COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Einfeld J.(1)

CWDS
  Arbitration - power of arbitrator to declare contract void ab initio under
section 87 of Trade Practices Act - whether undermines arbitration clause -
severability
  Commercial Arbitration Act 1894 (NSW) section 53
  IBM Australia Ltd v National Distribution Services Ltd (1991) 100 ALR 361
  Q.H. Tours Ltd v Ship Design (1991) 105 ALR 371

HRNG
SYDNEY, 2 December 1992
#DATE 25:3:1993
  Counsel and solicitor for the applicants:   C.J. Birch instructed by
                                              Hunt, Musgrave and Peach
  Counsel and solicitor for the respondents:  B.C. Oslington QC
                                              instructed by Middletons
                                              Moore and Bevins

ORDER
  1.  That part of the proceedings as concerns a dispute as to the
      proper sum owing under the first applicant's current account with
      any or all of the respondents is stayed pending arbitration.
  2.  Applicants to pay respondents' costs.
Note:  Settlement and entry of orders are dealt with in Order 36 of the
Federal Court Rules.

JUDGE1
EINFELD J.  Between 1986 and 1989 the first applicant (Morton) was a member of
Bain and Company (Bains), a partnership of accountants. He was also a director
and sole decision-maker of the second applicant (Valfront).  By the execution
of a deed (the deed) on 14 August 1989, Morton retired from the partnership
and Valfront redeemed the units it held in a unit trust set up by Bains.
Morton and Valfront say that the deed was induced on their parts by a number
of representations made to them by Bains, including that Morton's current
account with the partnership was in deficit in the amount of $370,000 (or
$375,000), that Westpac Bank had told them that if Morton remained in the
partnership and made no other arrangements, Westpac would immediately call up
its loan to him of $500,000, and that Deutsche Bank Australia had told them it
had no wish to extend its existing interest in Bains.  Morton and Valfront say
that all these representations were false or misleading in breach of Bains'
fiduciary duty to disclose the facts to all partners equally including Morton.
As a consequence, their interests were more valuable than agreed to in the
deed, said to be witnessed by the fact that two years and seven months later,
on 26 March 1992, they were sold to the Deutsche Bank for $1,771,000.
2.  Morton and Valfront therefore issued an application and statement of claim
against Bains and two associated entities on 10 August 1992 claiming an
inquiry into the profits made on these transactions, a declaration of
invalidity or termination of the deed, a taking of accounts of the
partnership, and damages.  A notice of appearance was filed on 28 August and
the matter came before Justice Hill on 10 September 1992 when mediation was
suggested and the case was adjourned. On 25 November 1992 Bains and associated
entities moved on notice for an order that the proceedings be stayed pending
arbitration pursuant to clause 5.5 of the deed.  This clause provides:
      Any dispute with respect to the amount of the GJM Current
      Account or any entries relating thereto (whether occurring
      previously or hereafter) shall be referred to Arbitration by
      such person as shall be mutually agreed upon between the
      parties.  In the event of the parties being unable to agree
      on the appointment of an Arbitrator, the Arbitrator shall be
      appointed by the President for the time being of the
      Institute of Chartered Accountants in Australia, who shall
      appoint a member of such institute or other person suitable
      to hear and determine the dispute.
      (GJM is Morton)
3.  The motion was returned on 2 December 1992 when written submissions were
ordered.  It is the resolution of this motion which is now for judgment.
4.  The statement of claim raises three distinct matters.  One complaint
relates to Bains' failure to disclose to Morton the interest or intention of
the Deutsche Bank to increase its interest in the firm. The second complaint
concerns an alleged threat by Bains to reveal to Westpac potentially harmful
matters concerning Morton.  The third complaint arises from alleged errors in
calculating Morton's indebtedness on his current account with Bains.  Although
the motion and supporting affidavit speak generally, Bains in fact seek only
an arbitration of the current account dispute and have no objection to the
other parts of the statement of claim proceeding to trial.  As I see it, the
terms of clause 5.5 would admit of no other approach, especially as clauses
2.3, 5.1 and 5.6 make perfectly clear how the debt in the current account is
to be handled in the retirement context. The parties agree that the Court has
power to grant the order sought and that section 53 of the Commercial
Arbitration Act 1894 (NSW) applies to the present proceedings.  That section
states:
      (1)   If a party to an arbitration agreement commences
            proceedings in a court against another party to the
            arbitration agreement in respect of a matter agreed to
            be referred to arbitration by the agreement, that
            other party may, subject to subsection (2), apply to
            that court to stay the proceedings and that court, if
            satisfied:
            (a)   that there is no sufficient reason why the
                  matter should not be referred to arbitration in
                  accordance with the agreement; and
            (b)   that the applicant was at the time when the
                  proceedings were commenced and still remains
                  ready and willing to do all things necessary for
                  the proper conduct of the arbitration,
            may make an order staying the proceedings...
5.  They also agree that:
  1.  an arbitrator may determine claims under the Trade Practices Act
      including under section 87 for an order that a contract be
      declared void ab initio: IBM Australia Ltd v National Distribution
      Services Ltd (1991) 100 ALR 361 at 374 and 380.
  2.  notwithstanding some contrary expressions in IBM, the principle
      stated by Justice Foster in Q.H. Tours Ltd v Ship Design (1991)
      105 ALR 371 at 384 is a correct statement of the law applying to
      this case, viz. that an arbitration clause in a contract can be
      regarded as severable, with the result that an arbitrator is not
      prevented from exercising power under an arbitration agreement to
      declare the principal contract void ab initio without at the same
      time destroying the basis of his power to do so.  See in this
      regard IBM per Kirby P at 375 apparently agreeing; Clarke JA at
      379 apparently disagreeing; Handley JA at 380 agreeing with both;
      and
  3.  the Court has the power to grant the stay sought to permit the
      dispute over the current account to be arbitrated.  The matter in
      issue in relation to the current account is between Bains'
      position that Morton owed $375,000 or thereabouts and Morton's
      assertion that the indebtedness is much less.
6.  Morton and Valfront argue that various heads of claim are not discrete but
interconnected complaints.  Whether that be so or not, and I cannot see the
nexus myself, the resolution of such a dispute would not resolve this motion
because the effectiveness of the arbitration clause in relation to the current
account dispute would still have to be determined.  Although the application
does not in terms seek the voiding of the deed ab initio, Morton and Valfront
say that they are seeking the backdating of rescission at least to January
1992 so that they can obtain the benefits that would then and thereafter have
been obtained were it not for the execution of the deed.  They say that the
issue to be determined in this case is whether there was conduct in trade or
commerce which induced their entry into the deed and this is not what clause
5.5 covers.  So much, Morton and Valfront say, arises from the context of
clause 5.5 which they say is set by clauses 5.1, 5.2 and 5.3.
7.  This argument is not tenable.  The content and context of clause 5.5 are
the ascertainment of how the current account stood at the relevant time set by
the deed, and the amount one side or the other had to pay to bring the current
account into order, presumably to a zero balance, in the light of that
calculation.  It is any dispute over this amount that was agreed to be
arbitrated.  This arbitration will in no way impede Morton arguing that any
deficit of his as arbitrated is not enforceable against him because of the
alleged misleading and deceptive conduct by Bains.  It will merely set the
maximum amount that may be obtained from him or set off against any amounts
found to be payable by Bains in the action.
8.  Under the Commercial Arbitration Act 1894 (NSW), it is then for Morton and
Valfront to establish that there is no sufficient factual reason to refer the
current account dispute to arbitration.  They have made no such case and
suggested no such reason.  In the circumstances there is no basis for
rejecting the motion for a stay and it will be granted with costs.