S Apci 2013 0162 Flint Ink NZ Limited v Huhtamaki Australia Pty Ltd (ACN 003 122 843) Appellant First Respondent and Lion-Dairy & Drinks Pty Ltd (ACN 004 486 631) Second Respondent

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2013 0162
FLINT INK NZ LIMITED v HUHTAMAKI AUSTRALIA PTY LTD (ACN 003 122 843)	Appellant First Respondent
and
LION-DAIRY & DRINKS PTY LTD (ACN 004 486 631)	Second Respondent

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JUDGES	WARREN CJ, NETTLE and MANDIE JJA
WHERE HELD	MELBOURNE
DATE OF HEARING	22 May 2014
DATE OF JUDGMENT	6 August 2014
MEDIUM NEUTRAL CITATION	[2014] VSCA 166
JUDGMENT APPEALED FROM	[2013] VSC 555 (Vickery J)

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ARBITRATION – Appeal against decision refusing to stay third party proceeding on the basis of arbitration agreement – Claimant in third party proceeding not a party to arbitration agreement – Whether claiming ‘through or under a party’ to the arbitration agreement – Whether matter capable of resolution by arbitration – Appeal allowed – Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332 considered – International Arbitration Act 1974 (Cth) s 7.

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Appearances:	Counsel	Solicitors
For the Appellant	Mr D J Batt QC with Mr R Andrew	Wotton & Kearney
For the First Respondent	Mr K JA Lyons QC with M P Barrett	Lander & Rogers
For the Second Respondent	No appearance

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WARREN CJ:

Background

The appellant, Flint Ink NZ Limited (‘Flint Ink’) is a company incorporated in New Zealand that manufactures ink products at its factory in New Zealand. The first respondent, Huhtamaki Australia Pty Ltd (‘Huhtamaki Australia’) is a company incorporated in Australia and is part of the Huhtamaki group of companies, which manufactures and supplies packaging products including packaging used to contain food. The second respondent, Lion-Dairy & Drinks Pty Ltd (‘Lion-Dairy’), is a company incorporated in Australia that manufactures dairy products and makes Yoplait yogurt products in Gippsland, Victoria.

In proceedings in the Trial Division, Lion-Dairy seeks damages from Huhtamaki Australia for losses following a recall of Yoplait products necessitated by defective packaging supplied to it by Huhtamaki Australia (‘the principal proceedings’). The packaging had been manufactured in New Zealand by Huhtamaki New Zealand Limited (‘Huhtamaki NZ’), another member of Huhtamaki group of companies, using Melam ink manufactured and supplied to it by Flint Ink. Huhtamaki Australia denies that the packaging was defective, but claims that if it were, any defects were caused by the ink supplied by Flint Ink.

On 4 February 2013, Huhtamaki Australia filed a third party notice in the principal proceeding against Flint Ink alleging, inter alia, that:

·Huhtamaki Australia had engaged Flint Ink to supply Huhtamaki Australia with ink for use on packaging to be used to contain food products for retail use;
·Huhtamaki Australia relied on Flint Ink to advise it as to the suitability of ink supplied for that use; and
·Flint Ink owed a Huhtamaki Australia a duty of care.

In response to this notice, Flint Ink’s solicitors informed Huhtamaki Australia that the ink was supplied by it to Huhtamaki NZ pursuant to an agreement between it and Huhtamaki NZ entered into in November 2005 (‘ink supply agreement’), and that it had not entered into any agreement with Huhtamaki Australia. Flint Ink also advised Huhtamaki Australia that its agreement with Huhtamaki NZ contained an arbitration clause on which it intended to rely. The clause provides:

Governing Law and Arbitration. This Agreement shall be governed by and construed in accordance with the laws of New Zealand.
Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or validity thereof shall be finally settled by arbitration in accordance with the Arbitration Act 1996.

Huhtamaki Australia’s reply acknowledged that it was not party to any agreement with Flint Ink and enclosed an amended third party statement of claim that abandoned the claim for breach of contract but proceeded with a claim in negligence. In its amended third party claim Huhtamaki Australia pleads that if it is liable to Lion-Dairy as alleged, then Huhtamaki Australia is entitled to indemnity or contribution from Flint Ink by reason of its failure to supply, or properly advise as to, suitable inks.

Flint Ink opposed Huhtamaki Australia’s application to file the amended third party statement of claim and contended, amongst other things, that the claim was an impermissible attempt by Huhtamaki Australia to avoid pursuing a claim via Huhtamaki NZ by arbitration in accordance with the ink supply agreement. Flint Ink also sought a stay of the third party proceeding pursuant to s 7(2) of the International Arbitration Act 1974 (Cth) (‘the IA Act’), or alternatively, art 8 of the UNCITRAL Model Law, s 8 of the Commercial Arbitration Act 2011 (Vic), Order 23 of the Supreme Court (General Civil Procedure) Rules or s 63 of the Civil Procedure Act 2010 (Vic).

On 18 October 2013, the trial judge delivered reasons for judgment on the applications. His Honour refused Flint Ink’s application for a stay and granted Huhtamaki Australia leave to file and serve its amended third party statement of claim. The trial judge relevantly held that Huhtamaki Australia’s claim against Flint Ink was not a matter capable of settlement by arbitration ‘because there was no arbitration agreement which was applicable to the parties to the third party claims’.[1] His Honour further held that, in any case, Huhtamaki Australia was not claiming ‘through or under’ Huhtamaki NZ within the meaning of the IA Act as Huhtamaki Australia’s claim was not ‘in any relevant sense is derived from Huhtamaki NZ’.[2] This was the essence of his Honour’s reasons.
[1]Lion-Dairy & Drinks Pty Ltd (formerly National Foods Limited) v Huhtamaki Australia Pty Ltd & Anor [2013] VSC 555 (‘Reasons’).
[2]Ibid [66]–[67].

Flint Ink was granted leave to appeal against the decision of the trial judge on those grounds of its proposed notice of appeal concerning the application of the IA Act.

The International Arbitration Act

Section 2D of the IA Act sets out the Act’s objects:

(a)to facilitate international trade and commerce by encouraging the use of arbitration as a method of resolving disputes; and
(b)to facilitate the use of arbitration agreements made in relation to international trade and commerce; and
(c)to facilitate the recognition and enforcement of arbitral awards made in relation to international trade and commerce; and
(d)to give effect to Australia’s obligations under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted in 1958 by the United Nations Conference on International Commercial Arbitration at its twenty-fourth meeting; and
(e)to give effect to the UNCITRAL Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law on 21 June 1985 and amended by the United Nations Commission on International Trade Law on 7 July 2006; and
(f)to give effect to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States signed by Australia on 24 March 1975.

Section 7 of the IA Act relevantly provides:

7 Enforcement of foreign arbitration agreements
…
(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.

…
(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.

When read together with s 7(2), s 7(4) enables a person claiming through or under a party to an arbitration agreement to be referred to arbitration even if they themselves are not a party to such an agreement. Sub-section (4) therefore enlarges the definition of ‘a party to an arbitration agreement’ by deeming persons claiming ‘through or under’ a party to be themselves parties to that agreement.

In the event that the circumstances set out in s 7(2) are satisfied, the Court is required to stay the proceedings or so much of the proceedings as involves the determination of that matter and refer the parties to arbitration.

The appeal

Flint Ink relies on two grounds of appeal:

1. His Honour erred in holding ([at 45]) that the claims in the third party statement of claim were not a ‘matter…capable of settlement by arbitration’ for the purposes of section 7(2) of the IA Act.
2. His Honour erred in holding (at [66]-[67]) that Huhtamaki Australia was not claiming ‘through or under’ Huhtamaki NZ within the meaning of section 7(4) of the IA Act.

Huhtamaki Australia also relies on the following grounds set out in its notice of contention:

1. The appeal should be dismissed and the decision below should be affirmed on the ground that:

(a) On the proper construction of s7(2)(b), a matter is only capable of settlement by arbitration in pursuance of an arbitration agreement if the matter is between the parties to the arbitration agreement or their privies;
(b) As the matter in this case is not between the parties to the arbitration agreement or their privies, it is not capable of settlement by arbitration in pursuance of the arbitration agreement, and accordingly s7 does not apply.

2. The appeal should be dismissed and the decision below should be affirmed on the further ground that:
(a) On the proper construction of s7, the obligation to stay a matter only arises where, and in so far as, the matter can be referred to arbitration;
(b) A matter can only be referred to arbitration where the parties to the matter are parties, or privies of parties, to the arbitration agreement;
(c) As the applicant and first respondent (being the parties to the matter) are not both parties, or privies of parties, to the arbitration agreement, the matter cannot be referred to arbitration and accordingly s7 does not apply.

3. The appeal should be dismissed and the decision below should be affirmed on the further grounds that:
(a) On the proper construction of s7(4), in order for a person to be claiming “through or under” a party to an arbitration agreement:
i.The person must be seeking to enforce a contractual right under that agreement;
ii.The claim must be derivative in the sense that that person’s claim must be or have been vested in or exercisable by the party to the arbitration agreement.

(b) The first respondent’s claim:
i.Is not seeking to enforce a contractual right under the arbitration agreement;
ii.Is not vested in or exercisable by a party to the arbitration agreement;

and accordingly, the first respondent is not claiming “through or under” a party to the arbitration agreement.
4. The appeal should be dismissed and the decision below should be affirmed on the further ground that:
(a) Section 7(2)(a) and s7(2)(b) are cumulative requirements that must be satisfied for s7 to apply;
(b) On its proper construction s7(4) expands the class of plaintiffs for the purposes of s7(2)(a), but does not expand the nature of the matter described by s7(2)(b);
(c) Whether or not the first respondent claims “through or under” a party to the arbitration agreement, the matter is not capable of settlement by arbitration in pursuance of an arbitration agreement as required by s7(2)(b) and accordingly s7 does not apply.

Ground 2 - Is Huhtamaki Australia claiming through or under Huhtamaki NZ?

Since Flint Ink must establish that Huhtamaki Australia is claiming through or under Huhtamaki NZ within the meaning of s 7(4) before s 7(2) can apply, it is convenient to deal with the second ground of appeal first.

