ALTERNATIVE DISPUTE RESOLUTION CLAUSES HOW TO GET THE MOST OUT OF THEM

Transcription

1 ALTERNATIVE DISPUTE RESOLUTION CLAUSES HOW TO GET THE MOST OUT OF THEM Albert Monichino + Barrister, Arbitrator & Mediator I. INTRODUCTION Alternative Dispute Resolution ( ADR ) 1 is flavor of the month. Everybody seems to be promoting it whether it be law reformers 2, Attorneys-General 3 or judges 4. This is not surprising given the general dissatisfaction with litigation. As Justice Heydon of the High Court has commented extra-curially: The essential difficulty is the tendency of every aspect of litigation to be bloated, flabby and excessively voluminous allegations in pleadings, the content of discovery, and in particular written argument, citation of authority, and summing-up and judgments themselves. 5 Good commercial lawyers whether they be front end transaction lawyers or back end litigators are well informed as to the alternatives to litigation. While existing or future disputes may be referred to ADR, it is best to give proper consideration to the appropriate form of dispute resolution at the time of entering into a contract and before any dispute has arisen. That is, once a dispute arises, one party invariably will drag its heels as it is not in its interests to resolve the dispute expeditiously. Most commonly, therefore, ADR clauses are concerned with the reference of future disputes to an appropriate form of ADR. There are many and varied forms of ADR. It pays to be familiar with the available alternatives Paper presented at a Legalwise Litigating Contracts Dispute in Sydney on 20 November 2008 and in Melbourne on 27 November LLM (Cambridge), FCIArb, FIAMA. 1 Although in some quarters there is a push to replace the word Alternative with the word Appropriate. Thus, see chapter 4 of the Victorian Law Reform Commission ( VLRC ) Civil Justice Review Report (May 2008). See the Australian Financial Review, 6 June 2008, where the Federal Attorney-General Robert McClelland was quoted as urging Government agencies to be less reliant on litigation by using Alternative Dispute Resolution, saying that Government needed to play a leading role in encouraging greater use of ADR, given disputes were often between Government agencies and individuals with limited means. Who are promoting judicial mediation. For example, see James Eyres, Australian Financial Review, 9 May 2008: Victoria will increase spending on the justice system to boost its efficiency and to introduce a pilot scheme later this year to involve more judges in mediation. JD Heydon, Reciprocal Duties of Bench and Bar (2007) 81 ALJ 23 at 28.

2 2 In this paper I propose to: (a) (b) (c) (d) canvas the major forms of ADR; comment on some different types of ADR clauses; survey some aspects of the law relating to arbitration agreements; and discuss the enforceability of ADR clauses. In essence, there is a two stage intellectual process. First, one must decide what sort of ADR process(es) best fits the (existing or likely future) dispute in question. Secondly, one must consider how as a matter of drafting that conceptual choice is to be achieved effectively. II. DIFFERENT TYPES OF DISPUTE RESOLUTION PROCESSES Let me briefly outline the major forms of ADR that are commonly encountered in ADR clauses. (A) Executive Negotiation It is not uncommon these days for ADR clauses to involve a stepped process that is, a series of ADR processes culminating in either arbitration or litigation. The first such step in the process usually involves direct negotiation between the parties unassisted by any facilitator. In that regard, the contract may nominate a representative of the respective parties who is to participate in the direct negotiations. Failing successful resolution of the dispute, the stepped ADR clause will then invariably nominate another form of ADR. It is worth noting at this point that ADR processes fall broadly into two categories. First, processes which necessarily result in a binding determination. In this category would fall arbitration and expert determination. Secondly, processes which do not necessarily result in a binding determination. In this category would fall mediation and early neutral evaluation. (B) Mediation I need hardly describe mediation. It is now part of the general legal milieu. Mediation is a decision making process in which the parties, assisted by an independent facilitator (ie. the mediator), attempt to reach a consensual

