VSC decides whether a lack of pre-agreed procedure invalidates an arbitration agreement

The recent decision of the Supreme Court of Victoria in Gemcan Constructions Pty Ltd v Westbourne Grammar School [2020] VSC 429 considered the validity of an arbitration agreement as well as the factors the Court will consider when appointing an arbitrator.

On 25 July 2016, Gemcan Constructions Pty Ltd (Gemcan) and Westbourne Grammar School (WGS) entered into a construction contract for the provision of various works and other services at WGS’ Williamstown campus. The contract comprised of a formal instrument of agreement signed by the parties, the AS4000-1997 General Conditions, and two Annexures to the General Conditions. Clause 42.2 of the contract provided, amongst other things, that if a dispute had not been resolved within 28 days of the service of a notice of dispute, “that dispute shall be and is hereby referred to arbitration”.

A number of disputes arose between the parties and Gemcan sought to refer the matter to arbitration under clause 42.2 of the contract. WGS opposed the referral and asserted that clause 42.2 did not constitute a binding agreement for arbitration because it did not contain details of how the arbitrator would be appointed and which arbitration rules would apply. Where these details should have been included, the contract instead specified that these matters were ‘not applicable’. WGS argued that this evinced an objective intention by the parties to exclude reference to arbitration under clause 42 of the contract.

The Court was required to consider first, whether there was a binding arbitration agreement under the construction contract, and if so, who the appropriate arbitrator should be.

Lyons J found in favour of Gemcan and held that in order to create an enforceable agreement for arbitration, the parties by their language need only objectively intend to refer certain disputes to arbitration. It is not essential that the contract specify the machinery for the appointment of the arbitrator or the rules to be applied because these matters can be determined pursuant to the Commercial Arbitration Act 2011 (Vic) (the Act).

On the basis that there was an enforceable agreement, Gemcan sought an order under section 11 of the Act that Mr Shnookal QC be appointed to act as the arbitrator. Gemcan asserted Mr Shnookal had extensive experience acting as a tribunal member in domestic building disputes which was necessary given the complex issues to be determined in this matter and the value of the parties’ claims. Mr Shnookal’s fees were $8000 per day.

WGS sought the appointment of Mr James Shaw of junior counsel as arbitrator. WGS asserted the appointment of junior counsel was appropriate because many of the matters in the Notice of Dispute had been the subject of a successful challenge under the Security of Payment Act and because Mr Shaw’s fees were half the amount of Mr Shnookal QC.

Lyons J found that the authorities and statutory framework of section 11 of the Act, together with common sense, made plain that determining the appropriate arbitrator was a balancing exercise between:

•   the experience and qualifications of each candidate to determine the issues in dispute, having regard to the nature, complexity and magnitude of those issues; and
•   the proportionality of the arbitrator’s fees to the quantum of the dispute.

In balancing these factors, Lyons J held that Mr Shnookal QC was the appropriate arbitrator to determine the dispute, despite the significantly higher fees, on the basis that:

•   the legal and factual issues in the dispute were complex and the claims raised were of significant value to the parties; and
•   Mr Shnookal QC’s appointment was likely to result in the arbitration being conducted in the most efficient way given he had significantly more experience appearing at arbitrations in comparison to Mr Shaw.

This case highlights that a lack of agreed procedure as to the conduct of an arbitration will not necessarily invalidate an arbitration agreement, and, that a court will have regard to the factors set out in the Act in appointing an arbitrator to determine a dispute.

The full decision can be found here.