Siam Steel International PLC v Compass Group (Australia) Pty Ltd - [2014] WASC 415

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: SIAM STEEL INTERNATIONAL PLC -v- COMPASS GROUP (AUSTRALIA) PTY LTD [2014] WASC 415

CORAM: LE MIERE J

HEARD: 17 SEPTEMBER 2014

DELIVERED : 7 NOVEMBER 2014

FILE NO/S: CIV 1113 of 2014

BETWEEN: SIAM STEEL INTERNATIONAL PLC
Plaintiff
AND
COMPASS GROUP (AUSTRALIA) PTY LTD
Defendant

Catchwords:

Arbitration agreement - Whether the International Arbitration Act 1974 (Cth) applies - No notice of dispute given - Arbitration agreement is not inoperative - Proceedings stayed - Parties referred to arbitration

Legislation:

Commercial Arbitration Act 1985 (WA)
Commercial Arbitration Act 2012 (WA), s 8
Commercial International Arbitration Act 1974 (Cth), s 7

Result:

Proceedings stayed
Parties referred to arbitration

Category: B

Representation:

Counsel:

Plaintiff: Mr P G Clifford
Defendant: Mr M N Solomon SC

Solicitors:

Plaintiff: Alan Rumsley
Defendant: Norton Rose Fulbright Australia

Case(s) referred to in judgment(s):

Bakri Navigation Company Ltd v Owners of Ship 'Golden Glory' Glorious Shipping SA (1991) 217 ALR 152
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 88 ALJR 447
Hi‑Fert Pty Ltd v Kiukiang Maritime Carriers Inc (1998) 155 ALR 94
Lightsource Technologies Australia Pty Ltd v Pointsec Mobile Technologies AB [2011] ACTSC 59
Mannai Investment Company Ltd v Eagle Star Assurance Co Ltd [1997] AC 749
LE MIERE J:

Overview

In May 2012 the plaintiff, Siam Steel International Plc (SSI), entered into an agreement with the defendant, Compass Group (Australia) Pty Ltd (Compass), by which SSI agreed to supply accommodation buildings at the Gateway Village in South Headland for $28,997,543. The relevant terms of the contract included the following. SSI was to provide security of 10% of the contract price by way of an approved banker's undertaking. When Compass agreed to make an advance payment to SSI, SSI was required to provide additional security in an amount equal to that advance payment. SSI was to make progress payment claims for complete shipments upon the issue of a certificate of practical completion by Compass. There were other terms relating to security by SSI and payments to SSI. SSI provided Compass with three banker's undertakings in the amount of $4,349,631.
SSI made shipments of materials under the contract. Compass reported to SSI that the first shipment contained alleged plumbing defects. As a result, SSI and Compass agreed to vary the payment terms of the contract which included Compass retaining 20% of the value of each shipment by way of retention monies. SSI has submitted progress payment claims and has been paid a total of $20,073,265. SSI says that Compass has retained the sum of $7,317,967 by way of cash retention.
SSI says that it has carried out rectification works and that it has achieved practical completion and that Compass has taken occupation of the works. Compass alleges that SSI has not completed the work and that it is in breach of the contract because of defects in the work.
By a letter in December 2013 Compass stated its intention to have recourse to retention monies and/or cash security and/or to convert into money a security that does not consist of money. The letter said that the reasons for that recourse were set out in a communication to SSI in which Compass indicated that it was taking over the whole of the work under the contract and that it had previously taken action to rectify defects SSI had been directed to take by Compass but failed to do so. Compass identified in a letter costs to rectify defects of the works with a total of $1,765,489.
On 28 January 2014 SSI filed a writ of summons in which it claimed a declaration that the contract provides that Compass is not entitled to call upon the bankers' undertakings unless and until it is genuinely entitled to access the bankers' undertakings and then only for the reasonable costs of rectifying defective work and then only after it has exhausted security provided by way of cash retentions. SSI claimed an injunction restraining Compass from demanding or receiving any payment from the banks pursuant to the bankers' undertakings. Prior to filing the writ, SSI made an ex parte application for an interim injunction. On 27 January 2014 Simmonds J delivered draft reasons for decision (Draft Reasons) and made orders restraining Compass from making a demand for payment on the bankers' undertakings (the Orders).
On 28 January 2014 SSI served on Compass a number of documents including the Writ of Summons, the affidavits of Alan Rumsley and Surapol Kunanantakul each sworn 24 January 2014 in support of its application for the interim injunction, the Draft Reasons, the Orders and the outline of submissions of SSI in support of its application for the interim injunction (Outline of Submissions). I will refer to those documents collectively as the January Court Documents.
On 7 April 2014 SSI delivered to Compass a minute of proposed amended writ of summons dated 7 April 2014 (Draft Amended Writ). The writ of summons was subsequently amended in similar, but not identical, terms on 7 May 2014.