The principal authority on the application of s 7 of the IA Act is the decision of the High Court in Tanning Research Laboratories Inc v O’Brien.[3] In that case Brennan and Dawson JJ, with whom Toohey J relevantly agreed, explained that:

… s 7(4) of the Act brings within the ambit of sub-s. (2) a person who claims ‘through or under a party’. Although a person who was not a party to the arbitration agreement is not bound by the contract to submit to arbitration, a person who claims ‘through or under a party’ is so bound by force of the statute: see Bonnin v Neame. In statutes similar to s 7 of the Act, the phrase ‘through or under a party’ or its equivalent has been construed to apply to, inter alios, a trustee of a bankrupt’s estate (Piercy v Young), an assignee of a debt arising out of a contract containing an arbitration clause (The ‘Leage’), a company being a subsidiary of a parent company which is party to an arbitration agreement (Roussel-Uclaf v Searle; but cf Mount Cook (Northland) v Swedish Motors) and a company being a parent of a subsidiary company which is party to an arbitration agreement when claims are brought against both companies based on the same facts: J J Ryan & Sons v Rhone Poulenc Textile, S A …The meaning of the phrase ‘through or under a party’ must be ascertained not by reference to authority but by reference to the text and context of s 7(4).
In the first place, as sub-s (2) speaks of both parties to an arbitration agreement, a person who claims through or under a party may be either a person seeking to enforce or a person seeking to resist the enforcement of an alleged contractual right. The subject of the claim may be either a cause of action or a ground of defence. Next, the prepositions ‘through’ and ‘under’ convey the notion of a derivative cause of action or ground of defence, that is to say, a cause of action or ground of defence derived from the party. 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…[4]

[3](1990) 169 CLR 332 (‘Tanning’).

[4]Ibid 341–342 (citations omitted).

In a separate judgment, Deane and Gaudron JJ observed that:

To ascertain whether s. 7(2) operates in respect of proceedings pending in a court it is necessary to first identify the subject matter of the controversy which falls for determination in those proceedings. Only when that has been done is it possible to identify whether the proceedings "involve the determination of a matter ... capable of settlement by arbitration": s. 7(2)(b). That process of identification is also necessary to ascertain whether, if a party to the proceedings is not a party to the arbitration agreement, he or she is a person "claiming through or under a party": s. 7(4).[5]
…
Section 7(2) of the Act is concerned with ‘proceedings [which] involve the determination of a matter … capable of settlement by arbitration’. Its operation is thus not confined to proceedings in which the parties seek the same relief as might have been sought in arbitration proceedings. Because s 7(2) has this wider operation, the question whether a person is claiming through or under a party to the arbitration agreement is necessarily to be answered by reference to 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.[6]

[5]Ibid 351.

[6]Ibid 353.

Huhtamaki Australia submitted that in the reasoning of Brennan and Dawson JJ the meaning of ‘through or under’ requires ‘standing in the same position’ as the party to the agreement and is thus restricted to privies whose rights were derived from the party via an assignment or other process of law. Huhtamaki Australia further submitted that Brennan and Dawson JJ, by the use of the terms ‘vested in’ or ‘exercisable by’, were employing the language of rights in the sense of a right to a cause of action, or a right to a defence. Given that one cannot speak of an ‘element of a right’, Huhtamaki Australia submitted that the phrase ‘essential element’ as appears in the judgment does not capture their Honours’ intention and thus should be disregarded. On the basis of these submissions, Huhtamaki Australia contended that as it was not pleaded that there was a relationship of agency, or a parent-subsidiary relationship between it and Huhtamaki NZ, its cause of action was independent of any cause of action available to Huhtamaki NZ and could not be seen as having derived from Huhtamaki NZ such as to bring it within s 7(4). It further argued that, to the extent that this reasoning is inconsistent with that of Deane and Gaudron JJ, it is to be preferred as it represents the view of the majority, Toohey J having agreed with Brennan and Dawson JJ on this point.

I do not accept these submissions. Whilst the reasoning of Brennan and Dawson JJ refers to examples from the authorities of trustee of a bankrupt’s estate, an assignee and a company in a parent-subsidiary relationship, I do not consider that Brennan and Dawson JJ sought to confine the meaning of ‘through or under a party’ to the circumstances obtaining in these examples. On the contrary, their Honours explicitly state that the meaning of the phrase ‘through or under a party’ must be ascertained by reference to the text and context of s 7(4) and not by reference to the authorities.

In addition, I do not accept that Brennan and Dawson JJ proceeded on the basis that it is the cause of action or defence as a whole and not merely an element of it that must be vested in or be exercisable by the party for the sub-section to apply. As Huhtamaki Australia concedes, such a reading requires that words in their Honours’ judgment be disregarded. In my view, neither the reasoning nor the result in Tanning compels such a reading. In Tanning, the liquidator, who was defending his refusal to admit a creditor’s proof of debt on the general law grounds that the debt was not enforceable against the company, was held to be claiming through or under the company. Although the liquidator was not defending the company against a general law claim in debt, he sought to uphold his entitlement to reject the proof of debt on grounds of defence which were not only available to the liquidator but which were also available to the company under the general law. In my view, it may readily be said in these circumstances that an essential element of the liquidator’s defence had been vested in the company.

The approach contended for by Huhtamaki Australia is also not consistent with the observation of Deane and Gaudron JJ that that the operation of s 7(2) is not confined to proceedings in which the parties seek the same relief as might have been sought in arbitration proceedings. Their Honours held that because s 7(2) is not restricted in this way, the question whether a person is claiming under or through a party must be determined by identifying the subject matter of the controversy which falls for determination rather than by the formal nature of the proceedings or the precise legal character of the person initiating the proceedings. Although the reasoning of Deane and Gaudron JJ differs in some respects from that of Brennan and Dawson JJ, I do not consider that the approaches are inconsistent on this point. Indeed, the whole of the relief sought by the liquidator, being the upholding of his entitlement to refuse to admit the proof of debt, could not have been sought by the company in arbitration.

The essence of Huhtamaki Australia’s claim is that either under the ink supply agreement, or arising from it, Flint Ink owed Huhtamaki Australia a duty of care which it breached by advising Huhtamaki NZ to use Melam ink in the packaging material supplied to Lion-Dairy.

The extension of the duty to encompass Huhtamaki Australia is based primarily on the alleged proximity of Huhtamaki Australia and Huhtamaki NZ, of which it is alleged Flint Ink knew, or ought to have known. The third party claim pleads that:

·both Huhtamaki Australia and Huhtamaki NZ are part of the same group of companies;
·both manufactured and supplied packaging for food products, including to Lion-Dairy; and
·both Huhtamaki NZ and Huhtamaki Australia were vulnerable and susceptible to suffering economic loss if Flint Ink recommended the use of unsuitable inks.

The particulars of breach identify failures of Flint Ink to exercise reasonable care in its advice, recommendations and warnings to Huhtamaki NZ. The particulars do not identify any acts of breach in relation to Huhtamaki Australia.

Flint Ink submitted that the fact that it had had no dealings with Huhtamaki Australia and that every circumstance giving rise to Huhtamaki Australia’s claim necessarily concerns and originates with Huhtamaki NZ provides strong support for its contention that Huhtamaki Australia is claiming through or under Huhtamaki NZ.

I agree. The pleaded duty arises from or out of the ink supply agreement between Flint Ink and Huhtamaki NZ. It is only in respect of Huhtamaki NZ that any act of breach by Flint Ink NZ is pleaded. In my view, any breach of duty in respect of Huhtamaki Australia is derivative from Huhtamaki NZ. To put the matter another way, in respect of the allegation of breach, Huhtamaki Australia stands in the same position vis-à-vis Flint Ink as does Huhtamaki NZ.

I am satisfied that the circumstances referred to by Brennan and Dawson JJ in Tanning, being that essential elements of Huhtamaki Australia’s cause of action are vested in or exercisable by Huhtamaki NZ, is satisfied here. Support for this conclusion may be drawn from the very fact that particulars of breach with respect to Huhtamaki NZ are pleaded at all, since there would be no reason to do so were they were not essential to Huhtamaki Australia’s claim.

To the extent that Deane and Gaudron JJ articulate a different approach to that of Brennan and Dawson JJ in Tanning, in my view it is also satisfied in this case. The subject matter in controversy here is whether Flint Ink is liable to provide indemnity or contribution to Huhtamaki Australia in respect of any liability of Huhtamaki Australia to Lion-Dairy. Such liability could only arise because Flint Ink was negligent in its advice to Huhtamaki NZ in relation to the suitability of the ink it supplied.

I would allow ground 2.

Ground 1 - Is the matter capable of settlement by arbitration?

The text of s 7(2)(b) directs attention to a ‘matter’ capable of settlement by arbitration, not to the proceeding per se.

In Tanning, Deane and Gaudron JJ discussed the meaning of the phrase ‘matter capable of settlement by arbitration’, as follows:

The word ‘matter’ is not defined in the Act. … However, in any context, ‘matter’ is a word of wide import. In the context of s 7(2), the expression ‘matter … capable of settlement by arbitration’ may, but does not necessarily, mean the whole matter in controversy in the court proceedings. So too, it may, but does not necessarily encompass all the claims within the scope of the controversy in the court proceedings. Even so, the expression ‘matter … capable of settlement by arbitration’ indicates something more than a mere issue which might fall for decision in the court proceedings or might fall for decision in arbitral proceedings if they were instituted. It requires that there be some subject matter, some right or liability in controversy which, if not co‑extensive with the subject matter in controversy in the court proceedings, is at least susceptible of settlement as a discrete controversy. The words ‘capable of settlement by arbitration’ indicate that the controversy must be one falling within the scope of the arbitration agreement and, perhaps, one relating to rights which are not required to be determined exclusively by the exercise of judicial power.[7]

[7]Ibid 351 (citations omitted).

Justices Brennan and Dawson found it unnecessary to attempt a precise definition of ‘matter’, however, their Honours observed that:

… the matter to be referred to arbitration cannot extend to issues which would not arise in proceedings between [the company] and [the creditor] or which are unrelated to the contract containing the arbitration clause…[8]

[8]Ibid 344.

In Recyclers of Australia Pty Ltd v Hettinga Equipment Inc[9] Merkel J held that:

While Deane and Gaudron JJ may have differed in some respects from the majority on the question of the scope of a "matter", Tanning Research is authority for the view that, for the purposes of s 7(2), the "matter" to be determined in a proceeding is to be ascertained by reference to the subject matter of the dispute in the proceeding and the substantive, although not necessarily the ultimate, questions for determination in the proceeding. The scope of the matter is to be ascertained from the pleadings and from the underlying subject matter upon which the pleadings, including the defence, are based: Tanning Research at 343-344 and 351-354 cf Fencott v Muller (1983) 152 CLR 570 at 608, Hooper v Kirella [1999] FCA 1584; (1999) 167 ALR 358 at 368-371.[10]

[9]Recyclers of Australia Pty Ltd v Hettinga Equipment Inc (2000) 100 FCR 420 (‘Hettinga’).

