Application of Arbitration Agreements to Non-Signatories: the ‘Through or Under’ Route
Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13 (8 May 2019)
In a previous CommBar note, I discussed the implications of the High Court of Australia’s decision in Rinehart v Hancock Prospecting Pty Ltd (‘Hancock’)[i] in respect of the interpretation of arbitration agreements. This note considers a second aspect of the judgment; namely, the scope and operation of the phrase ‘through or under’ in s 2(1) of the Commercial Arbitration Acts (‘CAA’)[ii] and, consequently, the ability of non-signatories to an arbitration agreement to avail themselves of the agreement.
I. Background
The extent to which third-parties may rely on, or be bound by, arbitration agreements remains a vexed question in arbitration. The ‘through or under’ provision has the potential to avoid the privity doctrine and increase the number of parties to an arbitration. Yet, the origin, scope and operation of ‘through or under’ has received little attention, with Australian courts giving the phrase differing interpretations with varying results.[iii]
The facts of Hancock are complex. For present purposes, the relevant facts are that:
(a) Mrs Rinehart was the trustee of the HMH Trust and HFMF Trusts of which her children (including Bianca Rinehart and John Hancock (‘Siblings’)) were the sole beneficiaries.
(b) The principal assets of each trust were companies within the Hancock Group of companies, including HFMF, and the mining tenements owned by those companies.
(c) In the mid-1990’s, HFMF transferred three mining tenements to HPPL, a Hancock Group company in which Mrs Rinehart had a majority interest and the Siblings had no interest.
(d) These tenements were subsequently transferred to other companies in the Hancock Group: RHIO, HDIO and MDIO (‘the Third-Party Companies’)
(e) Mrs Rinehart was a director of each of the Hancock Group companies, including the Third-Party Companies.
(f) In 2006, the Siblings, Mrs Rinehart and certain Hancock Group companies (including HPPL and HFMF) entered into the Hope Downs Deed (‘Deed’), which was intended to resolve disputes between the parties in respect of the beneficial ownership of the mining tenements. The Deed included an arbitration agreement and required the Siblings to give releases of claims and undertakings not to sue the Hancock Group Companies that were party to the Deed.
(g) The Third-Party Companies were not party to the Deed.
In 2014, the Siblings initiated litigation in the Federal Court of Australia against their mother, Mrs Rinehart, and certain companies in the Hancock Group, for breach of trust and breach of fiduciary duty. They claimed that the Third-Party Companies had received the mining tenements, by way of assignment, from HPPL with knowledge of a breach of trust. Therefore, argued the Siblings, the Third-Party Companies held the mining tenements on constructive trust for the Siblings.[iv]
The Third-Party Companies, though not parties to the Deed, sought to stay the claims against them, in reliance on s 8 of the Commercial Arbitration Act 2010 (NSW). The Third-Party Companies raised two contentions:
(a) they were entitled to claim ‘through or under’ HPPL because an essential element of their defence was that HPPL was beneficially entitled to the mining tenements (ie there was no breach of trust); and
(b) further or alternatively, HPPL obtained releases under the Deed (and therefore was absolved of responsibility for any breach of trust). The Third-Party Companies contended that they were entitled to the benefit of such releases as assignees of the tenements: [58], [73].
II. High Court of Australia
The High Court plurality (Kiefel CJ, Gageler, Nettle and Gordon JJ) adopted an expansive view of the scope of ‘through or under’, overturning the narrow approach applied by the Full Court of the Federal Court of Australia (‘Full Court’) below. In dissent, Edelman J endorsed a narrower interpretation of the phrase, agreeing with the Full Court.
Notably, both the plurality and Edelman J were expressed to rely on the joint judgment of Brennan and Dawson JJ in the seminal case of Tanning,[vi] albeit differently.
The plurality held that, properly understood, the Brennan and Dawson JJ ‘derivative test’ required asking ‘whether an essential element of the defence [of the Third-Party Companies] was, or is, vested in or exercisable by the party to the arbitration agreement [namely, HPPL]’: [66]. Applying a relatively broad conception of this test,[vii] the plurality held that an ‘alleged knowing recipient of trust property who invoke[d] as an essential element of its defence’ the allegation that the trustee was beneficially entitled to the subject property, was claiming ‘through or under’ the trustee, for the purposes of the arbitration legislation: [66].
