CATCHWORDS CONTRACTS - construction and interpretation - arbitration clauses - dispute whether agreement void ab initio - Trade Practices Act 1974, s. 52 - Scott v Avery clause severable from main agreement and effective where 'sufficiently wide to embrace the dispute or difference which has arisen between the parties'. Trade Practices Act 1974: s. 52 RINBRIDGE MARKETING PTY LIMITED v RINBRIDGE PTY LIMITED, JOHN PROSPHER CULLEN and PETER THOMAS WALSH G 723 of 1994 LOCKHART J. 23 OCTOBER 1995 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA) ) NEW SOUTH WALES DISTRICT REGISTRY) No. G723 of 1994 ) GENERAL DIVISION ) BETWEEN: RINBRIDGE MARKETING PTY LIMITED Applicant AND: RINBRIDGE PTY LIMITED First Respondent JOHN PROSPHER CULLEN Second Respondent PETER THOMAS WALSH Third Respondent RINBRIDGE PTY LIMITED Cross Claimant RINBRIDGE MARKETING PTY LIMITED Cross Defendant JUDGE MAKING ORDER: LOCKHART J. WHERE ORDER MADE: SYDNEY DATE ORDER MADE: 23 OCTOBER 1995 MINUTE OF ORDER THE COURT ORDERS THAT: 1. The proceeding be adjourned to a date to be fixed. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA) ) NEW SOUTH WALES DISTRICT REGISTRY) No. G723 of 1994 ) GENERAL DIVISION ) BETWEEN: RINBRIDGE MARKETING PTY LIMITED Applicant AND: RINBRIDGE PTY LIMITED First Respondent JOHN PROSPHER CULLEN Second Respondent PETER THOMAS WALSH Third Respondent RINBRIDGE PTY LIMITED Cross Claimant RINBRIDGE MARKETING PTY LIMITED Cross Defendant 23 October 1995 REASONS FOR JUDGMENT LOCKHART J. This is a motion to strike out the amended statement of claim. The principal allegations made in the amended statement of claim are summarized as follows:- . An agreement in writing was executed on 22 June 1994 between the applicant, Rinbridge Marketing Pty Limited (RM), and the respondent, Rinbridge Pty Limited (R). . During May and June 1994 the second and third respondents, John Prosper Cullen and Peter Thomas Walsh, directors of R, made the following representations to two directors of RM, described in paragraph 18 of the amended statement of claim in these terms: '(a)the Protecta Point is child safe; (b) the Protecta Point is child proof; (c) objects cannot be inserted into the Protecta Point whilst there is no electrical plug inserted; (d) the barrel of the Protecta Point will always return when an electrical plug is removed; (e) the Protecta Point is the safest power point in Australia; (f) defects that appeared in the Protecta Point as first exhibited to the Applicant had been removed; (g) the First Respondent was able to supply, within two weeks of about 2 June 1994, to the Applicant a Protecta Point which has the features of: (i) the inability to insert an object into the Protecta Point whilst there is no electrical plug inserted; and (ii)the barrel returning to its original position when the electrical plug is removed; and (h) the Protecta Point would function in accordance with its design.' . Acting on the truth of the said representations, and induced thereby, RM executed the agreement of 22 June 1994 (para. 20). . Each of the representations was false in the various respects pleaded in para. 21. . Each of the representations was not only false, but was known by R to be false at the time it was made (para. 21A). . By reason of the 'said falsity' RM suffered loss and damage in various sums totalling $400,033.46 (para. 22). . Representations were made in trade and commerce, and constituted misleading or deceptive conduct, in contravention of s. 52 of the Trade Practices Act 1974 (the TP Act) (paras. 23 - 28). . By reason of the contravention, RM has suffered loss and damage and continues to do so (para. 26). . Mr Cullen and Mr Walsh were persons who were involved in the contravention by R (para. 27). . The same particulars of loss and damage are given for the causes of action based on s. 52 of the TP Act and for the common law count mentioned earlier. . On 24 October 1994 RM rescinded the agreement (para. 29). RM seeks a declaration that the agreement is void ab initio, and claims damages together with interest to the date of judgment, and costs (para. 30). The application claims the relief mentioned in para. 30 of the amended statement of claim. The agreement pleaded in paragraph 20 of the amended statement of claim was in evidence at the hearing of the motion. The agreement recites that R is the importer of, and has exclusive manufacturing and distribution rights with respect to, a power point product known as the 'Protecta Point' (Recital C). The relevant aspects of the agreement are as follows: . R appointed RM to promote the product and effect the sales of units within Australia (clause 1), and to have exclusive marketing rights with respect to it (clause 2). RM was required not to market any product which would be in competition with the product in Australia (clause 3), but was not required to purchase any specified number of units of the product from R (clause 4). RM was required to order a certain minimum number of units during each twelve month period for the term of the agreement (clause 5). R agreed to supply