[10]Ibid [18].

I respectfully agree with his Honour. Here, the relevant subject matter is whether Flint Ink breached a duty owed by it to Huhtamaki NZ, and by extension to Huhtamaki Australia, such that it should be required to provide indemnity in Lion‑Dairy’s claim. I would identify the relevant matter for the purposes of s 7(2) as whether Flint Ink breached duties owed by it to Huhtamaki NZ pursuant to, or arising out of, the ink supply agreement.

Huhtamaki Australia conceded that a claim in negligence by Huhtamaki NZ against Flint Ink would be a matter capable of settlement by arbitration, however, it notes that no such claim has yet been made. It submitted that its action for indemnity or contribution could not be brought by Huhtamaki NZ, and was therefore independent of any cause of action that may be available to Huhtamaki NZ. Huhtamaki Australia submitted that since it was not a party to the arbitration agreement, its claim does not fall within the scope of the arbitration agreement and therefore is not a matter capable of settlement by arbitration within the meaning of s 7(2).

I reject this submission. For the reasons set out above, the application of s 7(4) means that Huhtamaki Australia must be deemed to be a party to the arbitration agreement. Whilst it may be accepted that s 7(4) does not provide for disputes that go beyond the scope of the arbitration agreement to be referred to arbitration, it does enlarge the content of the meaning of ‘party to the agreement’ and in this way, enables the referral of disputes which could not be referred to arbitration in the absence of the sub-section.

Having determined that Huhtamaki Australia is claiming through or under Huhtamaki NZ, there is nothing about the matter as I identify it that takes it outside the scope of the arbitration agreement, or renders it otherwise incapable of settlement by arbitration pursuant to the agreement. The question whether Flint Ink breached duties owed by it to Huhtamaki NZ pursuant to, or arising out of, the ink supply agreement is, I consider, a matter capable of settlement by arbitration.

I would allow ground 1. It follows that I would allow the appeal and dismiss the notice of contention.

Conclusion and disposition

At the commencement of the hearing, counsel for Flint Ink made application to amend the notice of appeal in respect of the orders it submitted should follow in the event that the appeal was successful. Counsel realised that the terms of s 7(2) require the Court to refer the matter to arbitration in the event that an order is made staying the proceedings and sought to amend the notice of appeal to conform with the requirements of this provision. I would grant leave to so amend.

The effect of the IA Act and the UNCITRAL is that parties are submitting more disputes to arbitration. Courts have acknowledged the commercial utility of arbitration as a means of resolving disputes and will endeavour to hold parties to their agreements to arbitrate. Indeed, this is the primary purpose of s 7(2).[11]
[11]O’Brien v Tanning Research Laboratories Inc (1988) 14 NSWLR 601, 622 (Kirby P).

I observe that s 7(2) allows the Court to impose such conditions (if any) as it thinks fit on the parties. Any conditions imposed pursuant to s 7(2) should further the section’s purpose. To that end, I would order that the third party claim be stayed pursuant to s 7(2) of the IA Act, such a stay being conditional on Flint Ink undertaking to use its best endeavours to refer Huhtamaki Australia's claims that Flint Ink breached contractual or common law duties of care alleged to have been owed to Huhtamaki NZ to arbitration in accordance with the arbitration clause and to pursue the arbitration with due expedition.

NETTLE JA:

This is an appeal by leave from interlocutory orders of a judge of the Commercial and Equity Division. His Honour granted leave to the respondent, Huhtamaki Australia, to file and serve an amended Third Party Statement of Claim and refused an application by the appellant, Flint Ink, for a permanent stay of the Third Party proceeding pursuant to s 7(2)(b) of the IA Act.

The Third Party proceeding arises out of a claim by Lion-Dairy against Huhtamaki Australia for damages alleged to have been suffered as a result of defects in food packaging containers manufactured by Huhtamaki Australia’s related company, Huhtamaki NZ, and sold by Huhtamaki Australia to Lion-Dairy. Huhtamaki Australia denies that the packaging was defective but says that, if it were, the defect was caused by faults in or the unsuitability of ink manufactured and sold by Flint Ink to Huhtamaki NZ for use in the manufacture of the packaging.

As originally cast, the Third Party Statement of Claim alleged that Flint Ink supplied the ink to Huhtamaki Australia under an agreement between Flint Ink and Huhtamaki Australia. Following service of the Third Party Statement of Claim, the solicitors for Flint Ink wrote to the solicitors for Huhtamaki Australia pointing out that the ink had in fact been supplied by Flint Ink to Huhtamaki NZ under an agreement between Flint Ink and Huhtamaki NZ, and that there was not and never had been an agreement between Flint Ink and Huhtamaki Australia. They also went on to point out that the agreement between Flint Ink and Huhtamaki NZ contained an arbitration agreement (‘the arbitration agreement’) on which Flint Ink intended to rely and therefore that any claim in relation to the ink should properly be brought by Huhtamaki NZ and be dealt with by arbitration.

The solicitors for Huhtamaki Australia replied, acknowledging the lack of a contract between Flint Ink and Huhtamaki Australia and advising that, in the circumstances, Huhtamaki Australia had resolved to abandon its claim in contract and proceed with its Third Party claim against Flint Ink on the basis of negligence alone. They enclosed a proposed amended Third Party Statement of Claim.

In turn the solicitors for Flint Ink replied that they did not agree to the proposed amendment because, among other reasons, they considered that the proposed amended claim was an impermissible attempt by Huhtamaki Australia to avoid pursuing Flint Ink by way of arbitration as was required under Clause 13.3 of the agreement between Flint Ink and Huhtamaki NZ.

Clause 13.3 of the agreement provides as follows:

Governing Law and Arbitration. This Agreement shall be governed by and construed in accordance with the laws of New Zealand.
Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or validity thereof shall be finally

settled by arbitration in accordance with the Arbitration Act 1996.

After further correspondence and proposed amendments to the Third Party Statement of Claim, Huhtamaki Australia’s application to amend the Third Party Statement of Claim came on for hearing before the judge on 23 August 2013 and then was adjourned for further hearing to 11 September 2013.

Meanwhile, on 5 September 2013, Flint Ink issued a summons returnable on 11 September 2103 seeking a stay of the Third Party proceeding pursuant to s 7(2) of the IA Act, alternatively, Art 8 of the UNCITRAL Model Law, s 8 of the Commercial Arbitration Act2011 (Vic), O 23 of the Supreme Court (General Civil Procedure Rules) 2005 or s 63 of the Civil Procedure Act 2010 (Vic).

On 18 October 2013, the judge delivered reasons for judgment in which his Honour held that Flint Ink’s summons should be dismissed and Huhtamaki Australia should have leave to amend its Third Party Statement of Claim substantially as proposed.

The judge’s reasons

In his reasons, the judge summarised the proposed Third Party claim, accurately, as follows:

In its proposed amended third party statement of claim directed to Flint Ink NZ as the third party, Huhtamaki Australia alleges that the Lion Dairy claims are apportionable claims and that Flint Ink NZ is a concurrent wrongdoer for the purposes of Part IV of the Wrongs Act 1958 (Vic) and Part VIA of the TPA.
It pleads further that if Huhtamaki Australia is liable to Lion Dairy as alleged, and if any or all of the claims made by Lion Dairy are not apportionable claims, then Huhtamaki Australia is entitled to indemnity or contribution from Flint Ink NZ by reason of the principal allegations summarised below:
(a) Flint Ink NZ Supply Contract
1.On or about 1 November 2005, Huhtamaki NZ and Flint Ink NZ entered into an agreement under which Huhtamaki NZ would purchase exclusively from Flint Ink NZ, and Flint Ink NZ would supply, ink products for the use, among others, of printing on goods which would be used for retaining liquids and/or foods for human consumption (the ‘Flint Ink Supply Agreement’).
2.Flint Ink NZ agreed to supply and Huhtamaki NZ agreed to buy exclusively from Flint Ink NZ, on the terms and subject to the conditions contained in the Flint Ink Supply Agreement, the ink products covered by the agreement (the Ink Products).

(b) Claim in Respect of Advice provided by Flint Ink NZ to Huhtamaki NZ
3. Huhtamaki Australia alleges that at all material times:
(i)Huhtamaki NZ relied on Flint Ink NZ to advise it as to what would be suitable inks to use;
(ii)Flint Ink NZ knew or ought to have known of Huhtamaki NZ's reliance on it;
(iii)Flint Ink NZ knew or ought to have known that if Huhtamaki NZ, in reliance on such advice, purchased unsuitable ink products, its customers would likely suffer loss;
(iv)Flint Ink NZ in fact advised Huhtamaki NZ as to what would be suitable ink products to use;
(v)In the circumstances, Flint Ink NZ owed Huhtamaki NZ and Huhtamaki Australia (as a customer of Huhtamaki NZ) a duty to exercise reasonable care in advising Huhtamaki NZ as to what ink products to use;
(vi)Between about 2004 and August 2008, Flint Ink NZ advised Huhtamaki NZ to use Melam ink, including with corona treated substrate, for the production of yoghurt packaging for Lion Dairy (the ‘Advice’); and
(vii)Relying on the Advice, Huhtamaki NZ: in or about late 2007 and early 2008, pursuant to the Flint Ink Supply Agreement, purchased Melam ink for use with a corona treated substrate in the production of packaging for Lion Dairy; between about December 2007 and July 2008, used the Melam ink in the production of such packaging for Lion Diary; between about May 2008 and August 2008 Huhtamaki NZ supplied to Huhtamaki Australia, which resupplied to Lion Dairy, the packaging material.

(c) Third Party Claim by Huhtamaki Australia in Respect of the Advice
4. Huhtamaki Australia refers to the claims of Lion Dairy against it that the packaging material was defective, not fit for purpose, not of merchantable quality, not in accordance with the Specifications, was not safe for use in the production of the Products, and was not manufactured with the same or higher level of care and skill as would reasonably be expected of a person qualified and experienced in the manufacture of the Goods (the ‘Alleged Failures’).
5. Huhtamaki Australia alleges that the Alleged Failures, if established, are due to:
(i)The Melam ink recommended by Flint Ink NZ and used by Huhtamaki NZ not being suitable for use with a corona treated substrate; and
(ii)The Advice being given negligently.

6. It is further alleged by Huhtamaki Australia that any loss suffered by Lion Dairy as a result of the Alleged Failures was caused or contributed to by Flint Ink NZ's negligence.
7. Further or alternatively, it is further alleged by Huhtamaki Australia that if the packaging material was not safe or fit for purpose as alleged by Lion Dairy, then:
(i)It was not safe and/or fit for purpose because the Melam ink was not suitable for use with a corona treated substrate; and
(ii)The supply of such product by Flint Ink NZ to Huhtamaki NZ was in breach of the warranty in the Flint Ink Supply Agreement.

