Commercial Arbitration in Australia – Part 1

In 2023, a four-part series of articles introduced some critical and unique features of Australian statutory law which are important for any enterprise doing business in or trading with Australia, including commercial arbitration with a connection with Australia (regardless of governing law).

This year’s series develops two features which arise in commercial arbitration in particular.

Part 1 looks at jurisdiction. Part 2 will look at issues which arise in enforcing arbitral awards.

The issue of jurisdiction illustrates an aspect of jurisdiction and arbitration agreements under Australian law that is counterintuitive and in contradistinction to other jurisdictions.

The issue which arises via Section 7(2) of the International Arbitration Act 1974 (Cth) and its state equivalents concerns the identification of parties to arbitration agreements. That legislation enacts the Model Law as covering the fields of international and domestic commercial arbitration respectively.

Section 7(2) and its state equivalents require the court on application to stay a court proceeding between parties to an arbitration agreement. The question of party identification thereby arises. For a long time, the conventional assumption was that a party meant one or more subjects that are collectively privy because the statute referred in Section 7(4) to a person claiming “through or under a party”. That had the obvious merit of relative clarity and complicity and recognised party autonomy over the arbitral process.

Not so in Australia. In Rinehart v Hancock Prospecting (2019) 267 CLR 514 a plurality of the High Court extended the concept of “through or under” beyond familiar notions of privity to include third parties whose rights or defences were dependant on the position of a party to the arbitration agreement. Edelman J in dissent held to privity. It is necessary to explain the conclusion to understand its full significance.

The origins of this diverting possibility seem to be the outcome rather than reasoning in Roussel-Uclaf v GD Searle & Co [1978] 1 Lloyd’s Rep 225 which spoke in vague terms about the close relationship between parent and subsidiary. This was eschewed by the English Court of Appeal in City of London v Sancheti [2009] 1 Lloyd’s Rep 122, but before then in Tanning Research Laboratories v O’Brien (1990) 169 CLR 332 the High Court had picked up Roussel-Uclaf in a case concerning a liquidator’s derivative defence where there was an arbitration agreement, and was followed by Nettle JA in Flint Ink NZ v Huhtamaki Australia [2014] VSCA 166 (without reference to Sancheti), although Nettle JA emphasised the derivative factors in line with Tanning Research.

In Rinehart, the plurality (which included Nettle JA) cited Sancheti and said that it correctly understood Roussel-Uclaf stood for the proposition that the core issue between the parties to the arbitration agreement and the non-party subsidiary were the same (ie, entitlement under an agreement which included the arbitration agreement). That was a fact to be determined in the arbitration (ie, a matter) and so Roussel-Uclaf was in line with what the High Court had said in Tanning Research.

The plurality in Rinehart made an observation about the approach in England – ie, that instead of treating the non-party as a party, the correct approach is to stay against the party and then consider whether a stay against the non-party was also just – cf Dallah Real Estate [2011] AC 763. Rationalisations about efficiency and purpose were made to support the plurality’s preference for the direct route.

This overturned the Full Court’s approach (2017) 257 FCR 442 at [323] and it is useful to understand how. The Full Court said Roussel-Uclaf was wrong and inconsistent with Australian authority that required the claim or defence in question must be derived from a party to the arbitration agreement and there must be a relationship of sufficient proximity (BHPB Freight v Cosco Oceania Chartering[2008] FCA 551). Its key holding was that, while the party had been given an extended meaning beyond assignment or transfer, the absence of a legal relationship between the parties was critical. In the Hight Court, Edelman J agreed. He considered that Mance J in Grupo Torras v Al-Sabah [1995] 1 Lloyd’s Rep 225 was correct to identify agency, operation of law, assignment or novation as indicative.

Rinehart stands as the definitive statement of Australian law. Its implications are considerable, particularly for infrastructure procurement and tiered contracts which are structured to avoid the very situation where separate interests are aggregated in dispute resolution.