In Amcor Packaging (Australia) Pty Ltd v Baulderstone Pty Ltd [2013] FCA 253 the Federal Court recently considered whether an arbitration clause in one agreement applied to disputes relating to the negotiation of a separate agreement. The Court was also asked to determine whether it should exercise its discretion to stay other disputes that fell beyond the scope of the arbitration clause.

The Court’s decision aligns with the courts’ current preference to construe liberally arbitration clauses. This approach should be borne in mind both when negotiating dispute resolution clauses and when considering the ambit of their application when a dispute arises.

Background

Amcor Packaging (Australia) Pty Ltd (Amcor) and Baulderstone Pty Ltd (Baulderstone) were involved in prolonged negotiations for the design and construction of a building for a paper machine and the installation of the machine at Amcor’s premises in Botany, New South Wales (the Project).

Baulderstone submitted a tender to undertake stage 1 of the Project. In a covering letter accompanying Baulderstone’s tender, two Baulderstone representatives stated that they considered a guaranteed maximum price (GMP) contract to be ‘most suitable’ for the Project.

In June 2008 Amcor informed Baulderstone that its tender had been successful and the parties subsequently entered into a Project Delivery Proposal Agreement (PDPA). The PDPA related to the development and completion of a proposal for the delivery of the Project.

Relevantly, the PDPA contained a dispute resolution clause which confirmed that any disputes would be referred by the parties ultimately to arbitration.

Baulderstone performed the stage 1 works in the first half of 2010.

In May 2010 Amcor and Baulderstone signed a letter of intent, which confirmed a variety of matters, including a GMP of $202 million, and required the parties to ‘cooperate in good faith and use reasonable endeavours to negotiate and execute the design and construction contract’. In the meantime, the terms and conditions of the design and construct contract were being negotiated.

Also in May, the parties amended the PDPA to confirm that the stage 2 works would be performed under a GMP contract.

However, in the next few months a variety of issues threatened to derail the negotiations. These included Baulderstone canvassing a higher GMP than had been agreed and Baulderstone informing Amcor (it would appear for the first time) that Baulderstone’s German parent company, Bilfinger Berger AG (Bilfinger), had withdrawn approval of Baulderstone’s involvement in the Project if it were governed by a GMP contract.

Ultimately, the parties could not resolve the outstanding issues and Amcor terminated its negotiations with Baulderstone.

Amcor claimed that Baulderstone’s decision not to enter into the GMP contract cost Amcor tens of millions of dollars. It proposed to bring litigation against Baulderstone under the Trade Practices Act 1974 (Cth) (TPA) for allegedly making representations as to future matters without reasonable grounds, and against two Baulderstone managers for their alleged knowing involvement in those representations. Amcor also indicated that it may seek to bring proceedings against Bilfinger.

Baulderstone sought orders from the Court staying the proposed litigation by Amcor against Baulderstone and the Baulderstone representatives. This was primarily on the basis that the disputes were required to be referred to arbitration.

Decision

Was the Court required to stay the proposed litigation by Amcor against Baulderstone?

Section 8 of the Commercial Arbitration Act 2011 (Vic) (the Act) essentially requires a Court to refer a matter to arbitration if it is governed by an ‘arbitration agreement’. ‘Arbitration agreement’ is defined in section 7 of the Act as:

… an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

Baulderstone pointed to clause 31 of the PDPA, which it said was an ‘arbitration agreement’. That clause stated:

A party must not start court proceedings (except proceedings seeking interlocutory relief) or any other available form of dispute resolution in respect of a Dispute unless it has complied with this clause 31.

Relevantly, the PDPA defined ‘Dispute’ as ‘a dispute arising out of or in connection with [the PDPA] …’.

Amcor argued that clause 31 of the PDPA was irrelevant here as its potential causes of action against Baulderstone arose in connection with the negotiation of the proposed GMP contract, and not the PDPA.

It was accordingly necessary for Justice Marshall to determine whether the disputes were ‘arising out of or in connection with’ the PDPA.