3 3 resolution of their dispute. 6 decision on the parties. Significantly, the mediator does not impose a (C) Expert Determination Expert determination involves the parties agreeing to refer their dispute to an independent person for a binding determination. As Einstein J noted in The Heart Research Institute Limited v Psiron Limited 7 : expert determination is a process where an independent expert decides an issue or issues between the parties. The disputants agree beforehand whether or not they will be bound by the decisions of the expert. Expert determination provides an informal, speedy and effective way of resolving disputes, particularly disputes which are of a specific technical character or specialised kind Unlike arbitration, expert determination is not governed by legislation. The adoption of expert determination is a consensual process Expert determination clauses have become common place, particularly in the construction industry, and frequently incorporate terms by reference to standards such as the rules laid down by the Institute of Arbitrators & Mediators of Australia... 8 Unlike an arbitrator, however, that independent person is not required to act in a quasi-judicial manner. Thus, unless the parties otherwise agree, he or she is not bound to receive submissions from the parties or give reasons for the determination. 9 While expert determination has its advantages, it has severe limitations in resolving major factual controversies as the expert will invariably reach a determination without the benefit of cross-examination of witnesses. 10 (D) Arbitration Arbitration is a process whereby the parties agree to refer their dispute to an independent person who will resolve the dispute by a binding determination following a quasi-judicial inquiry. In other words, the arbitrator must afford natural justice to the parties. He or she is, if you like, a private judge. Arbitration has a long history dating back to ancient Greece. 11 Unlike expert I should however add that in his recent textbook Mediation: Principles, Process Practice (2005, LexisNexis Butterworths), Professor Laurence Boulle states in the opening chapter Mediation is not easy to define or describe and then proceeds to devote 12 pages to definitional issues. [2002] NSWC 646. See also Robert Hunt, The Law relating to Expert Determination (2002) 18 Building and Construction Law 2. See Triarno Pty Ltd v Triden Contractors Ltd (unreported), NSW Supreme Court, Cole J, 22 July 1992 quoted by Robert Hunt at p.8. If the expert insists on or allows cross-examination to take place, he is in danger of transforming himself from an expert determiner to an arbitrator. Contrast Age Old Builders Pty Ltd v Swintons Limited [2003] VSC 307 at [68] - [69] per Osborn J, on appeal at [2005] VSCA 217. Homer s Iliad refers, for example, at to the arbitration of a dispute to determine the blood price of a slain man; see also D. Roebuck, Sources for the History of Arbitration (1998) 14 Arbitration International 237.

4 4 determination, arbitration is subject to a legislative framework. It is not purely a creature of contract. The relevant legislation defines the rights and obligations of the parties in connection with the arbitration process. There are two primary forms of arbitration in Australia. First, there is domestic arbitration regulated by the uniform Commercial Arbitration Act. As the name suggests, domestic arbitration is concerned with the resolution of purely domestic disputes by way of arbitration. On the other hand, there is international commercial arbitration which is regulated by the International Arbitration Act 1974 (Cth). (i) Domestic Arbitration The uniform Commercial Arbitration Act confers limited jurisdiction on the State Supreme Courts of Australia to vary or set aside an arbitral award in relation to any question of law arising out of the award. On the other hand, there is much less scope for a Court to interfere with an international arbitration award. 12 Therefore, whether one is operating under the Commercial Arbitration Act as opposed to the International Arbitration Act is of critical significance. (ii) Fast-track Arbitration Fast-track arbitration is an exciting new form of arbitration developed by the Institute of Arbitrators and Mediators Australia ( IAMA ) in 2007 to address the malaise affecting domestic arbitration in Australia. The distinguishing feature of fast-track arbitration is that the arbitrator s award must be produced within a period of 150 days from the commencement of the arbitration. The arbitrator has a very limited power to extend the time limit to 180 days. Thereafter, absent the agreement of the parties or the intervention of the Court 13, the arbitrator is functus officio after the expiry of the time limit. The overriding objective of the IAMA Fast-Track Rules is that the arbitration should be conducted fairly, expeditiously and cost effectively and in a manner that is proportionate to the amount of money involved and the complexity of the issues. The IAMA Fast-Track Rules, a Practice Note explaining their operation and a sample dispute resolution clause Thus, an international arbitration award cannot be upset on the ground of error of law. Under section 48 of the Commercial Arbitration Act.

5 5 referring (future or existing) disputes to fast-track arbitration can be found on the IAMA website. 14 One must nevertheless be careful in referring all future disputes under a contract to fast-track arbitration. In State of NSW v Austeel Pty Ltd 15 at [24] Palmer J noted that if: the dispute happens to be extremely complex, then the lawyers conducting the arbitration are required to adopt procrustean measures to accommodate it to the available arbitration time. 16 (emphasis added) Serious consideration should, however, be given by lawyers to referring disputes of lesser significance to fast-track arbitration. For example, in a multi-million dollar contract there may be substantial attraction to having disputes of up to $200,000 determined by fast-track arbitration. (iii) International Arbitration An arbitration is international for the purposes of the International Arbitration Act: if the parties have their places of business in different countries; if the place of arbitration is a country different from the place of the business of one party; where the contract has to be performed in a different country; or where the parties expressly agree that the subject matter of the agreement relates to more than one country. The UNCITRAL Model Law forms a schedule to the International Arbitration Act. The Model Law is a template for domestic legislation promulgated by the United Nations in order to harmonise the rules of international commercial arbitration. 17 The Model Law is (or at least substantial parts of it are) enacted in legislation in countries throughout the world. The Model Law, via its incorporation in the International Arbitration Act, forms part of Australian law and attaches to [2003] NSWSC In that case, the arbitration clause in the contract imposed a 30 day time limit from beginning to end of the arbitration notwithstanding that the project involved hundreds of millions of dollars and complex issues. See Malcolm Holmes QC, International Arbitration: What is it and why is it so important? (March 2008) Issue No. 6 The ADR Reporter p. 20 at 21.

