InfraShore Pty Ltd v Health Administration Corporation

HIS HONOUR: The Royal North Shore Hospital (RNS) is a major teaching hospital in Sydney. It comprises many buildings built progressively since the hospital first opened just after 1902. Some of the buildings were known to have hazardous materials present, especially asbestos.

On 23 October 2008, the defendant (Health) and the plaintiff (InfraShore or the Project Company) entered into a written agreement styled the PPP Project Deed (the Contract) under which Health retained InfraShore to finance, design and construct certain works and manage, maintain and provide services for a project known as the RNS and Community Health Project. The project entailed demolition of some buildings.

Clause 4.6(a) of the Contract provides for the establishment of a committee to be known as the Project Co-ordination Group, comprising representatives of both parties.

Clause 4.6(h) of the Contract provides that if any dispute arises between the parties, a party may by notice to all other parties refer the dispute to the Project Co-ordination Group for resolution. The notice must specify in reasonable detail the nature of the dispute.

Clause 4.6(j) of the Contract provides that if a dispute is referred to the Project Co-ordination Group, it will meet to resolve the dispute and that if it is not resolved within a specified period, either party may refer the dispute to designated Representatives in accordance with cl 40.1(a).

Clauses 40.1 to 40.3 of the Contract provide as follows:

Resolution Period is defined in cl 1.1 of the Contract to mean the period of 5 Business Days from the date on which a Referral Notice described in cl 4.6(h) or cl 40.1 is served.

The works commenced in about July 2009. On about 7 June 2013, InfraShore issued a Hazardous Materials Variation Claim (the Claim), asserting that additional work (by way of deemed variation) was necessitated by the presence of asbestos in certain buildings, which variation gave it an entitlement to additional payments.

Health rejected the claim for various reasons upon which it is not necessary for present purposes to elaborate.

On 5 December 2013, InfraShore gave a Referral Notice. The Representatives failed to resolve the dispute whereupon the Project Co-ordination Group referred it to Expert Determination under cl 40.2.

To facilitate Expert Determination the parties, on 28 May 2014, entered into an Expert Determination Agreement under which John Tyrril & Associates Pty Ltd was appointed Expert. Clause 12.4 of the Expert Determination Agreement provides:

On 20 April 2015, the Expert determined that InfraShore was not entitled to any additional payment in respect of the Claim.

On the same day, InfraShore sued out of this Court a Summons and accompanying Technology and Construction List Statement claiming (based on the same matters relied on in the Claim) damages exceeding $16 million and a declaration that the Expert Determination is not binding on the parties. The Summons was returnable on 1 May 2015.

On 30 April 2015, Health served on InfraShore a ‘Notice of Arbitration’ stating that ‘Pursuant to clause 40.2(e) of the [Contract] and clause 12.4 of the Expert Determination Agreement’ it was notifying InfraShore that it was referring the determination made by the Expert to arbitration.

Before the Court is a Notice of Motion (the Motion) filed by Health on 30 April 2015 by which it seeks an order that the proceedings be referred to arbitration pursuant to s 8(1) of the Commercial Arbitration Act 2010 (NSW) (the Act) and an order that the proceedings be stayed.

References below to sections are references to the Act unless the context otherwise indicates.

Section 7(1) provides that:

Section 8 provides that:

Section 5 provides that:

By the Motion, Health requests that the parties be referred to arbitration. It has not yet in the action submitted its first statement on the substance of the dispute.

Section 8(1) applies, and the court must refer the parties to arbitration, where the following four requirements are met:

The first and third requirements are uncontroversial in this case. It is also uncontroversial that there is an arbitration agreement between the parties within the meaning of s 7(1).

The contest is as to whether the second requirement is met, namely that the action is in a matter which is the subject of the Contract.

That requirement is met where, at the time a party makes the relevant request, the rights or liabilities in controversy fall within the ambit of controversies which the parties have agreed to will be referred to arbitration.

Health argues that cl 40.2(e) of the Contract and cl 12.4 of the Expert Determination Agreement are an arbitration agreement under which each party has the right to refer the present dispute to arbitration, which right is not lost to one party where the other elects to commence proceedings.

InfraShore argues that in the circumstances that have occurred and on the proper construction of the Contract, the present dispute is not one which either party can require to be arbitrated.

Whether the Contract requires the present dispute to be referred to arbitration is a matter of contractual construction.

For the following reasons, I am of the opinion that InfraShore is correct and Health’s proposed construction is unsustainable.

Firstly, the words of cl 40.2(e) (and of cl 12.4 of the Expert Determination agreement which rise no higher from cl 40.2(e)) in their ordinary meaning confer on neither party any right to require arbitration, and they give rise to no such right by necessary implication.

Clause 40 provides only two routes by which a dispute is required to go to arbitration.

The first is under cl 40.1(d)(ii), where the Project Co-ordination Group refers it to arbitration under cl 40.3. The second is where the Project Co-ordination Group or the Representatives request the President to select the process for resolution and the President selects arbitration. In both cases the arbitration is governed by cl 40.3.

Here, neither route is available any longer. The Project Co-ordination Group referred the dispute for Expert Determination, and the procedure under cl 40.2 has been exhausted. The alternative route of a request to the President is not open. There is no other route by which either party may force arbitration.

Secondly, cl 40.2(e) encapsulates a mechanism which gives the parties the option not to be bound by the Expert Determination. Either party can achieve this by commencing legal proceedings within 10 Business Days, otherwise the Expert Determination is binding. If there is no further agreement as to arbitration instead of litigation, a party can exercise its right by commencing proceedings. The provision gives the parties an opportunity to agree to arbitrate before one of them takes that course. If there is a referral to arbitration within the time limit, the Expert Determination will likewise not be binding.

Thirdly, cl 40.3, which lays down a governing procedure in comprehensive terms, only applies if a dispute is referred to arbitration under cl 40.1. There is no such procedure for the arbitration which Health asserts it is entitled to require both parties to have. It may be inferred that where the parties contemplated forced arbitration, they would also have legislated for procedure, including a method of selection of the arbitrator. They have clearly left this over for further agreement in the case of cl 40.2(e).

Fourthly, the clause makes no provision for who prevails if one party chooses litigation and the other arbitration, something which one would expect the parties to have regulated. In order to be read as giving a right to force arbitration, it would either have to operate on a first past the post basis with the person calling for the arbitration beating the party opting for litigation, or arbitration has to prevail even if the other party litigates first. Both are unsatisfactory. The first encourages a race and the second has the unsatisfactory consequence that the party choosing litigation would have taken a step it was entitled to take at the time but then be penalised if the other later chose arbitration. In both cases games of cat and mouse or brinkmanship are encouraged.

Finally, a matter telling against Health’s construction is that it subjects the parties, after failure to resolve without agreement, to two compulsory alternative dispute resolution processes. I consider it more to accord with commercial common sense that they contemplated only one such process unless they agreed otherwise.

In my view there is no agreement for the referral of the present dispute to arbitration to which s 8(1) can attach. An alternative way of looking at it is that so far as the present dispute is concerned, the arbitration agreement is not operative.

It follows that the Motion must be dismissed, and I so order.

I will make directions for the further conduct of the proceedings. I will hear the parties on costs. The exhibits can be returned.