RM with the units ordered from it (clause 7). R agreed not to market any item in competition with the product being marketed by RM during the currency of the agreement (clause 9). . Clause 10 provides that the agreement shall terminate on 31 August 1996, or upon written notice from one party to the other as a result of the 'receiving party's' failure to adhere to its obligations under the agreement, and after such party has been given one month's notice to rectify the particular breach, or breaches, of the agreement. . Clause 19 provides: 'This agreement shall be governed by and construed in accordance with the laws of New South Wales. With the exception of a dispute or difference as to unit price as referred to in clauses 9 and 10A the parties hereto agree to submit the resolution of any disputes arising hereunder to the exclusive jurisdiction of the courts of that State or within properly constituted dispute resolution procedures (excepting arbitration procedures) available in that State.' The agreement contains a number of other provisions which I need not recite. The critical clause is clause 24, which is in the following terms: '24(a) In the event of any dispute or difference arising between the two parties hereto at any time as to the construction of this agreement or as to any matter or thing of whatsoever nature arising hereunder or in connection herewith then any party may give to the other notice in writing adequately identifying the matters the subject of that dispute or difference (herein after referred to as the "Notice of Dispute") and the giving of such Notice of Dispute shall be a condition precedent to the commencement by any party of proceedings (whether by way of arbitration or litigation) with regard to the matters the subject of that dispute or difference as identified in that notice. (b) If the dispute or difference relates to the unit price to be paid pursuant to either or both clauses 9 and 10A hereof then at the expiration of twenty-one (21) days from the date of service of the Notice of Dispute the party giving such notice may notify the other in writing that it requires the dispute or difference to be referred to arbitration (hereinafter referred to as the "Notice of Arbitration") and such dispute or difference (unless meanwhile settled) shall upon receipt of such notice by the other party then be referred to arbitration pursuant to paragraph 24(c) below.' Counsel for the respondents argued that the amended statement of claim should be struck out and the proceeding dismissed on the ground that clause 24(a) of the agreement made notice in writing, adequately identifying the matters the subject of a dispute or difference between the parties, a condition precedent to the right of either party to the agreement to commence proceedings against the other (whether by way of arbitration or litigation), where the dispute or difference had arisen between them 'as to the construction of this agreement or as to any matter or thing of whatsoever nature arising hereunder or in connection herewith'. It is common ground that no such notice was given by RM to R. Further, it was submitted by counsel for the respondents that the dispute or difference which arose between R and RM was 'in connection' with the agreement. Accordingly, under clause 24(a), notice in writing was required before this proceeding could be instituted. As the notice was not given, counsel for the respondents submitted that the proceeding was misconceived and should be dismissed. But apart from and prior to the clauses of the agreement, counsel for RM argued that the two causes of action pleaded in the amended statement of claim are founded on representations made by R to RM which led and induced RM to enter into the agreement, and that the agreement should still be set aside as void ab initio, either for fraud or for contravention of s. 52 of the TP Act. According to counsel for RM, clause 24 of the agreement is concerned with a proceeding for breach of a term or condition of the agreement. But the agreement followed the fraud or misrepresentation. Thus, clause 24 is not relevant to this proceeding, because the whole agreement was vitiated ab initio upon the election of RM. Notably, clause 24 of the agreement differs from the usual Scott v Avery clause (Scott v Avery [1856] 5 HLC 811; 10 ER 1121) which provides that disputes between parties shall be referred to arbitration, and that the making of an award is a condition precedent to any right of action in respect of disputes. Scott v Avery clauses take different forms in particular cases. For example, in South Australian Railways Commissioner v Egan (1973) 130 CLR 506, the clause was in a slightly different form to the usual Scott v Avery clause, but the High Court held that it was a Scott v Avery clause, making the obtaining of a certificate from the Chief Engineer a condition precedent to a right of action. Nevertheless, it is now well established that all such clauses do not oust the jurisdiction of the courts. The reasoning in the cases is that the parties to the