Third Party Claims "Through or Under" a Party to an Arbitration Agreement
THIRD PARTY CLAIMS AND DEFENCES ‘THROUGH OR UNDER” A PARTY TO AN ARBITRATION AGREEMENT - RINEHART V HANCOCK PROSPECTING PTY LIMITED; RINEHART V RINEHART [2019] HCA 13 (8 MAY 2019) – HIGH COURT OF AUSTRALIA
Background
1. Proceedings were brought by 2 of Mrs. Rinehart’s 4 children (the appellants). The claims were characterized in the High Court as:
- “Substantive Claims” [5]whereby it was alleged thatMrs. Rinehart’s breached trusts and breached other equitable and contractual duties arising from a number of deeds, agreements and declarations of trust [3], whereby Mrs. Rinehart dealt with companies and their assets for her benefit and the benefit of a company controlled by her, and to the detriment of the 2 appellants as beneficiaries.
- “The validity claims” [11] in respect of the deeds executed by the appellants alleging that the execution of the deeds by them was procured by misconduct on the part of their mother Mrs. Rinehart.
The substantive claims were subject to the arbitral provisions but were the validity claims subject to the arbitral provision.
2. The validity claims and the substantive claims were not discrete. “The validity claims incorporate and rely upon the substantive claims” [12, 43].
3. In interlocutory proceedings and before any defence had been filed, Mrs. Rinehart sought an order pursuant to s 8(1) of the Commercial Arbitration Act 2010 (CAA) that the matters the subject of the proceedings be referred to arbitration.
S 8(1) provided:
"A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party's first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed."
4. Clause 20 of one of the deeds provided:
"[i]n the event that there is any dispute under this deed" there is to be a confidential arbitration.
5. The arbitral provision in each of the other 2 deeds the subject of claims was relevantly in similar terms.
6. The question in the High Court (on appeal from the Full Court of the Federal Court) was whether the validity claims were the subject of the arbitral clauses [14]. That is to say: were the validity claims disputes “under this deed” within the meaning of that phrase in Cl 20?
7. The provisions of the Commercial Arbitration Act 2010 (NSW) were recognised as a part of an integrated framework for international and domestic arbitration which implemented the UNCITRAL Model Law on International Commercial Arbitration recognising that arbitration agreements were distinct and limits attacks on their validity, and the kompetenz-kompetenz principle were acknowledged but were found not to be determinative of the appeal [13].
8. The Federal Court at first instance (Rinehart v Rinehart (No 3) [2016] FCA 539; 337 ALR 174)held that the validity claims were not subject to the arbitral clause [14-15]; on appeal, the Full Court of the Federal Court (Hancock Prospecting Pty Ltd v Rinehart [2017] FCAFC 170 (27 October 2017) held that they were subject to the arbitral clause; on appeal from the Full Court of the Federal Court to the High Court it was held by the High Court that the conclusion of the Full Court was correct [16-17]. Further consideration of the High Court’s reasoning follows.-
9. At [16-17] the High Court held that the Full Court was correct in giving the arbitral clause a liberal, not narrow interpretation. At [17] the High Court said:
“When regard is had to the context of the Deeds, including the circumstances in which they were made as reflected in the text of the Deeds, it is apparent that the conclusion reached by the Full Court that the validity claims fell within the scope of the arbitral clauses is correct.”
(See also Edelman J [83], agreeing with the plurality on this point).
10.The reasoning of the Full Court appears at [162 – 167]. At [163] the Full Court said:
“The construction of any arbitration clause in a contract (and such, by the principle of separability and s 16(2) of the CA Act, of an arbitration agreement) is governed by the principles of the common law of Australia attending the construction and interpretation of contracts. The construction and interpretation of written contracts is to be undertaken by an examination of the text of the document in the context of the surrounding circumstances known to the parties, including the purpose and object of the transaction or of the subject matter of the agreement and by assessing how a reasonable person would have understood the language in that context”
11.In considering the purpose and object the Full Court relied on Mason Jin Codelfa Construction Pty. Ltd. V State Rail Authority of NSW [1982] HCA 24 who referred to the speech of Lord Wilberforcein Reardon Smith Line Ltd. V Yngvar Hansen-Tangen[1976] 1 WLR 989 at 996:
“... when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties.”
12.Therefore at [165-167] the Full Court held that arbitration clauses:
“should be read against the sensible presumption (in effect the rational presumption of reasonable people) that the parties did not intend the inconvenience of having possible disputes being heard in two places;” and that
“part of the assumed legal context is this correct general approach which is to give expression to the rational assumption of reasonable people by giving liberal width and flexibility where possible to elastic and general words of the contractual submission to arbitration, unless the words in their context should be read more narrowly.”
13.The High Court’s analysis of the 3 deeds relevant to the question of arbitrability of the substantive claims as well as the validity claims [28-49] led the Court to hold:
“[that] the context for the making of the Deeds was the growing number of claims being made. One of the fundamental purposes of the Deeds, their Honours said, was the quelling of disputes about the title to assets, which was of great commercial importance to the prospective arrangements with a joint venturer” [Rio Tinto] [31].
