FEDERAL COURT OF AUSTRALIA

Four Colour Graphics Australia Pty Ltd v Gravitas Communications Pty Ltd [2017] FCA 224

ORDERS

THE COURT ORDERS THAT:

1.    The interlocutory application dated 8 November 2016 be refused.

2.    The respondent pay the applicant’s costs of the interlocutory application.

3.    The proceeding be listed for a case management hearing on 13 April 2017 at 9.30 am.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

GLEESON J:

1    The respondent (“Gravitas”) seeks a referral to arbitration pursuant to s 8 of Commercial Arbitration Act 2010 (NSW) (“Act”) and a consequential stay of the proceeding brought in this Court.

2    Section 8 of the Act provides:

(1)    A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party’s first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

(2)    Where an action referred to in subsection (1) has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.

3    The relevant arbitration agreement is contained in cl 10 of an agreement entitled “contract for services” between Gravitas and the applicant (“Four Colour”). Four Colour does not dispute that cl 10 is an arbitration agreement within the meaning of s 8(1). Four Colour accepts that cl 10 is an agreement to arbitrate “any dispute about the interpretation or application of this contract or any of its provisions”.

4    The issue between the parties is whether the action brought in this Court by Four Colour is “brought in a matter which is the subject of” the arbitration agreement. The resolution of that issue requires identification of the “matter” or matters that are the subject of the substantive proceeding, and then consideration of whether the matter or matters fall within the scope of the arbitration agreement: cf. ACD Tridon v Tridon Australia [2002] NSWSC 896 (“Tridon”) at [99].

Background

5    In about September 2015, Four Colour and Gravitas entered into a written agreement entitled “Agreement for sale and purchase of business and assets” (“sale agreement”). In general terms, the sale agreement provided for the sale of a business, owned by Four Colour, of the provision of prepress and plate services, to Gravitas.

6    By clause 3 of the agreement, the purchase price for the business was specified as $250,000 plus GST. Clause 3 contained “earn out” provisions including the following:

The Purchase Price is deferred and payable as follows:

•    $25,000+GST to be paid on 20 October 2015

•    $25,000+GST to be paid on 20 January 2016

•    8 quarterly instalments of $25,000+GST if Jeff Holland is able to generate $200,000 of sales (excl of GST) in that quarter.

7    Jeff Holland is the sole director and secretary of Four Colour. He owns 50% of the shares of Four Colour, the other 50% being owned by Janelle Holland.

8    Clause 10.5 of the sale agreement provides:

Entire Agreement: This agreement records the entire understanding and agreement of the parties relating to the matters dealt with in this agreement. This agreement supersedes all previous understandings or agreements (whether written, oral or both) relating to such matters.

9    Clause 10.12 of the sale agreement provides:

Governing Law and Jurisdiction: This agreement is governed by the laws of NSW. The parties submit to the non-exclusive jurisdiction of the courts exercising jurisdiction in Victoria in respect of all matters relating to this agreement.

10    Although the precise facts are not clear, at about the same time as the parties entered into the sale agreement, they entered into another written agreement entitled “contract for services”. Broadly, the contract for services provides for Four Colour to provide the services of Mr Holland “to act as a Sales Relationship Manager”. Clause 5 provides:

In general terms, the contractor shall provide the services listed here:

1.    To provide Jeff Holland to act as a Sales Relationship Manager

It is anticipated that the contractor will spend the time required in fulfilling its obligations under this contract. The particular amount of time may vary from day to day or week to week.

The contractor undertakes that these services will be provided at all times by Four Colour Graphics Australia Pty Ltd. The contract may not be assigned or delegated.

11    Clause 7 provides for Gravitas to pay a monthly fee of $10,375 plus GST in respect of the provision of the agreed services.

12    The term of the contract for services is from 1 June 2015 to 31 May 2018 unless terminated earlier. That is, the term of the contract for services extended beyond the duration of the “earn out” provision.

13    Clause 8 of the contract for services concerns several matters including conflicts of interest and confidential information. Clause 9 requires Four Colour to keep records and information or materials received in relation to the contract, which records are to be the property of Gravitas.

14    Clause 10 of the contract for services provides:

If there is any dispute about the interpretation or application of this contract or any of its provisions, and the parties are unable to resolve the dispute, they shall agree on the appointment of a referee. The referee shall first seek to assist the parties to resolve the dispute. If this is unsuccessful, the referee shall, with the agreement of the parties at the time of the dispute, rule on the dispute and the ruling shall be binding on the parties.

If the parties do not agree on the appointment of a referee, or do not agree to give the referee the power to rule on the dispute, the provisions of the Commercial Arbitration Act 2010 NSW shall take effect.

