21 Aug 2014

Bun fight in a sandwich shop - is VCAT a "court"?

by Doug Jones

Expanding the definition of "court" under the Victorian legislation has implications for the interpretation of the Model Law on International Commercial Arbitration across Australia.

In Subway Systems v Ireland [2014] VSCA 142, the Victorian Court of Appeal decided that the Victorian Civil and Administrative Tribunal (VCAT) is a "court" for the purposes of the Commercial Arbitration Act 2011 (Vic). This decision adds another layer of difficulty for parties who have previously agreed to an arbitration clause to wriggle their way out of it by starting proceedings in VCAT.

The decision's significance is also magnified as it is a decision on the uniform Commercial Arbitration Act (CAA), which is enacted in all states and territories except the ACT, and modelled on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration. It is therefore likely to have implications for similar tribunals in other states and territories (such as NCAT in New South Wales).

This means that parties agreeing to arbitration clauses in other states and the NT may also have difficulty in escaping their arbitration agreement by bringing proceedings in tribunals.

Arbitrate or litigate disputes?

The case involved a dispute over a franchise agreement between Subway Systems and the Irelands for the operation of a Subway sandwich store in a shopping centre. The franchise agreement contained an arbitration clause for the resolution of disputes. A dispute arose between the parties, with the Irelands alleging that Subway Systems breached the franchise agreement, acted negligently and engaged in misleading and deceptive conduct.

Subway Systems contended that the dispute was within the scope of the arbitration clause precluding VCAT from hearing the proceeding. Under section 8 of the CAA, any dispute which arises under a contract containing an arbitration clause must not be heard by a court but must instead be referred to arbitration. The issue in this case was whether VCAT was considered a "court" for the purposes of section 8 of the CAA so as to preclude the proceedings from being heard there.

Arbitration framework within Australia – limiting involvement of courts

International arbitration in Australia is governed by the International Arbitration Act 1974 (Cth) (IAA), which gives effect to the Model Law. One of the main purposes of the Model Law is to limit the involvement of courts in commercial disputes. The rationale is that parties should prefer the "finality and expediency of the arbitral process" over litigation. Aside from being a theoretically faster and more cost effective avenue for dispute resolution, the other advantages of arbitration are that decisions made are binding upon parties, and are enforceable by jurisdictions that are also a signatory to the Model Law.

In the domestic context, Australian legislation implements the Model Law through a series of Acts. For instance, section 8 of the CAA reflects Article 8 of the Model Law by stating that courts must refer parties to arbitration if an action is brought by one party against another and the contract between them contains an arbitration clause. The exception is if a court finds the agreement null, void, inoperative or incapable of being performed.

Furthermore, the Note in Part 1A of the CAA states that the sections in the Act are substantially the same as those in the Model Law where the purpose is to "be as uniform as possible" with the Model Law. Article 2 of the Model Law defines the word "court" as "a body or organ of the judicial system of a State", however, the commentary on this Article in the case makes clear that the term "court" is not restricted to organs referred to as "court/s" and can include other "competent authorities".

Interpreting section 8 of the CAA in the context of the Model Law

President Maxwell in the Court of Appeal stated that "special rules" of interpretation apply when construing provisions giving effect to international agreements whereby "certainty and uniformity of application are of paramount importance and interpretation should be unconstrained by technical rules". Bearing this in mind, VCAT was considered to be a "court" as it is part of the judicial system, invested with the authority to judge cases, and its decisions determine the rights and liabilities of parties.

The underlying purpose of the CAA was not just to give preference to avenues of recourse which were speedy and inexpensive in nature, but to give preference to avenues which held parties "to their bargains that in terms involve preferring arbitration of whatever kind has been agreed between the parties over State sponsored dispute resolution (no matter how cost efficient or time effective...)". With this in mind, VCAT could be characterised as a "body or organ of the judicial system of Victoria" and was a "court" for the purposes of the CAA.

The dissenting judgment of Justice Kyrou is also worth looking at to explain why VCAT should not be considered a court, because VCAT:

  • is not bound by the rules of evidence;
  • cannot enforce its own decisions;
  • has some members that are not legally qualified;
  • can be required to apply a statement of government policy; and
  • can be required to provide advisory opinions. 

How does this affect other Australian jurisdictions?

Expanding the definition of "court" under the Victorian legislation has implications for the interpretation of the Model Law across Australia, under the CAAs for domestic arbitrations, as well as the IAA for international arbitrations. It means that parties to arbitration clauses in other States and Territories may also find difficulty in escaping their arbitration agreements by bringing proceedings in similar tribunals.

What also may be of concern to some – as highlighted in the dissenting judgement of Justice Kyrou – is that administrative bodies such as VCAT were specifically established to provide an alternative to courts through their speedy and inexpensive processes. As has been evidenced by this case, however, in some specific contexts there is scope for them to be treated on the same footing as other courts. This apparent conflation is of particular interest given that the government appears not to have shown an intention for administrative bodies to be characterised as courts (an intention it could easily have made clear).

While this decision does not propose that this approach ought to be adopted by courts across the board, it may, if taken further by courts in the future, have implications in areas beyond arbitration, where the distinction between courts and administrative bodies is relied upon by parties and their legal advisers to pursue a particular outcome.

This decision re-establishes the pro-arbitration approach which Australian courts at both State and Federal level have taken in recent times. This is most evident in the court's willingness to take an avenue to refer the dispute to arbitration where it is reasonably open to it based on the facts. This approach also reflects Australia's obligations under the Model Law, especially in terms of promoting consistency across nation-states that are a signatory to the Model Law.

It will be interesting to follow this case and see if a leave for appeal to reconsider some of the legal issues raised will be sought for and granted.

Thanks to Ketki Kotwal for her help with this article.

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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.