Plaintiff v Defendant

Supreme Court of Victoria|2009-12-08|Before: HARGRAVE J

ARBITRATION - Dispute concerning scope of the arbitration clause - Interim award by arbitrators as to scope of their jurisdiction - Challenge to interim award - Relevant principles to be applied in ascertaining scope of an arbitration clause.

1 The plaintiff, TCL Airconditioner (Zhongshan) Co Ltd, is a Chinese company which manufactures airconditioners. On 29 December 2003, TCL entered into a distribution agreement with the defendant, Castel Electronics Pty Ltd. Castel is an Australian company based in Melbourne.

2 Under the distribution agreement, TCL granted Castel the exclusive right to sell TCL airconditioners in Australia for a fixed period, subject to extensions if certain conditions were met. Subsequently, the distribution agreement was extended in its operation until 31 January 2014.

3 The distribution agreement was amended on 29 May 2007.

4 Castel claims that TCL has breached certain terms of the distribution agreement. It also claims that TCL has breached the terms of sales contracts and other agreements made pursuant to, or in connection with, the arrangements constituted by the distribution agreement.

5 The distribution agreement contains a clause referring certain disputes to arbitration ('the arbitration clause'). Castel referred its claims against TCL to arbitration under that clause. The parties agree that some aspects of Castel's claims, in particular the claim for breach of the exclusivity covenant, fall within the terms of the arbitration clause. TCL contends, however, that many of the claims made by Castel are outside the scope of the arbitration clause.

6 The arbitration commenced with service by Castel of a notice of dispute. The disputes were referred to a panel of three arbitrators, who directed that Castel deliver points of claim. TCL then applied to strike out the points of claim. The threshold ground was that many of Castel's claims fell outside the scope of the arbitration clause. The arbitrators determined to hear argument on that question alone, and to deliver an interim award determining the scope of their jurisdiction. The remaining grounds upon which TCL challenges the adequacy of the points of claim were left for further argument after determination of the extent of the arbitrators' jurisdiction.

7 The arbitrators delivered a considered interim award, in which they carefully reviewed the relevant legal principles governing the approach to interpretation of arbitration clauses for the purpose of ascertaining the scope of the reference to arbitration. TCL does not contend that the arbitrators erred in stating the principles to be applied. Rather, it contends that the arbitrators erred in their application of these principles, by interpreting the arbitration clause to include disputes concerning alleged breaches of sales contracts made between the parties. TCL contends that, upon its proper construction, the reference to arbitration is limited to disputes concerning alleged breaches of the terms of the distribution agreement. On this basis, TCL seeks to set aside the interim award and claims declaratory relief.

8 It is necessary to set out the terms of the arbitration clause and the legal principles governing the interpretation of arbitration clauses.

9 The reference to arbitration is contained in Article 12 of the distribution agreement, which provides:

(I) In case there is any breach of the provisions under this Agreement by either party during the effective period of this Agreement, the parties hereto shall first of all try to settle the matter in question as soon and amicable as possible to mutual satisfaction or if not so settled within 60 days such matters will be referred to arbitration in Territory for resolution.[1]

10 The scope of a referral to arbitration depends upon the proper construction of the relevant arbitration clause. Accordingly, the role of the Court in ascertaining the scope of an arbitration clause involves giving meaning to the words chosen by the parties. In that task, where the words of the arbitration clause are sufficiently elastic and general, or capable of broad and flexible meaning, they should be given a liberal construction. The justification for this liberal approach is the presumption that commercial parties are unlikely to intend the inconvenience of having possible disputes from their transaction being heard in two places. A liberal approach is especially justified where the parties are operating in an international market and come from different countries.[2]

11 In Paper Products Pty Ltd v Tomlinsons (Rochdale) Ltd,[3] French J (as he then was) recognised the liberal approach, but nevertheless determined that the words chosen by the parties limited the scope of the reference to contractual disputes. French J stated that 'the range of disputes covered by an arbitration clause must depend upon the language of the clause',[4] and stated the principle of interpretation to be applied in the following terms:

