Samsung C&T Corporation v Duro Felbuera Australia Pty Ltd [2016] WASC 193

The scheme of the UNCITRAL Model Law on International Commercial Arbitration (‘Model Law’) assumes that the arbitral tribunal shall have the “first bite” at determining questions of arbitral jurisdiction. This is an aspect of the Kompetenz-Kompetenz principle (reflected in Article 16 of the Model Law) which recognises the ability of arbitral tribunals to rule on their own jurisdiction. Such rulings are amenable to (de novo) review by the supervisory court at the seat of the arbitration (see Article 16(3)). The corollary – sometimes referred to as “the negative effect of Kompetenz-Kompetenz” – is that courts (at the seat or otherwise) should not pre-empt arbitral rulings on jurisdiction. A recent decision of the Supreme Court of Western Australia fails to recognise this and threatens to set a dangerous precedent for Australian courts.

Facts

Samsung (a Korean company) was engaged as a contractor on Gina Rinehart’s Roy Hill mine in Western Australia. In turn, Samsung entered into a joint venture with Duro and Forge (’Subcontract’). When Forge entered into external administration, Samsung terminated the subcontract (as it was entitled to do). Samsung then entered into a separate subcontract with Duro (‘Interim Subcontract’).

The Subcontract contained an arbitration clause providing for all disputes to be referred to arbitration in Singapore, according to UNCITRAL arbitration rules, to be administered by the Singapore International Arbitration Centre (‘SIAC’). It also provided that the governing law of the contract (i.e. the law determining the merits of the dispute) was Western Australian law.

The Interim Subcontract was contained in a term sheet. It provided that the new subcontract was on the same terms as the original Subcontract, as modified by the terms set out in the term sheet. Relevantly, the term sheet contained a jurisdiction clause (clause 3.2(b)) by which the parties consented to submit to the non-exclusive jurisdiction of the courts of Western Australia in respect of proceedings arising out of or in connection with the Interim Subcontract. The term sheet provided that the parties would negotiate in good faith to enter into a new (formal) subcontract containing such changes as required, but that in the interim the term sheet contained legally binding obligations. As events transpired, no substitute subcontract was entered into.

Dispute arose under both the Subcontract and the Interim Subcontract. Samsung commenced arbitration proceedings in Singapore in respect of claims under the Subcontract. Duro sought to raise claims under the Interim Subcontract by way of set off and counterclaim. Samsung objected to the jurisdiction of the arbitral tribunal to entertain Duro’s claims (on the basis that there was no agreement to refer disputes under the Interim Subcontract to arbitration). A duly constituted arbitral tribunal was poised to resolve the jurisdictional objection.

Meanwhile, Samsung commenced a proceeding in the Supreme Court of Western Australia, seeking declaratory relief to the effect that the parties had not agreed to resolve the Duro claims by arbitration and that the proper forum for their determination was the Supreme Court of Western Australia. Conversely, Duro applied to strike out the proceeding (on the basis that the Court did not have jurisdiction to grant the relief sought) or alternatively stay the proceeding pursuant to s 7 of the International Arbitration Act 1974 (Cth) (‘IAA’) or Article 8 of the Model Law.

Decision

The Supreme Court of Western Australia (Le Miere J) identified the central question to be whether the arbitration clause in the original Subcontract (clause 42) was incorporated in the Interim Subcontract comprised by the term sheet. This depended on the proper interpretation of the term sheet and, in particular, whether the (earlier) arbitration clause was inconsistent with the (later) jurisdiction clause. The Court held that it was not inconsistent as incorporation of the arbitration clause would nevertheless leave the jurisdiction clause with work to do (for example, providing for the submission of the parties to the jurisdiction of the Western Australian courts in respect of injunctive or urgent declaratory relief, contemplated by the arbitration clause). In other words, it was possible to construe clause 3.2(b) of the term sheet and clause 42 of the Subcontract in a way that allowed them to co-exist.

