Interpreting arbitration agreements: An impact on the rights and obligations of a third party may not invalidate an agreement to arbitrate

August 20, 2018

The recent decision of the Supreme Court of Western Australia in Eastern Goldfields Ltd v GR Engineering Services Ltd [2018] WASC 224 considered the scope of an agreement to arbitrate and whether a dispute concerning an alleged settlement agreement constitutes a dispute “in connection with the subject matter of the Contract”.

 

In our previous update, we wrote about Tottle J’s decision to refer a number of disputes that had arisen between Eastern Goldfields Ltd and GR Engineering Services Ltd (which had entered into a design and construct contract under which GR Engineering agreed to design and carry out certain refurbishment works on Eastern Goldfields Davyhurst Gold Plant (the Contract)) to arbitration, and stay court proceedings which had been commenced in respect of those disputes, on the basis that the Contract contained a dispute resolution clause which included an agreement to arbitrate. A copy of that update is available here.

 

Following Tottle J’s decision, GR Engineering commenced arbitral proceedings alleging substantially the same claims against Eastern Goldfields as had been made in the court proceedings. This included GR Engineering’s claim that Eastern Goldfields owed it $5 million, in accordance with an agreement between GR Engineering, Eastern Goldfields and other parties (the Partial Accord and Satisfaction Agreement). GR Engineering alleged that, pursuant to that agreement, it had agreed that it would consent to an order for the setting aside of a statutory demand for monies owing under the Contract in return for Eastern Goldfields promise to pay it $5 million.

 

In response, Eastern Goldfields argued that the arbitrator did not have jurisdiction to determine a dispute concerning the alleged Partial Accord and Satisfaction Agreement, and, pursuant to s 16(9) of the Commercial Arbitration Act 2012 (WA), requested that the court determine whether the arbitrator had jurisdiction. In support of its position, Eastern Goldfields advanced the following three reasons:

 

  • The Partial Accord and Satisfaction Agreement was a settlement agreement, and therefore the dispute in connection with Contract had ceased to exist. That is, the dispute in question was not a dispute “arising in connection with the Contract”, but rather a dispute in connection with the Partial Accord and Satisfaction Agreement.

  • The choice of law and non-exclusive jurisdiction clauses in the documents comprising the Partial Accord and Satisfaction Agreement evidenced a mutual intention on the part of the parties that disputes arising from those documents would be resolved by the court and not by arbitration. Those clauses relevantly specified a governing law of Western Australia and recorded that each party submitted to the non-exclusive jurisdiction of the courts of Western Australia and waived any right to object to an action being brought in the courts of Western Australia.

  • The dispute about the existence of the Partial Accord and Satisfaction Agreement was not within the scope of the arbitration agreement because it was not a bipartite dispute between GR Engineering and Eastern Goldfields but is a multi-party dispute involving third parties.

 

In finding that the arbitrator had jurisdiction to determine all the disputes between the parties, including the claim based on the alleged Partial Accord and Satisfaction Agreement, Tottle J held that:

 

  • The factual connection between the Contract and the Partial Accord and Satisfaction Agreement satisfied the requirement that the dispute or difference between the parties arose “in connection with the subject matter of the Contract”.

  • The existence of the choice of law and non-exclusive jurisdiction clauses in the documents comprising the Partial Accord and Satisfaction Agreement was not inconsistent with the continued operation of the arbitration agreement in the main contract. His Honour considered that the non-exclusive jurisdiction provisions continued to serve a purpose, even where the parties had agreed to arbitrate, because the court retained its supervisory and ancillary jurisdiction with respect to arbitrations.

  • The fact the Partial Accord and Satisfaction Agreement was alleged to be an agreement between more than two parties and was an agreement that gave rise to multiple obligations did not prevent a dispute arising under it from being “in connection with the subject matter of the Contract” for the purposes of the arbitration agreement. His Honour considered that any other interpretation would be unduly restrictive, and that a broad, liberal and flexible approach to the construction of arbitration agreements should be adopted.

 

This decision provides a timely reminder to all parties to construction contracts that the courts will favour a broad, liberal and flexible approach to the construction of arbitration agreements, and will enforce a valid arbitration agreement even in circumstances where the rights and obligations of a third party (i.e. a non-party to the arbitration agreement) may be impacted by a decision of the arbitrator. This in turn reiterates the importance for parties entering into a contract, that do not wish to enter into arbitration in relation to that contract, to be aware of the scope of any arbitration agreements in existing contracts between the parties.

 

The full decision can be found here.

 

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