Can Non-Signatories be Compelled to Arbitrate?
This article was featured in our 2023 Construction Arbitration Report, which is part of a series of industry-focused arbitration reports edited by Jus Connect and Jus Mundi.
This issue explores the construction industry and presents a goldmine of information based on data available on Jus Mundi and Jus Connect as of May 2023. Discover updated insights into construction arbitration and exclusive statistics & rankings, as well as in-depth global and regional perspectives on construction projects, disputes, & arbitration from leading lawyers, arbitrators, experts, arbitral institutions, and in-house counsel.
THE AUTHORS:
Nastasja Suhadolnik, Partner and Head of the Arbitration Group at Corrs Chambers Westgarth
Andrew Stephenson, Partner and Head of the Projects Group at Corrs Chambers Westgarth,
Where disputes arise on major construction projects, they inevitably impact a complex set of contractual relationships between principals, contractors, various subcontractors and third parties, leading to related claims and disputes under multiple contracts. When arbitration is chosen by some or even all of the parties, multiplicity of transactions and associated disputes can cause inefficiency and risk inconsistent decisions or delays in the resolution of the related disputes. In order to avoid inconsistency, proceedings in one part of the contractual chain may be stayed until others are concluded.
Multi-party arbitration, by parties either commencing arbitration against multiple parties, or by joinder of parties or consolidation of arbitrations, offers greater efficiency through processes such as discovery, streamlined resource allocation and logical issue sequencing. But it typically turns on party consent – expressed either in the arbitration agreement, or indirectly by choice of arbitral rules.
The conventional requirement of party consent has been brought into question in Australia by recent jurisprudence that has significantly broadened the circumstances in which third parties may be brought into an arbitration between parties named in an arbitration agreement. Until further clarification is provided, this development has potentially far-reaching consequences for the resolution of disputes that arise in the construction industry.
The Conventional Rules on Multi-Party and Multi-Contract Arbitration in Australia
In Australia, arbitration is governed by the International Arbitration Act 1974 (Cth) (“IAA”) and uniform State and Territory Commercial Arbitration Acts (“CAAs”), for international and domestic arbitrations, respectively. Both incorporate the UNCITRAL Model Law with minimal amendments.
The IAA and the uniform CAAs contain provisions which empower arbitral tribunals in Australian-seated arbitrations to order the consolidation of proceedings commenced pursuant to one or more arbitration agreements in certain circumstances. Consolidation may be ordered where: (a) a common question of law or fact arises in all those proceedings; (b) the rights to relief claimed in all those proceedings are in respect of, or arise out of, the same transaction or series of transactions; or (c) for some other reason specified in the application, it is desirable that an order of consolidation be made. While, theoretically, these criteria may be easily met in disputes arising under related transactions on a construction project, achieving consolidation will require tribunals appointed in each of the arbitrations (where they are different) to deliberate jointly and agree that the arbitrations should be consolidated. Absent agreement, the arbitrations shall proceed separately without consolidation.
Australia’s leading international dispute resolution institution, the Australian Centre for International Commercial Arbitration (“ACICA”), has issued rules that equally provide for an extended scope for consolidation if certain requirements are met, mirroring international best practice. The 2021 ACICA Arbitration Rules (“ACICA Rules”) allow consolidation where (a) all parties have consented to consolidation; (b) all the claims in the arbitrations are made under the same arbitration agreement; or (c) the claims in the arbitrations are made under more than one arbitration agreement, but there is a common question of law or fact in both or all of the arbitrations, the rights to relief claimed are in respect of, or arise out of, the same transaction or series of transactions, and ACICA finds the arbitration agreements to be compatible.
In addition, the ACICA Rules also provide for the joinder of parties to arbitral proceedings, provided that (a) the additional party being joined is, on the face of the matter, a party to the same arbitration agreement between the existing parties; or (b) all parties, including the additional party, have consented to the joinder.
These provisions are designed to facilitate multi-party arbitrations to resolve disputes involving several related transactions that commonly occur on construction projects, but their application is fundamentally, and unsurprisingly, a function of party consent.