When the language of the arbitration clause in question is sufficiently elastic, then the more liberal approach of the courts ... can have some purchase. A wide construction of such clauses can be supported on the basis ... that it is unlikely to have been the intention of the parties to artificially divide their disputes into contractual matters which could be dealt with by an arbitrator and non-contractual matters which would fall to be dealt with in the courts.[5]

12 In Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd,[6] the Court of Appeal in New South Wales stated the liberal approach in the following terms:

When the parties to a commercial contract agree, at the time of making the contract, and before any disputes have yet 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 ...[7]

13 In Walter Rau Neusser Oel Und Fett AG v Cross Pacific Trading Ltd,[8] Allsop J (as he then was) said of the liberal approach:

That is not to say that all arbitration clauses should be given an identically broad meaning. The parties and (as here) industry associations are free to choose such language as they wish. A liberal interpretation of words with an elastic meaning does not entitle one to give the words in question meaning which they do not bear.[9]

14 In Comandate Marine Corp v Pan Australia Shipping Pty Ltd,[10] Allsop J (Finn and Finkelstein JJ agreeing) summarised the relevant principles to be applied in the following terms:

The ascertainment of the scope of the clause is a question of the construction of a contract. Its meaning is to be determined by what a reasonable person in the position of the parties would have understood it to mean, having regard to the text, surrounding circumstances, purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at 462 [22].
...
... Regard should be had in construing [the arbitration clause] to the clear tenor of approach internationally in construing arbitration clauses in international agreements. The authorities (to which I will refer shortly) are clear that a liberal approach should be taken. That is not to say that all clauses are the same or that the language used is not determinative. The court should, however, construe the contract giving meaning to the words chosen by the parties and giving liberal width and flexibility to elastic and general words of the contractual submission to arbitration.
This liberal approach is underpinned by the sensible commercial presumption that the parties did not intend the inconvenience of having possible disputes from their transaction being heard in two places. This may be seen to be especially so in circumstances where disputes can be given different labels, or placed into different juridical categories, possibly by reference to the approaches of different legal systems. The benevolent and encouraging approach to consensual alternative non-curial dispute resolution assists in the conclusion that words capable of broad and flexible meaning will be given liberal construction and content. This approach conforms with a common-sense approach to commercial agreements, in particular when the parties are operating in a truly international market and come from different countries and legal systems and it provides appropriate respect for party autonomy.[11]

15 In Premium Nafta Products Ltd v Fili Shipping Company Ltd,[12] Lord Hoffman summarised the applicable principles of interpretation in the following terms. First, that arbitration is consensual: 'Only the agreement can tell you what kind of dispute [the parties] intended to submit to arbitration.'[13] Second, the meaning of the words chosen by the parties 'will be affected by the commercial background and the reader's understanding of the purpose for which the agreement was made'.[14] Third, 'so far as the language used by the parties will permit',[15] the Court should give effect to the commercial purpose of the arbitration clause. Fourth, the Court:

should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator's jurisdiction.[16]

16 In the passages quoted above, I have emphasised the terms in which the commercial presumption underpinning the flexible approach has been expressed. In Paper Products Pty Ltd v Tomlinsons (Rochdale) Ltd,[17] Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd,[18] and Premium Nafta Products Ltd v Fili Shipping Company Ltd,[19] the presumption was expressed in terms of the likely intention of the parties. In Comandate Marine Corp v Pan Australia Shipping Pty Ltd,[20] Allsop J stated the presumption in more definite, terms. He referred to 'the sensible commercial presumption that the parties did not intend the inconvenience of having possible disputes from their transaction being heard in two places'.[21]

17 The formulation by Allsop J of the underlying commercial presumption was emphasised by counsel for Castel. They submitted that this formulation, combined with the statements by Lord Hoffman in Premium Nafta Products, gave rise to a legal presumption in favour of arbitrability, such that a party contending that a question is outside the scope of the arbitration must point to very clear language that this is so. In common with the arbitrators, I do not accept that submission.

