King River Digital Assets Opportunities SPC v Salerno

[2023] NSWSC 510

Supreme Court

New South Wales

Medium Neutral Citation:

King River Digital Assets Opportunities SPC v Salerno [2023] NSWSC 510

Hearing dates:

29 March 2023

Date of orders:

16 May 2023

Decision date:

16 May 2023

Jurisdiction:

Equity - Commercial List

Before:

Rees J

Decision:

Proceedings stayed.

Catchwords:

COMMERCIAL ARBITRATION — plaintiff is customer of digital asset trading company — arbitration agreement between customer and company — customer entrusts US$20.4m to company — company goes into administration — customer sues company director for accessorial liability for misleading and deceptive conduct of company — director will defend claim on basis that company did not engage in such conduct — director initially seeks transfer and security for costs – director becomes aware of ability to seek stay — s2 Commercial Arbitration Act 2010 (NSW) — whether a person claiming “through or under” party to the arbitration agreement — director taking stand on same ground as that available to company — essential element of defence vested in or exercisable by company – whether claim is subject of arbitration agreement — whether agreement inoperative by abandonment.

Legislation Cited:

Commercial Arbitration Act 2010 (NSW) ss 2, 8, 16

UNCITRAL Model Law on International Commercial Arbitration art 16(1)

Cases Cited:

ACD Tridon v Tridon Australia [2022] NSWSC 896

Comandate Marine Corp v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45; [2006] FCAFC 192

Commonwealth v Verwayen (1990) 170 CLR 394; [1990] HCA 39

DFD Rhodes Pty Ltd v Hancock Prospecting Pty Ltd [2022] WASCA 97

Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2017] 3 SLR 267; [2016] SHJC 238

Hancock Prospecting Pty Ltd (2019) 267 CLR 514; [2019] HCA 13

Hancock Prospecting Pty Ltd v Rinehart (2017) 257 FCR 442; [2017] FCAFC 170

John Holland v Kellog Brown & Root [2015] NSWSC 451

Khoury v Government Insurance Office of NSW (1983) 165 CLR 622; [1984] HCA 55

LaDonnaPtyLtdvWolfordAG [2005] VSC 359; (2005) 194 FLR 26

Lepcanfin Pty Ltd v Lepfin Pty Ltd (2020) 102 NSWLR 627; [2020] NSWCA 155

Michael Wilson & Partners v Nicholls (2011) 244 CLR 427; [2011] HCA 48

Pipeline Services WA Pty Ltd v Atco Gas Australia Pty Ltd [2014] WASC 10

Sargent v ASL Developments Ltd (1974) 131 CLR 634; [1974] HCA 40

Tanning Research Laboratories Inc v O’Brien [1990] HCA 8; (1990) 169 CLR 332

WCX M4-M5 Link AT Pty Ltd v Acciona Infrastructure Projects Australia Pty Ltd (No 2) [2022] NSWSC 505

WesTrac Pty Ltd v Eastcoast OTR Tyres Pty Ltd [2008] NSWSC 894; (2008) 219 FLR 461

Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17

Category:

Procedural rulings

Parties:

King River Digital Assets Opportunities SPC (Plaintiff)
Matteo Salerno (Defendant)

Representation:

Counsel:
Mr O Jones (Plaintiff)
Mr J Hutton SC (Defendant)

Solicitors:
Arnold Bloch Leibler (Plaintiff)
Thynne + Macartney Lawyers (Defendant)

File Number(s):

2022/386106

JUDGMENT

1. HER HONOUR: The defendant, Matteo Salerno, is the sole director and shareholder of Trigon Trading Pty Ltd (administrators appointed). Trigon carried on a digital asset trading business as “TrigonX”, specialising in foreign exchange and cryptocurrencies. The plaintiff, King River Digital Assets Opportunities SPC, was a customer of Trigon. When the largest international cryptocurrency exchange, FTX Trading Limited, collapsed in November 2022, King River lost some US$20.4 million entrusted to Trigon for trades. King River seeks to recover these funds from Mr Salerno under the Australian Consumer Law on the basis of accessorial liability for misleading and deceptive conduct engaged in by Trigon.

