Separate cases before two Australian state Supreme Courts demonstrate the importance of clear arbitration agreements

Both matters are reminders of how imprecise multi-tier dispute resolution clauses in contracts are fertile ground for procedural battles if not drafted with precision. Careful drafting, tailored to the project and its risk profile, remains essential to avoiding costly and distracting forum disputes before the substantive issues can even be addressed.

When arbitration is mandatory

In the first case, before the Supreme Court of Queensland, a dispute arose out of a long running design consultancy agreement for Brisbane Airport’s new runway, following alleged defects claimed to have caused cracking. Brisbane Airport Corporation (BAC) commenced court proceedings against Jacobs Group seeking damages and compensation under an indemnity clause. In response, Jacobs applied for a stay of the proceedings under section 8(1) of the Commercial Arbitration Act 2013 (QLD) (CAA), which requires a court to stay court proceedings and refer a matter to arbitration if a valid arbitration agreement exists.

The issue at the heart of the proceedings was whether the arbitration agreement in the consultancy agreement conferred a choice between litigation and arbitration, or whether arbitration was the mandatory  forum for resolving disputes. BAC argued that the multi-tiered dispute resolution clause provided a choice: a party could elect either to follow the contractual framework, which resulted in arbitration; or to proceed directly to the courts.

This argument was based on the language of a clause in the first step of the tiered process, which stated that either party “may” give a notice of dispute, in circumstances where a dispute or difference arose. BAC asserted that arbitration would only be required if the tiered process was triggered by a party serving such a notice.

BAC also relied on the fact that compliance with the tiered dispute resolution framework was an express pre-condition for arbitration, and that under the agreement, the parties submitted to the nonexclusive jurisdiction of the Queensland courts.  On BAC’s construction, the dispute resolution clause merely facilitated a pathway to arbitration, but did ultimately not require it. As a result, BAC argued that it had decided not to engage the contractual pathway to arbitration and section 8(1) of the CAA was not engaged.

The Queensland Supreme Court, reading the dispute resolution clause as a whole and adopting a commercial approach, rejected BAC’s argument, stating that the parties had agreed that arbitration, not litigation, was the agreed mechanism for resolving disputes.

The court held that the use of the word “may” in relation to giving a notice of dispute did not create an option to litigate, but instead reflected that a party could either accept the other’s position or initiate the contractual dispute resolution process.

Critically, the court pointed to the language in the clause which stated that compliance with the dispute resolution procedures was a condition precedent to arbitration, finding that the presence of that mandatory language was inconsistent with any suggestion that arbitration was optional. Properly construed, the consultancy agreement did not make litigation the ordinary means of resolving disputes, except in limited circumstances such as applications for urgent or interim relief, according to the court.

The court also rejected the argument that the arbitration agreement was inoperative for the purposes of s 8 of the CAA because certain pre-arbitration steps, which included the service of a notice of dispute and the holding of representative meetings. had not yet been completed. To hold otherwise would undermine the policy of the CAA and enable parties to sidestep their contractual bargain by commencing court proceedings prematurely. Instead, where a valid arbitration agreement exists, courts must stay proceedings and require parties to comply with the contractual steps necessary to progress the dispute to arbitration.

Finally, the court confirmed that the arbitration agreement in the consultancy agreement captured not only contractual claims, but also claims of negligence and claims under the Australian Consumer Law. The arbitration agreement applied to disputes “arising out of or in connection with” the consultancy agreement, which language the court found was broad enough to encompass noncontractual causes of action that are factually and legally connected to contractual performance. As a result, the proceedings commenced by BAC were stayed under s 8(1) of the CAA, pending any arbitration award or reference between the parties or until further order.

When arbitration is optional

In the second case, the New South Wales Supreme Court reached a different conclusion, not because the law applied differently, but because the language used in the dispute resolution clause appeared to point away from mandatory arbitration.
After an employee of Dnata Airport Services was injured while unloading cargo from a Polar Air aircraft and subsequently sued for negligence, Polar Air filed a crossclaim against Dnata for breach of contract and indemnity under their standard ground handling agreement.

Dnata, seeking a stay of the cross‑claim, argued that there was a binding arbitration agreement between it and Polar Air and that, under the International Arbitration Act 1974 (Cth) (IAA), the crossclaim was required to be arbitrated and not litigated in court.

The dispute resolution clause under the standard ground handling agreement stated: “In the event of any dispute or claim concerning the scope, meaning, construction or effect of this Agreement, the parties shall make all reasonable efforts to resolve disputes amongst themselves. Failing mutual resolution of the dispute, the parties may elect to resolve the dispute through arbitration (either by a single arbitrator or a panel of arbitrators). In the event that the parties fail to agree to an arbitration process, the dispute shall be settled in accordance with the laws of the state or jurisdiction set out in Annex(es) B, by the courts set out in Annex(es) B without regard to principles of conflict of laws.”

In its decision, the court rejected Dnata’s application and found that the clause was not a mandatory arbitration clause, but a multi‑tiered dispute resolution clause that culminated in litigation if the parties did not mutually agree to arbitrate. The clause required the parties to attempt to resolve disputes through negotiation, then permitted arbitration by agreement and, “in the event that the parties fail to agree to an arbitration process”, directed that the dispute be resolved by a court under Australian law.

The court rejected Dnata’s argument that the clause permitted either party unilaterally to compel arbitration, stating that the use of the term “the parties may elect” and the reference to a failure to agree indicated that arbitration required mutual consent. Within this context, the dispute resolution clause was characterised as an “agreement to agree,” and not an arbitration agreement for the purposes of the IAA.

Commercial context reinforced that conclusion. The agreement contemplated claims by Dnata’s employees. Against that background, the court considered it commercially sensible to interpret the clause as making arbitration optional and dependent on the agreement of both parties. That construction avoided Polar Air having to litigate related disputes in two separate forums, reducing duplicated costs, procedural inefficiency, and the risk of inconsistent outcomes.

Takeaway

Together, these decisions underscore a practical lesson for construction and infrastructure contracting parties, that courts will hold parties to their bargain, and so it is necessary for the parties’ desired dispute resolution regime to be carefully drafted. Where contracts express a clear and mandatory intention to arbitrate, courts will robustly enforce that choice and stay court proceedings in favour of arbitration.