FEDERAL COURT OF AUSTRALIA
Recyclers of Australia Pty Ltd v Hettinga Equipment Inc [2000] FCA 547
ARBITRATION – stay of proceeding – whether determination of whether a matter is capable of settlement by arbitration is to be determined by reference to the issues pleaded or to the subject matter of the underlying dispute – whether claims severable from, independent of or ancillary to the arbitrable claims should be stayed – whether under the law of Iowa claims of misrepresentation in respect of pre-contractual and post-contractual representations is a dispute arising under the contract
WORDS AND PHRASES – “matter”
International Arbitration Act 1974 (Cth) s 7(2)
Federal Arbitration Act, 9 U.S.C. 1 et seq
Iowa Uniform Arbitration Act, I.C.A. Chapter 679A
Flakt Australia Ltd v Wilkins & Davies Construction Co Ltd [1979] 2 NSWLR 243 - considered
Allergan Pharmaceuticals Inc v Bausch and Lomb Inc (1985) 7 ATPR 40-636 - considered
Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332 - applied
Hooper v Kirella (1999) 167 ALR 358 – cited
IBM Australia v National Distribution Services [1991] 22 NSWLR 466 – cited
Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160 – cited
Amin Rasheed Shipping Corp v Kuwait Insurance Co [1984] 1 AC 50 - cited
Prima Paint Corporation v Flood & Conklin Manufacturing. Co. 388 U.S. 395 (1967) – cited
Moses H Cone Memorial Hospital v Mercury Construction Corporation 460 U.S. 1 (1983) - considered
Southland v Keating 465 U.S. 1 (1984) - cited
Mastrobuono v Shearson Lehman Hutton Inc 514 U.S. 52 (1995) - cited
Doctor’s Associates Inc v Casarotto 517 U.S. 681 (1996) - considered
Wesley Retirement Services Inc v Hansen Lind Meyer Inc 594 N.W. 2d 22 (Iowa 1999) – considered
Volt Information Sciences Inc v Board of Trustees of the Leland Stanford Junior University 489 U.S. 468 (1989) – considered
Iowa Telephone Association v City of Hawarden 589 N.W. 2d 245 (Iowa 1999) - cited
Griffin v Semperit of America Inc 414 F.Supp. 1384 (Sd. Tex. 1976) – considered
In re Kinoshita and Co 287 F.2d 951 (2d Cir. 1961) – considered
Mediterranean Enterprises Inc v Ssangyong Corporation 708 F.2d 1458 (1983) - considered
Tracer Research v National Environmental Services Co 42 F.3d 1292 (9th Cir. 1994) – cited
Weinrott v Carp 298 N.E.2d 42 (1973, N.Y.) – cited
Terra International Inc v Mississippi Chemical Corporation 119 F.3d 688 (1997) – applied
Paper Products Pty Ltd v Tomlinsons (Rochdale) Ltd (1993) 43 FCR 439 - cited
Hi-Fert Pty Ltd v Kiukiang Maritime Carriers Inc (1998) 159 ALR 142 - cited
Dodwell & Co (Aust) Pty Ltd v Moss Security Ltd Federal Court, Wilcox J (unreported, 11 April 1990) – considered
RECYCLERS OF AUSTRALIA PTY LTD v HETTINGA EQUIPMENT INC
VG 565 OF 1999
JUDGE: MERKEL J
PLACE: MELBOURNE
DATE: 30 MAY 2000
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IN THE FEDERAL COURT OF AUSTRALIA |
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VG 565 of 1999 |
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BETWEEN: |
RECYCLERS OF AUSTRALIA PTY LTD (ACN 007 074 517) FIRST APPLICANT
UNIMOULD PTY LTD (ACN 005 705 627) SECOND APPLICANT
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AND: |
HETTINGA EQUIPMENT INC FIRST RESPONDENT
SIEBOLT HETTINGA SECOND RESPONDENT |
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DATE OF ORDER: |
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WHERE MADE: |
UPON counsel for the respondents undertaking to the Court on behalf of the respondents that the respondents will use their best endeavours to refer the applicants’ claims to arbitration and to pursue the arbitration with due expedition.
THE COURT ORDERS THAT:
1. The proceeding be stayed until further order.
2. The applicants pay the respondents’ costs of and incidental to their motion to stay the proceeding.
3. Liberty to apply be reserved.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
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IN THE FEDERAL COURT OF AUSTRALIA |
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VG 565 of 1999 |
REASONS FOR JUDGMENT
Background
1 The respondents have applied for a stay of the proceeding, commenced by the applicants, pursuant to s 7(2) of the International Arbitration Act 1974 (Cth) (“the Commonwealth Arbitration Act”).
2 In the proceeding the applicants claim damages pursuant to s 82 of the Trade Practices Act 1974 (Cth) (“the TPA”) and at common law in respect of certain representations allegedly made by the respondents to the applicants in the course of pre-contractual and post-contractual negotiations. The negotiations concerned an injection moulding unit which was purchased by the second applicant (“Unimould”) from the first respondent (“Hettinga Equipment”) for US$4,188,150 under a sale agreement made on or about 17 October 1996. The representations are alleged to have given rise to causes of action, which are the subject of the proceeding, for misleading and deceptive conduct in contravention of s 52 of the TPA and in negligence.
3 The respondents claim that under the sale agreement Unimould agreed to refer the dispute, the subject of the proceeding, to arbitration and that, as a consequence, Hettinga Equipment is entitled to have the proceeding brought by Unimould against it stayed as of right under s 7(2) of the Commonwealth Arbitration Act. The respondents also claim that, as they are agreeable to submitting the claims which are not subject to the arbitration clause to arbitration, it is appropriate for the Court to stay the proceeding in respect of all claims.