2. By two motions, Mr Salerno seeks orders to:

1. stay these proceedings in favour of arbitration pursuant to section 8 of the Commercial Arbitration Act 2010 (NSW), or

2. transfer these proceedings to the Supreme Court of Queensland pursuant to section 5(2)(b)(iii) of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth).

3. It is convenient to deal with the stay application first. Whilst I have been greatly assisted by counsels’ comprehensive submissions, I have not, by and large, set them out in this judgment.

Arbitration clause

4. On 23 February 2022, Trigon and King River executed a Master Purchase Agreement, which takes the form of “boilerplate” documents commonly used in the United States. The agreement noted:

BY SIGNING BELOW, [KING RIVER] AND [DIRECTOR GUARANTOR] ACKNOWLEDGE THAT THE MASTER PURCHASE AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION CLAUSE IN CLAUSE 6.5 OF THE TERMS OF BUSINESS AND THAT [KING RIVER] AND [DIRECTOR GUARANTOR] HAS RECEIVED, READ, UNDERSTOOD, AND AGREED TO THE TERMS THEREOF.

5. The arbitration clause was, in fact, in clause 5.5 of Appendix I, “Terms of Business”, and provided:

Clause 5.5 Governing Law: Venue: Waiver of Jury Trial.

(a)   This Agreement shall be governed by, and construed and enforced in accordance with, the laws of Queensland, Australia, without giving effect to the principles of conflicts of law thereof. Subject to Clause 5.5(b), each party hereby agrees that (i) any and all litigation arising out of this Agreement shall be conducted only in Australia; and (ii) such courts shall have the exclusive jurisdiction to hear and decide such matters. …

(b)   Any dispute, controversy or claim arising out of, relating to or in connection with this Agreement, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration administrated by the Australian Centre for International Commercial Arbitration (“ACICA”) in accordance with the ACICA Arbitration Rules for the time being in force, which rules are deemed to be incorporated by reference in this clause. The seat of arbitration shall be Brisbane. The number of arbitrators shall be one. The language of arbitration shall be English.

(c)   Each party irrevocably and unconditionally hereby submits to the personal jurisdiction of such courts described in Clause 5.5(a) and/or arbitration described in Clause 5.5(b) and waives any objection such party may now or hereafter have to venue or that such courts and/or arbitration are inconvenient forums.

That is, the arbitration clause was clause 5.5(b), failing which, the parties agreed that litigation would be conducted in Australia.

6. Clause 5 of Appendix I also dealt with various “MISCELLANEOUS” matters, of which King River relied on two sub-clauses:

Clause 5.2 Assignment: Successors and Assigns. This Agreement shall be binding on and inure to the benefit of the Parties and their respective successors, heirs, personal representatives, and permitted assigns. [King River] may not assign or delegate their rights or obligations hereunder without the prior written consent of Trigon, which may be withheld in Trigon’s sole discretion.

...

Clause 5.11 No Third Party Beneficiary. The terms and provisions of this Agreement are intended solely for the benefit of each Party and their respective successors or permitted assigns, and it is not the intention of the Parties to confer third-party beneficiary rights upon any other Person.

7. Other appendices to the Master Purchase Agreement set out settlement and trading terms, including the pre-funding of trading.

Facts

8. After signing the Master Purchase Agreement, King River was “onboarded” on 1 March 2022. A “slack chat channel” was created. According to King River’s pleading, access to this platform allowed King River to view the amount of funds held by King River with Trigon in fiat currency (such as USD) and the nature and value of crypto-assets held by King River with Trigon. Messages sent over the “slack chat channel” are in evidence. Trigon and King River staff communicated in respect of trades and the deposit of funds by King River for trades.

