Introduction
The 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 even though the underlying contract contains an arbitration clause.
In considering whether or not 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 (Fiona Trust case).[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.
The High Court of Australia recently considered the approach to be taken to stay applications under section 8 of the Commercial Arbitration Act 2010 (NSW) (CAA) in Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13 (the Rinehart case).[2] The High Court determined that it must identify the scope of the arbitration agreement in deciding whether or not 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 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.
In this note we briefly consider the three main approaches that have been adopted by courts to the standard of review for stay applications. We then consider the decisions in the Rinehart cases. Finally, we consider the approach of the High Court to the definition of “parties” to an arbitration agreement.
Different approaches to stay applications
There are three main approaches that have been adopted by courts to the standard of review for applications to stay court proceedings on the basis of an arbitration agreement: the presumptive approach adopted by the English courts; the prima facie approach adopted by many Model Law jurisdictions, such as Singapore, and the balance of probabilities approach.
In England, the House of Lords adopted a presumptive approach to a stay application in the Fiona Trust case.[3] Lord Hoffmann emphasised that in construing an arbitration clause the court should give effect “to the commercial purpose of the arbitration clause” “so far as the language used by the parties will permit”. He criticised the semantic distinctions often drawn between phrases such as “arising out of”, “relating to”, “in connection with” and “under” emphasising that such cases “reflect no credit upon English commercial law” and that there needs to be a “fresh start”.[4] Lord Hoffmann stated:
“In my opinion the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction.”
Lord Hoffmann also emphasised that pursuant to the separability principle the arbitration agreement is separable from the underlying contract and that any allegation as to the existence, validity or termination of the contract must directly impeach the arbitration clause itself.
The prima facie approach similarly emphasises the complimentary principles of separability and kompetenz-kompetenz, i.e. that the tribunal has the power to determine its own jurisdiction. Adopting this approach, the court does not carry out a full merits review but considers whether the matters in dispute are, on a prima facie basis, covered by the arbitration agreement. The tribunal is then to determine its own jurisdiction.
For example, in Tomolugen Holdings Ltd v Silica Investors Ltd,[5] the Singapore Court of Appeal adopted a prima facie approach rather than a full merits review. The court considered the travaux preparatoires of the UNCITRAL Model Law and the approach in England, Canada and Hong Kong. The court acknowledged the potential tension between stay applications and the principle of kompetenz-kompetenz and concluded that the prima facie approach should be adopted.
In Australia, the courts may be requested to grant a stay in relation to domestic arbitrations under section 8 of the CAA or 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 stay applications under both the CAA and the IAA, the Australian courts have focused on adopting a liberal commercial approach to the construction of arbitration clauses, consistent with Lord Hoffman’s approach in Fiona Trust.[6] The Australian courts have also acknowledged that it is preferable that related disputes are heard in one not multiple forums. However, the Australian courts have not gone as far as to say that the starting point of construction is a presumption in favour of arbitration similar to that adopted by Lord Hoffmann in Fiona Trust.
Further, the Australian courts have not adopted a consistent approach to the standard of review required for stay applications. As explained further below, the primary judge in the Rinehart case held that the balance of probabilities approach was was required. However, neither the Full Federal Court nor the High Court provided a definitive statement as to the applicable standard of review.
Background to the Rinehart cases
The Rinehart cases arise out of disputes between Mrs Gina Rinehart and her children, Mr John Hancock (Mr Hancock) and Ms Bianca Rinehart (Ms Rinehart) relating to various family trusts, including the Hope Margaret Hancock Trust (HFMF Trust) set up by Mrs Rinehart’s father, Lang Hancock, mining magnate and founder of the Hancock Group of companies. The property of the HFMF Trust included a valuable shareholding in Hancock Prospecting Pty Ltd (HHPL), the company that held three mining tenements: the Roy Hill tenement, Hope Downs tenement and Mulga Downs tenement.