This application

By chamber summons filed 13 May 2014 Compass seeks orders that the matter be stayed and referred to arbitration pursuant to s 8 of the Commercial Arbitration Act 2012 (WA) or alternatively pursuant to the inherent jurisdiction of the court. Compass has sought to amend its chamber summons to seek orders that the matter be stayed and referred to arbitration pursuant to s 7(2) of the International Arbitration Act 1974 (Cth) or alternatively s 8 of the Commercial Arbitration Act or alternatively the inherent jurisdiction of the court. SSI opposed leave to amend the chamber summons on the ground that the International Arbitration Act does not apply to the arbitration agreement in the contract. Compass does not press its claim pursuant to the inherent jurisdiction of the court and I need say nothing further about that.

Does the International Arbitration Act apply?

The International Arbitration Act was enacted 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 24th meeting (the New York Convention). The International Arbitration Act s 7 provides that that section applies to an arbitration agreement where, amongst other things, a party to an arbitration agreement is a person who was, at the time when the agreement was made, domiciled or ordinarily resident in a country that is a Convention country. Arbitration agreement means an agreement in writing of the kind referred to in sub‑article 1 of Article II of the Convention. The kind of agreement in writing referred to in sub‑article 1 of Article II of the Convention is an agreement under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration. The agreement contained in cl 48 of the contract is an agreement in writing of that kind. At the time when the agreement was made SSI was domiciled or ordinarily resident in Thailand. Thailand is a Convention country.
SSI submitted that the International Arbitration Act does not apply to the arbitration agreement in the contract because of the terms of the contract. The General Conditions of Contract cl 1.2 and Annexure A provide that the contract shall be governed by and construed with a reference to the laws for the time being in force in Western Australia. Clause 48.3 and Annexure A of the General Conditions provide that arbitration shall be effected in accordance with the Western Australian Commercial Arbitration Act 1985 Rules for the conduct of commercial arbitration. SSI submits that the reference to the Commercial Arbitration Act 1985 (WA) should be read as a reference to the Commercial Arbitration Act 2012 (WA). SSI submits that on the express words of the contract the parties intended that the contract would be subject to the law of Western Australia, any arbitration which would be commenced or contemplated as a result of the dispute between the parties would be governed or managed in accordance with the Commercial Arbitration Act 1985 (WA) and there was no contemplation of, or agreement to, the application of the International Arbitration Act or any associated international treaties and rules.
Section 7(1) of the International Arbitration Act provides that the section applies to the agreement if any of the four conditions specified in the subsection are met. The condition specified in subpar (d) is met. As a matter of statutory construction s 7 applies to the arbitration agreement in the contract. A key element in s 7 is that the stay is mandatory. Once the requirements of the section are satisfied a party cannot rely on jurisdiction clauses or choice of law clauses to resist the grant of a stay order. The International Arbitration Act is in terms applicable to the arbitration agreement in the contract and it must be applied without reference to the normal choice of law process or jurisdiction clauses.
The International Arbitration Act applies to the arbitration agreement in the contract. I will consider the defendant's application in relation to the International Arbitration Act. If, contrary to my finding, the International Arbitration Act does not apply then the Commercial Arbitration Act applies. It is not necessary to separately consider the application of the Commercial Arbitration Act because its provisions are relevantly the same as those of the International Arbitration Act.

The statutory provisions and the arbitration agreement

SSI contends that the court should not make an order staying the proceedings and referring the parties to arbitration in respect of the matter because the arbitration agreement is inoperative. To explain that contention it is necessary to set out s 7(2) and (5) of the International Arbitration Act and cl 48 of the contract. The International Arbitration Act s 7 relevantly provides:
(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.
…
(5)A court shall not make an order under subsection (2) if the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed.
Clause 48 of the contract relevantly provides:
48.1 Notice of Dispute
In the event of any dispute or difference arising between the Contractor and the Company, or the Company's Representative on its behalf, as to the construction of the Contract or as to any matter or thing of whatsoever nature arising thereunder or in any connection therewith, then either party shall give to the other notice in writing adequately identifying the matters the subject of that dispute or difference.
Notwithstanding the existence of a dispute, both the company and the Contractor shall continue to perform their respective obligations under the Contract.
48.2 Parties to Confer
Within 14 days of the service of a notice of dispute under Clause 48.1, the parties shall confer at least once to attempt to resolve the dispute and falling resolution of the dispute to explore alternative methods of resolving the dispute. At any such conference each party shall be represented by a person having authority to agree to a resolution of the dispute.
If after 28 days from the service of the notice of dispute under Clause 48.1 the dispute cannot be so resolved or if at any time either party considers that the other party is not making reasonable efforts to reach a resolution, either party may be notice in writing to the other party refer the dispute to arbitration. The dispute cannot be referred to arbitration unless such a notice under this Clause 48.2 is issued not later than 90 days after the service of the notice of dispute under Clause 48.1.