8.Huhtamaki Australia then alleges that, as a result of the negligence and breaches referred to above, Huhtamaki Australia has suffered loss and damage, being its exposure to Lion Dairy's claim and the costs of defending it.[12]

[12]Reasons [15]–[16].

As his Honour then went on to observe, s 7(2) of the IA Act provides that:

(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.[13]

[13]Reasons [40].

Section 7(4) of the IA Act in turn provides that

(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.

As the judge further observed, Flint Ink opposed the proposed amendment and sought a stay of the Third Party proceeding on the basis that Huhtamaki Australia was a party to the arbitration agreement within the meaning of s 7(4), because it was claiming through or under Huhtamaki NZ, and that the dispute between them was a matter within the meaning of s 7(2) which was capable of settlement by arbitration in pursuance of the agreement between Flint Ink and Huhtamaki NZ.

The judge rejected both contentions. His Honour held that he was not satisfied that Huhtamaki Australia was a person claiming through or under Huhtamaki NZ and thus through or under a party to the arbitration agreement within the meaning of s 7(4), because:

… I am not satisfied that there is sufficient proximity between the party to the Arbitration Agreement, namely Huhtamaki NZ, and the person that Flint Ink NZ claims is prosecuting or defending an action through or under that party, namely, Huhtamaki Australia.
First, there is insufficient evidence as to the relationship between Huhtamaki NZ and Huhtamaki Australia. It appears to be common ground that they do not enjoy a ‘parent/subsidiary’ relationship, and there is no evidence that one company habitually acts at the behest of the other. The highest it was put in oral argument was that the companies are two ‘sister’ entities, but there was no evidence as to the details of that relationship.

Further, the evidence, such that it was … points away from the necessary degree of proximity. It is pleaded in Lion Dairy’s statement of claim that Huhtamaki Australia was incorporated in Australia. The evidence is that Huhtamaki NZ was incorporated in New Zealand. Further, in a letter written by Flint Ink NZ’s solicitors to the solicitors for Huhtamaki Australia dated 14 March 2013, the following is said: … (c) Flint NZ did not have any dealings with Huhtamaki Australia. All of our client’s dealings were with Huhtamaki NZ.
It is pleaded … in the proposed amended third party statement of claim that Huhtamaki NZ supplied to Huhtamaki Australia film manufactured by Huhtamaki NZ using Flint Ink NZ products. … although it establishes a commercial relationship between Huhtamaki NZ and Huhtamaki Australia, it does not materially add to the evidence so as to establish a sufficient degree of proximity between … Huhtamaki NZ, and … Huhtamaki Australia.[14]

[14]Reasons [59]–[62].

The judge further held that the dispute between Huhtamaki Australia and Flint Ink was not a ‘matter’ within the meaning of s 7(2) of the IA Act which was capable of settlement by arbitration in pursuance of the arbitration agreement, because:

In the present case I am satisfied that the relevant ‘matter’ for the purposes of s 7(2)(b) of the IAA, as pleaded in the present third party statement of claim and the proposed third party statement of claim, essentially comprises two claims. First, a claim for indemnification or contribution pursuant to s 23B Wrongs Act 1958 (Vic) in respect of any amount ordered to be paid by Huhtamaki Australia to Lion Dairy. Second, and in the alternative, a claim for damages, pursuant to the causes of action pleaded in the third party statement of claim, which are referred to above. Neither Huhtamaki Australia nor Lion Dairy are parties to the Arbitration Agreement or to any relevant arbitration agreement.
To my mind, this matter is not capable of settlement by arbitration. An arbitral body may be regarded as capable of determining a matter in accordance with the national law agreed upon by the parties to the arbitration agreement. However, the subject matter of the third party claim cannot be referred to arbitration, because there was no arbitration agreement which was applicable to the parties to the third party claims.[15]
[15]Reasons [44]–[45].

Grounds of appeal

There are two grounds of appeal. First, Flint Ink contends that the judge erred in holding that the dispute between Huhtamaki Australia and Flint Ink was not a ‘matter’ capable of settlement by arbitration in pursuance of the arbitration agreement within the meaning of s 7(2) of the IA Act; and, secondly, Flint Ink contends that the judge erred in law in holding that Huhtamaki Australia was not claiming through or under Huhtamaki NZ within the meaning of s 7(4) of the IA Act and thus was not a party to the arbitration agreement. It is convenient to deal with the latter ground first.

Claiming through or under a party

According to high authority, ‘claiming through or under a party’ within the meaning of the statutory provisions like s 7(4) of the IA Act is a relatively flexible concept. In Tanning,[16] Brennan and Dawson JJ, with whom Toohey J agreed, explained that:

… s 7(4) of the Act brings within the ambit of sub-s. (2) a person who claims ‘through or under a party’. Although a person who was not a party to the arbitration agreement is not bound by the contract to submit to arbitration, a person who claims ‘through or under a party’ is so bound by force of the statute: see Bonnin v Neame.[17] In statutes similar to s 7 of the Act, the phrase ‘through or under a party’ or its equivalent has been construed to apply to, inter alios, a trustee of a bankrupt's estate (Piercy v Young ),[18] an assignee of a debt arising out of a contract containing an arbitration clause (The ‘Leage’),[19] a company being a subsidiary of a parent company which is party to an arbitration agreement (Roussel-Uclaf v Searle;[20] but cf Mount Cook (Northland) v Swedish Motors)[21] and a company being a parent of a subsidiary company which is party to an arbitration agreement when claims are brought against both companies based on the same facts: J J Ryan & Sons v Rhone Poulenc Textile, S A[22] …The meaning of the phrase ‘through or under a party’ must be ascertained not by reference to authority but by reference to the text and context of s 7(4).
In the first place, as sub-s (2) speaks of both parties to an arbitration agreement, a person who claims through or under a party may be either a person seeking to enforce or a person seeking to resist the enforcement of an alleged contractual right. The subject of the claim may be either a cause of action or a ground of defence. Next, the prepositions ’through’ and ‘under’ convey the notion of a derivative cause of action or ground of defence, that is to say, a cause of action or ground of defence derived from the party. 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…

[16](1990) 169 CLR 332, 341–342.

[17][1910] 1 Ch 732, 738.

[18](1879) 14 Ch D 200.

[19][1984] 2 Ll R 259, 262.

[20][1978] 1 Ll R 225.

[21][1986] 1 NZLR 720.

[22](1988) 863 F 2d 315.

In a separate judgment, Deane and Gaudron JJ reasoned differently, but to the same conclusion, that:

Section 7(2) of the Act is concerned with ‘proceedings [which] involve the determination of a matter … capable of settlement by arbitration’. Its operation is thus not confined to proceedings in which the parties seek the same relief as might have been sought in arbitration proceedings. Because s 7(2) has this wider operation, the question whether a person is claiming through or under a party to the arbitration agreement is necessarily to be answered by reference to 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.[23]

[23](1990) 169 CLR 332, 353.

Counsel for Huhtamaki Australia stressed the observation of Brennan and Dawson JJ that the prepositions ’through’ and ‘under’ convey the notion of a derivative cause of action or ground of defence or, in other words, a requirement that an essential element of the cause of action or defence must be or must have been vested in or exercisable by a party before the person claiming through or under the party can rely on the cause of action or ground of defence. He submitted that their Honours should be taken to have meant that a claimant or defendant is not properly to be regarded as claiming ‘through or under a party’ to an arbitration agreement unless asserting a claim or defence which was available to the party and to which the claimant or defendant has succeeded by way of assignment or legal process in effect tantamount to assignment (such as in Tanning, where a liquidator was empowered to assert the claims and defences of the company).

I do not accept that submission. Tanning does not dictate that the notion of ‘through or under and party’ is so limited. The authorities to which Brennan and Dawson JJ referred with apparent approval imply that the notion of ‘through or under a party’ is considerably broader than that.

For example, in Roussel-Uclaf v GD Searle & Co Ltd (No)2,[24] Graham J said that:

There is no decisive authority on this point which covers the present case, although the words seem to have been included in the various Arbitration Acts for some time. On pages 143 and 144 of Russell on Arbitration, 18th edition , the expression ‘claiming through or under’ is shown to include the instances of an assignee of a contract containing the arbitration claim, of the personal representatives of a deceased party, and of the trustee of a bankrupt. It apparently has been held to exclude the mortgagee of the share in a partnership of a partner in respect of whom the partnership has been determined, because it was said the mortgagee’s right to an account was independent of the deed. It was, however, held to include the insurers of a motor vehicle who stood in the shoes of their insured in respect of a policy containing an arbitration clause in relation to which an action was also begun. The action was stayed.[25]

[24][1978] RPC 747 (‘Roussel-Uclaf’).

[25]Ibid 755.

His Lordship noted that the line between what is within and what is outside the description has to be drawn somewhere, and the argument in favour of a wider scope as opposed to a narrow interpretation may sometimes not admit of much elaboration. But, he said, in relation to the facts of the case before him:

I see no reason why these words in the Act should be construed so narrowly as to exclude a wholly-owned subsidiary company claiming, as here, a right to sell patented articles which it has obtained from and been ordered to sell by its parent. Of course, if the arbitration proceedings so decide, it may eventually turn out that the parent company is at fault and not entitled to sell the articles in question at all; and, if so, the subsidiary will be equally at fault. But, if the parent is blameless, it seems only common sense that the subsidiary should be equally blameless. The two parties and their actions are, in my judgment, so closely related on the facts in this case that it would be right to hold that the subsidiary can establish that it is within the purview of the arbitration clause, on the basis that it is ‘claiming through or under’ the parent to do what it is in fact doing whether ultimately held to be wrongful or not.[26]

[26]Ibid 755–756.

Similarly, in Ryan & Sons v Rhone Poulenc Textiles SA,[27] the United States Court of Appeals, Fourth Circuit, held that the question whether an arbitration agreement encompasses a dispute depends on whether the factual allegations underlying the claim are within the scope of the arbitration clause, regardless of the legal label assigned to the claim.[28] Consequently, an arbitration clause which provided for the reference to arbitration of ‘all disputes arising in connection with [a] contract’ embraced every dispute having a significant relationship to the contract regardless of the label attached to it.[29] It followed that, where charges against a parent company and its subsidiary were based on the same facts and were inherently inseparable, the court could refer claims against the parent to arbitration even though the parent was not formally a party to the arbitration agreement.
[27](1988) 863 F 2d 315.
[28]Ibid, citing Mitsubishi Motors Corp v Soler Chrysler-Plymouth Inc 473 US 614, 622 (1985).
[29]Ibid 321.