4 The affidavit material before the Court leaves open the possibility that the sale agreement was partly in writing and partly oral. However, the parties contested the stay application on the basis that the relevant terms of the sale agreement were set out in:
· quotation no 2724 dated 17 July 1996 from Hettinga Equipment to the first applicant (“ROA”); and
· invoice no. 4106 dated 17 October 1996 from Hettinga Equipment to Unimould.
5 The quotation and invoice contained, inter alia, the following terms:
“Applicable Law, Pricing and Terms of Sale: Any contract between Buyer and Hettinga shall be governed, construed and interpreted under the law of the State of Iowa, and shall be subject to the terms and conditions listed below. Any Purchase Order issued by Buyer as a result of this quotation shall be deemed to incorporate the terms and conditions of this quotation. If there is any conflict between these conditions of sale and those of the buyer, these conditions shall control…
…
Arbitration: All disputes hereunder, including the validity of this agreement, shall be submitted to arbitration by an arbitrator in Des Moines, Iowa U.S.A. under the Rules of the American Arbitration Association, and the decision rendered thereunder shall conclusively bind the parties. Judgment upon the award may be entered in any court having jurisdiction.”
…
Equipment Warranty: The machinery and equipment sold hereunder is warranted to the original Buyer to be free from defective material and workmanship for a period of one hundred eighty (180) days from date of shipment. Hettinga Equipment, Inc. engineered parts are warranted to the original Buyer to be free from defective material and workmanship for a period of twelve (12) months from date of shipment. If Buyer notifies Seller in writing of any claimed defect in the equipment and if, after appropriate reasonable opportunity to inspect and remedy any defect by Seller, the equipment is found not to be conformity with this warranty, the Seller will, at its option and expense either repair the same or provide a replacement of defective parts, Ex works, Des Moines, Iowa U.S.A. and/or other shipping points.
The foregoing warranty does not cover, and the seller makes no warranty with respect to:
(a) Equipment not initially started up at Buyer’s factory by Hettinga Equipment, Inc.
(b) Failures not reported to Seller within the warranty period above specified.
(c) Failure or damage due to negligence, accident, abuse, improper operation or maintenance or abnormal conditions of temperature, moisture, dirt or corrosion.
(d) The cost of dismantling and installation of the equipment.
THE WARRANTIES SET FORTH HEREIN ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED BY LAW OR TRADE USAGE. SELLER SHALL NOT BE LIABLE FOR ANY SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO LOSS OF USE OR LOSS OF ANTICIPATED PROFITS, ARISING OUT OF THIS CONTRACT OR A BREACH THEREOF. SELLER DOES NOT WARRANT ANY AUXILIARY EQUIPMENT. ANY WARRANTY ON SUCH EQUIPMENT SHALL BE THAT OF ITS ORIGINAL MANUFACTURER OR SUPPLIER OTHER THAN HETTINGA EQUIPMENT, INC. ALL EQUIPMENT NOT INITIALLY STARTED UP BY HETTINGA EQUIPMENT, INC. AT BUYER’S FACTOR IS SOLD ‘AS IS’ AND WITHOUT WARRANTY.”
6 In the proceeding the applicants claim that:
· Hettinga Equipment engaged in misleading or deceptive conduct contrary to s 52 of the TPA, or breached a duty of care, in making certain representations to ROA as to the performance capabilities of the injection moulding unit during negotiations which led to Unimould agreeing to purchase the unit;
· the second respondent (“Mr Hettinga”) aided, abetted, counselled, procured or was directly or indirectly knowingly concerned in, or party to, Hettinga Equipment’s contravention of s 52 of the TPA;
· Hettinga Equipment breached a duty of care in failing to advise the applicants, after the sale agreement had been entered into, that the pre-contractual representations it had made could not be fulfilled because the electrical cycle in Australia was 50 cycles per second;
· Hettinga Equipment breached a duty to take reasonable care to ensure that the injection moulding equipment was capable of performing the task for which it was intended;
· Hettinga Equipment engaged in misleading or deceptive conduct or breached a duty of care in representing to Unimould after the sale agreement had been entered into that production rates would increase if it reduced the temperature of the injection moulding equipment’s chilled water supply.
7 The applicants rely only upon pre-contractual and post-contractual representations, rather than on any terms or warranties contained in the sale agreement, to found their claim to damages.
8 The respondents have delivered a defence that admits that Hettinga Equipment sold the injection moulding equipment to Unimould under the sale agreement containing the terms set out in the quotation and invoice. The respondents deny the allegations of the applicants in relation to their TPA and negligence claims, but also plead that the liability of Hettinga Equipment (if any) in respect of the unit is limited to the liability arising under the Equipment Warranty clause in the sale agreement, and not otherwise. The applicants accept that the Equipment Warranty clause is to be construed in accordance with the law of the State of Iowa, but contend that the operation of the clause cannot defeat their TPA claims for misleading and deceptive conduct: see Clark Equipment Australia Ltd v Covcat Pty Ltd (1987) 71 ALR 367 at 371 and Petera Pty Ltd v EAJ Pty Ltd (1985) 7 FCR 375 at 377-378.
Section 7(2) of the Commonwealth Arbitration Act
9 Section 7(2) provides:
“Subject to this Part, where:
(a) proceedings instituted by a party to an arbitration agreement to which this section applies against another party to the agreement are pending in a court; and
(b) the proceedings involve the determination of a matter that, in pursuance of the agreement, is capable of settlement by arbitration;
on the applicant of a party to the agreement, the court shall, by order, upon such conditions (if any) as it thinks fit, stay the proceedings or so much of the proceedings as involves the determination of that matter, as the case may be, and refer the parties to arbitration in respect of that matter.”
10 The question arising under s 7(2) is whether the proceeding involves the determination of a “matter” that, under the arbitration clause, is capable of settlement by arbitration. As the arbitration clause and the sale agreement are to be governed, construed and interpreted “under the law of the State of Iowa”, the issue of whether any of the matters involved in the proceeding are arbitrable under the clause is to be determined in accordance with the law of Iowa.