The issues

SSI says that it gave a notice of dispute on 28 October 2013 by a letter to Compass, or alternatively on 28 January 2014, by serving the January Court Documents on Compass. SSI says that Compass did not give a notice referring the dispute to arbitration until 7 May 2014 which is more than 90 days after the service of the notice of dispute upon it. Therefore, SSI says, pursuant to the terms of cl 48.2 of the contract, the dispute cannot be referred to arbitration. SSI says that the arbitration agreement is therefore inoperative and in accordance with s 7(5) of the International Arbitration Act the court shall not make an order staying the proceedings or referring them to arbitration.
Compass says that neither the letter of 28 October 2013 nor service of the January Court Documents was a notice of dispute under cl 48.1 of the contract. Compass says that it gave a notice of dispute by a letter of 6 February 2014 or alternatively SSI gave notice of dispute by serving on Compass the Draft Amended Writ on 7 April 2014. Compass gave notice referring the matter to arbitration on 7 May 2014. Where the expression used is 'not less than' a certain period of time, the period contemplated is exclusive of both the date on which the obligation is imposed and the date for its performance. Accordingly, the notice of referral was issued not later than 90 days after 7 April 2014. Hence both the letter of 6 February 2014 and the Draft Amended Writ, if they are relevantly notices of dispute, were within the time limit specified in cl 48.2 of the contract.
Compass says that it gave a notice of referral in accordance with cl 48.2 of the contract. Therefore, Compass says, the arbitration agreement is operative and the court is not precluded by s 7(5) of the International Arbitration Act from staying the proceedings and referring the parties to arbitration.
The first issue for determination is whether each of SSI's letter of 28 October 2013, service of the January Court Documents, Compass' letter of 6 February 2014 and service of the Draft Amended Writ is a notice of dispute for the purposes of cl 48.1 of the contract. The second issue is whether or not, having regard to my findings on the fifth issue, the arbitration agreement is inoperative.

Notice of dispute

Whether or not SSI's letter of 28 October 2013 and the other alleged notices, were notices of dispute under cl 48.1 of the contract depends upon the proper construction of cl 48.1 and a consideration of the terms of the alleged notices, construed objectively.
The objective of the construction of an arbitration agreement, like any commercial contract, is to achieve a commercially sensible result. In Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 88 ALJR 447 French CJ, Hayne, Crennan and Kiefel JJ said:
[T]his Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption 'that the parties … intended to produce a commercial result'. A commercial contract is to be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience' [35].
The objective approach applied under principles of commercial construction requires the use of a 'reasonable person' to determine the parties' intention. The relevant principle is the 'perspective rule' under which the reasonable person is taken to stand in the shoes of the addressee of the words at issue: Carter JW, The Construction of Commercial Contracts (2013) [11‑22]. In Mannai Investment Company Ltd v Eagle Star Assurance Co Ltd [1997] AC 749 the House of Lords considered the validity of notices to terminate a lease. Lord Steyn characterised the notices as belonging to the general class of unilateral notices served under contractual rights reserved eg notices to quit, notices to determine licences, notices to complete and notices under charter parties or contracts of afreightment. Lord Steyn said that such notices may be valid if they are sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate. Lord Steyn added:
That test postulates that the reasonable recipient is left in no doubt that the right reserved is being exercised. It acknowledges the importance of such notices. The application of that test is principled and cannot cause any injustice to a recipient of the notice (768).
The purpose of a notice of dispute under cl 48.1 is to inform the other party that there is a dispute, to identify the dispute and to inform the other party that the rights of the party giving the notice are being exercised and the time limited for referring the matter to arbitration has begun to run. A notice of dispute therefore requires some measure of formality so that the recipient knows that the dispute resolution process has been triggered and the relevant rights are being exercised and time has begun to run. That a measure of formality is required for a notice of dispute is confirmed by the terms of cl 48.2. That clause refers to the service of a notice of dispute. There must be something which can properly be described as 'a notice' and it must be served. A notice is a direct and definite statement of a thing, as distinguished from supplying materials from which the existence of such a thing may be inferred. A notice of dispute under cl 48.1 is a notice which brings home to the mind of a reasonable reader that there is a dispute between the parties and that it is a notice under cl 48.1. The notice must also adequately identify the matters the subject of that dispute . Any other construction would not be a businesslike interpretation of the clause.
The first step is to determine whether a reasonable person in the position of the recipient of the alleged notice would understand it to have been given for the purpose of giving notice of a dispute between the parties under cl 48.1 of the contract. If a reasonable person in the position of the recipient would have understood the alleged notice to have been given for that purpose the next step is to consider whether the alleged notice adequately identifies the matters the subject of the dispute.

