The recent decision of the Supreme Court of New South Wales in Broken Hill City Council v Unique Urban Built Pty Ltd [2018] NSWSC 825 considered what is meant by the term ‘inoperative’ in the context of an agreement to arbitrate, and whether a defect in the appointment procedure contained in an arbitration agreement renders such an agreement ‘inoperative’.

Broken Hill City Council retained Unique Urban Built Pty Ltd to upgrade the Broken Hill Civic Centre, by the terms of a contract in the form of AS4000-1997 published by Standards Australia. A dispute arose between the parties, and the Council commenced proceedings against Urban, alleging that Urban failed to progress and complete the works in accordance with the contract. The contract contained a detailed dispute resolution procedure which included (amongst other things) an agreement to arbitrate. Clause 42.2 of the contract provided that “if the dispute has not been resolved within 28 days of service of the notice of dispute, that dispute shall be and is hereby referred to arbitration”. Clause 42.3 of the contract provided that, if the parties could not agree on an arbitrator, “the person to nominate an arbitrator is, if no one is stated, the President of the Australasian Dispute Centre”. Relevantly, no one was stated.

At the time of the contract, the Australasian Dispute Centre did not exist. The parties had used an obsolete standard form contract. As a result of the non-existence of the nominated appointor, the Council argued that the agreement to arbitrate was inoperative, and as such, the Council was free to commence proceedings against Urban in order to resolve the disputes in question. Urban argued that clause 42.2 was an arbitration agreement in its own right and capable of standing alone within the meaning of s 7(1) of the Commercial Arbitration Act 2010 (NSW) (the Act). Accordingly, by virtue of s 8(1) of the Act, the Court must refer the parties to arbitration. Further, Urban argued that even if clause 42.3 was ineffective as a mechanism for the appointment of an arbitrator, it and the Council had failed to agree on a procedure of appointing an arbitrator, in which event, s 11(3)(b) of the Act empowered the Court to appoint one.

In finding that the arbitration agreement was effective, Hammerschlag J held that:

•   clause 42.3 was a stand-alone provision and was clearly severable from clause 42.2;
•   clause 42.2 was an arbitration agreement, whereas clause 42.3 was a ‘machinery provision’ for the appointment of an arbitrator;
•   even if clause 42.3 was ineffective, the Court is empowered, by virtue of s 11 of the Act, to appoint an arbitrator. The Act therefore remedied any apparent defect in the appointment procedure; and
•   by reference to Lucky-Goldstar International (HK) Ltd v NG Moo Kee Engineering Ltd [1993] HKCFI 14, it would be difficult to argue that either party placed any importance on the role of a non-existent person, such that any arbitration agreement would be ‘inoperative’.

In light of the above, and in accordance with s 8(1) of the Act, his Honour held that the parties must be referred to arbitration, with the Court to appoint an arbitrator under s 11(3)(b) of the Act.

This decision provides some useful guidance on the meaning of ‘inoperative’ for the purposes of s 8(1) of the Act. Importantly, this case demonstrates the difficulty of arguing that an arbitration agreement is “null and void, inoperable or incapable of being performed”, and therefore should not be enforced, merely due to deficient ‘machinery provisions’, such as the procedure for the appointment of an arbitrator.

The full decision can be found here.