Are parties who agree to arbitration clauses ultimately relinquishing their right to resolve disputes pursuant to the jurisdiction of the court?

Contracting parties are increasingly including 'arbitration clauses' in contracts. These clauses allow parties to resolve contractual disputes by way of arbitration. However, few contracting parties are aware that, at the point of contract execution, they may be agreeing to limit their future dispute resolution options.

In 2010, new commercial arbitration laws were enacted in NSW, significantly changing the rules governing NSW arbitrations, including judicial interference in arbitral agreements.

RECENT DEVELOPMENTS - COMMERCIAL ARBITRATION ACT 2010 (NSW)

An "arbitration agreement" is simply any written agreement between parties to a legal relationship (whether contractual or not) to submit their disputes to arbitration. Such agreements are usually found in an arbitration clause within a contract, however they can also take the form of a separate agreement.

The commencement of the Commercial Arbitration Act 2010 (NSW) (Act) has considerably altered the law in respect of domestic arbitration in NSW; we consider some of the important effects of the Act below.

1. The court must enforce an arbitration agreement:

Prior to the commencement of the 2010 Act, the enforcement of domestic arbitration agreements was discretionary. This is no longer the case.

The Act now requires that, on application of a party to an arbitration agreement, the court must stay any court proceedings brought in respect of the arbitration agreement, unless the arbitration agreement itself is "null and void, inoperative or incapable of being performed".

Further, the Act allows for the commencement (or continuation) of arbitral proceedings and for an arbitral award to be made by the tribunal while the issue is pending before the court.

2. Grounds to set aside and arbitration award

The 2010 Act has restricted the grounds upon which an arbitration award in NSW can be set aside.

The new Act provides discrete grounds for setting aside an arbitral award, including (notably) where:

  • a party was under some incapacity;
  • the arbitral award goes outside of the scope of the submission to arbitration;
  • the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties; or
  • the subject-matter of the dispute is not capable of settlement by arbitration under the law of NSW.

The parties may also appeal an award on a question of law.

3. Binding nature of arbitral awards

The Act recognises the validity of arbitral awards and provides that an arbitral award is recognised in NSW as binding.

However, recognition of an award may be refused if a party:

  1. applies to a court; and
  2. is able to prove certain grounds set out in the Act (that is incapacity / no notice / award exceeded scope of arbitration / subject-matter not capable of being settled by arbitration).

4. Competence of an arbitral tribunal to rule on its own jurisdiction

The Act allows an arbitral tribunal to rule on its own jurisdiction. That is, the tribunal itself can determine whether it has the requisite jurisdiction to hear and resolve the dispute.

It is important to note that if the agreement to arbitrate is included as a clause in a contract, that clause will be treated as an independent agreement; in other words, any decision by the arbitral tribunal that the contract is null and void will not necessarily invalidate the parties' agreement to submit the dispute to arbitration.

5. Arbitral procedures

Parties have relative freedom to determine the arbitral procedures that they wish to follow, subject to the provisions of the Act. If the parties are unable to come to an agreement as to the rules of the proceeding, or if their choice of procedure would cause unnecessary delay and/or expense, the arbitral tribunal can conduct the arbitration in such manner as it considers appropriate.

SUMMARY

Parties should be aware that if they contractually agree to refer disputes to arbitration, they may be limiting the dispute resolution mechanisms that they can ultimately rely upon.

Unless a party can prove some level of incapacity or invalidity of the agreement, a court must enforce an arbitration agreement.