Construction disputes experts Kon Nakousis, Lucy Zimdahl and Reid Hadaway acted for successful Respondent Elecnor Australia in the unanimous NSW Court of Appeal decision in Clough Projects Australia Pty Ltd v Elecnor Australia Pty Ltd. The judgment endorses Australia’s reputation as a pro-arbitration jurisdiction, upholds Elecnor’s first-instance victory in the NSW Supreme Court (NSWSC) and paves the way for the NSWSC to determine vital questions for Australia’s construction and insolvency industries: does a DOCA bind an insolvent party’s construction JV partner in respect of non-monetary JV claims, and can a DOCA validly transfer a party’s JV interest absent the JV partner’s consent?
Key takeaways
The judgment is essential reading for international arbitration practitioners. It condenses 50 years of jurisprudence on section 7 of the International Arbitration Act 1974 (the Act) on “matter” and “arbitrability” and outlines what is set to become seminal guidance on when commencement of curial proceedings will – and will not – render the arbitration agreement inoperative for future disputes. Bell CJ (Ward P and Free JA agreeing) confirmed that:
- court proceedings may involve more than one “matter” (within the meaning of section 7(2) of the Act). If proceedings are commenced in breach of an arbitration agreement, a party may seek to stay and refer to arbitration the proceedings generally “or so much of [them] as involves the determination of that matter”;
- despite an arbitration agreement, certain limited “matters” are not “arbitrable” (that is, capable of being settled by arbitration) including (relevantly) the construction of a DOCA and consideration of the Corporations Act vis-à-vis Clough’s third-party creditors;
- section 7(2) of the Act mandates that arbitrable matters within the arbitration agreement’s scope are stayed and referred to arbitration;
- a “matter” which must be stayed and referred to arbitration may be co-extensive with court proceedings generally, or only parts of those proceedings. Any resulting fragmentation may be inconvenient or inefficient, but is a necessary consequence of section 7(2) and the parties’ agreement to arbitrate;
- whether to stay curial proceedings pending the outcome of matters referred to arbitration is a fact-dependent case management decision;
- third parties putting in issue matters beyond those available to a party to the arbitration agreement do not claim “through or under” for the purposes of section 7(4) of the Act; and
- repudiation, election, abandonment or waiver may render the arbitration agreement inoperative but require unequivocal conduct demonstrating an intention not to be bound by the arbitration agreement in respect of all disputes – which will not be inferred lightly.
Background
Elecnor and Clough were parties to a Joint Venture Deed (JVD) containing an arbitration agreement. Together, as ‘Contractor’, they also entered into an EPC Contract with Transgrid for the delivery of project ‘EnergyConnect’: a nation-critical transmission interconnector between NSW, South Australia and Victoria.
In late 2022, Clough’s failure to provide security under the EPC Contract and its appointment of voluntary administrators constituted material default events under the JVD. In February 2023, Transgrid called on Clough’s EPC Contract bank guarantees, and Clough entered a Deed of Company Arrangement (DOCA) which purported to assign Clough’s JV interest to the Trustees of the Creditors’ Trust established by the DOCA without Elecnor’s consent.
Elecnor then exercised its JVD ‘step-in’ rights and has since proceeded to successfully deliver the project for Transgrid.
Clause 21.3 of the JVD entitled Elecnor to treat Clough’s material default as an invitation to offer to purchase Clough’s JV interest, with an expert to determine any disagreement regarding the purchase price.
After entry into the DOCA, Elecnor offered to acquire Clough’s interest in the JV for $1. Deloitte (as Trustees of the Clough Creditors’ Trust) disputed Elecnor’s entitlement to rely on clause 21.3 and the validity of Elecnor’s offer, asserting that the Trustees had disavowed adoption of the JVD, and that the DOCA bound Elecnor.