6 6 international commercial arbitrations where the place of arbitration is a city within Australia. Also scheduled to the International Arbitration Act is the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Currently some 142 countries have signed-up to the New York Convention. Spiegelman CJ has noted that the New York Convention provides for the effective and efficient enforcement of arbitration awards throughout the world, adding: Nothing remotely like that exists if one obtains a judgment from a Court. 18 (E) Early Neutral Evaluation Early Neutral Evaluation is a non-binding process in which the parties present arguments and evidence to a dispute resolution practitioner who then provides a non-binding opinion. For example, a non-binding opinion by a senior lawyer or retired judge as to the proper interpretation of a written contract. (F) Med-Arb Med-Arb is an abbreviation for Mediation-Arbitration. It is a hybrid dispute resolution process. It combines mediation and arbitration. The combined process is sometimes reversed and called Arb-Med. The VLRC stated in its Civil Justice Review Report: 19 The Commission believes hybrid dispute resolution processes should be included in the list of ADR options available to the parties. The US experience suggests that hybrid processes can be very effective in the right circumstances and offer parties another alternative to conventional dispute-resolution approaches. 20 The uniform Commercial Arbitration Act specifically allows the arbitrator to change hats and act as a mediator. 21 Med-Arb also has a long history Spiegelman CJ, Transaction Costs and International Litigation, Inter-Pacific Bar Association Conference, Sydney, 2 May VLRC, Civil Justice Review Report (2008). At p See section 27 of the Commercial Arbitration Act. See Roebuck, The Myth of Modern Mediation (2007) 73 Arbitration 105 at 106: Everywhere in the Ancient Greek world arbitration was normal and in arbitration the mediation element was primary mediation was attempted first The processes of mediation and arbitration often intermingled, but they were conceptually distinct

7 7 An almost invariable feature of mediation is that the mediator will meet the parties separately in private session. In those private sessions, matters are usually disclosed to the mediator that are not disclosed in open session. Unless expressly authorised to disclose those matters to the other party, the mediator is required to keep those disclosures confidential. It is anathema to most common lawyers that a judge or arbitrator empowered to make a binding determination should be entitled to receive private communications from one party. As a result, notwithstanding the express legislative sanction provided in section 27 of the Commercial Arbitration Act, Med-Arb has not been embraced in Australia as a dispute resolution process. But there is, I believe, a change in the wind. Specifically, the Australian branch of the Chartered Institute of Arbitrators ( CIArb ) 23 is about to launch a set of Med-Arb Rules which address the traditional concerns with the Med-Arb process. The central features of the new Med-Arb Rules (or Hybrid Dispute Resolution Rules) 24 are as follows: (a) (b) a party under a contract which refers a relevant dispute to Med-Arb in accordance with the CIArb Med-Arb Rules is required to notify the dispute to CIArb; CIArb then appoints two neutrals to resolve the dispute; (c) the first neutral accepts appointment as an arbitrator 25 and then proceeds to mediate the dispute (including, unless the parties otherwise agree, meeting the parties in private session); (d) if the mediation is not successful in resolving the dispute, the first neutral will continue to resolve the dispute by way of arbitration but only if: (i) (ii) both parties expressly authorise the first neutral to proceed to act as an arbitrator and waive any objection on the grounds that he may have received private communications during the mediation phase of the process; and the first neutral consents to continuing to act in relation to the dispute in the capacity as arbitrator in other words, provided Of which I am the Victorian Chapter Convenor. The Rules have not yet been formally named. Thereby attracting the operation of the Commercial Arbitration Act.

8 8 that he does not feel compromised by what has occurred during the mediation; (e) if the above cumulative conditions are not met, CIArb as appointing authority will then immediately request the second neutral to continue to determine the dispute by arbitration. One advantage of the Med-Arb process referred to above over separate mediation followed by separate arbitration is that it limits the hiatus between the mediation and arbitration phases. I commend the Med-Arb process for your consideration. III. DIFFERENT TYPES OF ADR CLAUSES ADR clauses come in all shapes and sizes. They can be simple or they can be complex. Generally speaking, the simpler they are, the more likely they are to be effective. If you want to select a single ADR process as your preferred dispute resolution process, there are numerous samples of ADR clauses that you can use and which can be found on the websites of the major dispute resolution bodies in Australia for example, IAMA 26, CIArb 27, the Australian Centre of International Commercial Arbitration ( ACICA ) 28 and the Australian Commercial Disputes Centre ( ACDC ) 29. There you will find mediation clauses, arbitration clauses and expert determination clauses. Difficulties arise, however, when parties seek to achieve something more sophisticated in particular: (a) (b) a staged (or multi-tiered) process utilising different forms of ADR (say, executive negotiation followed by mediation, alternatively expert determination, followed by arbitration); or seek to separate particular types of disputes for particular treatment. The above objectives can of course be achieved but one must be especially careful to use clear language to achieve the desired result. Otherwise, the parties may well find