As part of a settlement of these disputes, the family, HHPL and related companies entered into settlement deeds (Settlement Deeds), including a Deed of Obligation and Release entered into by Mr Hancock in April 2005 and the Hope Downs deed first entered into in August 2006 (Hope Downs Deeds). Mr Hancock adopted the Hope Downs Deed in April 2007. Each of the Settlement Deeds contained arbitration clauses (Arbitration Agreements).
In October 2014, Mr Hancock and Ms Rinehart (the Applicants) commenced court proceedings against Mrs Rinehart, their sisters, HHPL, other companies within the Hancock Group as well as third party companies (the Respondents). The Applicants’ claims included alleged breaches of the HFMF Trust (Substantive Claims). They also challenged the validity of the Settlement Deeds, arguing that the Settlement Deeds were procured by misconduct and undue influence by some of the Respondents (Validity Claims).
The Respondents applied to the Federal Court of Australia for a stay of the court proceedings in accordance with section 8(1) of the CAA on the basis of the Arbitration Agreements. Two main questions arose:
(1) whether the claims were “matters within the scope of the arbitration agreement”, this including the Substantive Claims and the Validity Claims; and
(2) whether the Court should stay the proceedings in relation to some of the Respondents who were third party companies on the basis that they were claiming “through or under” a party to the Settlement Deeds and thus, the Arbitration Agreements.
Ultimately, the High Court granted a stay with respect to all claims and with respect to all Respondents.
Application to stay the Substantive and Validity Claims
Primary judge
The primary judge, Gleeson J, granted a stay with respect to the Substantive Claims only. Her Honour held that the Validity Claims did not come within the scope of the Arbitration Agreements and ordered a separate trial of these claims.[7]
Gleeson J considered the different approaches that had been adopted in different jurisdictions to stay applications. Referring to the decision of the English Court of Appeal in Joint Stock Company ‘Aeroflot Russian Airlines’ v Berezovsky (Berezovsky),[8] Gleeson J adopted a “balance of probabilities” approach. Her Honour held that:
“Thus, in my view, the correct approach is to decide on the balance of probabilities whether, on the proper interpretation of the relevant arbitration agreement, a matter arising in the proceeding falls within the scope of the agreement. This will generally involve a characterisation of the matter, without an assessment of the merits of the dispute arising from the matter. However, in some cases, it may be necessary to consider the merits of a claim or defence said to be the subject of an arbitration agreement in order to be satisfied that there is a relevant “matter”.”
Gleeson J then considered whether the court could determine whether or not the arbitration agreement was null and void, inoperative or incapable of being performed. Following the English Court of Appeal in Berezovsky, Gleeson J found that the court could make this determination, and that the standard of proof was the balance of probabilities.
Applying this approach, Gleeson J found that the Substantive Claims were matters arising out of the arbitration agreement. However, Her Honour did not determine that the Validity Claims (i.e. the claims relating to the validity of the Deeds) came within the scope of the arbitration agreement and ordered a separate trial to determine this issue.
Her Honour concluded that the terms “under” or “hereunder” in the Arbitration Agreements ought to be interpreted narrowly, and thus, were incapable of extending to a dispute concerning the underlying validity or enforceability of the Deeds. Gleeson J considered a validity claim is distinct from a substantive claim that would arise from the parties performance of their obligations pursuant to the Deeds. As a result, Gleeson J held that the validity claims were to be determined by the court under the proviso to section 8(1) of the CAA.
Her Honour’s decision with respect to the Validity Claims was appealed to the Full Federal Court.
Full Federal Court Decision
On appeal, the Full Federal Court, consisting of Allsop CJ, Besanko and O’Callaghan JJ, granted a stay with respect to the Validity Claims.
