D Issues, it would be deciding the merits of the proceeding which the Producers sought to stay. That would defeat the purpose of s 7(2).
5. The Producers' submission points starkly to the difficulty facing a court deciding a stay application under s 7(2), in particular how far the Court may go in deciding whether the statutory test in s 7(2)(b) is satisfied.
6. OBL relied on a number of cases in which it was said that the need to construe the arbitration agreement had been acknowledged, expressly or implicitly, by the court, including cases dealing with questions of foreign law.[35] Some of the cases involved s 8(1) of the Commercial Arbitration Act 2011, or its equivalent in other States, which is in the following terms:

Arbitration agreement and substantive claim before court (cf Model Law Art 8)

(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.

1. It can be seen that this provision does not contain the statutory language with which we are concerned, namely 'in pursuance of the agreement, ... capable of settlement by arbitration'. It refers instead to a 'matter which is the subject of an arbitration agreement'. Care must therefore be taken in applying the case law on s 8(1) in the present context. However, the underlying task of the court in either case is very similar, and the Commercial Arbitration Act, like the IAA, gives effect to the competence principle: s 16.
2. As OBL submits, the cases demonstrate that it may be necessary, in answering the statutory questions, to engage in some construction of the terms of the arbitration agreement. In particular, the courts have interpreted contractual language defining the scope of the referral to arbitration in this context.[36] In Great Union Pty Ltd v Sportsgirl Pty Ltd, this Court said that the question whether a claim was a 'matter' which was the subject of an arbitration agreement for the purposes of s 8 of the Commercial Arbitration Act required the Court to construe the arbitration agreement to determine 'what disputes are the subject' of that agreement.[37]
3. The task which OBL submits fell to the Court in the present case was a process of construction of this kind. On OBL's principal argument,[38] the fact that cl 18 of the Settlement Agreement provided that the agreement was to be interpreted and applied in accordance with the law of New York had the consequence that the parties had agreed that a court, and not the arbitrators, would decide questions as to the arbitrators' jurisdiction. The result was that the question of jurisdiction was not capable of settlement by arbitration in pursuance of the arbitration agreement. On OBL's alternative argument,[39] the Court needed to determine whether the words 'subject to clause 5(b)' in cl 19(b) had the effect of rendering the disputes as to the D&D Issues incapable of settlement by arbitration pursuant to the Settlement Agreement.
4. The judge did not address OBL's principal argument in terms. He described the issue of New York law as 'entirely irrelevant', without explaining why. The merits of the principal argument arise for determination in grounds 3, 4, 4A, 4B and 5, below.
5. In addressing OBL's alternative argument, the judge did not deny the potential need to construe the arbitration agreement. Instead, he referred to the authorities and found that they contemplated the Court 'forming a general view' as to whether a dispute falls within the scope of an arbitration agreement, which involved a 'light touch' on the part of the Court.[40] Having referred to 'orthodox principles of interpretation' the judge observed that the arbitration agreement in the present case '(whether contained in the Settlement Agreement or otherwise) is couched in a suite of complex provisions in a suite of complex documents and the subject of a long history of various amendments and arbitral awards and determinations'.[41] The judge referred to the application of the competence principle and 'respect for and support of the jurisdiction of the arbitral tribunal'.[42] He stated that it was 'clear that where the issues raised involve factual matters a court should defer to the jurisdiction of the arbitral tribunal and the application of the [competence principle] now embedded in that jurisdiction'.[43]
6. In our view, the case law supports the approach the judge took in this regard. The judge set out a lengthy passage from the judgment of the Full Court of the Federal Court in Hancock, which we repeat below, in somewhat abridged form:[44]

The proper approach to an application under s 8

Broadly, there have been said to be two approaches. The first approach taken largely by courts in what might be called 'Model Law jurisdictions' is to give significant weight to the authority of the arbitrator and to the principle of Kompetenz-Kompetenz recognised by s 16 of the CA Act. Under this approach, the Court does not reach a final view on the balance of probabilities in respect of the matters in s 8, including the scope of the arbitration agreement. If there appears to be a valid arbitration agreement which prima face covers the matters in dispute, the matter should be referred to the arbitrator to deal with questions of jurisdiction, including the scope of the arbitration agreement. ... There was a caveat in the judgment of the majority in [Dell Computer Corp v Union des consommateurs ('Dell')[45]] as to the general applicability of the so-called prima facie approach to which we will come ...

The second and contrasting approach is that adopted by the English Courts that a full merits hearing will be undertaken as to the existence and scope of the arbitration agreement and that the disputes fall within it ...

...

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. In Dell, Deschamps J speaking for the majority (McLachlin CJ, Binnie, Abella, Charron and Rothstein JJ) reflecting this approach said:

• ... [t]he court's expertise in resolving such questions, ... the fact that the court is the forum to which the parties apply first when requesting referral and ... the rule that an arbitrator's decision regarding his or her jurisdiction can be reviewed by a court. It allows a legal argument relating to the arbitrator's jurisdiction to be resolved once and for all, and also allows the parties to avoid duplication of a strictly legal debate. In addition, the danger that a party will obstruct the process by manipulating procedural rules will be reduced, since the court must not, in ruling on the arbitrator's jurisdiction, consider the facts leading to the application of the arbitration clause.[46]

1. The Court in Hancock was astute to the risk to which the Producers pointed in the present case. The judgment continued:

To understand whether a body of disputes being the 'matter', assessed and characterised (at the necessarily early stage of the proceeding), is the subject of an arbitration agreement, will generally require the Court to form a view as to the legal meaning of the arbitration agreement. Section 8 is an important power the purpose of which is to protect the practical legitimacy and authority of the arbitration process as reflected in the words of s 1C of the CA Act. It involves the referral to arbitration, by a stay of court proceedings. However, it will often not be possible fully to delineate the metes and bounds of a dispute without fully hearing the dispute. To do so, that is to hear the facts to decide the width of the dispute, would undermine the practical and effective operation of s 8. ... The boundaries of the dispute may be unclear, but it will have to be characterised on the material available to be assessed as to whether it can be seen to be the 'subject of' the arbitration agreement. That latter assessment will require some stability or clarity as to the meaning of the arbitration agreement. The Court is then required to construe the clause, at least to the point of being satisfied that the disputes forming the matter are the subject of the agreement, or not, as the case may be. That said, ... not every legal question need be, or should be, decided by the Court about the rights and obligations of the parties. That too would tend to undermine the practice and effective operation of s 8.[47]