14.Therefore both the substantive claims and the validity claims were subject to the arbitral clause.
Some of the corporate respondents (referred to in the reasons as ‘third party companies’) [58] were not parties to the deeds. Were they parties as defined in s 2(1) of the CAA by reason of which their application that the claims against them should be referred to arbitration should be allowed.
15.On this question of statutory construction, the High Court (Edelman J dissenting on this point) allowed the appeals holding, contrary to the decisions of the first instance judge and the Full Court (references in para. 8 above), that each of the third party companies was a “party” within the meaning of s 2(1) of the CAA, and that the claims against them should be referred to arbitration. The cross appeal was allowed.
S 2(1) of the CAA provides:
"party means a party to an arbitration agreement and includes:
(a) any person claiming through or under a party to the arbitration agreement, and
(b) in any case where an arbitration does not involve all of the parties to the arbitration agreement, those parties to the arbitration agreement who are parties to the arbitration." (underlining added).
16. The substance of the cross appeals was that [58]:
“The third party companies contend that they are claiming through or under HPPL and HRL, and therefore are parties to the arbitration agreement in the Hope Downs Deed, because it is an essential element of their defence to the appellants' claims that HPPL and HRL were beneficially entitled to the tenements, and further or alternatively that HPPL and HRL obtained releases under that deed, to the benefit of which the third party companies are entitled as assignees of the tenements.”
17.It was held that the meaning of s 2(1)(a) should be ascertained by the text and context of the provision (Tanning Research Laboratories Inc v O’Brien [1990] HCA 8; (1990) 169 CLR 332 (6 March 1990 [10].
18. Tanningraised the question of whether a liquidator of a company which (prior to its liquidation) was a party to an agreement containing an arbitration provision was relevantly a person claiming through or under the company in liquidation. Tanning was considering the provisions of s 7(4) of the Arbitration (Foreign Awards and Agreements) Act 1974which provided:
“For the purpose of sub-section (2) and (3) a reference to a party includes a reference to a person claiming through or under a party.”
19. The judgment of Brennan and DawsonJJ in Tanningprovides the following two propositions on the meaning of s 7(4) - [11]:
a. S 7(2) speaks of both parties to an arbitration agreement and a person claiming through or under a party may be either a person seeking to enforce or a person seeking to resist the enforcement of an alleged contractual right. The subject of the claim may be either a cause of action or a ground of defence:
S 7(2) provides:
"Subject to thisActwhere -
(a) proceedings instituted by a party to an arbitration agreement to which this section applies against another party to the agreement are pending in a court; and
(b) the proceedings involve the determination of a matter that, in pursuance of the agreement, is capable of settlement by arbitration, on the application of a party to the agreement, the court shall, by order, upon such conditions (if any) as it thinks fit, stay the proceedings or so much of the proceedings as involves the determination of that matter, as the case may be, and refer the parties to arbitration in respect of that matter."
b. An essential element of the cause of action or defence must be, or must have been, vested in or exercisable by the party [to the arbitration agreement] before the person claiming through or under the party can rely on the cause of action or ground of defence (Tanning ibid {11]).
20. The reasons in Tanningwere expressed with a higher degree of generality than the facts of that case may have required. They were not confined to the position of a liquidator. The reasons in Tanning recognised that the section itself was in broad terms and could embrace a number of fact situations which may have come within s 7 and in particular within the phrase “a person claiming through or under a party.”
21. Similarly, in Tanning, Deaneand GaudronJJ said in a joint judgment at [18]:
“Section 7(2)of the Actis concerned with "proceedings (which) involve the determination of a matter ... capable of settlement by arbitration". Its operation is thus not confined to proceedings in which the parties seek the same relief as might have been sought in arbitration proceedings. Because s. 7(2) has this wider operation, the question whether a person is claiming through or under a party to the arbitration agreement is necessarily to be answered by reference to the subject matter in controversy rather than the formal nature of the proceedings or the precise legal character of the person initiating or defending the proceedings.” (See Rinehart, High Court [67]).
22. So much was recognised in Rinehart when the High Court [66] referred to the formulation of the test in Tanning:
[The test was]“…whether an essential element of the defence was or is vested in or exercisable by the party to the arbitration agreement. That accorded to the protean quality of the phrase "through or under" and their Honours' view [in Tanning] that its meaning was to be "ascertained not by reference to authority but by reference to the text and context of the provision in which it appeared.”
