In Oil Basins Limited v Esso Australia Resources Pty Ltd [2025] VSC 34, the Supreme Court of Victoria considered whether to grant a stay of court proceedings under section 7 of the International Arbitration Act 1974 (Cth) (IAA) in favour of arbitration. In granting the stay application, the Court affirmed the significance of allowing an arbitral tribunal to rule on its own jurisdiction.

Background

Under a royalty agreement, Esso was required to make royalty payments to Oil Basins Limited (OBL) in relation to hydrocarbons produced and recovered from a designated area in Bass Strait. The proper amount of royalty payable was a regular subject of contention between the parties. Accordingly, the parties entered into a Settlement Agreement providing an agreed methodology to calculate royalties. Clause 19 of the Settlement Agreement contained an arbitration agreement.

Upon the parties serving notices of dispute regarding multiple issues, the parties executed an Ad Hoc Arbitration Agreement appointing arbitrators pursuant to the Settlement Agreement. However, the parties disagreed on whether issues in dispute regarding depreciation and decommissioning costs were capable of arbitration under the Settlement Agreement.

The declarations sought

OBL sought declarations from the court that those issues were not capable of being arbitrated under the Settlement Agreement and an injunction preventing the parties from taking steps to progress the arbitration of such issues. In response, Esso sought to have the court proceedings stayed pursuant to section 7 of the IAA, asserting that the matters were within the arbitral tribunal’s competence to determine.

Section 7(2) of the IAA provides that a court must grant a stay where:

• (pending) court proceedings are commenced by a party to an arbitration agreement (to which section 7 applies) against another party to the agreement; and
• such court proceedings involve determining a matter capable of settlement by arbitration.

The central issue before the Court in this matter was whether the dispute regarding depreciation and decommissioning costs fell within the scope of the arbitration agreement and therefore, whether the matter was capable of settlement by arbitration.

Decision

In assessing this question, Croft J had regard to a number of prior cases assessing the court’s obligation including under section 7 of the IAA and Article 8 of the UNCITRAL Model Law on International Commercial Arbitration 1985, to stay proceedings in favour of arbitration. In particular, the Federal Court’s decision in Hancock Prospecting Pty Ltd v Rinehart (2017) 257 FCR 442 (Hancock), in which the Federal Court held that a dispute must be referred to arbitration unless there is “no sustainable argument that a matter or dispute can be characterised as falling within the agreement”. However, the Federal Court noted that determining this question does not require the courts to assess the strength of the case or act as a filter for determining whether matters are suitable for arbitration. Doing so would “usurp the role of the arbitrator”. The Federal Court also noted a further exception to the court’s obligation to stay proceedings where the issue relates solely to a question of law. In those circumstances, the Federal Court had considered that it may be less than useful for the court not to deal with the question.

Justice Croft also had regard to the Supreme Court of Canada’s decision in Dell Computer Corporation v Union des Consommateurs [2007] 2 SCR 801 (Dell), an authority cited by the Full Court in Hancock. In Dell, the Supreme Court of Canada found that a general rule in any case involving an arbitration clause, is that a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator. The Supreme Court of Canada recognised that such rule may be departed from where the challenge to the arbitrator’s jurisdiction is solely based on a question of law.

In the present case, Croft J found that the arbitration agreement the subject of the stay application was characterised by a complex suite of provisions and documents, in addition to an extensive history of amendments and arbitrations. Adopting Lyons J’s summary in Transurban WGT Co Pty Ltd v CPB Contractors Pty Ltd [2020] VSC 476 of the Full Court’s reasoning in Hancock, his Honour accepted that where determining whether the arbitration agreement is subject to issues such as whether the agreement is null and void, inoperative or incapable of being performed and these issues contain “some legal and/or factual complexity”, it is more appropriate for the issues to be referred to the arbitral tribunal. His Honour regarded this view as consistent with the position that the arbitral tribunal’s jurisdiction, particularly the doctrine of Kompetenz-Kompetenz (which provides that a tribunal may rule on its own jurisdiction), is to be respected and supported.

Applying a “light touch” approach, citing Hancock, Croft J concluded that any issues regarding the scope of the arbitration agreement and/or its proper construction formed a matter within the arbitral tribunal’s discretion.

The decision can be found here.