Keeping Mum – High Court rules on confidential arbitration clause
WHO SHOULD READ THIS
- Senior management, corporate officers, individuals negotiating contracts and alternative dispute resolution practitioners.
THINGS YOU NEED TO KNOW
- Potentially limiting words and phrases in arbitration clauses such as ‘under’ this deed and ‘hereunder’ should be treated with additional care to ensure they do not dilute the scope of the clause and lead to litigated proceedings, as occurred in the recent Hancock/Rinehart dispute.
WHAT YOU NEED TO DO
- Review your existing contracts and arbitration clauses to ensure they are sufficiently broad to be effective in referring disputes to arbitration.
- Get in touch with our team if you need any assistance.
Handed down on 8 May 2019, the High Court’s decision to refer the highly publicised Rinehart/Hancock dispute to arbitration illustrates the fine line between an effective arbitration agreement and an inadequate one that undermines the arbitral process.
Between 2003 and 2010, Mrs Gina Rinehart and her controlled entities entered into various deeds with her children, including her son and daughter, Mr John Hancock and Ms Bianca Rinehart. The general purpose of these deeds was to curb a series of claims and threats of litigation publically made by John Hancock, alleging that Gina Rinehart and her controlled entities had committed a number of financial wrongdoings against her children. Three of these deeds have since become the subject of the current litigation:
- the confidential Deed of Obligation and Release entered into by John Hancock in April 2005 (Deed of Obligation and Release);
- the Hope Downs Deed entered into with Bianca Rinehart and her two sisters in August 2006 (Hope Downs Deed); and
- a further deed entered into with John Hancock in April 2007 in which he adopted the Hope Downs Deed (April 2007 Deed),
(together, the Deeds).
The Deeds each contain an arbitration clause. For example, clause 20 of the Hope Downs Deed provides that ‘[i]n the event that there is any dispute under this deed’ there is to be a confidential arbitration. Clause 9 of the April 2007 Deed and clause 14 of the Deed of Obligation of Release are in similar terms.
Notwithstanding the terms of the Deeds, in October 2014, Bianca Rinehart and John Hancock (the Appellants) commenced proceedings in the Federal Court against Gina Rinehart and various entities controlled by her (the Respondents). Amongst others, the Appellants made two significant allegations. First, they alleged the Respondents had mismanaged trust assets and committed other breaches of trust in relation to trusts under which the Appellants were beneficiaries (Substantive Claims). Second, the Appellants alleged they were not bound by the Deeds, because their signatures were procured by misconduct and undue influence on the part of Gina Rinehart, Hancock Prospecting Pty Ltd and others. They applied for declarations that the Deeds were void as against them (Validity Claims).
By interlocutory application, Gina Rinehart sought an order pursuant to section 8(1) of the Commercial Arbitration Act 2010 (NSW) (Act) that the proceedings (including both the Substantive and Validity Claims) be dismissed or permanently stayed, and referred to arbitration. Section 8(1) provides:
A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party’s first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.
At first instance, Gleeson J determined that the Validity Claims were not subject to the arbitral clauses in the Deeds. Her Honour interpreted the words ‘under this deed’ and ‘hereunder’ restrictively, finding them to be incapable of extending to a dispute as to the underlying enforceability or validity of the deeds themselves. Accordingly, her Honour ordered a separate trial of the Validity Claims, but agreed that the Substantive Claims could be referred to arbitration.
Full Federal Court decision
The Full Federal Court (Allsop CJ, Besanko and O’Callaghan JJ) unanimously overturned Gleeson J’s decision, holding that the arbitration clauses in the Deeds should be given a liberal, rather than a narrow interpretation. The Full Court was strongly persuaded by the approach taken by the House of Lords to the construction of arbitral clauses in Fiona Trust & Holding Corporation v Privalov  4 All ER 951 (Fiona Trust). In Fiona Trust, Lord Hoffman held that the construction of an arbitral clause should:
…start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal.
Thus, the Full Court construed the arbitration clauses in the Deeds in accordance with the presumption that: ‘unless the language makes it clear that certain questions [are] intended to be excluded from the arbitrator’s jurisdiction’, the entire dispute should be determined in arbitration. As such, the Full Court had little difficulty in determining that, after starting with the assumption in Fiona Trust, a liberal reading of the clause ‘any dispute under this deed’ clearly led to a finding that both the Substantive Claims and Validity Claims were within the scope of the arbitration agreement.
On appeal, the High Court upheld the Full Federal Court’s decision, agreeing with their Honours’ conclusion, but for different reasons. Notably, the High Court rejected the relevance of Fiona Trust, finding it unnecessary to consider the correctness of Lord Hoffman’s approach. Instead, the High Court preferred to rely wholly on the construction of the clause ‘by reference to the language used by the parties, the surrounding circumstances, and the purposes and objects to be secured by the contract’.