9 9 themselves involved in satellite litigation over the meaning or operation of the relevant ADR clause. One commentator has noted: There are a number of risks associated with escalation clauses. First, such clauses may well be pathological in the sense of not being capable of functioning in practice. This is because parties may well stumble on a step on the escalation ladder. The complexity of the clause increases potential for error, particularly given the circumstances in which such clauses are drafted. 30 Secondly, such clauses may well involve a greater risk of uncertainty. Thirdly, escalation clauses may heighten ill-feeling rather than produce the good faith that is necessary for some of the ADR processes to work effectively. 31 (emphasis added) The same commentator noted that a multi-tiered ADR clause must provide for smooth transition from one dispute resolution level to the next so that the clause can work effectively and that: Perhaps the most important matter when drafting [a multi-tiered ADR clause] is to allow a method to ascertain the point of failure [of one step]. If the point of failure is to be left to the parties, this creates an obvious lacuna. 32 Inability to determine with certainty the conclusion of one of the steps of a multi-tiered process is likely to render the ADR clause unenforceable. If a multi-tiered ADR clause is to be utilised, strict time limits should be inserted to prevent unnecessary delays. Parties may also wish to insert a stand still clause to stop time running for the purposes of any relevant statute of limitations. 33 When parties seek to afford separate treatment for particular types of dispute, they should be careful to define with clarity the nature of the dispute to be afforded special treatment. For example, parties in a construction contract may wish to refer technical engineering disputes to an appropriately qualified expert for expert determination. It is often difficult in advance to define the nature of likely future disputes with clarity. Invariably lawyers at a later date engage in vigorous debate as to what the parties objectively intended at the time of the making of their contract No doubt alluding to the fact that ADR clauses sometimes referred to as midnight clauses are left to last to negotiate in a commercial contract and are not given as much attention as other clauses. See K Dharmananda, Reflections on drafting effective dispute clauses (2008) 24 BCL 150 at 157. Dharmananda at 158. See Holmes QC, How to draft an effective arbitration clause in an international commercial contract, paper presented on 4 September 2008 in Sydney at a seminar entitled Aspects of International Commercial Arbitration hosted by the Law Society of NSW, para 46, available on the CIArb website at

10 10 Finally, consideration needs to be given at the contract drafting stage to balancing the resolution of disputes by ADR (as opposed to litigation) with the need to obtain urgent interim or interlocutory relief. In a domestic arbitration or expert determination, the neutral has (absent the express agreement of the parties or provision contained in special rules agreed to be applied by the parties) little or no power to grant urgent interim relief. In those circumstances the parties may wish to include a provision in their ADR clause expressly contemplating that the parties are at liberty to apply to the Court for injunctive or other interim relief. It is advisable in those circumstances to provide that the reservation of a right to seek injunctive or interim relief does not amount to a waiver of a party s rights to enforce the ADR clause. 34 IV. ARBITRATION AGREEMENTS (A) General Principles An arbitration agreement is an agreement by 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. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. 35 Thus, what is to be referred to arbitration is either existing or future disputes, even if only one party under the contract has the right to refer the relevant dispute to arbitration. An arbitration agreement is special in that it has a separate existence from the remaining part of the contract in which the arbitration clause is found. Thus, the House of Lords in Heyman v Darwins Ltd 36 held that an arbitration clause did not cease to have effect merely because one party claimed that the contract had been discharged by repudiation. This is known as the separability doctrine. There are two broad forms of arbitration. First, adhoc arbitration. Secondly, institutional arbitration. In the latter form of arbitration, an arbitration institution such as ACICA, the International Chamber of Commerce ( ICC ) the London Court of International Arbitration ( LCIA ), or the American Arbitration Association ( AAA ) to name a few, administer the arbitration. Each arbitration See the discussion in relation to Seeley s Case below. See Article 7 of the UNCITRAL Model Law. [1942] AC 356.

11 11 institution has a set of procedural rules conducting arbitral proceedings administered by them. The rules govern such matters as the appointment of arbitrators, costs and timetabling. Alternatively, an adhoc arbitration is an arbitration where the parties agree to conduct the arbitration in accordance with specific agreed procedures. In many adhoc arbitrations, the arbitration clause nominates adoption of the UNCITRAL Rules. These rules are a neutral set of arbitration rules developed by the United Nations. In fact, many of the institutional arbitration rules are modelled on the UNCITRAL Rules. A survey conducted by Pricewaterhouse Coopers in conjunction with the Queen Mary College of the University of London entitled International Arbitration: Corporate Attitudes and Practices 2006 ( the PWC 2006 Report ) found, inter alia, that 76% of the corporations surveyed opted for institutional arbitration. The most commonly cited reasons were reputation, understanding and familiarity with institutionally administered arbitral proceedings, and convenience of the process. (B) Matters to Consider Aside from contemplating whether your arbitration is to be an adhoc or an institutional arbitration, you should consider the place (or seat) of the arbitration. The seat of the arbitration is especially important in international disputes. The law of the seat will regulate the procedural aspects of the arbitration. The Courts of the seat will have the primary supervisory responsibility for the arbitration. Thus, any interim relief in aid of the arbitration is to be made to the Courts at the seat of the arbitration. Similarly, challenges to the arbitral award are to be made to the Courts at the seat of the arbitration. As Kerr LJ noted in Bank Mellat v Helliniki Techniki SA 37 : [The common law] does not recognise the concept of arbitral proceedings floating in the trans-national firmament unconnected with any municipal system of law. The PWC 2006 Report found that legal considerations were the single most important factor for a corporation s choice of venue for international arbitration proceedings that is, a reputation for neutrality, a strong legal system and judicial independence. 37 [1988] 1 QB 291 at 301.