Having arrived at that conclusion, the court found that the preconditions for the grant of a stay of proceedings in s 7 of the IAA had been made out – in particular, that the proceedings were instituted by a party to an arbitration agreement and that the proceedings involved the determination of a matter that fell within the scope of that agreement (the latter aspect was not in contest). Accordingly, the Court stayed the proceedings (as it was mandated to do by s 7(2) of the IAA).

The court recognised that an issue arose as to the standard of review to be adopted by a court on a stay application. It identified two competing approaches:

  1. first, the prima facie review approach – by which the court conducts a prima facie review of the existence and scope of the arbitration agreement. Provided the court is satisfied on a prima facie basis that the matter sought to be ventilated by the plaintiff in the court arguably falls within the scope of an apparently valid arbitration agreement, it will stay the court proceedings and allow the arbitral tribunal to resolve (in the first instance) any challenge to the existence and scope of the putative arbitration agreement;
  2. secondly, the full review approach – by which the court on the stay application determines, on the balance of probabilities, the existence and scope of the contested arbitration agreement.

The Court noted that the prima facie review approach had recently been adopted by the Singapore Court of Appeal in Tomolugen Holdings Ltd v Silica Investors Ltd [2015] SGCA 57, but that the English courts preferred the full review approach (see Joint Stock Co ‘Aeroflot Russian Airlines’ v Berezovsky [2013] EWCA Civ 784). According to Le Miere J, Gleeson J had recently adopted a full review approach in Rinehart v Rinehart (No 3) [2016] FCA 539 in the context of s 8 of the Commercial Arbitration Act 2010 (NSW). This emboldened his Honour to adopt the full review approach in the context of s 7 of the IAA.

On the question of pre-emptive court declarations of arbitral jurisdiction, Le Miere J opined that while Article 16 of the Model Law provided that the arbitral tribunal may rule on its own jurisdiction, neither the IAA nor the Model Law had removed the jurisdiction of the courts to grant declaratory relief in relation to the existence of an arbitration agreement (see [27]). Thus, the Court had jurisdiction to entertain Samsung’s application for declaratory relief. It was not necessary to consider whether the Court should exercise its discretion to grant declaratory relief, as the Court had concluded that a stay should be granted.

Comment

With respect, while the Court ultimately arrived at the correct result by staying the court proceedings, several aspects of the judgment are extremely troubling.

First, both Singapore (Tomolugen) and Hong Kong (PCCW Global Ltd v Interactive Communications Service Ltd [2006] HKCA 434), the leading jurisdictions in the Asia-Pacific, adopt the prima facie standard of review on stay applications. It is out of step for Australia to adopt a different standard of review. Strictly speaking, Gleeson J did not adopt a full review approach in Rinehart. Her Honour applied a prima facie review approach to the question of the existence of the arbitration agreement, but (curiously) a full review approach to the question of scope of the arbitration agreement. There is no good reason why a different standard of review should apply to these two questions. The Singapore Court of Appeal applied the same standard of review to these questions (at [63]). Moreover, it (at [65] ff) gave several reasons for departing from the English “full review” approach. In particular, it reasoned that to require a court, on a stay application, to undertake a full determination of an arbitral tribunal’s jurisdiction could significantly hollow out the Kompetenz-Kompetenz principle of its practical effect. Le Miere J did not consider these reasons. Nor did the Court consider the undesirability of adopting an approach which was out of step with the approach taken by other Model Law jurisdictions in the Asia Pacific.

Secondly, in concluding that neither the IAA nor the Model Law had removed the jurisdiction of the court to grant declaratory relief in relation to the existence of an arbitration agreement, Le Miere J failed to consider Article 5 of the Model Law, which provides that “[i]n matters governed by this Law, no court shall intervene except where so provided in this Law.” Arguably that section precludes such declaratory relief. To grant such relief completely erodes the negative effect of Kompetenz-Kompetenz. Moreover, there is a danger of inconsistent judgments if a court in one jurisdiction (here, Australia) gives a declaration as to matters touching on the jurisdiction of an arbitral tribunal putatively seated in another jurisdiction (here, Singapore). Comity requires that this not be done.