Australian case shows broad drafting of arbitration clauses needed

Out-Law Analysis | 13 Jul 2020 | 7:38 am | 4 min. read

A recent decision by a court in New South Wales overturning the referral of a dispute to arbitration should not be seen as undermining Australia's reputation as an arbitration-friendly jurisdiction.

The decision by the New South Wales Court of Appeal turned on the specific wording of a bespoke multi-tiered dispute resolution clause in a 'chicken growing' contract between Inghams Enterprises (Inghams) and contractor Francis Hannigan.

The case, when combined with previous case law, is a reminder that the wider, more straightforward and more standardised the arbitration clause, the better chance the parties have of it covering all claims. Broad wording like "all disputes arising out of or in connection with" is preferable to clauses with limitative wording, such as "under this Agreement", which was used in this case.

Had the parties to this case followed the wording of model arbitration clauses, it is likely that the outcome would have been very different.

What did the court say?

Ingham contracted with Hannigan to supply him with day-old chicks, to be grown into chickens by Hannigan and returned to Ingham. On 8 August 2017, Ingham purported to terminate the contract and refused to supply further chicks to Hannigan.

Hannigan wished to commence arbitration and pursue 'unliquidated' compensatory damages for losses incurred due to wrongful termination of the agreement. He sought to rely on a multi-tiered dispute resolution clause in the contract stating that, where mediation was unsuccessful, any disputes that "concern any monetary amount payable and/or owed by either party to the other under this agreement, including without limitation matters relating to determination, adjustment or renegotiation of [fees due under particular provisions of the contract]" should be referred to arbitration.

The central issue was whether Hannigan's claim for unliquidated damages was a dispute concerning a "monetary amount payable and/or owed by either party to the other under this agreement" which therefore should be referred to arbitration. The court, in a split decision, found that it was not.

Both the majority and the dissenting judge, President Bell, agreed that the arbitration clause should be construed liberally and broadly. On this premise, they determined that a claim for unliquidated damages was a dispute "arising out of the agreement". However, the majority stayed the arbitration proceedings on the grounds that unliquidated damages were not "payable under this agreement", as they arose by operation of law rather than under the terms of the agreement.

What did the dissenting judge say?

President Bell dissented by holding that compensatory damages are a form of money payable "under" contract, because the amount of damages is calculated by reference to the notional performance of the contract.

Although a dissenting judgment, President Bell's judgment is of commercial interest as it provided a helpful discussion of the legal position in support of arbitration in Australia and compared this with the UK approach.

President Bell considered that the correct approach to dispute resolution clauses is the 'Hancock approach', as set out by the Full Federal Court in the 2019 Hancock Prospecting case. This approach, in Bell's words, "give[s] expression to the rational assumption of reasonable people by giving liberal width and flexibility where possible to elastic and general words of the contractual submission to arbitration unless the words in their context should be read narrowly".

When arriving at his conclusion, President Bell also referred to a line of cases dating back to 1996. The rationale of the case law is to ensure that disputes can be settled in a coherent and consistent manner, avoiding the prospect of divergent findings; and ensuring that the parties' predetermined dispute resolution preferences can be properly implemented.

What do the arbitral institutions recommend?

Model arbitration clauses provided by the arbitral institutions in common use in Australia back the trend towards broad arbitration agreements.

The Australian Centre for International Commercial Arbitration (ACICA) and Hong Kong International Arbitration Centre (HKIAC) both recommend that the clause apply to "any dispute, controversy or claim arising out of, relating to or in connection with this contract". Both the London Court of International Arbitration (LCIA) and the Singapore International Arbitration Centre (SIAC) model clauses apply to "any dispute arising out of or in connection with this contract". The International Centre for Dispute Resolution (ICDR), which is based in the US, has a model clause which covers "any controversy or claim arising out of or related to this contract".

Had the parties in the Ingham case drafted a broader arbitration clause similar to these model clauses, Australian case law suggests that the clause is likely to have operated as a 'catch all' applicable to all disputes and the claim for damages. In a 2013 Federal Court (FCA) case between Amcor Packaging and Baulderstone, the words "a dispute arising out of or in connection with this agreement" were construed widely, so that any matter which related to the subject matter of the agreement could be arbitrated on.  In that case, the FCA referenced a 2004 judgment, in a dispute between Incitic Ltd and Alkimos Shipping Corporation, which concerned identical wording. There, the judge concluded that the wording should be given a "wide or generous construction", and that the parties intended that there be "a reach of some width of liberality".

In a 2016 case between Australian Maritime Systems and McConnell Dowell Constructors, the Western Australia court similarly found that an arbitration clause stating "any dispute, controversy or difference of any kind arising out of or in connection with the agreement" was sufficiently broad to capture the different formulations of 'matter' in which the action was brought. The court in this case reinforced the "broad, liberal and flexible general approach to the construction of arbitration agreements".

Internationally, the courts have reached similar conclusions. In 2017, the Singapore High Court upheld two identical arbitration clauses which stated "the seller and buyer agree that all disputes arising out of or in connection with this agreement shall be resolved by arbitration", in a dispute between KVC Rice Intertrade and Asian Mineral Resources. The court applied the principle established by the 2009 Insigma v Alstom Court of Appeal decision, and found that where the parties "have evinced a clear intention to settle any dispute by arbitration, the court shall give effect to such intention, even if certain aspects of the agreement may be ambiguous, inconsistent, incomplete or lacking".

In England, in a 2018 dispute between Uttam Galva Steels and Gunvor Singapore, the High Court found that the words "all disputes arising out of or in connection with" were sufficiently wide to apply to disputes under bills of exchange. The court applied the general assumption that "the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship ... to be decided by the same tribunal".

Additional contributions from Sarah Chan and Kevin Zhou of Pinsent Masons.