BURRUP HOLDINGS PTY LTD (ACN 097 138 353) (Discontinued)

Arbitration - Meaning of arbitration clause - Extent to which arbitration clause applies to a bill of exchange - Whether International Arbitration Act 1974 (Cth) or Commercial Arbitration Act 1985 (WA) applies - Stay of proceedings

Commercial Arbitration Act 1985 (WA), s 53

International Arbitration Act 1974 (Cth), s 7, s 21

Abigroup Contractors Pty Ltd v Transfield Pty Ltd [1998] VSC 103; (1998) 217 ALR 435

Administration of Norfolk Island v SMEC Australia Pty Ltd (Unreported, FCA, 21 July 2004); [2004] NFSC 1

Comandate Marine Corp v Pan Australia Shipping Pty Ltd [2006] FCAFC 192; (2006) 157 FCR 45

Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 2 All ER 463

1 The first defendant, by chamber summons filed on 22 June 2007, seeks an order that the proceedings be stayed under s 7 of the International Arbitration Act 1974 (Cth) or alternatively, it be stayed under s 53(1) of the Commercial Arbitration Act 1985 (WA) or alternatively, under the inherent jurisdiction of the court.

2 For the purpose of this application, the facts can be summarised as follows:

1. There is an arbitration agreement.
2. The plaintiff and the first defendant are ordinarily resident in a convention country.
3. A contract exists between the plaintiff and the first defendant for the supply of equipment and a dispute exists as to payment under that contract and under a separate bill of exchange.
4. The first defendant has determined that this matter ought be resolved by arbitration.

3 The plaintiff accepts the dispute under the contract should go to arbitration, but the question as to the bill of exchange should not. This question turns on a proper construction of cl 22 of the contract. There are two aspects of this. The first is whether or not the word 'dispute' includes a dispute relating to a bill of exchange. The second is whether or not, on its proper construction, the wording of the clause manifests an intention to exclude the International Arbitration Act.

The Principal in all circumstances and at its sole discretion shall determine whether the parties resolve the dispute by litigation within the jurisdiction of the courts of Western Australia or arbitration under the Commercial Arbitration Act. The Principal shall notify the Contractor, by notice in writing, of its decision to refer the dispute to litigation or arbitration within 28 days of either the Principal or the Contractor electing that the dispute be determined by either litigation or arbitration.

5 The term 'dispute' is defined in the contract at cl 2 as follows:

'Dispute' means a dispute or difference between the parties as to the construction of the Contract or as to any matter or thing of whatsoever nature arising, whether antecedent to the Contract and relating to its formation or arising under or in connection with the Contract, including any claim at common law, in tort, under statute or for restitution based on unjust enrichment or for rectification or frustration or a dispute concerning a direction given and/or acts or failing to act by the Engineer or the Engineer's Representative or interference by the Principal or the Principal's Representative.

6 The first defendant contends that the term 'dispute' as defined in cl 2 is a term of the widest possible import. It was submitted that the precise nature of the dispute regarding the bill of exchange does not matter. However, counsel referred to the affidavit of Mr Vinojit Ambalavaner sworn on 17 August 2007 where a Mr Vikas Rambal stated in an email at page 25:

Mr Bhargava

As per my discussion with Mr Swraup BOE will be amended duly signed from Paramount but regarding payment no payment will be released until all technical issues will be resolved.

Thanks

Vikas Rambal

Dear Mr Bhargava,

This letter is to confirm that Vinojit Ambalavaner of Paramount (WA) Ltd is signing the bill of exchange on the 19 July 2005.

The signing of bill of exchange does not waive a right of Paramount (WA) Ltd to recover from Paharpur Cooling Towers Limited any amount wrt late delivery and defect rectification in accordance with the contract.

Yours sincerely,

[Signed]

Vinojit Ambalavaner

8 The first defendant contends that the bill of exchange was signed expressly on the understanding that it would not operate in the ordinary way, but rather, to only require payment when rectification of the defects has been resolved. It is said the bill of exchange cannot be enforced until the rectification is resolved. Further, the first defendant placed particular emphasis on the words 'arising under or in connection with the Contract' as they appear in cl 2 of the contract.

9 The plaintiff contends the bill of exchange is a separate contract between three parties and it does not contain an arbitration clause. The first defendant concedes there has been a co-acceptance of the bill of exchange by a further person, but does not concede there is a third party.