The High Court noted that a critical object of the Hope Downs Deed was the maintenance of confidentiality about the affairs of the Hancock Group (including a number of companies under Gina Rinehart’s control), the trusts, the intra-family dispute and the provisions of the Deeds themselves. This need for commercial confidentiality was underscored by the fact that highly confidential negotiations were underway amongst the Hancock Group in relation to financing a new joint venture agreement. In this context, the parties were essentially agreeing ‘to avoid public scrutiny’ threatening to jeopardise their commercial endeavours. Moreover, at the time the Deeds were drafted, the Appellants and the Respondents were aware that disputes were likely to arise in the future. This, in turn, was said by the High Court to indicate that the parties intended to draft an arbitration clause that facilitated a method of dispute resolution of the same level of confidentiality that characterised the Deeds as a whole. In their Honours’ words:
It is inconceivable that such a person would have thought that claims of the latter kind, raising allegations such as undue influence, were not to be the subject of confidential dispute resolution but rather were to be heard and determined publicly, in open court.
Thus, the High Court rejected the Appellants’ appeal, referring the parties to arbitration in respect of both the Validity Claims and Substantive Claims.
A second (albeit less publicised) matter in the dispute was the cross-appeal brought by three of the Respondents, Roy Hill Iron Ore Pty Ltd, Hope Downs Iron Ore Pty Ltd and Mulga Downs Iron Ore Pty Ltd (the Cross-Appellants). The Cross-Appellants sought a stay under section 8 of the Act in respect of claims brought against them by the Appellants, relating to breach to trust and knowing receipt of trust property (being mining tenements) held by the Respondents for the Appellants. The Cross-Appellants, none of which is a party to any of the Deeds, applied to Gleeson J for an order that the claims against them be referred to arbitration. The basis for their request was that each of them was claiming ‘through or under’ a party to the Hope Downs Deed (Hancock Prospecting Pty Ltd and Hancock Resources Limited), and therefore was a party within the definition of ‘party’ in section 2 of the Act, which provides:
“party” means a party to an arbitration agreement and includes:
(a) any person claiming through or under a party to the arbitration agreement, and…
The High Court overturned the decision of the Full Court in allowing the cross-appeal. The majority (Kiefel CJ, Gageler, Nettle, Gordon JJ) reasoned that the Cross-Appellants received the mining tenements with knowledge that they were assigned to them in breach of trust. As such, when the Cross-Appellants sought to contest the claim brought against them by the Appellants on the basis there was no breach of trust, the Cross-Appellants took their stand upon a ground which was available to the Respondents and stood in the same position vis-à-vis the Appellants as the Respondents.  In other words, since the Respondents and the Appellants are bound by an arbitration agreement applicable to the claim of breach of trust, this claim should be determined as between the Cross-Appellants and the Respondents in the same way as it is determined between the Appellants and the Respondents. The Cross-Appellants therefore satisfied the definition of ‘party’ in section 2 of the Act. However, Edelman J dissented, finding that the ‘wide and liberal interpretation’ given by the majority to the words ‘through or under’ was ‘antithetical to the global fundamental principle that arbitration is a matter of contract’, in respect of which the concept of privity of contract ought to be upheld unless the parties agreed otherwise. The majority swiftly rejected Edelman J’s approach and references to comparative jurisprudence. Their Honours noted in obiter that despite the international origins of Australia’s arbitration legislation, no party made submissions regarding the approach of other jurisdictions and thus, ‘attempts to resolve issues raising separate considerations capable of discrete controversy must be eschewed as beyond the boundaries of the resolution of the question of law raised’.
The High Court’s decision in the Rinehart/Hancock dispute highlights the importance of considering and applying the ordinary principles of contract interpretation and construction in drafting an arbitration clause. Potentially limiting words and phrases such as ‘under’ this deed and ‘hereunder’ should be treated with additional care to ensure they do not dilute the scope of the clause and lead to litigated proceedings, where the court is likely to publically scrutinise the specific factual context in which the parties negotiated, drafted and signed the contract. Indeed, this is precisely what occurred in the Rinehart/Hancock dispute, despite the parties’ initial intentions to keep their disputes away from the public eye.
As is clear from those proceedings, drafting a broad arbitration agreement can be complex. However, most arbitral institutions provide model arbitration clauses in an effort to ensure parties who intend to refer their disputes to arbitration can adopt a tried and tested clause. For example, ACICA’s Model Arbitration Clause is:
Any dispute, controversy or claim arising out of, relating to or in connection with this contract, including any question regarding its existence, validity or termination, shall be resolved by arbitration in accordance with the ACICA Arbitration Rules.
Although it may appear cumbersome or verbose, the model clause aims to avoid the type of litigation in the present case by providing a very broad scope to the arbitration agreement.
If you need to draft an arbitration clause, or amend an existing clause to ensure it is effective, please contact our leading Arbitration lawyers below.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.