The recent decision of Great Union Pty Ltd v Sportsgirl Pty Ltd [2021] VSCA 299 considered the scope of an arbitration clause in a lease agreement.

Great Union, the lessor, entered into a seven-year lease agreement with Sportsgirl, the lessee, for a commercial shop space in the Bourke Street Mall (the Agreement). The Agreement, which commenced in March 2017, was for $2,500,000 per annum plus GST, increasing annually.

In March 2020, the Victorian State Government introduced various regulatory restrictions to reduce the community transmission of COVID-19. Between April 2020 and December 2020, Sportsgirl failed to pay the prescribed rent provided for in the Agreement, and instead made rent payments in proportion with the loss caused due to the interference with access. Great Union commenced proceedings against Sportsgirl, seeking 9 months’ worth of outstanding rent. Sportsgirl counterclaimed that the COVID-19 pandemic resulted in access and foot traffic to the store being rendered unlawful and seriously constrained, such that:

•    the premises were unfit for Sportsgirl’s occupation and use; and
•    the store was inaccessible by the public, and Sportsgirl’s employees and contractors.

Sportsgirl argued that it was entitled to reduce its rent payments under the Agreement until such time that the premises were made fully accessible to, and wholly fit for, Sportgirl’s use. Sportsgirl sought orders that the claim be referred to arbitration pursuant to the Rent Abatement clause in the Agreement, and the proceeding be stayed pursuant to section 8 of the Commercial Arbitration Act 2011 (Vic) (the CAA). Relevantly, clause 37.3(b) of the Agreement stated that:

If the parties do not agree on the reduction to apply under the previous clause, within seven days after the damage or interference with access occurs, then the proportion must be decided under the Commercial Arbitration Act 1984.

Sportsgirl sought to refer the following issues to arbitration:

1.        whether Sportsgirl was entitled to rental abatement (the Entitlement Issue); and
2.        if so, the proportion of the rent to be abated (the Quantification Issue).

Great Union argued that due to the express words of clause 37.3 of the Agreement, only the Quantification Issue could be referred to arbitration.

Sportsgirl succeeded at first instance. The primary judge held that the parties’ intention was that all issues arising under the Rent Abatement clause (including both the Quantification and the Entitlement Issues) were to be referred to arbitration, as it was inherently unlikely that the parties would have intended for disputes to be bifurcated between a court deciding the Entitlement Issue, and an arbitrator deciding the Quantification Issue.

Great Union appealed, arguing that:

•    the only dispute which could be referred to arbitration under section 8(1) of the CAA was a dispute the parties had agreed in writing, in this case, the Quantification Issue; and
•    clause 37.3(b) of the Agreement only concerned disputes regarding the ‘proportion of the reduction to apply’ in abating rent.

The Victorian Court of Appeal allowed the appeal and held in favour of Great Union, finding amongst other things, that:

•    while a court may approach the task of construction on the basis that the parties intended to produce a commercial result, this does not constitute a licence to alter the meaning of a term to achieve a result the court may think to be reasonable;
•    the expression ‘if the parties do not agree on the reduction to apply under the previous clause’ in clause 37.3(b) of the Agreement assumes an entitlement to a reduction, and does not carry with it an agreement that the arbitrator should determine whether such an entitlement exists or not;
•    under the Agreement, the sole issue to be referred to arbitration was the proportion of any rent reduction. There was no reason why a reasonable businessperson would consider the word ‘proportion’ intended to raise the Entitlement Issue; and
•    had this been the intention, the parties would have used different language, particularly given that the Agreement was prepared with the assistance of lawyers.

This decision demonstrates the approach courts will adopt when interpreting commercial contracts: considering the drafting reflected in the contract, the surrounding circumstances, and the purpose and objects to be secured by the contract. However, while such an approach will be adopted, it will not override the express words of the contract.

The full decision can be found here.