11 Before considering that issue it is necessary to consider what constitutes a “matter” to be determined in the proceeding. In Flakt Australia Ltd v Wilkins & Davies Construction Co Ltd [1979] 2 NSWLR 243 at 250 McLelland J said that:
“…the word ‘matter’ in s 7(2)(b) denotes any claim for relief of a kind proper for determination in a court. It does not include every issue which would, or might, arise for decision in the course of the determination of such a claim. The use of the word ‘settlement’ provides support for the view. ‘Settlement’ is an apt term to be used in relation to a claim for relief – it is less apt in relation to a mere issue. Furthermore, it is significant, that, if the prescribed conditions are fulfilled, a stay is mandatory, notwithstanding that the governing law of the arbitration agreement is that of a country not a party to the Convention; and that, under the law of that country, a stay of proceedings on the basis of an agreement to arbitrate may be discretionary, as it is under the law of New Zealand. In such circumstances, I would not, in the absence of compelling language, attribute to Parliament an intention to require that proceedings be stayed, unless the claim made in those proceedings was capable of resolution by arbitration.”
12 See also Elders CED Ltd v Dravo Corporation (1985) 59 ALR 206 at 210 and Allergan Pharmaceuticals Inc v Bausch and Lomb Inc (1985) 7 ATPR 40-636 at 47,174 per Beaumont J.
13 Section 7(2) was considered in Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332, which concerned the application of the sub-section to an appeal to a court by a creditor against a liquidator’s rejection of a proof of debt on grounds that were able to be referred to arbitration, had the dispute been between the creditor and the company in liquidation. The case was, in part, concerned with whether the liquidator was a person “claiming through or under” the company in liquidation, and therefore within s 7(4) of the Commonwealth Arbitration Act. However, some consideration was given to what constituted a ‘matter’ under s 7(2). Although the creditor’s appeal against the liquidator’s rejection of the proof of debt was not capable of being referred to arbitration, the liquidator contended that the underlying issue of the creditor’s indebtedness to the company in liquidation was required to be referred to arbitration under s 7.
14 Brennan and Dawson JJ (with whom Toohey J agreed) at 343-344 found that the various grounds that were being relied upon by the liquidator to contend that there was no enforceable debt were grounds that were available to the company in liquidation. In those circumstances, their Honours found that the determination of whether the company owed the debt to the creditor was clearly a “matter” capable of settlement by arbitration, however that term was defined. Accordingly, the proceeding was required to be stayed. Their Honours also observed that the matter to be referred to arbitration could not extend to the determination of issues which fell outside the arbitration clause.
15 Deane and Gaudron JJ took a broader view of what constitutes a “matter” saying (at 351):
“The word ‘matter’ is not defined in the Act. In the quite different context of Ch III of the Constitution, it has been held that the word ‘matter’ means ‘the whole matter’ and encompasses ‘all claims made within the scope of the controversy’: Fencott v. Muller (1983) 152 CLR 570, at p 603. See also Philip Morris Inc. v. Adam P Brown Male Fashions Pty. Ltd. (1981) 148 CLR 457, at p 475. However, in any context, ‘matter’ is a word of wide import. In the context of s.7(2), the expression ‘matter ... capable of settlement by arbitration’ may, but does not necessarily, mean the whole matter in controversy in the court proceedings. So too, it may, but does not necessarily encompass all the claims within the scope of the controversy in the court proceedings. Even so, the expression ‘matter ... capable of settlement by arbitration’ indicates something more than a mere issue which might fall for decision in the court proceedings or might fall for decision in arbitral proceedings if they were instituted. See Flakt, at p 250. It requires that there be some subject matter, some right or liability in controversy which, if not co-extensive with the subject matter in controversy in the court proceedings, is at least susceptible of settlement as a discrete controversy. The words ‘capable of settlement by arbitration’ indicate that the controversy must be one falling within the scope of the arbitration agreement and, perhaps, one relating to rights which are not required to be determined exclusively by the exercise of judicial power.”
16 and at 353:
“Section 7(2) of the Act is concerned with ‘proceedings [which] involve the determination of a matter ... capable of settlement by arbitration’. Its operation is thus not confined to proceedings in which the parties seek the same relief as might have been sought in arbitration proceedings. Because s.7(2) has this wider operation, the question whether a person is claiming through or under a party to the arbitration agreement is necessarily to be answered by reference to the subject matter in controversy rather than the formal nature of the proceedings or the precise legal character of the person initiating or defending the proceedings.”
17 Their Honours regarded the entire controversy as to the debt owing, including estoppel issues, as the matter to be referred to arbitration.
18 While Deane and Gaudron JJ may have differed in some respects from the majority on the question of the scope of a “matter”, Tanning Research is authority for the view that, for the purposes of s 7(2), the “matter” to be determined in a proceeding is to be ascertained by reference to the subject matter of the dispute in the proceeding and the substantive, although not necessarily the ultimate, questions for determination in the proceeding. The scope of the matter is to be ascertained from the pleadings and from the underlying subject matter upon which the pleadings, including the defence, are based: Tanning Research at 343-344 and 351-354 cf Fencott v Muller (1983) 152 CLR 570 at 608, Hooper v Kirella (1999) 167 ALR 358 at 368-371.
19 The manner in which a claim or a defence is pleaded is of importance to, but is not determinative of, the characterisation of the “matter” for the purpose of s 7(2). Once the “matter” is properly characterised the question to be determined is whether that matter is capable of settlement under the arbitration clause.
20 The proceeding in Tanning Research, being the appeal to the Court, was stayed because the outcome of the proceeding was dependent, at least in part, on the determination of the matter to be referred to arbitration. Given the requirement in s 7(2) that only so much of the proceeding as involves the matter need be stayed, it is clear that a proceeding that includes matters severable from or independent of the matter required to be referred to arbitration need not be stayed in respect of those matters.
