John Holland Pty Limited v Kellogg Brown & Root Pty Ltd [No 2]

On 22 April 2015 I determined that John Holland and KBR are to be referred to arbitration under s 8(1) of the Commercial Arbitration Act 2010 (NSW) (“the Act”) and that John Holland’s proceedings against Atlantis are to be stayed (John Holland Pty Limited v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451).

I invited submissions on whether the proceedings against KBR should be stayed or dismissed, and on costs. The parties provided written submissions and there was brief oral argument.

This judgment should be read in conjunction with the principal judgment. Defined terms there have the same meaning here.

The question whether the proceedings against KBR should be dismissed as opposed to stayed arises because, unlike the now repealed s 53(1) of the Commercial Arbitration Act 1984 (NSW) (“the old Act”) which provided for the Court to stay proceedings commenced by one party in a Court against another party to an arbitration agreement in respect of a matter agreed to be referred to arbitration, s 8(1) of the Act provides solely for the Court to refer the parties to arbitration. It says nothing of what is to occur with the proceedings. There is no part of the proceedings against KBR which can be furthered at this time.

KBR puts that “the historical practice” of ordering a stay of proceedings where there is an arbitration agreement was founded upon s 53(1) of the old Act and that its repeal, together with the enactment of s 8(1) of the Act, which makes no provision for a stay, reflects a legislative intention to abrogate the stay procedure in the present circumstances. It puts that s 5 of the Act, which provides that in matters governed by it no Court must intervene except where so provided by the Act, limits the Court’s ability to grant a stay. It puts further that John Holland’s Summons should be dismissed because it can never be prosecuted and that there is no sound reason for leaving it on foot.

John Holland puts that a stay is the usual form of order made when proceedings are inhibited by forum non conveniens, contractual agreements as to forum, or alternative dispute resolution procedures. It puts that a stay will better serve the ends of justice because the proceedings may still be of utility as the arbitration agreement might yet be rendered inoperable or incapable of being performed, for example if terminated for breach. The proceedings may also be effective to interrupt the relevant limitations period. It points out that a stay causes no prejudice to KBR and that the KBR Motion, in terms, seeks a stay not dismissal.

Neither party pointed to any directly pertinent authority in the context of a referral under s 8(1) of the Act.

In my view, a stay is the appropriate and just outcome.

Agreements to resort to courts of a foreign jurisdiction, to invoke arbitration procedures, to submit to the process of a private domestic tribunal and determinations of forum non conveniens are traditionally indirectly enforced by way of stay.

Whereas KBR points to no prejudice if a stay is granted, John Holland identifies possible prejudice if the proceedings are dismissed. John Holland also identifies ways in which the proceedings may in the future have some utility.

The grant of a stay is not inconsistent with a referral to arbitration under s 8(1) of the Act. Power to grant a stay is given by s 67 of the Civil Procedure Act 2005 (NSW) (“CPA”) which provides that subject to rules of court, the court may at any time and from time to time, by order, stay any proceedings before it, either permanently or until a specified day. Additionally, the court has an inherent power to stay proceedings which are an abuse of process.

Section 8(1) of the Act says nothing of what is to occur with the proceedings upon the parties being referred to arbitration. The absence of specification reflects no legislative intention either way. Something must be done with the proceedings.

Whether there be a stay or dismissal, there is no intervention, to which s 5 of the Act applies, inconsistent with the referral.

Section 7(2) of the International Arbitration Act 1974 (Cth), which is in the following terms, contemplates both referral and stay:

The International Arbitration Act and the suite of State and Territory Commercial Arbitration Acts enacted since 2010 are generally intended to give effect to the UNCITRAL Model Law on International Commercial Arbitration. Good policy suggests that absent clear legislative intent to the contrary, construing them so as to result in incongruent outcomes should be avoided.

Both KBR and Atlantis submit that John Holland should be ordered to pay their costs on the indemnity basis.

John Holland acknowledges that both the KBR Motion and the Atlantis Motion were successful. It puts that costs, on the ordinary basis, should follow the event on both.

KBR and Atlantis urge the Court to adopt the approach taken in A v B [2007] EWHC 54 (Comm) that provided it can be established by a successful application for a stay or anti-suit injunction as a remedy for breach of an arbitration or jurisdiction clause that the breach has caused the innocent party to incur legal costs, those costs should normally be recoverable on an indemnity basis.

In A v B Colman J said the following:

In Australia this approach has apparently found favour only in Western Australia where, in Pipeline Services WA Pty Ltd v Atco Gas Australia Pty Ltd [2014] WASC 10 at [18] Martin CJ described Colman J’s reasoning as impeccable. The approach has also been followed in Singapore; see Tjong Very Sumito and Others v Antig Investments Pte Ltd [2009] SGCA 41 at [19] and [71]. However, its correctness has been doubted in Victoria; Ansett v Malaysian Airline System (No 2) [2008] VSC 156 at [22].

In the context of applications by a party to appeal against or set aside an arbitral award or for an order refusing enforcement, a similar approach has been taken at first instance in Hong Kong, commencing with the judgment of Reyes J in A v R [2009] 3 HKLRD 389 and followed in Wing Hong Construction Ltd v Tin Wo Engineering Co Ltd [2010] HKEC 918 at [8] – [14] and Taigo Ltd v China Master Shipping Ltd [2010] HKCFI 530 at [13] – [16].

