Jurisdiction - Australia
Reports and Analysis
Australia – No Stranger To Arbitration.

 

24 August, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

 

Parties can be bound by the arbitration agreements of related companies

 

WHAT YOU NEED TO KNOW

 

  • The Court of Appeal of the Supreme Court of Victoria has handed down its decision in Flint Ink NZ Ltd v Huhtamaki Australia Pty Ltd [2014] VSCA 166.
  • The decision illustrates how section 7 of the International Arbitration Act 1974 (Cth) can bind a company to an arbitration agreement, despite it not being a party to that agreement, where it was entered into by a related company in the same corporate group.

 

 

On 6 August 2014, the Court of Appeal of the Supreme Court of Victoria handed down its decision in Flint Ink NZ Ltd v Huhtamaki Australia Pty Ltd [2014] VSCA 166. The decision illustrates how the International Arbitration Act 1974 (Cth) can bind a company to an arbitration agreement, despite it not being a party to that agreement, where the agreement was entered into by a related company in the same corporate group. The case is an example of the legislature and courts preventing agreements to arbitrate being circumvented.

 

Background: Claiming “Through Or Under A Party”

 

Section 7(2) of the International Arbitration Act 1974 (Cth) requires a court to stay proceedings and refer them to arbitration where they are commenced by a party to an international arbitration agreement against another party to that agreement, and those proceedings involve the determination of a matter that can be settled by arbitration under that agreement. Importantly, section 7(4) enlarges the definition of “a party” to include “a person claiming through or under a party”. The overall effect is that a person or entity claiming through or under a party to an arbitration agreement can be referred to arbitration, even though they themselves are not party to the arbitration agreement. A similar regime applies to domestic arbitration agreements by virtue of sections 2 and 8 of the various state and territory Commercial Arbitration Acts. Section 7 is an exception to the general rule of privity that a contract only bind the parties to that contract. The section is in line with the overall policy of facilitating arbitration. It discourages a party to an arbitration agreement from attempting to circumvent its obligations by relying on a related non-party to bring to court what is, in substance, a claim that the party has agreed to resolve by arbitration. The section also protects a party who, having bargained for the benefit of resolving disputes by arbitration, would otherwise lose that benefit by having to litigate a related non-party’s claim.

 

The Facts

 

Flint Ink NZ Ltd (a New Zealand-based company), sold ink to Huhtakamaki New Zealand Ltd (another New Zealand-based company). The sale contract contained an agreement to arbitrate. Huhtakamaki NZ used the ink to manufacture packaging, which it supplied to Huhtakamaki Australia, an Australian-based company in the same Huhtamaki group. Huhtakamaki Australia then supplied the packaging to Lion-Dairy. The packaging was defective, and Lion-Dairy claimed against Huhtakamaki Australia, who then filed a third party notice against Flint Ink alleging negligence. Flint Ink sought to have the third party proceedings against it stayed because of the agreement to arbitrate in its contract with Huhtakamaki NZ.

 

The Decision

 

The trial judge had denied Flint Ink’s stay application on the basis that there no arbitration agreement applied to Huhtakamaki Australia’s claim. His Honour also held that Huhtakamaki Australia was not claiming “through or under” Huhtakamaki NZ. The Court of Appeal overturned these findings. It held that any liability of Flint Ink to Huhtakamaki Australia was dependent on facts entirely relating to dealings with Huhtakamaki NZ. Flint Ink could only be liable to the Australian company because of negligent conduct in its dealings with the New Zealand related company, and indeed the only breaches of duty alleged against Flint Ink were in respect of the related company. The fact that each company was a separate legal entity did not alter this finding. The Court emphasised that section 7 of the International Arbitration Act (Cth) depends on an assessment of the “subject matter in controversy” rather than the “formal nature of the proceedings” or the “precise legal character” of the parties. By relying on inter-group trading, Huhtakamaki Australia had effectively bound itself to an agreement to arbitrate that Huhtakamaki NZ had entered into with respect to products purchased from outside the corporate group.

 

Implications

 

The High Court of Australia explained in Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332 that the issue in section 7 of the International Arbitration Act (Cth) as to whether someone was claiming “through or under a party” to an arbitration agreement is case-specific and a matter of context. Nevertheless, case law illustrates that a number of situations fall within section 7, including claims by an assignee of a contract containing an arbitration clause, by the personal representatives of a deceased party, and by the trustee of a bankrupt.

 

Flint Ink NZ Ltd v Huhtamaki Australia Pty Ltd adds to this list claims by companies related to a party to an arbitration agreement, where they are claiming through or under that party. Importantly, the decision indicates that the closeness of separate companies within the same corporate group, and how they conduct their inter-group affairs, can have arbitration consequences where one company seeks to bring a claim against an outsider to the corporate group in connection with dealings involving another company in the group. If one company’s dealings with an outsider
are subject to an arbitration agreement, then other companies within the same corporate group may find themselves effectively bound to that arbitration agreement unless their claim against the outsider is completely independent from the company that is party to the agreement. Companies should therefore keep abreast of the arbitration obligations of their corporate relatives so as to avoid surprise and to structure their claims accordingly.

 

Ashurst Logo

 

For further information, please contact:

 

Peter Voss, Partner, Ashurst
peter.voss@ashurst.com

 

Ashurst Dispute Resolution Practice Profile in Australia

 

Homegrown Dispute Resolution Law Firms in Australia

 

Comments are closed.