SSI's letter of 28 October 2013

The plaintiff says that its letter of 28 October 2013 must be considered in its context. The plaintiff says that the immediate context of the letter is the correspondence which preceded it. I will summarise that correspondence.
The first letter referred to by SSI is a letter of 31 May 2013 from Hatch Associates Pty Ltd, Compass' agent or supervisor, to SSI. Hatch stated that specified defects have been identified in the accommodation modules delivered by SSI with some resulting in an instruction being issued to SSI to rectify them. Hatch said that while some of the defects have been rectified a number remain outstanding and required SSI to advise it of the current status of those defects. Hatch referred to relevant provisions of the special conditions of contract including the application of liquidated damages clause and the withholding of payments until default was rectified clause. Hatch concluded by stating that if the outstanding defects were not substantially remedied by 20 June 2013 Compass would pursue its contractual options and in the meantime reserved its rights.

On 31 May 2013 Hatch wrote a second letter to SSI. The letter stated that it was a notice issued under cl 33 of the general conditions of contract which deals with defective work or materials. The letter said that SSI had failed to use materials, being moisture resistant furniture particleboard, that are suitable and required by the contract. The letter stated that Compass requires SSI to replace all furniture in specified modules with furniture manufactured of moisture resistant general purpose particle board and to submit a remedial work management plan detailing how this is to be achieved.
On 4 June 2013 Hatch again wrote to SSI a letter stated to be under cl 33 of the general conditions. The letter said that SSI has failed to ensure a sufficient standard of workmanship as required by cl 33.5. Specifically, Hatch said that door and window seals had not been installed so as to be watertight and are therefore not fit for their intended purpose. The letter stated that Compass requires SSI to rectify defective door and window seals in specified modules and to submit a remedial work management plan detailing how that was to be achieved.
On 6 June 2013 Hatch sent to SSI a letter stating that it was a show cause notice issued under cl 45 of the general conditions. Clause 45 deals with default by SSI. Clause 45.2 provides that if the contractor commits a substantial breach of contract and Compass considers that damages may not be an adequate remedy, Compass' representative may give SSI a written notice to show cause. If SSI fails to show reasonable cause Compass may take out of the hands of SSI the whole or any part of the work under the contract or terminate the contract. The letter stated that SSI has failed to use materials, being moisture resistant furniture particle board, that are suitable and in compliance with the contract and has failed to comply with a site instruction in accordance with cl 26 of the general conditions. The letter required SSI to show cause why Compass should not exercise its rights to take the work out of the hands of SSI. On 10 June 2013 Hatch wrote a further letter to SSI stated to be a show cause notice under cl 45 of the general conditions. The letter stated that SSI has failed to submit a remedial work management plan for rectification of door and window seals and failed to comply with a site instruction.
On 23 October 2013 Compass sent a letter to SSI which was stated to be a show cause notice under cl 44 of the general conditions. The letter stated that SSI had failed to or failed to comply with:
(a)the rectification of defects in the accommodation modules specified in Hatch's letter of 31 May 2013;
(b)the replacement of furniture in the accommodation modules delivered by SSI with furniture manufactured of moisture resistant general purpose particleboard as specified in Hatch's letter of 31 May 2013;
(c)notice under cl 33 regarding door and window weather sealing as specified in Hatch's letter dated 4 June 2013;
(d)to respond to the show cause notice as to why SSI has not used materials, being moisture resistant furniture particleboard that are suitable as required by cl 33.2 of the general conditions as specified in Hatch's letter dated 6 June 2013;
(e)to respond to the show cause notice under cl 45 in Hatch's letter of 10 June 2013.
The letter stated that Compass considers there are numerous other substantial breaches of the contract. The letter stated that SSI is required to show cause why Compass should not exercise its rights under cl 45.4(a) of the general conditions.