21 On the basis of the principles set out above, the “matter” to be determined in the applicants’ proceeding is their entitlement to recover damages by reason of the respondents’ representations, upon which the applicants’ claims under the TPA, and in negligence, are based. The issue is whether under Iowa law the applicants’ entitlement to damages by reason of the representations is, in pursuance of the sale agreement, capable of settlement by arbitration.
Iowa law
22 While the parties were in dispute as to the operation of s 7(2), they were in agreement upon the following propositions:
· the applicant for a stay under s 7(2) bears the burden of showing that the matter is capable of being settled by arbitration and falls within the scope of the arbitration agreement (Tanning Research at 353);
· as a matter of Australian municipal law, a claim for relief under the TPA may be made the subject of a domestic arbitration (IBM Australia v National Distribution Services [1991] 22 NSWLR 466 at pp 475-477) and, similarly, according to Australian conflicts rules, a claim for relief under the TPA may be made the subject of a foreign international arbitration (Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160 at 166-167 per Gleeson CJ);
· the proper law of the contract, being the law of the State of Iowa, is paramount in determining the creation, validity and effect of contractual obligations (Amin Rasheed Shipping Corp v Kuwait Insurance Co [1984] 1 AC 50 at 65 per Lord Diplock), with the consequence that, in the present case, the Court is to consider the validity, legal effect and interpretation of an agreement to arbitrate as matters of substantive law governed by the law of Iowa (cf Hamlyn & Co v Talisker Distillery [1894] AC 202 at 210 and 213-214; Russell on Arbitration 18th ed at 52 and Dicey & Morris, The Conflict of Laws, 9th ed at 1065).
23 The law of Iowa is a question of fact to be determined by reference to the evidence adduced by the parties. The parties have adduced evidence from eminent United States legal experts as to the statutory and case law that govern the validity, legal effect and interpretation of the arbitration clause.
(a) The respondents’ contentions
24 Relying upon expert opinion and relevant statutory and case law, the respondents contended as follows. The arbitration clause should be interpreted broadly in accordance with the policies and principles of federal law applicable in Iowa being, relevantly, the Federal Arbitration Act, 9 U.S.C. 1 et seq (“the FAA”) and, to the extent that they are not in conflict with the FAA, the policies and principles of the Iowa Uniform Arbitration Act, I.C.A. Chapter 679A (“the IUAA”).
25 Although there may be no controlling or binding authority under the law of Iowa in respect of the arbitration clause in the present case, the Court should adopt the broad approach taken in cases in which U.S. courts have held that fraudulent inducement claims are claims “in relation to” or “pertaining to” a contract alleged to have been induced by the fraud. In so far as it is contended by the applicants that, under the IUAA, the arbitration clause was unenforceable in relation to arbitration of the applicants’ claims:
· the IUAA is in conflict with the FAA, which prevails in accordance with Art VI[2] of the United States Constitution;
· a court in Iowa, applying the policies and principles of federal law, would not construe the choice of law clause as intending to oust the operation of the FAA.
26 Adopting a broad approach mandated by the FAA, the words “all disputes hereunder, including the validity of the agreement” refer to disputes arising by reason of, or arising out of, the contractual relations entered into between the parties.
27 The proceeding relates to disputes by reason of, or arising out of, contractual negotiations, including the misleading representations alleged to have been made by the contracting parties in the course of those negotiations. Therefore, the proceeding must be stayed under s 7(2) of the Commonwealth Arbitration Act, because it falls within the scope of the arbitration clause. To the extent that the claims extend beyond claims between Hettinga Equipment and Unimould, the two contracting parties, those claims are bound up with and subsidiary to the claims required to be arbitrated and should, in the exercise of the Court’s discretion, be stayed.
(b) The applicants’ contentions
28 The applicants, in reliance upon expert evidence and relevant statutory and case law, contended that the dispute the subject of the proceeding was not capable of settlement by arbitration under the law of the State of Iowa. The applicants submitted as follows.
29 Under Ch 679A of the IUAA, the arbitration clause is not enforceable as an arbitration agreement because it contains standard form printed conditions and is therefore an “adhesion contract” (s 679A.1(2)(a) of the IUAA), and because an agreement to arbitrate tort claims is not enforceable (s 679A.1(2)(c) of the IUAA).
30 The respondents’ expert witnesses do not dispute the unenforceability of the arbitration clause under the IUAA but incorrectly rely upon an asserted pre-emption of the federal FAA over the IUAA. There is no such pre-emption because under the choice of law clause contained in the sale agreement:
· the FAA does not form part of the law of the State of Iowa;
· the IUAA, unlike the FAA, is required to be applied by a court in Iowa applying the law of the State of Iowa.
31 Accordingly, the FAA, and its policies and principles, do not govern the validity or legal effect of the arbitration clause.
32 In any event, the applicants’ claims do not fall within the scope of the arbitration clause because, irrespective of whether state or federal law is applied, a court would not construe the arbitration clause as encompassing the applicants’ TPA or negligence claims. In support of that submission it was said that:
· there is no binding authority in Iowa as to the meaning of the arbitration clause;
· the authorities from other US jurisdictions are divided on the meaning of comparable clauses;
· IUAA s 679A.1(2)(c) expresses a public policy of the Iowa legislature to limit the arbitrability of tort claims and consequently displaces the application of the federal pro-arbitration rules of construction relied on by the respondents;
· the language used in the arbitration clause could have been drafted broadly but was not, and, in any event, should be construed contra proferentem.
33 Accordingly, the applicants’ claims do not fall within the scope of the arbitration clause.
Prevalence of federal law
34 Article 2 of the FAA provides:
“Validity, irrevocability, and enforcement of agreements to arbitrate
A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”
35 It is well established that Art 2 ensures and protects the enforceability of arbitration clauses in contracts falling within its scope: see Prima Paint Corporation v Flood & Conklin Manufacturing. Co. 388 U.S. 395 (1965) at 405-406; Moses H Cone Memorial Hospital v Mercury Construction Company 460 U.S. 1 (1983) at 24-25; Southland v Keating 465 U.S. 1 (1984) at 10-11; Mastrobuono v Shearson Lehman Hutton Inc 514 U.S. 52 (1995) at 58 and 64; and Doctor’s Associates Inc v Casarotto 517 U.S. 681 (1996) at 686. It is common ground that the sales agreement is a contract falling within Art 2.
