AED Oil Ltd v Puffin FPSO Ltd (No 2)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT

COMMERCIAL AND EQUITY DIVISION LIST B

No. 8380 of 2009

AED OIL LIMITED (ACN 110 393 292)	Plaintiff
v
PUFFIN FPSO LIMITED (COMPANY REGISTRATION NO.C37772) (INCORPORATED IN MALTA)	Defendant
PUFFIN FPSO LIMITED (COMPANY REGISTRATION NO.C37772) (INCORPORATED IN MALTA)	Plaintiff by Counterclaim
and
AED OIL LIMITED (ACN 110 393 292) AED SERVICES PTE LTD (INCORPORATED IN SINGAPORE)	Defendants by Counterclaim

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JUDGE:	JUDD J
WHERE HELD:	MELBOURNE
DATE OF HEARING:	16 & 17 NOVEMBER 2009
DATE OF JUDGMENT:	1 DECEMBER 2009
CASE MAY BE CITED AS:	AED OIL LTD v PUFFIN FPSO LTD (NO. 2)
MEDIUM NEUTRAL CITATION:	[2009] VSC 534	FIRST REVISION 4 DECEMBER 2009

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Arbitration – Application for stay – International Arbitration Act 1974 (Cth) – Construction of arbitration agreement – Whether arbitration agreement “inoperative” - whether an applicant for stay waived its rights – Whether the dispute was “not capable of settlement by arbitration” – person claiming “through or under” a party – Urgent declaratory relief.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff and First Defendant by Counterclaim	Mr. J. Gleeson SC Mr. N. Pane	Corrs Chambers Westgarth
For the Defendant and Plaintiff by Counterclaim	Mr. P. Jopling QC Dr. J. Moore Mr. R. Garnett	Freehills
For the Second Defendant by Counterclaim	Mr. J. Digby QC Dr. M. Collins	Mallesons

HIS HONOUR:

On 17 August 2009 the plaintiff, AED Oil Limited, commenced a proceeding in this court against Puffin FPSO Limited, the defendant and plaintiff by counterclaim. Puffin is a company registered in Malta. AED Oil sought injunctions to restrain Puffin from taking any steps to enforce a registered Fixed Charge dated 20 May 2006 in favour of Puffin.

The charge secured the obligations of AED Oil as guarantor of performance by AED Services Pte Ltd, the second defendant to counterclaim, under a FPSO Charter Contract.[1] The parties to the charter contract were AED Services, a company incorporated in Singapore, and Puffin. AED Oil is the ultimate holding company of AED Services. Under the charter contract AED Services was, in defined circumstances, required to indemnify Puffin in respect of tax liabilities.
[1]The original FPSO charter contract, made between AED Oil Ltd and Puffin FPSO Ltd is dated 3 March 2006. It was amended on 25 January 2007 and on 17 May 2007 novated to a subsidiary of AED Oil, AED Services Pte Ltd.

The commencement of the proceeding followed demands made by Puffin, in notices sent to AED Services and AED Oil, for amounts referable to alleged income tax and goods and services tax liabilities of Puffin. There were also claims for unpaid invoices.

On 20 August 2009 an injunction was granted restraining Puffin from relying upon the events of default stipulated in the demands as the basis for exercising its powers under the charge. It was a condition of the injunction that AED Oil provide security for an amount estimated to be Puffin’s GST liability. Directions were made to facilitate an amended statement of claim, a defence and any counterclaim and any reply and defence to counterclaim. In the events that occurred AED Oil did not file an amended statement of claim. On 15 September 2009 Puffin filed its defence and counterclaimed against AED Oil and commenced a proceeding by way of counterclaim against AED Services. Both defendants to the counterclaim filed defences on 2 November 2009.

By summonses, both dated 9 October 2009, the defendants to counterclaim, AED Oil and AED Services each made application to the court that the counterclaim against it be stayed. Each applicant relied upon s 7 of the International Arbitration Act 1974 (Cth), s 53 of the Commercial Arbitration Act 1984 (Vic) and the inherent jurisdiction of the court. The foundation for each application is the agreement to arbitrate in Article 33 of the charter contract.

Background

AED Oil is in the business of oil exploration and production. It is incorporated in Australia. AED Oil has exploration and production rights in the Southern Timor Sea. Until about 1 July 2009 Puffin supplied a floating production storage and off-loading tanker (FPSO) to AED Services under the charter contract. The tanker had been converted into an FPSO by Puffin between late 2006 and mid 2007 for the purpose of the charter contract. The converted tanker, known as the Front Puffin FPSO, was deployed in the Puffin North East oil field. It utilised an APL buoy and swivel arrangement and was connected by a sub-sea manifold to two production wells. Production commenced on 6 October 2007.

The charter contract, initially made between AED Oil and Puffin, was novated to AED Services on 17 May 2007 when the parties entered into a Deed of Novation and Amendment. AED Services replaced AED Oil under the contract. The novation agreement included mutual releases and discharges and the conferral of rights so as to give effect to the novation. There was a condition precedent. AED Oil was required to enter into a guarantee in a prescribed form in favour of Puffin under which it promised to guarantee the obligations of AED Services under the charter contract.

In March 2008 East Puffin Pty Ltd, a subsidiary of Sinopec International Petroleum Corporation, acquired a 60% interest in AED Oil’s Puffin project. As a consequence, East Puffin became project operator. Although East Puffin held the dominant position in the joint venture and was project operator, AED Services remained the party contracted to Puffin under the charter contract and thus liable to indemnify Puffin in respect of tax liabilities.

Under the Deed of Novation and Amendment the parties acknowledged that Puffin’s rights under or pursuant to the charge remained in full force and effect. The charge became enforceable upon an Event of Default, which was a failure to pay any of the Secured Moneys when due and payable. Secured Moneys was defined as all debts and monetary liabilities of AED Services to Puffin on any account under or in relation to any Transaction Document and in any capacity. The guarantee given by AED Oil was a Transaction Document.

Article 15 of the charter contract was designed to ensure that payments were made to Puffin net of any amount of tax which AED Services was required to deduct from payments or which Puffin might be obliged to pay. The intention of the parties was that Puffin would receive the full amount of its invoices and other entitlements and that any tax liabilities incurred as a consequence of the payments would be ultimately borne by AED Services. This commercial arrangement was achieved in part by AED Services agreement to indemnify Puffin in respect of any and all "Tax Claims", which are defined as follows:

… any assessment, notice or demand or any other document issued or action taken by or on behalf of any governmental authority or any form of self-assessment from which it appears that the Contractor is subject to, ought to be made subject to, or might be subject to any obligation to make a payment under a Tax Law including without limitation any notification of a risk review or audit by a governmental authority administrating a Tax in any jurisdiction.

It was common ground that Puffin was amenable to Australian taxation laws in respect of the work undertaken by the FPSO Front Puffin. The charter contract included general obligations of Puffin to comply with Australian taxation laws and, in order to protect AED Services’ ultimate liability, to minimise taxation. To augment those more general obligations, the parties agreed that AED Services would manage Puffin’s tax responsibilities, including the preparation and filing of returns. Puffin was limited in what it could do, and was exposed to the risk of losing its right to indemnity if it took steps in the process without authorisation from AED Services.

Article 15 to the charter contract is important. Relevant clauses are set out below:

15.1 The Contractor agrees to:
(a)maintain residence, for taxation purposes in Malta, Singapore or such other jurisdiction as agreed between the company and the Contractor;
(b)to comply with its obligations under the laws of Australia and Malta, including (without limitation) the payment of all Taxes within the times required, obtaining all applicable registrations for Tax purposes, providing Tax Invoices and lodging all prescribed Tax Returns to ensure compliance with the laws of Australia and Malta to the extent such action is not able to be legally undertaken by the Company in accordance with clause 15.9;
(c)at the request of the Company, negotiate with the Company in good faith and use reasonable endeavours, including without limitation the provision of all information, the prompt execution of documents and the arrangement of its financing, to ensure that allowable deductions, credits, refunds and rebates are available to the maximum extent and to minimize to the extent legally possible any Australian and Maltese Taxes associated with the Services.