It is true, as Brennan and Dawson JJ said in Tanning, that the meaning of ‘through or under a party’ for the purposes of s 7(4) is to be ascertained by reference to the text and context of s 7(4) rather than by reference to authority. But, as it appears to me, that observation was intended to convey that, although it had not previously been held that a liquidator could be regarded as claiming through or under the company to which he is appointed, their Honours considered that reference to the text and context of s 7(4) dictated that a liquidator should be so regarded. As such, their reference to the text and context of s 7(4) implies a relatively broad conception of the requirement that an essential element of the cause of action or defence must be or must have been vested in or exercisable by the party. That is also consistent with Deane and Gaudron JJ’s conclusion that it is something to be assessed by reference to 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.

Similarly, in Mount Cook (Northland) Ltd v Swedish Motors Ltd,[30] which concerned parent and subsidiary companies, Tompkins J distilled that the essence of the matter inheres in the nature of the relationship between the claimant or defendant and the party to the agreement.
[30][1986] 1 NZLR 720 (‘Mount Cook’).

The facts and reasoning in Swedish Motors are also instructive. In that case, Swedish Motors had instituted a claim against Saab for damages for negligent advice which it was alleged had induced Swedish Motors to recommend and sell to one of its customers a particular type of Saab motor and drive for use in the customer’s boat. The motor and drive were supplied by Saab to Swedish Motors’ related company, Swedish Motors Wholesale, which on-sold them to Swedish Motors before Swedish Motors supplied them to the customer. The goods proved to be defective in the application in which they were installed and Swedish Motors sued Saab in negligence. Saab sought a stay of the proceeding on the basis of an arbitration clause in the agreement between Saab and Swedish Motors Wholesale. It contended that Swedish Motors was party to the agreement within the meaning of s 4 of the Arbitration (Foreign Agreements and Awards) Act 1982 (NZ)[31] because its claim was made through or under Swedish Motors Wholesale and that Swedish Motors’ claim was a matter capable of settlement by arbitration in pursuance of the arbitration clause. Tompkins J rejected the argument on the basis that Swedish Motors’ alleged cause of action was solely for damages for negligent advice proffered directly by Saab to Swedish Motors in breach of a duty of care alleged to have been owed directly by Saab to Swedish Motors. The claim was thus completely independent of any agreement between Swedish Motors Wholesale and Saab and in no way based on any obligation which may have been owed by Saab to Swedish Motors Wholesale. As Tompkins J explained:

In considering whether Swedish Motors is claiming through or under Swedish Motors Wholesale, it is, in my view, important to have regard to the nature of the claim in the second third party notice. It is an action in tort based on negligence. It is alleged that Saab is vicariously liable for the negligence … in failing to make a proper assessment of the suitability of the engines and gearboxes and in giving negligent advice. To come within the expression the person claiming must be doing so ‘through or under’ the party to the arbitration agreement. So the relationship between them must be an essential ingredient of the claim. But if the claim is brought independently of the party to the agreement, so that any relationship between them is irrelevant to the grounds advanced in support of the claim, then the claim is not brought through or under the party to the agreement.[32]

[31]In relevant respects, the same as s 7 of the IA Act.

[32]Ibid 725.

In this case, the position is essentially the converse. Due to the way in which the amended Third Party Statement of Claim is pleaded, the relationship between Huhtamaki Australia and Huhtamaki NZ is essential to the claim. The duty of care which it is alleged Flint Ink owed to Huhtamaki Australia is alleged to have arisen out of the agreement between Huhtamaki NZ and Flint Ink; alternatively, to have arisen out of a duty of care owed by Flint Ink to Huhtamaki NZ, which in turn arose out of the agreement between Flint Ink and Huhtamaki NZ. Correspondingly, Flint Ink’s breach of duty of care to Huhtamaki Australia is alleged to have been the result of Flint Ink’s breach of agreement with Huhtamaki NZ or alternatively of Flint Ink’s breach of its consequential duty of care to Huhtamaki NZ.

In summary, Huhtamaki’s claim as pleaded is that, because Flint Ink had an agreement with Huhtamaki NZ and, further or alternatively, because Flint Ink owed Huhtamaki NZ a duty of care arising out of the agreement, Flint Ink also owed Huhtamaki Australia a duty of care; and, because Flint Ink breached its agreement with Huhtamaki NZ and, further or alternatively, because it breached its duty of care to Huhtamaki NZ arising out of the agreement, Flint Ink thereby breached a duty of care which it owed Huhtamaki Australia.

Counsel for Huhtamaki Australia submitted that, although Brennan and Dawson JJ propounded the test of ‘through or under’ a party in terms of it being necessary only that an essential element of a claimant’s cause of action or defence be or have been vested in or exercisable by the party, the words ‘an essential element’ should in effect be disregarded. Read in context, counsel submitted, it was apparent that what Brennan and Dawson JJ meant to convey was that it is not enough that an element of a claimant’s cause of action or defence be or have been vested in or exercisable by a party. Rather, it is necessary that the whole of the claimant’s cause of action or defence be or have been vested in the party and hence that the claimant stands in the same position as the party or, to use counsel’s words, stands in the shoes of the party. So much was apparent, counsel submitted, from the fact that, in the sentences which immediately follow Brennan and Dawson JJ’s reference to ‘an essential element’, their Honours went on to say:

… A liquidator may be a person claiming through or under a company because the causes of action or grounds of defence on which he relies are vested in or exercisable by the company; a trustee in bankruptcy may be such a person because the causes of action or grounds of defence on which he relies were vested in or exercisable by the bankrupt.
A liquidator who defends his rejection of a proof of debt on the ground that, under the general law, the liability to which the proof relates in not enforceable against the company, takes his stand on the ground which is available to the company. A liquidator who resists a claim made by a creditor against the assets available for distribution on the ground that there is no liability under the general law thus stands in the same position vis-a-vis the creditor as does the company.[33]

[33](1990) 169 CLR 332, 342 (emphasis added).

Further, counsel submitted, it was not to the point that Deane and Gaudron JJ may have defined ‘through or under’ by reference to ‘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’. For inasmuch as Toohey J agreed with Brennan and Dawson JJ, Brennan and Dawson JJ’s reasoning must be treated as the reasoning of the majority and so must prevail.

I do not accept the argument. With respect, as I read Brennan and Dawson JJ’s reasons, their Honour said in terms, and so are to be understood as meaning, that a claimant may be taken as claiming ‘through or under’ a party if an essential element of the claimant’s cause of action or defence is or has been vested in or exercisable by the party; and, on the facts of the case before them, an essential element of the liquidator’s defence had been vested in the company in that, although the liquidator was defending a decision to refuse to admit a creditor’s proof of debt, as opposed to defending a general law claim in debt, the liquidator was defending the decision to refuse to admit the proof on the ground that, as a matter of general law, the company was not indebted to the creditor. The reference to the liquidator standing in the same position as the company was thus epexegetical of, and not intended to contradict, the broader statement of principle earlier enunciated.

So understood, Brennan and Dawson JJ’s reasoning is also consistent with Deane and Gaudron JJ’s conclusion that s 7(2) goes beyond proceedings in which the parties seek the same relief as might have been sought in arbitration proceedings. It has a wider operation such that the question whether a claimant is claiming through or under a party is to be answered by reference to 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 am fortified in that interpretation of their Honours’ reasoning by the fact that Brennan and Dawson JJ could not logically have come to the view that s 7(2) applied to the liquidator’s claim of entitlement to resist the creditor’s proof of debt, as their Honours did, without being positively persuaded that s 7(2) does go beyond proceedings in which the parties seek the same relief as might have been sought in arbitration proceedings and applies despite the formal nature of the proceedings or the precise legal character of the person initiating or defending the proceedings.

It follows in my view that Huhtamaki Australia is claiming through or under Huhtamaki NZ in the sense identified in Tanning. In terms of the test propounded by Brennan and Dawson JJ in Tanning, Huhtamaki Australia is so claiming because essential elements of its cause of action against Flint Ink are that Flint Ink breached its agreement with Huhtamaki NZ or breached a duty of care to Huhtamaki NZ which is alleged to have arisen out of the agreement. Equally, in terms of the test favoured by Deane and Gaudron JJ, Huhtamaki Australia is claiming through or under Huhtamaki NZ because the matter principally in controversy between Huhtamaki Australia and Flint Ink is whether Flint Ink breached its agreement with Huhtamaki NZ or breached its alleged duty of care to Huhtamaki NZ. So, too, in terms of Graham J’s analysis in Roussel-Uclaf, Huhtamaki Australia is claiming through or under Huhtamaki NZ because, on the facts of the case, Huhtamaki Australia’s rights against Flint Ink are so closely related to Huhtamaki NZ’s rights against Flint Ink that is right to hold that Huhtamaki Australia is ‘claiming through or under’ Huhtamaki NZ.

Counsel for Huhtamaki Australia contended that so to hold would mean that s 7(2) would apply in every case where a consumer makes a product liability claim directly against a manufacturer, so long as the contract under which the manufacturer sold the product in question to the relevant wholesaler or retailer contained an arbitration clause. In counsel’s submission, that would be inconsistent with the plain objectives and policy of the IA Act.

I reject the submission. In most consumer actions, the consumer relies on a duty of care alleged to arise independently of any contractual or common law obligations owed by the manufacturer to middlemen suppliers. Donoghue v Stevenson[34] is the paradigm. As is demonstrated by the reasoning of Tompkins J in Mount Cook,[35] which was earlier referred to, where a claimant relies on a duty of care owed directly to the claimant which is not dependent upon or derived from any claim which a wholesaler or retailer may have or have had against the manufacturer, the claimant cannot be said to be claiming through or under the middleman party. The difference in this case is that, as Huhtamaki’s third party claim is pleaded, it is critically dependent upon and derivative from the contractual and common law obligations alleged to have been owed by Flint Ink to Huhtamaki NZ.
[34][1932] AC 562.
[35][1986] 1 NZLR 720.

Counsel for Huhtamaki also prayed in aid the second reading speech relating to the IA Act, in which the Minister said that ‘an arbitration agreement for this purpose is one by which the parties undertake in writing to submit their differences to arbitration’.[36] Counsel argued that the absence of any reference in the second reading speech to expanding the reach of arbitration to non-parties and staying non-arbitrable claims was indicative of a legislative intention that the IA Act should apply only to parties.
[36]Hansard, Wednesday 2 October 1974 (emphasis added).