The plurality emphasised the subject-matter in controversy. Their Honours were highly influenced by the fact that the Third-Party Companies’ defences were closely related to the defences of HPPL and that if HPPL were found to be ‘blameless’, the Third-Party Companies ‘would be equally blameless’: [76].[viii]
In contrast, Edelman J considered that an expansive approach to ‘through or under’ would undermine fundamental notions of privity of contract and party autonomy upon which arbitration is based: [94]. Thus, to claim though or under, the third-party must be agitating a right of the party to the arbitration agreement itself, and not its own right: [85], [88]. Therefore, ‘through or under’ should be given a limited discriminatory operation consistent with the doctrine of privity, such as in the case of agency, assignment, novation or succession by operation of law: [96].
His Honour proceeded to apply the approach of Brennan and Dawson JJ approach more strictly than the plurality: [90], [92]-[93]. According to Edelman J, to claim ‘through or under’, the non-party to the arbitration agreement must stand in the same position as the party to the arbitration agreement and claim a defence or cause of action available to the party to the arbitration agreement: [92]-[93].
His Honour characterised the claims against the Third-Party Companies as ‘assertions of direct liability’: [98] (emphasis added). Here, Edelman J focussed on the legal nature of the claim against the alleged knowing recipients as being a claim that was independent of the claim brought by the beneficiary against the trustee: [98].
Ultimately, then, on the view of Edelman J, the Third-Party Companies were neither in the same position as, nor asserted any contractual right available to, HPPL: [102]. Instead, they were defending an independent claim from those advanced against HPPL, ‘relying upon their own rights’: [102].
III. Comment
Given the majority’s decision, an expansive approach to the concept of ‘through or under’ now prevails in Australia. Under this approach, ‘through or under’ is treated as a statutory exception to the privity doctrine. Thus, third-parties to an arbitration agreement may claim ‘through or under’ the arbitration agreement, even though not privy to the agreement to arbitrate.
The effect of the majority’s decision in Hancock is to raise uncertainty as to which third-parties may exercise rights under an arbitration agreement.
With respect, the approach of Edelman J is to be preferred. This approach respects the fundamental notion of privity of contract and promotes party autonomy by enabling parties to determine who they arbitrate with and about what.
It is noted that a similar procedural result could have been achieved by simply staying the proceeding against the Third-Party Companies pursuant to the Court’s inherent jurisdiction upon those parties agreeing to be bound by the result in the arbitration.[ix] Such an approach ‘avoids any artificial construction as to the identity of the parties to the arbitration, whilst preserving an orderly resolution of the issues in one forum’.[x]
[i] [2019] HCA 13.
[ii] The phrase also appears in s 7(4) of the International Arbitration Act 1974 (Cth).
[iii] See Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332; AED Oil Limited v Puffin FPSO Limited [2009] VSC 534 (Judd J); BHPB Freight Pty Ltd v Costco Oceania Chartering Pty Ltd (2008) 168 FCR 169; Nearmap Ltd v Spookfish Pty Ltd [2014] NSWSC 1790; Flint Ink NZ Ltd v Huhtamaki Australia Pty Ltd (2014) 44 VR 64.
[iv] The Full Court noted that Mrs Rinehart was a director and the controlling mind of the Third-Party Companies and, therefore, her knowledge was to be imputed to the Third-Party Companies. See Hancock Prospecting Pty Ltd v Rinehart (2017) 257 FCR 442, [291], [293].
[vi] Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332.
[vii] See Flint Ink NZ Ltd v Huhtamaki Australia Pty Ltd (2014) 44 VR 64, [65] (Nettle JA).
[viii] Referring to Roussel-Uclaf v G D Searle & Co Ltd [1978] 1 Lloyd’s Rep 225.
[ix] As did the Full Court, albeit not upon any condition requiring the Third-Party Companies to agree to be bound by the result in the arbitration: Hancock Prospecting Pty Ltd v Rinehart (2017) 257 FCR 442, [114].
[x] David Joseph, Jurisdiction and Arbitration Agreements and Their Enforcement (Thompson Reuters, 3rd ed 2015), [7.50].
