The recent decision of the Western Australian Court of Appeal in Hancock Prospecting Pty Ltd v DFD Rhodes Pty Ltd1 highlights the complex issues that arise where court proceedings commenced by “strangers” to an arbitration agreement involve disputes covered by the arbitration agreement.
The case concerned appeals against the first instance decision of Le Miere J, who refused to stay the whole of two court proceedings commenced by non-parties to an arbitration agreement, allowing the claims brought by the non-parties to continue while staying counterclaims between the parties to the arbitration agreement. The decision of the Court of Appeal clarifies when the court’s mandatory obligation to stay proceedings under section 8 of the Commercial Arbitration Act 2012 (WA) (CAA) applies and the factors the court should consider when deciding whether to grant a stay in the exercise of its general power to control its own proceedings.
In this update we provide a brief overview of the decision and consider the implications of the case on the enforcement of domestic arbitration agreements in Australia.
- The fact that a dispute between parties to an arbitration agreement also involves “strangers” to the arbitration agreement does not prevent the dispute between the parties to the arbitration agreement from being subject to the court’s mandatory obligation to refer the parties to arbitration under section 8 of the CAA.
- The matter referrable to arbitration and the entire controversy in the court proceedings do not have to be co-extensive.
- A party to an arbitration agreement cannot circumvent that agreement by seeking to involve third parties in a dispute. However, there is a risk of multiplicity of proceedings and inconsistent decisions where disputes the subject of an arbitration agreement become entangled with disputes involving strangers to the arbitration agreement.
The decision in Hancock Prospecting Pty Ltd v DFD Rhodes Pty Ltd is the latest in a series of legal battles over a settlement deed entered into between parties including Gina Rinehart and her children (the Hope Downs Deed). The Hope Downs Deed deals with disputes about title to certain mining tenements and contains an arbitration agreement providing that any disputes under the Deed are to be resolved by way of confidential arbitration.
The construction of that arbitration agreement and its application to various court proceedings commenced by two of Mrs Rinehart’s children, John Hancock and Bianca Rinehart, have been the subject of several earlier decisions. However, in each of the earlier cases, the court proceedings were commenced by parties to the Hope Downs Deed. In Hancock Prospecting Pty Ltd v DFD Rhodes Pty Ltd the plaintiffs in the primary proceedings, Wright Prospecting Pty Ltd (WPPL) and DFD Rhodes Pty Ltd (DFD Rhodes), both claimed interests in the Hope Downs mining tenements and were not parties to the Hope Downs Deed.
In response to WPPL and DFD Rhodes’ claims, Mr Hancock and Ms Rinehart filed defences and made counterclaims against Mrs Rinehart and others.
At first instance Le Miere J stayed the counterclaims against the parties to the Hope Downs Deed in accordance with section 8 of the CAA. His Honour also stayed the counterclaims against the other parties pursuant to the Court’s general power to control its own proceedings. However, his Honour did not stay the whole of the primary proceedings or Mr Hancock and Ms Rinehart’s defences.
The appellants argued that Le Miere J should have stayed the whole of the primary proceeding (or at least the defences) pending any arbitral proceedings between the parties to the Hope Downs Deed.
The decision deals with three broad issues:
- Whether a mandatory stay of the whole proceedings (or at least the defences) was required pursuant to section 8 and/or section 5 of the CAA.
- Whether the primary judge should have stayed the whole proceedings (or at least the defences) pursuant to the Court’s general power.
- In the alternative, whether the primary judge erred by not restraining Mr Hancock and Ms Rinehart from making claims in relation to the Hope Downs tenements.
This note considers the Court of Appeal’s findings on the first and second issues.
Scope of the court’s obligation to grant a mandatory stay in favour of arbitration
Section 8(1) of the CAA provides: A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests … refer the parties to arbitration …
The central issue before the Court of Appeal was whether a dispute with non-parties to an arbitration agreement can be a “matter which is the subject of an arbitration agreement”.
The Court of Appeal unanimously upheld the primary judge’s decision, finding that:
- The application of section 8(1) of the CAA is not to be determined solely by reference to the subject matter of the dispute (i.e. the factual and legal issues raised) but also requires attention to the parties to the relevant dispute.
- A “matter which is the subject of an arbitration agreement” may arise in court proceedings notwithstanding that those proceedings also involve disputes with parties that are not bound by the arbitration agreement – the “matter” does not need to be co-extensive with the entire controversy in the court proceedings.
- Only a dispute between the parties to an arbitration agreement can constitute a “matter which is the subject of an arbitration agreement” for the purposes of section 8 of the CAA.