18 In Walter Rau Neusser Oel Und Fett AG v Cross Pacific Trading Ltd,[22] Allsop J stated:

There is no legal rule that a dispute necessarily falls within an arbitration clause unless the court can be persuaded with 'positive assurance' that the clause is not susceptible of any meaning that would include the dispute within the clause ... There is no legal presumption at work.[23]

19 Similarly, in ACD Tridon v Tridon Australia,[24]Austin J stated that there was no presumption in favour of arbitrability.[25]

20 In my opinion, the statements by Allsop J and Austin J that there is no legal presumption at work are correct, and have not been altered by anything said by Allsop J in Comandate Marine or by Lord Hoffman in Premium Nafta Products. The arbitrators were right to so conclude.

21 Against the above legal background, I proceed to construe the arbitration clause.

22 The arbitration clause is, like most of the distribution agreement, poorly drafted. There are indications in the text of the distribution agreement that it was drafted by a person with a poor command of English language, grammar and punctuation. Many provisions are ambiguous, and a number contain otiose words.

23 The scope of the arbitration clause depends upon the proper construction of the words:

In case there is any breach of the provisions under this agreement by either party ... the matter in question ... will be referred to arbitration ...

24 The words 'under this agreement' are used in a number of places in the distribution agreement. Taking all of the various uses into account, however, I gain no assistance in determining the meaning of those words in the arbitration clause.

25 It was submitted on behalf of Castel that the arbitration clause extends to include disputes concerning breaches of sales contracts and other agreements made between the parties in consequence of, or under the umbrella of, the distribution agreement. To a large extent, these submissions found favour with the arbitrators. They expressly accepted that disputes concerning breaches of individual sales contracts were within the scope of the arbitration clause. However, they did not, at least expressly, accept that disputes concerning breaches of other agreements were within that scope.

26 The arbitrators characterised the distribution agreement as a 'constituent' or 'umbrella' agreement which established a commercial relationship between the parties. In light of that characterisation, they determined that it was appropriate to adopt a broad interpretation of the word 'under' in the arbitration clause.

27 In giving the word 'under' a broad interpretation, the arbitrators adopted the statement of Warren J (as she then was) in BTR Engineering (Australia) Ltd v Dana Corporation;[26] that the word 'under' means 'governed, controlled or bound by; in accordance with'.[27] On that basis, the arbitrators determined that breaches of sales agreements entered into 'under the umbrella of the relationship established by the distribution agreement', or 'in consequence of' that relationship, were 'governed, controlled, or bound by; in accordance with' the provisions of the distribution agreement. In reaching this result, the arbitrators were also influenced by the view that the distribution agreement is 'something of a hybrid in that it also ventures into matters which might be said to be provisions or terms of the particular sale agreements entered into under the umbrella of the Distribution Agreement'.[28]

28 The conclusion reached by the arbitrators as to the broad meaning of the word 'under', has the effect that the arbitration clause should be read as if the italicised words appearing in the re-formulation below replaced the word 'under':

In case there is any breach of the provisions governed, controlled or bound by, or in accordance with, this agreement by either party ... the matter in question ... will be referred to arbitration ...

29 This reformulation of the arbitration clause begs the question: what are 'the provisions' governed, controlled or bound by, or in accordance with, this agreement? The arbitrators did not expressly address this question. Having given the word 'under' the broad meaning referred to, they concluded that, as a result, the arbitration clause applied to any breach of any provision of any of the sales agreements entered into by the parties under the umbrella of the relationship established by the distribution agreement, or otherwise in consequence of those arrangements.[29]

30 In my opinion, this conclusion does not follow from giving the word 'under' the broad meaning attributed to it. If the broad meaning is adopted, the arbitration clause would include disputes concerning breaches of provisions contained in the distribution agreement which also apply to individual sales agreements. The arbitrators have gone much further. In effect, they have read the words 'the provisions under this agreement' as including the italicised words in the following further re-formulation:

In case there is any breach of the provisions under this agreement or under any sales agreement entered into under the umbrella of, or in consequence of, this agreement by either party ... the matter in question ... shall be referred to arbitration ...