Justice Marshall reviewed several cases in which courts had considered similarly worded clauses. The Court quoted Justice Allsop’s comments in Comandate Marine Corp v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45 regarding why courts should liberally construe arbitration clauses:

This liberal approach is underpinned by the sensible commercial presumption that the parties did not intend the inconvenience of having possible disputes from their transaction being heard in two places [ie in court and in arbitral proceedings] ...

The Court also noted that in another case the Court held that the words ‘in connection with’ in the context of a dispute should ‘exclude only claims entirely unrelated to the commercial transaction covered by the contract’.

Justice Marshall applied those cases and accepted Baulderstone’s argument that the GMP contract being negotiated ‘was related to, arose out of and was in connection with the matters covered by the [PDPA], being the delivery of the B9 Project with Baulderstone as the contractor referred to in the PDPA’. In this regard, the Court noted that it was ‘significant’ that the PDPA contemplated the parties would enter into a GMP contract. It would appear that this clearly connected the PDPA to the GMP contract being negotiated.

As Amcor’s proposed causes of action related to the negotiation of the GMP contract, His Honour accordingly ordered that the proposed litigation between Amcor and Baulderstone be stayed.

Was the Court required to stay the proposed litigation by Amcor against the Baulderstone representatives?

Having ordered the stay of the proposed litigation between Amcor and Baulderstone, Justice Marshall next had to determine whether the proposed litigation by Amcor against the Baulderstone representatives could continue. The Baulderstone representatives were not parties to the PDPA. The ‘arbitration agreement’ could not apply to them.

Baulderstone argued that because Amcor’s foreshadowed claims related to the representatives’ alleged involvement in Baulderstone’s alleged breaches of the TPA, they hinged on a prior finding that Baulderstone had breached the TPA. On that basis, Baulderstone argued that the Court should apply s 23 of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) to stay the proposed litigation against the Baulderstone representatives.

The Court again traversed authorities in which courts had stayed proposed litigation with respect to additional issues that fell outside the scope of the arbitration clause. In one of those cases, Casaceli v Natuzzi SpA [2012] FCA 691, Justice Jagot explained the rationale for this approach as follows:

… The basis for the discretion is that the spectre of two separate proceedings – one curial and one arbitral – proceeding in different places with the risk of inconsistent findings on largely overlapping facts, is undesirable.

Justice Marshall saw this approach to the exercise of the discretion to be ‘a practical and appropriate one’ and accordingly exercised the discretion to order the stay of the proposed litigation between Amcor and the Baulderstone representatives.

Could Amcor nonetheless apply to the Court for preliminary discovery against Baulderstone and the Baulderstone representatives?

Amcor sought the preliminary discovery of documents by Baulderstone.

Justice Marshall had already decided that the application for preliminary discovery was a dispute arising out of or in connection with the PDPA. That said, because the PDPA specifically excluded ‘proceedings seeking interlocutory relief’ from the arbitration agreement, provided they were ‘urgently required’, it was necessary to determine whether the application for discovery could nevertheless be heard.

Justice Marshall held that they could not be heard. His Honour reasoned that ‘in the ordinary course of events, non-urgent applications such as the present one for preliminary discovery do not, from a policy perspective, require urgent intervention from a court and may be more appropriately addressed during the course of arbitration’.

The Court therefore also stayed the application for preliminary discovery.

What this decision means for you

This case confirms the current appetite of the courts to construe arbitration clauses widely. In those circumstances, commercial parties should be aware that:

  • allowing negotiations to continue for a substantial time can prevent certainty as to what dispute resolution processes will apply if agreement cannot be reached, and potentially lead to parties incurring wasted time and cost seeking to bring disputes in the wrong forum.
  • an appropriately worded arbitration clause may catch all disputes that are arguably connected to the commercial transaction covered by the contract containing the arbitration agreement, including, for instance, any disputes arising in the course of negotiating a further agreement.
  • a court may stay proposed litigation against third parties not caught by the arbitration agreement whilst the arbitration between the parties to the arbitration agreement is being conducted.
  • an application for preliminary discovery is unlikely to be seen as requiring urgent interlocutory relief.