It was then that SSI sent to Compass its letter of 28 October 2013 which SSI says is a notice of default under cl 48.1 of the contract. The letter states that its subject is 'Gateway Village project, supply contract number H339419‑C006', and it is re 'Request for the return of 20% withholding payment and 10% cash retention and the issuance of certificate of practical completion'. The letter states as follows. The separable portions/shipments have been completely delivered to and received by Compass. Compass is now holding the amount of the payment to be made to SSI by Compass and the bank guarantees, being the total amount of $13,298,896.80. SSI has arranged for remedial work to be done by local contractors and paid them an amount of $1,456,538.27. A further amount of $724,893.61 is demanded by the subcontractors. SSI requests that Compass returns SSI the 20% deduction amount of $4,757,954.90 so that it will be able to pay the contractors. SSI also requests Compass to return the 10% cash retention as the cash retention is supposed to be in exchange for the bank guarantee which is now being held by Compass. Accordingly, Compass should return SSI the 20% deduction amount and 10% cash retention being the total amount of $7,499,388.20. Further, all shipments have been delivered and defects remedied and Compass has made commercial use of the accommodation buildings. SSI requests that Compass issue certificates of practical completion for all shipments. SSI also proposes a meeting between Compass and SSI to discuss the matter, to find solutions and dissolve all the outstanding issues in the matter.
Counsel for SSI also referred to correspondence after SSI's letter of 28 October 2013. Counsel stated that those letters show that Compass did not accept that SSI had remedied the defaults or that practical completion had been achieved.
At the time SSI sent its letter of 28 October 2013 to Compass there was, at least, a difference between them. Compass claimed that SSI had failed to carry out the work in accordance with the contract and failed to remedy defects in its work. SSI claimed that it had carried out all of the rectification work it was required to do and had achieved practical completion. However, the time limit in cl 48.1 of the contract is not 90 days after a dispute or difference has arisen between the parties but 90 days after the service of a notice of dispute under cl 48.1. SSI's letter of 28 October 2013 is not a notice of dispute under cl 48.1. The letter does not state that it is a notice of dispute under cl 48.1. A reasonable person in the position of Compass would not have understood that the letter was a notice of dispute under cl 48.1 or was given for the purpose of being notice of a dispute under cl 48.1. The letter makes no reference to arbitration or the settlement of disputes under the contract. The letter does not state that there is any dispute between the parties.
A reasonable person in the position of Compass would have inferred that there was a dispute between SSI and Compass but that is not sufficient. A notice of dispute is a direct and definite statement that there is a dispute between the parties. The letter of 28 October 2013 does not do that. Furthermore, a reasonable person in the position of Compass would not have understood the letter to have been given for the purpose of being a notice of dispute under cl 48.1 of the contract. The letters from Compass, or its agent, before 28 October 2013 letter were letters said to be issued under cl 33 of the general conditions or show cause notices under cl 45 of the general conditions. A response to them would not necessarily be understood by a reasonable person to be a notice of dispute under cl 48.1 of the contract.
As I have said, in its 28 October 2013 letter SSI proposed a meeting between Compass and SSI to discuss the matter, to find solutions and to resolve all outstanding issues in the matter. That is consistent with the requirement under cl 48.2 that within 14 days of the service of a notice of dispute under cl 48.1 the parties shall confer at least once to attempt to resolve the dispute. However, that is not sufficient to render the letter a notice of dispute.
Furthermore, the letter does not adequately identify the matters the subject of the dispute between the parties. The letter states that the separable portions/shipments have been completely delivered to and received by Compass and that SSI made an arrangement through subcontractors for rectifications. The letter requests that payment be made to SSI and requests that Compass issue certificates of practical completion. A request followed by a refusal, or failure to comply with a request, may give rise to a dispute but a request itself cannot be properly described as a notice of dispute.
A notice of dispute might adequately identify the matters the subject of the dispute by incorporating or expressly referring to another document which identifies the matters the subject of the dispute. However, the 28 October 2013 letter did not do that. It is not sufficient that Compass might ascertain the matters the subject of the dispute by reviewing the correspondence and inferring the matters in dispute. A notice must definitely state, either within the notice itself or by express reference to another document, the matters in dispute.