All costs associated with the resolution of disputes shall be borne equally by the parties.

15    According to Four Colour’s statement of claim, between 6 January 2016 and 5 April 2016, Gravitas made payments totalling $50,000 by way of part payment of the purchase price for the business under the sale agreement.

16    The statement of claim also alleges that the contract for services was “summarily terminated … without proper cause” on 19 February 2016. Four Colour alleges that, in substance, the termination of the contract for services prevented Mr Holland from generating sales that would have enabled Four Colour to earn out the balance of the purchase price for the business.

“Matter” the subject of the proceeding before this Court

17    A “matter” for the purposes of s 8(1) means some right or liability in dispute which is susceptible of settlement as a discrete controversy: cf Tanning Research Laboratories Inc v O’Brien [1990] HCA 8; (1990) 169 CLR 332 (“Tanning Research”) at 351 per Deane and Gaudron JJ; Flint Ink NZ Ltd v Huhtamaki Australia Pty Ltd [2014] VSCA 166; (2014) 289 FLR 30 (“Flint Ink”) at 39 [31] per Warren CJ, at 51-54 [84]-[89] per Nettle JA (as his Honour then was); Amcor Packaging (Australia) Pty Ltd v Baulderstone Pty Ltd [2013] FCA 253 at [44]-[47] (“Amcor”), or a claim for relief of a kind proper for determination in a court: Flakt Australia Ltd v Wilkins & Davies Construction Co Ltd (1979) 39 FLR 267; [1979] 2 NSWLR 243 at 250; nearmap Ltd v Spookfish Pty Ltd [2014] NSWSC 1790 at [65] (“nearmap Ltd”).

18    A “matter” for the purposes of s 8(1) may or may not comprise the whole dispute in any given court proceeding: Tanning Research at 351 per Deane and Gaudron JJ; Flint Ink at 53 [87(c)] per Nettle JA; Casaceli v Natuzzi SpA [2012] FCA 691; (2012) 292 ALR 143 at 158 [48]; Amcor at [45]-[47]. As Beaumont J observed in Administration of Norfolk Island v SMEC Australia Pty Ltd [2004] NFSC 1 at [107] “there may, of course, be more than one ‘matter’ [in the proceeding], and some only of these may be capable of settlement by arbitration”.

19    Ordinarily, the nature and extent of the “matters” involved in a court proceeding are to be ascertained from the pleadings and from the underlying subject matter upon which the pleadings, including any defence, are based: WDR Delaware Corporation v Hydrox Holdings Pty Ltd; In the Matter of Hydrox Holdings Pty Ltd [2016] FCA 1164 at [106]; Robotunits Pty Ltd v Mennel [2015] VSC 268; (2015) 297 FLR 300 at 311-312 [19].

20    In this case, the originating application and the statement of claim disclose two matters:

(1)    Four Colour’s claim for relief under the Independent Contractors Act 2006 (Cth), varying the sale agreement, on the basis of the Court’s opinion that the contract is unfair or harsh; and

(2)    Four Colour’s claim for damages for unlawful termination of the contract of services.

Claim for relief under Independent Contractors Act

21    In order to support its claim for relief under the Independent Contractors Act, Four Colour alleges, relevantly, that:

(1)    the sale agreement and the contract for services formed part of a single transaction (para 9 of statement of claim);

(2)    the contract for services is a “services contract” within the meaning of s 5 of the Independent Contractors Act (para 11 of statement of claim);

(3)    the sale agreement was a “collateral arrangement” that relates to the contract for services for the purposes of s 5(4) of the Independent Contractors Act (para 12 of statement of claim);

(4)    by reason of matters pleaded in the statement of claim, the sale agreement is “taken to be part of the” contract for services within the meaning of s 5(4) of the Independent Contractors Act (para 13 of statement of claim);

(5)    alternatively, certain pleaded terms of the sale agreement were conditions that related to the contract for services for the purposes of s 5(4) of the Independent Contractors Act (para 14 of statement of claim);

(6)    by reason of matters pleaded in the statement of claim, the “related conditions” referred to in para [21(5)] above are “taken to be part of the” contract for services within the meaning of s 5(4) of the Independent Contractors Act (para 15 of statement of claim);

(7)    the sale agreement failed to provide certain terms and had certain consequences, by reason of which, it is alleged, the sales agreement was unfair and harsh within the meaning of s 12 of the Independent Contractors Act (paras 27, 28 and 30 of statement of claim); and

(8)    alternatively, the “related conditions” referred to in para [21(5)] above had certain consequences, by reason of which, it is alleged, those conditions were unfair and harsh within the meaning of s 12 of the Independent Contractors Act (paras 29 and 31 of statement of claim).

