When parties to a contract include an arbitration clause in their agreement, they usually expect to be able to stay out of the courtroom and take advantage of the relative informality, flexibility and confidentiality of arbitration in the event that a dispute arises under the contract.
However if the effectiveness or applicability of an arbitration clause is disputed by one of the parties, complicated issues of jurisdiction arise which may have to be resolved by a court before an arbitral tribunal can start doing its job.
A recent decision of the WA Supreme Court gives an important indication of the role Australian courts might play in dealing with these jurisdictional issues, in the context of international arbitrations arising in Australia. The decision needs to be carefully considered by businesses which might find their dispute resolution clauses under scrutiny in Australian courts.
In Samsung C & T Corporation v Duro Felbuera Australia Pty Ltd  WASC 193, the defendant (Duro) was in an unincorporated joint venture with Forge Group Constructions Pty Ltd (Forge), providing engineering and construction services to the plaintiff (Samsung) in relation to the Roy Hill Iron Ore Mining, Rail and Port Project. These services were provided to Samsung pursuant to a contract (the Subcontract) which contained a clause requiring disputes under the Subcontract to be resolved by arbitration.
When Forge went into voluntary administration in early 2014, Samsung terminated the Subcontract and entered into another agreement with Duro, the Interim Subcontract, which took effect from 21 February 2014.
The Interim Subcontract was said to be on the same terms as the Subcontract except to the extent that those terms were specifically modified. The Interim Subcontract contained a governing law clause, and a jurisdiction clause, consenting to the non-exclusive jurisdiction of the Supreme Court of Western Australia, but no separate arbitration agreement.
Significant disputes arose between Samsung and Duro in late 2015. On 17 March 2016 Samsung issued a notice of arbitration against Duro pursuant to the Subcontract, and requested that the Singapore International Arbitration Centre (SIAC) administer the arbitration between Samsung and Duro.
On the following day Duro issued its response to the notice of arbitration which included various claims against Samsung under the Interim Contract (referred to in the judgment as the Duro Claims).
Samsung asserted that because the Duro Claims arose under the Interim Contract, which contained no arbitration clause, they could not be dealt with in the SIAC arbitration and had to be resolved in the WA Supreme Court, in accordance with the governing law and jurisdiction clauses in the Interim Contract.
Duro sought a stay of the Supreme Court proceedings pursuant to section 7 of the International Arbitration Act, which is an application of the UNCITRAL Model Law on International Commercial Arbitration, and which requires a court to stay court proceedings if they involve a matter capable of being settled by arbitration.
The Court found that the Interim Subcontract did in fact incorporate the arbitration clause in the Subcontract. The Duro Claims were therefore capable of being resolved by arbitration, and Samsung’s application to have the Duro Claims dealt with in the Supreme Court was stayed.
On its face this looks like a win for the institution of arbitration in Australia, but the decision requires closer scrutiny.
The court had to consider the extent to which the arbitral tribunal in Singapore could determine its own jurisdiction. This is a matter of considerable importance in international arbitration and is known as the kompetenz-kompetenz principle.
The court in this case considered the two competing approaches to be adopted when an issue of jurisdiction arises from a challenge to the validity or applicability of an arbitration agreement.
The “prima facie review” approach has recently been adopted by the Singapore Court of Appeal, and requires a court to satisfy itself on a prima facie basis that the subject matter of the arbitration or proposed arbitration may fall within the scope of an apparently valid arbitration agreement. If this low standard is met, a court will stay the court proceedings and allow the arbitral tribunal to resolve any challenge to the validity of the arbitration agreement.
The second approach, the “full review” approach, requires a court to itself determine on the balance of probabilities the validity and scope of a contested arbitration agreement, an approach that is favoured in English courts and has recently been considered in New South Wales.
The Supreme Court of WA emphatically adopted the latter “full review” approach. Not only did it determine that the Interim Contract contained an arbitration clause, it declined to hear evidence about the Arbitral Tribunal’s ruling as to its own ability to deal with the Duro Claims on the basis that the Court had decided that issue in favour of arbitration in any event.
The “prima facie” approach would have left this issue to the Arbitral Tribunal in Singapore to determine unless it was completely clear that there was no valid arbitration agreement.
On one view of things, the approach taken in this case led to an efficient outcome, in that the jurisdiction of the Arbitral Tribunal was determined in a single application. Had the court adopted the prima facie approach and allowed the Arbitral Tribunal to have the first go at determining the validity and scope of the arbitration agreement, that decision itself might have been reviewed by a court.
However the important point about this decision is not just that a stay of court proceedings was granted in favour of the ongoing arbitration. It is also very significant that the Supreme Court decided that it was the proper forum for making this decision, rather than the Arbitral Tribunal itself.
The “full review” approach arguably provides greater clarity and efficiency in resolving preliminary issues about the validity of an arbitration agreement, but it can be also be viewed as a significant intrusion into the independence of an arbitrating body. Article 16 of the Model Law contemplates that an Arbitral Tribunal will be able to determine its own jurisdiction, which is not what occurred in this case.
Whatever the relative merits of the “prima facie” and “full review” approach, the reasoning in this decision is markedly different to that adopted in other regional jurisdictions, perhaps most significantly Singapore. Whether the case is perceived as streamlining, or interfering with, the arbitration process by parties seeking to resolve disputes, remains to be seen.
For legal advice specific to this Update or any litigation and insolvency matter, please contact partner Tom Darbyshire at Kott Gunning Lawyers on (08) 9321 3755.
The information published on this website is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.