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18 Jun 2010

Court or arbitration? Victorian appeal court respects parties' intentions

by Lee Carroll

The Victorian Court of Appeal shows a welcome respect for parties' intention to have disputes decided by arbitration.

Should a dispute arising under a charter contract be determined in court or by arbitration? That was the issue in AED Oil Limited v Puffin FPSO Limited [2010] VSCA 37.

AED Oil Limited and Puffin FPSO Limited were originally parties to a charter contract. At a later stage AED Services Pte Ltd, which was related to AED Oil, succeeded to the rights and obligations of AED Oil. As part of the succession under the charter contract AED Oil guaranteed the performance of AED Services' obligations under the contract and granted a charge over its assets by way of security for the performance of those obligations.

Under the contract, AED Oil agreed to bear Puffin's tax liability and agreed to indemnify Puffin against any claim for a payment under a tax law as well as to prepare and file Puffin's tax returns. Puffin made a series of demands upon AED Services requiring the payment of money to meet Puffin's liability for income tax and GST. These demands were contested by AED Services. AED Services argued that the effective life of the assets was tied to the life of the oil field and, as a result of a sharp decline in production from the oil field, Puffin's income tax liability was largely extinguished.

AED Oil commenced proceedings against Puffin seeking declarations as to the validity or otherwise of the notices of demand and an injunction to restrain Puffin from taking any step to enforce its charge. Puffin brought a counter-claim against both AED Oil and AED Services, seeking various declarations that, inter alia, AED Services had unreasonably withheld its consent to filing Puffin's income tax return and that AED Services perform its obligation to pay the amounts of Puffin's tax liabilities.

AED Oil succeeded in its application for an injunction and applied for an order that Puffin's counter-claim be stayed in accordance with section 7 of the International Arbitration Act 1974 (Cth) on the basis that the charter contract contained an arbitration agreement requiring the parties to submit all disputes to arbitration.

Puffin resisted the application, arguing that the arbitration agreement contains an exemption which allowed each party to seek urgent interlocutory or declaratory relief from the courts. The particular clause states that:

"Nothing in this Article 33 prevents a party from seeking urgent interlocutory or declaratory relief from a court of competent jurisdiction where, in that party's reasonable opinion, that action is necessary to protect that party's rights."

The trial judge held that Puffin brought its case within the exception of that clause and, accordingly, was allowed to prosecute its claims in court.

Construction of Article 33.10

On appeal, the Victorian Court of Appeal considered the construction of Article 33.10.

It considered first, whether the adjective "urgent" qualified both interlocutory and declaratory relief.

Puffin submitted that because a declaration contained in an arbitral award is unlikely to be recognised and enforced as a judgment, the parties intended to leave themselves free to seek declaratory relief from a court, whether such relief was urgent or not. This submission was rejected with reference to the decision of the Federal Court in Electra Air Conditioning BV v Seeley International Pty Ltd [2008] FCAFC 169 which confirmed that declaratory awards are enforceable. The judges agreed with the decision of the trial judge and found that the adjective "urgent" qualified both interlocutory and declaratory relief.

In determining whether the relief sought by Puffin was urgent, the Court found that Article 33.10, by its terms, contained two requirements:

  • first, that the relief be in fact urgent, which is a matter to be determined objectively; and
  • secondly, that the party claiming the relief form the reasonable opinion that the relief was necessary to protect that party's rights.

The Court concluded that the relief sought in Puffin's counter-claim did not meet the description of urgent declaratory relief. The counter-claim merely sought to resolve the question whether AED Services was required to consent to Puffin filing income tax returns. Further, the counter-claim did not derive any urgency from AED Oil's claim. The Court also dismissed the submission that the counter-claim was urgent because AED Oil's financial position was deteriorating.

Finding that the counter-claim did not fall within the exemption for urgent interlocutory and declaratory relief under clause 33.10, the Court set aside the orders of the trial judge and granted a stay of the proceedings in order that the counter-claim may be referred to arbitration.

Comment

The decision of the Victorian Court of Appeal evidences a welcome respect for parties' intention to have disputes decided by arbitration. The Court construed Article 33.10 in the context of the dispute resolution provisions of the contract as a whole. In so doing, it deferred to the parties' preference that disputes arising under the contract were to be decided arbitration, saying:

"This preference may be set at nought if Article 33.10 is not limited to cases which are in fact urgent".

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.