12 12 As well as specifying the seat of the arbitration, the parties should specify the procedural rules to be applied in the arbitration whether the UNCITRAL Rules, the ACICA Rules, the ICC Rules, etc. Such rules invariably cover all the matters that require agreement between the parties in order to create an effective arbitral process. 38 One of the advantages of arbitration is that the parties may choose their arbitrator. Sometimes the arbitration clause contains defined criteria or qualifications that the arbitrator must possess. Parties are well advised, however, to restrain their desire to appoint an arbitrator with specialist skill in case it turns into a search for a mythical polymath, polygot superstar 39. In other words, if you are too prescriptive in the qualifications that you require in your arbitrator, you may find yourself with a limited or non-existent pool of arbitrator candidates. Another matter to consider when drafting your arbitration agreement is confidentiality and privacy. One of the advantages of arbitration over litigation is that arbitral proceedings, unlike litigation, are private if not confidential. It is worthwhile noting that under Australian law arbitral proceedings are not inherently confidential 40. In this regard, Australian arbitration law is out of step with the arbitration law of other countries for example, the United Kingdom. 41 That is not to say that the parties cannot by their agreement expressly provide that the arbitration shall be confidential. In fact, Article 18 of the ACICA Rules provides that arbitral proceedings conducted in accordance with the ACICA Rules shall be confidential. Thus, as long as your arbitration is agreed to be conducted in accordance with the ACICA Rules, there is no requirement to expressly provide in your arbitration clause that the arbitral proceedings shall be confidential. (C) Pathological Arbitration Clauses The essential functions of an arbitration clause are to: produce mandatory consequences for the parties; exclude or minimise the intervention of Courts in the arbitral process; Including the number of arbitrators and language of the arbitration. Jonathan Hoyle, The pathological arbitration clause and what it may mean, presentation to the ACICA/ACLA Conference in Sydney on 10 August See Esso Australia Resources Limited v Plowman (1995) 183 CLR 10. See Dolling-Baker v Merrett [1990] 1 WLR 890.

13 13 maximise the ability to enforce the arbitral award; and produce a process that allows the parties to resolve their dispute in the most cost-effective and efficient manner possible. An arbitration clause which does not achieve the above objectives has come to be known as a pathological arbitration clause. coined by Frederic Eisemann in the 1970s. 42 pathological if it: The phrase was first An arbitration clause may be fails to cover the disputes that are intended to be referred to arbitration; fails to identify an appropriate seat for the arbitration or identifies an inappropriate seat; gives the arbitrator powers that he cannot exercise as a matter of law; fails to identify the correct institution or the correct set of arbitral rules 43 ; gives conflicting alternative methods of resolving the dispute 44 ; fails to provide default mechanisms in the event the process breaks down; or adopts institutional rules in a way that is not possible or in a way that is not acceptable to the relevant institution. 45 Some examples of pathological arbitration clauses suffice to illustrate the point: The parties hereby agree to settle their disputes amicably by arbitration; or The arbitrator shall be a well known Chamber of Commerce; and, closer to home: 20.1 If senior management of each party are unable to resolve the dispute it shall be referred to arbitration in accordance with the rules for the conduct of commercial arbitrations of the Institute of Arbitrators & Mediators Australia. The number of arbitrators shall be one. The place of arbitration shall be Melbourne, Australia. The language of the arbitration shall be English. The arbitral award shall be final and binding upon both parties Former Secretary-General of the ICC Court of Arbitration. For example, nominates a non-existent arbitration institution. See discussion of Seeley s Case below. See Hoyle (supra at note 38).

14 Nothing in this clause prevents the parties seeking injunctive or declaratory relief in the case of a material breach or threatened breach of this agreement 25. Subject to clause 20 the parties irrevocably submit to the Courts of Victoria. 46 (emphasis added) Remember that arbitration clauses do not have to be elaborate in order to be effective. The following clause was held to be effective by the English Courts: Arbitration, if any, by ICC Rules in London... English law to apply. 47 The party resisting the reference to arbitration argued that the words "if any" were fatal as they did not suggest unconditional agreement. The argument was rejected and the words treated as surplusage or as properly read to mean "if any dispute arises". (D) Scope of the Arbitration Agreement The scope of the arbitration clause determines the disputes which are to be referred to arbitration. The parties may use different language in order to indicate the disputes intended to be referred to arbitration. Commonly used expressions such as disputes arising under, arising out of, in relation to or in connection with are utilised by parties in their arbitration clauses. Until recently, the case law was replete with cases involving sterile debates as to the breadth of expressions such as arising under and arising out of and whether they were wide enough to encompass, say, claims for misleading or deceptive conduct under the Trade Practices Act 1974 (Cth) in respect of precontractual negotiations. 48 In recent times there has been a change in the judicial approach to the interpretation of arbitration agreements. Sterile linguistic distinctions have been eschewed in favour of an approach which recognises that when parties by their agreement refer disputes to arbitration, they are presumed as a matter of commercial reality to have intended that all their disputes should be referred to arbitration, as opposed to the fragmentation involved in having some disputes referred to arbitration and others referred to litigation This clause was the subject of the Federal Court of Australia decision in Seeley s Case referred to below. See Mangistaumunaigaz Oil Production Association v United World Trade Inc [1995] 1 Lloyd's Rep 617. See for example, Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160.