9. According to King River’s pleading, from time to time, King River transferred crypto-assets to Trigon and purchased crypto-assets from Trigon, which were held by Trigon with King River’s consent. Trigon held these crypto-assets as custodian. Likewise, it is said that, from time to time, King River transferred USD funds to Trigon and sold crypto-assets to Trigon for USD funds; Trigon held the USD funds for King River in nominated bank accounts.

10. In November 2022, it is apparent from the slack chat messages that King River attempted to withdraw funds held by Trigon, due to significant market problems. On 9 November 2022, FTX suspended withdrawals. On 11 November 2022, Trigon advised that, due to current market conditions, it had paused deposits. FTX filed for bankruptcy. As pleaded by King River, Trigon then held US$20.4 million of King River assets, of which US$9.5 million had been transferred to FTX. King River instructed Trigon to return the funds held.

11. On 16 December 2022, Mr Salerno appointed administrators to Trigon under section 436A of the Corporations Act 2001 (Cth) (where directors are of the opinion that the company is insolvent or is likely to become insolvent).

These proceedings

12. On 22 December 2022, King River commenced these proceedings. On receipt of the Summons and Commercial List Statement, Mr Salerno’s solicitor advised that an application would be made to transfer the proceedings to the Supreme Court of Queensland. Security for costs application would also be brought. Mr Salerno’s solicitor circulated proposed short minutes of order in respect of both applications. On 10 February 2023, Ball J made orders accordingly. Correspondence ensued between the parties in respect of security for costs.

Transfer application

13. On 24 February 2023, Mr Salerno filed a motion seeking to have these proceedings transferred to Queensland. In support of the application for the transfer, Mr Salerno deposed as to Trigon’s operations in Queensland and its relationship with King River. In particular, Mr Salerno referred to the contractual relationships between the parties, adding:

“each of Trigon and King River agree that each party irrevocably submitted to the exclusive jurisdiction of the courts of Queensland.”

14. Mr Salerno deposed that his reasons for requiring this contractual arrangement was the fact that he was based in Queensland, Trigon traded in Queensland and had no physical presence elsewhere. As the company dealt with customers around the world, he wanted to make sure that any disputes were dealt with in Queensland and by Queensland courts rather than in any number of other states or countries.

15. Mr Salerno’s solicitor, Marc Maskell, also swore an affidavit, describing the arrangements in respect of the Commercial List operated by the Supreme Court of Queensland. If transferred, Mr Maskell said these proceedings would likely be managed in that list.

Stay application

16. Mr Maskell first became aware that his client might be able to bring an application to refer the proceedings to arbitration on 14 March 2023. Neither he nor Mr Salerno previously knew or understood that they might be able to do so. The same day, Mr Salerno’s solicitor wrote to King River’s solicitor, advising that “in the course of our preparations with counsel … we give notice that this proceeding ought to be stayed by virtue of section 8(1) of the Commercial Arbitration Act 2010.” Where section 2(1) of the Act defined a party to an arbitration as including “any person claiming through or under a party to the arbitration agreement”, Mr Salerno was said to fall within this extended definition, relying on Rinehart v Hancock Prospecting Pty Ltd (2019) 267 CLR 514; [2019] HCA 13 at [66]-[67]. Further:

5.   … Your client’s case against our client is one of accessorial liability pursuant to section 236 of the Australian Consumer Law (ACL). It is trite that in order to establish accessory liability of our client pursuant to section 236, your client must establish that Trigon contravened section 18 of the ACL.

6.   Clearly this is a dispute which relates to the subject matter of the [Master Purchase Agreement] as it plainly concerns allegations related to Trigon’s performance under the [Master Purchase Agreement] and allegations that Trigon engaged in misleading or deceptive conduct in relation to that performance.

7.   Further, we confirm, without making a statement on the substance of the dispute, that, among other grounds, our client intends to defend the allegations made against him on the ground that Trigon did not contravene section 18 of the ACL.

17. On 15 March 2023, Mr Salerno filed a motion seeking a stay. Both motions were listed to be heard together.

APPLICATION FOR STAY

18. Section 8(1) of the Commercial Arbitration Act provides: (emphasis added)

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.

