DON'T COUNT YOUR CHICKENS: AUSTRALIAN COURT FINDS UNLIQUIDATED DAMAGES CLAIM OUTSIDE THE SCOPE OF A NARROWLY DRAFTED ARBITRATION AGREEMENT

In Inghams Enterprises Pty Limited v Hannigan [2020] NSWCA 82, the New South Wales Court of Appeal found that a claim for unliquidated damages for breach of contract could not be referred to arbitration because it was not within the scope of a narrowly drafted arbitration agreement. Relevantly, the scope of the arbitration agreement was confined to disputes concerning “any monetary amount payable and/or owed by either party to the other under this Agreement.”

The case is a further reminder to parties that they will almost always be best served by drafting the scope of the submission to arbitration broadly.

Background

Inghams entered into a ‘chicken growing contract’ with Mr Hannigan (Agreement), under which Inghams paid Mr Hannigan to receive batches of chicks, grow them into chickens, and return them. Clause 23 of the Agreement contained a multi-tiered dispute resolution clause requiring a dispute first to be mediated and then submitted to arbitration under clause 23.6 if:

• the parties “fail to resolve the Dispute in accordance with Clause 23.4 within twenty eight (28) days of the appointment of the mediator”; and
• the dispute “concerns any monetary amount payable and/or owed by either party to the other under this Agreement, including without limitation matters relating to determination, adjustment or renegotiation of the Fee” under certain sections of the contract.

Inghams purported to terminate the Agreement. Mr Hannigan was successful in seeking a court declaration that the purported termination was wrongful and Inghams resumed supplying batches of chicks to him. Mr Hannigan did not seek damages in the proceedings, but made express reservations of his right to do so.

Mr Hannigan then issued a dispute notice to Inghams seeking damages due to loss of profits for the failure to supply chicks to Mr Hannigan between the date of the purported termination and the date supply resumed. The parties unsuccessfully attempted to mediate and Mr Hannigan contended that clause 23.6 the Agreement entitled him to refer the dispute to arbitration. Inghams commenced proceedings in the New South Wales Supreme Court to restrain the arbitration, seeking declarations that:

1. Mr Hannigan’s damages claim did not fall within clause 23 of the Agreement; and
2. even if it did, Mr Hannigan had waived any entitlement to arbitrate the dispute under clause 23 because of his commencement of the wrongful termination proceedings.

The primary judge held that Mr Hannigan was entitled to refer his damages claim to arbitration under clause 23.6 of the Agreement. Inghams appealed, arguing the primary judge erred by:

1. construing the contract such that the damages claim fell within clause 23.6 and could be referred to arbitration; and
2. not finding that Mr Hannigan had waived his right to refer the dispute to arbitration.

Decision

Meagher and Gleeson JJA agreed with Inghams and allowed the appeal with costs, finding:

• The claim for damages was not an amount that was “payable” or “owed” as a result of an express or implied term of the Agreement. The dispute was not one which affected or related to the negotiation, adjustment or determination of any amount “payable” or “owed” under such a term. Accordingly, the dispute did not concern a monetary amount payable under the Agreement.
• There is an important distinction between monetary amounts which are payable or owed “under a contract” and remedies which arise by operation of law. Whereas liquidated damages are recoverable by a contractual right of recovery, unliquidated damages for breach of contract “are compensation assessed by the court in accordance with common law principles for loss occasioned by breach”.
• As the dispute was not required to be referred to arbitration, the waiver issue did not arise. If the dispute had been required to be referred to arbitration, Mr Hannigan had not waived his right to do so.

Bell P dissented, holding:

• The dispute resolution clause should be construed broadly, based on legal principles and textual indications in clause 23.6 which suggest the parties intended it be interpreted liberally, including the use of:
  • the indefinite pronoun “any” in the phrase “any monetary amount”;
  • the alternative formulation “payable and/or owed”;
  • the phrase “including without limitation”; and
  • the broader concept of “monetary amount” instead of “fees”.
• Mr Hannigan had not waived his right to arbitration because the wrongful termination proceedings did not result in, or occur because of, Mr Hannigan unequivocally abandoning any right claim damages for breach of contract in arbitration at some future time.

Comment

The majority decision follows the recent High Court of Australia decision in Rinehart & Anor v Hancock Prospecting Pty Ltd & Ors [2019] HCA 13, which eschewed adopting the Fiona Trust principle as a principle of Australian law. In Rinehart, the High Court emphasised the importance of construing the words of an arbitration clause, like any clause in an agreement, in its context.

In this case, applying that approach, the narrow formulation found in the arbitration clause (“monetary amount payable and/or owed … under the Agreement”) led to the result that claims for unliquidated damages were outside the scope of the arbitration agreement.

Had the parties used a broader formulation, as is recommended by many arbitral institutions (such as “arising out of or in connection with” or a variant thereof), it is likely the outcome would have been different.

The case therefore serves as another reminder that parties should take care when drafting an arbitration agreement, and seek expert advice from practitioners with expertise in the field when deviating from the model clauses recommended by leading arbitral institutions.

For further information, please contact Brenda Horrigan, Head of International Arbitration (Australia), Chad Catterwell, Partner, Nicholas Brewer, solicitor, or your usual Herbert Smith Freehills contact.