agreement cannot acquire a cause of action because, by the terms of the agreement itself, they have stipulated that no cause of action can accrue until something is done to invoke procedures of arbitration, resulting in an award. That is to say, clauses of this kind have the effect of making arbitration a condition precedent to any right of action in respect of the disputes or differences falling within it: John Grant & Sons Limited v Trocadero Building & Investment Co Limited (1938) 60 CLR 1 especially per Starke J. at 21-22. In Plucis v Fryer (1967) 126 CLR 17, the High Court said that it was the evident purpose of a clause of this kind to prevent the litigation of disputes once they have arisen. It achieves this by preventing the commencement, or the maintenance, of any action upon a dispute until the reference to arbitration is complete, and then allows the cause of action to arise where an award is made in the arbitration. Thus a Scott v Avery clause does not unlawfully oust the jurisdiction of the courts, because neither party undertakes liability unless the certificate or the reward is obtained. See also J & H Manktelow Pty Limited v Alloway Grazing Pty Limited [1975] 1 NSWLR 385, a judgment of the New South Wales Court of Appeal; Q H Tours Limited v Ship Design and Management (Aust) Pty Limited (1991) 33 FCR 227, a judgment of Foster J. to which I shall return shortly; and Ferris v Plaister (1994) 34 NSWLR 474. In Ferris the Court of Appeal of New South Wales followed the judgment of Foster J. in Q H Tours, and declined to follow an earlier judgment of the Court of Appeal of New South Wales in IBM Australia Limited v National Distribution Services Limited (1991) 22 NSWLR 466. C.f. also Codelfa Construction Pty Limited v State Rail Authority of New south Wales (1982) 149 CLR 337, especially per Mason J. at 365; and State Rail Authority of New South Wales v Codelfa Construction Pty Limited (1982) 150 CLR 29. There was no disagreement between the parties on this point. The disagreement upon which this case turns related to a question to which I shall come later. Clause 24 of the agreement does not make it a condition precedent to a right of action in respect of the dispute between the parties that the dispute be first arbitrated and the subject of an award. Rather, clause 24 provides that the giving of a Notice of Dispute shall be a condition precedent to the commencement of proceedings, whether by arbitration or litigation. Nevertheless, clause 24 still falls within the principles that are now well established. And hence, it does not oust the jurisdiction of the courts. The primary question in this case is whether the dispute between the parties falls within the description of a: 'dispute or difference arising between the two parties hereto at any time as to the construction of this agreement or as to any matter or thing of whatsoever nature arising hereunder or in connection herewith' (clause 24(a)) In particular, is the dispute 'as to ... any matter or thing of whatsoever nature ... in connection herewith'? As mentioned earlier the two causes of action pleaded in the amended statement of claim are based on representations alleged to have been made by R to RM and to have led and induced RM to enter into the agreement, one action being for damages for fraud and the other for relief for contravention of s. 52 of the TP Act. In either case, RM seeks an order that the agreement be set aside as void ab initio. In Q H Tours, Foster J. held that the arbitration clause in that case was severable from the main contract, so that the arbitrator, if otherwise empowered to do so, could declare the main contract void ab initio without at the same time destroying the basis of his power to do so. The applicants were companies involved in the tourism industry. They entered into an agreement with the first respondent for the design and construction of a cruise vessel. The agreement contained an arbitration clause. The applicants alleged that the discussions and negotiations which led to the conclusion of the agreement took place between certain people acting on behalf of others, that representations were made during those discussions and negotiations and that as a result of them the applicants entered into the agreement. The applicants alleged that each of the representations was false and constituted misleading or deceptive conduct, and that they suffered loss and damages. The arbitration clause said in essence that if any dispute or difference arose between the parties at any time over the construction of the agreement, or over any matter or thing of whatsoever nature arising thereunder or in connection therewith, then either party was to give to the other notice in writing adequately identifying the matters the subject of the dispute or difference. The notice was a condition precedent to the commencement by either party of arbitration with regard to the matters the subject of the dispute or difference, as identified in the notice. Foster J. referred to IBM Australia Limited v National Distribution Services Limited (1991) 22 NSWLR 466, a judgment of the Court of Appeal of New South Wales, and also referred to Heyman v Darwins Limited [1942] AC 356, where the Lord Chancellor, Viscount Simon, said at 366 that if one party to the alleged contract contended that it was void ab initio because, for example, the making of it was illegal, the arbitration clause could not operate. Lord McMillan said words to the same effect at 370, as did Lord Wright at 384. Lord Porter took a different approach at 392. Foster J. said that in cases in England subsequent to Heyman the view has been taken that Heyman laid down a rule of law to the effect that an arbitrator can in no circumstances be clothed with the power of deciding whether the contract in which the arbitration clause is incorporated is void ab initio. Notwithstanding IBM and Heyman, Foster J. said that on its true analysis the arbitration clause was collateral to the principal agreement in Q H Tours. His Honour concluded that one did not derive from the obiter dicta expressed by their Lordships in Heyman any firm rule that there was a legal prohibition upon an arbitrator declaring an agreement void ab initio. His Honour said he was not satisfied that there is any rule of law which prohibits the empowering of an arbitrator to decide the initial validity of a contract containing an arbitration clause, and he said (at 240) that: 'generally speaking, it can be regarded as severable from the main contract with the result that, logically, an arbitrator, if otherwise empowered to do so, can declare the main contract void ab initio without at the same time destroying the basis of his power to do so.' He therefore held that an arbitrator appointed under clause 16 of the agreement in that case, having regard to the width of the clause, would have the necessary power to declare the main contract void ab initio as a result of breaches of s. 52 of the TP Act. In Ferris v Plaister (1994) 34 NSWLR 474 an arbitration clause was held by the Court of Appeal of New South Wales to be severable from the main contract. The Court said that the clause was drafted widely enough for the arbitrator to determine if the contract was void ab initio, without depriving himself of jurisdiction. Q H Tours was followed, and IBM not followed. In Morton v Baker, unreported, 25 March 1993, Einfeld J. took the same view as Foster J. had taken in Q H Tours about the doctrine of the severability of an arbitration clause. Notwithstanding some reservations which I have about the correctness of the conclusions reached in Q H Tours and Ferris on this point, sitting as a single Judge, I must follow the judgments in those two cases in the interest of ensuring the certainty of the law. I therefore conclude that the language of clause 24 of the agreement in dispute is sufficiently wide to embrace the dispute or difference which has arisen between the parties, that the clause is severable from the main agreement, and that a Notice of Dispute is required notwithstanding that the relief sought by RM is to set aside the agreement ab initio, either for fraud or for contravention of s. 52 of the TP Act. It is not necessary for me to consider in this case whether or not an arbitrator, when determining the question of whether one party to an arbitration has or has not committed breaches of s. 52 of the TP Act, is exercising the judicial power of the Commonwealth and therefore is prevented by s. 71 of the Constitution. In Q H Tours Foster J. held that the arbitrator in that case would not be exercising the judicial power of the Commonwealth. The point did not arise in the IBM Case. At this time, I prefer to leave the question open. It follows that, on the facts of this case, the giving of a Notice of Dispute pursuant to clause 24(a) is a condition precedent to the commencement by RM of this proceeding. As no such notice was given, the proceeding must be dismissed. I would add that in paragraph 29 of their further amended defence to the amended statement of claim the respondents invoked clause 24. (See J & H Manktelow Pty Limited v Alloway Grazing Pty Limited [1975] 1 NSWLR 385 per Samuels J.A. at 399). The motion before the Court seeks an order that in the circumstances the application and statement of claim be 'struck out'. Whether this is the appropriate order for the Court to make, or the proceeding should be dismissed, is a matter on which I shall hear brief argument on a date to be fixed. The order of the Court today is that the proceeding be adjourned to a date to be fixed for the purpose of determining the fate of this proceeding. Brief submissions can be made on behalf of the parties. I certify that this and the preceding fourteen (14) pages are a true copy of the reasons for judgment herein of the Honourable Justice Lockhart. Associate Dated: 23 October 1995 Counsel for the Applicant : Mr D E Grieve QC Mr G F Cohen Solicitors for the Applicant: Cutri & Associates Counsel for the Respondents : Mr J S Drummond Solicitors for the Respondents: Walsh & Blair Date of Hearing : 6 July 1995 Date of Judgment : 23 October 1995