I reject that submission, too. The meaning of the legislation is primarily to be derived from its words;[37] and, as the High Court made clear in Tanning, according to the natural and ordinary meaning of the words of the legislation ss 7(2) and (3) apply to a non-party who claims through or under a party.
[37]Flemming v The Queen (1998) 197 CLR 250, 256 [12]; Baini v The Queen (2012) 246 CLR 469, 476 [14].

Counsel for Huhtamaki Australia contended that, if the words ‘in pursuance of the agreement capable of settlement by arbitration’ in s 7(2)(b) of the IA Act were read as anything other than a requirement that the matter to be referred to arbitration must involve a party or privy exercising or being bound by contractual rights and obligations or rights or obligations arising directly out of the contract, it would render the phrase ‘in pursuance of the agreement’ meaningless.

I do not accept that contention either. The reasoning in Tanning is enough in itself to show that the concept of a claimant or defendant claiming through or under a party is capable of extending beyond parties and their privies. Roussel-Uclaf is another example.

Finally, on this aspect of the matter, counsel for Huhtamaki Australia submitted that, because Huhtamaki Australia’s claim against Flint Ink could not be referred to arbitration, the construction of s 7(2)(b) contended for by Flint Ink would have the result that Huhtamaki Australia’s claim would be stayed.

The short answer to that is that for the reasons which follow, I consider that the dispute between Huhtamaki Australia and Flint Ink does involve a matter which is capable of settlement by arbitration within the meaning of s 7(2) of the IA Act and, therefore, that it is within the power of the court to refer so much of the proceeding as involves the determination of that matter to arbitration.

Matter that in pursuance of the agreement is capable of settlement by arbitration

As was earlier noticed, s 7(2) of the IA Act is concerned with ‘proceedings [which] involve the determination of a matter … capable of settlement by arbitration’. Its operation is not confined to proceedings in which the parties seek the same relief as might have been sought in arbitration proceedings. And the question whether a claimant is claiming through or under a party to the arbitration agreement is to be answered by reference to 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.

In Tanning, Deane and Gaudron JJ essayed the meaning of ‘matter capable of settlement by arbitration’, as follows:

The word ‘matter’ is not defined in the Act. … However, in any context, ‘matter’ is a word of wide import. In the context of s 7(2), the expression ‘matter … capable of settlement by arbitration’ may, but does not necessarily, mean the whole matter in controversy in the court proceedings. So too, it may, but does not necessarily encompass all the claims within the scope of the controversy in the court proceedings. Even so, the expression ‘matter … capable of settlement by arbitration’ indicates something more than a mere issue which might fall for decision in the court proceedings or might fall for decision in arbitral proceedings if they were instituted. It requires that there be some subject matter, some right or liability in controversy which, if not co‑extensive with the subject matter in controversy in the court proceedings, is at least susceptible of settlement as a discrete controversy. The words ‘capable of settlement by arbitration’ indicate that the controversy must be one falling within the scope of the arbitration agreement and, perhaps, one relating to rights which are not required to be determined exclusively by the exercise of judicial power.[38]

[38](1990) 169 CLR 332, 351 (citations omitted).

Counsel for Huhtamaki Australia contended that, whatever the ambit of s 7(2), it applies only to a claim for relief of a kind proper for determination in a court and not to every or any issue which might arise for decision in the course of the determination of such a claim. He further submitted that, in this case, the only relevant claim is one made by Huhtamaki Australia against Flint Ink for breach of duty alleged to be owed by Flint Ink to Huhtamaki Australia; and, as he would have it, that claim is not capable of settlement by arbitration. Counsel conceded that Huhtamaki Australia’s claim, as pleaded, is based to some extent on alleged breaches of contractual and common law duty owed by Flint Ink to Huhtamaki NZ; and he conceded that a claim by Huhtamaki NZ against Flint Ink for damages for breach of those duties would be capable of settlement by arbitration. But, in counsel’s submission, in the context of Huhtamaki Australia’s claim against Flint Ink, questions of whether Flint Ink owed or breached any contractual duties of care to Huhtamaki NZ are simply issues which might arise for determination in Huhtamaki Australia’s claim. They are not in themselves claims which are capable of settlement by arbitration, and not least for the reason that there is no claim made by Huhtamaki NZ.

Those submissions are largely based on the reasoning of McLelland J in Flakt Australia Ltd v Wilkins & Davies Construction Co Ltd,[39] in which his Honour said that:

In my opinion, the word ‘matter’ in s 7(2)(b) denotes any claim for relief of a kind proper for determination in a court. It does not include every issue which would, or might, arise for decision in the course of the determination of such a claim. The use of the word ‘settlement’ provides support for the view. ‘Settlement’ is an apt term to be used in relation to a claim for relief — it is less apt in relation to a mere issue. Furthermore, it is significant that, if the prescribed conditions are fulfilled, a stay is mandatory, notwithstanding that the governing law of the arbitration agreement is that of a country not a party to the Convention; and that, under the law of that country, a stay of proceedings on the basis of an agreement to arbitrate may be discretionary, as it is under the law of New Zealand. In such circumstances, I would not, in the absence of compelling language, attribute to Parliament an intention to require that proceedings be stayed, unless the claim made in those proceedings was capable of resolution by arbitration. Although it is legitimate to look at the terms of the Convention to resolve any ambiguity of expression in the Act, and one finds the expressions ‘subject matter’ and ‘matter’ used in Art. II, sub-arts. 1 and 3 respectively of the Convention, each of these expressions seems to be there used in a fairly loose way, to which the way in which ‘matter’ is used in s 7(2)(b) has no necessary relationship. Section 7(2) by no means reflects the exact language of the Convention, but there is nothing in the Convention which suggests that s 7(2) does not, on the view of its effect which I have expressed, operate to fulfil Australia's relevant obligation under Art II.[40]

[39](1979) 2 NSWLR 243.

[40]Ibid 250.

That passage of the judgement in Flakt has been followed and applied a number of times. In view, however, of more recent developments, it appears that it should now be read as subject to three qualifications. First, although it is true that s 7(2)(b) denotes a claim for relief of a kind proper for determination in a court, we now know, as a result of the definition of ‘matter’ undertaken by Deane and Gaudron JJ in Tanning, that:

(a) s 7(2)(b) denotes not only a claim but also a defence of a kind proper for determination in a court;

(b) the claim or defence may be one which is derived by the claimant or defendant through or under a party to the arbitration agreement, in the sense that it is or was vested in that party;

(c) the claim or defence may, but does not necessarily have to be, the whole matter in controversy in the court proceedings; and

(d) although the claim or defence must be more than a mere issue for decision in the court proceedings, it may be enough that it amounts to the assertion of a right or liability in controversy which, if not co‑extensive with the subject matter in controversy in the court proceedings, is at least susceptible of settlement as a discrete controversy.

Secondly, although it is true to say that Brennan and Dawson JJ did not undertake the task of defining ‘matter’ in the same way as Deane and Gaudron JJ, as Merkel J later reasoned in effect in Hettinga,[41] the fact that Brennan and Dawson JJ were able to decide Tanning without attempting a precise definition of ‘matter’ is not a reason to regard Deane and Gaudron JJ’s definition of ‘matter’ as other than authoritative. As Merkel J put it:

While Deane and Gaudron JJ may have differed in some respects from the majority on the question of the scope of a ‘matter’, Tanning Research is authority for the view that, for the purposes of s 7(2), the ‘matter’ to be determined in a proceeding is to be ascertained by reference to the subject matter of the dispute in the proceeding and the substantive, although not necessarily the ultimate, questions for determination in the proceeding. The scope of the matter is to be ascertained from the pleadings and from the underlying subject matter upon which the pleadings, including the defence, are based… [42]

[41](2000) 100 FCR 420, 434 [65].

[42]Ibid 426 [18].

Thirdly, for reasons earlier stated, the difference between ‘the assertion of a right or liability in controversy which, if not co-extensive with the subject matter in controversy, in the court proceedings, is at least susceptible of settlement as a discrete controversy’ on the one hand, and ‘a mere issue for decision in the court proceedings’, on the other hand, is logically to be decided as one of fact and degree by reference to the ‘whole matter in controversy in the court proceeding’.

Here, for reasons earlier stated, the substance of the whole of the matter in controversy between Huhtamaki Australia and Flint Ink is whether, as a result of the contractual obligations and common law duty of care which Flint Ink is alleged to have owed to Huhtamaki NZ, it owed a common law duty of care to Huhtamaki Australia; whether Flint Ink breached its alleged contractual obligations and common law duty to Huhtamaki NZ; and whether, by breaching its alleged contractual and common law duties to Huhtamaki NZ, it thereby breached its alleged duty of care to Huhtamaki Australia.

Thus, as also earlier stated, as Huhtamaki Australia’s Third Party Statement of Claim is drawn, Huhtamaki Australia’s claim against Flint Ink is critically dependent on establishing that Flint Ink breached a contractual or common law duty of care which it is alleged to have owed Huhtamaki NZ. If that claim fails, the whole claim will fail.

Having regard, therefore, to the whole of the matter in controversy between Huhtamaki Australia and Flint Ink in the Third Party proceeding, the claim that Flint Ink breached the contractual and common law duties of care it is alleged to have owed to Huhtamaki NZ is more than a mere issue in the Third Party proceeding. And it is also at least susceptible of settlement as a discrete controversy.

Further, the question of whether Flint Ink breached any contractual or common law duty of care owed to Huhtamaki NZ is one which arises out of the contract and is thus capable of settlement by arbitration. And, equally, to adopt and adapt the reasoning of Deane and Gaudron JJ in Tanning, it is a controversy as to a matter of a kind which is frequently the subject of arbitration proceedings and which could not be said to require determination only by the exercise of judicial power.[43]
[43](1990) 169 CLR 332, 352.

Counsel for Huhtamaki Australia argued that courts have consistently held or proceeded on the basis that non-parties exercising rights not derived under the auspices of contract cannot be referred to arbitration. He also cited a number of judicial observations which he submitted were authority for that proposition. In my view, none of them avails him.

