Family feud: validity of arbitration clauses may be determined in arbitration

The High Court of Australia in Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13 recently considered whether a challenge to the validity of an agreement is a matter which should be determined in arbitration under the arbitral clause contained in that agreement. The Court also considered the meaning of “party” in section 2 of the Commercial Arbitration Act 2010 (NSW) (the Act) and the circumstances in which a non-party to an arbitral clause will be allowed to rely on it to defend claims made against it in arbitration rather than in court proceedings.

Ms Bianca Rinehart and Mr John Hancock (the Appellants), two of mining magnate Gina Rinehart’s (Mrs Rinehart) children, entered into a series of deeds with their mother, two of her companies (Respondent Companies) and the Appellants’ two other siblings. Under the deeds the Appellants agreed not to publicly challenge the title to various mining tenements (Assets) which were the subject of future joint venture agreements involving other companies of Mrs Rinehart (Third Party Companies). The Appellants also provided a release to Mrs Rinehart and the Respondent Companies from all claims to the Assets in return for cash payments. The deeds provided that “any dispute under this deed”, or in one case “all disputes hereunder”, were to be referred to arbitration.

The Appellants later commenced court proceedings claiming amongst other things that Mrs Rinehart and the Respondent Companies had transferred the Assets to the Third Party Companies in breach of trust, and that the terms of the deeds were not binding on the Appellants because entry into them was procured by misconduct on the part of Mrs Rinehart.

The High Court affirmed the approach of the Full Court of the Federal Court in deciding that the validity question came within the scope of the arbitral clause. This involved the Court looking not just at the wording of the arbitral clause but at the context and underlying purpose of the deeds. The High Court agreed with the Full Court that the purpose of the deeds was to quell disputes about title to the Assets, stabilise claims about ownership and ensure confidentiality, given previous media coverage and the risk of commercial damage from disclosure of confidential information. The High Court held that it could not have been understood by the parties that any challenge to the efficacy of the deeds was to be determined in the public spotlight, and that such challenges should be heard in arbitration.

In a cross-appeal, the Third Party Companies sought to stay the Appellants’ claims for knowing receipt of trust property so that the matters could be determined in arbitration. The Third Party Companies were not parties to the deeds but argued that they were claiming “through or under” the Respondent Companies pursuant to section 2 of the Act, which expands the definition of “party” to be “any person claiming through or under a party to the arbitration agreement”.

The High Court held that the Third Party Companies were “parties” to the arbitration agreement. This was because an “essential element” of their defence to the Appellants’ claim was that under the terms of the deeds the Respondent Companies:

•   were beneficially entitled to the Assets; and/or
•   transferred the Assets free of any claim of breach of trust.

These were the same arguments available to the Respondent Companies.

The High Court reasoned that to deny the settlement of these claims in the same arbitration would give the arbitral clauses an uncertain operation, jeopardise orderly arrangements, potentially lead to a duplication of proceedings and potentially increase uncertainty about which matters are to be determined by litigation and which by arbitration.Ultimately, it would frustrate the “evident purpose” of the statutory definition of “party” under the Act.

The High Court’s decision emphasises the importance of the context and underlying purpose of an agreement when construing the scope of an arbitral clause, and clarifies that a third party can claim through or under a party to an arbitration agreement if:

•   the rights of the party under the agreement are an essential element of the third party’s defence;
•   the rights are said to be vested in and exercisable by the parties to the agreement; and
•   the rights are the subject matter of the controversy with the third party.

However, the High Court was careful to note that their decision did not deal with the wider and more complex issues of arbitral consent, privity and third party claims in general, which may likely include when, if ever, a third party could be forced into arbitration.

The full decision can be found here.