Thursday, 6 October 2016

Masters of their own destiny - Court upholds arbitration agreement between Woolworths and Lowe's

The recent decision of the Federal Court in WDR Delaware Corporation v Hydrox Holdings Pty Ltd1 affirms the courts’ willingness to uphold arbitration agreements, consistent with Australia’s international convention obligations, judicial recognition of the efficiency of arbitration, and Australia’s reputation as a sophisticated jurisdiction in which to conduct arbitration.

The nuts and bolts
In 2009, Woolworths Ltd (Woolworths) entered into a joint venture agreement (JVA) with the American entity Lowe’s Companies Inc. (Lowes) for the purpose of establishing the Masters Home Improvement hardware chain in Australia and New Zealand.  Hydrox Holdings Pty Ltd (Hydrox) was incorporated to conduct the business. Woolworths held two-thirds of the shares in Hydrox, and Lowes owned the remaining one-third through WDR Delaware Corporation (WDR).

Masters has operated at a loss since its inception, causing several disputes between Woolworths and Lowes.  On 29 August 2016, Lowes and WDR sought from the Federal Court a declaration that the affairs of Hydrox had been conducted in a manner oppressive to, unfairly prejudicial to or unfairly discriminatory against WDR [2].   The American entities also sought an order that Hydrox be wound up [3].

In short, Lowes and WDR asserted that Woolworths:
  1. failed to provide information necessary for the Lowes nominee directors to vote on resolutions put to the Board
  2. caused the Lowes nominees to be overwhelmed with information prior to meetings of the Board in circumstances where the nominees had insufficient time to consider that information
  3. without the approval of any Lowes nominee, purported to exercise powers that required such approval
  4. wrongfully and in bad faith purported to terminate the JVA for an improper purpose, and
  5. had taken control of the affairs and management of Hydrox to the exclusion of Lowes and WDR [4].
Application for stay
The JVA contained an alternative dispute resolution clause, which required the parties to resolve disputes by arbitration.  The parties had not yet attempted arbitration of the present dispute, although two other separate disputes had been referred to arbitration.

On 31 August 2016, Woolworths sought a stay of the proceeding pending determination of the dispute by arbitration [5].   The application for stay was grounded in section 7 International Arbitration Act 1974 (Cth) (IAA), which gives effect to the UNCITRAL Model Law on International Commercial Arbitration.  Section 7 of the IAA applied to the arbitration agreement because, at the time of entry into the JVA, Lowes and WDR were domiciled in the United States, a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards [6].

Pursuant to section 7, where there are proceedings pending before the Court involving parties to an arbitration agreement, and where the proceedings require the determination of a matter capable of settlement by arbitration, the Court must stay the proceedings and refer the parties to arbitration [7].

A determination of whether the court must stay a proceeding in favour of arbitration invites two considerations: first, whether the dispute falls within the scope of the agreement between the parties; and, second, whether the matter is arbitrable [8].  In the present case, the parties agreed that the disputes came within the scope of the clause [9].   The question for determination by the Court, then, was whether some or all of the claims were arbitrable and whether the whole or only part of the proceeding should be stayed [10].

Identification of the relevant ‘matters’
Section 7 speaks of a ‘matter’ capable of settlement by arbitration [11].   Lowes and WDR argued that the dispute involved only one such matter, being the question as to whether Hydrox should be wound up [12].   It was argued that the winding up of a company is not within the power of an arbitrator [13]  and that, as such, the sole matter in the dispute was not arbitrable [14].

Justice Foster rejected these contentions, preferring Woolworths’ conception of the dispute as comprising four distinct matters including deficiencies in the provision of information, wrongful voting by Woolworths’ nominee directors, wrongful termination of the JVA, and Woolworths’ conduct in keeping secret its ‘game plan’[15].

Lowes and WDR contended that, even if the dispute involved multiple matters, not one of them was arbitrable [16].    Based on a number of arguments, Lowes and WDR submitted that the public interest required a claim for a winding up order to be heard in open court and not by a private tribunal [17].   The arguments in support of this submission included:
  1. an order for winding up affects the legal status of a person and has serious consequences for the company
  2. an order for winding up affects third parties, including shareholders and creditors
  3. the creation and dissolution of a company is uniquely the subject of governmental authority, and
  4. there is a public interest in ensuring adherence to the procedural steps of liquidation [18]
The Court rejected these assertions.  Rather, it was held, as contended for by Woolworths, that the arbitral tribunal could determine the legal and factual disputes between the parties, but leave to the Court the question of winding up.  Woolworths described the matters to be determined by the tribunal as ‘jurisdictional or forensic preconditions to the proper consideration by the Court of the appropriateness of making a winding up order.’[19]  By this approach, accepted by Foster J, it is open to the Court to consider the relevant arbitral award or awards, supplemented by evidence if required, when determining whether the making of a winding up order is justified [20].

In addition, the Court found no substantial public interest element in the determination of the disputes, because they arose between the sole shareholders of Hydrox and related only to the performance of obligations between those parties, and because Hydrox was not insolvent [21].

Justice Foster granted a stay of the whole of the proceedings.

The decision in Hydrox Holdings is another example of the Australian courts’ willingness to uphold arbitration agreements, and underlines Australia’s reputation as a sophisticated jurisdiction in which to conduct arbitration.  This facilitative approach is consistent with Australia’s obligations under international conventions and promotes the efficient and inexpensive resolution of disputes.  Importantly, Foster J found that the arbitration agreement could be enforced without usurping the jurisdiction of the courts to make orders for the winding up of a company.

The authors would like to thank Daniel Argyris, research clerk of McCullough Robertson, for his assistance in the preparation of this article.


1 [2016] FCA 1164 (Hydrox Holdings).
2 Ibid [11].
3 Ibid.
4 Ibid [54]
5 Ibid [17]
6 Ibid [21]
7 IAA s 7(2)
8 WDR Delaware Corporation v Hydrox Holdings Pty Ltd [2016] FCA 1164 [23]
9 Ibid [24]
10 Ibid [25]
11 IAA s 7(2)(b)
12 WDR Delaware Corporation v Hydrox Holdings Pty Ltd [2016] FCA 1164 [112]
13 Ibid [131]
14 Ibid [113]-[114]
15 Ibid [116]
16 Ibid [131]
17 Ibid
18 Ibid [131]
19 Ibid [165]
20 Ibid [152], [164]
21 Ibid [161]

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