1. Grounds 1 and 2 contend that the judge erred in holding that the court can grant a stay without determining whether the proceedings involve the determination of a matter that falls within the scope of the arbitration agreement, and that he erred in ordering a stay without the Producers having established that fact. But the reasoning in Hancock and the other authorities referred to by OBL shows that a strict 'determination' of that question is not always appropriate. The judge applied the 'light touch' contemplated in the authorities, and found that the factual complexity of the documents and the historical context, in circumstances where the arbitrators could apply the competence principle and resolve the question of their authority to arbitrate, established the basis for a stay. The judge was satisfied that the dispute between the parties (by which he evidently meant both the substantive disputes about the D&D Issues and the 'scope' dispute) had the 'requisite connection' with the arbitration agreement.[48]
2. As mentioned earlier, the Producers submitted that, if the judge had gone further and made a final determination as to the jurisdiction of the arbitrators to resolve the disputes about the D&D Issues, this would have rendered the stay application moot. We agree with that submission to the extent that it concerns OBL's alternative argument, namely that the reference in cl 19 of the Settlement Agreement to cl 5(b) deprives the arbitrators of jurisdiction to decide the disputes about the D&D Issues. That is the precise subject matter of the proceeding. The same is not true in respect of the principal argument, namely that the application of New York law deprives the arbitrators in this case of the ability to decide on the extent of their own jurisdiction. That is not the subject matter of the proceeding. The amended statement of claim makes no reference to cl 18 of the Settlement Agreement or New York law. As also mentioned earlier, by the proceeding OBL raises no issue as to the applicability of the competence principle.
3. The judge's omission to address OBL's arguments regarding New York law may have reflected an assumption or understanding that it is not possible, including by means of a choice of law, for parties to an international arbitration agreement to agree that arbitrators will not apply the competence principle in respect of disputes as to their jurisdiction. For the reasons set out in relation to ground 3, in particular, that assumption or understanding would have been correct. In the circumstances, the judge's omission to construe the agreement in accordance with cl 18 can have made no difference, and grounds 1 and 2 in their application to OBL's principal argument are moot.
4. In the circumstances, grounds 1 and 2 are not made out.

Excluding scope questions from arbitration (ground 3)

1. The issue raised by ground 3 is whether, if the parties have agreed that disputes about the scope of the arbitration agreement will be decided by a court and not by arbitrators, it follows that such disputes are not capable of settlement by arbitration in accordance with the agreement within the meaning of s 7(2)(b).
2. OBL submitted, and we have accepted, that the primary judge had failed to consider its argument that, because the parties had agreed that questions as to the scope of the arbitration agreement would be decided by a court and not by the arbitrators, the court proceeding did not involve a matter capable of settlement by arbitration within the meaning of s 7(2) of the IAA. That agreement was alleged to follow from the choice of New York law to apply to the Settlement Agreement, which itself is the subject of grounds 4 and 5.
3. This submission presents an issue of construction of s 7(2), namely whether, when the parties have agreed that the arbitrators are not to decide a question (including one as to the scope of their authority) that question is not 'capable of being settled by arbitration' 'in pursuance of' the arbitration agreement.[49]
4. In support of an affirmative answer to that question, OBL relied on the text, context and purpose of s 7(2). As to text, it was submitted that, if a question about an arbitration agreement can be decided by arbitrators, even if the parties have agreed that it will not be, then the words 'in pursuance of the agreement' in s 7(2) would be otiose.
5. As to context, OBL pointed to the fundamental principle that arbitration is consensual.[50] Article 16 of the Model Law did not compel a different result because it only provided that arbitrators 'may' determine scope questions. In any event, it was submitted, the construction of s 7(2) could not depend on the ability of an arbitral tribunal to determine scope questions, because some foreign arbitral tribunals may not have that power.
6. OBL also relied on Art II of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which was implemented by s 7(2), and which it was submitted requires courts to hold parties to their bargains by requiring them to arbitrate issues they have agreed to arbitrate.
7. OBL pointed to arts 34(2)(a)(iii) and 36(1)(a)(iii) of the Model Law, which provide that an arbitral award is liable to be set aside or refused enforcement if it deals with 'matters beyond the scope of the submission to arbitration'. It was said to follow that, if a tribunal purports to decide a scope question where the parties have agreed that a court will do so, the tribunal's award is liable to be set aside and refused enforcement, irrespective of how it answers the scope question. It was submitted that s 7(2) should not be construed as requiring such a futile exercise.
8. OBL submitted that it emerged from these considerations that the purpose of s 7(2) was to hold parties to their bargains by denying access to the courts for disputes that the parties have agreed will be arbitrated.
9. The submission made by OBL has significant elements of circularity. The fact that arbitration rests on the consent of the parties does not mean that provisions found in the legislation governing arbitral proceedings and the enforcement and recognition of arbitral awards are similarly dependent on such consent. It cannot be assumed, in addressing the question of construction OBL identified, that the purpose of the provision is to give effect to the intentions of the parties as to all such matters. Instead, the fact that arbitration is based on consent is only part of the context.
10. The same problem attends the submission that the alternative construction renders the words 'in pursuance of the agreement' otiose. The words are only otiose if it is legally open to the parties to make an agreement to depart from art 16(1) of the Model Law. The issue is whether an agreement of that nature is effective. The words 'in pursuance of the agreement' simply are not engaged by a purported but ineffective agreement.
11. There is a further assumption underlying this ground, as argued by OBL, which is open to question. It concerns the designation of the issue of the scope of the arbitration agreement as a 'matter' within the meaning of s 7(2)(b). It may be accepted that OBL's proceeding 'involves' that question, because it seeks declarations on that very subject. But that does not mean that the question constitutes a 'matter' for these purposes.
12. Section 7(2) operates by reference to three essential elements: the arbitration agreement, the proceedings between the parties to that agreement and the 'matter' whose determination the proceedings involve. The statutory task under s 7(2) of the IAA requires the Court to identify the matter for determination in the relevant proceeding and then to decide whether that matter is capable of settlement by arbitration in pursuance of the arbitration agreement.[51]
13. The 'matter' in question under s 7(2)(b) is the subject matter of the controversy that falls for determination in the proceeding.[52] This understanding of the term flows from the language of s 7(2)(b) and specifically the expression 'proceedings involve the determination of a matter'. That language, and indeed the word 'matter' itself, suggests that the 'matter' is the subject of the dispute between the parties which has led to the arbitration and the proceeding, rather than an issue that arises in the course of such processes. That also describes the subject matter of the dispute which is, or is not, capable of settlement by arbitration in pursuance of the arbitration agreement. In Comandate Marine Corp v Pan Australia Shipping Pty Ltd Allsop J said

the word 'matter' in s 7(2)(b) can be seen to be a reference to the differences between the parties or the controversy that are or is covered by the terms of the arbitration agreement. That is, such part (or all) of the differences that fall within the scope of the arbitration agreement. It is that body of differences which is to be capable of settlement by arbitration.[53]

