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Samantha Lord Hill
Freshfields Bruckhaus Deringer, Dubai/Singapore
samantha.lordhill@freshfields.com

Stefan Pislevik
Freshfields Bruckhaus Deringer, Dubai
stefan.pislevik@freshfields.com

 

On 8 May 2019, the High Court of Australia handed down the much-awaited decision in Rinehart v Hancock Prospecting^[1] concerning two applications for the stay of proceedings in favour of arbitration under section 8 of the Commercial Arbitration Act 2010 (NSW) (the Act). In essence:

• in ordering a stay in both instances, the High Court undoubtedly took an arbitration-friendly approach, liberally interpreting the scope of the arbitration agreements in question as well as the statutory definition of a ‘party’ under section 2(1) of the Act;

• the High Court applied orthodox principles of contractual interpretation to determine the scope of the arbitration agreements, side-stepping opining on the correctness of the approach of the House of Lords in Fiona Trust & Holding Corporation v Privalov^[2] and thereby leaving to stand the conflicting views of the Full Court of the Federal Court of Australia^[3] and the Court of Appeal of New South Wales^[4] on that decision; and

• in holding that certain third party companies fell within the definition of a ‘party’ under section 2(1) of the Act, the majority of the High Court left unanswered questions regarding issues of arbitral consent, privity of contract and third party claims more generally, while Edelman J in his dissenting opinion appeared to consider the fundamental tenets of arbitration to be undermined by such a broad interpretation of section 2(1), thus creating uncertainty as to how that provision will be interpreted in future.

Background

The decision is part of a high-profile and long-standing Australian family dispute between mining magnate, Gina Rinehart (Mrs Rinehart), and two of her children, Bianca Rinehart and John Hancock (together, the appellants), over the administration of certain family trusts established during the lifetime of Mrs Rinehart’s father, Mr Lang Hancock. Mr Hancock was the founder of the Hancock Group of companies, which were involved in the discovery and acquisition of iron ore in the Pilbara region of Western Australia.

The appellants had commenced proceedings before the Federal Court of Australia in which they made claims concerning the conduct of Mrs Rinehart, Hancock Prospecting Pty Ltd (HPPL) and others which is alleged to have diminished the assets of trusts of which the appellants were beneficiaries. These claims centred on an alleged agreement in 1988 between Mr Lang Hancock and Mrs Rinehart, and subsequent deeds which the appellants argued were invalid (the deeds).

Mrs Rinehart sought an order pursuant to section 8(1) of the Act that the matters the subject of the proceedings be referred to arbitration pursuant to the arbitration clauses in the deeds. The primary judge rejected the application on the basis that claims relating to the validity of the deeds were not within the scope of the arbitration agreements and thus no stay in favour of arbitration should be granted. However, the Full Court of the Federal Court disagreed, and stayed proceedings in favour of arbitration. The appellants then appealed to the High Court.

The appellants had also claimed before the Federal Court against Roy Hill Iron Ore Pty Ltd, Hope Downs Iron Ore Pty Ltd and Mulga Downs Iron Ore Pty Ltd (the third party companies) on the basis that they allegedly received certain mining tenements with knowledge of Mrs Rinehart’s alleged fraudulent conduct and/or breaches of fiduciary duty.

While the third party companies were not party to the deeds (and therefore to the arbitration agreements), they sought an order pursuant to section 8(1) of the Act that the matter be referred to arbitration on the basis that each of them was a person claiming ‘through or under’ a party to one of the deeds pursuant to section 2(1) of the Act. The primary judge rejected the application and that decision was upheld by the Full Court of the Federal Court. The Third Party Companies then cross-appealed to the High Court.

The appeal

A liberal approach to the interpretation of arbitration agreements

The question before the High Court on the appeal was whether the claims concerning the validity of the deeds was a matter falling within the scope of the arbitration agreements, which provided for confidential arbitration ‘[i]n the event that there is any dispute under this deed’.^[5] In dismissing the appeal, the High Court unanimously confirmed that the arbitration clauses when ‘construed in context, include as their subjects the validity claims raised by the appellants’,^[6] therefore the proceedings before the Federal Court should be stayed in favour of arbitration.

The High Court applied ‘orthodox principles of interpretation’^[7] to the arbitration agreements, stating that ‘[i]t is well established that a commercial contract should be construed by reference to the language used by the parties, the surrounding circumstances, and the purposes and objects to be secured by the contract.’^[8]

The Court carefully analysed the context in which the deeds were executed, which included ongoing public litigation, concerns of commercial damage to the Hancock group and risks of confidential information being disclosed, as well as the purpose of the deeds which was in large part to quell certain disputes in respect of the title to assets.^[9] The Court also considered the terms of the deeds, which included numerous provisions expressly requiring confidentiality, both in respect of the terms of the deeds and any mediation or arbitration commenced thereunder.^[10]

Given the importance placed by the parties on confidentiality at the time of executing the deeds, the Court found quite plainly ‘[i]t could not have been understood by the parties to these deeds that any challenge to the efficacy of the deeds was to be determined in the public spotlight.’^[11] On that basis, the Court concluded that the arbitration clauses in question had ‘wide coverage with respect to what was to be the subject of confidential processes of dispute resolution’^[12] and that the reference to ‘any dispute under this deed’ included claims in respect of the validity of the deeds.