January Court Documents

SSI does not claim that the whole of each document making up the January Court Documents is a notice of dispute. SSI's counsel identified certain parts of each document which are said to constitute a notice of dispute, either individually or collectively. Parts of documents from which something may be inferred is the antithesis of a notice. The January Court Documents, individually or collectively, are not a direct and definite statement of a dispute under cl 48.1 of the contract. A reasonable person in the position of Compass served with those documents would not know that SSI was thereby giving notice of a dispute under cl 48.1 of the contract. Far from being left in no reasonable doubt that the documents are intended to operate as a notice of dispute, a reasonable person in the position of Compass would have understood that the service of those documents informed Compass that SSI had issued court proceedings against it ‑ the antithesis of a notice of dispute which if unresolved might lead to an arbitration.
Furthermore, the January Court Documents do not adequately identify the dispute. The issues, and hence the matters in dispute, in the court proceedings are determined by Compass' response to the claims and assertions in the January Court Documents, not passages in those documents alone.

Compass' 6 February 2014 letter

Compass' letter of 6 February 2014 was addressed to SSI's lawyer. Its stated subject matter is 'Breach of contract by Siam Steel International Plc'. The letter states that SSI is in breach of its obligations under the contract and that as a result of the defective work supplied by SSI, Compass took over the work in accordance with cl 45.4(a) of the General Conditions. The letter then sets out Compass' claims against SSI under the contract which are stated to be:
1.the cost of rectifying defective works (which may be set off against any payments, including security, owing to the Contractor pursuant to cl 40 of the General Conditions); and
2.additional costs incurred by Compass in completing the works having taken over the works (cl 45.6 of the General Conditions) and
3.delay in delivery and completion of the works.
Under the subheading 'Furniture claim' the letter states that in light of the argument presented by SSI in support of the ex parte injunction, Compass provides the following clarification in relation to the claim for the replacement of defective furniture. Under the heading 'Conclusion' the letter states that Compass currently holds $12,062,707 in security made up by $6,263,198 in retention monies/monies withheld and bankers' undertakings totalling $5,799,508. The letter states that given that Compass estimates its total claim at more than $15 million Compass considers that it has a clear entitlement to make a demand under the bankers' undertakings but this letter does not constitute notice under cl 8.4 of the General Conditions of an intention to make a demand under the bankers' undertakings.
The letter is not a definite and direct statement of a dispute under cl 48.1. A reasonable person in the position of SSI would not have known that the letter was giving notice of a dispute under cl 48.1 of the contract. The thrust of the letter appears to be that Compass has claims against SSI for breach of contract which exceed the amounts held by Compass as security in the form of retention monies/monies withheld and bankers' undertakings and accordingly has an entitlement to make a demand under the bankers' undertakings. Such a letter would not be understood by a reasonable person in the position of SSI to be notice of a dispute under cl 48.1 of the contract.

Draft Amended Writ

The Draft Amended Writ is not notice by SSI to Compass of a dispute under cl 48.1 of the contract. The Draft Amended Writ is part of a conferral between the parties as to a step to be taken by SSI in the court proceedings or alternatively an informal warning of a step that SSI proposed to take in the court proceedings. Taking a step in court proceedings, or informing the other party that the first party proposes to take that step or conferring about it is the antithesis of giving notice of a dispute triggering the dispute resolution procedure in cl 48 of the contract.

No notice of dispute given

For the reasons I have stated none of the 28 October 2013 letter, the January Court Documents, the 6 February 2014 letter or the Draft Amended Writ is a notice of dispute under cl 48.1 of the contract. No notice of dispute has been given. Compass' purported notice of referral of dispute to arbitration by its letter of 7 May 2014 was of no force and effect.