Claim for damages for wrongful termination of contract

22    The claim for damages is for the loss of a monthly fee income of $10,375.00. The claim is based upon the allegation that the contract for services was terminated without proper cause.

Scope of arbitration agreement

23    The approach to construction of arbitration clauses is no different from the construction of any other contractual provisions: Rinehart v Welker [2012] NSWCA 95 at [115]. Thus, the following general principles, stated by the plurality in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [40], apply:

It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.

(footnotes omitted)

24    Under Australian law, there is no legal presumption in favour of arbitration. That is to say, in construing arbitration agreements, courts will not presume that a dispute falls within the scope of an arbitration clause unless the court can be persuaded otherwise: Walter Rau Neusser Oel und Fett AG v Cross Pacific Trading Ltd [2005] FCA 1102 at [41] (“Walter Rau”); Tridon at [123] (Austin J); TCL Airconditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd [2009] VSC 553 at [17]-[20] (Hargrave J).

25    Nevertheless, some courts have taken a “liberal approach” to the construction of arbitration clauses, whereby “words capable of broad and flexible meaning will be given liberal construction and content”: Comandate Marine Corp v Pan Australia Shipping Pty Ltd [2006] FCAFC 192; (2006) 157 FCR 45 at 87-88 [164]-[165] (Allsop J); see also Walter Rau at [41]-[42] (Allsop J) (noting, however, that the liberal approach “does not entitle one to give the words in question meaning which they do not bear”). The tendency to adopt a liberal approach to the interpretation of an arbitration clause which is couched in general words does not apply with equal force where specific areas of dispute are identified in the clause: cf. Vetreria Etrusca SRL v Kingston Estate Wines Pty Ltd [2008] SASC 75 at [21].

“about”

26    In this case, the arbitration agreement identifies two broad cases of disputes that fall within its scope. They are disputes “about”:

(1)    the interpretation of “this contract or any of its provisions”; and

(2)    the application of “this contract or any of its provisions”.

27    On behalf of Gravitas, Ms Edwards of counsel submitted that the relevant disputes extend to disputes “around and connected with the use to be made of and the meaning to be given to the contract” based upon the proposition that the word “about” should be construed similarly to, but wider than, phrases like “arising out of” and “in connection with”: cf John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451 at [69]; Paper Products Pty Ltd v Tomlinsons (Rochdale) Limited [1993] FCA 346; (1993) 43 FCR 439 at 444 to 446. Ms Edwards suggested that cl 10 extends to disputes “about … this contract or its provisions”. I do not accept these submissions. The word “about” simply identifies the subject matter of the disputes covered by the arbitration agreement, namely, the interpretation or application of the relevant contract or any of its provisions. It does not extend the ambit of the clause beyond that subject matter.

“this contract”

28    On behalf of Gravitas, it was argued that the words “this contract” in the arbitration agreement include the terms of the sale agreement, or at least cl 3 of the sale agreement. The basis for this argument was that the sale agreement contains terms that are collateral to the contract for services (and vice versa) and the two agreements formed a “whole” agreement. It was said that neither party would have agreed to enter into either contract in the absence of the other.

29    In oral submissions, Ms Edwards developed the argument by reference to specific provisions of the sale agreement and the contract for services. Ms Edwards submitted that cl 3 of the sale agreement could have no effect unless there was a separate agreement by which Mr Holland agreed to provide the services pursuant to which the purchase price would be earned. Ms Edwards relied on paras 9 and 12 of the statement of claim, referred to in [21] above, to emphasise that the collateral nature of the arrangements.

30    Ms Edwards observed that a dispute about whether there has been a breach of a collateral contract may be covered by an arbitration agreement in the contract to which it is collateral, as in Main Electrical Pty Ltd v Civil & Civic Pty Ltd (1978) 19 SASR 34 (“Main Electrical”). However, Ms Edwards accepted that Main Electrical did not assist her argument, having regard to the different terms of the arbitration agreement in the Main Electrical case.

31    Ms Edwards suggested that the terms of the sale agreement fell within the scope of “this contract” because those terms, as collateral arrangements are, in effect, terms of the contract for services. I do not accept that submission. Even if contracts are collateral, each contract has a separate existence: Heilbut Symons & Co v Buckleton [1913] AC 30 at 47. Hackendorf v West (1929) 46 WN (NSW) 145 illustrates that an arbitration clause may not cover a claim in respect of a collateral contract.

