QUEENSLAND COURT OF APPEAL UPHOLDS ARBITRATION AGREEMENT IN ESCALATION CLAUSE

A recent judgment of the Queensland Court of Appeal provides a further example of the pro-enforcement stance adopted by Australian courts in relation to arbitration agreements.

Takeaways

• The Court of Appeal upheld an escalation clause as validly recording the parties’ agreement to arbitrate, in circumstances where the parties envisioned that their dispute(s) would be referred to arbitration for ‘final settlement’, or to ‘another dispute resolution process’ to be agreed.
• The judgment is the latest in a series of decisions from Commonwealth jurisdictions that adopt a pro-arbitration stance in interpreting escalation clauses.^[1]
• This case also serves as a reminder for parties to carefully consider the dispute resolution clauses (and particularly, escalation clauses) in their commercial contracts, before commencing court proceedings.

Context

Lee v Lin & Anor [2022] QCA 140 (Lee) concerned an appeal on the sole issue of whether the parties’ dispute resolution clause contained an ‘arbitration agreement’ as defined under s 7 of the Commercial Arbitration Act 2013 (Qld) (CAA), which governs domestic commercial arbitration in the state of Queensland.

In 2014, the plaintiffs and the defendant entered a commercial contract which contained the following escalation clause for the resolution of disputes (Escalation Clause):

11. RESOLUTION OF DISPUTES

1. 1. If a dispute arises—out of or relating to this agreement, or the breach, termination, validity, or subject matter thereof, or as to any related claim in restitution or at law, in equity or pursuant to any statute—the parties agree to discuss the dispute with the aim of reaching an agreement that is acceptable to both sides. The agreement will be documented in writing, dated and signed by both the Agent and the Client.
   2. If one party requests an opportunity to discuss the dispute, the parties should attempt to reach an agreement within 21 days of that request (or a longer period if agreed between the parties).
   3. If the parties cannot reach an agreement within 21 days, the parties agree to refer the dispute to the Australian Commercial Disputes Centre (ACDC) for final settlement by a single arbitrator appointed in accordance with the Rules of the ACDC, or by another dispute resolution process suggested by ACDC and accepted by the parties. It is expected that any fees payable to ACDC or to the person appointed by ACDC will be paid by the parties equally.
   4. If the parties have been unable to resolve their dispute through ACDC, either party may commence Court proceedings but not before the expiry of 28 days from the date of referral to ACDC.
   5. A Client may vary the procedure set out in this clause if the Client can establish that DIAC may require the Client to depart Australia.

In September 2021, the plaintiffs commenced proceedings in the Supreme Court of Queensland alleging, among other things, breach of contract and negligence.  The defendant contended that by virtue of the Escalation Clause, the Court proceedings ought to be stayed and the dispute referred to arbitration.

The primary judge found that the Escalation Clause was not an arbitration agreement, on the basis that the Escalation Clause:^[2]

1. did not require that the parties submit to an arbitration;
2. did not require that the “single arbitrator” engage in an arbitration;
3. contemplated other dispute settlement methods being agreed upon by the parties; and
4. contemplated the possibility that the parties would be unable to resolve their differences through the ACDC (by virtue of clause 11(d)).

Decision

The Court of Appeal held that clause 11(c) of the Escalation Clause was an arbitration agreement. Central to this finding was the Court of Appeal’s interpretation of the words ‘for final settlement’ as meaning ‘to finally determine or end the dispute between the parties’.^[3]

The Court of Appeal found that, although clause 11(c) contemplated that the parties might, by further agreement, employ a process other than arbitration to resolve their dispute, this possibility did not detract from the fact that, absent such an agreement, they had agreed to refer their disputes to arbitration.^[4] Accordingly, the Court of Appeal held that the effect of clause 11(c) was to ‘oblige the parties, if they cannot settle their dispute by discussion, to have it determined by the award of a single arbitrator employed by the ACDC and appointed under the rules of the ACDC’.^[5]

In making the above finding, the Court of Appeal cited the general principle that commercial contracts must be construed in a business-like way, and referred to the paramount object of the CAA as being ‘to facilitate the fair and final resolution of commercial disputes by impartial arbitral tribunals without unnecessary delay or expense’.^[6]

Implications

The decision in Lee adds further weight to the body of Australian jurisprudence which supports a broad and inclusive interpretation of arbitration agreements. As the Court of Appeal noted (citing the dicta in Mulgrave Central Mill Company Ltd v Hagglunds Drives Pty Ltd):^[7]

This is an area of the law where the making of subtle verbal distinctions is not to be encouraged, and where it is desirable that standard conditions and uniform legislation should, as far as possible, be given the same meaning in jurisdictions throughout Australia.^[8]

Although the Court of Appeal’s decision in Lee concerned the application of the law governing domestic commercial arbitration in Queensland, it has potentially broader application, given that:

1. legislation identical to the CAA is applicable to domestic commercial arbitration in other Australian jurisdictions;^[9] and
2. the definition of ‘arbitration agreement’ in s 7(1) of the CAA is substantially the same as Art 7(1) of the Model Law (which is, in turn, mirrored in s 3 of the International Arbitration Act 1974 (Cth)).

For more information, please feel free to get in touch with any of the contacts below, or your usual Herbert Smith Freehills contact.

[1] See HSF’s note on C v D [2021] HKCFI 1474 (Hong Kong) here.

[2] Lin & Anor v Lee [2021] QSC 336, [20].

[3] Lee v Lin & Anor [2022] QCA 140, [4].

[4] Lee v Lin & Anor [2022] QCA 140, [5].

[5] Lee v Lin & Anor [2022] QCA 140, [8].

[6] Lee v Lin & Anor [2022] QCA 140, [4] citing Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, 116-117.

[7] [2002] 2 Qd R 514, 525, [13].

[8] Lee v Lin & Anor [2022] QCA 140, [4].

[9] Commercial Arbitration Act 2010 (NSW); Commercial Arbitration Act 2011 (Vic); Commercial Arbitration (National Uniform Legislation) Act 2011 (NT); Commercial Arbitration Act 2011 (TAS); Commercial Arbitration Act 2011 (SA); Commercial Arbitration Act 2012 (WA).