The High Court of Australia (HCA) , in its decision Rinehart v Hancock Prospecting Pty Ltd[2] (Rinehart) handed down on 8 May 2019, confirmed Australian courts’ approach to interpretation of commercial arbitration clauses and when a non-party to the arbitration agreement can participate in the arbitration by claiming ‘through and under’ a party to the agreement. As indicated below, this decision has important implications for commercial arbitrations in Australia. To hear more please use this link to join us, Albert Monichino QC and the Resolution Institute on 25 June to discuss the decision and its implications in detail (insert link).

Interpretation of arbitration agreements

The HCA confirmed that arbitration agreements should be construed just like any other commercial agreement. That is, they are to be construed by reference to the language used by the parties, the surrounding circumstances, and the purposes and objects to be secured by the contract[3]. In the circumstances of this case, this meant that despite the apparent narrow wording used in the arbitration agreement, it was to be given a wide application. Whilst the HCA, gave the particular arbitration clause in question a wide ambit based on the circumstances before it, the HCA declined to endorse the approach taken by the Full Federal Court of Australia which adopted the ‘presumptive liberal approach’ to interpretation of arbitration agreements, consistent with the U.K., Hong Kong and Singapore.

The “presumptive liberal approach”, presumes that it is the parties’ intention to avoid having their disputes split between arbitration proceedings and court proceedings. This approach is considered to do away with expensive and time consuming arguments based on particular interpretations of words in an arbitration clause by commencing with the presumption that the dispute falls within the arbitration clause unless there is a clear intention to the contrary.

Whilst the HCA nevertheless adopted a broad interpretation to the arbitration clause in question, a failure to endorse the presumptive liberal approach means Australia is out of step with its pro-arbitration neighbours, Singapore and Hong Kong, as well as, the U.K.. Further, as each clause will turn on the facts of each case, expensive and time consuming disputes regarding the scope of arbitration clauses are likely to continue. This is despite the HCA’s plurality suggestion that the approach in Fiona Trust may not assume much importance for courts in the future given the likelihood that arbitral clauses such as the model UNCITRAL arbitration clause[4] (expressed in wide terms) are now recommended for use by commercial parties.[5]

When a non-party can claim “through or under” a party to the arbitration agreement

The second issue considered by the HCA concerns the meaning of “party” in s 2(1) of the Commercial Arbitration Act 2010 (NSW) (the Act) which defines “party” to include “any person claiming through or under a party to the arbitration agreement”. As other state and territory commercial arbitration acts and the Commonwealth International Arbitration Act 1974 contain similar provisions, this HCA decision will apply to these acts as well.

The HCA plurality held that a third party which relies in its defence on a cause of action or claim of a party to the arbitration agreement is claiming “through or under” the party to the arbitration agreement for the purposes of s2(1) of the Act. In doing so, the HCA dismissed as applicable previous authorities to the effect that a party can only rely on s2(1) of the Act if it is invoking a derivative cause of action, vested in a party to the arbitration agreement as might occur when the arbitration agreement has been assigned or novated to a third party. This authority included the decision of the Full Federal Court below.

In his minority judgment Edelman J was of the opinion that s2(1) must be limited by the principles of privity of contract which underpin arbitral jurisdiction to the exclusion of the courts. However, the plurality expressly rejected the contention that its decision improperly impinged the principles of privity of contract stating that in this case, the third parties were claiming a defence exercisable by the parties to the arbitration agreement i.e that the relevant agreement contained a full defence to the claims commenced by the claimant. It was not the case of imposing an arbitration agreement on a non-consenting third party. In these circumstances, the plurality opined that there is nothing exceptional to the application of s2(1) as the third parties are simply accepting the “burden of [the] stipulated conditions” in respect of the agreement they are seeking the benefit of.

The HCA decision gives a broad scope to the meaning of ‘party’ under the arbitration acts. Whilst the HCA has sought to limit the scope of its decision to the precise facts before it, there remains the potential for it to be applied so as to join third parties to the arbitration against their consent.

Implications

This decision highlights the importance of considered drafting of arbitration agreements including who the parties to a dispute maybe. Where there are likely to be or are in fact multiple parties to a dispute, some of which are not parties to the arbitration agreement, consideration should be given to if and how non-parties can participate in the arbitration, and be bound by the tribunal’s decision. These considerations can be important from a time and cost perspective but also from the perspective of obtaining an enforceable award or judgment in respect of parties located outside of Australia.

KWM recommends considering these issues before negotiation of the agreement and dispute resolution clause commence as they can impact the structure of the underlying agreement, as well as the terms of the dispute resolution clause.