31 In my opinion, the words chosen by the parties are not capable of bearing this meaning. It is one thing to say that the breach of a term of an individual sales agreement which is specified in, and thus may be said to arise under, the distribution agreement, is within the scope of the arbitration clause. It is another thing altogether to say that all other (unspecified) provisions of individual sales contracts are governed, controlled or bound by, or in accordance with, the distribution agreement. As a matter of ordinary language, that is not so. The parties have chosen to limit the scope of the arbitration clause to breaches of 'the provisions under this agreement'. The use of the two definite articles 'the' and 'this' is inconsistent with an intention by the parties to extend the arbitration clause to include unspecified provisions of sales agreements to be negotiated and effected under the umbrella of the arrangements constituted by the distribution agreement.

32 This conclusion is reinforced by the fact that the words used are inconsistent with the commercial presumption that parties are unlikely to intend the inconvenience of having possible disputes being heard in two places. The arbitration clause does not use the structure commonly adopted in drafting arbitration clauses. The parties have not agreed to refer all disputes or differences 'arising out of' their respective rights and obligations under the distribution agreement, or used other similarly wide language. Instead, the arbitration clause is limited to any dispute ('the matter in question') in the event ('in case there is') one party contends that the other is in breach of agreement. Thus, even if the language of the arbitration clause was wide enough to include disputes about alleged breaches of sales contracts and other agreements made under the umbrella of the distribution agreement, the scope of the arbitration clause would still be limited to disputes concerning breaches of agreement. The language of the arbitration clause is not, on any view, sufficiently elastic and general to include other claims which may arise concerning the distribution arrangements between the parties. For example, a claim that one party engaged in misleading or deceptive conduct in relation to the distribution agreement, in contravention of s 52 of the Trade Practices Act 1974 (Cth), is not capable of being described as a dispute about a breach of agreement.

33 The arbitrators gave three reasons for extending the scope of the arbitration clause to encompass any breaches of any sales agreements entered into by the parties.

34 First, the arbitrators stated that the constituent or umbrella nature of the distribution agreement warranted giving the word 'under' a broad meaning. In that regard, I accept that the arbitrators correctly characterised the distribution agreement as a constituent or umbrella agreement which established the broad terms of the commercial relationship between the parties. I also accept that this characterisation justified the arbitrators giving the word 'under' a broad meaning. Further, adopting a broad meaning, I accept that the word 'under' means governed, controlled or bound by (or in accordance with). However, as I have said above, this does not extend the meaning of the arbitration clause to include any breach of any provision of a sales contract, whether or not that provision is specified in, or arises under, the distribution agreement.

35 Second, the arbitrators stated that the broad interpretation preferred by them would give meaning to the otherwise otiose words 'during the effective period of this agreement'. In my opinion, the fact that there may be some otiose words in the arbitration clause is of little weight. As I have said, there are other examples of surplus words in the distribution agreement. It is a poorly drafted document. In particular, the words 'during the effective period of this agreement' are used elsewhere in an otiose manner. For example, Article 2 of the distribution agreement provides: 'The relationship hereby established between supplier and distributor during the effective period of this agreement, shall be solely that of seller and buyer...'

36 Further, even if the broad interpretation preferred by the arbitrators is accepted, I do not accept that the words 'during the effective period of this agreement' are capable of the meaning attributed to them by the arbitrators. The arbitrators said that their construction gave meaning to the words because it limits the reference to arbitration 'to disputes under sales contracts, but only to those sales contracts made during the term of the distribution agreement itself'.[30] The difficulty with this construction is that the words 'during the effective period of this agreement' qualify the words 'any breach'. They do not qualify the words 'the provisions under this agreement'. If the construction advanced by the arbitrators is correct, the words 'during the effective period of this agreement' would need to be read as qualifying the words 'the provisions under this agreement'. This would involve re-writing the arbitration clause by the inclusion of the italicised words in the following re-formulation:

In case there is any breach of the provisions under this agreement, or under any sales agreement entered into during the effective period of this agreement, by either party ... the matter in question ... shall be referred to arbitration ...

In my opinion, such a re-writing of the arbitration clause is not permissible. It would alter its meaning.