19. The onus of establishing the requirements of section 8(1) rests on the party seeking the stay: Tanning Research Laboratories Inc v O’Brien [1990] HCA 8; (1990) 169 CLR 332 at 353 (per Deane and Gaudron JJ). Where the requirements are satisfied, “the court shall” stay the proceedings. A stay is mandatory and there is no discretion: Tanning Research at 350; WesTrac Pty Ltd v Eastcoast OTR Tyres Pty Ltd [2008] NSWSC 894; (2008) 219 FLR 461 at [7] (per Barrett J).

“through or under”

20. The request for referral to arbitration must be made by a "party". Section 2 of the Commercial Arbitration Act provides: (emphasis added)

In this Act ... "party" means a party to an arbitration agreement and includes:

(a)   any person claiming through or under a party to the arbitration agreement.

21. Where Mr Salerno was not a party to the arbitration agreement, the first question is whether he falls within the extended definition of “party” as claiming “though or under” a party to that agreement. The meaning of “through or under” was considered by the High Court in Tanning Research and, more recently, in Rinehart v Hancock Prospecting Pty Ltd (per Kiefel CJ, Gageler, Nettle and Gordon JJ).

22. In Tanning Research, Brennan and Dawson JJ observed that the meaning of “through or under” is to be ascertained by reference to the text and context of the provision. As a “party” means both parties to the arbitration agreement, a person claiming “through or under” may be either a person seeking to enforce a right or a person seeking to resist enforcement of that right, such that the subject of the claim may be either a cause of action or a ground of defence. At 342: (emphasis added)

In other words, an essential element of the cause of action or defence must be or must have been vested in or exercisable by the party before the person claiming through or under the party can rely on the cause of action or ground of defence.

23. In that case, the Court was considering whether a liquidator was bound by an arbitration clause in an agreement between the insolvent company and its creditor. The liquidator had rejected the creditor’s proof of debt and the creditor appealed to this Court. Brennan and Dawson JJ held that the liquidator was a person claiming “through or under” the arbitration agreement, and entitled to a stay of the proceedings, if the liquidator defended his rejection of the proof of debt by “tak[ing] his stand on a ground which is available to the company [and] thus stands in the same position vis a vis the creditor as does the company”: at 342. The position was different if the liquidator sought to rely on a ground which allowed him, and him alone, to go behind the judgment, accounts stated and the like: at 343. Likewise, Deane and Gaudron JJ considered that, where the liquidator “stands precisely in the position in which [the company] would have stood … the liquidator claims the benefit of the defences and answers which would otherwise have been available to [the company] and thus claims through or under” the company: at 353.

24. Tanning Research was followed by the majority of the High Court in Rinehart v Hancock Prospecting. The facts in Rinehart v Hancock are heinously complex. For present purposes, it is sufficient to say that Lang Hancock developed iron ore mines through Hancock Prospecting Pty Ltd (HPPL). He acquired the Hope Downs mining tenements, but through Hancock Mining Ltd (HML) and Hancock Resources Ltd (HRL) rather than HPPL. On Mr Hancock’s death, his daughter, Gina Rinehart, formed the view that her father should have acquired the mining tenements through HPPL and claimed that HML and HRL held the mining tenements on constructive trust for HPPL. HML and HRL transferred the mining tenements back to HPPL, which transferred the mining tenements onto subsidiary Hope Downs Iron Ore Pty Ltd (HDIO), which developed the mining tenements into a profitable mine. HDIO then assigned the mining tenements to third parties.

25. Two of Gina Rinehart’s children disputed the steps taken by their mother, contending that she had acted in breach of duty. The mining tenements should have remained with HML and HRL, such that HPPL held the mining tenements on constructive trust for them. The children, Mrs Rinehart, HPPL and HRL settled disputes about title to the mining tenements by signing the Hope Downs Deed, which included an arbitration clause. Notwithstanding this, the children brought proceedings against HPPL and their mother, contending inter alia that HPPL held the mining tenements on trust for the children. The children also sued the third parties in a Barnes v Addy claim, contending that the third parties received the mining tenements as knowing participants in Mrs Rinehart’s fraudulent and dishonest design and with knowledge of the breach of trust, such that the third parties held the mining tenements on constructive trust for the children.

