Arbitration and related third parties: Victorian Court of Appeal to rule on application to stay litigation based on upstream NZ arbitration agreement

In a recent decision,[1] the Supreme Court of Victoria rejected a New Zealand company’s application to stay a third party claim against it. The NZ company argued that that the claim was required to be referred to arbitration and that argument was rejected largely on the basis that the relevant claimant (being a related third party, one step down the supply chain from the counterparty to the arbitration agreement) was not, nor was it claiming through or under, the counterparty to the arbitration agreement. Accordingly, the claimant was not bound to arbitrate and could proceed with its claim before the Victorian Supreme Court.

On 13 December 2013, the Victorian Court of Appeal granted leave to appeal from the  decision at first instance on grounds including that the court of first instance erred in holding that the claimant was not claiming through or under a party to the arbitration agreement.[2] In doing so, the court confirmed that the wrongful loss of an entitlement to rely on an arbitration agreement would amount to substantial injustice if not reversed.[3]

This case provides another[4] reminder of the need for careful drafting where there are multiple parties and multiple related documents (for example, involving multi-party supply chains, transactions or business ventures).  It is important to ensure that your arbitration agreement binds the right parties and claims, failing which you may unintentionally be exposed to increased risk of:

1. facing costly claims in undesirable jurisdictions;
2. fragmented disputes, resolved in multiple fora, with potentially inconsistent outcomes; and
3. diminished prospects of meaningful recovery of claims.

Background

Lion-Dairy, an Australian manufacturer of food and dairy products, sued Huhtamaki Australia, an Australian packaging company. The claim was brought in the Supreme Court of Victoria and related to losses following a product recall of yoghurt which was necessitated by defective packaging.

Huhtamaki Australia issued a third party notice to Flint Ink NZ (Flint), an ink supplier based in New Zealand, claiming an indemnity or contribution towards Lion-Dairy’s claim. In the third party notice, Huhtamaki Australia alleged that Flint negligently recommended ink products that were not suitable for use in the packaging of the recalled products.

Flint had no direct contractual relationship with Huhtamaki Australia. Rather it supplied ink products to Huhtamaki NZ pursuant to a contract which included an arbitration agreement. Among other things, Flint sought to stay the third party notice against it by relying on:

1. its arbitration agreement with Huhtamaki NZ (to whom Flint supplied the ink); and
2. s 7(2) of the International Arbitration Act 1974 (Commonwealth of Australia) (Act), which provides, relevantly, that:

where … proceedings instituted by a party to an arbitration agreement … against another party to the agreement are pending in a Court; and … the proceedings involve the determination of a matter that, in pursuance of the agreement, is capable of settlement by arbitration … the court shall … stay the proceedings … and refer the parties to arbitration …

Section 7 of the Act was applicable to the arbitration agreement in question because the procedure in relation to arbitration under the arbitration agreement was governed by the laws of New Zealand, a New York Convention Country, and both Huhtamaki NZ and Flint  were domiciled in New Zealand at the time of making the arbitration agreement.[5]

The extended definition of “party” (to an arbitration agreement)

Flint sought to circumvent the absence of its counterparty to the arbitration agreement, Huhtamaki NZ, from the proceeding by relying on s 7(4) of the Act, which provides that:

… a reference to a party includes a reference to a person claiming through or under a party. (emphasis added)

This extended definition of “party” is mirrored in Australian domestic commercial arbitration legislation (as recently enacted and in the predecessor uniform legislation).

The judge at first instance recited the applicable principles arising from Tanning Research Laboratories v O’Brien (1990) 169 CLR 332 and BHPB Freight Pty Ltd v Cosco Oceania chartering P/L & Anor (2008) 168 FCR 169. The latter decision (at [15]) sets out two somewhat overlapping criteria that must be met in order to satisfy the extended definition:

1. A relationship of sufficient proximity between the party to the arbitration agreement and the person claiming to prosecute or defend an action through or under that party; and
2. The claim or defence is derived from the party to the arbitration agreement.

In Tanning Research (at 342), Brennan and Dawson JJ elaborated on this second criterion in the following terms:

In other words, an essential element of the cause of action or defence [advanced by the non-party to the arbitration agreement] must be or must have been vested in or exercisable by the party [to the arbitration agreement].