…
15.4Subject to this Article 15, the Company shall indemnify and hold the Contractor harmless from and against any and all Tax Claims including without limitations any withholding tax on any payment by the Contractor to a Related Body Corporate, whether in the form of dividend payments or otherwise, with respect to Taxes imposed under Australia, Singapore, Malta, as well as under any other jurisdiction (Tax Indemnity).
15.5The Company shall not be liable to indemnify the Contractor under the Tax Indemnity for any Tax claim which arises as a result of, or in respect of, or by reference to:
(ii)the Contractor’s failure to comply with Article 15.1(a), 15.9(ii) and 15.10 of this Contract.

…
15.8
(i)Subject to Article 15.8(ii), where the Company is liable to make any payment under the Tax Indemnity, the due date for the making of that payment (Due Date) shall be the date falling seven days after written notice has been served on the Company demanding that payment under the Tax Indemnity.

…
(vi)Prior to the Due Date, the Company shall on a monthly basis pay to the Escrow Agent an amount equal to the Taxes deemed to have been incurred in the previous month (Deemed Taxes). The Deemed Taxes will be held by the Escrow Agent under an escrow agreement to be prepared which contains usual and reasonable provisions for an arrangement of the type contemplated but otherwise in accordance with this Article 15.8. The Deemed Taxes shall be calculated by the Contractor and the calculation shall be submitted to the Company with all necessary information to understand and evaluate the calculation. The Company shall pay the Deemed Taxes to the Escrow Agent within seven days of the receipt of the calculation.
(vii)The Company’s payments under the Tax Indemnity shall be made from the accumulated amount of Deemed Taxes. If the payment under the Tax Indemnity exceeds the accumulated amount of Deemed Taxes, the balance shall be paid by the Company to the Contractor in accordance with this Article 15.8. If the accumulated amount of Deemed Taxes exceeds the payment under the Tax Indemnity, the balance shall be credited to the Company when calculating next month’s Deemed Taxes.

15.9
(i)The Company will, on behalf of the Contractor, undertake, manage and control the conduct of any action required in relation to the Contractor’s obligations to comply with Tax Law, including without limitation, the preparation and filing of Tax Returns and making of any applicable registrations for Tax purposes.
(ii)The Contractor must provide the Company with all assistance and information required to enable the Company to satisfy its obligations under Article 15.9(i).

15.10If the Contractor becomes aware of any circumstance which is likely to give rise to a claim under the Tax Indemnity, the Contractor agrees to give or cause to be given written notice of the Tax Claim (as the case may be) to the Company within a reasonable time.
(i)The Company will assume the conduct of any action in respect of a Tax Claim and the Contractor shall take such action as the Company may reasonably request to avoid, dispute, defend, resist, appeal or compromise any Tax Claim.

(ii)       The Contractor must not:
(a)       accept, comprise or pay;
(b)       agree to arbitrate, comprise or settle; or
(c)make any admission or take any action in relation to a Tax claim.

without the Company’s prior written approval, which must not be unreasonably withheld or delayed.

In late 2007 the oilfield’s production began to fall sharply, declining from about 27,000 barrels per day in October 2007 to about 1,000 barrels per day by July 2008. AED Services terminated the charter contract on or about 1 July 2008. The termination has resulted in claims and counterclaims which are already the subject of arbitration proceedings.

On 29 May 2009, shortly prior to termination, Puffin made a written demand on AED Services in relation to income tax, claiming the amount of $12,597,977 for the income year ended 30 June 2008 plus interest, and a further sum of $22,855,080 to be paid into an escrow account against an anticipated liability in respect of the income year ended 30 June 2009.

On 10 July 2009 Puffin made a demand on AED Services in relation to its liability for GST in the sum of $24,596,021.57 for the period 1 August 2007 to 31 May 2009 including interest, and required a further sum of $753,513.95 to be paid into an escrow account. On 14 July 2009 Puffin made a demand on AED Services for overdue invoices in the sum of $2,640,008.60.

The amount claimed for income tax was revised upward and on 11 August 2009 Puffin made a demand on AED Oil under the guarantee for income tax in the sum of $21,251,000 including interest, and required payment of $26,748,000 into an escrow account. In relation to GST, a demand was made on AED Oil on 11 August 2009 for $24,596,021.57, with a payment to be made into escrow of $753,513.95. On the same day a demand was made on AED Oil for $2,680,183 in relation outstanding invoices.

Each demand served on AED Oil alleged that AED Services was in default under the charter contract, demanded immediate payment and drew to its attention the fact that in default of payment Puffin was entitled to exercise its rights under the charge.

AED Oil challenged the validity of the notices of demand by advancing the following propositions, which are more or less reflected in the Statement of Claim:

(a)The tax indemnity arose only in respect of “Tax Claims”. There is no “Tax Claim” in relation to income tax, or GST.
(b)Even if there was a “Tax Claim” there was no “Tax Indemnity” because of the defendant's failure to comply with relevant obligations under the charter contract.
(c)There was no occasion for any payment into an escrow account.
(d)There was an unresolved dispute about the outstanding invoices and the disputed amounts were not payable.
(e)Accordingly, there was no “Event of Default” under the charge.

In addition to injunctions restraining Puffin from acting under the charge, AED Oil sought the following declarations,

C.A declaration that the amounts claimed in any or all of the First Notice of Demand, the Second Notice of Demand, the Fourth Notice of Demand or the Fifth Notice of Demand are not AED Services Money Owing as that phrase is defined in the guarantee.
D.A declaration that the amounts claimed in any or all of the First Notice of Demand, the Second Notice of Demand, the Fourth Notice of Demand or the Fifth Notice of Demand are not Secured Moneys as that phrase is defined in the Charge.

The declarations, if pressed and made, would require a consideration of the character of the claimed amounts and in particular, whether the amounts claimed for tax fell within the definition of Tax Claim in the charter contract.

During the course of the hearing of this application, Puffin propounded and sought to file an Amended Defence and Counterclaim. All parties proceeded on the basis of that document. In summary, Puffin alleged:

(a)AED Services had unreasonably withheld their consent to Puffin registering with the Australian Taxation Office for GST purposes; lodging business activity statements; paying GST owed by it and filing an income tax return in relation to the 2007/2008 income tax year. [paras 30-32]
(b)AED Services wrongfully assert that the indemnity given under Article 15.4 is ineffective because an officer of Puffin allegedly made an admission of tax liability in an affidavit filed in this proceeding contrary to Article 15.10(ii)(c). [paras 33-35]
(c)AED Services failed to pay Deemed Taxes pursuant to Article 15.8(vi) of the charter contract. [paras 36-42]
(d)AED Services demanded that Puffin sign tax returns for the 2007/2008 year of income and the 2008/2009 year of income, prepared by AED Services, which Puffin alleged are incorrect and reasonably believe to be incorrect. [paras 43-50]

In its counterclaim Puffin sought the following declarations and orders:

AA declaration that AED Services has unreasonably withheld its consent to Puffin FPSO Ltd taking the steps set out in paragraph 30 above.
BAn order that each of AED Services and AED Oil specifically perform their obligation to consent to Puffin FPSO Ltd taking each of the steps set out in paragraph 30 above.
CAlternatively to B, an order that each of AED Services and AED Oil specifically perform their obligation to take the steps set out in paragraph 30 above.
DAlternatively to B and C, a declaration that AED Services and AED Oil is obliged to consent to Puffin FPSO Ltd taking each of the steps set out in paragraph 30 above.
EA declaration that no statement made in the affidavit of Michael Staheyeff sworn 17 August 2009 constituted an admission for the purposes of Article 15.10(ii)(c) of the FPSO Charter Contract.
FFurther or alternatively to E, a declaration that the Tax Indemnity has not been rendered “inapplicable” by reason of any statement made in the affidavit of Michael Staheyeff sworn 17 August 2009.
GAn order that AED Services and AED Oil specifically perform their obligation to pay the amounts of Deemed Taxes referred to in paragraphs 37 to 40 above to an escrow account held in the name of Puffin FPSO Ltd and AED Services with:
a.Standard Chartered Bank, Singapore;
b.Alternatively to (a), a financial institution nominated by AED Services.

HAlternative to G, a declaration that AED Services and AED Oil are obliged to pay the amounts of Deemed Taxes referred to in paragraphs 37 to 40 above to an escrow account held in the name of Puffin FPSO Ltd and AED Services with:
a.Standard Chartered Bank, Singapore;
b.Alternatively to (a), a financial institution nominated by AED Services.

IA declaration that Puffin FPSO Ltd is not required to sign and authorise the lodgement of the income tax returns referred to in paragraph 43.
JA declaration that Puffin FPSO Ltd’s refusal to sign and authorise the lodgement of the income tax returns referred to in paragraph 43 does not constitute a breach by it of the Charter Contract.