The Court of Appeal considered these findings consistent with both the objects and purpose of the CAA (which emphasises the voluntary submission of parties to arbitration) and the mandatory nature of section 8 (which ensures that parties are held to their bargain to resolve their disputes by arbitration rather than curial determination). However, neither consideration justified the mandatory stay of proceedings brought by non-parties to an arbitration agreement.
Did section 5 of the CAA prohibit the court from determining the disputes?
The appellants also relied on section 5 of the CAA as prohibiting the court from determining any issue also covered by an arbitration agreement in a way which would bind the parties to that arbitration agreement.
Section 5 of the CAA provides: In matters governed by this Act, no Court must intervene except where so provided by this Act.
The Court of Appeal unanimously rejected the appellants’ argument, finding that:
- In providing that “no court must intervene” in matters governed by the CAA, the purpose and effect of section 5 is not to prevent the courts from exercising their ordinary jurisdiction in relation to disputes between persons who are not parties to arbitration agreements.
- Where a court proceeds to hear and determine a dispute that is not “a matter which is the subject of an arbitration agreement”, the fact that the resolution of that dispute may have some practical or legal effect on a party to an arbitration agreement does not involve the court “intervening” in a matter that is subject to the CAA.
- The effect of section 5 is that in relation to the various powers and functions the CAA confers on the court in relation to the arbitral process, the court may only intervene in the manner provided for in the CAA.
When a stay should be granted under the Court’s general power
A separate issue was whether, even though a mandatory stay was not required under sections 5 or 8 of the CAA, the primary proceedings (or at least the defences) should have been stayed pursuant to the court’s general power to control its own proceedings.
On this issue the Court of Appeal was divided, with Quinlan CJ finding no error in the primary judge’s exercise of discretion not to grant a stay and Beech and Vaughan JJA disagreeing.
The primary judge held that it was not in the interests of justice for a stay to be granted. In reaching this decision, his Honour weighed the following factors:
In favour of a stay:
- avoiding the risk of inconsistent decisions;
- avoiding unnecessary duplication and expense; and
- preventing Ms Rinehart and Mr Hancock circumventing the arbitration agreement.
Against a stay:
- WPPL and DFD Rhodes commenced the proceedings before Ms Rinehart and Mr Hancock commenced the Federal Court proceedings;
- WPPL and DFD Rhodes’ claims could not and would not be determined in the arbitration. The court should not lightly interfere with the exercise by non-parties of their right to pursue their rights in the court;
- The court was the only forum in which all of the claims to the Hope Downs tenements could be resolved. If the court proceedings were resolved first there would remain matters to be resolved by the arbitral tribunal but the major part of the dispute would have been resolved; and
- The proceedings in the court were considerably more advanced than the arbitral proceedings and it was likely, though not certain, that they would be resolved before the conclusion of the arbitral proceedings.
The majority held that his Honour erred by treating the potential binding effect of a decision by the court in the two primary proceedings upon the parties to the arbitration as a factor counting against the grant of a stay. Rather, where the court refers parties to arbitration pursuant to section 8 of the CCA, the potential for the court's determination of parallel curial proceedings to bind the arbitral parties between themselves and thereby dispose of substantial issues in the arbitral proceedings (there being overlap between the curial and arbitral proceedings) is a factor in support of staying the curial proceedings.
Their Honours were concerned that in circumstances where Mr Hancock and Ms Rinehart's counterclaims were the subject of a mandatory referral to arbitration, for the court to decide an issue so as to bind the parties to the arbitration agreement would (i) tend to undermine the efficacy of the parties' agreement to arbitrate and the arbitration itself; and (ii) undermine and sidestep and render inutile the mandatory referral under section 8.
What does this decision mean for you?
The ongoing disputes in relation to the Hope Downs Deed arbitration agreement are a salutary reminder of the importance of carefully drafting arbitration agreements to give effect to the parties’ preferred dispute resolution mechanism and the complexities that can arise when disputes about the meaning and effect of arbitration agreements spawn satellite litigation.
In particular, this decision highlights the risk of multiplicity of proceedings, fragmentation of issues and inconsistent decisions where disputes covered by an arbitration agreement become entangled with disputes involving strangers to the arbitration agreement. The Court of Appeal has confirmed that there is no mandatory obligation to stay the part of such proceedings that concern non-parties. The factors weighing for or against a stay in the exercise of the court’s general power are matters of discretion.
If disputes under an arbitration agreement are likely to involve third parties, the parties to that agreement should give careful consideration at the drafting stage to how such disputes should be managed to avoid interlocutory disputes, fragmentation and delay.