26. The third parties were not a party to the arbitration agreement but sought a stay of the proceedings on the basis that each was a party claiming “through or under” the arbitration agreement. The majority of the High Court held that the third parties met this description. At [69]:

… the allegation against the third party companies is that they took the mining tenements as assignees from a party to the arbitration agreement (HPPL or HRL) with knowledge that the tenements had been assigned to HPPL or HRL in breach of trust. The third party companies admit that they took the tenements as assignees from HPPL and HRL. The controversy is as to whether HPPL and HRL were beneficially entitled to the mining tenements and so free to assign the mining tenements to the third party companies without breach of trust. The first and potentially determinative issue is, therefore, whether HPPL and HRL were beneficially entitled to the mining tenements. That is a discrete matter of controversy capable of settlement by arbitration under the arbitration agreement and, as between the appellants and HPPL, has been referred to arbitration in accordance with the Hope Downs Deed.

27. That is, the third parties’ defence turned on claims and defences exercisable by the arbitral parties. Following Tanning Research, the majority concluded at [73]:

Likewise here, where an assignee of mining tenements is alleged to have taken the assignment with knowledge that the tenements were held by the assignor upon trust for the claimant and assigned to the assignee in breach of trust, and the assignee contests the claim on the ground that there was no breach of trust or if there were that, by reason of a deed of settlement, the assignor was absolved of responsibility for the breach of trust, the assignee takes its stand upon a ground which is available to the assignor and stands in the same position vis-a-vis the claimant as the assignor. Accordingly, since the assignor and the claimant are bound by an arbitration agreement applicable to the claim of breach of trust, there is no good reason why this claim should not be determined as between the claimant and the assignee in the same way as it will be determined between the claimant and the assignor. To exclude from the scope of the arbitration agreement binding on the assignor matters between the other party to that agreement and the assignee would give the arbitration agreement an uncertain operation. It would jeopardise orderly arrangements, potentially lead to duplication of proceedings and potentially increase uncertainty as to which matters of controversy are to be determined by litigation and which by arbitration. And ultimately it would frustrate the evident purpose of the statutory definition.

28. The High Court’s decision in Rinehart v Hancock Prospecting was recently applied in DFD Rhodes Pty Ltd v Hancock Prospecting Pty Ltd [2022] WASCA 97 (per Quinlan CJ, Beech JA, with whom Vaughan JA agreed). There, HPPL sought a stay of proceedings in favour of arbitration by reason of the same arbitration agreement but in respect of proceedings brought by a different third party. Rhodes sued HPPL, HDIO and the children, contending that HML and HRL acquired the mining tenements in breach of Lang Hancock’s duties owed to HPPL, with the consequence that HML and HRL held the tenements on constructive trust for HPPL. Further, Mrs Rinehart did not breach any fiduciary duties as alleged by the children by transferring the tenements to HPPL; she was undoing the improper transfer of assets at the direction of Lang Hancock. The children defended Rhodes’ claim on the basis that the shares in HML and HRL were not held on trust for HPPL, such that HDIO never obtained beneficial title to the mining tenements and did not hold those tenements subject to a trust in favour of Rhodes. In reply, Rhodes contended that HML and HRL held the mining tenements on trust for HPPL or, alternatively, Lang Hancock transferred the mining tenements in breach of his duties owed to HPPL such that the transmissions were ineffective in equity.

29. A stay was granted as the third party was claiming “through or under” HPPL. By differing portions of its pleading, Rhodes took its stand on a ground which was available to either HPPL, Mrs Rinehart or HRL. The Court of Appeal noted at [111]:

The focus is on the nature and source of the claims and defences of the person said to be claiming through or under a signatory to the arbitration agreement, not on the relationship between the two parties or on the relationship of the first person to the arbitration agreement.

