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Court says taxation indemnity case arbitrable
Practical Law Legal Update 0-501-0579 (Approx. 3 pages)
Court says taxation indemnity case arbitrable
| Law stated as at 17 Dec 2009 • Australia |
Andrew Robertson (Partner), Piper Alderman
In a decision handed down on 1 December 2009, Justice Judd of the Supreme Court of Victoria has held that a dispute relating to a taxation indemnity was arbitrable. The quantum of the taxation liability outstanding was in dispute. The court held that the taxation element of the dispute did not mean that the dispute was not capable of being resolved in arbitration. However, the court refused a stay, holding that the dispute did not fall within the particular provisions of the arbitration agreement.
In AED Oil Limited v Puffin FSPO Limited (No 2) [2009] VSC 534, the parties were in dispute in relation to the operation of an indemnity in a charter contract which provided that the charterer and a related party would indemnify the owner for certain taxation liabilities. The contract provided that the taxation returns for the owner were to be prepared by the charterer and lodged by the owner. A dispute arose as to the treatment of certain items for deprecation purposes and the owner refused to sign the returns prepared by the charterer. The ultimate owner of the charterer had guaranteed payment of the contractual indemnity by the charterer.
The guarantor commenced Supreme Court proceedings seeking injunctions and declarations against the owner. The owner counterclaimed for declarations and specific performance against the charterer and the guarantor. The charterer and the guarantor then sought a stay of the proceedings to permit the dispute on the counterclaim to proceed to arbitration. The stay was opposed by the owner.
The arguments in opposition to a stay
Arbitrability: Several grounds were advanced by the owner to avoid the stay of the proceedings. The first was that the dispute was not capable of settlement by arbitration because of the nature of taxation. International arbitrators were not skilled in the resolution of taxation issues. Even if the contractual issues were resolved any assessment by a private arbitrator would not bind the revenue authority.
The judge was not convinced that an underlying taxation issue rendered the dispute as not capable of settlement by arbitration. The claim was essentially a contractual claim relating to the provisions of the indemnity.
Through or under: Subsequently, the owner argued that the guarantor was not party to the arbitration agreement. The arbitration agreement was in the charter contract between the charterer and the owner. There was no arbitration agreement in the guarantee by which the guarantor become liable, nor was there any other agreement with the owner containing an arbitration clause (except in so far as the charter contract was contained in a schedule to another contract).
The guarantor asserted its claim to seek a stay based on section 7 (4) of the International Arbitration Act which provides that a reference to a party in the provisions relating to a stay "includes a reference to person claiming through or under a party".
In this case, the owner made identical claims against the charterer and the guarantor who was the ultimate owner of the charterer. In those circumstances, His Honour held that the guarantor was a party claiming through a party for the purposes of section 7 (2).
Waiver: The owner further argued that the guarantor had, through its conduct to date in the proceedings, waived its right to arbitrate and thereby rendered the arbitration agreement inoperable. The proceedings initiated by the guarantor were for, inter alia, injunctive relief and declarations. However, the parties had proceeded to orders for pleadings and for counterclaims.
The court confirmed that it was possible to waive a right to arbitrate and thereby render the agreement inoperable. However, without deciding whether there had in fact been a waiver, the court considered it would be unjust to accept this argument where the only conduct relied upon for the waiver was the conduct of the guarantor. The charterer was newly joined to the proceedings and was entitled to rely upon the arbitration agreement. In the circumstances it would be unjust to prevent the party claiming through the charterer to avail itself of the arbitration agreement.
Proviso in the arbitration agreement: So far, the requirements for the grant of a stay were established. However, the arbitration agreement provided that the agreement did not prevent "urgent interlocutory or declaratory relief". The court held that, to come within that exception, both the interlocutory and declaratory relief, had to be urgent. The proceedings initiated by the guarantor were for, inter alia, urgent injunctive relief and declarations The counterclaims were responsive to those claims and consequently had the same character as the claim - that is, they were urgent. On this basis, the stay was declined.
Conclusion
The court indicated that if it were not for the limitation in the arbitration agreement, a stay would have been granted. The case is interesting both for its robust attitude to what is arbitrable and what is a claim "through or under" another party.