To Arbitrate or Litigate? Well that depends on what you agreed.

To Arbitrate or Litigate? Well that depends on what you agreed.

• Failure to comply with the dispute resolution clause in your contract can be a costly mistake.
• If you wish to avoid the dispute resolution provisions in your contract, you will need clear and express agreement in writing to do so as John Holland found out in the recent case of John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC451.

 Background

• John Holland was engaged by Downer EDI Rail to design and construct a rail facility known as the Auburn Maintenance Centre (“the AMC”).
• Downer itself was engaged by Reliance Rail which, in turn, was engaged by Rail Corporation, New South Wales. By written agreement for engagement of a consultant entered into on 10 April 2007, John Holland contracted with Kellogg Brown & Root (KBR) to design services, including the design of stormwater detention facilities.
• In addition, John Holland entered into an agreement with Atlantis on 15 April 2008 to design, manufacture, supply and certify the stormwater detention facilities. Construction of the AMC was completed in 2010.
• Approximately three and a half years after construction, subsiding of the pavement in the carpark was observed. Laing O’Rourke were undertaking construction work nearby to the carpark.
• On 28 August 2014, John Holland brought proceedings in the Supreme Court against KBR and Atlantis, claiming damages for breach of contract, negligence under the Trade Practices Act and an indemnity against all loss or damage arising out of the breaches, or any other wrongful acts or admissions on their part.
• Both the KBR contract and the Atlantis contract contained arbitration provisions.

 The Response

• By Notice of Motion filed on 10 December 2014, KBR sought an order that the proceedings against it be stayed permanently and by amended Notice of Motion that the dispute be referred to arbitration, as did Atlantis.
• John Holland’s strategic concern was that if the proceedings were dismissed then it had to wait until after the arbitration under the provisions contained within the contract to recommence the proceedings it would by then be statute barred from pursuing its claim in Court.

 The Court’s Decision

• The matter was brought in front of Justice Hammerschlag in the Supreme Court.

The KBR Dispute

• Clause 12.3 of the KBR contract provided as follows:

“In the event that the Dispute cannot be resolved in accordance with a forgoing procedure, then a notice may be issued by one party to the other party requiring that the Dispute be referred to arbitration.”

• In relation to the KBR dispute, John Holland raised the argument that the dispute was not compliant with the Commercial Arbitration Act 2010 (NSW) because it was a subject of action against potentially four parties: KBR, Atlantis, Downer and Laing O’Rourke.
• Hammerschlag J rejected the argument by John Holland that the dispute could not be arbitrated because it involved multiple parties. Hammerschlag J held that the parties ought to be held to their bargain.  Even if other parties were involved in a broader dispute, and there was still a dispute between John Holland and KBR that could be arbitrated.
• Hammerschlag J noted that, while the court had a discretion under the old arbitration legislation to decline to refer the parties to arbitration if there was sufficient reason to take that course, this was not now the position available to the court under the new legislation, ie under the Commercial Arbitration Act.
• There was a contention by John Holland that KBR had agreed in oral negotiations that litigation was the correct dispute resolution. Hammerschlag J noted the high degree of proof that such an oral contract required and found, under the circumstances, that none existed.
• Hammerschlag J made orders referring the parties to arbitration as required by the Commercial Arbitration Act.
• Having referred the dispute to arbitration, Hammerschlag J ruled on whether the Supreme Court Proceedings against KBR should be stayed or dismissed.
• He noted that the Commercial Arbitration Act was silent on what should occur to a proceeding after the parties had been referred to arbitration. There was no judicial authority directly on the point.
• KBR argued for a dismissal, whereas John Holland argued for a stay.
• After a subsequent hearing, he considered that staying and not dismissing the proceedings was preferable as:

1. there was possible prejudice to John Holland in dismissing the proceedings;
2. the arbitration agreement could subsequently become incapable of being performed (thereby requiring court proceedings);
3. keeping the proceedings on foot could prevent a limitation period from expiring, ie, they could have a use in the future; and
4. a stay was not inconsistent with the Commercial Arbitration Act.

 The Atlantis Dispute

• In the case of the action against Atlantis, the court also found that the dispute arose out of, or in connection with, the contract and the Commercial Arbitration Act was capable of application.
• However, in the case of Atlantis, there were certain stages in the dispute resolution clause that had not been completed, namely negotiations and expert determination.
• His Honour did not refer the dispute to arbitration because of the condition precedent clauses requiring these actions to have taken place prior to any arbitration.
• As neither of these had happened, the dispute was not referred to arbitration and the Atlantis court action was permanently stayed.

 How may this effect you?

• It is critical to review the dispute resolution clause, as contained within your contract.
• A party wanting to circumvent whatever dispute resolution procedure is contained in the contract must ensure they do so with clear, express and precise agreement from the other party in writing.
• It is clear that the court will enforce the provisions in the contract for dispute resolution.
• In the event that you believe you may be statute barred for a claim if arbitration proceedings are brought, consideration should be given to whether or not proceedings should be commenced in court and then stayed in order to pursue the alternative dispute requirements as contained within the contract, in order to protect and preserve any claim you may have.

This communication is sent by Kreisson Legal Pty Limited (ACN 113 986 824). This communication has been prepared for the general information of clients and professional associates of Kreisson Legal. You should not rely on the contents. It is not legal advice and should not be regarded as a substitute for legal advice. The contents may contain copyright.