Arbitration: What standard of review (prima facie, full or something in between)?
The Full Court of the Federal Court of Australia adopts (guardedly) the ‘prima facie’ approach standard of review to applications for stay of court proceedings brought in the face of an arbitration agreement, bringing Australian jurisprudence in line with that of Singapore and Hong Kong.
Hancock Prospecting Pty Ltd v. Rinehart [2017] FCAFC 170
In a seminal judgment handed down on 27 October 2017, the Full Court of the Federal Court has stayed court proceedings commenced by two of Gina Rinehart’s children against Mrs Rinehart (ranked third in Australia’s 2017 Rich List[1]), her two other children and a panoply of related companies, pursuant to s 8(1) of the Commercial Arbitration Act 2010 (NSW) (‘CAA’).
In the proceeding, the Applicants alleged that Mrs Rinehart dishonestly breached her duties as trustee, syphoning off assets worth many millions of dollars and placing them within her grasp. The judgment described the underlying dispute as being in one sense about “the destruction of a family relationship under the crushing weight of wealth”: [134].
Jurisprudentially, the judgment is important in several respects. This note will concentrate on one matter; namely, the appropriate standard of review by a court entertaining a stay application under Article 8 of the UNCITRAL Model Law on International Commercial Arbitration (‘Model Law’), reflected in s 8 of the CAA, and s 7 of the International Arbitration Act 1974 (Cth).
Facts
The facts are complex. In essence, Bianca Rinehart and her brother, John Hancock[2], commenced proceedings in the Federal Court of Australia against their mother and a number of other companies controlled by her (collectively, “Hancock Group”), including Hancock Prospecting Pty Ltd (“HPPL”). Following the death of her father, Langley Hancock (“Lang”), Mrs Rinehart controlled all of the entities in the Hancock Group
The siblings alleged that Mrs Rinehart breached her duties as a fiduciary, and as a trustee, with the knowing assistance of HPPL, in particular by:
1) removing valuable mining assets from Hancock Family Memorial Foundation Limited (“HFMF”) and transferring them to HPPL; and
2) giving her children a 23.45% shareholding interest in HPPL, instead of a 49% interest, as contemplated in a 1988 agreement reached between Mrs Rinehart and her late father.
The siblings also alleged that certain deeds entered into by them and the Respondents, containing arbitration agreements, were procured by misleading or deceptive conduct, duress, and breach of trust by Mrs Rinehart and HPPL.
They sought declarations that the deeds, and the arbitration agreements contained within them, were void. Those deeds contained releases, bars to action and covenants not to sue, which precluded the claims sought to be agitated by the Applicants. The arbitration clauses were drafted in relatively narrow terms. They referred to arbitration “disputes under the deed”.
HPPL made an application under s 8(1) of the CAA for an order that the proceeding be stayed and for the parties to be referred to arbitration, pursuant to the arbitration agreements contained in the deeds. It argued that the matters before the Court fell within the scope of the arbitration agreements.
The Applicants resisted the stay application, contending that the arbitration agreements were “null and void, inoperative or incapable of being performed”, as a result of the misconduct of the Respondent which induced the Applicants to enter into the deeds.
At first instance Gleeson J held that the dispute was “commercial” in nature and therefore attracted the operation of the CAA. Her Honour held that there were prima facie arbitration agreements and that some of the disputes fell within the scope of those arbitration agreements. She directed a trial of the question of whether the arbitration agreements contained within the deeds were “null and void, inoperative or incapable of being performed”.
The Respondents sought leave to appeal. The Full Court granted leave and allowed the appeal, holding that the trial judge’s discretion miscarried. The end result is that the proceeding was stayed. Thus, the attack on the validity of the arbitration agreement will fall to be determined by the Arbitrator in the first instance (subject to review by the supervisory court under s 16 of the CAA).
Analysis
The trial judge, adopting a narrow interpretation of the arbitration agreements, accepted that several (but not all) of the matters sought to be agitated by the Applicants fell within the scope of apparently valid arbitration agreements contained in the various deeds. In particular, she found that the claims that the deeds should be set aside because of the various alleged misconduct (‘validity claims’) did not fall within the scope of the arbitration clauses. However, she found that those claims were available to impeach the arbitration agreements under the s 8 proviso.
Justice Gleeson identified two competing approaches to the question of the appropriate standard of review:
(a) first, the prima facie review approach – by which a court adopts a prima facie review of the existence and scope of the arbitration agreement. Provided the court is satisfied, on a prima facie basis, that the matter sought to be ventilated by the plaintiff in the court arguably falls within the scope of an apparently valid arbitration agreement, it will stay the court proceeding and allow the arbitral tribunal to resolve (in the first instance) any challenge to the existence and scope of the putative arbitration agreement;
(b) secondly, the full review approach – by which a court on a stay application determines, on the balance of probabilities, the existence and scope of the arbitration agreement.