The Full Court adopted a broader approach than Gleeson J to the interpretation of the Arbitration Agreements. Emphasising the need to take a liberal approach to the interpretation of arbitration clauses, the Full Court concluded that the Validity Claims were claims “under” the Settlement Deeds and therefore, could be referred to arbitration pursuant to the Arbitration Agreements. The Full Court noted that the context of the arbitration clause will be a guide to determining the objective intentions of such phrases, rather than “textual comparison of words of a general relationship character.”
The Full Court considered in detail the different approaches to stay applications in different jurisdictions, including the approach of the House of Lords in Fiona Trust. The Full Court acknowledged that “aspects of the prima facie approach have much to commend them as an approach that gives support to the jurisdiction of the arbitrator”.[9] However, the Full Court was also of the view that “any rigid taxonomy of approach is unhelpful, as are the labels “prima facie” and “merits” approach”.[10] Whilst emphasising that “it is difficult to see how the Court can exercise its power under s 8 without forming a view as to the meaning of the arbitration agreement”,[11] the Court did acknowledge that “it will often not be possible fully to delineate the metes and bounds of a dispute without fully hearing the dispute” and that “to hear the facts to decide the width of the dispute, would undermine the practical and effective operation of s 8”.[12]
On this basis, the Full Court held that the court is to decide the stay application on the basis of the information before it (this being the party’s first statement on the substance) adopting a liberal commercial interpretation to the arbitration clause consistent with the usual principles applying to the construction and interpretation of contracts, i.e:[13]
“The construction and interpretation of written contracts is to be undertaken by an examination of the text of the document in the context of the surrounding circumstances known to the parties, including the purpose and object of the transaction or of the subject matter of the agreement and by assessing how a reasonable person would have understood the language in that context.”
In the context of considering Comandate Marine Corp v Pan Australia Shipping Pty Ltd (Comandate),[14] the Full Court emphasised that the “arbitration clause should be read against the sensible presumption (in effect a rational assumption of reasonable people) that the parties do not intend the inconvenience of having possible disputes being heard in two places”.[15] This approach was also adopted by Gleeson CJ in Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways (Francis Travel).[16] The Full Court went on to state that “[e]ffect is given to that assumption by interpreting words liberally when they permit that to be done”.[17] In other words:[18]
“[P]art of the assumed legal context is this correct general approach which is to give expression to the rational assumption of reasonable people by giving liberal width and flexibility where possible to elastic and general words of the contractual submission to arbitration, unless the words in their context should be read more narrowly”.
Having considered the Australian cases, the Full Court found that the approach taken by these cases was consistent with the approach of the English courts in Fiona Trust.[19] In their view, the House of Lords still focused on the need to construe the arbitration agreement: “[w]hat these cases say is that the correct general approach is to give liberal amplitude to available meaning”.[20]
Applying this approach to the present dispute, the Full Court held that “[r]eading the words liberally, we cannot see how such a dispute is not to be viewed as a dispute under the deed”.[21] On this basis, the appeal, and thus, the stay with respect to the Validity Claims, was granted.
High Court of Australia Decision
The High Court unanimously dismissed the appeal. The High Court did not consider it necessary to review the approach in the Fiona Trust case, as the court found that the scope of the arbitration agreement in the present case could be determined applying orthodox principles of contractual interpretation, i.e. by reference to the language used by the parties, as well as the surrounding circumstances and the purpose and object of the contract. As a result, the High Court did not consider the standard of review for stay applications.
The High Court emphasised the context and purpose of the Deeds was to minimise publicity surrounding the substantive dispute and to avoid the disclosure of confidential information. As a result, “it is inconceivable” that a dispute as to the validity was intended by the parties to be heard in public court proceedings rather than confidential arbitration. Thus, the validity claims were covered by the Arbitration Agreements and were to be referred to confidential arbitration.
The High Court focused on interpreting the arbitration agreement in order to consider whether the matters in dispute were “matters within the scope of the arbitration agreement”. However, the High Court did not consider the standard of review to be applied in determining this question in the context of the statutory framework, i.e. the CAA.