Application of the arbitration clause to the bill of exchange

10 The plaintiff referred to Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 2 All ER 463 at some length. The arbitration clause in that case is quite different from the one before me. However, in relation to the bill of exchange, Lord Wilberforce said:

I shall deal however with the second point. I take it to be clear law that unliquidated cross-claims cannot be relied on by way of extinguishing set-off against a claim on a bill of exchange (Warwick v Nairn; James Lamont & Co Ltd v Hyland Ltd). As between the immediate parties, a partial failure of consideration may be relied on as a pro tanto defence, but only when the amount involved is ascertained and liquidated (Warwick v Nairn; Agra and Masterman's Bank v Leighton; James Lamont & Co Ltd v Hyland Ltd; Brown, Shipley & Co Ltd v Alicia Hosiery Ltd). The amount claimed here in respect of the machines is certainly neither ascertained nor liquidated, and the claim in respect of mismanagement is one for a wholly unrelated tort, so that there would seem to be no basis for denying the appellants' claim that, as regards the bills there is no dispute (469). (footnotes omitted)

11 Even if one accepts that to be so, the facts here are quite different. It is apparent that there is a dispute between the parties as to when payment under the bill of exchange is to be made. It is said that relates to the technical issues which have arisen under the contract. In Comandate Marine Corp v Pan Australia Shipping Pty Ltd [2006] FCAFC 192; (2006) 157 FCR 45, Allsop J said:

Hirst J in Ethiopian Oilseeds [1990] 1 Lloyd's Rep 86 undertook an extensive examination of many cases dealing with arbitration clauses. That decision (dealing as it did with the phrase 'arising out of') was referred to with unqualified approval by Gleeson CJ (with whom Meagher JA and Sheller JA agreed) as reflecting the current state of the law in New South Wales in Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd 39 NSWLR at 165. There, Gleeson CJ said:

'An extensive examination of the many cases dealing with the meaning and effect of various common arbitration clauses in contracts was undertaken by Hirst J in Ethiopian Oilseeds v Rio del Mar [1990] 1 Lloyd's Rep 86. As his Lordship demonstrated, the expression "arising out of" has usually been given a wide meaning. Some older cases, such as Crane v Hegeman-Harris Co Inc [1939] 4 All ER 68 and Printing Machinery Co Ltd v Linotype & Machinery Ltd [1912] 1 Ch 566, which held that arbitration agreements expressed in a certain manner or entered into in certain circumstances did not permit an arbitrator to deal with a claim for rectification, have been confined by later authorities to their special facts, and should not now be regarded as indicating the correct general approach to problems of this kind.

When the parties to a commercial contract agree, at the time of making the contract, and before any disputes have arisen, to refer to arbitration any dispute or difference arising out of the agreement, their agreement should not be construed narrowly. They are unlikely to have intended that different disputes should be resolved before different tribunals, or that the appropriate tribunal should be determined by fine shades of difference in the legal character of individual issues, or by the ingenuity of lawyers in developing points of argument.

In Ethiopian Oilseeds, Hirst J held that a claim for rectification of a contract gave rise to a dispute "arising out of" the relevant agreement.

That decision, and the reasoning underlying it, reflects the current state of the law in New South Wales: see also IBM Australia Ltd v National Distribution Services Ltd (1991) 22 NSWLR 466 at 475-477, per Kirby P.'

(Emphasis added.)

The approach enunciated by Hirst J and, through him, by Gleeson CJ, Meagher JA and Sheller JA, is consistent with most modern authorities: Heyman v Darwins Ltd [1942] AC 356 especially at 366; HE Daniels Ltd v Carmel Exporters and Importers [1953] 2 QB 242, 255; Government of Gibraltar v Kenney [1956] 2 QB 410 at 421-23; Gunter Henck v Andre & Cie SA [1970] 1 Lloyd's Rep 235, 240-41 (Mocatta J); Ashville Investments Ltd v Elmer Contractors Ltd (The Playa Larga) [1989] QB 488; though compare Union of India v EB Aaby's Rederi A/S (The Evje) [1975] AC 797, 814 and 817.

Given the unqualified approval of Gleeson CJ to the reasoning of Hirst J in Ethiopian Oilseeds [1990] 1 Lloyd's Rep 86, it is of utility to examine some aspects of that reasoning. Hirst J referred with approval to the decision of Sellers J in Government of Gibralter v Kenney [1956] 2 QB 410. In that case the arbitration clause was framed, relevantly, as follows:

'any dispute ... in relation to any thing or matter arising out of or under this agreement ...'

Sellers J (Gibralter v Kenney [1956] QB at 421-22) made clear that the phrase 'arise out of' was wide enough to encompass claims not contractual in nature, but which had a 'close association' with the contract, or were 'incidental to' the contract, or which required the 'same investigation of the contract and its terms and the performance under it' as claims in contract would, and which were 'so closely linked with the contract'. Such an approach can be seen to be conformable with the presumed intentions of the parties to have possible disputes connected with the making, the terms and the performance of the contract dealt with by one forum - the arbitration [167] - [170].

12 I accept that the meaning of each arbitration clause is to be ascertained having regard to the text, surrounding circumstances, purpose and object of the transaction: Comandate Marine Corp v Pan Australia Shipping Pty Ltd (162). Having considered cl 22 in conjunction with the definition of dispute in cl 2 of the contract and taking a liberal approach: Comandate Marine Corp v Pan Australia Shipping Pty Ltd (162 - 163), I am of the view that the arbitration clause is sufficiently wide in scope to encompass the dispute between the parties, including the dispute which relates to the bill of exchange. The bill of exchange was borne out of the contract and the issues in dispute under the contract have a clear connection with the payment under the bill of exchange.

