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How broad is your dispute resolution clause? Think carefully before cementing its terms

Tensioned Concrete Pty Ltd v Munich Re [2020] WASC 431

Most commercial contracts include a dispute resolution clause. It is also common, particularly in construction contracts, for that clause to include a term pursuant to which the parties agree to submit disputes arising under the agreement to Arbitration. This is because construction contracts, by their very nature, typically involve multiphase projects completed over an extended period of time, creating an environment ripe for disputes to arise, and Arbitration is a popular alternate dispute resolution process adopted in attempts to minimise the cost and distraction of litigation.

Nevertheless, the Court’s decision in Tensioned Concrete Pty Ltd v Munich Re [2020] WASC 431 provides a timely reminder, as we start the year and get back into the mindset of critical commercial negotiations, of the importance of giving careful consideration to the precise wording of the dispute resolution clause in your contract, before cementing its terms. In the case we consider in this note, the broad terms of the Arbitration clause under the contract meant that there was wide scope for the Arbitrator to deal with all of the disputes referred to arbitration, including disputes involving non-parties to the contract.

Background to the case

Pursuant to a head construction agreement (Head Contract), AMP Royal Randwick engaged Built Environs WA Pty Ltd (Built Environs) as the principal contractor to complete expansion works at the Ocean Keys Shopping Centre in Clarkson, Western Australia.

Subsequently, Built Environs entered into a sub-contract with Tensioned Concrete Pty Ltd (TCPL) (Sub-contract), pursuant to which TCPL provided the design and post tensioning works required for a cement slab to be constructed and installed on the roof level carpark of the shopping centre. TCPL and Built Environs also agreed to, in effect, refer any disputes arising between them to Arbitration.

Issues later emerged over the fitness for purpose of the concrete roof slab at the shopping centre due to cracking, resulting in water leakages as well as grievances from occupants of the retail complex at the shopping centre, who were affected by water ingress. As a result, Built Environs undertook rectification work of the concrete slab, spending in excess of $3 million on those works and other measures to address all of the manifested concrete slab problems.

Built Environs made claims for indemnity under insurance policies that it had taken out in respect of risks around the expansion works at the shopping centre, being a construction risks material damage policy (CAR Policy) and a professional indemnity policy (PI Policy). The insurers under the CAR Policy and the PI Policy (Insurers) indemnified Built Environs in respect of some of its expenditure and outlays incurred in undertaking the slab rectification work. However, some of Built Environs' expenses in undertaking that work was not covered by the Insurers, leaving Built Environs directly exposed to meeting those losses itself.

The arbitral proceeding

Built Environs, in its own right and as subrogee, in accordance with the Insurers’ right of subrogation, commenced Arbitral proceedings against TCPL, seeking to recoup its loss and damage, both indemnified under the CAR Policy and PI Policy, and not indemnified. An engineer, Mr John Fisher, was appointed as Arbitrator. The Arbitration is listed for final hearing on 8 March 2021.

In the proceeding, TCPL alleged that Built Environs breached its insurance obligations in the Head Contract and in the Sub-contract, as according to TCPL, both agreements required TCPL to be a co-insured with the benefit of cross-liability and waiver of subrogation provisions. TCPL also sought a stay of the Arbitration as well as damages.

The WA Supreme Court proceeding

Separately, TCPL brought Court proceedings in the Western Australian Supreme Court against Built Environs and the Insurers, as well as Mr Fisher.

TCPL alleged that the Insurers had wrongly commenced the Arbitral proceeding, as TCPL is also an insured under the CAR Policy and PI Policy. Alternatively, TCPL alleged that as subcontractor of Built Environs in respect of the post tensioning works, it was entitled to the benefit of the waiver of subrogation promises, as set out in the CAR Policy and the PI Policy, pursuant to which the Insurers agree not to pursue any rights of subrogation they enjoy as against TCPL.

TCPL sought various orders, including injunctive relief against the defendants, restraining them from continuing with the Arbitration.

The stay application

Built Environs and the Insurers made an application for orders that the Court proceeding be stayed under section 8 of the Commercial Arbitration Act 2012 (WA) (CA Act), which provides that, where an action is brought before the Court which is the subject of an arbitration agreement and a party so requests, the Court must refer the matter to Arbitration. In the alternative, Built Environs and the Insurers sought a stay as a matter of discretion, under the Court’s inherent jurisdiction, or as an abuse of the processes of the Court.

The primary basis for the application was that the issues in dispute in the proceeding were, essentially, the same as, or significantly overlapped, the issues in dispute in the Arbitral proceedings. TCPL resisted the stay application on the basis that, although there was some overlap of common issues, the parties to the Arbitral proceeding were different to the parties to the litigation. In particular, TCPL argued that it seeks no relief against Built Environs in the litigation.

The Court's decision

His Honour Kenneth Martin ordered a temporary stay of the litigation for the following reasons.

The extent of the overlap of issues in the litigation and the Arbitration is extensive

His Honour held that, having regard to:

  • the extent of overlap of common issues in the litigation and Arbitration, noting that it was not necessary for all of the issues to be co-extensive; and
  • the terms of the dispute resolution clause in the Sub-contract, which expresses the term ‘disputes’ broadly and embracing the wider disputes between the parties ‘in connection with’ the subject matter of the Sub-contract;

‘it was tolerably clear that most of the controversy sought to be raised under the litigation by TCPL as plaintiff also forms a component of the dispute which is also the subject of the arbitration agreement and, beyond that, which is now currently pending for hearing in a March 2021 determination before the arbitrator’.

The Court must not intervene where a matter is governed by the CA Act

The Court found that, to the extent that a matter is governed by the CA Act, a court must not intervene, except as permitted by that Act. His Honour found that given the terms of section 5 of the CA Act, which provides that no Court must intervene expect where so provided by the Act, and the ‘demonstrable intersection’ of the matters raised in the Arbitral proceeding relating to insurance coverage with the litigation, these were all matters governed by the CA Act.

His Honour added that although it was unnecessary to consider the alternate basis for a stay put forward by Built Environs and the Insurers, by reason of the Court exercising its general or inherent powers, the Court was obliged by the terms of the CA Act to not intervene, and accordingly, should stay the litigation.

The parties to the litigation and the Arbitration are not different

The Court rejected TCPL’s argument that the parties in the litigation and Arbitral proceeding are different, noting that the definition of ‘party’ in section 2(1) of the CA Act was broad and included ‘any person claiming through or under a party to the arbitration agreement’, which clearly extended to the Insurers.

Conclusion

It is a commercial reality that parties to a transaction will be primarily focused on the deal or project at hand, growing business and developing business relationships, without giving much thought to what will happen if the transaction turns sour.

The Court’s decision in Tensioned Concrete Pty Ltd v Munich Re [2020] WASC 431 serves as a reminder that considering the scope of the dispute resolution clause in your commercial agreement, including the parties which may be permitted to be involved in any such process, is essential and must not be an afterthought in commercial negotiations.[1]


[1] [Note: The above material provides a summary only of the subject matter covered, without an assumption of a duty of care by Resolution Institute or Clayton Utz. The material is not intended to be nor should it be relied upon as a substitute for legal or other professional advice. Copyright in the material is owned by Clayton Utz.]