1. It therefore makes no difference whether the starting reference point for identifying the 'matter' is the proceeding or the arbitration. In either event, the 'matter' in s 7(2)(b) is the substantive dispute and not a disagreement as to whether that dispute is capable of arbitration pursuant to an arbitration agreement. It is a right or liability in dispute which is susceptible of settlement as a discrete controversy.[54] The disagreement about the scope of the arbitration agreement amounts to a disagreement as to who should decide the substantive dispute. That issue is resolved by applying the terms of s 7(2) to the substantive dispute. To treat the disagreement about arbitral scope as the 'matter' in s 7(2)(b), despite it not being a right or liability in dispute, would mean the court deciding under s 7(2)(b) whether a question of scope raised in a proceeding is capable of determination by arbitration. That would require the court to decide, albeit not necessarily in a final way, the question which it is the purpose of s 7(2) to prevent the court from deciding.
2. The Producers submitted that it was not open to parties to an international arbitration agreement to agree that art 16 of the Model Law does not apply to a dispute about the scope of the agreement to arbitrate. It was submitted that the terms of the arbitration agreement could not displace the mandatory operation of s 7(2) or dictate the Court's exercise of its power under that provision, as OBL sought to do. The Producers submitted that, even if the proper law of the arbitration agreement was that of New York, this could not constrain the operation of arts 5 and 16 of the Model Law, or condition the duty of the Court imposed by s 7(2) of the IAA.[55] The parties' choice of New York law was given effect by the common law of Australia and, since the common law was subject to a statutory provision to the contrary, that choice of law could not override Australian statutory law.
3. The Producers further submitted that, although the arbitrators were able to resolve the scope of the agreement to arbitrate by virtue of art 16(1), this determination was not final. A ruling or award beyond the scope of the arbitration agreement is not final and is liable to be set aside by the Court under arts 16(3) or 34(2)(a)(iii). It is also liable not to be enforced, by virtue of art 36(1)(a)(iii). Rather than being an exercise in futility, this was said to recognise the objects of international commercial arbitration as reflected in ss 2D, 39(1)(a)(vii), (b) and (c) and 39(2) of the IAA.
4. We agree with the Producers' submissions. There is a fundamental difficulty in seeking to maintain the contention advanced by OBL in respect of a purported agreement that art 16 of the Model Law (specifically, the competence principle) does not apply to the case. Although OBL disavowed any submission that the Model Law did not apply, the effect of its submissions would be that the arbitrators would be precluded, by agreement of the parties, from exercising the authority conferred by art 16(1). Whether that is characterised as 'excluding' art 16(1), overriding it or not applying it, the effect is the same. This is not, as OBL contended in its written submissions filed after the hearing, a question of construction of art 16(1). If anything, it is a question of construction as to the legal effect of s 16 of the IAA.
5. Section 16(1) of the IAA provides that, subject to pt III, 'the Model Law has the force of law in Australia'. Section 21, entitled 'Model Law covers the field', provides in sub-s (1) that, if the Model Law 'applies to an arbitration, the law of a State or Territory relating to arbitration does not apply to that arbitration'. By these provisions, the competence principle articulated in art 16(1) has the force of law in Australia.
6. Moreover, art 8 of the Model Law requires a court before which an action is brought 'in a matter which is the subject of an arbitration agreement', if a party so requests not later than when submitting their first statement on the substance of the dispute, to 'refer the parties to arbitration' unless the court 'finds that the agreement is null and void, inoperative or incapable of being performed'. This provision reflects s 8 of the Commercial Arbitration Act and s 7(5) of the IAA, and its policy is closely aligned to that of s 7 of the IAA.
7. There is limited provision in the IAA or the Model Law for the parties to an arbitration agreement to opt out of their application,[56] and it does not extend to s 7(2), or to arts 8 or 16. Those provisions have the force of law in Australia and parties who consent to arbitration are bound by these and other laws that govern commercial arbitration (in this case, international commercial arbitration). That does not undermine the fundamental nature of consent as the foundation of arbitral processes. It merely identifies consequences of such consent.
8. The fact that parties to an arbitration agreement cannot exclude the operation of art 16(1) of the Model Law means that, despite the parties having agreed that a court, and not arbitrators, will determine the scope of the arbitrators' jurisdiction, the arbitrators retain that power pursuant to the competence principle. It follows that it is incorrect to conclude that the parties' agreement would mean that questions as to the scope of the arbitrators' authority to arbitrate are incapable of settlement by arbitration. Ground 3 therefore fails.
9. As noted later in these reasons, the parties made competing submissions as to the effect of adopting the Commercial Arbitration Act 1984 in cl 19 of the Settlement Agreement to govern their arbitrations. OBL submitted that this meant that the parties chose to opt out of the Model Law (including art 16), as was then permitted by s 21 of the IAA. The Producers submitted that the parties' choice of Melbourne as the seat of the arbitration attracted the mandatory provisions of the Model Law, including art 16. These arguments have no bearing on the present question as to the construction of s 7(2).
10. Nor do they bear on the present arbitration, in any event. Section 21 was amended in 2010 so as no longer to permit the parties to agree that the Model Law did not apply in relation to settlement of a dispute.[57] As mentioned earlier,[58] the provision now makes it clear that the Model Law 'covers the field' in legislative terms. This takes away the former ability of the parties to exclude the Model Law.[59] In 2015, s 21 was further amended to make it clear that it applied to all arbitration agreements, including those entered into before the commencement of the 2010 amendments, in respect of arbitral proceedings that commence after that time.[60]

Proper law of the arbitration agreement (grounds 4A and 4B)