The reasoning in A v R was succinctly summarised by Warren CJ in IMC Aviation Solutions Pty Ltd v Altain Khuder LLC (2011) 38 VR 303 at 319 [56] as follows:

The trial judge adopted the approach taken in A v R. This did not find favour with the Court of Appeal. Warren CJ found it unnecessary to express a view on whether the approach should be followed in Victoria. However, at [335] Hansen JA and Kyrou AJA said:

I decline to follow the A v B approach. I respectfully agree with the comments of the majority of the Victorian Court.

Sections 56(1) and (2) of the CPA provide:

Section 98(1) of the CPA provides:

The section gives the Court a wide discretion. In Oshlack v Richmond River Council (1998) 193 CLR 72 at 81 [21] – [22] Gaudron and Gummow JJ said of s 69(2) of the Land and Environment Court Act 1979 (NSW), which is in the same terms as s 98(1) of the CPA:

Part 42 r 42.1 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") provides:

Part 42 r 42.2 of the UCPR provides:

Part 42 r 42.5 of the UCPR provides:

The A v B approach is not the law in this State. Despite the praise lavished upon it, for the reasons which follow (and which are not in any order of precedence), I consider it to be unsound and insupportable in principle.

First, the imposition of bespoke categories and presumptions in favour of an award of indemnity costs is contrary to the accepted starting point that costs are on the ordinary basis. It displaces the usual presumption that indemnity costs will not be awarded except where there is a special entitlement or some relevant unreasonable action including relevant misconduct in connection with the conduct of the proceedings. It makes the ordinary basis the exception, not the rule. It is an unwarranted fetter on the Court’s wide discretion.

Secondly, there is no logical or rational reason for the creation of categories restricted to the breach of arbitration or forum agreements. Such bargains have no greater sanctity than other bargains, including releases and covenants not to sue which, like arbitration and forum agreements, restrict the right to resort to curial proceedings.

Thirdly, in all cases of breach of contract where the successful party only obtains an order for costs on the ordinary basis, it is left uncompensated for the difference between the amount assessed on that basis and the full indemnity basis.

Fourthly, the approach makes no allowance for a correlative presumption that a party who wrongly asserts the existence or applicability of an arbitration or forum agreement should be mulcted with indemnity costs.

Fifthly, the approach encourages collateral disputes related to the question of costs such as whether there was conduct which had the potential to lead a party to believe that the chosen forum could be ignored or which broke the chain of causation. Characterising costs as damages also gives rise to questions of mitigation. The approach is inimical to the achievement by the Court of the overriding purpose under the CPA to facilitate the just, quick and cheap resolution of the real issues in the proceedings.

Sixthly, the precise reach of the presumption is unclear. As articulated in paragraph [11] of A v B, all that is required is breach by one party, causing the other reasonably to incur costs. This is an objective test. As articulated in paragraph [15], the guilty party must deliberately ignore an arbitration or jurisdiction clause so as to derive an unjustifiable procedural advantage. This incorporates a subjective element.

Seventhly, the Legislature could have, but did not, create or recognise any such categories for an award of indemnity costs in the Act.

Finally, there is sufficient power in the Court to award indemnity costs in any circumstances where it is warranted.

True support for commercial arbitration neither necessitates nor justifies abandonment of principle.

This is not a case where there should be an award of indemnity costs. To the contrary, it is one where justice dictates that the award should be on the ordinary basis.

John Holland’s opposition to the KBR motion was, although unsuccessful, reasonable. Part of its opposition was that it (as one of Colman J’s exceptions contemplate) had been led by KBR to believe that the chosen forum could be ignored. It was a challenge of substance. Only a Court could decide it; see Mio Art Pty Ltd v Mango Boulevard Pty Ltd and Ors (No 3) [2013] QSC 95 at [13].

As to Atlantis, John Holland’s challenge to that part of the Atlantis Motion which sought a referral under s 8(1) succeeded. It was Atlantis which, in breach of the Atlantis Contract, claimed a referral to arbitration. Indeed, if the A v B approach gave a correlative entitlement to indemnity costs with respect to a successful challenge, Atlantis should have to pay John Holland’s costs on the indemnity basis in respect of this issue.

I record that Atlantis put a submission that John Holland should pay its costs on the indemnity basis for the reason that, as it put it, John Holland took a commercial risk in commencing proceedings when it knew both that it had no agreement to the contrary with Atlantis and that it was bound by the alternative dispute resolution provisions in the Atlantis Contract. Apart from the fact that John Holland was partially successful, this submission overlooks the significant consideration that, as appears from the principal judgment, John Holland had some difficulty in extracting from Atlantis what its position was with respect to relying on the alternative dispute resolution provision. Also, I do not consider that John Holland’s opposition was unreasonable.

John Holland was not guilty of conduct which deserves to be marked by an order for indemnity costs. Both KBR and Atlantis succeeded in their motions. Costs should follow the event, and they should be on the ordinary basis.

John Holland’s proceedings against KBR will be stayed.

John Holland is to pay the costs of KBR and Atlantis.