36 Chapter 679A.1 of the IUAA similarly protects and ensures the enforceability of an arbitration clause but does not apply to “a contract of adhesion” or, unless otherwise provided in a separate contract, any “claim sounding in tort whether or not involving a breach of contract”. It is well established that contracts not falling within Chapter 679A.1 are not enforceable: see Mutual Service Casualty Insurance Company v Iowa District Court for Woodbury County, 372 N.W. 2d 261 (Iowa 1985) at 264 and Wesley Retirement Services Inc v Hansen Lind Meyer Inc 594 N.W. 2d 22 (Iowa 1999) at 26. It is common ground that the arbitration clause is a contract of adhesion and that the applicants’ tort claims would not be enforceable under the IUAA.
37 The question is whether the FAA preempts the IUAA in respect of the arbitration clause. On that issue I prefer the expert evidence and submissions of the respondents to the effect that, in so far as the IUAA operates to render the arbitration clause unenforceable, the IUAA is pre-empted by the FAA. My reasons for that preference may be briefly stated as follows.
38 The law of the State of Iowa includes the substantive principles of law that the courts of Iowa would apply: see Mastrobuono at 64. Those principles include the principles and policies contained in the FAA which, under the United States Constitution, prevail over or pre-empt any conflicting principles or policies arising under State law concerning the enforceability of arbitration clauses such as the IUAA, in the event that the FAA is invoked by the parties: see Moses H Cone Memorial Hospital at 24-25; Southland v Keating at 13-15; Mastrobuono at 56 and Doctor’s Associates at 687-688. The cases establish that, while State law rendering a contract, including the arbitration clause, unenforceable does not conflict with the FAA, a law such as the IUAA, which renders only the arbitration clause unenforceable is pre-empted by the FAA if it applies, and is invoked: see for example Doctor’s Associates at 687-688.
39 Accordingly, upon the FAA being invoked (as it has been in the present case), the unenforceability of the arbitration clause (being an adhesion contract), and the non-arbitrability of tort claims under the IUAA, do not apply to the arbitration clause which, under the FAA, is enforceable in respect of all disputes encompassed by its terms.
40 I do not accept the applicants’ submission that the decision of the Supreme Court of Iowa in Wesley Retirement Services, which upholds the non-arbitrability of tort claims by reason of the IUAA, is authority that the FAA cannot apply as part of the law of Iowa and is therefore inconsistent with the above conclusions. In Wesley Retirement Services, the question was not considered because the FAA was not invoked in the district court. Therefore, there was no occasion to determine if there was federal pre-emption in relation to the FAA’s protection of the arbitrability of the tort claims. The Supreme Court of Iowa held (at 25) that as there was no decision by the district court on that issue, it was therefore not preserved for review by the Supreme Court on appeal.
41 The FAA protects the validity and enforceability of the arbitration clause. Accordingly, a court in Iowa would apply the settled federal rule that questions of arbitrability under international commercial contracts, that are subject to the FAA because it is invoked by a party, must be resolved with due regard for the federal policy favouring arbitration, and that ambiguities concerning the scope of arbitrable issues are to be resolved in favour of arbitration: see generally Moses H Cone Memorial Hospital at 24-25 and Volt Information Sciences Inc v Board of Trustees of the Leland Stanford Junior University 489 U.S. 468 (1989) at 476 and Doctor’s Associates at 687-688.
42 Although the Supreme Court in Volt Information Sciences (at 479) stated that the FAA does not compel arbitration regardless of the circumstances, I do not regard the case as authority for the proposition that the FAA does not preempt state law in the case of substantive, rather than procedural, conflict. As was explained in Doctor’s Associates (at 688), the arbitration clause the subject of the decision in Volt Information Sciences involved a limitation regarding procedural rules which:
“determined only the efficient order of proceedings, it did not affect the enforceability of the arbitration agreement itself. We held that applying the state rule would not ‘undermine the goals and policies of the FAA’ 489 U.S. at 478, because the very purpose of the Act was to ‘ensure that private agreements to arbitrate are enforced according to their terms…’”
43 In Iowa Telephone Association v City of Hawarden 589 N.W. 2d 245 (Iowa 1999) (at 251) the Supreme Court of Iowa said that if a federal law “pertains to an activity traditionally regulated by the states, the statute will be construed to protect state authority unless ‘the clear and manifest purpose of Congress’ is to preempt”. For the reasons set out above, in the case of the substantive conflict between the FAA and the IUAA which exists in respect of the arbitration clause, the intention of the FAA is “to pre-empt” conflicting provisions of the IUAA. Accordingly, I do not accept that a court in Iowa would:
· construe the choice of law clause as intending to oust the FAA or to oust the federal policies and principles of interpretation applicable to arbitrations covered by the FAA;
· apply the more restrictive policies and principles of the IUAA: see Mastrubuono at 64; Doctor’s Associates at 687-688.
44 It follows from the foregoing that the arbitration clause, being within the coverage of the FAA, is enforceable and is to be construed broadly as to issues of arbitrability.
A dispute “hereunder”
45 The question remains whether, applying the above principles, the entitlement of the applicants to damages by reason of the representations is a dispute that falls within the arbitration clause in the sale agreement because it is a “dispute hereunder”.
46 There is no controlling or binding authority under the law of the State of Iowa that is determinative of the scope of the arbitration clause. In those circumstances a Court, applying the law of the State of Iowa, would have regard to, and treat as persuasive, decisions of the state and federal courts in other jurisdictions in the US in relation to similar clauses. The Court is to determine, as a question of fact, whether the expert opinion and cases relied upon by the respondents, which take a broad view of such clauses, are to be preferred to the expert opinion and cases relied upon by the applicants, which take a narrow view.