The first was of Gummow ACJ, Hayne, Heydon, Crennan and Bell JJ in Michael Wilson & Partners Ltd v Nicholls.[44] In that case, a foreign corporation alleged that a former director and shareholder and two former employees had conspired to divert clients and business opportunities away from the company for their own benefit. The former director and shareholder were respondents to an arbitration in London instituted by the corporation under an arbitration clause in the original agreement between the corporation and the former director and shareholder. Since the former employees were not party to the agreement the corporation had instituted proceedings against them in the New South Wales Supreme Court. The claims in the arbitration were for breach of contract and breach of fiduciary duties. The claims in the Supreme Court proceeding were for breach of contract, breach of fiduciary duties, knowingly assisting the former director and shareholder in breaches of his fiduciary obligations, conspiracy and procuring breach of contract. One of the issues before the High Court was whether the institution of the Supreme Court proceeding was an abuse of process. In the passage of the judgment on which counsel relied,[45] their Honours held that it was not because, although the claim for knowing assistance of breach of fiduciary duty was dependent on the claim of breach of fiduciary duty, in the sense that it ‘depends upon establishing, among other things, that there has been a breach of fiduciary duty by another’, the findings in the arbitration proceeding would not constitute an issue estoppel or Anshun estoppel in the court proceeding against the former employees.[46] It was not necessary to say what the position would have been if they had been binding on the former employees.
[44](2011) 244 CLR 427 (‘Michael Wilson & Partners’).
[45]Ibid 457 [106]–[107].
[46]Since they were not parties to the arbitration.

I do not regard those observations as applicable to the matters in issue in this appeal. Michael Wilson & Partners was not an application to stay the Supreme Court proceeding pending reference of the matter in dispute to arbitration. It was not contended in that case that the former employees qualified as parties to the arbitration agreement as claimants or defendants claiming through or under the former director and shareholder. The court had no cause to refer to or consider the meaning or application of s 7(2) of the IA Act.

The second observation relied upon was of McColl JA in Trustees of the Sydney Grammar School v Winch.[47] The question in that case was whether a claim brought by the daughter of a primary victim for damages for nervous shock alleged to have been suffered as a result of the victim’s death was dependent on the right of action vested in the victim and so fell within the exclusive jurisdiction of the Dust Diseases Tribunal under s 11 of the Dust Diseases Tribunal Act 1989 (NSW).
[47](2013) 83 NSWLR 80, 120–1 [191]–[195].

I do not consider that to be relevant either. As I apprehend McColl JA’s reasoning, the daughter’s claim for nervous shock was not dependent on any right of action vested in the deceased because, in contradistinction to a Lord Campbell’s Act claim, the daughter’s claim for nervous shock was open to be made even though there had been no breach of duty of care to the deceased. With respect, that has little if anything to say on the subject of whether, in a case where an essential element of a claim or defence is or has been vested in a party to an arbitration agreement, the claimant asserting the claim or defence is a party to the agreement within the meaning of s 7(4) of the IA Act.

The third observation on which counsel relied was of Steytler P of the Western Australian Court of Appeal in Paharpur Cooling Towers Ltd v Paramount (WA) Ltd.[48] The issue there was whether a dispute between a constructor and a client arising out of the dishonour of a bill of exchange drawn by the client pursuant to amended terms of the construction agreement and accepted by the client and a third party was a dispute within the meaning of an arbitration clause in the construction agreement. The court held that it was not.
[48][2008] WASCA 110, [33]–[47] (‘Paharpur’).

Flint Ink further submitted that the judge’s conclusion that Huhtamaki Australia’s claim was not relevantly derived from Huhtamaki NZ was in error because it was clear, including from the pleading itself, that Huhtamaki Australia had no dealings with Flint Ink and that all relevant dealings had been with Huhtamaki NZ. Therefore, to the extent that Huhtamaki Australia might possibly have a claim against Flint Ink, every fact and circumstance giving rise to such a claim necessarily concerned and originated with Huhtamaki NZ. The ‘source’ of Huhtamaki Australia’s claim was Huhtamaki NZ and it was therefore a derivative claim. Flint Ink referred to and relied upon what was decided by the High Court in Tanning.[85] Flint Ink referred to a key passage from the judgment of Brennan and Dawson JJ in Tanning.[86]
[85](1990) 169 CLR 332.
[86]See [141].

Flint Ink submitted that Huhtamaki Australia’s claim was such a derivative cause of action but that, in any event, an essential element of Huhtamaki Australia’s claim, namely breach of a duty of care, was alleged only against Huhtamaki NZ.

In response, Huhtamaki Australia submitted that its claim in the amended statement of claim was not a derivative claim but an independent claim, albeit having some of the same factual substratum. Huhtamaki Australia submitted that s 7(4) of the IA Act was directed to claims made by a party who was standing in the shoes of the party to the arbitration agreement and that, in the present case, it was not pleaded that there was any agency relationship between Huhtamaki Australia and Huhtamaki NZ, nor was there any parent-subsidiary relationship between the two corporations. Huhtamaki Australia submitted that its cause of action for damages was not a cause of action or part of a cause of action vested in Huhtamaki NZ and thus could not be correctly characterised as a derivative claim.

Consideration of Ground 2

It is clear and, was not contested, that s 7 of the IA Act applied to the arbitration agreement between Flint Ink and Huhtamaki NZ because the procedure in relation to arbitration under that arbitration agreement was governed by the law of a Convention country.[87]
[87]See s 7(1) of the IA Act.

The key question is whether Huhtamaki Australia is a person ‘claiming through or under’ Huhtamaki NZ within the meaning of s 7(4) of the IA Act because, if so, the third party proceeding brought by Huhtamaki Australia will be treated as ‘proceedings instituted by a party to an arbitration agreement…against another party to the agreement’.[88]
[88]See s 7(2)(a) of the IA Act.

The leading authority, if not the only significant one, is the decision of the High Court in Tanning.[89] That case involved an appeal by a foreign company to the Supreme Court of New South Wales against the rejection by a liquidator of a proof of debt. The alleged debt was for the price of goods sold under an agreement between the foreign company and the company in liquidation that contained an arbitration clause. At first instance and in the New South Wales Court of Appeal consideration was given to a number of other issues but Kirby P (as he then was) decided the appeal by reference to s 7(4) of the IA Act.[90] Kirby P, after referring to the object of upholding arbitration agreements, said:

There is, moreover, in s 7(4) an indication that the legislature contemplated derivative claims…the liquidator here is claiming through or under the company which is party to the agreement. Accordingly, he is entitled by the express terms of s 7(4), so long as his claim be lawful and otherwise within his powers, to claim through the company of which he is a liquidator. His application is thus the application ‘of a party to the agreement’.[91]

[89](1990) 169 CLR 332.

[90]O’Brien v Tanning Research Laboratories Inc (1988) 14 NSWLR 601. McHugh JA (as he then was) agreed with Kirby P, after withdrawing his own orders; see 641.

[91]Ibid 621.

On appeal to the High Court, the appellant creditor contended that the liquidator was not claiming ‘through or under’ the company for a number of reasons. One reason was that the liquidator was not claiming anything, but was resisting a claim. The second reason was that the liquidator was an officer of the Court, exercising his powers as such, and not acting as a claimant or as the company’s agent. The appellant further contended that the question of whether the debt should be admitted and in what amount was not a matter the determination was which was capable of settlement by arbitration.[92] In answer, the liquidator respondent submitted that the liquidator claimed through or under a party for the purposes of s 7(4) and that that provision was designed to apply to privies, that is third parties, whose rights or title in respect of property or contract were derived or claimed from or through the party and that in an appeal, the liquidator took up the company’s position.
[92]Compare ground 1 in the present appeal.

Brennan and Dawson JJ said that the liquidator was not the company and legal title to the assets of the company was not vested in him, nor was he a party to the arbitration agreement, but that s 7(4) of the IA Act brought within the ambit of s 7(2) a person who claimed ‘through or under a party’.[93] Although a person who was not a party to the arbitration agreement was not bound by the contract to submit to arbitration, a person who claimed ‘through or under a party’ was so bound by the force of the statute.[94] Their Honour’s said that in statutes similar to s 7 of the IA Act, the phrase ‘through or under a party’ or its equivalent had been construed to apply to inter alios a trustee of a bankrupt’s estate, an assignee of a debt arising out of a contract containing an arbitration clause, a company being a subsidiary of a parent company which was party to an arbitration agreement and a company being a parent of a subsidiary company which was party to an arbitration agreement when claims were brought against both companies based on the same facts.[95]
[93]See Tanning (1990) 169 CLR 332, 341.
[94]Ibid.
[95]Ibid 341–42.

Brennan and Dawson JJ then said:

In the first place, as sub-s. (2) speaks of both parties to an arbitration agreement, a person who claims through or under a party may be either a person seeking to enforce or a person seeking to resist the enforcement of an alleged contractual right. The subject of the claim may be either a cause of action or a ground of defence. Next, the prepositions "through" and "under" convey the notion of a derivative cause of action or ground of defence, that is to say, a cause of action or ground of defence derived from the party. 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. A liquidator may be a person claiming through or under a company because the causes of action or grounds of defence on which he relies are vested in or exercisable by the company; a trustee in bankruptcy may be such a person because the causes of action or grounds of defence on which he relies were vested in or exercisable by the bankrupt.[96]

[96]Ibid 342.

Their Honour’s continued by saying that a liquidator who rejected a proof of debt on general law grounds was standing in the same position vis a vis the creditor as did the company.[97] Further, the grounds raised by the liquidator fell under the arbitration clause and the question whether the company in liquidation owed the creditor an enforceable debt was clearly a ‘matter’ the determination of which was involved in the Supreme Court proceedings.[98]
[97]Ibid.
[98]Ibid 343.

Their Honours then said:

Thirdly, the matter to be referred to arbitration cannot extend to issues which would not arise in proceedings between [the company] and [the creditor] or which are unrelated to the contract containing the arbitration clause…The ultimate question whether the liquidator’s decision should be reversed or modified cannot itself be referred to arbitration though the answer to the question will follow inevitably upon determination of the matter of [the company’s] debt to [the creditor].[99]

[99]Ibid (citations omitted).

Toohey J, so far as relevant, agreed with Brennan and Dawson JJ.[100]
[100]Ibid 354–55.