30. As to the case brought here, King River contends that Trigon represented that King River’s assets held by Trigon were not exposed to exchange third party risk. Further, none of King River’s assets were held by FTX and all of King River’s USD funds were held in various bank accounts. In reliance on these representations, King River did not instruct Trigon to remove all of King River’s funds from FTX or transfer all USD funds to King River, such that the funds remained with FTX. In fact, Trigon had transferred a portion of King River’s funds to FTX and exposed King River to exchange third party risk. Some of King River’s USD funds were not held in the nominated bank accounts. As a consequence, King River continued to place bids for Bitcoin which, unbeknownst to King River, resulted in USD funds being transferred to FTX by Trigon or remaining with FTX.

31. King River alleges that Trigon engaged in misleading or deceptive conduct in contravention of section 18 of the Australian Consumer Law (ACL). Mr Salerno is said to have aided, abetted, counselled or procured Trigon’s contravention of the ACL. Where King River has suffered loss of some USD$20.4 million as a result of Trigon’s conduct, compensation is sought from Mr Salerno as having been involved in that conduct.

32. Where the relevant inquiry is into the "subject matter in controversy rather than the formal nature of the proceedings or the precise legal character of the person initiating or defending the proceedings", I consider that Mr Salerno’s position falls comfortably within the meaning of "through or under": Rinehart v Hancock at [67], [73]-[74]. Indeed, it is a simpler example. Mr Salerno intends to defend King River’s claim on the basis that Trigon did not engage in misleading and deceptive conduct and, as such, he has no accessorial liability for damage caused by Trigon. In denying that Trigon is liable for misleading or deceptive conduct in contravention of section 18 of the ACL, Mr Salerno is taking his stand upon a ground which is available to Trigon and stands in the same position vis-a-vis King River as Trigon. That part of his defence will necessarily be decided in the same way as it would be decided if it were being put by Trigon. Although Mr Salerno is not a party to the arbitration agreement in the Master Purchase Agreement, he will be defending these proceedings "through or under" a party to the arbitration agreement. Mr Salerno is thus a “party” within the extended definition of "party" in section 2 of the Commercial Arbitration Act and entitled to a mandatory stay of the proceedings under section 8 of the Act.

“a matter which is the subject of an arbitration agreement”

33. The second question is whether the action brought in these proceedings is “a matter which is the subject of an arbitration agreement.” Ordinarily, the arbitrator will rule on this question under the principle of kompetenz-kompetenz, that is, the arbitrator has jurisdiction to determine whether the dispute falls within the scope of the arbitration clause and whether the arbitration agreement exists and is operative. As explained by Full Federal Court in Hancock Prospecting Pty Ltd v Rinehart (2017) 257 FCR 442; [2017] FCAFC 170, the Court can determine such questions but, generally speaking, should leave these matters to the arbitrator unless the context in which these questions arise make it preferable for the Court to determine such matters. Nothing points to this Court as being the obvious and convenient place to determine this issue.

34. As such, the prima facie approach espoused in Hancock Prospecting v Rinehart approach should be followed, that is, the Court does not reach a final view on scope and operation of the arbitration agreement; if there appears to be a valid arbitration agreement which prima facie covers the matters in dispute, the matter is referred to the arbitrator to deal with questions of jurisdiction: at [141]. The Court observed, “Of course, if there is no sustainable argument that a matter or dispute can be characterised as falling within the agreement, it should not be referred to arbitration”: at [149]. But the enquiry should not travel into the merits of the case beyond determining whether the argument is sufficiently weak not to be sustainable: at [149]. The Court should take a broad view characterising the dispute to assess whether it is the subject of the arbitration agreement, rather than engage substantially in the merits of the case: at [151], [377]-[378].