The Underlying Dispute

Much of the applicants’ material was directed at demonstrating action on their part in the management of Puffin’s tax obligations. Puffin is now registered for GST. There have been meetings between representatives of the parties and with the Commissioner of Taxation in an attempt to resolve outstanding GST obligations. It would appear that there has been significant, if not complete, agreement between the parties on the extent of that liability and a reasonable prospect of reaching accommodation with the Commissioner for off-sets and refunds which, if achieved, will dispose of that issue.

The degree of enthusiasm with which the applicants have pursued the resolution of the GST issue is no doubt attributable, in large measure, to the condition imposed on the grant of the injunction restraining enforcement of the charge. The same degree of success has not been achieved in resolving income tax liability. The Commissioner of Taxation has not been engaged in negotiations or discussions over the issues of depreciation and no private ruling has been sought. Tax returns have not yet been filed by Puffin and no assessments have issued.

By letter dated 9 November 2009 Mr Little of AED Services reminded Puffin of its obligations and risks under Article 15 of the charter contract, including the limitations on the right of indemnity. He enclosed income tax returns, prepared by AED Services and required Puffin to sign them. Puffin was also required to engage AED Services’ accounts as its tax agent. Mr Little wrote:

2.6Finally, we remind you that there are various exclusions to the obligation of AED to indemnify Puffin in respect of a Tax Claim under the Tax Indemnity provided in Article 15. AED has and will continue to rely on those exclusions. To the extent that Puffin has breached or in the future breaches its obligations AED will rely on those matters in accordance with its rights under Article 15.5 and the Tax Indemnity will not apply.
2.7In the context of lodging the Tax Returns and AED making voluntary disclosure, we refer you to Article 15.5(ii) which provides that AED will not be liable to indemnify Puffin for any Puffin failure to comply with Article15.1(a), 15.9(ii) and 15.10. Without limiting the generality of this paragraph and AED’s rights under Article 15, as contemplated by Article 15.10:
(a)AED will assume the conduct of any action in respect of the Tax Returns and any voluntary disclosure and Puffin must take such action as AED may reasonably request to avoid, dispute, defend, resist, appeal or compromise matters relevant to the Tax Returns;
(b)AED requires Puffin to appoint RSM as its tax agent and authorised contact person for the purpose of all communications with the ATO in relation to the Tax Returns and any voluntary disclosure. An engagement letter authorising RSM in this regard is attached for Puffin to sign and return to AED; and
(c)Puffin must not accept, compromise or pay or make any admission or take any action in relation to the above matters without AED’s prior written approval.

2.8Finally, if Puffin fails to act reasonably as contemplated by this letter and as required by Article 15, then AED fully reserves the right to review its position with respect to the matters set out in this letter.

Mr Little’s letter concluded:
4.1Finally, we repeat that the enclosed Tax Returns are complete and ready for lodgement with the ATO.
4.2AED now requires Puffin to sign:
(a)the Tax Returns;
(b)the RSM Engagement letter;
(c)the Ernst & Young release letter,
and return the signed documents to us by 4.00pm Melbourne time on Friday, 13 November 2009. After receipt of the original documents, RSM will immediately lodge the signed Tax Returns with the ATO.

4.3AED reserves all rights without limitation.

Preceding Mr Little’s letter of 9 November, there had been correspondence between the parties and their respective legal and accounting advisors in relation to the preparation by AED Services of income tax returns for Puffin. The principal difference between the parties related to the depreciation of Puffin’s plant and equipment employed in the project. The relevant plant and equipment is comprised of the vessel, its buoy, swivel system, moorings, processing equipment, emergency equipment and well service pump. The AED parties and their accounting advisors were of the opinion that the effective life of some assets was relatively short and that they should be depreciated over the short life of the project on the basis that they were project specific and unable to be deployed elsewhere. If the AED Parties are correct, the tax payable by Puffin (and ultimately AED Services) will be very substantially less than that calculated by Puffin.

In late August 2009 East Puffin engaged Ernst & Young to provide a report dealing with specific matters relating to the availability of tax depreciation of Puffin’s project assets. In a draft report dated 9 September 2009 Ernst & Young advised that the Front Puffin FPSO was a composite asset which had a number of components that performed different functions. Having been provided (presumably by East Puffin) with a factual background which formed the basis of its report, Ernst & Young stated that it was reasonably arguable that separate depreciating assets could be identified. That being so, different rates of depreciation may be applicable. Ernst & Young concluded, in the executive summary:

On balance, taking into account the fact that the various assets identified above (with the exception of the vessel and well service pump) were specifically designed to operate within the Puffin field and would require a material level of modification or adaption to be used elsewhere, those assets will likely be commercially obsolete (and, in some cases, abandoned) at the end of the field life. It is therefore at least reasonably arguable that those assets are separate depreciating assets, with an effective life based on the field life. As regards the vessel and well service pump, absent any evidence to the contrary, it may be appropriate to follow the effective life determined by the commissioner (capped at 15 years).

RSM Bird Cameron, accountants for AED Oil, prepared a “Reasonably Arguable Position” paper dated 30 October 2009. In it they recommend that Puffin self-assess the effective life of the vessel on the assumption that an effective life of less than 15 years can be justified. They drew a distinction between the vessel and the other assets recommending that Puffin self-assess the effective life of what it called “field specific assets” as having an effective life referable to the term of the project which commenced in mid-2007. If adopted and applied in the preparation of Puffin’s income tax returns, the net result (subject to amended assessments) would be that Puffin would pay no income tax for the year ended 30 June 2007 and a little over $1m for the year ended 30 June 2008.

The Income Tax Assessment Act 1997 (Cth) enables a taxpayer to recalculate the effective life of a depreciating asset because of changed circumstances. The circumstances relate to the use of the asset by the taxpayer. If the taxpayer concludes “that the asset would be likely to be scrapped, sold for no more than scrap value or abandoned before the end of [the life of the asset which the taxpayer would reasonable expect from its expected circumstances of use], its effective life ends at the earlier time”.[2] Thus, arriving at the correct period for depreciation of an asset invokes circumstances uniquely personal to the taxpayer acting reasonably, including the taxpayer’s conclusions regarding the future employment of the asset. It is in respect of the personal considerations imposed on Puffin under the ITAA that the major disagreement between the parties emerged.
[2]Income Tax Assessment Act 1997 s 40-105.

On 11 November 2009 Puffin responded to the draft Ernst & Young report and the RSM Bird Cameron report. Puffin identified, with the assistance of its solicitors and after having received advice from PricewaterhouseCoopers, its accountants, the areas of disagreement. Puffin accepted the relevant law as outlined in the Ernst & Young report and that, for income tax purposes it may be possible to identify separate assets that together constitute the FPSO. Accordingly, Puffin proceeded on the basis that the FPSO could be broken into separate “depreciating assets” for income tax purposes.

Thus, the principal area of disagreement distilled to an assessment of the effective life of the depreciating assets. The premise for the observations and recommendations made in the Ernst & Young report and the RSM Bird Cameron report was that for certain depreciating assets their effective life was tied to the life of the field. Puffin responded by informing AED Services that it held the view that the effective life of the FPSO extended beyond the life of the Puffin field. Puffin said that it was never intended to scrap the components, identified by Ernst & Young as being commercially obsolete, at the end of utilisation in the Puffin field. Puffin said that since termination of the charter contract it had continued to maintain the FPSO in its current form and had been negotiating to retrieve a buoy and mooring system. Puffin said it was confident it could redeploy the FPSO on a basis that would not require major modification. It argued that many of the factors that caused Ernst & Young and RSM Bird Cameron to form the views they did were factually incorrect.

The letter from Puffin to AED Services, dated 11 November 2009, enclosing the response to the Ernst & Young report and the RSM Bird Cameron report, did not directly respond to the demands made by AED Services that Puffin sign the income tax returns and appoint RSM Bird Cameron as its tax agents. Puffin responded to that letter on 12 November 2009, informing AED Services that the draft returns were based on information that was not true and correct and, in respect of which, Puffin had already expressed that view. It concluded,

… Puffin cannot and will not sign tax returns that are not based on true and correct facts or otherwise do not comply with the law.