1. In light of our conclusion that the parties cannot, by agreement, render art 16(1) of the Model Law inapplicable, it is not necessary to decide whether that was the effect of nominating New York law in the Settlement Agreement. In the circumstances, we shall address these grounds briefly.
2. OBL derived its suggested agreement between the parties, as to who could decide the 'scope' of the arbitration, from the reference in cl 18 of the Settlement Agreement to the law of New York. It is therefore a necessary step in its argument that the arbitration agreement is governed by the law of New York, or at least that the arbitration agreement adopts the law of New York regarding the authority of arbitrators to decide the scope of their own jurisdiction.
3. OBL submitted that, where a contract contains an arbitration agreement, at least three systems of law may be engaged: the proper law of the contract; the proper law of the arbitration agreement, and the curial law (lex arbitri) which governs the procedure of the arbitration and court supervision or review of its awards. The proper law of the arbitration agreement is determined by applying the forum's choice of law rules, ie the choice of law rules of Victoria. OBL submitted that, where the arbitration agreement is in another contract which nominates a governing law, that choice applies to the whole of the contract, including the arbitration agreement.[61] It was submitted that the choice of curial law (based on the choice of the seat of the arbitration) does not negate the inference that the governing law of the contract is that of the arbitration agreement as well.[62]
4. It followed, OBL submitted, that the proper law of the arbitration agreement was the law of New York as stipulated in the Settlement Agreement, in which the arbitration agreement was located in cl 19. The fact that the parties chose a Victorian seat of arbitration, and the law of Victoria as the curial law (in cl 19 and in the Arbitrator Appointment Agreement) did not alter that position. The judge therefore erred, it was submitted, in treating New York law as 'entirely irrelevant' on the stay application.
5. In response to the Producers' notice of contention relying on the Arbitrator Appointment Agreement, OBL submitted that the Arbitrator Appointment Agreement was not an 'arbitration agreement'. Rather than being a self-standing agreement to arbitrate an existing dispute, it was a 'reference', being an agreement to appoint arbitrators to arbitrate a dispute under an existing arbitration agreement. The parties' notices of dispute had been given expressly pursuant to cl 19 of the Settlement Agreement, before the execution of the Arbitrator Appointment Agreement. The latter agreement recited the contention of OBL that the disputes as to the D&D Issues could not be arbitrated under the Settlement Agreement.
6. The Producers submitted that the parties did not agree that the arbitration agreement was to be interpreted and applied in accordance with New York law. By cl 18 of the Settlement Agreement, the parties chose New York law to govern their substantive rights under that agreement, and under cl 19(a) they also chose the place of the arbitration to be Melbourne, with the arbitration to determine their disputes 'in accordance with the Commercial Arbitration Act 1984'.
7. The Producers submitted that, because s 21 of the IAA as in force at the time of the Settlement Agreement permitted parties to opt out of the procedural law provided for by the IAA, that was the effect of adopting the Commercial Arbitration Act in cl 19(a). After the IAA was amended in 2010 so that the Model Law covered the field with respect to international arbitrations conducted in Australia and excluded the operation of State law, the parties' choice of Melbourne as the seat of the arbitration attracted the mandatory provisions of the Model Law, including Art 16.[63] Further, the Producers submitted, other mandatory provisions of the Model Rules permit the parties to adopt their own procedures (art 19) or to designate the law of another State as that which governs the substantive issues in the dispute (art 28), but do not provide for adoption of another State's conflict of law rules in relation to the dispute.[64]
8. The Producers submitted that the decision of the Supreme Court of the United Kingdom in Enka[65] confirmed that the parties may be presumed to have chosen one law to govern their relationship, and that this presumption is not displaced merely because the parties have agreed to arbitrate at a nominated seat. It was submitted that the presumption may be rebutted if there is a risk that a finding that the proper law of the arbitration agreement was the same as that of the contract in which that agreement is found would undermine the effectiveness of the agreement.[66] The Producers submitted that an arbitration clause may be more readily found to be governed by a law different from the rest of the contract, because the clause is not concerned with establishing substantive rights and obligations, but with providing a mechanism for resolving disputes.[67]
9. In this case, the Producers submitted, the proper law of the arbitration agreement was the law of Victoria rather than New York. Clause 18 of the Settlement Agreement was said to apply New York law only to the interpretation and application of the agreement. It did not simply adopt the substantive law of New York as the proper law of the agreement. In addition, cl 18 provided for a carve-out where required by the law of the place where the hydrocarbons are produced (Victoria). The mandatory application of the IAA as a result of the arbitration seat being in Victoria meant that the law of Victoria 'otherwise required'.[68] If New York law were to apply to the arbitration agreement, the Producers submitted, with the scope issue therefore being determined by the Court, this would cut across the principle of Victorian law that the parties are presumed to have intended that all issues between them, including scope, will be determined by the same tribunal.[69]
10. The Producers submitted that Australian curial law vested the arbitrators with authority to decide whether they or the Court had the primary power to decide the scope of the arbitration agreement. That being the case, New York law was of no application or force in deciding that issue, and the Court was required to facilitate the arbitrators' authority rather than to usurp it.
11. Clause 18 of the Settlement Agreement applies New York law to the interpretation and application of the agreement. The provision is expressed to apply '[e]xcept as otherwise required by the law of the place where the hydrocarbons are produced'. It follows that, to the extent that Australian law requires application of the Model Law, the choice of New York law by the parties can have no different effect. That is not surprising, given that New York law is not said to apply of its own force. As the Producers submitted, New York law only has effect by application of the Australian common law choice of law principles, which are necessarily subject to Australian statutory provisions to the contrary.
12. At the same time, the provision applies New York law in a limited way. It does not provide that it governs the agreement or the arbitration. It provides for the agreement to be 'interpreted and applied in accordance with' New York law. Clause 18 sits alongside cl 19(a), which provides for the arbitration to take place in Melbourne in accordance with the Commercial Arbitration Act. The effect is to confirm that the curial law of the arbitration is Australian law. Clause 18 must be read accordingly. It would not be correct, in the circumstances, to find that the proper law of the Settlement Agreement, or more particularly the separable arbitration agreement in cl 19, is the law of New York.
13. For these reasons, grounds 4A and 4B must be rejected.
14. In so far as ground 4A raises questions of procedural fairness and the adequacy of the judge's reasons, any errors or defects in the course of the hearing in the Trial Division have been overtaken by the hearing and determination of the issues raised in this Court. It is unnecessary to address those arguments further.

Were 'scope' questions excluded from the arbitration agreement? (grounds 4 and 5)

1. The next issue is whether, by applying New York law as the proper law of the agreement, the parties agreed that questions of the scope of the arbitration agreement were to be decided by a court and not by arbitration. Again, these grounds do not arise in light of our answer to ground 3, and what we have said in relation to grounds 4A and 4B. We therefore confine ourselves to the following observations.
2. OBL submitted that the expert evidence led as to the principles of New York law applicable to the question of the scope of an arbitration agreement was consistent. In particular, New York law was said to provide that parties to an arbitration agreement are presumed to agree that a court, not arbitrators, will decide whether a given dispute is within the scope of the arbitration agreement, unless there is 'clear and unmistakeable' evidence of a contrary intention.[70] Even if the parties adopt rules that provide for arbitrators to decide their own jurisdiction, that will not suffice to establish the requisite contrary intention if the arbitration clause is subject to an arguably applicable exclusion.[71]
3. It was said to follow that the effect of adopting New York law as the proper law of the arbitration agreement was that the correct construction of cl 19 was that a court, and not arbitrators, would decide whether a dispute fell within the scope of the agreement, there being no clear and unmistakable evidence of any other intention. Clause 19 contains no provision for arbitrators to decide their own jurisdiction. The choice of the Commercial Arbitration Act to govern the arbitration amounted to an express choice to opt out of the Model Law (including art 16), as was formerly permitted by s 21 of the IAA. No agreement to any contrary effect had been made after the IAA was amended in 2010 to prohibit 'opting out'. There was said to be no foothold for the necessary clear and unmistakeable evidence to displace the presumption under New York law.
4. OBL submitted that the concern of New York law was with the parties' intentions at the time of contracting. The later adoption of the IAA was by force of statute and cl 19 remained the statement of the parties' intentions.
5. OBL submitted that even if it were decided that the parties had adopted art 16 after 2010, this would not constitute 'clear and unmistakable evidence' because there was an 'arguably applicable exception'. That was because the definition of 'dispute' in cl 19 was 'subject to clause 5(b)', and cl 5(b) precluded modifications by arbitration to the special referee's modified methodology that are inconsistent with cl 6B(f). Clause 6B(f) provided for the calculation of deductions for cost of capital, including specified rates. OBL submitted that it was arguable that the modifications sought by the Producers in raising the D&D Issues were inconsistent with the rates in cl 6B(f) such that the dispute was outside the definition of 'dispute' in cl 19.
6. The Producers submitted that, by choosing the place of the arbitration to be Melbourne, the parties had subjected themselves to the curial law applicable to commercial arbitrations conducted in Melbourne at the time of the arbitration.[72] As from the date of the Settlement Agreement any arbitration commenced by the parties would be subject to the IAA. Section 21 of the IAA then permitted parties to opt out of the procedural law for which it provided, and the parties did so by adopting the Commercial Arbitration Act of Victoria. The Producers submitted that, when the IAA was amended in 2010 to exclude the operation of Victorian law in respect of international commercial arbitrations, the choice of Melbourne as the location of the arbitration attracted the mandatory provisions of the Model Law, including arts 16, 19, 28 and 34.[73] The Producers submitted that this confirmed that the powers of the arbitrators conferred by the Model Law could not be constrained by the substantive law chosen by the parties.[74]
7. Finally, the Producers submitted that the Arbitrator Appointment Agreement put beyond doubt that the arbitration was governed by the IAA, irrespective of the proper law of the Settlement Agreement.
8. Accepting that the parties to an arbitration agreement may agree that foreign law applies to the construction of that agreement,[75] that does not seem to us to be what OBL's argument in the present case seeks to do. Instead, OBL contends that the parties' adoption of New York law had the effect of their agreeing that questions of the jurisdiction of the arbitrators will be decided by a court and not by the arbitrators. We are not persuaded that the suggested consequence involves any interpretation or application of the Settlement Agreement (which is the extent of the adoption of New York law in cl 18 of the Settlement Agreement). The competence principle applies by statute, not any provision of the agreement, and its application is confirmed by the choice of Melbourne as the location or seat of the arbitration. No question of interpretation or application of the Settlement Agreement arises. We would therefore reject grounds 4 and 5.