The Edelman J Dissent in Rinehart
23. Edelman J at [83 – 104] dissented.
24. Whereas the majority held that s 2(1) expanded the principle of ‘privity’ by the extended definition of ‘party’ in s 2(1) of the New South Wales Act [52, 77], to include “any person claiming through or under a party to the arbitration agreement,” Edelman J held that s2 (1) maintained the rules of privity of contract and further held at [85]:
“ the Full Court was correct to conclude that the third party companies do not claim "through or under" HPPL and HR. To stretch the words of s 2(1) giving them a wide and liberal construction, would be antithetical to the global "fundamental principle that arbitration is a matter of contract" and, consequently, that "parties may specify with whom they choose to arbitrate their disputes.”
Further at [86, 87]. At [88] His Honour said:
“The meaning of s 2(1)requires that, for a third party's claim to be "through or under" a party, the third party seek to enforce or to resist the enforcement of a right held or duty owed by the party.So understood, this is not an exception to privity of contract, because if a third party's claim relies upon or resists a right of the party to the arbitration agreement, then the third party is agitating the right of a party and not agitating its own right”
And at [89]:
“An interpretation of s 2(1) that maintains the rules of privity of contract is further supported by the consequence that otherwise a person who had not agreed to arbitration could unilaterally be deprived of her, his, or its right of access to the courts. Parliament should not lightly be found to have had such an intention in these circumstances.”
Some Issues with the doctrine of Privity of Contract in Common Law and Civil Regimes.
25. The doctrine of privity of contract has been, in Australia, the subject of significant case law and the doctrine, it might be said, is under attack.
26. In Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107 (8 September 1988) the joint reasons MasonCJ and WilsonJ [12 – 31] and the observation of DawsonJ (concerning contracts of insurance) at [4] that ”in latter years privity of contract has had more detractors than supporters,” led DawsonJ to observe:
“Rejection of the doctrine of privity of contract by judicial decision could not be restricted upon any conceptual basis to contracts of insurance. There may be practical reasons for wishing to retain the doctrine in its application to some kinds of contract, but such a choice could not be made by a court by reference to any coherent body of principle. However, the rejection of the doctrine in anything other than a restricted manner requires the elaboration of a number of matters without which the law would be left unacceptably confused and uncertain. A glance at the legislation in those jurisdictions in which the doctrine has been abolished shows that it has been found necessary to provide for such matters as the manner in which the third person is to be specified in the contract, whether the benefit to the third person must be direct, whether any defence which is available against the promisee should be available against the third person and whether the promisee not being a party to any action should nevertheless be bound by the result, whether the third person should be bound by any obligations imposed upon him by the contract, whether acceptance of the contract by the third person is required and whether the contract may be discharged or varied without the consent of the third person. These are things which are beyond the purview of a court in its task of expounding the law in the context of resolving individual disputes.”
27. More directly, the doctrine of privity of contract in a commercial context has been overcome by the concept of agency (Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165 (11 November 2004)) [79]. The concept of agency was described by Lord Bingham of Cornhill as:
“a deft and commercially inspired response to technical English rules of contract, particularly those governing privity and consideration” (Homburg Houtimport BV v Agrosin Ltd [2004] AC 715 at 744).
28. Further, insofar as arbitration, more particularly, international commercial arbitration, has an international perspective which may be relevant to the construction of Australian legislation in the field, German courts (without consideration of any doctrine of privity as possibly limiting third party claims) consider torts and contracts as species of the law of obligations. Thus:
“Where a solution cannot be found in tort, German lawyers and the courts often cross over into contract.For example, claims for negligent misstatement are dealt with in contract law, under which contracts do not require consideration. A party to a contract is considered to be under a general duty, not only to perform a contract in a proper fashion, but also not to cause injury to persons or harm to property. The courts in Germany extend that protection to a third party plaintiff if the promisee had a clear interest in bringing them within the ambit of the contractual protections and the defendant, the promisor, had some knowledge of the likelihood of harm to the plaintiff. Duty under a contract arises where there is a close relationship between the plaintiff and the promisee and the promisor could foresee that the plaintiff might suffer damage.” (Barclay v Penberthy [2012] HCA 40 (2 October 2014) [169].
29.Approaching the question of application of the arbitration provision in Rinehartto third parties as a question of statutory construction should not be seen as “a deft and commercially inspired response to technical English rules of contract, particularly those governing privity and consideration” (Homburg supra).
30.On the other hand, the decision inRinehart,applying the accepted approach to statutory construction in Australia, has extended the definition of “party” and those claiming “through or under” a party in s2 (1) to non-privies in a way that New South Wales’ and Australian Arbitration legislation might be seen to accord with international arbitration law, albeit by a different but well reasoned approach.
CONCLUSION
31.In light of the above, the reasoning of the plurality Rinehartat [73] may be better understood and assist in ensuring consistency with developing international understanding of third party arbitrability:
“To exclude from the scope of the arbitration agreement binding on the assignor matters between the other party to that agreement and the assignee would give the arbitration agreement an uncertain operation. It would jeopardise orderly arrangements, potentially lead to duplication of proceedings and potentially increase uncertainty as to which matters of controversy are to be determined by litigation and which by arbitration. And ultimately it would frustrate the evident purpose of the statutory definition.”