Puffin also rejected the requirement to appoint RSM Bird Cameron as its tax agent in circumstances where it was contemplated that Puffin’s tax agent would also sign the draft income tax returns, confirming that they had been prepared in accordance with information supplied by the taxpayer (ie by Puffin) and that the taxpayer had made a declaration stating that the information was true and correct.

On 12 November 2009 Puffin received written advice from senior counsel recommending that Puffin should decline the requirement to sign the draft tax returns and that it must ensure that they are accurate. The advice set out, amongst other things, the statutory obligations imposed on Puffin and drew attention to cl 15.1 of the charter contract requiring Puffin to comply with its obligations under the laws of Australia.

On 13 November 2009 AED Services wrote to Puffin rejecting the proposition that the income tax returns were not based on true and correct facts and did not comply with the law. Mr Little again drew Puffin’s attention to AED Services’ rights and entitlements pursuant to Article 15.9(i), asserting, amongst other things, that Puffin’s response was contrary to its obligations under Article 15.9(ii) and unreasonably impeded efforts by AED Services to comply with its obligations under Article 15.9(i). His letter continued:

In these circumstances, we see no utility in responding to each of the assertions you have made in the Puffin Letter. It suffices to say that AED Services has complied fully with its obligations under Article 15, and we now require Puffin to do likewise.
We repeat that the Tax Returns you received on 9 November 2009 are complete and ready for lodgement with the ATO, and pursuant to Article 15 of the Contract we require Puffin to sign and return to us those Tax Returns.

Mr Little’s letter concluded by extending, on a without prejudice basis, the time within which Puffin was required to sign and return the tax returns and appoint RSM Bird Cameron as tax agent.

Thus, the dispute between the parties might be characterised as follows:

(a)whether Puffin is in breach of its obligations under Article 15 of the charter contract by refusing to comply with the requirement of AED Services to sign the income tax returns and appoint RSM Bird Cameron as its tax agent; or
(b)whether Puffin is excused from compliance with the requirements of AED Services.

That is the way the applicants would characterise the dispute, with some justification because the counterclaim does just that.[3] So construed, the dispute appears, at least superficially, to be contractual in nature and amenable to arbitration.

[3]See the relief sought by Puffin in paragraphs I and J of its counterclaim.

The contractual formulation of the dispute, however, tends to mask important matters of principal, public policy and third party rights. One consequence of the dispute is that Puffin has not completed or filed its income tax returns which it is required to do in response to statutory and contractual obligations. If the calculations and approach to depreciation adopted by Puffin’s accountants are employed in the preparation of income tax returns, the tax payable by Puffin for the year ended 30 June 2008 would exceed $16m, whereas AED Services calculate the amount at nil. In the following year of income, PricewaterhouseCoopers calculated Puffin’s income tax liability as exceeding $20m, whereas AED Services calculated the tax liability at a little over $1m. The difference reflects the different approaches to depreciation. Thus, if the PricewaterhouseCoopers approach is correct, a very substantial amount of income tax is payable to the Commonwealth by Puffin and ultimately by AED Services under the indemnity.

AED Services is legitimately concerned that it should not pay any more tax than it is legally obliged to pay. To go some way to meet Puffin’s concerns, AED Services proposes to make voluntary disclosure to the commissioner at the time of lodging the returns. It is not clear what AED Services meant by voluntary disclosure. Puffin had not been provided with any details of what AED Services intends to disclose. AED Services might disclose the different positions of the parties, although if full disclosure were to be made of Puffin’s stated intention and belief in relation to its asset, it is almost inevitable that the commissioner would determine any entitlement to depreciation based upon that information. It is, after all, the intention and potential utilisation of the asset by the taxpayer that is relevant.

Furthermore, if Puffin is left to its own devices to file a return reflecting its view of depreciation, a substantial assessment will undoubtedly issue and AED Services, through Puffin, would have no opportunity to challenge the self-assessment made by Puffin.

Much of Puffin’s evidence was directed to the financial position of AED Oil. The general thrust of that evidence was to establish a basis for a reasonable apprehension that unless the liability for income tax was crystallized and paid by AED Services as a matter of urgency there may remain insufficient funds to satisfy Puffin’s right of indemnity.

The applicants submitted that Puffin’s reluctance to sign the tax returns was part of a strategy to achieve some collateral commercial outcome. The evidence does not support such an allegation. The applicants also submitted that if Puffin truly wished to have the tax liability crystallize, it could have prepared and signed its own tax returns, but in doing so would risk losing the right of indemnity because of the operation of Article 15.5(ii) and 15.10(ii)(c).

Puffin has not prepared and submitted to AED Services income tax returns which it is willing to sign and file. While Puffin alleged in its amended counterclaim that it sought the consent of AED Services to file a return in relation to the year of income ended 30 June 2008, it does not suggest that one was prepared or provided to AED Services for its considerations. It does, however, seek declarations to the effect that it is not required to comply with the demands of AED Services and that its refusal does not constitute a breach. Puffin is unable, at least at this time, to allege that AED Services has unreasonably withheld consent to allow Puffin to prepare and sign its own returns. Even if it could formulate such an allegation there remains a question whether the contractual issues could be properly determined without a determination of the correct treatment of depreciation. That seems to be the position of AED Services, presumably on the basis that the correct position informs the determination of questions of reasonableness of the parties.

It may be open to the court or an arbitrator, appointed under Article 33, to make a determination of the correct levels of depreciation for different assets as part of a determination of the reasonableness of the parties in their performance of their respective obligations under Article 15, although I am not persuaded that such a determination is necessary. If made, such a determination would not bind the Commissioner of Taxation. A determination of the underlying issue would, I have been told, take many weeks of evidence merely to get to the point where the court or arbitrator could decide whether a party had acted reasonably when the outcome of the protracted hearing may not have any bearing upon the position ultimately determined by the commissioner or upon review or appeal from an assessment. Such a course, if pursued, would offend common sense.

The stalemate between the parties is most unsatisfactory. Puffin has not discharged its statutory obligations and the revenue is denied the opportunity to receive its entitlement. The indemnity in favour of Puffin coupled with a mechanism to ensure some control by AED Services over its liability thereunder is commercially explicable. The practical question remains, however, whether it is possible to remedy the impasse and avoid an expensive, protracted and perhaps arid determination of the correct levels of depreciation.

During the course of the hearing the court expressed a concern that the enforcement of cl 15.9, in the circumstances of the present case, may be contrary to public policy. That issue had not been expressly raised or pleaded by Puffin and argument was necessarily limited. The effect of cl 15.9, as asserted by AED Services, is to require Puffin to sign tax returns which Puffin believes, on advice, are incorrect or risk losing any right to indemnity for income tax paid.

The Taxation Administration Act 1953 (Cth) requires a taxpayer filing a return to declare that the information is true and correct. A false or misleading statement can lead to civil and criminal penalties. A contractual term that required a party, as a taxpayer, to sign a return the taxpayer believes to be incorrect may be contrary to public policy and unenforceable.[4] Such a provision may offend public policy because it may tend to corrupt the operation of a statutory scheme that binds taxpayers to their verification of the truth and correctness of their own return. The statutory scheme imposes a personal duty supported by civil and criminal sanctions.
[4]Wilkinson v Osborn (1915) 21 CLR 89 at 97-8.

Article 15 itself seems to contemplate the possibility that cl 15.9 may be unenforceable. Clause 15.1(b) requires Puffin to lodge “all prescribed Tax Returns to ensure compliance with the laws of Australia … to the extent such action is not able to be legally undertaken by [AED Services] in accordance with cl 15.9”. Thus, if the enforcement or an obligation to sign the returns is contrary to public policy or otherwise prohibited by an implied limitation, it might be said that the primary obligation to prepare and file the returns reverts to Puffin.

As the lawfulness of AED Services’ requirements under cl 15.9 is not expressly raised by Puffin I do not propose to decide the issue. What is presently in issue is whether Puffin is required to sign and authorise lodgement of the returns propounded by AED Services and whether its refusal to do so is a breach of the charter contract. The basis for the relevant declaration sought by Puffin is, however, unclear. Puffin alleges that the income tax returns understate its income and that it reasonably believes that they are not true and correct. In argument Puffin relied upon the difficulty confronting it when called upon to comply with its contractual obligations and sign what it believed to be inaccurate income tax returns, to argue that its refusal was reasonable.