Fiona Trust left unaddressed

The High Court unfortunately did not take the opportunity to address whether the House of Lords decision in Fiona Trust^[13] represents the correct approach to the interpretation of arbitration clauses in Australia. In Fiona Trust, Lord Hoffman stated that the construction of an arbitration clause should ‘start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal’^[14] and that assumption should apply unless the language of the arbitration clause makes it clear that certain disputes fall outside its scope.

The primary judge in the Federal Court had eschewed the Fiona Trust approach in favour of the decision of the Court of Appeal of New South Wales in Rinehart v Walker, in which Bathurst CJ held that Fiona Trust was contrary to the approach to the interpretation of commercial contracts in Australia,^[15] adopting instead a narrow interpretation of the words ‘under this deed’.^[16]

The Full Court of the Federal Court disagreed: in analysing the Australian case law on the interpretation of arbitration clauses, it opined that Fiona Trust was reflective of the correct general approach and that the Court of Appeal of New South Wales misunderstood Fiona Trust.^[17] Since the High Court side-stepped this issue, there remains a degree of uncertainty as to the status of the Fiona Trust approach in Australia in light of the conflicting decisions.

The cross-appeal

A liberal interpretation of ‘a person claiming through or under a party to the arbitration agreement’

The question on the Cross-Appeal was whether the third party companies, as non-parties to the deeds (and therefore the arbitration agreements), were nonetheless ‘parties’ within meaning of section 2(1) of the Act, being ‘any person claiming through or under a party to the arbitration agreement’, such that the proceedings against them should also be stayed in favour of arbitration.

The Third Party Companies had received certain mining tenements from HPPL and Hancock Resources Limited (HRL), who were parties to the Hope Downs deed. The third party companies argued they were entitled to rely on the arbitration agreement in the Deed pursuant to section 2(1) of the Act. An essential element of their defence to the appellants' claims was that HPPL and HRL were beneficially entitled to the tenements, and/or that HPPL and HRL obtained releases under that deed on which the third party companies were entitled to rely as assignees of the tenements.^[18]

Disagreeing with the decision of the primary judge and the Full Court of the Federal Court, the majority of the High Court held that the third party companies fell within the definition under section 2(1) of the Act and therefore granted the stay. The majority reasoned:

‘Since the assignor and the claimant are bound by an arbitration agreement applicable to the claim of breach of trust, there is no good reason why this claim should not be determined as between the claimant and the assignee in the same way as it will be determined between the claimant and the assignor.’^[19]

They went on to say that to exclude the claims against the third party companies from the scope of the arbitration agreement would give the arbitration agreement an ‘uncertain operation’, would ‘jeopardise orderly arrangements’ and would potentially lead to duplication of proceedings.^[20]

Questions of consent and privity of contract left unanswered

The majority of the High Court appears to have tried to limit the potentially wide-reaching consequences of its decision by expressly stating that no submissions were made regarding the issues of arbitral consent, privity of contract and third party claims more generally,^[21] thereby leaving these questions unanswered and scope for a narrower interpretation of section 2(1) of the Act in future.

Indeed, in his dissenting opinion, Edelman J was concerned with the fundamental principles of consent to arbitrate and privity of contract, stating that:

‘However laudable may be the pragmatic considerations of reducing expense and increasing convenience, there is no basis for an extended meaning of ‘party’ in s 2(1) that would compel a third party to submit its independent claim or defence to arbitration without the third party having consented to the procedure, without an arbitrator to whose appointment the third party had consented in the exercise of its own ‘voice in the choosing of the arbitrators’, and possibly by a reference to a legal system that would not have been chosen by and would not otherwise have applied to the third party.^[22]

Edelman J emphasised that the meaning of section 2(1) of the Act requires that, for a third party's claim to be ‘through or under’ a party, the third party must seek to enforce or to resist the enforcement of a right held or duty owed by the party to the agreement and, so understood, is not an exception to the principle of privity of contract.^[23] In circumstances where the third party companies were defending claims made directly against them concerning their own liability, not that of HPPL or HRL, Edelman J found they could not rely on section 2(1) and therefore their request for a stay in favour of arbitration should be denied.

Concluding remarks

The decision in Rinehart v Hancock is consistent with a general arbitration-friendly trend in Australia and in that regard is encouraging. It has, however, left unanswered some important questions, in particular concerning the potential use by third parties of section 2(1) of the Act (and other similar provisions) to join an arbitration which, in turn, gives rise to further questions as to the potential repercussions at the post-award stage.

 

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