Ordinarily, an arbitral tribunal does not have power to order preliminary discovery of documents that would allow a prospective plaintiff to evaluate whether or not sufficient evidence exists to commence a claim.  This was one of the findings of the Supreme Court of NSW in a recent case in which a company suspected that a number of its former senior managers and consultants had misused the company’s confidential information or infringed its IP rights.

Background to the case

The former employees and consultants had established a competitive business, and a publicly available description of the new business’ technology was alleged to be “remarkably similar” to the plaintiff company’s technology.  This led to the plaintiff company writing to the prospective defendants requesting that they provide various documents for the purpose of enabling the plaintiff company to evaluate whether or not to commence proceedings for breach of confidence or infringement of IP rights.  The prospective defendants acknowledged the existence of certain restrictions that were binding on them, denied breaching those restrictions and refused to provide the documents requested.  The plaintiff company then applied to the Supreme Court of NSW seeking orders for preliminary discovery.  The prospective defendants argued that the court should grant a stay of the application for preliminary discovery on the basis that the parties had agreed that all disputes regarding their relationship would be resolved by arbitration rather than in the courts.

The court dismissed the defendant’s motion for a stay, but has not yet decided whether the plaintiff is entitled to preliminary discovery.

Under the relevant Commercial Arbitration Act, if there is a “matter which is the subject of an arbitration agreement” brought before the court, the court is obliged to refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

Here most, but not all, of the prospective defendants had agreed to arbitrate any disputes they had with the plaintiff company in respect of their prior relationships.  This was contained in the employment agreements of the former employees, and in a consulting contract with the former consultant.

The decision

There were two main reasons for dismissing the defendant’s motion:

  1. On the facts of the case, there was no “matter which is the subject of an arbitration agreement” before the court.  The arbitration clause in the employment agreements applied to disputes “as to the rights or obligations” of the parties to the agreement.  The court held that a dispute as to the availability of preliminary discovery was a dispute that was independent of a dispute as to the rights or obligations of the parties.  Such a dispute might arise later – after the plaintiff company had seen the documents and decided to commence a claim against one or more of the prospective defendants.  In other words, a substantive claim between the parties would likely need to be referred to arbitration.
  2. Although an arbitral tribunal has certain powers to grant “interim measures” which are akin to interlocutory injunctions until a final arbitral award has been made, that power does not extend to the making of an order akin to preliminary discovery.  The rationale appears to be that a preliminary discovery order may only be granted by a court prior to the existence of a dispute which must be referred to arbitration.

Lessons from the decision

Think twice about including an arbitration clause in an employment agreement.  At the very least, consider whether applications for interlocutory relief should be carved out of the arbitration clause.

Although the court clearly decided that the “interim measures” provisions of the domestic arbitration legislation did not extent to orders akin to preliminary discovery, it seems to me that it would be theoretically possible for parties to agree between themselves that preliminary discovery disputes be resolved by an arbitrator rather than in the courts.  This is because the basis of arbitration is to uphold the agreement of the parties.  To do this, I think that the agreement would need to:

  • specifically provide a contractual entitlement akin to the preliminary discovery regime; and
  • have a tailored arbitration clause that provided for disputes between the parties as to their entitlement to documents under the contractually agreed preliminary discovery regime to be resolved by arbitration.

If those steps were taken, a dispute over preliminary discovery issues would be a “matter which is the subject of an arbitration agreement”.  In practice two potential disputes could be resolved by arbitration – first a dispute over preliminary discovery issues and second a substantive dispute.  At the first stage the arbitral tribunal would have power, if necessary, to grant an order preserving evidence of the kind for which preliminary discovery was sought as an “interim measure” (such preservation orders were acknowledged as falling within the “interim measures” regime by the court in this decision).  Whether or not it would be a sensible thing to try to “get around” the impact of this decision by taking these steps is another matter entirely and would need to be given careful consideration at the time of drafting the relevant agreement.