Identity unknown: What happens to an arbitration agreement if a non-existent person is supposed to nominate the arbitrator?!
Broken Hill City Council v Unique Urban Built Pty Ltd  NSWSC 825
Where the person prescribed in the contract to nominate an arbitrator does not exist, does this render the arbitration agreement inoperative? In the recent decision of Broken Hill City Council v Unique Urban Built Pty Ltd  NSWSC 825, the Supreme Court considered the meaning of the term 'inoperative' in the context of an agreement to arbitrate and found that a defect in the procedure of appointment does not render the parties' arbitration agreement inoperative.
Broken Hill City Council (Council) retained Unique Urban Built Pty Ltd (Urban) to upgrade the Broken Hill Civic Centre using a standard form contract (Contract). The Council retained the second defendant architects to design the upgrade, to be project manager for the works and to administer the Contract. A dispute arose between the parties, with the Council alleging that Urban breached the Contract in numerous respects. Council also alleged that the architects' design was defective. Both Urban and the architects disputed the Council's allegations.
The Dispute Resolution Clause of the Contract provided that, if the dispute had not been resolved within 28 days of service of the notice of dispute, the dispute would be referred to arbitration. It also provided that, if, within a further 14 days, the parties have not agreed upon an arbitrator, the arbitrator shall be nominated by the President of the Australasian Dispute Centre.
However, at the time of the Contract, the Australasian Dispute Centre did not exist. There was no President. It was apparent that such an organisation once existed, however it became defunct in 2011. The Council and Urban had used an obsolete standard form contract. The Contract further provided that, if no other provision was expressly made, the rules for any arbitration would be Articles 5-18 of The Rules of the Institute of Arbitrators, Australia for the Conduct of Commercial Arbitrations (Rules).
Urban sought an order from the Court that it and the Council be referred to arbitration, notwithstanding the above background.
The Issue for Determination and the Parties' Arguments
The issue for determination before the Court was whether the arbitration agreement was inoperative, in light of the deficiencies identified above. The Court's view was that this required consideration of:
- what was meant by the term 'inoperative'; and
- whether the defect (if that was what it was) in the Dispute Resolution Clause rendered the arbitration agreement inoperative.
Urban advanced its application for a referral to arbitration on three main grounds:
- first, that Article 8 of the Rules, which was expressly incorporated into the Contract by, was the mechanism for the appointment of an arbitrator;
- second, that the Dispute Resolution Clause was an arbitration agreement in its own right and was capable of standing alone within the meaning of section 7(1) of the Commercial Arbitration Act 2010 (NSW) (Act). Following from that, if the action was brought in a matter which is the subject of an arbitration agreement (as Urban argued was the case), the Court must, if a party requests, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed; and
- third, that even if the Dispute Resolution Clause was ineffective, Urban and the Council had failed to agree on a procedure of appointing an arbitrator; in which event, section 11(3)(b) of the Act empowered the Court to appoint one.
The Council argued that, because the appointer described in the Contract did not exist, the arbitration agreement was inoperative. It argued that the parties contemplated a single method for appointment and their agreement to arbitrate was dependent upon that method working. If it did not work, there was no agreement to arbitrate.
Hammerschlag J held that the agreement was not 'inoperative'; despite the defective mechanism for the appointment of an arbitrator.
As to the issue of what was meant by the term 'inoperative', His Honour took the view that the term meant "having no field of operation or to be without effect". His Honour stated that an evaluation of whether an arbitration agreement was, in fact and in law, 'inoperative' was to be done by reference to the provisions of the Act.
His Honour held that the Act distinguishes between an arbitration agreement under section 7(1) and an agreement on a procedure to appoint an arbitrator as contemplated by section 11(2). If in fact an arbitration agreement is inoperative, null or void, the Court cannot refer the parties to arbitration pursuant to section 8(1) of the Act. However, where there was a defect or deficiency in the agreed procedure or process for an arbitration, the position was not necessarily the same. In fact, section 11 of the Act is directed to ensuring that an arbitration agreement operates where the procedure for the appointment of the arbitrator fails, by allowing the Court to appoint an arbitrator in the absence of agreement by the parties, or where the agreed procedure for appointment fails
His Honour distinguished the present case from the case of Sembawang Engineers , where there was importance placed on the fact that the arbitrator was to be, or appointed by, a specific person or specialist. His Honour also noted that he found it difficult to accept that reasonable persons in the positions of both parties intended that their agreement would fail because of the non-existence of the appointing authority.
Hammerschlag J ultimately ordered the Council and Urban to be referred to arbitration in accordance with s 8(1) of the Act, with the Court to appoint an arbitrator under s 11(3)(b) of the Act.
Implications and Conclusion
The case provides some useful guidance on the meaning of 'inoperative' for the purposes of s 8(1) of the Act.
In a broader context, it also reinforces the importance of carefully drafting and checking dispute resolution clauses to ensure that they are not tied to specific mechanisms for operation that may change over time. Another example of this, was in respect of expert determination clauses and the provision to have an independent expert appointed by the President of the Institute of Chartered Accountants. The Institute of Chartered Accountants ceased this service in 2015.
The case also, more broadly, highlights the importance of routinely checking standard form contracts to ensure that they are current and enforceable.
Note: The above material provides a summary only of the subject matter covered, without an assumption of a duty of care by LEADR 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.
Thanks to Karen Ingram and Tanya Thomas from Clayton Utz Litigation and Dispute Resolution team, for preparation of the Legal Update.