Notwithstanding the lack of clarity in the issues as presently formulated by the parties, I remain unpersuaded that a determination of the contractual issues necessarily requires a determination of the underlying tax dispute – the correct approach to depreciation. A challenge to the bona fides of Puffin in its refusal may involve some consideration of the respective positions. Ultimately, however, it will be necessary to confront the question whether Puffin’s failure to comply is a breach of the charter contract. In doing so the provisions of the ITAA, the charter contract, the advice given to Puffin by its legal and accounting advisors and Puffin’s intended use of the FPSO Front Puffin will all be relevant. The lawfulness of AED Services demands may be a deciding factor.

Legislative Framework

Both applicants rely upon the same legislative framework. They advance their primary cases under s 7 of the International Arbitration Act; alternatively under s 53 of the Commercial Arbitration Act; and finally invoke the inherent jurisdiction of the court to stay a proceeding which is an abuse of process.

The relevant parts of s 7 of the International Arbitration Act provide:

Enforcement of foreign arbitration agreements
(1) Where:
…
(d)a party to an arbitration agreement is a person who was, at the time when the agreement was made, domiciled or ordinarily resident in a country that is a Convention country;

this section applies to the agreement.

(2) Subject to this Part, where:
(a)proceedings instituted by a party to an arbitration agreement to which this section applies against another party to the agreement are pending in a court; and
(b)the proceedings involve the determination of a matter that, in pursuance of the agreement, is capable of settlement by arbitration;

on the application of a party to the agreement, the court shall, by order, upon such conditions (if any) as it thinks fit, stay the proceedings or so much of the proceedings as involves the determination of that matter, as the case may be, and refer the parties to arbitration in respect of that matter.
(3)Where a court makes an order under subsection (2), it may, for the purpose of preserving the rights of the parties, make such interim or supplementary orders as it thinks fit in relation to any property that is the subject of the matter to which the first‑mentioned order relates.
(4)For the purposes of subsections (2) and (3), a reference to a party includes a reference to a person claiming through or under a party.
(5)A court shall not make an order under subsection (2) if the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed.[5]

[5]Emphasis added.

It was common ground that if the prerequisites for a stay under s 7 are found to exist, a stay must be granted. The prerequisites may be summarised as follows:

(1)There must exist an arbitration agreement to which the section applied.
(2)A party to the arbitration agreement is a person who was at the time of the agreement relevantly connected with a convention country.
(3)There is a proceeding instituted by a party to the arbitration agreement against another party to the agreement.
(4)The proceeding involves the determination of a matter that is capable of settlement by arbitration.
(5)The arbitration agreement is not null and void, inoperative or capable of being performed.

The applicants submitted that each condition was satisfied and that accordingly, the court was required to stay the counterclaims. The existence of an arbitration agreement to which the Act applied was common ground.

Puffin submitted that the nature of the proceeding and the declaratory relief sought by it in its counterclaim had the effect of invoking an exception to the arbitral process. Clause 33.10 provided:

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.[6]

[6]Emphasis added.

Puffin also submitted that one of the conditions for a stay was not satisfied because the subject matter of the counterclaim was “not capable of settlement by arbitration”. Puffin relied upon the centrality to the dispute of its statutory obligation to register for GST, file income tax returns and ultimately pay GST and income tax. It argued that those matters involve third party rights and public obligations which are not suitable for determination and management in a private arbitral context.

As to the application for a stay made by AED Oil, Puffin submitted that it was not a party to the arbitration agreement and was not a person claiming through or under a party to the agreement. It submitted that AED Oil, as guarantor, was not claiming through or under AED Services.

Finally, Puffin argued that AED Oil had submitted to the jurisdiction of this court and waived its right to invoke the arbitration agreement. Thus, the arbitration agreement was “inoperative”.

In the alternative, the applicants relied on the Commercial Arbitration Act. Unlike the Commonwealth Act, where the court must grant a stay if the requirements are satisfied, the Commercial Arbitration Act confers on the court a discretion as to whether to stay a proceeding if satisfied that there is no sufficient reason why the matter should not be referred to arbitration in accordance with the agreement and the applicant for a stay remains ready and willing to prosecute the arbitration. The applicants submitted that while the remedy is discretionary there is a general practice of staying court proceedings under the Commercial Arbitration Act where the parties have agreed to refer their disputes to arbitration.[7]
[7]Abigroup Contractors Pty Ltd v Transfield Pty Ltd & Anor [1998] VSC 103 at [137]-[138].

Section 53 of the Commercial Arbitration Act provides,

Power to stay court proceedings
(1)If a party to an arbitration agreement commences proceedings in a court against another party to the arbitration agreement in respect of a matter agreed to be referred to arbitration by the agreement, that other party may, subject to subsection (2), apply to that court to stay the proceedings and that court, if satisfied—
(a)that there is no sufficient reason why the matter should not be referred to arbitration in accordance with the agreement; and
(b)that the applicant was at the time when the proceedings were commenced and still remains ready and willing to do all things necessary for the proper conduct of the arbitration—

may make an order staying the proceedings and may further give such directions with respect to the future conduct of the arbitration as it thinks fit.
(2)An application under subsection (1) shall not, except with the leave of the court in which the proceedings have been commenced, be made after the applicant has delivered pleadings or taken any other step in the proceedings other than the entry of an appearance.
(3)Notwithstanding any rule of law to the contrary, a party to an arbitration agreement shall not be entitled to recover damages in any court from another party to the agreement by reason that that other party takes proceedings in a court in respect of the matter agreed to be referred to arbitration by the arbitration agreement.

Puffin submitted that insofar as the applicants relied upon s 53 of the Commercial Arbitration Act the court should refuse to exercise its discretion for the following reasons:

(1)Clause 33.10 of the charter contract expressly permitted urgent and declaratory relief.
(2)The subject-matter of the dispute was not appropriate for arbitration because it involves Puffin’s relationship to the Commissioner of Taxation and its statutory obligations.
(3)The matter was urgent. Puffin was concerned to have an early resolution of its rights under the charge. It submitted that the financial position of AED Oil was uncertain and Puffin should not be exposed to delay and the prospect of losing the value of the charge.
(4)The issues concerning tax liability and related obligations are capable of a relatively rapid determination. If joined in with other issues which are presently the subject of arbitration they would lose the momentum they deserve.
(5)In relation to AED Oil, it is not a party to an arbitration agreement.
(6)To stay the counterclaims or the counterclaim against AED Services (in the event the counterclaim against AED Oil was not to be stayed) would fragment the proceeding.
(7)The issues in the counterclaims are very different to those in the present arbitration between the parties.

Dispute “not capable of settlement by arbitration”

Puffin submitted that the dispute involved third party interests and public policy considerations which made it inappropriate for resolution by private arbitration. In ACD Tridon v Tridon Australia Austin J[8] said after dealing with an issue not relevant to this proceeding:

The second kind of limitation was described by MJ Mustill & SC Boyd, Law and Practice of Commercial Arbitration in England (second edition, 1989), p 149. After stating the general principle that any dispute or claim concerning legal rights which can be the subject of an enforceable award is capable of being settled by arbitration, and noting that the general principle was subject to some reservations, the authors proceeded to explain the reservations, including the following:
Second, the types of remedies which the arbitrator can award are limited by considerations of public policy and by the fact that he is appointed by the parties and not by the state. For example, he cannot impose a fine or a term of imprisonment, commit a person for contempt or issue a writ of subpoena; nor can he make an award which is binding on third parties or affects the public at large, such as a judgment in rem against a ship, an assessment of the rateable value of land, a divorce decree, a winding-up order or a decision that an agreement is exempt from the competition rules of the EEC under Article 85 (3) of the Treaty of Rome.[9]
[8](2002) NSWSC 896 at [189].
[9]Footnotes omitted.

