When commercial arbitration goes against the grain

Breaking up (so the song tells us) is hard to do.  This proposition is no less true of commercial relationships than it is of personal relationships, which is why difficulties can arise in the enforcement of contractual dispute resolution procedures, such as agreements to arbitrate.  Once a dispute actually arises, one party to the agreement may decide that it no longer wishes to comply with the previously agreed procedure (usually because that party perceives a tactical forensic advantage in doing so).  When that happens, a court is required to resolve a dispute about how to resolve the dispute.

A recent decision of the Supreme Court of Western Australia involving contracts for the sale of grain considered a number of (ultimately unsuccessful) challenges to an arbitration agreement.  The case contains some useful lessons in relation to the drafting and enforcement of dispute resolution clauses.

The plaintiffs in the case were 47 wheat growers who supplied their wheat to the defendant, which operated a grain marketing pool.  The contracts under which the grain was supplied provided for arbitration of disputes under the Grain Trade Australia (GTA) Dispute Resolution Rules.  The contracts also contained a choice of law clause (specifying the laws of Victoria) and a choice of forum clause (specifying a non-exclusive submission to the courts of Victoria).

The initial statement of claim alleged that the defendant had failed to pay  to the plaintiffs the correct amounts of money coming to them.  In the initial claim, it was said that this underpaid money was held on trust for the growers.  However, when the defendant objected to the court proceedings and sought referral to arbitration, the plaintiffs amended their claim to seek the appointment of a new trustee to administer the trust.

In opposing the defendant’s application to stay the court proceedings and refer the matter for arbitration, the plaintiffs raised three principal arguments.

The first argument was that the GTA Trade Rules (which were incorporated into the contracts) limited GTA arbitration to disputes of “mercantile, financial or commercial character” (which it was said that the present dispute was not).  However, this argument was rejected because the language of the arbitration agreement was very broad.  As a general principle, agreements to resolve disputes will usually be construed as meaning that all issues in dispute should be resolved in the same place – that is, parties are not usually presumed to intend that some of the disputes between them should be resolved by arbitration and some in court.

The second argument was that because the parties had submitted to the non-exclusive jurisdiction of the courts of Victoria, this indicated that the arbitration clause should be construed narrowly (so that the jurisdiction of courts would be preserved).  This argument was rejected because the selection of a court is merely a recognition that there may be some disputes which are outside the scope of the arbitration agreement, and does not bear on the construction of the arbitration agreement.  Further, the fact that the submission was “non-exclusive” did not support an intention to exclude arbitration.

The third argument was that the plaintiffs’ claims were not “arbitrable” (which means “capable of being resolved by arbitration”).  This argument appeared to be based on the premise that the appointment of a new trustee under the relevant legislation (which was sought in the plaintiffs’ amended claim) is a power which is reserved to the court.

The amended claim on which this argument was based was described in the defendant’s written submissions as “a claim without merit clearly made in an attempt to craft a claim that may be asserted to be inarbitrable” and in oral submissions as “a colourable attempt to avoid” arbitration.  However, it was not necessary for the court to consider the correctness of those Fighting Words, because it was held that the arbitrator should determine the relief which should be granted (and because the fact that an arbitrator may not be able to grant all of the relief which a court can grant does not make the dispute inarbitrable).  Accordingly, the court also rejected this argument, with the consequence that the parties were referred to arbitration.

The case emphasises that it is important to carefully consider dispute resolution clauses when contracts are being drafted.  Each party needs to consider its position from the point of view of the disputes which are most likely to arise (for example, a party which is a buyer of goods will face a different dispute profile to that faced by the seller).  Where contracts incorporate the terms of other documents (for  example, the dispute resolution rules of a particular organisation) it will be necessary to check those documents to ensure that they have not changed since the last time the clause was used (or that they do not create the potential for inconsistency).

The decision in this case does not disclose why it was that the plaintiffs were so keen to avoid arbitration, but keen they must have been.  Had the reason for that keenness been more carefully considered when the contracts were being made, the breaking up might have been a little easier (or at least,  the plaintiffs may have had more arguments which were wheat, and fewer which were found to be chaff).

For more on our dispute resolution capabilities, contact Dennis Vuaran or Angus Macinnis

For more on our commercial law capabilities, contact Philip Stevens or Angus Macinnis or William Han

August 4
Commercial Law Litigation and dispute resolution