15 15 The seminal case which introduced this change in judicial thinking was a decision of the Full Court of the Federal Court of Australia in Comandate Marine Corp v Pan Australia Shipping Pty Ltd 49. The relevant arbitration clause in Comandate provided that all disputes arising out of the contract should be referred to arbitration. The question was whether the parties objectively intended by their agreement that legal claims for misleading or deceptive conduct in contravention of the Trade Practices Act in respect of pre-contractual events should be referred to arbitration. In other words, was such a dispute a dispute arising out of the contract? On a strict linguistic analysis, probably not. Yet the Full Court held otherwise, emphasising that standard form international contracts should be construed liberally and that the parties should be presumed not to have intended the inconvenience of having their disputes heard in different venues. Allsop J (with whom Finn and Finkelstein JJ agreed) said: 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. This may be seen to be especially so in circumstances where disputes can be given different labels, or placed into different juridical categories, possibly by reference to the approaches of different legal systems. The benevolent and encouraging approach to consensual alternative non-curial dispute resolution assists in the conclusion that words capable of broad and flexible meaning will be given liberal construction and content. This approach conforms with a commonsense approach to commercial agreements, in particular when the parties are operating in a truly international market and come from different countries and legal systems and it provides appropriate respect for party autonomy. 50 In other words, the parties were presumed to have favoured one-stop adjudication. Significantly, the House of Lords expressly endorsed the approach taken in Comandate in Fiona Trust & Holding Corp & Ors v Yuri Privalov & Ors 51, at least in the context of international arbitration agreements. The question in Fiona Trust was whether disputes about the rescission of a charter party contract on the grounds that the contract was induced by bribery fell within the (2006) 157 FCR 45; [2006] FCAFC 192. At [165]. [2007] 4 All ER 951; [2007] UKHL 40 affirming [2007] 1 All ER (Comm) 891; [2007] EWCA Civ 20.

16 16 arbitration clause in the charter party which provided for disputes arising out of the charter party to be referred to arbitration in London. Notwithstanding this change in judicial approach towards the interpretation of arbitration agreements, it is prudent when drafting an arbitration agreement to draft it as widely as possible say: All disputes arising out of, in relation to or connected with this agreement shall be referred to arbitration Some recent cases illustrate that the drafting of arbitration agreements remains somewhat perilous. 52 The first decision is a decision of the Federal Court of Australia in Seeley International Pty Ltd v Electra Air Conditioning BV 53. The arbitration clause in Seeley s Case appeared in an international exclusive distributorship agreement. The text of the clause is set out above. 54 In essence, the parties agreed that in the absence of resolution of the relevant dispute by executive negotiation, the parties would refer their dispute to arbitration (see clause 20.1). The difficulty was that the contract contained apparent inconsistent provisions (see clauses 20.3 and 25). Those other provisions did not sit comfortably with the apparent agreement of the parties to refer all their disputes to arbitration. One view is that the parties may have intended to clarify that the arbitrator may grant injunctive or declaratory relief. 55 The Court was not persuaded by that interpretation. The Court instead interpreted clause 20.3 as preserving the parties rights to seek injunctive or declaratory relief from a Court. That construction was supported by clause 25 an exclusive jurisdiction clause. Clause 25 was inconsistent with an agreement to refer all disputes to arbitration. That is, an arbitration agreement is an agreed forum clause. A jurisdiction clause is the same thing. You can t have both. 56 The existence of clauses 20.3 and 25 caused the arbitration agreement to fail. The reference to declaratory relief in clause 20.3 was particularly confusing See Doug Jones, Drafting an arbitration agreement it s not as easy as it looks (August 2008) The Resolver at p. 3; see also Michael Pryles, Inoperative and operative arbitration agreements developments in Australian case law (2006) Vol. 23(3) Journal of International Arbitration 227; see also Max Bonnell, When is an arbitration agreement inoperative? (2008) International Arbitration Law Review 111. (2008) 246 ALR 589; [2008] FCA 29, affirmed on appeal at [2008] FCAFC 269. See footnote 45 above. See Doug Jones (supra at note 51). See Hoyle (supra at note 38).

