Section 7C of the Home Building Act (HBA) provides that “a provision in a contract or other agreement that requires a dispute under the contract to be referred to arbitration is void”.   The recent case of Cavasinni Constructions Pty Ltd v New South Wales Land and Housing Corporation [2014] NSWSC 1678) considered the application of section 7C of the HBA to a detailed contractual dispute resolution regime in a contract between very sophisticated parties.  The regime involved numerous stages including expert determination and in certain circumstances, arbitration.

By way of background:

  1. Cavasinni Constructions (Cavasinni) contracted with NSW Land and Housing Corporation (LHC) to construct forty residential units and two retail units (Contract).
  2. After issuing a ‘show cause’ notice, LHC issued a notice that it was exercising a right to take over the works and then proceeded to engage other contractors to complete the project.
  3. Upon the completion of the works:
    1. the Superintendent certified that Cavasinni owed LHC anamount of approximately $900,000 (Certificate);
    2. the next day LHC called upon bank guarantees worth thatCavasinni had provided as security under the Contract;
    3. Cavasinni initiated the dispute resolution process under theContract by submitting a dispute to the Superintendent.
  4. The Contract’s dispute resolution procedure involved a four stepprocess:
    1. submitting a notice of dispute to the Superintendent and adecision by the Superintendent;
    2. if dissatisfied with the Superintendent’s decision, submitting thedispute to LHC and a decision by the LHC;
    3. if dissatisfied with LHC’s decision, requiring that the dispute bereferred to expert determination;
    4. the expert’s decision on the dispute being binding on theparties except where LHC is required to pay Cavasinni anamount greater than $500,000, in which case LHC could givenotice required the dispute to be referred to arbitration.
  5. At the same time as initiating an expert determination, Cavasinnicommenced separate proceedings in the Supreme Court seekingrelief in relation to LHC’s call on the bank guarantees (Proceedings). 
  6. The Proceedings involved issues already in the subject of the disputeresolution process on foot under the Contract (including the validity ofthe Certificate and LHC’s rights under the Contract in relation torecourse to the security).
  7. LHC’s sought a stay on the basis that the Proceedings had beencommenced in breach of a mandatory dispute resolution regimeunder the Contract and constituted an abuse of process because theycreated a second set of proceedings in relation to the sameunderlying disputes (Stay Application).
  8. Cavasinni’s main defence to the Stay Application was that it could notbe said that there were multiple proceedings as section 7C of theHBA made void the whole of the Contract’s dispute resolution regime,as it provided for arbitration. 
  9. LHC’s response was that section 7C operated only to void that part ofthe dispute resolution regime concerning arbitration and that thebalance of the regime remained untouched. 

The Court had little difficulty in finding for LHC, accepting the position that the part of the dispute resolution regime providing the right of the Principal to refer the dispute to arbitration was void, but that the balance of the clause remained unaffected.  

Darke J found that section 7C was directed only at provisions that require contractual disputes to be referred to arbitration and was not directed at provisions for other forms of dispute resolution such as mediation or expert determination.  His Honour also found that the provision for arbitration was readily severable from the balance of clause, noting that instead of arbitration the parties could “resort to the courts or the other avenues provided for under Part 3A of the Act”.  Cavasinni’s primary defence having been determined, His Honour then went on to grant the stay sought by LHC on the basis that the matters in dispute could be dealt with in accordance with the agreed regime (ie. expert determination). 

Conclusions and Observations

The clear message from this decision is that prohibition in section 7C of the HBA is targeted at arbitration provisions only and will not be read more broadly so as to impugn cascading dispute resolution provisions that incorporate other forms of dispute resolution such as mediation or expert determination.

On a different level, the decision again raises the question of the appropriateness of the prohibition on arbitration, particularly in contracts with developers.  This looks like regulatory over-reach, with the usual nuisance-like consequences (such as the defence raised in the litigation the subject of this note).  If Developers can finance and manage the development of four or more dwellings under the same contract, presumably they are perfectly capable of participating in an arbitration of a dispute. 

Developers are excluded from some of the HBA’s ‘nanny state’ type regulation such as cooling off periods, consumer information and restrictions on types of progress payments. One might well ask why not extend this to the prohibition of arbitration?