Puffin relied on this passage and identified the third party rights and public policy considerations as those arising from a taxpayer’s obligation to file a return and pay tax. Puffin drew support for its proposition from the United States. In an article published in the Journal of Transitional Law and Policy, entitled Tax Liability and Inarbitrability in International Commercial Arbitration,[10] the learned authors considered whether a tax law matter, inextricably linked to a contractual dispute, causes the matter to fall outside the jurisdictional reach of arbitrators. As a vehicle for their analysis the authors considered hypothetical facts under which a dispute arose over whether withholding tax could properly be withheld. They concluded:

IX. Resolution of Tax Issues
… the resolution of statutory claims involving tax issues is unsuitable for arbitral determination. Of the statutory issues that can surface in the context of a commercial transaction (antitrust, bankruptcy, etc.), it is the least susceptible to resolution by reference to commercial good sense. Basic familiarity with tax regulations reveals such regulations and the problems they raise have a truly sui generis character. The resolution of tax problems is a specialty. Often, the provisions of the tax laws are ambiguous; it is always a challenge to determine even whether they apply. The content of the provisions usually gain real meaning only in the context of the IRS process. Tax disputes involve the exercise of discretion by a variety of individuals and the operation of a number of processes: in addition to the parties themselves, an auditor, a supervisor, the recourse to an internal settlement process, and finally an appeal to the tax courts. It would be foolhardy to maintain that any non-specialist could determine the content and application of the relevant tax laws.
Therefore, an intimate professional acquaintance with the content of U.S. tax laws is not required to conclude that the question of the applicability of relevant tax provisions on withholding tax from the payments made under an international contract raises the type of interpretative problems that are completely inapposite for submission to the commercial and juridical expertise of international commercial arbitrators. Even assuming regulatory claims pertaining to antitrust, securities, RICO, or bankruptcy laws are arbitrable, none of these laws depends upon an administrative agency akin to the IRS for their implementation or definition. Not only is the content of tax law unusually complex, but the process designed to give practical content and implementation to the regulatory provisions is also intricate, complicated, and elusive to the dictates of common sense. The individual discretion of members of this vast bureaucracy often lead to inconsistent and unpredictable results. Supervisors are not bound by the determinations of the initial auditors, and the parties may reach yet another result through a settlement conference prior to appeal to tax court. The agency can take the position that each tax case or problem is sui generis and commands a singular interpretation of the law. Therefore, there may be little room for predictable outcomes and accurate prophecies of potential tax liability outside the perimeters of the IRS.
The facts of the hypothetical case present an additional complication in light of the international character of the transaction and the foreign nationality of some of the implicated companies. Presumably, this is not the usual fare of the IRS's supervision of the tax consequences of business conduct. For example, in the circumstances of the case, the IRS must determine whether the royalty payments were subject to the newly-imposed tax. The applicable provisions may be far from clear. To the extent the character of the parties' relationship raises a res nova for tax purposes, the ambiguity of the law will be exacerbated, making the IRS bureaucracy and the attendant appeals procedure the sole mechanism for achieving a certain result as to tax liability.
An arbitral award ruling on this matter would certainly not be binding upon the IRS in subsequent similar disputes and might not resolve the tax liability issue that divides the parties. Because the IRS and the appellate court process have exclusive jurisdiction to determine the application of tax provisions to individual cases, a determination of a tax issue by a private, non-national adjudicatory body can only be binding on the arbitrating parties. A valid arbitral award can be rendered enforceable by judicial judgement; to that extent, the arbitral determination of the tax liability issue may be binding upon the IRS. However, in this regard the award is likely to be challenged by one of the parties or the IRS under Article V of the 1958 New York Arbitration Convention on the basis of inarbitrability, violation of U.S. public policy, and/or excess of arbitral authority. The award could also be subject to the "second-look" doctrine as to its ruling on the issue, thereby making it subject to a merits review by the U.S. courts. This result would not only confound the attempt to resolve the dispute, and threaten the legitimacy of the award, but it would also create a jurisdictional conflict between the IRS and the process of international arbitration. These complications and destructive conflicts could be avoided simply by an advisory reference to the IRS or a tax court at a preliminary stage of the arbitral proceeding.
Finally, in the hypothetical case, an undeniable duplication of issues exists between the action brought before the federal district court in New Jersey and the issues submitted to the arbitral tribunal. If part of the basic purpose for submission to arbitration is to achieve efficiency and expertise in international commercial adjudication, neither rationale of the arbitral process is served in these circumstances. The federal court has jurisdiction over a case involving basically identical issues arising from an integrated commercial transaction between corporate parties. Moreover, these issues require a national court's particular and special expertise. There must be some value for international commercial parties to engage in an efficient and competent adjudication of claims before the court.[11]

[10]Thomas E. Carbonneau and Andrew W. Sheldrick (1992) 1 JTLP 23

[11]Emphasis added.

The analysis undertaken by the learned authors is helpful because it highlighted the very difficulty presented by this case. A determination may bear upon the contractual issues and in particular the reasonableness of AED Services in requiring the completion of income tax returns or Puffin’s refusal to sign the returns. A determination, whether made by an arbitrator or this court, will not bind the commissioner. The commissioner, or a tribunal or court on review or appeal, may reach a different conclusion. As a mechanism to resolve the underlying dispute, the determination of the contractual issues by an arbitrator or the court is exposed to the risk of delays consequent upon an application to set aside an award or an appeal from the decision of this court. None of that assists the purposes of the ITAA to ensure that each taxpayer verify their income tax return as true and correct and pay a lawfully assessed amount of tax.

The learned authors helpfully suggest that “these complications and destructive conflicts could be avoided simply by an advisory reference to the IRS or a tax court at a preliminary stage of the arbitral proceedings”. I have already proposed to the parties that they might take steps to seek a private ruling from the commissioner. No such ruling has been sought and AED Oil has indicated a reluctance to pursue that course.

I am not persuaded that a determination of the tax issue is necessary for a determination of the contractual dispute. The question of whether Puffin is in breach might be resolved by the resolution of whether the demands by AED Services were lawful. Even if I am wrong about that and it becomes necessary to determine the correct approach to depreciation, I am not persuaded that the mere existence of the underlying tax issue renders the dispute “not capable of settlement by arbitration”. The dispute is in form and substance, a contractual dispute.

While it cannot be said that the contractual dispute arising out of the counterclaims is “not capable of settlement by arbitration”, it is highly undesirable that the proceeding is fragmented so that counterclaims, which genuinely traverse the primary claim are decided by an arbitrator while the primary claim remains for the court to decide. This is not a case in which the counterclaims were unresponsive to the proceeding commenced by AED Oil. There is no application by AED Oil to have the primary claim also referred to arbitration.

AED Oil, of course, argues that it was left with no option but to commence the proceeding following the threat by Puffin to appoint a receiver. That is no doubt correct. But if AED Oil had been a party to the arbitration agreement it could readily have invoked cl 33.10, which exempts urgent relief from the obligation to arbitrate.

Having brought the proceeding as a matter of urgency, inviting contradictory relief, AED Oil (and AED Services, as the party to the arbitration agreement through which AED Oil makes its claim for a stay under s 7) now seeks to stay Puffin’s response and effectively fragment the proceeding. Those matters will receive further consideration in connection with the scope of cl 33.10 and s.56 of the Commercial Arbitration Act.

AED Oil – claim ‘through or under’ AED Services

It is convenient at this stage to deal with particular submissions advanced by Puffin in relation to the application brought by AED Oil. Puffin argued that AED Oil had no standing to apply to stay the counterclaim against it and even if it did, it had submitted to the jurisdiction of this court and waived any right to arbitrate.

AED Oil is not a party to the charter contract. There is no arbitration agreement in the guarantee or any other agreement between Puffin and AED Oil except insofar as the charter contract is a schedule to the deed of novation and amendment.

The applicants submitted that in Tanning Research Laboratories Inc v O’Brien[12] the High Court held that the phrase “through or under” applied to a company being a parent of a subsidiary company which is a party to an arbitration agreement when claims are brought against both companies based on the same facts. Those observations did not, however, relate to the facts of the case. In that case a foreign company proved in a winding up of a company in liquidation for the price of goods sold under an agreement between them which contained an arbitration clause. The liquidator rejected the proof of debt and the foreign company appealed against the rejection to the Supreme Court of New South Wales. The liquidator invoked the arbitration clause and sought a stay of the court proceeding in favour of a determination of the amount of the debt by arbitration. The Court of Appeal ordered that the proceedings be stayed pursuant to s 7(2) of the Arbitration (Foreign Awards and Agreements) Act 1974 (Cth).
[12](1990) 169 CLR 332.

In the High Court the primary question was whether the conditions governing the application of s 7(2) of the Act were satisfied. It was held that the liquidator claimed “through or under” the company for the purpose of s 7(4). In the course of their judgments, the members of the court gave consideration to other circumstances in which one party may claim “through or under” another. One such instance was when a company being a parent of a subsidiary company which is a party to an arbitration agreement is subject to claims brought against both companies based on the same facts.[13] While strictly obiter, the observation is highly persuasive. In my view, it would further the objects of the legislation to permit an ultimate holding company to invoke an arbitration clause in such circumstances. To adopt such an approach would tend to avoid the fragmentation of claims and facilitate arbitration where there is an agreement by a subsidiary.
[13]Supra at 342.

