What you need to know
In the rush to close a deal, dispute resolution clauses and arbitration agreements are often given little, if any, consideration. This can have serious consequences after the ink is dry.
Not only is it critically important to tailor your dispute resolution clause to suit your particular project, any agreement to arbitrate should clearly describe the types of disputes it is intended to cover and whether those disputes are required to be referred to arbitration.
As the WA Court of Appeal recently found, unless an arbitration agreement requires a dispute to be referred to arbitration, a court, in turn, will not have to refer the matter to arbitration under s.8 of the Commercial Arbitration Act 2012 (WA).
Background
MSP Engineering Pty Ltd was engaged by Tianqi Lithium Kwinana Pty Ltd to construct a lithium hydroxide processing plant in Kwinana, pursuant to two largely identical contracts.
The contracts set out the mechanism by which progress claims were to be made by MSP, certified by the Superintendent and paid accordingly.
Pursuant to that mechanism, payments in excess of $32 million were certified by the Superintendent as due and payable to MSP.
But Tianqi did not pay.
No doubt feeling the effects of a missing $32 million, MSP sought to enforce payment by applying to the Supreme Court for summary judgment.
The day after it was served with the proceedings, Tianqi issued notices of dispute under the contracts alleging equitable set-offs. Those notices activated the dispute resolution procedure under the contracts, which required the disputes arising "in connection with the subject matter of the Contract" to be referred to arbitration.
It was on this basis that Tianqi applied to stay the summary judgment proceedings. In doing so it relied upon s.8 of the Commercial Arbitration Act 2012 (WA), which it contended required the Court to refer the proceedings to arbitration.
Application to Stay Primary Proceedings
Master Sanderson dismissed Tianqi's application.
In doing so, he found that once amounts have been certified as payable then, contractually, they are not in dispute. He also found that this outcome is entirely appropriate in the construction context where money must freely flow (i.e. to enable head contractors to pay their subcontractors etc) and as clearly expressed in the Construction Contracts Act 2004 (WA) (though the Master acknowledged this legislation was not relevant to the proceedings).
Moreover, he found that the carve out in the arbitration clause recognised this. It provided:
42.4 Summary relief
Nothing herein shall prejudice the right of a party to institute proceedings to enforce payment due under the
Contract or to seek injunctive or urgent declaratory relief(emphasis added).
By this clause the parties agreed to permit recourse to the courts in such circumstances. Master Sanderson further found that this would not affect the integrity of the arbitration that had been commenced by Tianqi as that process could carry on to completion and may ultimately require the contractor to pay back some of the money it had received as progress payments. In the meantime, the money could flow as intended.
Court of Appeal Proceedings
Tianqi appealed on four grounds including, relevantly:
that Master Sanderson misconstrued the carve out in cl. 42.4 insofar as he found that it applied to MSP's claim for summary judgment on the certified progress claims; and
that his interpretation of cl. 37, cl. 42 and s. 8 of the Arbitration Act gave rise to an error of law and that the Master should have stayed the proceedings and referred them to arbitration under s. 8(1) of the Arbitration Act.
As to first ground, Tianqi contended that the carve out did not cover the payments in dispute and that case law supporting the contrary view should not be followed.
The Court disagreed and found that, properly construed, the reference to 'proceedings to enforce payment due' in cl. 42.4 was a reference to proceedings such as the Primary Proceedings. Namely, proceedings capable of summary determination.
Further, the Court agreed with the Master that once the procedure for certifying amounts payable under the contracts has been followed, those amounts become payable. Once payable, contractually, they are not in dispute.
The effect of this finding was that the summary judgment proceedings were not brought 'in a matter which is the subject of an arbitration agreement'.
The Court further identified that it would be inconsistent with the object of the Arbitration Act to construe it as requiring that a dispute that the parties agreed could, but was not required to be, determined by arbitration, must nevertheless be referred to arbitration by reason of s.8. Read in light of that purpose, the reference in s.8 to 'a matter which is the subject of an arbitration agreement' is to a matter that an agreement requires be submitted to arbitration. Accordingly, Ground 3 was also not made out. The appeal was dismissed.
Analysis
This decision again emphasises the importance of carefully drafted arbitration clauses.
In particular, when deciding whether or not to agree a carve out you should consider the precise circumstances in which you want a party to be able to have recourse to the courts as opposed to arbitration and draft your clause accordingly.
You should also bear in mind the established principle that money must flow in construction contracts. Accordingly, if a principal is of the view that it is contractually entitled to set-off a payment claim, it should raise that set-off at the appropriate time and before a payment claim is certified. Issuing a notice of dispute after a payment claim has been certified will not displace the parties' contractual bargain that progress payments that have been certified are due and payable and able to be enforced in court.
While this is a WA decision, provisions identical to s.8 are included in the Commercial Arbitration Acts for each state. Accordingly, the decision is likely to be relevant, no matter where you are in Australia.
By Adam Firth, Partner; Catherine Pedler, Partner, Melissa Yeo, Senior Associate; and Lauren Howe, Seasonal Clerk.