Update on non-parties claiming “through or under” a party to an arbitration clause

In the recent decision of King River Digital Assets Opportunities SPC v Salerno [2023] NSWSC 510, the Supreme Court of New South Wales considered whether a non-party to a contract was able to rely upon its arbitration clause.

The High Court of Australia previously considered a similar issue in Rinehart v Hancock Prospecting Pty Ltd (2019) 267 CLR 514 (Rinehart) (see our update published here). In that decision, the High Court found that a third party to a contract who sought to rely upon its arbitration clause could be treated as a party to the arbitration by virtue of section 2 of the Commercial Arbitration Act 2010 (NSW) (the Act), which extends the definition of “party” to “any person claiming through or under a party to the arbitration agreement”.

In King River v Salerno, the Supreme Court of New South Wales followed the decision of the High Court in Rinehart and provided some further clarity on the meaning of the words “through or under” in section 2 of the Act.

Matteo Salerno (Mr Salerno) was the sole director and shareholder of Trigon Trading Pty Ltd (Trigon), which carried on a digital asset trading business. King River Digital Assets Opportunities SPC (King River) was a customer of Trigon and claimed that Trigon engaged in misleading or deceptive conduct in contravention of the Australian Consumer Law. King River alleged Trigon had represented that King River’s assets were not held by FTX (the largest international cryptocurrency exchange at the time) and were not otherwise exposed to third party risk. This was not, in fact, the case. When FTX collapsed, King River lost approximately $20.4 million it had entrusted to Trigon for trades. King River sought to recover those funds from Mr Salerno in the Supreme Court of New South Wales, on the basis of accessorial liability for Trigon’s conduct.

Mr Salerno sought to stay the Supreme Court proceeding in favour of arbitration, pursuant to section 8 of the Act. He claimed that he should be considered a “party” to the arbitration clause in the contract between Trigon and King River, as he met the Act’s extended definition.

Rees J found that Mr Salerno “falls comfortably within” the extended definition of “party” in the Act. Following the reasoning of the High Court in Rinehart, her Honour concluded that, as Mr Salerno seeks to deny that Trigon is liable for misleading or deceptive conduct, Mr Salerno is “taking his stand” on a defence available to Trigon and “stands in the same position” as Trigon in relation to King River. Accordingly, Mr Salerno was entitled to stay the proceedings while the dispute is referred to arbitration.

It was critical to Rees J’s decision that Mr Salerno was bringing a defence that was “vested in or exercisable by” the original party to the arbitration clause. In other words, the defence could have been brought by Trigon itself.

Rees J came to two additional conclusions:

• Firstly, there was no compelling reason for the Court to decide as to whether this action was a “matter which is the subject of the arbitration agreement”, with that decision being left to the arbitrator, per the precedent in Hancock Prospecting Pty Ltd v Rinehart (2017) 257 FCR 442;
• Secondly, Mr Salerno did not “abandon” the agreement, or waive his right to seek arbitration, when he took other steps in this proceeding, for example seeking to have the matter transferred to another jurisdiction. This was because Mr Salerno had not known about his right to seek a stay at the time he took those steps and as soon as he learned of that right, he immediately took steps to seek the stay. Additionally, Mr Salerno had not filed his defence.

The full decision can be found here.