Exclusion of 'scope' questions and s 7(5) (ground 6)

1. OBL submitted, in the alternative to its argument that the dispute was not a matter capable of settlement by arbitration in pursuance of the agreement, that the arbitration agreement was inoperative in respect of disputes in the proceeding within the meaning of s 7(5) of the IAA, and that this prevented the Court from ordering a stay under s 7(2). It was submitted that the agreement was 'inoperative' because the parties had agreed that the disputes in the proceeding would be decided by a court rather than by arbitration, and because of the exclusion of subject matter from the definition of 'dispute' in cl 19(b) by reference to cl 5(b). OBL submitted that the judge had failed to apply s 7(5) on its terms and had instead simply asserted that the matter was complex.[76]
2. The Producers submitted that a dispute as to the scope of the arbitration agreement did not render the agreement 'null and void, inoperative or incapable of being performed' within the meaning of s 7(5) of the IAA. They submitted that a dispute as to the engagement of s 7(5) was itself a dispute within the scope of art 16, whose resolution should be stayed and referred to arbitration, including because its resolution was fact-dependent.[77]
3. We accept the submissions of the Producers. In Hancock, the Full Court of the Federal Court said this of the corresponding language in s 8 of the Commercial Arbitration Act 2010 (NSW):

[T]he words of Art 8 and s 8 should be read and given content against the background, first, that the Court is not required to decide the matters in the proviso; secondly, that the competence principle is wide enough to permit the arbitral tribunal to decide any question of jurisdiction, including whether the arbitration agreement came into existence; and, thirdly, that that decision by the arbitral tribunal is not final, the Court having the final say on the question. A further consideration is that s 8 should, conformably with its language, be construed to facilitate, not impede, the process of arbitration: s 1C(1) of the CA Act.[78]

1. The approach to the operation of the 'proviso' in s 8 adopted by the Full Court was summarised by Lyons J in Transurban in the following terms, which were quoted and applied by the trial judge in the present matter:[79]

The Full Federal Court considered that, in most circumstances, the question of who should determine the proviso issue is 'a practical question' based upon the nature of the relevant issue, including its legal and factual complexity. ...

Relevantly, the Full Federal Court considered that:

(1) If the issues relating to the proviso were of short compass, it may be appropriate for the Court to resolve the issue. For example, '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', then it might be useful for the Court to address the issue.[80]

(2) If the issues relating to the proviso are of some legal and/or factual complexity, then it will be generally more appropriate for the proviso issue to be referred to the arbitral tribunal.[81]

1. Applying these principles, the question whether the arbitration agreement is 'inoperative' with respect to the disputes as to the D&D Issues requires evaluation of the arguments advanced by OBL in the proceeding regarding the effect of the words 'subject to clause 5(b)' in cl 19(b) of the Settlement Agreement. The question is legally and factually complex. The judge was justified in deciding, as he did, that the 'legal and/or factual complexity' of the 'proviso' issues relating to the arbitration agreement were such that any issue under the 'proviso' was a matter for the arbitral tribunal.[82]
2. It followed that OBL was not able to establish a basis for the Court to apply s 7(5). We see no error in the judge's approach.

1. OBL submitted that it was not open to find that its opposition to the stay application had no reasonable prospects of success. The judge should have found that there was at least a novel issue raised as to whether parties can be forced to arbitrate questions they have agreed should be decided by a court. It was submitted that the judge's view as to prospects derived from his rejection of the relevance of New York law. But even if that conclusion were to be found correct, the Producers had not submitted at the stay hearing that the proper law of the arbitration agreement was the law of Victoria; they had submitted that the law 'governing the arbitration' was the law of Victoria, but that was a reference to the curial law. There was a denial of procedural fairness, it was submitted, when the judge accepted a later submission, in relation to costs, about the proper law of the arbitration agreement, and upheld that submission without giving reasons. OBL submitted that the judge's assessment of prospects was also based on his incorrect failure to consider the proper construction of the arbitration agreement.
2. Even if the judge's assessment of prospects was correct, OBL submitted that, in applying a different approach to costs because OBL was resisting a stay application under s 7(2), the judge failed to follow this Court's decision in IMC Aviation Solutions Pty Ltd v Altain Khuder LLC.[83] It was submitted that the judge should have held that the Producers were entitled to indemnity costs only if OBL knew, or should have known, that its opposition to the stay application was hopeless,[84] but no such finding was made or open to be made.
3. The Producers submitted that appeals on costs are exceptional and leave should be refused if there was a ground on which the judge could reasonably have made the order in question.[85] It was submitted that OBL had not challenged three of the four grounds upon which the judge relied in ordering indemnity costs: the mandatory nature of the IAA, OBL's 'plainly incorrect' reliance on the 'Dell exception' and the production of 930 pages of irrelevant material.
4. The Producers submitted that the decision in IMC Solutions turned on the onus of proof. The Court had not considered the situation where a costs order was based on a determination that resistance to the enforcement of an arbitral award had no reasonable prospects of success. The Producers submitted that the decision was correct, but that it should not be followed to the extent that anything said by the majority might be inconsistent with Sino Dragon.
5. The Producers correctly submitted that appeals on costs are exceptional. Here, however, the costs order that was made reflected the judge's assessment of the strength of arguments which this Court has now comprehensively addressed on appeal. It would be unjust not to revisit the question of costs if that process disclosed a different assessment of the strength of the arguments to that of the primary judge, even if the end result as to the substance of the litigation is the same. We turn therefore to that issue.
6. Generally speaking, courts in this country will order the costs of a civil proceeding to be paid by the unsuccessful party on the standard or party/party basis.[86] The position is no different in proceedings brought under the IAA, as this Court recognized in IMC Solutions.[87] In that case, Hansen JA and Kyrou AJA stated:

In proceedings under the [IAA], as in other civil proceedings, costs will ordinarily be awarded against the unsuccessful party on a party and party basis unless the successful party can establish special circumstances. The principles for determining the existence of special circumstances are well established. Special circumstances, if they exist, are found in the facts of the case at hand, and the exercise of the judicial discretion is not otherwise conditioned on whether those facts are comprehended by a category of case or cases in which a special order has been made. The fact that an award debtor fails to establish a ground for resisting enforcement of a foreign arbitral award cannot, of itself, constitute special circumstances. Nor can a finding that the award debtor's case was 'unmeritorious' if all that is meant by that expression is that the award debtor failed to persuade the court to accept his or her evidence and submissions.[88]

1. In conformity with IMC Solutions, the primary judge acknowledged that an indemnity costs order against OBL, the unsuccessful party in this case, could only be made if it were shown that the case was 'exceptional' or there was 'some special or unusual feature' which justified the exercise of the Court's discretion to order costs on an indemnity basis.[89] The judge awarded indemnity costs against OBL because, in his view, its resistance to the stay application had no reasonable prospects of success.[90] For the following reasons, we do not consider that this conclusion was open in the circumstances of this case.
2. Before turning to this central issue, however, we note in passing that the judge referred to an 'ongoing international debate' as to 'whether a special costs rule which carries a reverse onus should apply to challenges to arbitral awards or ... stay applications'.[91] The judge discussed the topic in some detail,[92] but his discussion did not ultimately bear on his decision.[93] We shall therefore not dwell on it here. We observe, however, that the passage from IMC Solutions set out above is seemingly inconsistent with a 'special costs rule' of the kind to which the judge referred.[94]
3. The primary judge relied on the following four considerations in support of his conclusion that OBL's case against the respondents lacked reasonable prospects of success: first, OBL's position was inconsistent with the competence principle; secondly, OBL's submissions concerning the application of New York law were inconsistent with the proper law of the arbitration agreement; thirdly, OBL's submissions as to the applicability of the Dell exception were 'plainly incorrect'; and finally, OBL had introduced a significant amount of evidence that ultimately did not bear on the Court's decision.
4. All but the last of the matters relied on by the judge were in substance his key reasons for rejecting OBL's case. Plainly enough, as Hansen JA and Kyrou AJA indicated in IMC Solutions in the passage set out above, the fact that a litigant fails to have its submissions accepted by the court is not, without more, a justification for an award of indemnity costs.[95] In this case, we do not consider there was anything about OBL's submissions that made them unreasonable, perverse or otherwise so exceptional so as to justify an award of indemnity costs. In so far as the judge treated OBL's failure to have its submissions accepted as a justification for an award of indemnity costs, he acted on a wrong principle.
5. Furthermore, in concluding that OBL's proceeding had no reasonable prospects of success, the judge failed to have regard to the novelty and complexity of the issues raised by its case. This consideration was relevant to the question whether it could properly be said that the arguments advanced by OBL had no reasonable prospects of success. As our reasons in this matter indicate, OBL's submissions did not admit of any clear and immediate answer. While OBL has failed to persuade us that the primary judge's rejection of its case was in error, our reasons disclose that the determination of the issues that OBL raised (including some that the judge did not address) was far from straightforward.
6. Moreover, we reject the proposition that OBL's reliance at trial on a significant amount of evidence that ultimately proved to be irrelevant is, in the circumstances of this case, a reason to award indemnity costs against OBL. The evidence was not indicative of a lack of reasonable prospects of success, as the judge's reasons might suggest. On the contrary, the evidence was relevant to OBL's prospects of success only in the sense that such evidence was necessary for it to make out its case in the event that the Court accepted its submissions on the law and its effect. As we have said, these submissions raised novel and complex issues. We do not accept that OBL's reliance on evidence that turned out to be irrelevant because the Court did not accept its view of the law was, in these circumstances, relevant to the judge's conclusion that OBL had no reasonable prospects of success or that OBL's conduct in adducing that evidence was so unreasonable as to attract an award of indemnity costs.
7. Whilst an award of costs is in the discretion of the court,[96] the exercise of that discretion is subject to the principles set out in House v The King.[97] According to these principles, a decision made in exercise of discretion should be reviewed and the discretion re-exercised by an appellate court if the appellate court finds that the judge has acted on a wrong principle, has failed to take relevant considerations into account, or has taken into account irrelevant considerations.[98]
8. In this case, as we have said, the judge acted on a wrong principle in so far as he treated OBL's failure to persuade him to accept its submissions as a factor which justified an award of indemnity costs. In so far as he relied on the evidence on which OBL relied as a further factor justifying indemnity costs, the judge failed to have regard to a relevant consideration, namely, that this evidence was necessary if OBL were to succeed, assuming its submissions on the law were accepted.[99]
9. There was, in our opinion, no proper basis to conclude that an award of indemnity costs should be made against OBL in this case, and the exercise of the discretion as to costs miscarried. Leave to appeal in respect of costs should therefore be granted and the appeal against costs allowed. We will instead order that OBL pay the defendants' costs of the stay application on the standard basis, such costs to be taxed immediately in default of agreement.

1. OBL should have leave to appeal, but the appeal should be dismissed except in respect of costs. It is therefore not necessary to deal with the Producers' notice of contention.
2. We shall hear the parties as to the costs of the appeal.

• ESSO AUSTRALIA RESOURCES PTY LTD (ACN 091 829 819)

• WOODSIDE ENERGY (BASS STRAIT) PTY LTD (ACN 004 228 004)

• WOODSIDE ENERGY (NORTH WEST SHELF) PTY LTD (ACN 004 514 489)

[1] Ground 7 does not add to grounds 1 to 6: see [45] below.

[9] The reference to the 'Producers' in this context is confined to the first and second respondents.

[10] 'LVO' is short for the technical expression 'last valve off': cl 6(b)(i)(aa).

[13] Oil Basins Ltd v Esso Australia Resources Pty Ltd [2025] VSC 34 [56] (Croft J) ('Reasons').

[16] Oil Basins Ltd v Esso Australia Resources Pty Ltd [No 2] [2025] VSC 257 [28] (Croft J) ('Costs Reasons').

[18] [2016] FCA 1169 [26] ('Sino Dragon').

[26] This categorisation of the issues recognises that ground 7 adds nothing to grounds 1 to 6. We shall not refer to it further.

[27] Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332, 351 (Deane and Gaudron JJ) ('Tanning Research'); Recyclers of Australia Pty Ltd v Hettinga Equipment Inc [2000] FCA 547; (2000) 100 FCR 420, 424 [10], 430 [45] (Merkel J) ('Recyclers'); Robotunits Pty Ltd v Mennel [2015] VSC 268; (2015) 49 VR 323, 336 [21], 345 [43] (Croft J) ('Robotunits').