47 United States cases dealing with the construction of similar, but not comparable, arbitration clauses accept that a claim that a party was fraudulently induced to enter into an agreement is a controversy, dispute or claim arising out of, relating to or pertaining to the agreement: see Sangivanni & Sons v Floryan & Co. Inc 262 A. 2d 159 (Conn. 1969) at 162-163, JP Stevens & Co Inc v Harrell International Inc 299 So.2d 69 (1974 Fla.App.) at 70 and Two Sisters Inc v Gosch and Co. 370 A. 2d 1020 (Conn. 1976) at 1022-1023.
48 Although no claim in fraud is made in the present case, the claims of negligent misrepresentation and misleading conduct in inducing the sale agreement, and to incur other expenditures in consequence thereof are not, relevantly, distinguishable from the United States fraudulent inducement cases: cf Allergan Pharmaceuticals at 47,173. While the post-contractual representations might stand in a different category, the broad approach to such arbitration clauses would generally treat such claims as embracing any controversy, dispute or claim arising out of or relating to the contract if the representations were made in the context, or as a consequence, of the contractual relationship entered into between the parties.
49 In Griffin v Semperit of America Inc 414 F.Supp. 1384 (Sd. Tex. 1976), the court considered whether fraudulent inducement was a controversy or claim “arising out of or relating to this agreement or the breach thereof”. Applying the well established federal principle that whenever the scope of the arbitration clause is fairly debatable or reasonably in doubt the court should decide the question of construction in favour of arbitration, the court held that a claim of fraudulent inducement, being inextricably bound up with other factual issues involved in the contract dispute, was a controversy or claim arising out of the agreement or the breach thereof (at 1391). Relevantly, for present purposes, the court at (1391-1392) contrasted the breadth of the clause it was considering with the clause considered in In re Kinoshita and Co 287 F.2d 951 (2d Cir. 1961), which concerned a clause that limited arbitration to disputes or differences arising under a charter agreement.
50 The applicants rely on In re Kinoshita and Co to support their claim that an arbitration clause limited to disputes arising under a contract is a narrow clause which is not of sufficient breadth to encapsulate representations that induced a party to enter into the contract or which were made after the contract had been made or performed.
51 In In re Kinoshita and Co the United States Court of Appeals, Second Circuit, (at 953) contrasted arbitration clauses relating to disputes “arising out of” or “relating to” an agreement with clauses relating to disputes “arising under” an agreement. In the latter situation arbitration was to be limited to disputes and controversies relating to the interpretation of the agreement and matters of performance which do not include fraud in the inducement of the agreement.
52 In re Kinoshita and Co was applied by the United States Court of Appeals, Ninth Circuit, in Mediterranean Enterprises Inc v Ssangyong Corporation 708 F.2d 1458 (1983) where, relevantly, the arbitration clause was restricted to “disputes arising hereunder”. The court recognised the strong federal policy favouring enforcement of arbitration agreements but observed that the issue of arbitrability, ultimately, is to be determined by the terms of the contract entered into by the parties with the task of the court remaining one of contractual interpretation. The court said (at 1464):
“We interpret ‘arising hereunder’ as synonymous with ‘arising under the Agreement’. The phrase ‘arising under’ has been called ‘relatively narrow as arbitration clauses go’. Sinva, Inc. v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 253 F.Supp. 359, 364 (S.D.N.Y. 1966). In In re Kinoshita & Co., 287 F.2d 951, 953 (2d Cir. 1961), Judge Medina concluded that when an arbitration clause ‘refers to disputes or controversies ‘under’ or ‘arising out of’ the contract’, arbitration is restricted to ‘disputes and controversies relating to the interpretation of the contract and matters of performance’. Judge Medina reasoned that the phrase ‘arising under’ is narrower in scope than the phrase ‘arising out of or relating to,’ the standard language recommended by the American Arbitration Association.”
53 In Mediterranean Enterprises the court held that claims of breach of agreement and breach of fiduciary duty created by the agreement fell within the scope of the arbitration clause, but that other claims of inducement (conspiring to breach a different contract and quantum merit) did not. While the claims considered in Mediterranean Enterprises differ significantly from those in the present case, the interpretation given to the words “arising hereunder” is supportive of the applicants’ contentions.
54 Tracer Research v National Environmental Services Co 42 F.3d 1292 (9th Cir. 1994) also supports the applicants. The court (at 1295) referred to Mediterranean Enterprises as limiting claims to those arising under or arising out of the agreement in question and observed that a claim of misappropriation of trade secrets was a tort claim and that, although the claim would not have arisen “but for” the parties’ agreement, that was not determinative of whether the claim could be described as one arising out of the agreement.
55 However, the respondents’ broader approach to the interpretation of the arbitration clause is also not bereft of judicial support. In Weinrott v Carp 298 N.E.2d 42 (1973, N.Y.) the Supreme Court of New York adopted a broad approach to conclude that an arbitration clause relating to “[a]ll disputes, controversies or claims arising hereunder, the interpretation of any of the provisions or the performance called for thereunder” was sufficiently wide to include the claim of fraudulent inducement. The Court (at 47) stated that the result was consistent with federal policy. A similarly broad approach has been taken to other clauses which are comparable to the arbitration clause: see Aerojet-General Corporation v Non-Ferrous Metal Refining Ltd 322 N.Y.S. 2d 33 (1973) and Terra International Inc v Mississippi Chemical Corporation 119 F.3d 688 (1997).
