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"Double-Barrelled" Dispute Resolution Clauses? Lessons from Down Under

Spring 2008
International Disputes Quarterly
Leon Ioannou

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On January 29, 2008, the Federal Court of Australia handed down a decision that confirmed the need for care in setting out the scope of parties' submission to arbitration in a dispute resolution clause and raised questions as to how Australian courts will interpret them.¹

The "Double-Barrelled" Arbitration Agreement
Electra Air Conditioning BV, a Dutch company, appointed Seeley International Pty Ltd, an Australian company, as its exclusive distributor of air conditioners in Australia and New Zealand. The dispute resolution clause was "double-barrelled," in that:

It provided that "a dispute, question or difference of opinion … between the parties concerning or arising out of this Agreement or its construction, meaning, operation or effect or concerning the rights, duties or liabilities of any party ... shall be referred to arbitration" under the arbitration rules of the Institute of Arbitrators and Mediators Australia.
However, such reference to arbitration did not "preven[t] a party [from] seeking injunctive or declaratory relief in the case of material breach or threatened breach of this Agreement." The dispute resolution clause did not specify from which forum — an arbitral tribunal or a court — such injunctive or declaratory relief could or should be requested.

A dispute arose when Electra, due to problems with its credit insurer, refused to accept Seeley's purchase orders, as it was contractually bound to do. Seeley applied to the Federal Court for a declaration and summary judgment that Electra was obliged to accept its purchase orders.

In turn, Electra applied for an order that Seeley's proceedings be stayed pursuant to Section 7(2) of the International Arbitration Act 1974 (Cth). Section 7(2) provides that a court must stay proceedings before it and refer the dispute to arbitration where the proceedings are instituted by a party to an arbitration agreement against another party to the agreement. Seeley resisted Electra's application for a stay, arguing that its claim for declaration and summary judgment was not covered by the parties' arbitration clause.

The Parties Agreed to Arbitrate, Right?
Justice Mansfield's analysis was itself double-barrelled in deciding whether the parties agreed to submit their dispute regarding declaratory relief to arbitration.

The Judge found that the parties' clause constituted an arbitration agreement sufficiently wide to encompass a declaration as to the meaning and proper operation of the parties' agreement. That is, it impliedly gave the arbitrator the power to grant declaratory relief.

However, the Judge observed that parties may agree that certain potential disputes do not have to be referred to arbitration. He stated that the proper scope of dispute to be arbitrated should be "robustly assessed," which involves ascertaining the intention of contracting parties, having regard to the text of the arbitration agreement and the factual matrix surrounding its drafting.

The Judge interpreted the clause to mean that the parties were not confined to seeking declaratory relief in arbitration; they could also seek such relief from the Federal Court. The Judge held that — on a close reading of the text of the clause – the parties had agreed to treat disputes as to declaratory relief (which did not have to be referred to arbitration) differently from other disputes (which had to be referred to arbitration). In justifying this reading, the Judge placed emphasis on the fact that the agreement was the result of extensive negotiation and careful drafting.

Accordingly, the Judge decided that the parties were not confined to seeking declaratory relief from an arbitrator. He therefore declined Electra's request to stay proceedings before the Court.

Practical Lessons
The Seeley decision is a sobering reminder for drafters of arbitration clauses to exercise caution in expressing which disputes are intended to be referred to arbitration and which disputes are intended to be resolved by other means (e.g. by the courts).

In Seeley, the Judge observed that "it does not flaunt business common sense that the parties, having agreed upon arbitrating their disputes, should nevertheless agree upon an optional alternative dispute resolution process — by way of court proceedings — in certain circumstances." However, to give the dispute resolution clause "business common sense", it is necessary to consider the "circumstances" in which the parties would want "an optional alternative dispute resolution process."

This is exactly what the Judge did not do. While noting that he was obliged to "robustly asses[s]" the scope of the disputes the parties agreed to arbitrate, the Judge took an overly strict, literal interpretation of the words of the arbitration clause, and in doing so, preserved the Court's jurisdiction over the matter. Although the Judge mentioned several factors in considering the arbitration clause, those bearing on the words of the clause — such as the clause's drafting history — were teased out as being most important. The Judge's close textual reading of the parties' arbitration clause bucks the current Australian and international trend, which favours according an arbitral tribunal broad power by widely construing the parties' agreement to arbitrate.

The Judge noted that the second "barrel" of the clause was designed to address circumstances "of some urgency." However, the Judge did not analyse whether, in the circumstances, the relief sought by Seeley was urgent. The particular dispute in Seeley — namely, whether Electra was bound to accept purchase orders — did not appear to be "urgent" or a pressing business matter.

If the function of the clause was to permit a court (as opposed to a tribunal) to provide urgent injunctive or declaratory relief, the wording of the parties' clause did not make that clear.

The Judge's decision also gives rise to the practical problem of having more than one forum consider the same problem. In Seeley, the Court would decide on the question of injunctive relief, but any questions of damages resulting out of that decision (or any other relief) would have to be determined by arbitration. Notably, the Judge observed that it is "unlikely [the parties] intended that different disputes should be resolved before different tribunals." The Judge did not explain why it makes "commercial common sense" for parties to have half of their substantive dispute resolved in one forum and half in another.

Thus, parties should ensure that their arbitration agreements are water-tight, including setting out clearly the particular circumstances in which disputes are to be referred exceptionally to a court or other dispute resolution forum. Otherwise, Australian courts following the Seeley decision may consider themselves empowered to hear disputes through a literal interpretation of dispute resolution clauses providing for both arbitration and litigation.

¹ Seeley International Pty Ltd v. Electra Air Conditioning BV [2008] FCA 29 (29 January 2008).

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