Supreme Court Considers the Operation of an Arbitration Agreement

A recent decision of the Supreme Court of Queensland considered the operation of an arbitration clause in a subcontract.

In Cheshire Contractors Pty Ltd v Civil Mining & Construction Pty Ltd [2021] QSC 75, the Queensland Department of Transport and Main Roads (TMR) appointed Civil Mining & Construction Pty Ltd (CMC) as principal for roadworks construction. CMC subcontracted certain civil engineering works to Cheshire Contractors (Cheshire). Under the subcontract, Cheshire was required to comply with certain performance requirements as per TMR’s specifications. This included a requirement to use specified material only.

During construction, Cheshire notified CMC of its intention to submit a variation claim for the additional costs associated with the use of unspecified materials. In response, CMC requested that, rather than submit a variation claim, Cheshire provide it with a letter upon which CMC could base a latent conditions claim against TMR. Cheshire did so and also submitted a claim for relief for the latent condition. However, CMC then rejected Cheshire’s claim on the basis that Cheshire assumed the risk for latent conditions under its subcontract.

A dispute arose between the parties and Cheshire issued Supreme Court proceedings arguing that CMC was estopped from rejecting Cheshire’s claim in circumstances where:

•    CMC, in serving its own interests, procured Cheshire to make a claim for remuneration on a different basis to that contemplated by the subcontract;
•    the parties had consensually departed from the subcontract by agreeing that they would progress their dealings on the mutual assumption that any latent conditions encountered by Cheshire in the course of excavation could not have been anticipated by Cheshire at the time of tender; and
•    in making and pursuing what was in effect CMC’s latent condition claim, Cheshire lost the opportunity to make an alternative claim for damages or remuneration under, and in compliance with, the subcontract.

CMC argued the arbitration clause in the subcontract required any “disputes or differences arising between the Parties” to be referred to arbitration. As such, the proper avenue for the resolution of Cheshire’s claim was by way of arbitration, and CMC sought for the proceeding to be permanently stayed and for the dispute to be referred to arbitration pursuant to section 8(1) of the Commercial Arbitration Act 2013 (Qld) (the Act).

Henry J found in favour of CMC and ordered for the proceedings to be stayed and for the dispute to be referred to arbitration. In reaching his decision, Henry J had regard to the following:

•    while the arbitration clause itself did not define “disputes or differences arising between the Parties” by reference to any defined legal relationship as required by the Act, the clause should be interpreted in the broader context of the subcontract as a whole, which defined the legal relationship between CMC and Cheshire as parties to the subcontract;
•    the arbitration clause did not restrict the types of disputes to be referred to arbitration. While the conduct that Cheshire relied upon arose outside of the contract, the conduct arose out of the commercial transaction to which the subcontract gave rise. On this basis, Cheshire’s claim had been brought in a matter which was the subject of the arbitration agreement; and
•    Cheshire’s reliance upon estoppel by convention sought to establish a right to payment not provided for by the subcontract. However, the pursuit and existence of such a right did not appear to be inconsistent with the continued operation of the subcontract and its arbitration clause. Therefore, the arbitration clause remained operative.

The full decision can be found here.