[28] OBL relied on the following cases considering the construction of arbitration agreements: Hancock Prospecting Pty Ltd v Rinehart [2017] FCAFC 170; (2017) 257 FCR 442, 481-2 [146] (Allsop CJ, Besanko and O'Callaghan JJ) ('Hancock'); Great Union Pty Ltd v Sportsgirl Pty Ltd [2021] VSCA 299 [28], [32], [36]-[49] (McLeish and Kennedy JJA and Macaulay AJA) ('Sportsgirl'); Casaceli v Natuzzi SpA [2012] FCA 691; (2012) 292 ALR 143, 150 [27]-[28], 152 [31], 153-4 [34], 155 [38] (Jagot J); [2012] FCA 691 ('Casaceli'); Dialogue Consulting Pty Ltd v Instagram Inc [2020] FCA 1846; (2020) 291 FCR 155 [196]-[202], [260], [421]-[431], [442], [465], [467]-[468], [471], [590]-[591] (Beach J); Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCA 172 [82]-[83], [94], [136]-[140] (Moshinsky J) ('Freedom Foods'); Recyclers [2000] FCA 547; (2000) 100 FCR 420, 424 [10], 430 [45] (Merkel J); Tianqi Lithium Kwinana Pty Ltd v MSP Engineering Pty Ltd [No 2] [2020] WASCA 201; (2020) 56 WAR 169, 178 [21], 189-90 [77]-[78], 192-3 [87]-[89], 196 [107], [127]-[128] (Buss P, Murphy and Mitchell JJA) ('Tianqi').

[29] See, eg, Recyclers [2000] FCA 547; (2000) 100 FCR 420, 424 [10], 430 [45] (Merkel J).

[31] Hancock [2017] FCAFC 170; (2017) 257 FCR 442, 481-2 [145]-[146] (Allsop CJ, Besanko and O'Callaghan JJ).

[32] Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13; (2019) 267 CLR 514, 529-35 [26]-[49] (Kiefel CJ, Gageler, Nettle and Gordon JJ, Edelman J agreeing at 548 [83]).

[33] The Producers also submitted that the phrase 'capable of settlement by arbitration' raised the question whether a dispute is not susceptible to arbitration on the basis that it would be contrary to public policy to resolve the dispute in that way: Tesseract International Pty Ltd v Pascale Construction Pty Ltd (2024) 98 ALJR 880, 896 [75] (Gageler CJ), 911 [155] (Edelman J), 934 [271] (Steward J), [340]-[341] (Jagot and Beech-Jones JJ); [2024] HCA 24 ('Tesseract').

[34] Hancock [2017] FCAFC 170; (2017) 257 FCR 442, 474 [111], 475 [114], 483 [150], 504 [237], 526 [338], 526 [340] (Allsop CJ, Besanko and O'Callaghan JJ).

[36] Tianqui [2020] WASCA 201; (2020) 56 WAR 169, 178 [21], 190 [78], 192 [88], 196 [107], 203 [127]-[128] (Buss P, Murphy and Mitchell JJA) (carve-out for 'proceedings to enforce payment due'); Recyclers [2000] FCA 547; (2000) 100 FCR 420, 422 [5], 430 [45] (Merkel J) ('dispute hereunder'); Casaceli [2012] FCA 691; (2012) 292 ALR 143, 158 [47] (Jagot J) ('disputes arising out of the present contract').

[37] [2021] VSCA 299 [28]-[30] (McLeish and Kennedy JJA and Macaulay AJA).

[38] See [35] above.

[39] See [36] above.

[44] [2017] FCAFC 170; (2017) 257 FCR 442, 480-1 [141]-[145] (Allsop CJ, Besanko and O'Callaghan JJ).

[45] [2007] 2 SCR 801.

[47] [2017] FCAFC 170; (2017) 257 FCR 442, 481-2 [146] (Allsop CJ, Besanko and O'Callaghan JJ) [146].

[48] Reasons [68]. There was some debate in this Court as to whether the judge had applied the 'Dell exception' or some form of 'discretion' arising from the Full Court's reasons in Hancock. We have characterised his approach differently. Nothing therefore turns on whether such an exception or discretion exists.

[49] In written submissions filed after the hearing, OBL characterised the argument differently, as raising a question of construction of art 16(1), namely whether such an agreement means that 'may' in art 16(1) means 'must'. We refer to this contention at [79] below.

[50] TCL Air Conditioner (Zhongshan) Co Ltd v Judges of the Federal Court of Australia (2013) 251 CLR 533, 547 [11] (French CJ and Gageler J), 568 [81], 573 [101], 575 [106], [109] (Hayne, Crennan, Kiefel and Bell JJ) ('TCL Air Conditioner').

[51] Tanning Research (1990) 169 CLR 332, 350 (Deane and Gaudron JJ); Rinehart v Hancock Prospecting Pty Ltd (2019) 267 CLR 415, 540 [67] (Kiefel CJ, Gageler, Nettle and Gordon JJ); Robotunits [2015] VSC 268; (2015) 49 VR 323, 336 [21] (Croft J); Freedom Foods [2021] FCA 172 [82]-[83] (Moshinsky J); Recyclers [2000] FCA 547; (2000) 100 FCR 420, 426 [18]-[19] (Merkel J). The parties differed as to the document which comprised or included the arbitration agreement. OBL relied on the Settlement Agreement whereas the Producers treated the Arbitrator Appointment Agreement as constituting the arbitration agreement. This issue need not be resolved.

[52] Flint Ink NZ Ltd v Huhtamaki Australia Pty Ltd [2014] VSCA 166; (2014) 44 VR 64, 85-6 [87]-[89] (Nettle JA); Freedom Foods [2021] FCA 172 [82] (Moshinsky J); Robotunits [2015] VSC 268; (2015) 49 VR 323, 334-6 [19]-[23] (Croft J).

[53] [2006] FCAFC 192; (2006) 157 FCR 45, 1066 [235] (Finn J agreeing at 52 [7], Finkelstein J agreeing at 52 [9]).

[54] Sportsgirl [2021] VSCA 299 [34] (McLeish and Kennedy JJA and Macaulay AJA), citing Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13; (2019) 267 CLR 514, 541 [68] (Kiefel CJ, Gageler, Nettle and Gordon JJ) and Tanning Research (1990) 169 CLR 332, 351-2 (Deane and Gaudron JJ).

[55] The Producers referred to Carnival Plc v Karpik (Ruby Princess) [2022] FCAFC 149; (2022) 294 FCR 524, 550 [90]-[91] (Rares J), 614-19 [324]-[346] (Derrington J).

[56] See, eg, Model Law, art 19(1) (allowing the parties to agree on the procedure to be followed by the arbitral tribunal) and art 28(1) (allowing the parties to determine the rules of law that govern the substantive issues in dispute).

[57] International Arbitration Amendment Act 2010 (Cth) s 3, sch 1 item 16.

[58] See [80] above.