17 17 Where parties wish to preserve the right to apply to a Court for urgent injunctive relief whilst maintaining a preference for arbitration of their disputes (particularly in a domestic arbitration where the arbitrator has limited, if any, power to grant injunctive relief) 57, the parties are well advised to make their intentions clear and to expressly provide in their arbitration clause that application for injunctive relief shall not amount to a waiver of a party s rights under the arbitration clause. The second case which has caused consternation in recent times is the Western Australian Court of Appeal decision in Paharpur Cooling Towers v Paramount 58. The facts were as follows. In June 2003 Paharpur (an Indian company) and Paramount (an Australian company) entered into a contract by which Paharpur agreed to design, supply and supervise the installation of two cooling towers for an ammonia plant being constructed by Paramount for BFPL (another Australian company) in the north of Western Australia. BFPL was not a party to the contract. Clause 22 of the contract provided that when any dispute arises between the parties any party may give to the other party a notice of dispute in writing. Clause 22 then set out a process by which the parties were to endeavour to resolve the dispute, but in the event that they were unable to do so, Paramount at its sole discretion: Shall determine whether the parties resolve the dispute by litigation within the jurisdiction of the Courts of Western Australia or arbitration under the Commercial Arbitration Act 59. [Paramount] shall notify [Paharpur], by notice in writing, of its decision to refer the dispute to litigation or arbitration within 28 days of either [Paramount] or [Paharpur] electing that the dispute be determined by either litigation or arbitration. (emphasis added) Contrast section 23 of the International Arbitration Act in relation to international arbitration which confers power on an arbitrator in an international arbitration to grant interim relief. [2008] WASCA 110. The reference to the Commercial Arbitration Act was anomalous in that this was an international contract and any arbitration under it should have been subject to the International Arbitration Act. The Court did not resolve the question whether the express reference in clause 22 to the Commercial Arbitration Act was intended to exclude the operation of the International Arbitration Act. Section 21 of the International Arbitration Act provides that: If the parties to an arbitration agreement have... agreed that any dispute that has arisen or may arise between them is to be settled otherwise in accordance with the Model Law, the Model Law does not apply in relation to the settlement of that dispute. In other words, the parties to an arbitration agreement attracting the operation of the International Arbitration Act may opt out of the Model Law regime. The question is whether a reference in an arbitration clause in an international contract to the Commercial Arbitration Act has the effect of signaling an agreement between the parties to opt out of the Model Law regime. See Aerospatiale Holdings Australia v Elspan International Ltd (1992) 28 NSWLR 321; See also American Diagnostica Inc v Gradipore Ltd (1998) 44 NSWLR 312 at 325.

18 18 Clause 2 of the contract defined Dispute in very wide terms: Dispute means a dispute or difference between the parties as to the construction of the Contract or as to any matter or thing of whatsoever nature arising, whether antecedent to the Contract and relating to its formation or arising under or in connection with the Contract, including any claim at common law, in tort, under statute or for restitution based on unjust enrichment or for rectification or frustration or a dispute concerning a direction given and/or acts or failing to act by the Engineer or the Engineer s Representative or interference by the Principal [ie. Paramount] or the Principal s Representative. (emphasis added) About a year later, Paramount and Paharpur agreed to amend the terms of payment to, inter alia, require Paramount to provide a bill of exchange, to be accepted by both Paramount and BFPL, in the sum of $4 million (together with interest) payable to Paharpur 180 days from the date of the shipment of the last of the equipment. The bill of exchange, endorsed as accepted by Paramount and as co-accepted by BFPL, was returned to Paharpur. However, payment was not made when the bill of exchange fell due for payment. Accordingly, Paharpur commenced proceedings against Paramount and BFPL in the Supreme Court of Western Australia. In that proceeding Paharpur made claims against Paramount for monies due and payable under the contract as well as under the bill of exchange. As against BFPL, Paharpur made a claim under the bill of exchange. Following the commencement of the proceeding, Paramount served on Paharpur a notice referring all of the matters in issue between them to arbitration under clause 22 of the contract. Paramount applied to the Supreme Court of Western Australia for an order that the proceeding, so far as it related to Paramount 60, be stayed pursuant to section 7 of the International Arbitration Act, alternatively under section 53(1) of the Commercial Arbitration Act of Western Australia, pending the determination of the relevant issues by arbitration under clause 22 of the contract. At first instance, the application for a stay was successful. That decision was reversed on appeal. The Court of Appeal reviewed the authorities which 60 There was no question that Paharpur was entitled to proceed with its claim against BFPL in the Supreme Court of Western Australia.

