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Australia – Restraining Arbitration To Protect The Integrity Of The Court Process.

7 April 2014

 

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

 

In the recent decision of Caratti v Caratti [No 2],1 Justice Allanson of the Supreme Court of Western Australia granted an interlocutory injunction restraining a party to the proceedings from commencing arbitration. In so doing, His Honour clarified the operation of section 8(2) of the Commercial Arbitration Act 2012 (WA) (CAA), a provision that is based on the text of Article 8(2) of the UNCITRAL Model Law2 and is replicated in the domestic commercial arbitration legislation of all Australian states and territories (save for the ACT).

 

The decision clarifies that the ability under section 8(2) CAA to commence arbitration in parallel to court proceedings is subject to the court’s power to protect the integrity of its own processes.

 

Background

 

Caratti v Caratti [No 2] was an interlocutory decision in an ongoing Supreme Court proceeding commenced by John Caratti in 2008 against his brother Allen and numerous other defendants concerning the brothers’ respective rights to family assets and the management of various family companies.3

 

At issue in the proceedings is a settlement deed executed by John and Allen Caratti in 2002 (the 2002 Deed) pursuant to which the brothers agreed that their beneficial interests in the family’s assets would be divided equally between them upon John Caratti reaching the age of 60.

 

Pursuant to clause 11 of the 2002 Deed, disagreements regarding the distribution of the family’s assets would be resolved by the final and binding determination of an independent barrister to be appointed by the President of the Law Society of Western Australia. The independent barrister would act at the joint cost of John and Allen Caratti and decide all issues within 60 days of his appointment.

 

When the solicitors for Allen Caratti attempted to invoke the dispute resolution procedure in clause 11 of the 2002 Deed in November of 2013, John Caratti applied for an injunction to restrain him from doing so.

 

Decision Of The Supreme Court Of Western Australia

 

Allanson J appears to have proceeded on the assumption that clause 11 of the 2002 Deed was an arbitration agreement and turned to consider the effect of section 8(1) of the CAA.4

 

Section 8(1) CAA states, in essence, that where the court is presented with a matter in respect of which the parties have entered into an arbitration agreement, the court must refer the parties to arbitration at the request of a party unless:

 

  • it finds the arbitration agreement is null and void, inoperative or incapable of being performed; or
  • the request for referral to arbitration occurs after the requesting party has submitted its “first statement on the substance of the dispute.”

 

Allanson J found that Allen Caratti had already submitted his “first statement on the substance of the dispute” (presumably a reference to Allen Caratti’s defence) and the court was therefore not required to refer the parties to arbitration under section 8(1).

 

His Honour then considered section 8(2) CAA pursuant to which arbitral proceedings may be commenced or continued and an arbitral award made while the issue is pending before the court.

 

Allanson J accepted John Caratti’s submission that section 8(2) was permissive only and subject to the power of the court to restrain arbitral proceedings. His Honour stated:

 

… the court may restrain parallel arbitral proceedings where that course is necessary to protect its own proceedings or processes or, more generally, where the administration of justice so demands.5

 

The judgment cites the principle from CSR Ltd v Cigna Insurance Australia Ltd6 that every court has an inherent or implied power to prevent its processes being abused and to protect the integrity of those processes once set in motion.7

 

The court granted the injunction, concluding that there were “abundant reasons” why the reference to a barrister under clause 11 of the 2002 Deed should be restrained including:

 

  • the procedure under clause 11 could not resolve all of the issues between the parties (there were a total of 72 defendants in the litigation who were not even parties to the 2002 Deed and so would not be bound by the independent barrister’s decision);
  • the complexity of the factual and legal issues in dispute;
  • the “ridiculously tight” schedule of 60 days contemplated in clause 11 of the 2002 Deed for the barrister to reach a decision;
  • the potential for inconsistent decisions; and
  • the fact that the court proceedings had been on foot for more than five years.8

 

Analysis

 

Once a party to an arbitration agreement has filed pleadings with the court, they may be unable to invoke section 8(1) CAA to have their dispute referred to arbitration.

 

Instead, they will need to rely on section 8(2) CAA which permits arbitral proceedings to be commenced or continued in parallel to the court process. However in light of Allanson J’s decision in Caratti v Caratti [No 2], it seems that a party may be restrained from initiating parallel arbitration where to do so would undermine the integrity of the court process.

 

The complexity of the issues in dispute, whether the process contemplated in the arbitration agreement sufficiently accounts for those complexities, the potential for inconsistent decisions and the length of time that has elapsed since the commencement of litigation are all factors that may be considered by a court when deciding whether to allow arbitration to proceed under section 8(2) CAA and its equivalents in other jurisdictions.

 

End Notes:

 

1 [2014] WASC 65.

2 UNCITRAL Model Law on International Commercial Arbitration (As adopted by the United Nations Commission on International Trade Law on 21 June 1985, and as amended by the United Nations Commission on International Trade Law on 7 July 2006).

3 See: Caratti v Caratti [2012] WASC 357.

4 [2014] WASC 65 at [12].

5 [2014] WASC 65 at [12].

6 (1997) 189 CLR 345, 391 – 392.

7 [2014] WASC 65 at [13].

8 [2014] WASC 65 at [61] – [71].

 

herbert smith Freehills

 

For further information, please contact:

 

Elizabeth Macknay, Partner, Herbert Smith Freehills

[email protected]

 

Scott Ivey, Herbert Smith Freehills

[email protected]

 

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