Australian Courts: Granting a stay of proceedings
The Australian courts are often requested to enforce an arbitration agreement by granting a stay of court proceedings. A stay application may be made when a party has commenced court proceedings despite the existence of an arbitration agreement in the underlying contract.
In Australia, the courts may be requested to grant a stay in relation to domestic arbitrations under section 8 of the Commercial Arbitration Act 2010 (NSW) (CAA) and in relation to international arbitrations under section 7 of the International Arbitration Act 1974 (Cth) (IAA). Both the CAA and the IAA are based on the UNCITRAL Model Law.
In considering whether to grant a stay, courts in different jurisdictions have adopted different approaches to the standard of review. In England, the House of Lords (now the Supreme Court) adopted a presumptive approach in Fiona Trust & Holding Corporation v Privalov.[1] In many arbitration friendly jurisdictions, such as Singapore, Hong Kong and Canada, the courts have adopted a prima facie approach. Other courts have adopted a “balance of probabilities” approach which involves a full merits review of the stay application.
High Court of Australia decision
The High Court of Australia recently considered the approach to be taken to stay applications under section 8 of the CAA in Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13 (Rinehart case).[2]
The Rinehart case concerned an ongoing dispute between Gina Rinehart and two of her children regarding Ms Rinehart’s actions in her capacity as trustee of a trust (Trust). The beneficiaries of the Trust (Plaintiffs) commenced court proceedings in the Federal Court of Australia (FCA) against Ms Rinehart and others claiming a breach of contractual and equitable duties owed to the beneficiaries in her capacity as trustee of the Trust. Ms Rinehart had previously entered into a number of settlement deeds with her children. These settlement deeds contained a dispute resolution clause, which provided that any dispute “under this deed” or “any dispute hereunder” would be referred to arbitration. Ms Rinehart applied to the court for a stay of the proceedings on the basis that the dispute was to be referred to arbitration. The Plaintiffs argued that the settlement deeds were not valid and the dispute ought to be dealt with by the courts.
The Plaintiffs also brought claims against third parties, who were recipients of assets from the Trust. These third parties also applied for a stay on the basis of the arbitration clauses in the Settlement Deeds. The third parties argued that they were a party claiming “through or under” Ms Rinehart, and were therefore parties within the meaning of section 2(1) of the CAA.
The High Court determined that it must identify the scope of the arbitration agreement in deciding whether to grant a stay. It held that an arbitration agreement must be construed like any other clause in a contract, i.e. by reference to the context, object and purpose of the agreement, as well as the language used by the parties.
Whilst focusing on the need of the court to construe the specific arbitration clause for the purpose of the stay application, the High Court did not consider the standard of review. In particular, the court did not consider whether it should adopt a prima facie approach or carry out a full merits review to determine the merits of the stay application on the basis of a balance of probabilities.
The High Court also considered whether claims commenced with respect to third parties, who were not party to the arbitration agreement, should nonetheless be stayed on the basis that the third parties were acting “through or under” a party to the arbitration agreement and thus, came within the expanded definition of “party” in section 2 of the CAA. The majority of the High Court (Edelman J dissenting) found that the third parties were persons claiming “through or under” parties to the underlying agreements, stating that “there is no good reason why this claim should not be determined as between the claimant and the assignee in the same way as it will be determined between the claimant and the assignor.” The majority noted their concerns about multiple proceedings being conducted in arbitration and court. For these reasons, the third parties were parties within the definition of “party” in section 2(1) of the CAA.[3]
Conclusion
The decision of the High Court emphasises the importance of the manner in which the Australian courts will construe the words of an arbitration clause against the context and purpose of the underlying agreement. The High Court focused on the orthodox principles of contractual interpretation without considering the underlying statutory framework of the CAA. Further, the High Court did not clarify the standard of review to be adopted by the courts when enforcing an arbitration agreement. Without this clarification, the decision did not resolve the different, and sometimes inconsistent, approaches of the different Australian courts to determining whether to stay court proceedings in favour of arbitration.
Moreover, the broad approach taken by the majority to the definition of “party” to an arbitration agreement, and in particular, “through or under” a party, may expand the scope of arbitration agreements to third parties in spite of privity of contract. It now seems that a third party may be entitled to the benefit of an arbitration agreement if elements of a third party’s defence is dependent upon the rights of a party to this underlying agreement.
The Rinehart case demonstrates the importance of giving careful consideration to the drafting of arbitration clauses in contracts.
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[1] [2008] UKHL 40.
[2] Note that section 8 of the CAA is in similar terms to section 7 of the International Arbitration Act 1974 (Cth) (IAA). Both the CAA and IAA are based on the UNCITRAL Model Law on International Arbitration (UNCITRAL Model Law).
[3] Section 2(1) of the CAA provides that a party to an arbitration agreement includes any person claiming through or under a party to the arbitration agreement.