The significance of the statutory framework was one of the key points emphasised by ACICA in its amicus curiae submissions. ACICA stressed that the “domestic arbitration regime is now fully integrated with the regime governing international arbitration in Australia”, both of which are based on the Model Law.[22] The Model Law is an “international instrument” which is “given an international meaning and application” and requires uniformity “to produce certainty and consistency in international commerce”.[23]
On this basis, ACICA also emphasised that the court “should be informed by the principles of construction for an instrument given an international meaning and application across a range of both common law and civil law jurisdictions”.[24] An arbitration clause should be given a liberal interpretation so that disputes are referred to arbitration. This is consistent with the principles of separability and kompetenz-kompetenz as well as the Model Law’s policy of minimal curial intervention and the wide range of disputes that are arbitrable.[25]
For these reasons, ACICA encouraged the High Court to follow the House of Lords decision in Fiona Trust. However, the High Court did not address the standard of review to be applied to stay applications, as explained above.
“Through or under” a party
The High Court also considered a cross-appeal initiated by three of the Respondents, who were not parties to the Deeds, but were assignees of the mining tenements under the Deeds (Third Parties). The Third Parties sought a stay of the proceedings under section 8(1) of the CAA, on the basis that each of the Third Parties were claiming “through or under” parties to the Deeds.
The primary judge and the Full Federal Court rejected the Third Parties’ application.
The majority of the High Court (Edelman J dissenting) reversed the decision of the Full Federal Court, finding that the Third Parties could be viewed as parties to the Deeds in their own right for the purpose of section 8(1) of the CAA. The majority found that the Third Parties were persons claiming “through or under” parties to the Deeds, 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.[26]
The majority did not consider it necessary to refer to broader issues of privity of contract in reaching this conclusion. However, in dissent, Edelman J considered that the NSW Parliament would not have intended to depart from the fundamental principle of privity of contract by the use of an old formula concerning a claim “through or under a party” which had a long-standing meaning, consistent with privity.
His Honour concluded “to stretch the words of section 2(1), to give a wide and liberal construction, would be antithetical to the global fundamental principle are that parties may specify with whom they choose to arbitrate their disputes”. In short, the Third Parties were not direct parties to the arbitration agreement. They had not agreed to arbitration and thus should not be regarded as parties on the basis that they were claiming “through or under” the claimant, i.e. another party who was a party to the arbitration agreement.
Conclusion
The decision of the High Court emphasises the importance of construing 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 Commercial Arbitration Act nor in particular, “the international dimension of the [UNCITRAL] Model Law”, as argued by ACICA in its amicus curiae submissions.[27] 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 different, and sometimes inconsistent, approaches of the different Australian courts to determining whether or not to stay court proceedings in favour of arbitration has not been resolved.
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 Rhinehart case demonstrates the importance of giving careful consideration to the drafting of arbitration clauses in contracts.
[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] [2008] UKHL 40.
[4] [2008] UKHL 40 at [12].
[5] [2015] SGCA 57.
[6] [2007] UKHL 40.
[7] Rinehart v Rinehart (No 3) [2016] FCA 539 (26 May 2016).
[8] [2013] EWCA Civ 784.
[9] [2016] FCA 539 [145].
[10] [2016] FCA 539 [145].
[11] [2016] FCA 539 [145].
[12] [2016] FCA 539 [146].
[13] [2016] FCA 539 [163].
[14] 157 FCR 45; [2006] FCAFC 192.
[15] [2016] FCA 539 [166].
[16] (1996) 39 NSWLR 160.
[17] [2016] FCA 539 [193].
[18] [2016] FCA 539 [167].
[19] [2016] FCA 539 [185].
[20] [2016] FCA 539 [202].
[21] [2016] FCA 539 [204].
[22] ACICA submissions [8].
[23] ACICA submissions [22].
[24] ACICA submissions [8].
[25] ACICA submissions [24].
[26] 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.
[27] ACICA submissions [22].
