New South Wales CA imports arbitration clause from one entity to another, stays proceedings

In Warner Bros Feature Productions Pty Ltd v Kennedy Miller Mitchell Films Pty Ltd [2018] NSWCA 81, the New South Wales Court of Appeal overturned the decision of the New South Wales Supreme Court by referring a dispute to arbitration in California pursuant to the parties’ agreement and by ordering a stay on court proceedings pursuant to section 7(2) of Australia's International Arbitration Act 1974 (Cth). The Court of Appeal applied a pragmatic approach to determine whether an arbitration clause found in standard term contracts used by other members of a company’s corporate group should be incorporated into the parties’ agreement.

Background

Warner Bros Feature Productions Pty Ltd (WB Productions) entered into an agreement with Kennedy Miller Mitchell Films Pty Ltd (KMMF) and Kennedy Miller Mitchell Services Pty Ltd (KMMS). The agreement was in the form of a ‘Letter Agreement’ (Letter Agreement).

A dispute arose regarding, among other things, KMMS and KMMF’s entitlement to a bonus payment under the Letter Agreement for services provided in connection with the production of a film. KMMF and KMMS brought proceedings against WB Productions in the Supreme Court of New South Wales. WB Productions sought a stay on those proceedings on the basis that, pursuant to the Letter Agreement, the dispute should be submitted to arbitration in California. WB Productions’ position was that an arbitration clause had been incorporated into the Letter Agreement as the Letter Agreement contained the following clause: “The balance of terms will be WB and WB standard for ‘A’ list directors and producers, subject to good faith negotiations within WB’s and WB’s customary parameters” (Incorporation Clause). Relevantly, WB Productions sought to incorporate an arbitration clause which was found in standard form contracts used by other members of the Warner Bros Group.

Hammerschlag J, the primary judge, dismissed the application for a stay on the proceedings and determined that the New South Wales Supreme Court had jurisdiction to decide the matter. It was held that none of the contracts which were exhibited as evidence by KMMF and KMMS were agreements to which WB Productions was a party, and that there was “no evidence of any regularity of contracting on the standard terms by [WB Productions] itself”. His Honour also refused to read the clause as including WB Pictures given that the Letter Agreement unambiguously defined ‘WB’ as WB Productions. As such, WB Productions, as distinct from other members of the corporate Warner Bros Group, did not have any terms which were ‘standard’ and which could be incorporated into the Letter Agreement.

The applicants WB Productions and Warner Bros Entertainment Inc subsequently appealed the decision to the New South Wales Court of Appeal.

Court of Appeal Decision

Chief Justice Bathurst delivered the leading judgment and drew upon the constructional approach in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 in interpreting the Letter Agreement which required: “consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.”

The first issue for the Court of Appeal’s consideration was whether the Letter Agreement incorporated terms which were “WB Standard for ‘A’ list directors and producers prior to good faith negotiations occurring.” His Honour held that the proper construction of the clause was that the standard terms “were immediately incorporated, while leaving room for subsequent negotiations about their precise effect.” Accordingly, the Incorporation Clause did not require that the parties engage in good faith negotiations prior to the incorporation of standard terms.

The second and primary issue for determination was whether the arbitration clause was incorporated into the Letter Agreement. On this point the Court of Appeal disagreed with the decision of the primary judge. Bathurst CJ noted that the evidence established that WB Productions (the contracting entity) was under the control of WB Pictures and the fact that negotiations in respect of the film occurred between WB Pictures business affairs executive in conjunction with the Senior Vice-President and General Counsel and that of the United States representatives of KMMF and KMMS. In these circumstances, it was held that ‘WB standard’ referred to in the clause were terms which were ‘standard’ for companies generally, throughout the Warner Bros Group. Rather than evaluating what constitutes a ‘standard’ term based on the frequency of usage by WB Productions or use in a “sufficient preponderance of cases”, the Court of Appeal preferred to describe terms which are ‘WB standard’ as “terms which are habitually proffered by companies in the Warner Bros group for agreements with ‘A’ list directors and producers.”

The Court of Appeal then noted a number of factors which suggested that the arbitration clause was habitually proffered in Warner Bros Group agreements relating to ‘A’ list directors and producers. These included: that both of the 2009 Form Agreements contained the same arbitration clause; that this arbitration clause had been used since the early 2000s (as indicated by the 56 agreements in evidence) and that a substantially similar arbitration clause was also used in additional ‘Certificate of Employment’ agreements made between the same parties (including WB Productions).

As a result, it was held that the clause requiring arbitration in California contained in the 2009 Form Agreements was incorporated as a term which was ‘WB standard for ‘A’ list directors and producers’ into the Letter Agreement. Given that the procedure in relation to arbitration was governed by Californian law, the law of a Convention country (the United States), the proceedings were stayed under s 7(2) of the International Arbitration Act 1974 (Cth).

Comment

While it is significant that in this case the Court of Appeal determined that a standard arbitration clause used by one corporate entity could be incorporated into the contract of another entity in the same group, it must be noted this was largely a question of contractual construction which will always be approached on a case-by-case basis. Absent the Incorporation Clause there would have been no arbitration agreement, although had the arbitration clause been included directly within the Letter Agreement then it is unlikely that this dispute would have arisen in the first place. The case reinforces that it is important for those drafting arbitration agreements to take care to ensure that they are incorporated into the contract.