Broken Hill City Council v Unique Urban Built Pty Ltd

HIS HONOUR: The first defendant builder (Urban) moves under s 8(1) of the Commercial Arbitration Act 2010 (NSW) (the Act) that it and the plaintiff Council (the Council) be referred to arbitration.

References to sections are references to the Act.

On 26 April 2016, the Council retained Urban to upgrade the Broken Hill Civic Centre. Their contract is written and in the form AS4000 – 1997 published by Standards Australia (the Contract).

The Council retained the second defendant architects (the Architects) to design the upgrade, to be project manager for the works and to administer the Contract.

On 1 February 2018, the Council initiated an action by suing out of this Court a Summons and accompanying Technology and Construction List Statement against Urban and the Architects. It alleges that Urban breached the Contract by failing to proceed and complete the works with due diligence and within the time stipulated by the Contract, failing to carry out the works to the required standard, and failing to rectify defects and deficiencies in, and omissions from, the works. It asserts against the Architects that their design was defective.

Clause 42 of the Contract, entitled Dispute Resolution, provides:

References below to clauses are to clauses in the Contract.

The Contract defines Item to mean an Item in Annexure Part A. Item 32 a) referred to in cl 42.3 states that the person to nominate an arbitrator is, if no-one is stated, the President of the Australasian Dispute Centre. No-one is stated.

At the time of the Contract, the Australasian Dispute Centre did not exist. There was no President. Apparently, there was once such an organization, but it became defunct as long ago as 3 February 2011. The Council and Urban evidently used an obsolete standard form contract.

Item 32 b) provides that if nothing is stated, the rules for arbitration are rules 5 – 18 of The Rules of the Institute of Arbitrators, Australia for the Conduct of Commercial Arbitrations (the Rules).

The Institute of Arbitrators, Australia (now known as the Institute of Arbitrators & Mediators Australia) exists and it has arbitration rules. The parties are agreed that these are the Rules referred to in Item 32 b). The Rules are divided into Articles. The parties are agreed that rules 5 – 18 referred to in Item 32 b) are Articles 5 – 18.

Article 8 provides:

Article 12 para 1 provides that any arbitrator may be challenged if circumstances exist that give rise to a real danger of bias on that arbitrator’s behalf.

Article 13 sets out the procedure for a challenge. Article 13 para 4 provides:

The following are the relevant sections of the Act:

By Amended Notice of Motion, Urban moves that the Council and it be referred to arbitration under s 8(1). The Motion seeks an order that one of three nominated Senior Counsel are to be appointed as an arbitrator.

The Architects appeared but did not add anything. There is no arbitration agreement between the Council and the Architects.

Under s 8(1), if the action has been brought in a matter which is the subject of an arbitration agreement, the court must, if a party requests, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed. There is no discretion to do otherwise: John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451.

It is not in issue that:

The issue for determination is whether the arbitration agreement is inoperative. This requires consideration of:

Urban’s first argument is that Article 8, which is incorporated into the Contract by cl 42.3 and Item 32 b), is the mechanism for the appointment of an arbitrator.

Its second argument is that cl 42.2 is an arbitration agreement within the meaning of s 7(1) in its own right and is capable of standing alone. It argues that if cl 42.3 is ineffective as a mechanism for the appointment of an arbitrator by dint of the non-existence of the named appointor in Item 32 a), it and the Council have failed to agree on a procedure of appointing an arbitrator, in which event, s 11(3)(b) empowers the court to appoint one.

The Council’s argument is that because the appointor described in Item 32 a) does not exist, the arbitration agreement is inoperative.

It argues that the parties contemplated a single mechanism for appointment and that their agreement to arbitrate is dependent upon that mechanism not misfiring. Where it does misfire, as it has here, there is no agreement to arbitrate.

It argues that the Rules operate so as to govern arbitration procedure and have no role to play with respect to the initial appointment of the arbitrator. The Council did not articulate, with any precision, the constructional route whereby this result is achieved. It will, however, readily be observed that if cl 42.3 read with Item 32 was to operate to effect the appointment of the initial arbitrator, giving Article 8 the same operation would result in a direct conflict.

The conflict can be resolved as a matter of construction by reference to Article 8 para 1. In my view, the two parts of cl 42.3 were intended to operate sequentially. Once cl 42.3 read with Item 32 b) operates, Article 8 does not apply to the appointment because it commences with the words ‘if one arbitrator is to be appointed’, which will not be the case if the first part of cl 42.3 has already operated. In this way, the provisions of the Contract operate congruently: Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 529; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 117.

Article 8 still has a field of operation when there has been a successful challenge to a single arbitrator.

Although, as a matter of fact, there is no conflict because the first part of cl 42.3 has no operation, I do not think a construction of the words of cl 42.3 which brings about the initial appointment of the arbitrator by means of the Rules is reasonably open.

I accordingly turn to the question of whether the arbitration agreement is inoperative.

Section 8 of the Act comes from the UNCITRAL Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law on 21 June 1985.

I take the term ‘inoperative’ in s 8(1) to mean having no field of operation or to be without effect. Whether an arbitration agreement is in this state is to be determined in the context of, and having regard to, provisions of the Act which may make it operative.

In Lucky-Goldstar International (HK) Ltd v NG Moo Kee Engineering Ltd [1993] HKCFI 14 (Lucky-Goldstar), the parties had agreed that arbitration would be in accordance with the rules of procedure of an association which did not exist.

