Have you heard of the arbitration guidelines of the Law Institute of Victoria? Neither had Justice Croft when, in Robotunits Pty Ltd v Mennel,1 he had to consider an arbitration agreement that referred disputes to arbitration in accordance with these fictitious guidelines. This case demonstrates that Australian courts will uphold arbitration agreements where there is clear intention to refer disputes to arbitration even if the arbitration clause is poorly drafted.
Mr Mennel and Robotunits Pty Ltd (Robotunits) were parties to three agreements: a shareholders agreement, an amended shareholders agreement (together, the Shareholders Agreements) and an employment agreement. The Shareholders Agreements governed the relationship between the shareholders in Robotunits (including Mennel), whereas the employment agreement governed Mennel’s employment terms as managing director of Robotunits.
In February 2015, Robotunits issued a proceeding in the Supreme Court of Victoria against Mennel seeking the return of over $270,000 in payments it alleged Mennel caused Robotunits to transfer to his bank account in January 2015 without any legal or equitable basis and in breach of his duty as a director of Robotunits. There were two types of payments involved: a share payment claimed by Mennel to arise under the Shareholders Agreements and an entitlement payment claimed by Mennel to arise under his employment agreement.
In March 2015, Mennel filed an interlocutory application seeking a stay of the proceeding and for the dispute to be referred to arbitration.
The Shareholders Agreements both contained an arbitration agreement which stated: “Each party irrevocably and unconditionally submits to arbitration in accordance with the arbitration guidelines of the Law Institute of Victoria.” The parties did not dispute that this arbitration clause is, on its face, pathological because there are no such arbitration guidelines. However, Justice Croft considered that because Robotunits conceded that the clause could be rendered operable with judicial assistance and because of the use of the strong words “irrevocably and unconditionally” in relation to submission to arbitration, the clause could be effective.
In determining whether to grant a stay of proceedings under s 7(2)(b) of the International Arbitration Act 1974 (Cth) (IAA), Justice Croft considered the three questions raised by that section:
- What is the matter(s) for determination in the proceeding?
- Is the matter(s) within the scope of the arbitration agreement and, therefore, capable of settlement by arbitration pursuant to the arbitration agreement?
- Is the matter(s) capable of settlement by arbitration generally?
What is the matter(s) for determination in the proceeding?
In answer to the first question, Justice Croft easily identified the matters in dispute, being:
- whether the Shareholders Agreements provided a legal or equitable basis for Mennel to cause Robotunits to make the share payment to his account; and
- whether the employment agreement provided a legal or equitable basis for Mennel to cause Robotunits to make the entitlement payment to his account.
His Honour rejected the argument by Robotunits that there was any additional requirement.
Is the matter within the scope of the arbitration agreement?
In answer to the second question, the identified matters need to be matters within the scope of the arbitration agreement. The relevant principle required the Court to ascertain “what a reasonable person in the position of the parties would have understood it to mean, having regard to the text, surrounding circumstances, purpose and object of the transaction.”2 Justice Croft considered that the arbitration agreements in the Shareholders Agreements governed disputes arising under those agreements. However, the dispute concerning a payment made pursuant to the employment agreement was not within the scope of the arbitration agreements as a reasonable person in the position of the parties would not have understood the arbitration agreements to extend to matters beyond the scope of the Shareholders Agreements.
Is the matter(s) capable of settlement by arbitration?
Justice Croft identified that there are some disputes that are not capable of settlement by arbitration, such as intellectual property, anti-trust and competition, securities transactions and insolvency disputes, and that is because there are strong public policy against referring such matters to arbitration. However, his Honour did not accept that questions arising under the Corporations Act 2001 (Cth), including breach of directors’ duties, could not be referred to arbitration. In his Honour’s view, and as a general proposition, there is not a sufficient element of legitimate public interest in matters involving the Corporations Act to make their resolution by arbitration inappropriate. Accordingly, the question of whether the payment made under the Shareholders Agreements was capable of settlement by arbitration.
Pursuant to the powers conferred under s 7(2) of the IAA to make any order the Court “thinks fit”, Justice Croft stayed the whole proceeding but referred only the dispute under the Shareholders Agreements to arbitration.
In respect of the poorly drafted arbitration clause, Justice Croft made the orders on the condition that the parties seek to agree on the arbitral seat and the rules of the arbitration. His Honour expressed the preliminary view that the seat of the arbitration would most probably be Melbourne, Victoria given the reference to the Law Institute of Victoria and the fact that the parties agreed that the governing law of the contract is Victoria. However, should the parties not reach agreement, they were granted liberty to apply.
This case demonstrates the pro-arbitration approach being consistently taken by courts in Australia. The Court intended to uphold the agreement of the parties to refer disputes within the scope of their arbitration agreement to arbitration and maintain the objects of the IAA despite the pathologies of the arbitration agreement in issue.