37 If the arbitration clause is not re-written in this impermissible way, and the phrase 'during the effective period of this agreement' is read as qualifying the words 'any breach', then, even if the arbitration clause is read as extending to breaches of sales contracts, the phrase remains otiose. A breach of a provision of a sales contract can only occur during the effective period of that sales contract.

38 Third, the arbitrators considered that their interpretation should be preferred because the distribution agreement, as amended, contains a 'mixture' of provisions 'as between general constituent or umbrella provisions and those relating to particular sales transactions'. On this basis, the arbitrators concluded that:

it is a reasonable inference, if not relatively clear, that the parties themselves did not distinguish and did not seek to distinguish in the Distribution Agreement, between disputes under the Distribution Agreement itself and [disputes] arising as a result of breaches of the particular sales agreements.[31]

39 I do not accept that the distribution agreement, as amended, includes a mixture of general constituent or umbrella provisions on the one hand and provisions relating to particular sales transactions on the other. The only provision of the distribution agreement which applies to individual sales transactions is the provision as to the time and method of payment. In that regard, Article 16(iii) specifies the time and method of payment in respect of individual sales contracts. Article 10 specifies a 'price policy'. It provides that the wholesale and retail prices in Australia 'shall be negotiated ... in order to protect the market'. This article does not contain any identifiable provisions of individual sales contracts.

40 It was submitted on behalf of Castel that the provisions of the amending agreement were intended to apply to all sales transactions entered into after that date. Further, it was submitted that the provisions of the amending agreement somehow indicated that the parties intended the arbitration clause to extend to all contractual disputes arising under sales contracts and other agreements entered into in consequence of the distribution agreement. I do not accept those submissions. Taking each of the provisions of the amending agreement in turn:

(1) Clause 1 provides that TCL will 'promptly pay Castel for all sums outstanding subject to TCL verifying the computations but in any event such payments will be made by 30/6/07 or such extended time as Castel may agree thereto'. It was submitted on behalf of Castel that this was an ambulatory provision which was intended to apply to all amounts payable by TCL to Castel from time to time under the distribution agreement, or under any sales contract or other agreement entered into in consequence of the distribution agreement. I do not accept this submission. The clause is simply an agreement to pay an existing debt, subject to verification, by a specified time. It is not an amendment to the distribution agreement in any sense.

(2) Clauses 2 and 3 concern the obligation of TCL to rectify faulty products and supply spare parts. They amend the existing provisions of Article 9 of the distribution agreement. The obligations of TCL under Article 9 are general in nature, and depend upon the volume of total sales (as to spare parts) and the incidence of defects within certain percentage ranges as applied to the total sales. Neither the original nor the amended form of Article 9 specifies any provisions which apply to any individual sales or other contracts entered into in furtherance of the distribution agreement.

(3) Clause 4 of the amending agreement introduces a new obligation upon TCL. It is an obligation to indemnify Castel 'in respect of any claim/penalty imposed by the Australian Authorities for not complying with the Australian Regulations regarding TCL products imported by Castel'. This is a general obligation, and not one which applies to individual sales contracts.

(4) Clauses 5 and 6 of the amending agreement concern the exclusivity covenants contained in the distribution agreement. They do not stipulate any provisions which apply to any individual sales or other contracts entered into in furtherance of the distribution arrangements.

41 For the above reasons, I conclude that the arbitrators erred in their preliminary ruling on the scope of their jurisdiction. Their jurisdiction is limited to disputes arising from alleged breaches of: (1) provisions of the distribution agreement; or (2) any provision, of a sales contract or other agreement, which is specified in the distribution agreement. Their jurisdiction does not otherwise extend to disputes concerning alleged breaches of sales contracts or other agreements made in consequence of the distribution arrangements established by the distribution agreement. I will make appropriate orders and declarations to reflect this conclusion. I will hear the parties as to the appropriate form of the orders and declarations, and as to costs.

[2] Comandate Marine Corp v Pan Australia Shipping Pty Ltd [2006] FCAFC 192; (2006) 157 FCR 45, [162]−[165].

[11] Ibid, [162]-[165] (emphasis added).

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Judgment (72 paragraphs)

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Cases Cited (4)