Operation of the International Arbitration Act

13 As will be noted, the relevant part of cl 22 refers to the Commercial Arbitration Act. Whilst I accept that it is possible for parties to exclude the operation of s 7 of the International Arbitration Act: Abigroup Contractors Pty Ltd v Transfield Pty Ltd [1998] VSC 103; (1998) 217 ALR 435, 446 - 447, does that reference exclude the operation of s 7? The plaintiff contends that it does, whereas the first defendant contends that it does not.

14 The first defendant contends that reference to the Commercial Arbitration Act may well have the effect of excluding the model law under s 21 of the International Arbitration Act in governing the international arbitration under that Act, but that does not in any way affect the application of s 7 of that Act which is the substantive aspect and which requires the court to refer the matter to arbitration if the court is satisfied cl 22 encompasses in its scope the dispute over the bill of exchange. It was argued that cl 22 is an arbitration agreement and therefore is governed by the mandatory requirements of s 7(2).

15 The first defendant contends that when one takes the liberal approach referred to in Comandate Marine Corp v Pan Australia Shipping Pty Ltd (162), the clause does not manifest an intention to exclude the principal mechanism for the arbitration of international disputes in international commerce.

16 In Administration of Norfolk Island v SMEC Australia Pty Ltd (Unreported, FCA, 21 July 2004); [2004] NFSC 1, Beaumont CJ said in part:

• Kaipara next submits that whilst cl 45.7 provides that 'A reference to arbitration under this clause is a reference to arbitration within the meaning of the Commercial Arbitration Act (1994) NSW', and that 'the arbitration proceedings must be conducted in New South Wales', this does not amount to an attempt by the parties to 'contract out' of the application of s 7(2). The operation of s 7 is unaffected by the opting out mechanism contained in s 21 of the IA Act. (Section 21 provides that if parties to an arbitration agreement have agreed that any dispute between them is to be settled otherwise than in accordance with the United Nations Commission on International Trade Law's ('UNCITRAL') Model Law, the Model Law does not apply.) Kaipara refers to Abigroup Contractors Pty Ltd v Transfield Pty Ltd & Obayashi Corporation (unreported, Supreme Court of Victoria, 16 October 1998) where it was considered whether it was open to the parties to an arbitration agreement to contract out of s 7. Gillard J found that the parties had not excluded the operation of s 7, despite the circumstance that the arbitration agreement contained a clause that the Commercial Arbitration Act 1984 (Vic) was to apply to the arbitration. In Kaipara's submission, the provisions of cl 45.7 are analogous, and, thus, are not an effective contracting out of the IA Act. Kaipara also refers to Aerospatiale Holdings Australia Pty Ltd v Elspan International Ltd (1992) 28 NSWLR 321 where Cole J considered two arbitration agreements in which the parties agreed to arbitrate any disputes under the Commercial Arbitration Act 1984 (NSW). One of the parties, Elspan, was incorporated under the laws of Hong Kong. The parties were agreed that the arbitration agreement in question fell within the meaning of the IA Act. Cole J held that 'pursuant to s 7(2) ... it is obligatory upon this Court to stay such portion of the proceedings ... as are the subject of the arbitration agreement, and to refer that portion to arbitration'.
• Having fulfilled each of the requirements in s 7(2), Kaipara submits that it is entitled to a stay. The only basis on which a court can refuse to refer a matter to arbitration is if it found that the agreement was null and void, inoperative or incapable of being performed, citing the IA Act s 7(5). Kaipara submits that the Administration bears the onus of satisfying the Court of these matters. Kaipara submits that none of these grounds have been identified or made out by the Administration [59].

I agree with the observation in Aerospatiale, and in Abigroup Contractors that the reference to the Commercial Arbitration Act 1984 (NSW) does not deprive the Court of jurisdiction under the IA Act.

...

In my opinion, these observations are in point here, so that cl 45 should, in my view, be characterised as an 'arbitration agreement' for the purposes of s 7(2). Accordingly, so far as these claims (ie [66] including [36.2] but excluding [50] and [51]) are concerned, s 7(2) mandates the grant of a stay. However, the question of imposition of conditions in staying the principal proceedings remains.

18 In my view, the clause in that case was wider than cl 22. I am of the view that cl 22 should be characterised as an 'arbitration agreement' for the purposes of s 7(2) and the claim in relation to the bill of exchange should be stayed.

19 In any event, should I have discretion in this matter, I am of the view that it should be exercised in favour of a stay. This is a dispute which has an international element and relates largely to matters relating to the plaintiff's performance of the contract. As I have already held, the bill of exchange was borne out of the contract and the issues in dispute under the contract have a connection with the payment under the bill of exchange.

20 For the reasons given, I am of the view that the first defendant's application has been successful and that the proceedings should be stayed.