In BHPB Freight Pty Ltd v Cosco Oceania Chartering Pty Ltd & Anor[14] Finkelstein J considered whether an applicant for a stay of proceedings in the Federal Court, who was not a party to the arbitration agreement, may apply for a stay claiming “through or under” a party to the arbitration agreement. The applicant for the stay, Cosco, was not a party to the agreement. It was a shipbroker who took part in negotiations leading to a charter contract between BHBP and New Century International Leasing Co Ltd. BHBP commenced the proceeding to recover damages from Cosco and Braemar Seascope Pty Ltd, another shipbroker engaged by it to charter the vessel. BHBP sought to recover as damages unremitted hire charges for the quantum of an arbitration award in its favour. It also made claims against Cosco based on s 52 of the Trade Practices Act 1974 (Cth) for false representations made in relation to the negotiation of the charter.
[14](2008) 168 FCR 169.

Having reviewed Tanning Research Laboratories Inc v O’Brien and other authorities bearing upon the nature of the relationship necessary to support derivative claims, Finkelstein J said:

… these cases show that there are two somewhat overlapping criteria that must be met to trigger the operation of s 7(4). The first is that there is a relationship of sufficient proximity between the party to the arbitration agreement and the person claiming to prosecute or defend an action through or under that party. The second is that the claim or defence is derived from the party to the arbitration agreement.[15]

His Honour concluded that Cosco did not satisfy the criteria and thus s 7(4) of the Act.

[15]supra at [15].

Applied in the context of the present case, the criteria enunciated by Finkelstein J would be satisfied by AED Oil. It is the ultimate owner of AED Services. Its liability under the guarantee is to ensure performance by AED Services of its obligations. Puffin has made identical demands upon AED Oil under the guarantee for alleged failures by AED Services in its performance. If AED Services has a right to invoke the arbitration agreement for the resolution of a dispute, where its obligation is guaranteed by AED Oil, the connection or proximity of AED Oil is such that it may invoke the arbitration clause to protect its own position. AED Oil is claiming “through or under” AED Services.

AED OIL - Waiver

Next, Puffin argued that AED Oil had submitted to jurisdiction and waived its right to arbitrate. It argued that the waiver rendered the arbitration agreement “inoperative” for the purpose of s 7(5) of the Act.

Puffin submitted that AED Oil had gone much further than was required to protect its position when it commenced the proceeding to restrain the appointment of a receiver and manager. In that proceeding it sought declarations challenging the amounts claimed under the notices of demand; sought and obtained an order that Puffin file a defence; and at least acquiesced in an order that Puffin be entitled to file a counterclaim. Both AED Oil and AED Services have filed defences to the counterclaim. Puffin submitted that the counterclaim was a natural and probable consequence of the proceeding commenced by AED Oil and its application for a stay should be rejected on that basis.

In ACD Tridon Inc v Tridon Australia[16] Austin J referred to Eisenwerk Hensel Bayreuth Dipl.-Ing Burkhardt GmbH v Australian Granites Ltd,[17] holding that the right to arbitration, being a private one, may be waived and that a waiver renders the arbitration agreement “inoperative” for the purpose of s 7(5). Acknowledging some difficulty with the concept of waiver in this context, Pincus JA applied a notion of “waiver in the stronger sense” derived from the judgment of Gaudron J in Commonwealth v Verwayen.[18]
[16](2002) NSWSC 896.
[17][2001] 1 Qd R 461 at 466-7.
[18](1990) 170 CLR 394 at 482-484.

Waiver must always be an intentional act with knowledge. But in the context of steps in litigation its application may depend upon the extent to which the relationship of the parties has changed as a consequence. In the present case AED Oil sought urgent injunctive relief. Such action was expressly authorised as an exception to the arbitration agreement to which Puffin and AED Services are party. It is true that AED Oil and AED Services both filed defences. That step in the proceeding does not, however, constitute a waiver of the right to arbitrate or amount to an election to submit to jurisdiction such as to render the arbitration agreement “inoperative”. Puffin’s position has not materially changed as a consequence. The applicants have in all other respects acted promptly to make their applications for a stay.

Further, Puffin does not contend that AED Services has, by its conduct, rendered the arbitration agreement “inoperative”. That being so, it would be unjust to conclude that while AED Services could avail itself of the arbitration agreement a party claiming “through or under” AED Services could not.

Urgent Interlocutory or Declaratory Relief – Clause 33.10

When invoking the exception in cl 33.10, Puffin submitted that the qualification of “urgent” applied only to interlocutory relief and not declaratory relief. It argued that the declaratory relief sought by Puffin was such as to exclude the counterclaim from the operation of the arbitration agreement notwithstanding that other relief, in the form of specific performance, was also sought. Puffin also relied on the evidence of AED Oil’s financial position to support the contention that its opinion that such relief was necessary to protect its rights was reasonable.

Declarations as to a party’s rights and obligations under a contract are sometimes made by an arbitrator but would require enforcement by a court in the event of non-compliance. The Full Court of the Federal Court observed in Electra Air Conditioning BV v Seeley International Pty Ltd[19] that it is unlikely that the parties to the arbitration agreement would have intended, where urgency was required, that an application for a declaration should first be made to an arbitrator only to be later enforced by a court. The relevant agreement, in that case, provided that: “Nothing in this clause 20 prevents a party seeking injunctive or declaratory relief in the case of a material breach or threatened breach of this agreement”. There was no express mention of any requirement for urgency, although the analysis of the words by the court presupposed urgent relief was the intended scope of cl 20.[20]
[19][2008] FCAFC 169.
[20]supra at [45].

I am of the opinion that the qualification “urgent” in cl 33.10 applies to injunctions and declarations. The purpose of an exception of this kind is well understood and as the court observed in Electra Air Conditioning,

… is to preserve to the parties the right to obtain injunctive or declaratory relief in the case of a material breach or threatened breach of the agreement in circumstances where urgency dictates that relief should be granted.[21]

[21]Ibid.

The applicants submitted that Puffin’s application was not relevantly urgent and Puffin did not establish the necessary foundation to exempt its counterclaim under cl 33.10. The applicants accused Puffin of seeking to bolster this part of its case by the amendments made to the counterclaim incorporating additional declarations. They were also critical of Puffin’s reliance on the financial position of AED Oil, submitting that the risk identified by Puffin was merely an incident of the contractual relationship and was irrelevant to the kind of urgency required to attract the exception.

The applicants submitted that Puffin’s concern about urgency based on the need to perform its statutory duty was misconceived because Puffin could always prepare and file its own return and take its chances on the availability of the indemnity. They further submitted that some parts of the counterclaim, framed to support the declarations, were designed to support orders for specific performance which did not fall within cl 33.10. Because those issues were not within the exception they were amenable to arbitration and, the “whole matter” should be arbitrated.[22]
[22]Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332 at 351.

The claims for specific performance relate to the registration of Puffin for GST, outstanding business activity statements, payment of GST and the filing of a tax return for the year ended 30 June 2008. The first three items, relating to GST, are all but resolved. The last item, in relation to the income tax return has been overtaken by the preparation of returns by AED Services and its requirement that they be signed by Puffin. Puffin has not prepared its own income tax returns and sought written approval from AED Services to file them.

Thus, while there is an apparent absence of utility in the claims for specific performance, they are sufficiently discrete to enable the claims to be dealt with in an arbitration, if appropriate, in isolation from the declarations in paragraphs E, F, H, I and J in the prayer for relief.

The counterclaims are responsive to the primary claim by AED Oil. The claim was brought as a matter of urgency and would fall within cl 33.10 if brought by a party to the arbitration agreement. In my view the character of the responsive case, expressed in the counterclaims is, for the purpose of cl 33.10, the same as the claim. If the claim was urgent, the response is equally urgent. To hold otherwise would artificially fragment the resolution of disputes concerning common issues. Such an outcome would offend common sense. The parties to the arbitration agreement can not be taken to have intended such a consequence.

Further, the declarations sought in the counterclaim, in particular paragraphs I and J, present the only available means at this time to resolve the underlying issues between the parties, even though it may be in a roundabout and costly fashion. A determination of Puffin’s right to refuse to sign the returns may, in a properly formulated case, determine that it must comply with the demands or that Puffin is not required to complete the returns under cl 15.1(b) because the demands are unlawful.