35. The principles concerning the construction of an arbitration agreement, and whether a “matter” is within the scope, or in pursuance, of an arbitration agreement were reviewed by Bell P (Payne and McCallum JJA agreeing) in Lepcanfin Pty Ltd v Lepfin Pty Ltd (2020) 102 NSWLR 627; [2020] NSWCA 155 at [78]-[94]. Arbitration clauses are generally afforded a broad and liberal construction.

36. Here, the arbitration agreement applies to “Any dispute, controversy or claim arising out of, relating to or in connection with this Agreement”: clause 5.5(b). These words and phrases have a wide ambit: John Holland v Kellog Brown & Root [2015] NSWSC 451 at [69] (per Hammerschlag J). The present action arises out of or is connected with the Master Purchase Agreement, as it concerns the conduct of the trading relationship between Trigon and King River, including the payment and use of US dollar amounts to facilitate trades. These matters are the subject of the appendices to the Master Trading Agreement.

37. King River submitted that clause 5.5(b) of the Master Purchase Agreement must be read together with clause 5.11, “No Third Party Beneficiary”. Where Mr Salerno was not a party to the Master Purchase Agreement or a successor or permitted assign of any party, he was a “third party” for the purposes of clause 5.11. King River and Trigon had expressly agreed that he would not have the benefit of any aspect of the Master Purchase Agreement, including the arbitration agreement in clause 5.5(b). In those circumstances, the “matter” before the Court was appropriately characterised as whether Mr Salerno is liable to the plaintiff pursuant to sections 236 and 237 of the ACL. That “matter” is not subject to the arbitration agreement, because King River and Trigon expressly agreed that it would not be. In those circumstances, section 8(1) was not engaged. Further, clause 5.11 was said to render the arbitration agreement in clause 5.5(b) “inoperative”.

38. Without detracting in any way from an arbitrator’s construction of the arbitration agreement in due course, clause 5 deals with various “MISCELLANEOUS” matters, which are not necessarily related to each other: amendments, assignment, severability, descriptive headings and construction, governing law, confidentiality, entire agreement, counterparts, notices, third party beneficiaries, independent advice and counterparty’s obligations. Whilst the Master Purchase Agreement should be construed to supply a congruent operation to the various components of the whole (Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17 at [16] (per Gleeson CJ, McHugh, Gummow and Kirby JJ)), clause 5.5(b) is clear on its face. There is no obvious need to read down the clause to give effect to sub-clauses dealing with apparently distinct subjects of assignment and third party beneficiaries.

39. Nor is there any suggestion that Mr Salerno is seeking a stay by reason of his status as a contracting party or Trigon’s successor, heir, personal representative or assignee. Rather, Mr Salerno is entitled to a stay by operation of statute. As Brennan and Dawson JJ explained in Tanning Research, the effect of the “through or under” definition is that a person who is not a party to the arbitration agreement is bound to submit to arbitration by force of the statute: at 341. Nor do clauses 5.2 and 5.11 appear to seek to ‘contract out’ of the Act, nor even to conflict with it. I am satisfied, on a prima facie basis, that the matter the subject of these proceedings is the subject of the arbitration agreement.

“unless agreement is inoperative”

40. King River submitted that the arbitration agreement was inoperative by reason of abandonment: WCX M4-M5 Link AT Pty Ltd v Acciona Infrastructure Projects Australia Pty Ltd (No 2) [2022] NSWSC 505 at [105]; Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2017] 3 SLR 267; [2016] SHJC 238 at [162] (per Vinodh Coomaraswamy J); La Donna Pty Ltd v Wolford AG [2005] VSC 359; (2005) 194 FLR 26 (per Whelan J) cf ACD Tridon v Tridon Australia [2022] NSWSC 896 (per Austin J). Mr Salerno issued an application for the transfer of the proceedings to the Supreme Court of Queensland. The evidence in support of the application asserted that the parties had submitted to the jurisdiction of the Courts of Queensland. The transfer application remained on foot notwithstanding the later filing of the stay application. It was said that bringing and maintaining the transfer application constituted an abandonment of any right to arbitrate. Mr Salerno agreed to directions being made in these proceedings, including a timetable for him to file an application seeking security for his costs. The stay application was not filed until three months after commencement of the proceedings. In combination, these matters were said to constitute a waiver of any right to arbitration.