Her Honour noted that the prima face review approach had recently been adopted by the Singapore Court of Appeal in Tomolugen Holdings Ltd v Silica Investors Ltd [2015] SGCA 57, but that the English courts preferred the full review approach (thus see Joint Stock Company ‘Aeroflot Russian Airlines’ v Berezovsky [2013] EWCA CIV 784).
Gleeson J applied a prima facie review approach to the question of the existence of the arbitration agreement, but (curiously) a full review approach to the question of the scope of the arbitration agreement. As to the third question (i.e. applicability of the s 8 exceptions), her Honour recognised that a court on a stay application had a discretion to determine the question (either on a summary basis, alternatively upon the setting down for trial of that question), as opposed to leaving that question for the determination of the arbitral tribunal. In doing so, her Honour in effect adopted a hybrid approach to the standard of review in respect of this question. That is, sometimes a prima facie approach and sometimes a full review approach, depending on the circumstances.
The Full Court acknowledged the two broad approaches to the standard of review on stay applications. It noted that the ‘prima facie’ approach was largely taken by courts in “Model Law jurisdictions”, including Singapore, Hong Kong, New Zealand and Canada: [141].
With less than full enthusiasm, the Full Court embraced the prima facie approach (at [145]):
“We think that any rigid taxonomy of approach is unhelpful, as are the labels “prima facie” and “merits” approach. How a judge deals with an application under s 8 of the CA Act will depend significantly upon the issues and the context. Broadly speaking, however, and with some qualification, aspects of the prima facie approach have much to commend them as an approach that gives support to the jurisdiction of the arbitrator and his or her competence, as recognised by the common law and by s 16 of the CA Act, whilst preserving the role of the Court as the ultimate arbiter on questions of jurisdiction conferred by ss 16(9) and (10), 34(2)(a)(iii) and 36(1)(a)(iii) of the CA Act. Broadly, the approach is consonant with the structure of the CA Act and the Model Law.”
The Full Court held that the matters sought to be agitated in Court (including the ‘validity claims’) fell within the scope of the arbitration agreements[3] and that, except to a very limited extent, the Respondents had not engaged the proviso to s 8(1) by a relevant attack on the arbitration agreements.
In particular, the ‘validity claims’ were parasitical to the validity of the main agreement and did not constitute a separate attack on the arbitration agreements. The only matters capable of constituting a separate attack were the allegations that the Respondents had misled the Applicants by not telling them that the arbitration process would be private and would have to be paid for: [386]. The Full Court considered this attack to be of narrow compass: [389]. Moreover, it was ill-formulated and lacked apparent strength: [393].
Next, the Full Court held that a court entertaining a stay application was not mandated to hear and determine any proviso issues.[4] Rather, it had a discretion whether or not to do so: [367].
In exercising the discretion afresh,[5] the Full Court considered the following factors (at [393]):
(a) the attack on the arbitration agreements was of narrow compass;
(b) it was conceivable that those matters would become entangled with the ‘validity claims’ which fell within the scope of the arbitration agreement and therefore fell to be determined by the Arbitrator;
(c) given the history of the proceeding, it was unlikely that any court hearing on the proviso issues would be of short duration.
Accordingly, the Full Court held that it was preferable to allow the proviso question to be determined by the Arbitrator.
Comment
Both Singapore and Hong Kong, the leading jurisdictions in the Asia-Pacific, adopt the prima facie standard of review on stay applications. Both jurisdictions are Model Law jurisdictions. In contrast, the English Arbitration Act 1996 is not based on, and contains several important departures from, the Model Law. It would be out of step for Australia to adopt a different standard of review as it undermines the development of regional coherence in the interpretation and application of the Model Law. Moreover, one learned commentator has suggested that the adoption of the ‘full review’ approach was “a wrong turn in English law”.[6] In this regard, the Full Court’s decision is welcome.
[1] Katie Walsh, “Gina Rinehart wins bid to push battle with kids behind closed doors” (Australian Financial Review, 27 October 2017).
[2] Mr Hancock changed his name by deed poll.
[3] Taking a broader approach to the interpretation of the arbitration agreements.
[4] That is, whether the putative arbitration agreement is null and void, inoperative or incapable of being performed.
[5] The Full Court had to exercise the discretion afresh as the trial judge had wrongly concluded that any trial of the proviso question would involve a trial of the validity claims.
[6] David Joseph, Jurisdiction and Arbitration Agreements and their Enforcement (2nd Edition, Sweet & Maxwell 2010) p. 339.
