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Tic toc on the social media clock: When is it too late to arbitrate?

Instagram Inc v Dialogue Consulting Pty Ltd [2022] FCAFC 7

In the recent decision of Instagram Inc v Dialogue Consulting Pty Ltd [2022], the Federal Court has determined that a party can, through its litigation conduct, waive its right to rely on an arbitration agreement. The case serves as a timely reminder that where a party to court action seeks to rely on an arbitration agreement, it should do so at the earliest opportunity.

The Dispute
The applicants, the Meta parties (comprising Instagram Inc (Instagram) and Facebook), sought orders that proceedings commenced in the Federal Court be stayed under section 7(2) of the International Arbitration Act 1974 (Cth) (IAA) and that the matter be referred to arbitration, pursuant to an alleged arbitration agreement within Instagram’s Terms of Use. The respondent, Dialogue Consulting Pty Ltd (Dialogue) opposed the application, denying the existence of a valid arbitration agreement.

Background to the Dispute
Dialogue’s business involves managing social media posts on platforms such as Instagram and Facebook, on behalf of its clients. To undertake this work, Dialogue’s clients authorised Dialogue to log on to the clients' social media platforms, using the clients' individual login details.

The dispute the subject of this proceeding arose from Instagram’s decision to revoke Dialogue’s access to its platform. Instagram took this action on the basis that Dialogue had, by using its clients’ login details to post certain content on their behalf, breached Instagram’s Terms of Use in relation to accessing and storing user data.

Court’s Decision
Under s 7(2) of the IAA, where a valid arbitration agreement exists, a court will stay any proceedings commenced and refer the parties to arbitration.

The Meta parties did not seek a stay of the proceedings until almost a year after the proceedings had commenced. In determining whether to grant the stay, the court considered the Meta parties’ conduct throughout the course of the proceedings and found that their conduct amounted to a waiver of their right to arbitrate (despite the Court finding, at first instance, that a valid arbitration agreement existed).

The Court rejected the Meta parties’ argument that their litigation conduct was merely responsive and defensive in nature. The Court instead found that the conduct of the Meta parties was inconsistent with a reliance on the right to arbitrate; in particular because of their involvement / participation in the court proceeding.

The Applicants’ Litigation Conduct
The Court found that, collectively, the litigation steps taken by the Meta parties demonstrated a waiver of the right to arbitrate. Such steps included the Meta parties:

  1. complying with the litigation case management process without raising the arbitration agreement between the parties;
  2. filing a defence and an amended defence in the litigation process;
  3. filing a separate counter-claim against Dialogue in the litigation process;
  4. filing numerous affidavits in the litigation process;
  5. appearing at numerous Court hearings and attending a Court-ordered mediation in the litigation process;
  6. issuing extensive correspondence for Dialogue to produce large amounts of documents in the litigation process; and
  7. waiting almost 12 months after the litigation process had commenced before seeking a stay.

Importantly, the Court noted that, for close to a year, the Meta parties participated in the litigation process without:

  1. expressing any intention to rely upon an arbitration agreement; or
  2. making any appearance before the Court conditional upon an arbitration agreement.

In establishing that the Meta parties had waived their right to arbitrate, the Court also had to determine whether Dialogue had suffered prejudice. To assess this, the Court considered the following questions:

  1. was the vital function of arbitration, being the expedient, efficient and cost-effective resolution of disputes, substantially undermined by the conduct of the Meta parties?; and
  2. did the Meta parties (as the party moving to compel arbitration) use the judicial process to gain something that could not have been gained in arbitration?

The Court answered ‘yes’ to both questions. Among other things, the Court concluded that in an arbitration, the Meta parties would not have had the ability to seek the breadth of documents they obtained from Dialogue. And conversely, in an arbitration, Dialogue would not have had to expend the same time and cost to comply with the document requests (for instance, the first document request took Dialogue almost three months to comply with).

Implications
This case is important for parties who are involved in agreements which contain agreements to arbitrate, or for parties who aren’t sure of the status of a clause concerning arbitration, including because this case:

  1. illustrates the importance of reviewing agreements to confirm whether they contain an arbitration clause that is valid and legally binding. It may be to the party's benefit to seek to enforce such a clause. If so, that party needs to act consistently with the view that the arbitration clause is binding and of legal effect: conduct can be key; and
  2. demonstrates that, although the general proposition is that an arbitral tribunal (and not a court) can rule on whether it has jurisdiction and can determine questions on the existence, validity and scope of an arbitration agreement, in an appropriate case, a court is empowered to determine these issues. Here, the Court found it could deal with those issues as a discrete exercise, without the need to examine the substantive matters in dispute.[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.]