Puffin sought to rely upon the changing financial position of AED Oil and a perceived risk to the value of its security as a basis to support its contention that the matter was urgent. While the risks identified by Puffin are no doubt real to it and may have a bearing upon the ability of the commissioner to ultimately recover tax, it is the need to ensure compliance with statutory obligations and the protection of the revenue that compel an urgent resolution of the issues.

Notwithstanding my concern that a hearing and determination of the counterclaim may only indirectly resolve the underlying dispute between the parties, I am of the opinion that the counterclaim falls within the exception in cl 33.10 and requires an urgent resolution and that there is a reasonable basis for the opinion expressed by Puffin that urgency is required to protect its rights. Relevantly, its rights include its ability to verify an income tax return as true and correct (in compliance with Australian law), its right to an indemnity and its right to avoid penalties and prosecution.

Conclusion – Applications under s 7

In summary, I am not satisfied that AED Oil has, by submitting to jurisdiction or taking steps in the proceeding waived the right to invoke the arbitration agreement so as to render the agreement “inoperative” for the purpose of s 7(5). I am satisfied that AED Oil is a person claiming “through or under” AED Services and has standing to make its application for a stay.

The parties have formulated the case in terms of their contractual obligations. They might, but have not yet, sought a private ruling from the commissioner. I am persuaded that the dispute is essentially contractual in nature and is not to be characterised as one “not capable of settlement by arbitration”.

Nevertheless, the dispute is one which falls within the exception in cl 33.10 for two reasons: First, the counterclaims cannot be separated from the claim. If the claim was urgent, so is the resolution of Puffin’s response. The proceeding brought by AED Oil was correctly characterised as urgent. Second, the resolution of the counterclaims will clarify Puffin’s contractual obligations and assist in a timely performance of its statutory obligation to file true and correct income tax returns.

Puffin may prosecute in this court its counterclaim for declaratory relief in paragraphs E, F, H, I and J of the prayer for relief. Declarations A and D do not seem urgent. Insofar as they relate to GST liability, the issues appear to be near resolution. As for any liability for income tax, Puffin has not yet sought the consent of AED Services to file returns prepared by Puffin. The resolution of the dispute is also urgent because of the need to clarify Puffin’s contractual obligation to file income tax returns.

Other Grounds

The applicants also relied upon s 53 of the Commercial Arbitration Act and the inherent jurisdiction of the court. These pathways to relief do not assist the applicants where Puffin can avail itself of the exception in cl 33.10. But for that proviso, I would be required to grant a stay under the International Arbitration Act and would have done so subject to appropriate conditions.

If called upon to exercise the discretion under s 53, I would refuse to do so on the basis that there is good reason why the counterclaim should not be referred to arbitration. The counterclaims are intimately connected with the primary claim by AED Oil for injunctions and declarations. They are responsive to the claim and ought not be severed and heard by an arbitrator while the claim is to be heard by the court. The whole matter should be resolved by one tribunal. In addition to the derivative urgency of the counterclaim, there is a need for urgent resolution of the counterclaims because it will assist in clarifying Puffin’s obligations in relation to its statutory duties.

By appealing to the inherent jurisdiction of the court to stay the counterclaims as an abuse of process, the applicants must so characterise the counterclaims. That character is attributed to the counterclaims because of the arbitration agreement. The counterclaims are not an abuse of process. They are responsive to the primary claim and as urgently in need of resolution as the primary claim. They also require resolution to clarify Puffin’s statutory and contractual obligations. These matters are uniquely suited to resolution by a court.

As a consequence of the conclusions I have reached, directions will be made for the management of this proceeding to trial.

The lack of utility of this court (or indeed an arbitrator) deciding, as a question of fact and law, the correct depreciation regime to be applied to Puffin’s assets means that the parties should endeavour to refine or reformulate the issues in this proceeding to ensure that the contractual issues may be resolved with reasonable expedition. They should give further consideration to seeking a private ruling from the Commissioner of Taxation. In the absence of such a determination both parties will remain exposed to risks. Puffin will be exposed to penalties and perhaps prosecution for failing to lodge income tax returns. It is also anxious about the value of its right of indemnity and the charge. AED Services, on the other hand, has a legitimate concern to ensure that only the proper amount of tax is payable. Puffin will have no right of appeal against a self-assessment of income tax. On the other hand, an assessment made by the commissioner would be capable of challenge. There is no evidence of consultation with the Commissioner of Taxation in relation to the payment of any income tax liability pending the resolution of liability. Therein lies another possibility. I mention these matters because there are ways in which the underlying dispute might be more effectively resolved without the need to litigate the contractual dispute.

The applications to stay the counterclaims are dismissed.

Addendum

At a directions hearing on 3 December 2009, after these reasons for judgment had been published, counsel for Puffin queried the correctness of the last sentence in paragraph 65 which reads:

There is no application by AED Oil to have the primary claim also referred to arbitration.

Counsel for AED Oil was unable to immediately clarify the position and for good reason. The applications had proceeded before me on the basis that the target of the stay applications was the counterclaim in each case. It is true that in its summons AED Oil makes a general application to stay the proceeding. I did not understand AED Oil to seriously contend that, by its application, the claim initiated by it in this court, as the foundation of its urgent interlocutory injunctive relief, should be stayed and referred to arbitration. My reasons for judgment proceeded on the basis that such an application was not pressed.

Following the directions hearing the solicitor for AED Oil sent an email to my associate in the following terms:

We refer to the matter raised in Court today by counsel for the defendant concerning a clarification of the last sentence of paragraph 65 of his Honour’s reasons.
We have revisited the wording of s.7(2) of the International Arbitration Act (which makes both a stay and referral mandatory) and the transcript of 16 November 2009, and in particular page 39 of the transcript, and we do not think it is correct to say that there is no application by AED Oil to have the primary claim also referred to arbitration. Accordingly, we respectfully request that the final sentence in paragraph 65 be deleted.

I have no intention of deleting the sentence referred to above. To do so would imply an acceptance of the proposition that the case was argued and decided on a different basis.

By way of clarification, if clarification is necessary, I am of the opinion that AED Oil did not have any proper basis upon which to invoke the arbitration agreement in support of an application to stay its claim brought in this court to support urgent injunctive relief. It is not a party to the arbitration agreement and insofar as it may be entitled to claim “through or under” a party, that right does not assist it in relation to an application to stay the principal claim.

AED Oil and AED Services sought clarification of the reasons insofar as I had identified certain declarations as urgent. Presumably they would distinguish the non-urgent declarations as requiring a stay and consequential referral to arbitration. Their application to reopen the question of costs impliedly conveyed that purpose.

Having refused to stay a central dispute between the parties, concerning the contractual obligation of Puffin to sign income tax returns which Puffin believes to be incorrect, it is not appropriate to artificially dissect the pleadings or the relief in an attempt to distinguish between that which is truly urgent and that which is not. Merely because some claims or declarations are no longer urgent does not mean that it is appropriate to stay them and thus fragment the proceeding. It would be an affront to common sense and the administration of justice if I were to stay the non-urgent but inherently connected issues and relief, referring them to arbitration while deciding only the urgent issues. Those non-urgent connected elements of the proceeding remain part of the whole matter which ought to be heard and determined. To put it another way, having identified the issues requiring urgent resolution and refused a stay on that basis , those parts of the counterclaim which are intimately connected but which are not necessarily urgent, should properly be regarded as “not capable of settlement by arbitration”.

In the circumstances I propose to confirm my order dismissing the applications for a stay.

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Citations

AED Oil Ltd v Puffin FPSO Ltd (No 2) [2009] VSC 534

Most Recent Citation

AED Oil Ltd v Puffin FPSO Ltd (No 5) [2011] VSC 60

Cases Citing This Decision

2

Lion-Dairy and Drinks Pty Ltd (Formerly National Foods Limited) v Huhtamaki Australia Pty Ltd [2013] VSC 555

AED Oil Ltd v Puffin FPSO Ltd (No 5) [2011] VSC 60

Cases Cited

6

Statutory Material Cited

0

Australian Capital Television Pty Ltd v The Commonwealth [1992] HCA 45

Abigroup Contractors Pty Ltd v Transfield Pty Ltd [1998] VSC 103

[2009] VSC 534

1 DECEMBER 2009