In 2001, Larkden Pty Ltd (Larkden) and Lloyd Energy Systems Pty Limited (Lloyd) entered into a Licensing Agreement (the Agreement) whereby Larkden granted a licence to Lloyd of certain intellectual property (the Technology). The Agreement contained an arbitration agreement referring disputes to arbitration.

In 2007 Ausra Inc, a Delaware corporation, filed a patent application for certain intellectual property (the Ausra patent). In 2008 Solfast Pty Ltd (Solfast), an Australian subsidiary of Lloyd, filed a patent application for certain other intellectual property (the Solfast patent).

Larkden asserted that both the Ausra patent and the Solfast patent infringed their rights as they were based on the Technology. In the case of the Ausra patent, Larkden argued that it had been developed after Ausra had obtained confidential information from Lloyd while working at one of Lloyd's facilities.

In a settlement between Ausra and Larkden arising from the Ausra patent, Ausra agreed, in return for payments, to transfer the Ausra patents to Larkden or a nominee.

Lloyd commenced arbitration against Larkden, seeking relief, among other things, in relation to Larkden's interest in Lloyd's interest in the patents and what fees may be payable with respect to the patents.

Larkden objected to the relief sought on the basis that:

Pursuant to the Commercial Arbitration Act, the arbitrator has jurisdiction to determine his own jurisdiction, but that ruling may be challenged before a court within 30 days of it being made.

After hearing the arguments, the arbitrator ruled that he had jurisdiction. Larkden then issued proceedings in the Supreme Court seeking to challenge that decision.

Larkden argued that Lloyd was impermissibly seeking to use arbitration to determine the eligibility to grant the respective patents. Larkden argued that only the Commissioner of Patents or the Federal Court was competent to decide on this issue. It also argued that the arbitration involved determining the eligibility of patents from applications by parties who were not involved in the arbitration. Lloyd countered this argument by stating that all that was being determined by the arbitrator was whether a provision of the Agreement applied and that whether the relief sought was relief against Larkden, not other parties.

On the fees issue, Larkden argued that the relief sought regarding fees was a hypothetical issue because the triggering events for the payment of the fees (that is, the licensing of the patents or the manufacture of the components) were not alleged to have occurred. Therefore, whether there would be any liability if those events did occur would be hypothetical. Accordingly, there was no relevant dispute.

The Supreme Court upheld the jurisdiction of the arbitrator with regard to both the patents and fees issues.

While the decision related to a domestic arbitration, it was decided in New South Wales, which is a state that has enacted the modem domestic arbitration law, the Commercial Arbitration Act, based on the UNCITRAL Model Law. Therefore, while the particular mechanism that brought the issue before the court arose in a domestic arbitration, there is no reason to suspect that the decision on arbitrability per se would have been different if dealing with an international arbitration.

This case is yet another example of a forceful statement by an Australian court applying a modern approach in support of arbitration.

Larkden Pty Limited v Lloyd Energy Systems Pty Limited [2011] NSWSC 268.