Expanding the Ambit of Parties that May be Brought into an Arbitration
Recent jurisprudence of Australia’s highest court, the High Court of Australia, has significantly expanded the potential scope in Australia for achieving multi-party arbitration, by allowing parties that have not concluded a compatible arbitration agreement (or consented to consolidation) to be brought into an arbitration as third parties.
The IAA and the uniform CAAs provide that a stay may be granted of proceedings which are brought in a court by a party to an arbitration agreement against another party to the arbitration agreement, and the court may refer the parties to arbitration. The term ‘party’ is then defined in both acts as including ‘a person claiming through or under a party’ to the arbitration agreement. By virtue of this statutory provision, non-signatory third parties can be referred to arbitration (along with any signatories to the arbitration agreement) if they are ‘claiming through or under’ a party to the arbitration agreement.
In Rinehart & Anor v Hancock Prospecting Pty Ltd & Ors [2019] HCA 13 (“Rinehart”), the High Court of Australia considered the interpretation of ‘claiming through or under’ in the Commercial Arbitration Act 2010 (NSW) (CAA (NSW)). The case originated in a dispute between a trustee and beneficiaries about interests in mining tenements which the trustee had assigned to certain third-party companies. The beneficiaries commenced proceedings against the trustee and the third-party companies, some of whom were and some of whom were not originally parties to the deeds containing agreements to arbitrate. The trustee and the third party companies applied for a stay and for claims against them to be referred to arbitration under the CAA (NSW), on the basis that they were ‘person(s) claiming through or under a party to the arbitration agreement’.
The majority held that as assignees of mining tenements from parties to the relevant deed, the third-party companies could be considered persons claiming ‘through or under’ a party to that deed. This was based on the fact that an essential element of the defence of the third-party companies was exercisable by the party to the arbitration agreement, and to exclude them from the scope of the arbitration agreement could, undesirably, result in duplicated proceedings. The majority emphasised the subject matter of the dispute, noting that, as the defences of the third-party companies and the respondent were similar, if the respondent were found to be blameless, the third-party companies would be equally blameless.
In this way, the High Court in Rinehart dramatically broadened the interpretation of parties ‘claiming through or under’ which under previous jurisprudence required that third parties ‘claiming through or under’ have a claim or defence that is derived from a party to the arbitration agreement. This narrower – and more conventional – scope of parties ‘claiming through or under’ would include only examples where third parties are successors in title, such as assignees of rights under a contract. Pursuant to Rinehart, however, there is no longer a need for a third party to derive its cause of action or defence from the party to the arbitration agreement – rather, it suffices that there is an overlapping element in the claim or defence. Dissenting from the majority, one justice cautioned that this expansive approach to the definition of ‘party’ would undermine concepts of privity of contract and party autonomy.
The High Court’s judgment in Rinehart has potentially far-reaching implications for the construction industry. This is illustrated by a judgment of the Queensland Supreme Court in Bulkbuild Pty Ltd v Fortuna Well Pty Ltd [2019] QSC 173 (“Bulkbuild”) which applied Rinehart in a construction context.
Bulkbuild concerned a dispute under a contract for the design and construction of serviced apartments. Despite the arbitration clause contained in the design and construct contract, the contractor initiated court proceedings against the principal (with whom it had concluded an arbitration agreement) and superintendents (with whom no arbitration agreement had been concluded). The argument advanced by the contractor was that the resolution of claims before two different fora would risk producing inconsistent decisions, which made the arbitration clause in the design and construct contract ‘incapable of being performed’. The principal and superintendents applied for a stay of proceedings on the basis that the contract contained an arbitration agreement and arguing that, as parties whose claims are made ‘through or under’ the principal, the arbitration would also apply to the superintendents.
The court relied on the reasoning in Rinehart to find that the plaintiff’s claims against each of the defendants was ‘essentially the same case’ as they were closely related, dependent on findings about the same factual matters, and the success of the plaintiff’s claims against the superintendents was ancillary to its success against the principal. As a result of this overlap, the court considered that the superintendents were likely to rely on the rights of the principal under the design and construct contract, which meant that they were likely parties ‘claiming through or under’ the principal – and therefore bound by the arbitration agreement in the design and construct contract.