Examples of litigants meeting the extended definition of “party” in s 7(4) of the Act (or its equivalents) in previous cases include:

• trustee of a bankrupt estate or liquidator advancing a claim or defence available (or previously available) to the bankrupt or company in liquidation;
• assignee of a debt arising out of a contract containing an arbitration clause; and
• parent company of a subsidiary who is a party to an arbitration agreement when claims are made against both arising out of the same facts (although a parent/subsidiary relationship alone will not suffice), eg parent as guarantor.

The court endorsed the view that the “notional statutory assignment” effected by the Contracts (Rights of Third Parties) Act 1999 (UK) will not, of itself, satisfy the criteria.[6] Similar reasoning may apply in Australian jurisdictions which have legislated to modify privity of contract.[7]

Evidence and decision at first instance

At first instance, the court summarised the evidence bearing on Flint's argument that Huhtamaki Australia was “claiming through or under” Huhtamaki NZ as follows:

• the court accepted that Huhtamaki NZ supplied packaging (using ink products from Flint) to Huhtamaki Australia, which packaging was then supplied to the primary claimant, Lion-Dairy, however:
• the companies did not share a parent/subsidiary relationship and there was no evidence that one company habitually acted at the behest of the other; and
• the highest it was put in oral argument was that the companies were two “sister” entities, but there was no evidence as to the details of that relationship.

The court was not satisfied that there was sufficient proximity between Huhtamaki Australia and Huhtamaki NZ or that the claim of Huhtamaki Australia derived from Huhtamaki NZ such as to demonstrate that the former was claiming “through or under” the latter. For this reason (among others), the court refused to stay the third party notice.

Flint unsuccessfully sought to stay the claim pursuant to powers other than those contained in s 7(2) of the Act, including under Art 8 of the Model Law (a ground on which it also unsuccessfully sought leave to appeal), s 8 of the Commercial Arbitration Act 2011 (Vic) and the Court’s inherent jurisdiction. The other powers sought to be invoked (together with other issues resolved in the judgment) are beyond the scope of this post.

Leave to appeal

In granting leave to appeal, the Court of Appeal referred to Huhtamaki Australia’s:

• case that it and Huhtamaki NZ were each part of the Huhtamaki group of companies which operates worldwide; and
• admission that it supplied the relevant packaging out of its New Zealand plant to Lion-Dairy,

and concluded that it is was arguable that the pleadings as a whole denoted a relationship which “does not entitle Huhtamaki Australia to rely upon its separate corporate entity”. Furthermore, the Court of Appeal held that Flint’s amended third party statement of claim sufficiently “embedded” Huhtamaki Australia’s claim against Flint  in a claim of breach of duty of care to Huhtamaki New Zealand to make it arguable that Huhtamaki Australia claimed through or under Huhtamaki NZ.

Comment

A number of questions arise, including:

1. whether the Model Law (as given the force of law in Australia by s 16(1) of the Act) was properly invoked, given that the Model Law applies to international commercial arbitration and the arbitration agreement was a domestic NZ arbitration agreement: see Art 1(1) and 1(3) of the Model Law; and
2. whether the Commercial Arbitration Act 2011 (Vic) was properly invoked, given that the Act applies to domestic commercial arbitration in Australia and the arbitration agreement was a domestic NZ arbitration agreement: see s 1(3)(a) of the Commercial Arbitration Act 2011 (Vic); and
3. whether third party claims for contribution or indemnity (eg against alleged concurrent wrongdoers within the meaning of Part IV of the Wrongs Act 1958 (Vic) and Part VIA of the Competition and Consumer Act 2010 (Cth)) – as distinct from an independent claim in, for example, negligence[8] - are:

• • within the scope of the arbitration agreement in question, on its proper interpretation;[9] and
  • arbitrable (ie capable of settlement by arbitration), given that the principal claimant, Lion-Dairy in this case, cannot be joined to any arbitration without further agreement.

For more information, please contact Bronwyn Lincoln, Partner, or Shane Murphy, Senior Associate, or your usual Herbert Smith Freehills contact.