CPB held to its DEAL

A recent decision of the New South Wales Supreme Court in CPB Contractors Pty Ltd v DEAL S.R.L. [2021] NSWSC 820 confirmed the pro-arbitration approach of the Supreme Court and examined interesting issues concerning:

  1. the breadth of the kompetenz-kompetenz principle, and whether the Court or an arbitrator should determine if a “matter” falls within the scope of an arbitration agreement; and
  2. under what circumstances is it appropriate for the Court to impose conditions when staying proceedings and referring proceedings to arbitration under section 7(2) of the International Arbitration Act 1974 (Cth) (IAA).

Vincent Young acted for DEAL.

Facts

The plaintiff, CPB Contractors Pty Ltd (CPB) formed a joint venture with Rizzani de Eccher SpA (Rizzani) for the purpose of submitting a tender proposal in respect of major upgrade works to increase the carrying capacity of the M4 road between Silverwater Rd and Parramatta (M4 Project).

The defendant, DEAL S.R.L. (DEAL) is an Italian company which designs infrastructure services. CPB alleged that DEAL was engaged in mid-2014 to provide design advice and prepare certain engineering drawings in connection with the M4 Project to be submitted with the joint venture’s tender (Tender Services). The joint venture was ultimately successful in its bid for the M4 Project and later engaged DEAL to provide further design services for the M4 Project pursuant to a written contract. Clause 46.9 of this contract (Arbitration Clause) relevantly provided that:

Any dispute, controversy or claim arising out of, relating to, or in connection with this Agreement, including any question regarding its existence, validity or termination must be resolved by arbitration to be conducted in accordance with the Rules of the International Chamber of Commerce. The seat of the arbitration will be Singapore.…

CPB alleged that the joint venture incurred significant losses in connection with the M4 Project in the amount of $122,636,577.00 and, in mid-2020, CPB commenced proceedings in the Supreme Court against DEAL claiming damages in an amount of $61,318,288.50 (i.e. CPB’s share of the losses) alleging that, in providing the Tender Services, DEAL engaged in misleading or deceptive conduct, in breach of section 18 of the Australian Consumer Law (Proceedings). CPB did not effect service of the originating process on DEAL until about March/April 2021.

Shortly after service, DEAL made an application under section 7(2) of the IAA for the Proceedings to be stayed on the basis that the dispute the subject of the Proceedings fell within the scope of the Arbitration Clause (Application). The Application was heard by Justice Rees.

The Kompetenz-Kompetenz principle

Her Honour agreed with DEAL’s position that it was appropriate for the Court to dispose of the Application in accordance with Article 16 of the Model Law (Schedule 2 of the IAA), which states that an arbitrator has the power to decide whether or not a dispute falls within an arbitration agreement. That is known as the “Kompetenz-Kompetenz” principle.

In respect of how the principle is applied in Australia, her Honour noted that in Hancock Prospecting Pty ltd v Rinehart (2017) 257 FCR 442, the Full Federal Court considered two possible approaches: the “prima-facie” approach and the “full merits” approach.

Pursuant to the “prima-facie” approach, the Court gives significant weight to the authority of the arbitral tribunal and only considers whether there appears to be a valid arbitration agreement which prima-facie covers the matters in dispute. If such agreement appears to exist, the matter is referred to the arbitral tribunal for determination, including in respect of any questions of jurisdiction. The “prima-facie” approach is also called the “Model Law” approach reflecting that this is the way many Model Law countries (in particular Singapore and Hong Kong) approach the issue.

Pursuant to the “full merits” approach, the Court considers the full merits of the dispute as to the scope of the arbitration agreement and makes a final decision in respect of the arbitrator’s jurisdiction.

Relevantly, her Honour noted that, whilst the Federal Court in Hancock commended the “prima-facie” approach, it considered (contrary to other Model Law countries) that neither approach is appropriate in all cases.

Her Honour ultimately determined that the “prima-facie” approach should be applied in this case on the basis that no unique or particularly unusual issues of law arose in this case which would justify a “full merits” approach. Accordingly, her Honour found that there appeared to be a valid arbitration agreement which covered the dispute and stayed the Proceedings pursuant to section 7(2) of the IAA.

There are only a handful of decisions in Australia that have approached the question of referral through the prism of the kompetenz-kompetenz principle. This decision may encourage more respondents in both international and domestic arbitrations to rely on the kompetenz-kompetenz principle in applying to have proceedings referred to arbitration.

Conditions

Given that CPB’s claims against DEAL related to matters that occurred in mid-2014, both parties and the Court were alive to the fact that CPB may now be out of time to pursue some or all of its claims in arbitration. CPB sought, as an alternative position, to have certain conditions imposed on any orders made by the Court pursuant to section 7(2) of the IAA, including a condition that DEAL would not be able to raise any limitation defence in response to CPB’s claim, which would not have been available to DEAL at the time CPB commenced the Proceedings.

The imposition of conditions are available under the IAA but are not available (at least expressly) under the domestic commercial arbitration acts or the Model Law.

Whilst considering whether it would be appropriate for the Court to impose the conditions sought by CPB, her Honour noted that the courts should generally refrain from interfering with the arbitration process and the integrity of the commercial agreement between the parties. Accordingly, whilst the Court may be empowered to impose certain conditions, it should only do so if such conditions are incidental or ancillary to the achievement of the main purposes of section 7(2) of the IAA (Purpose Test).

In this case, her Honour considered the following matters in deciding whether the conditions proposed by CPB passed the Purpose Test:

  1. whether the plaintiff has properly commenced proceedings in this Court, at least in respect of part of its claim;
  2. whether the potential expiration of limitation period is referrable to the defendant’s delay or other events beyond the parties’ control, such as an order that the arbitration should not take place until court proceedings are concluded;
  3. whether the condition will substantively alter the rights of the parties or preserve the status quo; and
  4. whether the condition will change the bargain between the parties to arbitrate.

In this respect, her Honour noted that CPB commenced the Proceedings six years after submission of the tender and arguably on the last day of the limitation period under section 70 of the Limitation Act. Further, it took approximately 8 months for CPB to serve its originating process on to DEAL. Conversely, DEAL made the Application as soon as it was served with the originating process.

As a consequence of the above, the Court found that the conditions sought by CPB did not pass the Purpose Test, as they would distort the substantive rights of the parties in any arbitration.

It is interesting to note that the Court may have reached a different decision, if DEAL had materially contributed to CPB’s delay in pursuing its claims against DEAL.

Conclusion

The key takeaways are:

  1. Parties are bound by the dispute resolution regime under their contract and must take care to fully comply with such regime, if there is a dispute.
  2. Unless there are unusual circumstances, the Court will usually refer any questions of jurisdiction regarding the validity of an arbitration agreement for determination by an arbitral tribunal, as long as there appears to be a valid agreement.
  3. The Court will generally refrain from imposing conditions when making an order under section 7(2) of the IAA. In this respect, the Court will only impose conditions if it is satisfied that such conditions are incidental or ancillary to the purpose of section 7(2) of the IAA.

Article written by Phillip Coady, Tiago Silva and Pariya Hosseini