The NSWSC proceedings
In December 2024, Gilbert + Tobin (for Elecnor) commenced NSWSC proceedings against Clough and the Trustees, seeking declarations that the DOCA had not transferred Clough’s interest in the JV, JVD or EPC Contract and seeking specific performance of the compulsory acquisition process under clause 21.3 of the JVD. As the Court accepted, Elecnor commenced proceedings despite the JVD’s arbitration agreement in circumstances where:
- the Trustees (as opposed to Clough) were not parties to the JVD’s arbitration agreement (and had in any event expressly disavowed adoption of the JVD); and
- there was a live dispute about whether the DOCA had transferred Clough’s JV interest (with the Court upholding Elecnor’s successful argument at first instance that this question was not an “arbitrable” matter).
The cross-claim and the arbitral stay
Three months after Elecnor commenced the NSWSC proceedings and some two years after Clough’s insolvency and Transgrid’s call on Clough’s bank guarantees, Clough and the Trustees demanded that Elecnor contribute 50% of the Clough bank guarantees cashed by Transgrid (A$54 million), and filed a contribution cross-claim against Elecnor (Cross-Claim).
Elecnor sought to stay the Cross-Claim under section 7(2) of the Act, arguing it was a separate arbitral “matter” for determination under the JVD’s arbitration agreement. Clough and the Trustees instead sought to stay Elecnor’s NSWSC proceedings pending determination of any arbitration.
At first instance, Stevenson J found in favour of Elecnor, staying and referring the Cross-Claim to arbitration, and declining to stay the NSWSC proceedings.
The appeal
The Applicants (Clough and the Trustees) appealed, and the Respondent (Elecnor) sought to cross-appeal to additionally refer aspects of Clough and the Trustees’ defence to the NSWSC claim to arbitration along with the Cross-Claim.
The Court refused leave on the Applicants’ fifth ground of appeal, finding Stevenson J’s decision not to stay the NSWSC proceedings pending any arbitration was a valid case management decision. The Court otherwise granted leave to appeal and cross-appeal, but ultimately dismissed both, leaving Stevenson J’s judgment undisturbed and awarding Elecnor 90% of its costs.
Issues on appeal
- The Court upheld Stevenson J’s first-instance findings that Elecnor’s NSWSC claims for declaratory relief and specific performance (on the one hand) and the Cross-Claim (on the other) were two distinct “matters” under section 7(2) of the Act, and that only the Cross-Claim was arbitrable. It also rejected the Applicants’ argument that, by disputing liability for the contribution sought by the Cross-Claim, Elecnor was not “ready, willing and able” to perform its obligations under clause 21.3 of the JVD.
- Having found that the relief sought by Elecnor in the NSWSC proceeding was not an “arbitrable matter”, Stevenson J had not considered it necessary to determine whether the Trustees were claiming “through or under” Clough (for the purposes of section 7(4) of the Act). The Court found no error and applying Rinehart v Hancock Prospecting, held that the Trustees (as non-parties to the arbitration agreement) could only be taken to claim ‘through or under’ Clough to the extent their defence to Elecnor’s NSWSC claim derived from or was dependent upon Clough’s rights. The Court agreed that the Trustees’ defences to Elecnor’s NSWSC claim relied on the DOCA and the Corporations Act, not rights derived through Clough. By contrast, the Trustees plainly acted ‘through or under’ Clough in seeking contribution from Elecnor via the Cross-Claim.
- Turning to whether Elecnor had rendered the arbitration agreement inoperative, the Court rejected Clough’s arguments on multiple grounds:
- First, the Court saw “great merit” in the Respondent’s (Elecnor’s) position that commencement of curial proceedings for non-arbitrable relief involving a stranger to the arbitration agreement was not “an abandonment for all purposes of [Elecnor’s] right to refer arbitrable matters to arbitration”.
- Second, Elecnor could not have waived its right to arbitrate the Cross-Claim for contribution in circumstances where Elecnor had no knowledge (when commencing the NSWSC claim) of the matters that the Applicants would later ventilate through the Cross-Claim.
- Third, the Court described Elecnor’s prompt application under section 7(2) following receipt of the Cross-Claim as “the antithesis of any abandonment of its right to refer a matter to arbitration”.
- Finally, the Applicants’ repudiation argument must fail, given the commencement of court proceedings in respect of a non-arbitrable matter says nothing about a party’s willingness to arbitrate arbitrable matters.