Last Clause Standing: Survivorship of Dispute Resolution Clauses on Termination

February, 2014

Summary

A recent decision of the WA Supreme Court [1] provides a timely and instructive review of the law relating to the proper construction of commercial arbitration clauses that negotiators and drafters of commercial agreements should be mindful of.

The Court held that:

  • arbitration agreements are generally considered to be independent of the contract in which they are contained and, in the absence of the contrary intention of the parties, survive termination of the underlying contract;
  • whether the parties have expressed such an intention needs to be assessed in the context of the entire commercial transaction; and
  • the tendency of recent authorities is in favour of enforcing arbitration and dispute resolution provisions.

Background

ATCO Gas Australia Pty Ltd (ATCO) was contracted to extend the underground gas pipeline network in Yanchep WA.  ATCO contracted Pipeline Services WA Pty Ltd (Pipeline) to carry out the necessary excavation work and installation of the pipelines.

Disputes arose between the parties and both asserted, albeit on different bases, that the contract had been terminated.
The contract between ATCO and Pipeline includes the following provisions:

1.    A graduated dispute resolution procedure culminating in commercial arbitration pursuant to the Commercial Arbitration Act 1985 (WA); and

2.    A ‘survival’ clause, cl 26.14, which identifies four specific clauses, not including the dispute resolution clause, which survives expiry or termination.  The last paragraph of the survival clause provides that provisions of the contract that satisfy the following criteria also survive expiry or termination:

‘(e) any other Clauses that are expressed to survive expiry or termination or which, although not so expressed, need to survive in order to protect the presumed intention of the parties as expressed in this Agreement.’

Proceedings

Pipeline commenced proceedings against ATCO in the WA Supreme Court claiming damages for breaches of contract and seeking an order for the return of a bank guarantee provided by it under the contract.

ATCO entered a conditional appearance in the proceedings and applied for a stay pursuant to s 53 of the Commercial Arbitration Act 1985 (WA) or, alternatively, pursuant to the inherent jurisdiction of the court.  One week before the hearing of the stay application the Commercial Arbitration Act 2012 (WA), which specifically repealed the 1985 Act, came into force.

Because no arbitral tribunal had been convened regarding the matters in dispute the parties agreed that the 1985 Act did not apply.  As a consequence of this Pipeline submitted that ATCO’s stay application should be dismissed.  ATCO submitted that its application should be treated as a referral to arbitration under s 8 of the 2012 Act and there should be a stay of the Court proceedings to permit the referral to occur.  The Court accepted ATCO’s submission and made appropriate orders.

Outcome

The first, and more procedural, issue considered by the Court was whether ATCO’s application should have been dismissed because it was not made under the 2012 Act.  The Court rejected this submission for two reasons:

1.   ATCO also made application for a stay pursuant to the Court’s inherent jurisdiction; and

2.   ATCO could have applied to amend its application which the Court would have granted.

The Court next considered whether the dispute resolution procedure, cl 25 of the contract, survived termination of the underlying contract. It is the comments made by the Court in respect of this issue that may be of particular interest to negotiators and drafters of commercial contracts.

The Court noted that arbitration agreements are generally considered to be independent of the contract in which they are contained and, in the absence of the contrary intention of the parties, survive termination of the underlying contract.

Whether the parties have expressed such an intention needs to be assessed in the context of the entire commercial transaction, and courts generally:

‘…adopt a broad, liberal and flexible approach to the construction of such (arbitration) agreements and should favour a construction which provides a single forum for the adjudication of all disputes arising from , or in connection with, that agreement:’

However, commercial considerations cannot override the clear and unambiguous language of the parties.

Importantly, Pipeline contended that because cl 25 is not specifically referred to in c 26.14, or in any other provision of the contract providing for survival upon termination, the parties had in fact expressed their intention that the dispute resolution process does not survive termination.  The Court rejected this contention because it was clearly the intention of the parties that cl 26.14 is not an exhaustive list of the provisions which survive termination.  In this regard the Court specifically relied on the words, ‘need to survive in order to protect the presumed intention of the parties as expressed in this Agreement’ in paragraph (e) of cl 26.14.

Finally, the Court held there is nothing in cl 25 itself which indicates an intention of the parties that it would not survive termination.

Pipeline contended that cl 25 is void for uncertainty on five bases, The Court rejected all five and in doing so held:

1.   it is well established that a construction which renders a commercial agreement certain is to be preferred over one which does not;

2.   the tendency of recent authorities is in favour of adopting a construction of enforceability regarding arbitration and dispute resolution provisions.  This approach is consistent with holding contracting parties to their bargain;

3.   so far as the use of ‘may’ is concerned, no uncertainty arises from the parties agreeing that either may/may not refer the dispute to arbitration.  However, given the drafting of cl 25 the Court affirmed that a party cannot commence legal proceedings if it chooses not to refer the dispute to arbitration.

Pipeline also submitted that ATCO’s failure to invoke the cl 25 procedure in the face of Pipeline’s threat to commence legal proceedings constituted a waiver by ATCO to following the cl 25 dispute resolution process.  The Court also rejected this submission.  Pipeline was the party asserting claims.  Because ATCO was not the claimant and was not intending to commence legal proceedings its failure to invoke the cl 25 process cannot be evidence of an election to abandon its rights under cl 25 or to waive Pipeline’s compliance with its requirements.

The Court ultimately found that the disputes are arbitral and while s 8 of the 2012 Act is silent as to whether a reference to arbitration should be accompanied by a stay of court proceedings a failure to grant a stay would not be consistent with the paramount object of the 2012 Act, namely ‘to facilitate the fair and final resolution of commercial disputes by impartial arbitral tribunals.’

Conclusion

Consequently, leaving aside the slightly peculiar circumstances of the case, namely the 2012 Act coming into force one week before the hearing, the decision of the Court gives an excellent review of the current position in Australia with respect to the construction arbitration provisions in commercial contracts, particularly whether they survive expiry or termination of the underlying contract.

So often in commercial contracts the drafting of the dispute resolution provisions take place at ‘five minutes to midnight’ without necessarily receiving careful attention.  For contract drafters and those advising clients on the construction of dispute resolution procedures, particularly arbitration agreements, this judgment provides a concise summary of the current legal position.

Contact Mills Oakley

If you have any questions regarding this article or any other building, construction or infrastructure matter, please contact:


Ziv Ben-Arie| Partner
T: +61 2 8289 5854
E: zbenarie@millsoakley.com.au

Andrew Wallis| Partner
T: +61 2 8289 5810
E: awallis@millsoakley.com.au

Peter Meades | Partner
T: +61 2 8289 5889
E: pmeades@millsoakley.com.au

Scott Laycock | Partner
T: +61 2 8035 7871
E: slaycock@millsoakley.com.au

Scott Higgins | Partner
T: +61 2 8035 7872
E: shiggins@millsoakley.com.au

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[1] PIPELINE SERVICES WA PTY LTD v ATCO GAS AUSTRALIA PTY LTD [2014] WASC 10

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