19 19 referred to the desired liberal construction of arbitration clauses and the presumed intention of the parties for one-stop adjudication but noted that such a consideration did not necessarily apply in the same way where the dispute in question was not limited to the parties to the arbitration agreement, but instead involved the liability of a third party. Steytler P and Newnes AJA said: On the contrary, where a party to an arbitration agreement makes the same claim against both the other party in the arbitration agreement and a person who is not a party to the arbitration agreement with the result that, so far as it involves the latter, the dispute cannot be referred to arbitration it will generally be equally difficult to ascribe to the parties to the arbitration agreement an intention that in such an event the dispute should be fragmented and that the liability of the party to the arbitration agreement and that of the third party respectively should be determined in different forums. Whether or not the parties intended such an outcome will necessarily turn on the facts of each case, but in our view it is not readily to be inferred. It is not likely to be consistent with the commercial purpose of the agreement. It will commonly result in a duplication of proceedings that will be costly, inefficient and time consuming, and give rise to the unwelcome possibility of inconsistent decisions of the different tribunals involved. That is, it will commonly result in the very opposite of what the parties ordinarily set out to achieve by an arbitration clause. 61 Accordingly, the Court of Appeal held that upon its proper construction, clause 22 was intended to apply to a dispute between the parties only and not a dispute which involved the liability of a third party. As the dispute did not fall within the arbitration agreement contained in clause 22, no question arose as to the Court s discretion to stay the proceeding under either section 7 of the International Arbitration Act or section 53 of the Commercial Arbitration Act 62. The upshot of the decision was that Paharpur was entitled to litigate its claims upon the bill of exchange against Paramount and BFPL in the Supreme Court of Western Australia, whilst its remaining claims against Paramount under the contract were referred to arbitration. The above decision of the Western Australian Court of Appeal is, with respect, unsatisfactory. It would have the effect of defeating many arbitration clauses. For example, in a typical construction contract between an owner and an At [43] [44]. In other words, those Acts had no application.

20 20 engineer, it is inevitable that any dispute between the owner and the engineer will involve the liability of a third party (namely, subcontractors). To be safe, in the light of Paharpur s case, parties should include in their arbitration clause(s) a provision to the following effect: The parties hereby acknowledge that the fact that a dispute or difference may involve the liability of a third party who is not a party to this contract does not affect the application of this clause [referring disputes to arbitration] to such dispute. It is noted that the Court of Appeal could have reached the same result on the basis that the bill of exchange was a stand alone contract between the three parties and was not subject to the arbitration agreement contained in the earlier contract. appeal. 63 V. ENFORCEABILITY OF ADR CLAUSES This was one of the submissions made by Paharpur on The Court of Appeal found it unnecessary to decide this question. Finally, let us consider the enforceability of the different forms of ADR clauses. (A) Arbitration Clauses Different considerations apply depending upon whether you are concerned with a domestic arbitration or an international arbitration, and in particular whether the Commercial Arbitration Act or the International Arbitration Act applies. (i) Domestic Arbitration Clauses In the context of an Australian domestic arbitration, the Courts retain a discretion as to whether to enforce an arbitration agreement. In particular, section 53 of the Commercial Arbitration Act provides that the Court may stay court proceedings in favour of arbitration if, inter alia, the Court is satisfied that there is no sufficient reason why the matter should not be referred to arbitration in accordance with the agreement. Therefore, there is a legislative power to stay court proceedings in respect of a dispute agreed to be referred to arbitration under the Commercial Arbitration Act. However, the Court retains a discretion whether or not to stay proceedings Noted at [26]. See Manningham City Council v Dura (Aust) Constructions Pty Ltd [1999] VR 13.

21 21 Where the rights of third parties are involved and there is the likelihood of a multiplicity of proceedings with the consequent risk of inconsistent findings, an Australian Court may well find that there is sufficient reason why the matter should not be referred to arbitration. (ii) International Arbitration Clauses In the case of an international arbitration attracting the operation of the International Arbitration Act, section 7(2) of that Act provides that the Court shall (except for very limited exceptions) stay a proceeding which involves the determination of a matter that the parties have agreed to refer to arbitration, albeit upon such conditions (if any) as it thinks fit. Section 7 is reflective of Article 8(1) of the Model Law which provides: A Court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed. (emphasis added) Thus, provided the qualifying conditions are satisfied, the Court must stay the court proceeding. Unlike a domestic arbitration, the Court has no discretion whether or not to grant the stay. 65 (B) Mediation Clauses There is less certainty as to whether a Court will stay a legal proceeding brought contrary to an agreement to mediate. A number of Australian authorities have considered this question. 66 Provided the agreement to mediate is reasonably certain in detailing the process to be followed and, further, provides that mediation is a condition precedent to litigation, the authorities suggest that a Court will stay court proceedings initiated inconsistently with the agreement to mediate. The basis for the enforcement of the agreement to mediate is not legislative. Instead, the Court will invoke its inherent jurisdiction to stay a proceeding until the requirements of the dispute resolution clause are fulfilled because allowing the See WesTrac Pty Ltd v Eastcoast OTR Tyres Pty Ltd [2008] NSWSC 894. See Hooper Bailie Associated Ltd v Natcon Group Pty Ltd (1992) 28 NSWLR 194; Elizabeth Bay Developments Pty Ltd v Boral Building Services Pty Ltd (1995) 36 NSWLR 709; Aiton Australia Pty Ltd v Transfield Pty Ltd [1999] NSWSC 996; (2000) 16 BCL 70; see also R Angyal The enforceability of agreements to mediate (1994) 12 Australian Bar Review 1.