Implications for Parties Arbitrating in Australia
The expansive approach taken by the Australian courts in Rinehart and Bulkbuild to interpreting the ‘through or under’ provision in Australia’s lex arbitri has the potential to expand significantly the scope of parties that may be brought into an arbitration – including, in principle, where no consent to arbitration has been given.
These observation are subject to a caveat. There is limited case law applying the Rinehart interpretation and, indeed, the High Court majority itself noted in Rinehart that it did not receive submissions about wider complex issues of arbitral consent and privity of contract, and on third-party claims more generally. The court’s findings may therefore be difficult to apply outside of the specific circumstances of the case.
That notwithstanding, the majority’s judgment raises the obvious question as to whether it will enable parties in Australian-seated arbitrations to be coerced into arbitration when they have not consented to it, as it may be taken to do on at least one reading.
Leading academic Professor Richard Garnett has urged caution when applying the High Court’s Rinehart test to non-signatory third parties. In his view, the Rinehart test may be applied to a category of cases where a non-signatory defendant applies for a stay and by doing so consents to being referred to arbitration – which does not offend the fundamental requirement of party consent. However, the same rationale does not apply, according to Professor Garnett, when a non-signatory claimant wishing to pursue a claim in court is faced with a stay application by a defendant arguing that, perhaps unbeknownst to the claimant, the claimant is a party ‘claiming through or under’ a signatory to an arbitration agreement. In that scenario, the granting of the stay would mean that the non-signatory claimant’s claim in court would be defeated by an arbitration agreement it is not party to and in circumstances where that non-signatory has never consented to having its claim settled by arbitration.
The latter hypothetical scenario is distinguishable from the circumstances of Rinehart and Bulkbuild, where all defendants were seeking a stay in favour of arbitration – expressly or impliedly consenting to having the matter resolved by arbitration.
Whether or not it is desirable from the perspective of party consent, at least theoretically, the High Court’s expansive interpretation of ‘claiming through or under’ leaves open the possibility of arbitration to be directed with or without party consent. Until further clarification and perhaps narrowing of the interpretation is provided by a superior court, the uncertainty as to the boundaries of current jurisprudence will persist, making this a hot-button topic in Australia as the courts grapple to balance party autonomy and efficiency for fragmented disputes on major construction projects.
ABOUT THE AUTHORS
Nastasja Suhadolnik is a Partner and head of the Arbitration Group at Corrs Chambers Westgarth. A dual qualified lawyer (in New York and Australia), she specialises in domestic and international arbitration and public international law. Nastasja advises and represents corporate and sovereign clients in commercial arbitrations conducted under a range of arbitration rules, arising in a variety of sectors, and governed by different procedural and substantive laws (both common law and civil law). Having previously practiced in Paris and New York, Nastasja also has specific expertise in investor-state dispute resolution and public international law advisory work. Before coming to private practice, Nastasja worked at the United Nations Office of Legal Affairs, where she advised various departments within the UN Secretariat, UN Funds and Programmes, and UN System Organisations, in connection with a range of operational matters.
Andrew Stephenson is a Partner and head of the Projects Group at Corrs Chambers Westgarth, as well as an active member of the firm’s Arbitration Group. Andrew has over 40 years’ experience in contentious and non-contentious matters relating to all types of major projects. He advises clients in respect of contractual project risk allocation, dispute management and dispute resolution. He also advises inbound foreign investors and outbound domestic investors on bilateral investment treaty and free trade agreement protections in respect of their foreign investments. Andrew is a senior fellow of Melbourne University Law School lecturing in project risk and dispute resolution, and has previously lectured at Queensland University and the Queensland University of Technology. He is also the Australian correspondent for the International Construction Law Review, a member of the International Academy of Construction Lawyers (currently responsible for the academic program) and a board member of the International Construction Projects Committee of the IBA.
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