41. “Inoperative” has been interpreted across jurisdictions implementing the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards signed in 1958 (330 UNTS 3) – better known as the New York Convention – and the Model Law as meaning that the arbitration agreement has ceased to have effect for the future, either for a specific type of dispute or at large. An arbitration agreement may be “inoperative” as it is unenforceable, has been amended by a further agreement, is the subject of res judicata, has been set aside by a Court, has been frustrated or discharged by breach or by reason of waiver, estoppel, election or abandonment or has otherwise been repudiated: WCX at [117].

42. Some time was spent debating what amounts to waiver or election, and the requisite degree of knowledge, having regard to Commonwealth v Verwayen (1990) 170 CLR 394; [1990] HCA 39, Sargent v ASL Developments Ltd (1974) 131 CLR 634; [1974] HCA 40 and Khoury v Government Insurance Office of NSW (1983) 165 CLR 622; [1984] HCA 55 as applied in the arbitral context in ACD Tridon v Tridon Australia [2002] NSWSC 896 (per Austin J), Pipeline Services WA Pty Ltd v Atco Gas Australia Pty Ltd [2014] WASC 10 (per Martin CJ) and La Donna Pty Ltd v Wolford AG (per Whelan J).

43. Considering whether the arbitration agreement is inoperative is perhaps the wrong lens through which to view this problem, where the arbitration agreement has never been operative vis a vis Mr Salerno. He is not a party to the arbitration agreement and is only able to avail himself of its provisions by force of the statute: Tanning Research at 341. Perhaps the better question is whether Mr Salerno has abandoned his statutory right to seek a stay of these proceedings in favour of arbitration as “a person claiming through or under a party to the arbitration agreement.”

44. The uncontested evidence is that Mr Salerno initially took steps to transfer these proceedings, and to seek security for costs, at a time when he was not aware that he was entitled to seek a stay in favour of arbitration by reason of the extended definition of “party” in section 2 of the Act. On learning of this, Mr Salerno took immediate steps to stay the proceedings. Mr Salerno sought to exercise that right in the timeframe required by section 8(1). In the ordinary case, “the party’s first statement on the substance of the dispute” will be a defence: DFD Rhodes Pty Ltd v Hancock Prospecting Pty Ltd [2022] WASCA 97 at [91]ff. Mr Salerno has yet to file his defence. Mr Salerno’s conduct cannot be seen to have evinced an abandonment of the right to insist on arbitration in circumstances where the occasion for that choice to be made once and for all has not arisen: Comandate Marine Corp v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45; [2006] FCAFC 192 at [96] (per Allsop J).

ORDERS

45. The proceedings must be stayed. In these circumstances, it is neither necessary nor appropriate for me to consider the transfer application.

46. As to the costs of the respective motions, the transfer motion has not been determined. However, the plaintiff was put to the cost of dealing with this motion, including by the preparation of evidence, before the defendant realised that the stay application could be brought. I consider it appropriate in these circumstances that the defendant pay the plaintiff’s costs of the transfer motion until 15 March 2023, as it is hardly the plaintiff’s fault that the defendant initially proceeded in this manner. Should the transfer motion ever come to be determined by a Court, the evidence served will be out of date and need to be re-done. The defendant has succeeded on his stay application and should have his costs of that motion.

47. For these reasons, I make the following orders:

1. Stay these proceedings in favour of arbitration pursuant to section 8 of the Commercial Arbitration Act 2010 (NSW).

2. Order the defendant to pay the plaintiff’s costs of the motion filed on 24 February 2023 up to and including 15 March 2023.

3. Order the plaintiff to pay the defendant’s costs of the motion filed on 15 March 2023.

4. Otherwise order that the costs of these proceedings be the parties’ respective costs in the arbitration.

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Decision last updated: 16 May 2023