Jurisdiction - Australia
Australia – Corporations Act ‘Matters’ And The Scope Of A ‘Pathological’ Arbitration Agreement: Robotunits Pty Ltd v Mennel [2015] VSC 268.

12 May, 2015


Justice Croft of the Victorian Supreme Court handed down judgment on 22 June 2015 in an application for a stay of proceedings and referral to arbitration pursuant to the International Arbitration Act 1974 (Cth) (IAA).


Disputes had arisen under shareholder agreements containing an arbitration clause which provided that [e]ach party irrevocably and unconditionally submits to arbitration in accordance with the arbitration guidelines of the Law Institute of Australia.  The first question before the Court was whether there was an operable arbitration agreement in each of the shareholder agreements. Croft J observed that on its face, the arbitration clause was ‘pathological’ (there being no such thing as the referenced guidelines), however there was a concession made thatwith judicial assistance, the agreement may be rendered effective.  His Honour found that: 


… each party has agreed “irrevocably and unconditionally” to submit to arbitration.  These are strong words evincing a clear intention to submit disputes between the parties, which fall within the scope of the arbitration agreement, to arbitration.  For these reasons, I am of the opinion that the arbitration agreement is operable, and is capable of forming the basis of the orders [the defendant] seeks.


The second issue before the Court was whether the requirements of s 7(2)(b) of the IAA were met for the enforcement of the arbitration agreement.  In considering this issue, Croft J identified three questions: first, what was the matter or matters for determination in the proceeding; secondly, whether that matter or those matters are capable of settlement by arbitration in pursuance of the arbitration agreement(s); and thirdly, whether the matter or matters was capable of settlement by arbitration (at law).  


The answer to the first question involved an analysis of the plaintiff’s claim (so far as it had been articulated at that point in the litigation – where pleadings had not yet closed).   His Honour identified the ‘matters’ as whether the relevant shareholder agreements provided a legal or equitable basis for the defendant to cause the plaintiff to make a certain share payment and whether an employment agreement between the parties provided a legal or equitable basis for the defendant to cause the plaintiff to make a specified ‘entitlement payment’.  


The plaintiff submitted that in order to satisfy the requirements of s 7(2)(b) of the IAA, the Court also needed to be satisfied that the matters for determination were ‘sustainable’ (in that it had a reasonable prospect of success).  Croft J rejected this submission. After analysing relevant jurisprudence from both Australian and foreign jurisdictions, his Honour observed: 


… there are no grounds for reading such a requirement into s 7(2)(b) of the Act.  Indeed, in my view, to find otherwise would be to succumb to the temptation of “domesticity’ referred to above, by allowing the determination of whether to stay proceedings and refer the parties to arbitration to be coloured by the merits of the case.  In other words, this would involve engaging in an impermissible assessment of the relative strengths and weaknesses of the parties’ claims and defences as to the substance of the dispute – a task which the Act has reserved for either the trial judge, or the arbitration tribunal (if the requirements of s 7(2) are satisfied). 


On the second question, and having regard to the terms of the arbitration agreements and the matters in dispute between the parties, Croft J found that whilst the question of whether payments were authorised under the shareholder agreements did fall within the scope of the relevant arbitration agreement, the common sense interpretation of the arbitration agreement is not […] that the parties intended to submit all issues between them, regardless of how they may arise, to arbitration and that the matter of whether the employment agreement provided a basis for the defendant to cause the plaintiff to make certain ‘entitlement payments’ wasbeyond the scope of the arbitration agreement.  The reasons for this finding included the fact that the employment agreement was executed after the shareholder agreements and the fact that there was no evidence before the Court as to other surrounding circumstances, such as an established practice between the parties of submitting all disputes between them to arbitration. 


On the third question, being whether the matters to be determined are capable of settlement by arbitration, his Honour referred to the analysis of this phrase by Allsop J (as he then was) in the decision of Commandate Marine v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45 and, in particular, the discussion by Allsop J in that case as to the public policy dimension of arbitrability.  The specific issue before Croft J was the extent to which the matters for determination were impacted by or subject to provisions of the Corporations Act.  His Honour commented, on this issue, that [i]n my view, and as a general proposition, there is not a sufficient element of legitimate public interest in matters involving the Corporations Act to make their resolution by arbitration – that is, outside the national Court system – inappropriateadding for that I do not consider there to be a sufficient element of legitimate public interest in a matter making it inappropriate for private dispute resolution merely because a statutory body such as the Australian Securities and Investments Commission (“ASIC”) may have an interest in the proceeding, or have sufficient standing to bring an action in relation to it. 


Having considered the matters outlined above, Croft J concluded that the entire proceeding should be stayed, but that only the question arising under the shareholder agreements should be referred to arbitration.  His Honour noted further that orders should be made on the condition that the parties seek to agree on the arbitral seat and the rules of arbitration (if any rules were sought to be applied) within 28 days.  The reason for this condition was thepathologies of the arbitration agreement


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For further information, please contact:


Bronwyn Lincoln, Partner, Herbert Smith Freehills

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Kristy Haining, Herbert Smith Freehills

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