56 In Terra International the United States Court of Appeals, Eight Circuit, held that a clause construed as limited to disputes arising “hereunder” was sufficiently broad to cover claims in tort for damages resulting from an explosion that was alleged to have been caused as a consequence of the contractual relationship entered into between the parties. Approaching the claims as, in effect, flowing from relations that have arisen as a result of the contract, the court said (at 695) that the claims were broad enough to cover the contract-related tort claims because the tort claims involved “the same operative facts as would a parallel claim for breach of contract”. The court added (at 695):
“Admittedly, Terra did not raise any claims for breach of contract in its complaint. Strategic or artfully drawn pleadings, however, will not work to circumvent an otherwise applicable forum selection clause. See Lambert, 983 F.2d at 1121; Coastal Steel, 709 F.2d at 203. Although we recognize that Terra’s claims are alleged as tort claims, Terra plainly could have asserted a parallel claim for breach of contract in the same complaint. The fact that MCC’s technology allegedly caused an explosion that actively inflicted damage does not transform Terra’s cause of action into one based exclusively in tort. The same exact facts surrounding Terra’s tort claims would also give rise to a breach of contract claim.”
57 In Terra International the court adopted an approach to the construction of an arbitration clause, and the characterisation of a dispute falling within it, that is analagous to that adopted by Deane and Gaudron JJ in Tanning Research to interpreting the term “matter” in s 7(2) of the Comonwealth Act.
58 It is difficult to reconcile the apparently conflicting approaches taken by courts in the United States to an arbitration clause restricted to claims arising under a contract. Applying the broad federal approach that is applicable to such clauses, and reconciling the cases as best I can, the following principles can be discerned from the cases:
· an arbitration clause which is limited to disputes or controversies “arising hereunder”, in general, restricts arbitration to disputes and controversies relating to the interpretation of the contract and matters of performance which do not include fraud or other torts committed in the inducement of the agreement (In re Kinoshita and Mediterranean Enterprises);
· however, where the dispute arises out of relations that have arisen only as a result of the agreement and in circumstances where the tort claims involve substantially the same operative facts as would a parallel claim for breach of the contract, the courts, applying a broad approach to the substance, rather than the form, of the dispute or controversy treat such tort claims as contract-related claims and therefore claims arising “under” the agreement (Terra International).
59 The broach approach taken in Terra International may differ from that taken in respect of the same issue in Australian cases (see Paper Products Pty Ltd v Tomlinsons (Rochdale) Ltd (1993) 43 FCR 439 at 448 and Hi-Fert Pty Ltd v Kiukiang Maritime Carriers (1998) 159 ALR 142 at 160). However, that is not of assistance in determining the law of Iowa.
60 The pre-contractual representations relied upon to found the TPA and negligence claims relate to the performance of the injection moulding unit and are said to have induced Unimould to purchase the unit and incur the expenditures claimed (which, indirectly, appear to include the purchase price) by way of damages. The issues which arise in respect of the claim for damages include:
· whether the representations pleaded, including that the unit was “capable of performing the tasks for which it was intended”, are warranties;
· whether, under the law of Iowa, the Equipment Warranty clause in the sale agreement precludes or limits any entitlement to the damages claimed by Unimould.
61 Essentially, the claim for damages is based upon the unit being unsuitable for the purpose for which it was acquired. As explained, the fact that the applicants do not claim specific relief in respect of the sale agreement, or that the representations were warranties, does not have the consequence that the “matter” in dispute (s 7(2)) or the “dispute” between the parties (the arbitration clause) is not a dispute under the contract or relating to its validity. If the facts relied upon to establish negligence or a breach of s 52 of the TPA to found a claim in damages could also be relied upon for a parallel claim for breach of contract or to invalidate or render inoperative the contract or some of its provisions, a “strategic or artfully drawn pleading” (Terra International at 695) which avoids making the contract claims does not have the consequence that the subject matter of the dispute does not arise under the contract or relate to its validity.
62 The issues relating to the respondents’ reliance on the “Equipment Warranty” in the sale agreement to restrict the applicants’ entitlement to damages affords an example of the extent to which the applicants’ damages claim is connected with the sale agreement. Unimould has already contended that the s 52 claims cannot be defeated by the Equipment Warranty clause. That contention raises the issue of whether relief under s 87 of the TPA is to be sought to invalidate the clause or the contract. Even if such relief is not claimed the contention plainly raises the validity of the contract, or part thereof, as an issue which forms part of the underlying dispute between the contracting parties. Indeed, but for the arbitration clause, it is probable that parallel contractual claims relating to the suitability of the unit would have been pleaded as part of the dispute between the parties. In my view, the applicants' claims are analogous to those considered in Terra Industries in that the factual matrix for those claims, and the issues raised by them, substantially overlap with the factual matrix and the issues that would be raised by any contractual claims. In particular, the dispute surrounding Unimould’s tort and s 52 claims could have also resulted in overlapping contract claims relating to the suitability of the unit. Furthermore, that dispute arises out of relations that have arisen as a result of the sale agreement. That agreement is the primary source of the losses claimed by Unimould and is also a significant element in Hettinga’s defence of Unimould’s claims.
63 In those circumstances, applying the law of Iowa, the entitlement of Unimould to claim damages from Hettinga Equipment by reason of the pre-contractual representations as to the performance or suitability of the unit, is a matter that arises under the sale agreement, and is therefore capable of settlement by arbitration. Accordingly, a stay of the proceeding in so far as it relates to that “matter” must be ordered under s 7(2) of the Commonwealth Arbitration Act.
The non contractual claims
64 The post contractual representations stand on a different footing. To the extent that those representations do not rely upon or flow from the contractual relationship they are capable of standing as independent and severable claims that do not arise “under” the sale agreement. However, at this stage, the post contractual claims have not been sufficiently articulated to enable me to determine that they are truly independent of and severable from the contractual claims relating to the performance or suitability of the unit. As they presently stand, the claims appear to be ancillary to, and flow from, the claims the subject of the stay under s 7(2). Thus, a question arises as to whether they ought to be stayed pending the determination of the arbitrable claims. The same issue arises concerning all of the claims by or against the non contracting parties.