Kaplan J said the following of the phrase ‘inoperative or incapable of being performed’:

The Council relies on the following statement by Nathaniel Khng AR of the High Court of Singapore in Sembawang Engineers and Constructors Pte Ltd v Covec (Singapore) Pte Ltd [2008] SGHC 229 at [42] (Sembawang Engineers), made with respect to the phrase ‘incapable of being performed’ and quoted, with apparent approval, but obiter, by Vickery J in Nova West Contracting Pty Ltd v Brimbank City Council [2015] VSC 679:

The Council further relies on what on its face appears to be the transcript of an ex tempore unreported decision [2] of the Full Federal Court of Australia (Jenkinson, Neaves and Von Doussa JJ) in Leighton Contractors Pty Ltd v Hooker Corp Ltd unreported, Full Federal Court of Australia, 10 August 1989 - G10 of 1989 (Leighton Contractors) where an agreement provided for disputes or differences:

The Court considered that it was not possible to conclude whether the parties intended to appoint a particular person or body as an arbitrator or to give a power of appointment and that it was not possible to deduce what the parties intended by the quoted words. The Court rejected a submission that:

The Court considered that the different parts of the one clause were not susceptible to severance and that; in any event, severance would be inappropriate because it was not clear that either party intended to agree to arbitration regardless of the status or identity of the arbitrator. The Court held that it was not for it to frame a clause which the parties might well have made, but did not make.

The Court commented that a party to a building contract might be prepared to agree to the resolution of a future dispute by a nominated Chapter of the Royal Australian Institute of Architects, or by an architect member thereof nominated by a particular person, but might be quite unwilling to submit to arbitration by whoever might be appointed by the Court, for example, by a master builder or a lawyer. The qualifications of the arbitrator may be fundamental to the submission to arbitration.

In my view, the arbitration agreement is effective even if cl 42.3 does not operate.

Section 11(2) provides that the parties are free to agree upon a procedure for appointing the arbitrator. They are also free not to agree on it, in which event, the Act will fill the gap.

Under s 11(3)(b), where there is no agreed appointment procedure in an arbitration with a sole arbitrator, if the parties are unable to agree on the arbitrator, an arbitrator is to be appointed on the request of a party by the court.

Under s 11(4)(a), where under an appointment procedure agreed on by the parties, a party fails to act as required under the procedure, any party may request the court to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.

Under s 11(4)(c), where under an agreed appointment procedure, the parties are unable to reach agreement expected of them under the procedure, an arbitrator is to be appointed, on the request of a party, by the court.

The Act distinguishes between an arbitration agreement under s 7(1) and an agreement on a procedure to appoint an arbitrator as contemplated by s 11(2).

An arbitration agreement referred to in s 8(1) is one under s 7(1). If such an agreement is inoperative, the referral under s 8(1) does not happen. The same is not true where the agreement is on a procedure, as opposed to the arbitration agreement, and is inoperative. Indeed, s 11 is directed to ensuring that an arbitration agreement operates where the procedure for the appointment of the arbitrator fails.

In this case, cl 42.2 is the arbitration agreement and cl 42.3 is an agreement on a procedure. Section 8(1) does not apply to cl 42.3.

It is to be observed that cl 42.3 provides for two possible methods of appointment; agreement upon an arbitrator or, failing agreement, nomination by a specified person. The first method is alive. Only the second does not exist. No question of severance within cl 42.3 itself arises. It is merely that part of it has no application.

The present case can, it seems to me, be viewed in one of the following three ways, and the Act caters for each of them:

The authorities upon which the Council relies pertain to circumstances clearly distinguishable from those here.

Leighton Contractors concerned an enactment which did not contain provisions empowering the Court to appoint an arbitrator absent agreement on any procedure by the parties for appointment, as does the Act.

The Court there was unable to attribute a meaning to the provision which the parties agreed. Here, the words of the Contract are clear. There, the Court ascribed some importance to the fact that the arbitrator was to be, or to be appointed by, an architect member of the Royal Australian Institute of Architects which, the Court thought, indicated some consensus that the Arbitrator would be a specialist architect. Here, no such indication can be derived from the terms of cl 42.3. There, the Court was being asked to sever part of a clause whereas here, cl 42.3 is a stand-alone provision and is clearly severable from cl 42.2. Cl 42.2 is an arbitration agreement. Cl 42.3 is a machinery provision.

Unlike the situation described in the brief statement in Sembawang Engineers at [42], the parties have not chosen a specific arbitrator in the agreement. It is not necessary for me to consider whether the example described would come within the meaning of inoperative in the Act in any event.

In considering whether reasonable persons in the respective positions of the Council and Urban intended that their agreement would fail because of the non-existence of the President, I echo the sentiment of Kaplan J in Lucky Gold-Star where his Honour said at 408:

I fail to see how it can be argued that either party placed any importance on the role of a non-existent person.

In these circumstances, the Court must refer the Council and Urban to arbitration. There is no basis otherwise to stay the proceedings against the Architects.

Pursuant to s 8(1) of the Commercial Arbitration Act 2010 (NSW), the Court refers the plaintiff and the first defendant to arbitration.

I will stand the matter over to enable the Court to deal with any remaining issues, including the appointment of an arbitrator and costs.