32    Ms Edwards argued that cl 5 of the contract for services was part of the sale agreement because it was necessary to give effect to cl 3 of the sale agreement. She contended that cl 8 of the contract for services is concerned to protect the goodwill of Gravitas in the business it has just bought. Ms Edwards argued that cl 9 gives effect to cl 3 of the sale agreement. Having regard to these examples, Ms Edwards contended that the contract for services includes the sale agreement and vice versa.

33    I accept that the contract for services and the sale agreement form part of a single transaction. However, it does not follow that the sale agreement, or any term of the sale agreement, is part of the contract for services. Nor do any of the other matters identified by Ms Edwards support a conclusion that the sale agreement, or any term of the sale agreement, is part of the contract for services.

34    In my view, the proper reading of cl 10 is that “this contract” refers to the contract embodied in the contract for services and does not include any provisions of the sale agreement. The following matters support that interpretation:

(1)    The sale agreement and the contract for services were entered into between the same parties at the same time. The fact that the parties chose to enter into two separate agreements, albeit two agreements which formed part of a single transaction, at the same time, supports a conclusion that the words “this contract” refers only to the contract for services.

(2)    The terms of cl 10.5 and cl 10.12 of the sale agreement are inconsistent with the inclusion of the sale agreement as part of “this contract” in the context of the arbitration agreement. and

(3)    It would have been a simple matter for the parties explicitly to have included the sale agreement, or provisions of the sale agreement, within the operation of cl 10 if that was the intended outcome.

“dispute about the interpretation or application” of the contract

35    A dispute about the interpretation of a contract is a dispute about the meaning of the contract.

36    A dispute about the application of a contract is a dispute about whether the contract has effect in relation to particular circumstances.

37    On behalf of Gravitas, Ms Edwards contended that Four Colour’s claim for damages for unlawful termination of the contract for services was necessarily a dispute about the interpretation of that contract. I do not accept that contention. The statement of claim demonstrates that Four Colour’s claim for damages for unlawful termination does not involve a dispute about the interpretation of the contract for services, but rather a factual dispute about the performance and breach of that contract. In particular, the allegation that the contract for services was summarily terminated without proper cause does not give rise to a dispute about the interpretation or application of the contract.

38    Next, Ms Edwards submitted that it is inherent in the nature of a claim under the Independent Contractors Act claim that there is a dispute as to the interpretation of the terms of the contract because the applicant must prove that the contract is harsh or unfair. This argument must fail in the light of my conclusion that no term of the sale agreement falls within the meaning of “this contract” in the arbitration agreement. But, in any event, I do not accept this submission: the meaning of a term is a different issue from whether the term is harsh or unfair. In deciding whether a contract is harsh or unfair, the Court considers whether the terms of the contract, and the circumstances referred to in s 15(1) of the Independent Contractors Act existing at the time the contract was made, demonstrate a potential for the contract to operate harshly or unfairly. It is by reference to the potential of the contract (or part of the contract) to operate unfairly and or harshly that the Court forms an opinion as to whether the ground of unfairness of harshness referred to in s 12(1) is established: Informax International Pty Ltd v Clarius Group Ltd [2012] FCAFC 165; (2012) 207 FCR 298 at [170]. Ms Edwards did not identify any dispute about the interpretation of cl 3 of the sale agreement or any other term of the sale agreement.

39    Ms Edwards also argued that a dispute about the application of the contract for services extends to a dispute about whether the contract for services can be deployed as a foundation for a claim under the Independent Contractors Act, in that its existence is a material fact providing jurisdiction to entertain such a claim. I do not accept that, in cl 10 of the contract, the word “application” bears that meaning. In particular, I do not accept that reliance upon the contract for services to support a claim under the Independent Contractors Act can be properly characterised as an application of the contract for services.

Do the identified Matters fall within the scope of the arbitration agreement?

First matter: Independent Contractor’s Act claim?

40    The Independent Contractors Act claim is not a dispute about the interpretation of the contract for services: it does not raise any question about the meaning of the contract for services.

41    Nor is it a dispute about the application of the contract for services: it does not raise any question about whether that contract has effect in relation to particular circumstances.

Second matter: claim for damages for unlawful termination

42    The damages claim is not a dispute about the interpretation of the contract for services: Gravitas did not identify any question about the meaning of the contract. Rather, the claim concerns whether the contract was lawfully terminated in the circumstances of the termination.

43    Nor is the damages claim a dispute about the application of the contract for services: it does not raise any question about whether that contract has effect in relation to particular circumstances.

Conclusion

44    Section 8(1) has no application to the matters the subject of the proceeding.

45    The application must therefore be refused. Costs should follow the event.

Associate:

Dated:    9 March 2017