Dean and Gaudron JJ said:

To ascertain whether s. 7(2) operates in respect of proceedings pending in a court it is necessary to first identify the subject matter of the controversy which falls for determination in those proceedings. Only when that has been done is it possible to identify whether the proceedings "involve the determination of a matter ... capable of settlement by arbitration": s. 7(2)(b). That process of identification is also necessary to ascertain whether, if a party to the proceedings is not a party to the arbitration agreement, he or she is a person "claiming through or under a party": s. 7(4).
It was contended on behalf of [the creditor] that the subject matter of the proof of debt proceedings was whether and, if so, in what amount the indebtedness of [the company] to it should be admitted in the winding up. That matter, it was argued, is not "a matter ... capable of settlement by arbitration". So much may be accepted as correct. Even so, it is clear from the proof of debt and the notice of rejection (and, as events have transpired, from the course which the proceedings have taken) that a decision as to the admission of any debt in the winding up depends entirely upon the determination of the amount, if any, owing and enforceable as a debt for goods sold and delivered by [the creditor] to [the company] pursuant to the licence agreement.
Even if some issue in addition to the amount of enforceable indebtedness must be determined before the proof of debt proceedings can be finally decided, that would not oust the operation of s. 7(2) of the Act. By requiring that the proceedings or so much of the proceedings as involves the determination of a matter capable of settlement by arbitration be stayed, s. 7(2) clearly contemplates that the proceedings may encompass issues additional to those constituting "a matter ... capable of settlement by arbitration"…
The word "matter" is not defined in the Act. In the quite different context of Ch. III of the Constitution, it has been held that the word "matter" means "the whole matter" and encompasses "all claims made within the scope of the controversy”. However, in any context, "matter" is a word of wide import. In the context of s. 7(2), the expression "matter ... capable of settlement by arbitration" may, but does not necessarily, mean the whole matter in controversy in the court proceedings. So too, it may, but does not necessarily encompass all the claims within the scope of the controversy in the court proceedings. Even so, the expression "matter ... capable of settlement by arbitration" indicates something more than a mere issue which might fall for decision in the court proceedings or might fall for decision in arbitral proceedings if they were instituted. It requires that there be some subject matter, some right or liability in controversy which, if not co-extensive with the subject matter in controversy in the court proceedings, is at least susceptible of settlement as a discrete controversy. The words "capable of settlement by arbitration" indicate that the controversy must be one falling within the scope of the arbitration agreement and, perhaps, one relating to rights which are not required to be determined exclusively by the exercise of judicial power…
The substance of the controversy between [the creditor] and the liquidator is the amount, if any, enforceable as a debt for goods sold and delivered to [the company] under the licence agreement. That controversy is susceptible of settlement as a discrete controversy. And, when stated in those terms, the controversy is readily seen as one arising out of or relating to the licence agreement and thus encompassed within the agreement to arbitrate contained in cl. 10. Moreover, the controversy is as to a matter of a kind which is frequently the subject of arbitration proceedings and which could not be said to require determination only by the exercise of judicial power.[101]

[101]Ibid 350–52 (citations omitted).

Although the approach taken by Deane and Gaudron JJ differed from the approach taken by Brennan and Dawson JJ, I do not discern (despite submission by senior counsel for Huhtamaki Australia to the contrary) any difference of fundamental principle.

The question whether the claim by Huhtamaki Australia in the third party proceeding is a claim made ‘through or under’ Huhtamaki NZ must be determined by reference to the limited facts that are available together with the content of the amended statement of claim.

The uncontested evidence was that Flint Ink did not supply the ink products to Huhtamaki Australia and that Flint Ink had not dealt with Huhtamaki Australia. The following aspects of the amended statement of claim are, it seems to me, of relevance:

·It is alleged that Flint Ink knew or ought to have known that Huhtamaki Australia (as well as Huhtamaki NZ) was manufacturing and supplying flexible packaging for the purpose of packaging food but the particulars as to how that knowledge could be inferred relate only to the commercial relationship between Huhtamaki NZ and Flint Ink, the supply by Flint Ink of ink to Huhtamaki NZ and the fact that Flint Ink had an employee placed permanently in Huhtamaki NZ’s business premises.[102]
[102]The amended statement of claim says that further particulars will be provided after discovery but nothing in the particulars as supplied refers to Huhtamaki Australia.
·Huhtamaki NZ used corona treated substrates for the manufacture of flexible packaging and Flint Ink knew of this.
·Flint Ink held itself out to Huhtamaki Australia (as well as Huhtamaki NZ) as a specialist ink manufacturer and supplier.
·Flint Ink advised Huhtamaki NZ (no reference to Huhtamaki Australia) that Melam ink was a suitable ink for use as required by Huhtamaki NZ and that Melam ink had very good adhesion properties - all of the particulars in relation to the composition of that advice relate to Huhtamaki NZ.
·In reliance on the advice, Huhtamaki NZ (no reference to Huhtamaki Australia) purchased the ink and used it in the production of the packaging for Lion-Dairy.
·Flint Ink knew or ought to have known that Huhtamaki NZ (no reference to Huhtamaki Australia) relied on that advice.
·By giving the advice, Flint Ink assumed the responsibility of advising Huhtamaki NZ (no reference to Huhtamaki Australia) as to what inks would be suitable for the purposes of Huhtamaki NZ.
·That ‘in the premises’ Huhtamaki NZ and Huhtamaki Australia were vulnerable and susceptible to suffering economic loss if Flint Ink recommended unsuitable inks. The particulars provided of this vulnerability refer to the reliance of Huhtamaki NZ known to Flint Ink. The particulars provided of the vulnerability of Huhtamaki Australia were ‘the proximity and nature of the relationship between it Huhtamaki NZ and Flint Ink in the circumstances described above’ although ‘the circumstances described above’ do not appear to take the matter very far if at all, other than perhaps the reference to Huhtamaki Australia being part of the Huhtamaki ‘group’.
·That a reasonable person in the position of Flint Ink would have foreseen that a failure to exercise reasonable care in advising Huhtamaki NZ (no reference to Huhtamaki Australia) as to suitable inks involved a risk of causing economic loss to Huhtamaki NZ, Huhtamaki Australia and Lion-Dairy.
·‘In the premises’ Flint Ink owed Huhtamaki NZ, Huhtamaki Australia and Lion-Dairy a duty to exercise reasonable care and skill in advising Huhtamaki NZ as to suitable inks.
·In breach of the said duty of care, Flint Ink failed to exercise reasonable care and skill in giving the advice to Huhtamaki NZ (no reference to Huhtamaki Australia).

It is clear from the foregoing that any liability of Flint Ink to Huhtamaki Australia is almost entirely, if not entirely, dependent on the facts pleaded in relation to Huhtamaki NZ. Although it is pleaded that Flint Ink owed a duty of care to Huhtamaki Australia the pleading does not make it apparent as to how that duty of care arose other than by virtue of the fact that Huhtamaki Australia and Huhtamaki NZ were part of the same ‘group’ of companies. In those circumstances, it seems to me that Huhtamaki Australia’s cause of action is a derivative one in the sense referred to in Tanning and that the claim of Huhtamaki Australia is being made ‘through or under’ Huhtamaki NZ. In those circumstances too, I consider that essential elements of the cause of action, having regard to the way the matter is pleaded, are ‘vested in’ Huhtamaki NZ in the sense referred to by Brennan and Dawson JJ in Tanning.

Alternatively, adopting the approach taken by Dean and Gaudron JJ, the subject matter of the controversy falling for determination in the third party proceeding is whether Flint Ink gave negligent advice as to suitable inks to Huhtamaki NZ, that advice was relied upon by Huhtamaki NZ and that, as a result, Flint Ink is liable for any foreseeable consequential loss and, hence, liable to provide indemnity or contribution to Huhtamaki Australia in respect of any liability of Huhtamaki Australia to Lion-Dairy. The determination of that matter, so far as the pleading discloses, depends almost entirely upon the factual situation as between Flint Ink and Huhtamaki NZ.[103] Therefore, it seems to me, taking that approach also, that the claim of Huhtamaki Australia is being made ‘through or under’ Huhtamaki NZ.
[103]Compare Roussel-Uclaf [1978] 1 Ll.L.Rep 225, 231.

Accordingly, I would uphold ground 2.

Outline of submissions in relation to ground 1

Huhtamaki Australia submitted that the third party proceeding did not involve the determination of a matter that, in pursuance of the arbitration agreement, was capable of settlement by arbitration.[104] In essence, Huhtamaki Australia contended that its claim involved an independent cause of action for indemnity or contribution which was not comprehended within the arbitration agreement and therefore not capable of settlement by arbitration. Huhtamaki Australia submitted that the decision of the Judge in that regard was correct.
[104]See s 7(2)(a) of the IA Act.

In answer, Flint Ink submitted that once it was determined that the claim of Huhtamaki Australia was made ‘through or under’ Huhtamaki NZ, there was nothing about the subject matter of the controversy that rendered it incapable of settlement by arbitration pursuant to the arbitration agreement.

Consideration of ground 1

I would accept Flint Ink’s submission. In my view, the appeal turns on the question whether Huhtamaki Australia’s claim is made ‘through or under’ Huhtamaki NZ. I agree that, once that question is determined in favour of Flint Ink, the substantial matter involved in the third party proceeding is capable of settlement by arbitration pursuant to the arbitration agreement. I would add that I see no reason why, once the claim of Lion-Dairy against Huhtamaki Australia has been determined, an arbitrator would not be lawfully able, in pursuance of the arbitration agreement, to determine the liability of Flink Ink to Huhtamaki Australia including any questions of indemnity or contribution under Victorian law (assuming that to be the applicable law).

Huhtamaki Australia suggested that an arbitrator in New Zealand, or under New Zealand law, might consider that he had no power to determine the liability of Flint Ink to indemnify Huhtamaki Australia (or to make contribution) but I do not think that is so. Both Huhtamaki Australia and Flint Ink would be bound by a reference to arbitration by order of the Court and there would be no reason for an arbitrator to take such a point of his own motion.

Conclusion

I would therefore allow the appeal and in accordance with the proposed amended notice of appeal, stay the third party proceeding and refer the parties thereto to arbitration in respect of the matters the subject of the third party proceeding.

However, two further questions arise. The Court is empowered under s 7(2) of the IA Act to make such an order ‘upon such conditions (if any) as it thinks fit.’ In my opinion two conditions should be imposed (subject to any submissions by the parties). The first condition should, in my view, provide that the arbitration is not to commence unless and until this Court has determined the questions of liability and damages as between Lion-Dairy and Huhtamaki Australia. Otherwise, any arbitration would be premature – indeed the matter referred is entirely hypothetical unless and until it is determined whether, and if so, upon what basis, Huhtamaki Australia is liable in damages to Lion-Dairy. Without such a condition being satisfied, there can be no viable matter for referral to arbitration. The second condition should, in my view, provide that Flint Ink is entitled to participate in and is bound by the result of the proceeding in this Court involving the determination of liability and damages as between Lion-Dairy and Huhtamaki Australia. Without such a condition, inconsistent findings would be possible and a fundamental object of third party proceedings might be frustrated.

- - -

[2014] VSCA 166

6 August 2014