Reading Between the Lines: Part 3 – Arbitration Agreements

It is not uncommon for a dispute resolution process of a construction contract to contain a clause whereby the contracting parties agree to submit certain disputes to arbitration (i.e., an arbitration agreement). Such agreements can be an attractive option for dispute resolution as arbitration is often a private and often more efficient and cost-effective process, as opposed to litigating through the courts.

Unsurprisingly, the inclusion of an arbitration agreement in a contract means it will bind the parties to its terms and is therefore enforceable. On its face, this makes perfect sense in the context of a contract that is still on foot. But what happens when a dispute arises after a contract is terminated? Does an arbitration clause survive, and are the parties to a contract required to comply with the requirement to arbitrate? Or are the parties free to resolve their differences through the courts?

This final article of the series will explore the survivability of arbitration agreements and highlight what parties can do to avoid potential headaches down the line.

Separability and Survivability

An arbitration agreement is generally considered to be a standalone agreement, separate and distinct from the terms of a contract in which it is contained. When a contract is terminated, the primary obligations of the contract come to an end. However, at common law, it is well established that the enforceability of arbitration agreements endures beyond termination of the underlying contract, ensuring that disputes arising from the contractual relationship can be arbitrated.

By way of example, in Bulkbuild Pty Ltd v Fortuna Well Pty Ltd [2019] QSC 173, the court opined that it is “uncontroversial that an arbitration agreement is independent of the underlying contract in which it is contained and therefore that the enforceability of the arbitration agreement survives the termination of the contract it relates to”.

This principle aligns with a general policy favouring the enforceability of arbitration agreements and the efficient resolution of disputes, however, it is not absolute, and may be subject to the language and circumstances of each individual contract. Courts often examine the language used in an agreement and the context in which it was drafted to ascertain the parties’ intentions regarding the fate of an arbitration agreement on termination of the underlying contract.

Pipeline Services WA Pty Ltd v ATCO Gas Australia

The survivability of an arbitration agreement was considered in Pipeline Services WA Pty Ltd (Pipeline Services) v ATCO Gas Australia Pty Ltd (ATCO) [2014] WASC 10.

Facts

In this decision, ATCO engaged Pipeline Services to install underground gas transmission pipelines in Yanchep, north of Perth (Contract).

Shortly after Pipeline Services commenced work, it was advised that unexploded ordnance had been found in the area in which the pipeline was to be installed. ATCO suggested that a full search for unexploded ordnance be undertaken along a strip 6 metres wide into which the pipeline was to be installed, which would significantly change the difficulty and scope of the works. ATCO advised Pipeline Services that the Contract would be terminated and tenders called for a new contract, taking into account the revised scope of works. Pipeline Services submitted a tender for the revised works, which was ultimately not successful. The parties agreed that Pipeline would continue to carry out the work under the Contract until termination (where such work could avoid the prospect of encountering unexploded ordnance). The parties fell into dispute about the amount owed to Pipeline Services for the work it had completed.

Pipeline Services commenced proceedings against ATCO in the Supreme Court of Western Australia for breach of contract. ATCO applied for a stay of the proceedings on the basis that the Contract contained an arbitration agreement.

Issues

The court considered a number of issues to be determined including, inter alia, whether or not the arbitration agreement survived termination of the Contract.

Pipeline Services contended that on proper construction of the Contract, the parties should not be taken to have intended that the dispute resolution mechanisms, including the arbitration agreement (Clause 25 of the Contract), should survive termination of the Contract.

Held

The court rejected Pipeline Services’ argument on the basis that:

1. an arbitration agreement is generally considered to be separate of the underlying contract in which it is contained, and for that reason, in the absence of an express contrary intention of the parties, survives termination;
2. courts should adopt a broad, liberal, and flexible approach to the construction of arbitration agreements, and favour a construction which provides a single forum for the adjudication of all disputes arising from, or in connection with, that agreement;
3. a conclusion that the effect of a dispute resolution clause depends on the determination of whether the contract has been terminated is manifestly inconvenient, particularly where such a determination would practically require the parties to seek assistance from a court first as to whether or not a contract has been properly terminated, before commencing arbitral proceedings;
4. it was clear from the wording of Clause 26.14 of the Contract, which expressly provided that any clauses of the Contract which ‘need to survive in order to protect the presumed intention of the parties’ as expressed in the Contract, survive termination, even though they are not expressly stated to do so; and
5. the arbitration agreement contained no express indication that it would not survive termination.

What Parties Should Do

Parties should be aware of how the operation of an arbitration agreement will impact their rights and responsibilities, even after termination of a contract. While the Australian position is clear that an arbitration clause can survive termination, a sound understanding of this point is often not shared by all contracting parties. Parties who are not aware of, or ignore, the terms of such an agreement may be met with disappointment (and extra costs) after commencing litigation, and particularly in the event where a court orders a stay of proceedings while the parties are referred to arbitration. This can be a costly and time-consuming, yet avoidable, exercise for all parties which serves as a reminder of the importance of compliance with the requirements of an agreed dispute resolution process.

In order to mitigate the risk of costly and time-consuming disputes about the survivability of an arbitration clause, contract participants should be very clear and concise when drafting such clauses. If it is the intention of the parties that an arbitration does, or does not, survive termination of the underlying contract, then this should be expressly stated within the terms of such.

Lamont Project & Construction Lawyers

We have the industry knowledge and experience to assist both Principals and Contractors in all major projects. If you would like to discuss any of the matters raised in the above article or the forthcoming series as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.

The content of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.

Contact: Peter Lamont or Kristopher London

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