Property developers, construction contractors and others involved in the construction industry are frequent users of arbitration. The only limits to the nature and complexity of commercial disputes that can be referred to arbitration are the limits set by the arbitration agreement from which arbitrators (with help from both statute and judge-made law) derive their powers.

Arbitrators' powers are defined broadly in both statutes and contracts

In fact, as the WA Supreme Court's Kenneth Martin J. recently reminded us, commercial arbitration statutes and most commonly used arbitration agreements tend to expand an arbitrator's powers to deal with disputes that have been properly referred to them. This is generally done by:

• broadly defining, in the arbitration agreement, the scope of the arbitrator's powers as including (perhaps using different words) any dispute or difference between the parties, in connection with the subject matter of the contract between them (which usually contains the arbitration agreement as one of its terms); and

• broadly defining, in the relevant statutes, the parties to an arbitral dispute, to include (using the words of WA's Commercial Arbitration Act 2012, as applied in the Tensioned Concrete case):

“any person claiming under or through a party to the arbitration agreement”. 

The Tensioned Concrete case provides a timely reminder about the binding nature of arbitration clauses

The decision in Tensioned Concrete Pty Ltd v Munich Re and others [2020] WASC 431 sent a clear and timely message to the property developers, construction contractors and others in the construction industry. The message was: if you wish to limit the subject matter, size or complexity of disputes to be referred to arbitration, then negotiate amendments to your arbitration agreement before you agree to it. As was the case in Tensioned Concrete, the applicable arbitration agreement was an unamended standard-form clause (42) in a commonly used Australian Standard construction contract. No doubt, given its ubiquitous use, the parties had not even turned their minds to the effect of this clause before signing the contract. Perhaps unwittingly (on the part of Tensioned Concrete at least), they gave an arbitrator almost plenary powers to determine any dispute that might conceivably arise in connection with their construction contract.

Tensioned Concrete submitted to both the WA Supreme Court and to the arbitrator that it was entitled to the benefit of indemnities and waivers that would basically make it immune from defect liabilities

These two ways of broadening the scope of a commercial arbitrator's powers proved to be of critical importance in the Tensioned Concrete case. What brought the extent of arbitral powers into focus in that case was the involvement of Built Environs' defect liability insurers, which were not parties to the contract that contained the arbitration agreement. Regarding this, Tensioned Concrete, as subcontractor, complained that the head contractor, Built Environs, had breached its contractual promise:

• to ensure that Tensioned Concrete would have the benefit of the same indemnities that Built Environs had under its defects liability insurance policies (Tensioned Concrete having allegedly carried out its construction works defectively); and

• to ensure that the defects liability insurers would waive its ability to take over (or in legalese, “subrogate”) the right that Built Environs otherwise had, under its construction contract with Tensioned Concrete, to sue Tensioned Concrete for losses caused by defective workmanship.

Tensioned Concrete raised this complaint in two different forums, for two different reasons:

• in its defence to the claims that Built Environs' insurers had referred (in the name of Built Environs) to arbitration, for recovery of the amounts that they had paid, under their defect liability policies, to compensate the principal for defects that were said to be the fault of Tensioned Concrete; and

• in a separate WA Supreme Court action for recovery of what Tensioned Concrete said, were wasted legal expenses that Built Environs had caused by failing to ensure that its insurers extended to Tensioned Concrete, the same defect liability cover that Built Environs had.

The arbitration is listed for a final merits hearing in March 2021.

Kenneth Martin J. of the WA Supreme Court stayed its Supreme Court action, because the Supreme Court could determine matters that were pending before an arbitrator

Kenneth Martin J. of the WA Supreme Court stayed (i.e. placed an indefinite hold) on the Supreme Court action pending the outcome of the arbitration. In doing so, his Honour relied on:

• the scope of the arbitrator's powers as defined in the arbitration agreement between Tensioned Concrete and Built Environs;

• the expanded definition of “party” in the Commercial Arbitration Act 2012; and

• the fact that both the Commercial Arbitration Act 2012 and precedent cases require courts to avoid concurrent proceedings about the same issues in arbitration and in court, by staying the court proceedings pending the arbitral proceedings.

Tensioned Concrete opposes the stay, saying it could only sue insurers in Court because they were not parties to the arbitration agreement

Opposing the stay of its Supreme Court action, Tensioned Concrete argued:

• that court action was different than the arbitration, where Tensioned Concrete was not claiming anything but rather, was defending the insurers' claims (in the name of their insured, Built Environs) to recover insurance payouts for defective workmanship; and

• the insurers that Tensioned Concrete had sued in the court action were not parties and could not lawfully be joined as parties to the arbitral proceeding because, even though they were conducting that proceeding, they were doing so in the name of (in legalese, as “subrogees” of) Built Environs.

Kenneth Martin J. disagreed with Tensioned Concrete, reminding them of the breadth of an arbitrator's powers

His Honour disagreed.

As to the scope of the arbitrator's agreed powers, his Honour pointed out that the arbitration agreement contained within the construction contract between Built Environs and Tensioned Concrete defined this as extending to:

“a difference or dispute…between the parties…in connection with the subject matter of the [contract], including a dispute concerning [basically, every area of commercial law that applies in the jurisdiction of the dispute]”. 

As to whether the insurers were “parties” to the arbitration, his Honour pointed out that they, as subrogees of Built Environs, came within this statutory definition of “party”:

“[persons] claiming through or under a party to the arbitration agreement [being Built Environs]”. 

The entire dispute has been referred back to arbitration with the Court taking no further part in it

As a result of this decision, the arbitrator has been left to deal with all of the disputes and differences between Tensioned Concrete on one side and Built Environs and its insurers on the other. The Court will take no further part in their determination.

Conclusion: take legal advice about your contract's dispute resolution clause before signing it

The lesson is: don't take it for granted that just because a contract is in a standard AS, MBA or HIA form, every clause in it is right for you. Dispute resolution clauses in particular do not provide a one-size-fits-all solution.

It may be, for example, that you want to involve others who are not parties to the contract containing the dispute resolution clause, in a dispute regarding that contract. Because those other parties are not parties to the contract, you will not be able to involve them in an arbitration under that contract.

This may seem confusing given the Court's finding in Tensioned Concrete that insurers who were not parties to the relevant contract could – indeed, had to be taken to arbitration rather that to Court. However, that was because the insurers were subrogees of the principal (who was a party to the contract containing the relevant arbitration clause).

This is but one example of the many factors that may make arbitration an undesirable way to resolve disputes under a particular contract. This highlights the importance of taking legal advice before signing any contract, be it in a standard form (as it was in Tensioned Concrete's case) or bespoke.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

By
Daniel Morris