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When is a clause “not applicable” – the Victorian Supreme Court considers the enforceability of an arbitration agreement failing to nominate a process for appointing an arbitrator in Gemcan Constructions v Westbourne Grammar School [2020] VSC 429 || MTECC News 20.14

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In Gemcan Constructions v Westbourne Grammar School [2020] VSC 429 the Victorian Supreme Court held that specifying that provisions of a construction contract nominating an arbitrator, rules for arbitration and an appointing authority were “not applicable” did not render an arbitration agreement unenforceable.

Background

The respondent, Westbourne Grammar School (Westbourne), engaged the applicant, Gemcan Constructions (Gemcan), to perform works at its Williamstown campus. The parties fell into dispute regarding alleged delays in the progress of the works and other alleged breaches of contract by Gemcan.

After Westbourne issued a number of show cause notices pursuant to the Contract, it took the entirety of the Works out of Gemcan’s hands. Gemcan then issued a Notice of Dispute challenging the validity of Westbourne’s Take Out Notices and seeking payment from Westbourne on a number of different basis.

The parties were unable to resolve the dispute at conference. Accordingly, Gemcan sought to refer the matter to arbitration pursuant to cl 42.2 of the Contract, which provided:

If the dispute has not been resolved within 28 days of service of the notice of dispute, that dispute shall be and is hereby referred to arbitration.

Gemcan proposed nominating Mr Toby Shnookal QC as arbitrator, noting that it was willing to consider other candidates proposed by Westbourne.

In response, Westbourne asserted that the arbitration agreement in cl 42.2 was invalid. In particular, it relied on item 32 of Annexure A to the Contract, which stated next to clauses purporting to nominate a “person to nominate an arbitrator”, “rules for arbitration” and “Appointing Authority under UNCITRAL Arbitration Rules” “not applicable”. It argued that, objectively and commercially construed, this demonstrated an intention not to refer disputes under the Contract to arbitration, and as a consequence there was no valid and binding arbitration agreement.

It further asserted that another arbitrator – Mr James Shaw of Counsel – would be a more appropriate person to arbitrate any dispute.

Reasoning

The Court rejected Westbourne’s assertion that the arbitration agreement was unenforceable, and found that cl 42.2 of the Contract ‘clearly’ and ‘objectively’ evinced an intention that disputes should be referred to arbitration if unable to be resolved within 28 days of a Notice of Dispute. The court noted that item 32 of Annexure A provided a mechanism by which an arbitrator could be appointed and did not otherwise purport to amend or detract from the referral to arbitration contemplated by cl 42.2. Accordingly, the court held that the phrase ‘not applicable’ in item 32 of the Contract did not negate from the clear words of cl 42.2, particularly where Annexure B – which listed “deletions, amendments and additions” to the General Conditions of Contract – did not address any proposed amendment to cl 42.2.

The court noted that ss 10-11 and 19 of the Commercial Arbitration Act 2011 (Vic) created a regime for appointing an arbitrator and determining the rules to be applied in that arbitration which could be used where item 32 of Annexure A did not apply.

In respect to the choice of arbitrator, the Court stated that the “real issue” was whether the person appointed should be “more senior with more experience as an arbitrator (with a higher fee) or less senior with less experience as an arbitrator (with a lower fee)“ – a question which required the court to assess the experience and qualifications of each candidate and the proportionality of the arbitrator’s fees to the quantum of the dispute.

Ultimately, the Court determined that it was more appropriate to select Mr Shnookal QC, given that the legal and factual issues in the dispute were complex, the amount in dispute exceeded $1.4 million, and that Mr Shnookal’s extensive experience as an arbitrator and VCAT tribunal member would result in the arbitration being conducted in the most efficient way.

Bill Stephenson

Liability limited by a scheme approved under Professional Standards Legislation

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