Arbitration agreement is not inoperative

Section 7(5) of the International Arbitration Act provides that a court shall not make an order staying the proceedings and referring the parties to arbitration if the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed. In oral submissions counsel for the plaintiff and the defendant submitted that if none of the purported notices of dispute was a notice of dispute for the purposes of cl 48.1 of the Contract then the arbitration agreement was inoperative in relation to the disputes which are the subject of this action and the defendant's application should be dismissed. I subsequently considered that it was arguable that the arbitration agreement was not inoperative in relation to the plaintiff's claims merely because no notice of dispute had been given and an arbitrator had not validly been appointed. I invited the parties to make further written submissions on the issue.
In written submissions the plaintiff submitted that the failure of either party to 'enliven' the arbitration agreement in cl 48 by giving a notice of dispute in accordance with cl 48.1 does not render the arbitration agreement inoperative. I agree with that submission. The meaning of 'inoperative' in s 7(5) was considered by Gummow J in Bakri Navigation Company Ltd v Owners of Ship 'Golden Glory' Glorious Shipping SA (1991) 217 ALR 152 where his Honour said:
This is because, in my view, the arbitration agreement has, in any event, become 'inoperative' within the meaning of s 7(5). In that regard, Sir Michael Mustill and Mr S C Boyd state, in the 2nd edition of their work, The Law and Practice of Commercial Arbitration in England, Butterworths, London, 1989, p 464:
'The expression "inoperative" has no accepted meaning in English law, but it would seem apt to describe an agreement which, although not void ab initio, has for some reason ceased to have effect for the future. Three situations can be envisaged in which an arbitration agreement might be said to be "inoperative". First, where the English Court has ordered that the arbitration agreement shall cease to have effect, or a foreign court has made a similar order which the English Court will recognise.
Second … there may be circumstances in which an arbitration agreement might become "inoperative" by virtue of the common law doctrines of frustration, discharge by breach, etc. Third, the agreement may have ceased to operate by reason of some further agreement between the parties (169).'
Nothing has happened which renders the arbitration agreement inoperative in relation to the claims of the plaintiff in this action. The arbitration agreement has not ceased to have effect for the future in relation to the plaintiff's claims in this action.
An arbitration agreement is not inoperative in relation to particular claims merely because an arbitrator has not been appointed or a step that must be taken before an arbitrator is appointed has not yet been taken in relation to those claims. To construe 'inoperative' to cover such a situation would turn the exception in s 7(5) into a backdoor for a party wanting to escape the arbitration agreement. The effect of s 7 of the International Arbitration Act is that the parties are to be held to their bargain to arbitrate except relevantly where the arbitration agreement has ceased to have effect for the future at least in relation to the claims the subject of the action.
In written submissions dated 14 October 2014 the defendants referred to Lightsource Technologies Australia Pty Ltd v Pointsec Mobile Technologies AB [2011] ACTSC 59. In that case Refshauge J said at [168] that waiver or abandonment renders an arbitration clause inoperative or incapable of performance and so does a time bar. His Honour held that the effect of the time bar in that case was relevantly equivalent to waiver or abandonment. The arbitration agreement was inoperative or incapable of performance as a mechanism to resolve the dispute. The decision has been described as 'unusual' and 'questionable': Holmes and Brown The International Arbitration Act 1974: A Commentary [s 7‑22]. However, the decision does not assist the plaintiff. In this case the arbitration agreement may still have effect for the future in relation to the plaintiff's claims in this action. Either party may give a notice of dispute and, if the dispute is not otherwise resolved, refer the dispute to arbitration in accordance with the contract. The arbitration agreement is still capable of performance as a mechanism to resolve the plaintiff's claims in this action.
In its further written submissions the plaintiff submitted that although the failure of either party to 'enliven' the arbitration agreement by giving a notice of dispute does not render the arbitration agreement inoperative, the court should nevertheless dismiss the defendant's application for a stay. That was said to be because in the absence of a notice of dispute the arbitration agreement has not been enlivened. The plaintiff submitted that in the absence of an enlivened arbitration agreement the court has no jurisdiction to make an order pursuant to either s 8(1) of the Commercial Arbitration Act or s 7(5) of the International Arbitration Act. I do not agree. Section 7(2) of the International Arbitration Act provides that subject to that Part, where the specified conditions are met, the court shall stay the proceedings and refer the parties to arbitration. As I have said, the specified conditions are met. There is nothing in pt II of the Act which provides that the court has no jurisdiction or power to make an order under s 7(2) unless and until the arbitration agreement has been enlivened in relation to the claims in the court proceeding.

Refer to arbitration

Section 7(2) of the International Arbitration Act provides that if the specified conditions are met the court shall stay the proceedings and refer the parties to arbitration. The plaintiff objected that the court cannot refer the parties to arbitration because no valid notice of referral to arbitration has been given by the parties and no arbitrator has been validly appointed. In its further written submissions filed on 30 October 2014 the defendant said that more than one construction of s 7 of the International Arbitration Act was open but that the better construction gave rise to the conclusion that the court should not stay the proceedings where a condition precedent to the referral of the relevant dispute to arbitration has not occurred. The argument is as follows. The court's power under the International Arbitration Act s 7(2) is to stay the proceedings and refer the parties to arbitration. If the operation of the contractual provisions is such that the court cannot refer the parties to arbitration because the matters in dispute have not been identified by the mandatory mechanism provided by the contract in the event of a dispute then that itself indicates that the agreement is relevantly inoperative.