65 In the event that a proceeding includes matters that are not capable of being referred to arbitration, but the determination of which is dependent upon the determination of the matters required to be submitted to arbitration, a court may, in the exercise of its discretion, stay the whole proceeding: see Tanning Research at 216 per Brennan and Dawson JJ. A court may also exercise a discretion to impose terms that the arbitration of the arbitrable claims not proceed prior to the determination of the non-arbitrable claims where the arbitrable claims are seen to be subsidiary to or significantly less substantial than, but overlapping with, the non-arbitrable claims: see Hi-Fert at 167-168 cf Dodwell & Co (Aust) Pty Ltd v Moss Security Ltd Federal Court, Wilcox J (unreported, 11 April 1990) at [5] and [7]. The discretion may also be exercised to stay the proceeding where the non-arbitrable claims are the ancillary claims.
66 The broad discretion arises as part of the exercise of a court’s general power to control its own proceedings. The basis for the discretion is that the spectre of two separate proceedings – one curial, one arbitral-proceeding in different places with the risk of inconsistent findings on largely overlapping facts, is undesirable: see Dodwell & Co per Wilcox J at [5] and [7], Hi-Fert at 167-168 and McDonnell Dowell Smith East Asia Pty Ltd v State Electricity Commission of Victoria (Supreme Court of Victoria) Beach J, 24 November 1998 (unreported) at [22] to [24].
67 In the present case the respondents contend that it is appropriate to stay the proceeding, in respect of the matters that are not arbitrable, until after the hearing and determination of the arbitration. They contend that:
“a. it is clear from the Statement of Claim that insofar as the applicants claim to have suffered loss, that loss has been suffered by Unimould rather than ROA. Despite the allegation that representations were made to ROA, it was Unimould that purchased the machine for US$4,188,160 and made licence payments of US$450,000. Although Unimould is described in the Statement of Claim as a ‘subsidiary of ROA’ and ‘ROA’s asset’, at no time has ROA been a shareholder in Unimould. If Unimould were successful in its claims against Hettinga Equipment at arbitration, there might be no need for ROA to pursue its claims in this proceeding;
b. the claims against Mr Siebolt Hettinga are clearly ancillary to the claims made against Hettinga Equipment. It is therefore appropriate that the principal claims against Hettinga Equipment be determined first;
c. the determination of issues in the arbitration will cast light on issues that may need to be determined in the proceeding, for example, technical questions involving the performance and capabilities of the machine;
d. if the proceeding runs simultaneously with the arbitration it will cause serious difficulty for witnesses, including expert witnesses required to attend both the proceeding and the arbitration in different parts of the world.
e. …both Mr Siebolt Hettinga and, to the extent necessary, Hettinga Equipment, have agreed to submit to arbitration any claims made against them which are not covered by the arbitration agreement. Without the agreement of the applicants to do likewise, the preparedness of the Respondents to submit all matters to arbitration has no legal effect. It would, however, present a practical solution to the problems associated with a multiplicity of proceedings.”
68 The applicants contend that the non arbitrable claims stand as severable from the allegedly arbitrable claims. It is said that, as the determination of any of the arbitrable claims will not result in the determination of the other claims, the Court should exercise its discretion by requiring, as a condition of any stay, that any arbitrable claims only proceed to hearing after the non-arbitrable claims have been determined in the Federal Court: cf Hi Fert at 168.
69 On the basis of the present pleadings it is my view that the respondents’ contentions ought to be accepted. The “contractual claims” (which are to be stayed under s 7(2)) appear to be the primary and substantial claims, and the other claims the ancillary and less significant claims. It is also likely that the outcome of the contractual claims will be determinative of many of the issues arising between the parties. Furthermore, if Unimould succeeds on the contractual claims it is unlikely that the other claims would proceed and if they did, their outcome is likely to be significantly affected by the determination of the contractual claims.
70 In all the circumstances the significant legal and factual overlap between the contractual and the non-contractual claims makes it desirable that the primary and substantial contractual claims be determined first. That will avoid the undesirable outcome of having overlapping claims adjudicated upon by different tribunals at the same time with the risk of inconsistent decisions: see Hi-Fert at 167-168.
71 Accordingly, it is appropriate to exercise my discretion to stay the non arbitrable claims arising in the proceeding until further order. If the applicants do not wish those claims to proceed to arbitration, and can establish that they are not subsidiary to, dependant upon or closely linked to the determination of the arbitrable claims, then they can apply for the stay to be lifted.
Conclusion
72 The proceeding by Unimould against Hettinga Equipment is to be stayed under s 7(2) of the Commonwealth Arbitration Act on terms that Hettinga Equipment undertake to use its best endeavours to refer Unimould’s claims to arbitration in accordance with the arbitration clause and pursue the arbitration with due expedition.
73 The proceeding in respect of the claims by ROA, and the claims by the applicants against Mr Hettinga, are to be stayed until further order in the exercise of the Court’s discretion. The stay will be on the condition that in the event that the applicants agree to those claims being arbitrated, the respondents are to use their best endeavours to enable those claims to be referred to arbitration as part of the arbitration of the arbitrable claims and pursue the arbitration with due expedition. Whether the applicants agree to the reference to arbitration of claims that are not the subject of the stay under s 7(2), is a matter for them.
74 Liberty to apply is to be reserved generally to address any matters that might arise as a result of the Court’s orders.
75 As the respondents have succeeded in their stay application they are entitled to their costs.
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I certify that the preceding seventy-five (75) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Merkel. |
Associate:
Dated: 30 May 2000
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Counsel for the Applicant: |
Mr R Garratt QC |
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Solicitor for the Applicant: |
Cornwall Stoddart |
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Counsel for the Respondent: |
Dr C Pannam QC with Mr IG Waller |
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Solicitor for the Respondent: |
Clayton Utz |
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Date of Hearing: |
3 March 2000 |
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Date of Judgment: |
30 May 2000 |