[59] Rizhao Steel Holding Group Co Ltd v Koolan Iron Ore Pty Ltd [2012] WASCA 50; (2012) 43 WAR 91, 118 [124] (Martin CJ, Buss JA agreeing at 125 [153], Murphy JA agreeing at 125 [154]).

[60] Civil Law and Justice Legislation Amendment Act 2015 (Cth) s 3, sch 2 item 2.

[61] Enka Insaat ve Sanayi AS v 000 'Insurance Company Chubb' [2020] UKSC 38; [2020] 1 WLR 4117, 4132 [43], [45], [46], [49], 4134-5 [53]-[54], 4167-8 [170] (Lord Hamblen and Lord Leggatt JJSC, Lord Kerr of Tonaghmore agreeing), 4197 [255], 4198 [257] (Lord Burrows JSC), 4207-8 [286]-[288] (Lord Sales JSC) ('Enka').

[62] Enka [2020] UKSC 38; [2020] 1 WLR 4117, 4132 [43] (Lord Hamblen and Lord Leggatt JJSC, Lord Kerr of Tonaghmore agreeing); see also 4197 [255] (Lord Burrows JSC), [266] (Lord Sales JSC); Mineralogy Pty Ltd v Western Australia [2021] HCA 30; (2021) 274 CLR 219, 283 [163] (Edelman J); Tesseract (2024) 98 ALJR 880, 888 [26] (Gageler CJ); see also 941 [311] (Jagot and Beech-Jones JJ).

[63] IAA, s 16; Model Rules, art 1(2); Tesseract (2024) 98 ALJR 880, 888-9 [24] (Gageler CJ).

[64] Tesseract (2024) 98 ALJR 880, 887-8 [24]-[30] (Gageler CJ).

[66] Enka [2020] UKSC 38; [2020] 1 WLR 4117, 4150 [109] (Lord Hamblen and Lord Leggatt JJSC, Lord Kerr of Tonaghmore agreeing).

[68] XL Insurance Ltd v Ownes Corning [2001] 1 All ER (Comm) 530.

[69] TCL Air Conditioner (2013) 251 CLR 533, 550 [16] (French CJ and Gageler J).

[70] First Options of Chicago, Inc v Kaplan, [1995] USSC 50; 514 US 938, 944 (3rd Cir, 1995).

[71] NASDAQ OMX Group, Inc v UBS Securities, LLC, 770 F 3d 1010, 1016, 1018-19, 1031-2 (2nd Cir, 2014); DDK Hotels, LLC v Williams-Sonoma, Inc, 6 F 4th 308, 318-19 (2nd Cir, 2021); Katz v Feinberg, [2002] USCA2 155; 290 F 3d 95, 96-7 (2nd Cir, 2002); Zachariou v Manios, 68 AD 3d 539, 539-40 (NY, 2009).

[72] Tesseract (2024) 98 ALJR 880, 889 [35] (Gageler CJ), 900-1 [101] (Gordon and Gleeson JJ), 941 [311], 947 [338] (Jagot and Beech-Jones JJ).

[75] Model Law, art 28 and see, eg, TCL Air Conditioner (2013) 251 CLR 533, 548-9 [13] (French CJ and Gageler J); Tesseract (2024) 98 ALJR 880, 887-8 [24]-[30] (Gageler CJ); Recyclers [2000] FCA 547; (2000) 100 FCR 420, 424 [10], 430 [45] (Merkel J).

[76] Reasons [67]; Lysaght Building Solutions Pty Ltd v Blanalko Pty Ltd [2017] VSC 97; (2017) 52 VR 198, 213 [40] (Croft J); John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451 [190] (Hammerschlag J); Transurban WGT Co Pty Ltd v CPB Contractors Pty Ltd [2020] VSC 476 [166] (Lyons J) ('Transurban').

[77] The Producers referred to Hancock [2017] FCAFC 170; (2017) 257 FCR 442, 482 [147], 483 [149], 536 [378] (Allsop CJ, Besanko and O'Callaghan JJ); Transurban [2020] VSC 476 [157]-[161], [204]-[207] (Lyons J); CPB Contractors Pty Ltd v DEAL SRL [2021] NSWSC 820 [60] (Rees J); and Reasons [56], [64], [66].

[78] [2017] FCAFC 170; (2017) 257 FCR 442, 536 [378] (Allsop CJ, Besanko and O'Callaghan JJ). Section 1C of the Commercial Arbitration Act 2010 (NSW) provides for the 'paramount object' of that Act, namely 'to facilitate the fair and final resolution of commercial disputes by impartial arbitral tribunals without unnecessary delay or expense'; cf IAA s 2D.

[79] Transurban [2020] VSC 476 [159]-[160]; Reasons [66]-[67].

[80] Hancock [2017] FCAFC 170; (2017) 257 FCR 442, 481 [145], 538-9 [391], [393] (Allsop CJ, Besanko and O'Callaghan JJ).

[82] The term 'proviso' is more apt to describe the statutory language in s 8 of the Commercial Arbitration Act, but the correspondence to s 7(5) is clear.

[83] [2011] VSCA 248; (2011) 38 VR 303, 391-2 [335]-[336] (Hansen JA and Kyrou AJA) ('IMC Solutions').

[84] Winslow Constructors Pty Ltd v Head, Transport for Victoria (Costs) [2021] VSC 74; (2021) 64 VR 200 [11(b)] (Riordan J).

[85] Cargill Australia Ltd v Viterra Malt Pty Ltd [2023] VSCA 301 [62]-[63] (Sifris, Walker and Whelan JJA) ('Cargill'); Gayed v Yuan [2024] VSCA 85 [51] (Beach and Orr JJA).

[86] Supreme Court (General Civil Procedure) Rules 2025, r 63.31 ('Rules').

[87] [2011] VSCA 248; (2011) 38 VR 303, 392 [336] (Hansen and Kyrou JJA).

[94] IMC Solutions [2011] VSCA 248; (2011) 38 VR 303, 391-2 [335]-[336] (Hansen JA and Kyrou AJA). Their Honours' approach in this regard is broadly consistent with Sino Dragon, in which Beach J stated, amongst other things, that there was 'no compelling reason to create a special rule for costs flowing from a breach of an arbitration agreement': at [14(b)]. There is no occasion to consider this issue further in this case.

[95] IMC Solutions [2011] VSCA 248; (2011) 38 VR 303, 392 [336] (Hansen JA and Kyrou AJA).

[96] See Supreme Court Act 1986, s 24(1); Rules, Ord 63.

[98] Ibid 505 (Dixon, Evatt and McTiernan JJ).

[99] Having regard to this conclusion, it is also unnecessary to consider whether, notwithstanding this Court's decision in IMC Solutions, a rule along the lines articulated by Beach J in Sino Dragon at [26] applies to costs in respect of unsuccessful resistance to applications under s 7(2) of the IAA. On that approach, a party resisting a stay would need to show that it took positive steps to ensure that 'at inception' it had reasonable prospects of success, failing which it should be liable for indemnity costs. The judge endorsed, but did not apply, that approach in the present case, and we were not invited to do so either.