I do not agree that the arbitration agreement is inoperative because a step that must be taken before an arbitrator is appointed has not yet taken place. I do not agree that the court cannot refer the parties to arbitration, and therefore cannot stay the proceedings, because an arbitrator has not been appointed or a step that must be taken before an arbitrator is appointed has not yet been taken.
In my view the submissions of both parties misconstrue s 7(2) of the International Arbitration Act. What the section means when it says 'refer the parties to arbitration' is not 'refer the dispute to the arbitrators'. On its proper construction International Arbitration Act s 7(2) does not mean that the court has to transfer the case to the arbitrator. It simply means that, once the action is stayed by the court, the parties have no other remedy than going to arbitration, should they wish to pursue their dispute. If the parties, or any party, wish to pursue the dispute then they must then take the necessary steps to initiate an arbitration.
That is the effect of the judgment of Emmett J, with whom Beaumont and Branson JJ agreed, in Hi‑Fert Pty Ltd v Kiukiang Maritime Carriers Inc (1998) 155 ALR 94. Emmett J observed that the International Arbitration Act was enacted to give effect to the New York Convention, Article II of which relevantly provides as follows:
(1)Each Contracting State shall recognise an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship …, concerning a subject matter capable of settlement by arbitration.
…
(3)The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall …, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed [emphasis added].
Emmett J then said:
It is apparent that the language of s 7(2) of the IA Act introduces a directive which is not expressly provided for in the New York Convention, namely, the directive for a stay in respect of the proceedings. Article II(3) does not employ the word 'stay'. Rather, it simply requires that the court of a contracting State 'shall refer the parties to arbitration'. That expression appears in Art 4(1) of the Geneva Protocol of 1923 and its use appears to have been continued in the New York Convention without any discussion.
The expression could have two technical procedural meanings as follows:
(i)A court directive staying the court proceedings.
(ii)A court directive imposing arbitration on the parties.
The expression should not be taken as having the meaning of obliging the parties to arbitrate. I do not consider that the New York Convention requires a court directive to go to arbitration if a party refuses to participate. Such a directive would not be appropriate because it is up to the parties, or at least one of them, whether an arbitration will take place or proceed. An award could be made in the absence of an unwilling party without a court directive, provided only that the party has been duly notified of the initiation of the arbitration.
Such an interpretation appears to have been accepted in the United Kingdom. In the implementing legislation in the United Kingdom, namely the Arbitration Act 1975, the expression 'refer the parties to arbitration' does not appear but is rephrased in what appears to be the technical procedural sense intended, namely, 'to stay the court proceedings': see s 1(1).
Bearing in mind that the purpose of the IA Act is to enable Australia to accede to the New York Convention, it is appropriate to construe s 7 by reference to the provision of the New York Convention to which it is designed to give effect. Thus, s 7(2) must be interpreted in the light of Art II(3). Accordingly, while s 7(2) requires that the court must both 'stay the proceedings' and 'refer the parties to arbitration', that provision should be construed as being no more than a statement of the procedural means whereby Art II(3) is given effect. In other words, a stay order is simply the mechanism whereby the parties are referred to arbitration.
In so far as an order pursuant to s 7(2) of the IA Act is expressed to 'refer the parties to arbitration' it should be construed as doing no more than stating the consequence of the stay. An order should not be construed as having a compulsive effect. In other words, if the dispute is to be resolved it will be necessary for it to be referred to arbitration. If the plaintiff chooses not to refer the dispute to arbitration, the claim could not otherwise be pursued. On the other hand, the refusal of a defendant to participate in a reference to arbitration commenced by the plaintiff could never constitute a failure to comply with a court order. The consequences of not participating, once duly notified of the reference, is simply that an award may be made in absentia (112 ‑ 113).

Conclusion

The contract contains an arbitration agreement. At the time the arbitration agreement was made, SSI was domiciled or ordinarily resident in a Convention country. Therefore, s 7 of the International Arbitration Act applies to the agreement. Neither party has given to the other a notice of dispute under cl 48.1 of the contract. It is open to either party to give to the other party a notice of dispute and, if the dispute is not otherwise resolved, to refer dispute to arbitration in accordance with cl 48.2 of the contract. The arbitration agreement in the contract is not inoperative. The proceeding pending in this Court involves the determination of a matter that, in pursuance of the arbitration agreement, is capable of settlement by arbitration. Therefore, the Court must stay the proceedings and refer the parties to arbitration in respect of the matter.
The defendants' chamber summons will be amended so as to seek an order that the matter be stayed and referred to arbitration pursuant to s 7(2) of the International Arbitration Act or alternatively s 8 of the Commercial Arbitration Act. The action must be stayed and the parties referred to arbitration.