August 2014. . . A recent High Court decision has highlighted the Court’s ability to stay Court proceedings where some, but not all parties to the Court action are also parties to an arbitration relating to the same facts.

Danone Asia Pacific Holding Pte Limited & others v Fonterra Co-Operative Group Limited [2014] NZHC 1681 involved the well publicised botulism scare in which Fonterra milk powder exported to overseas consumers was thought to have been contaminated with the botulism toxin.  As a consequence, many millions of dollars worth of product had to be recalled.

Fonterra Co-Operative Group Limited (Fonterra) and Danone Asia Pacific Holding Pte Limited (Danone AP) were parties to a supply agreement under which milk powder and other products were supplied, to be used in the manufacture of end products including baby formula.  The supply agreement provided for arbitration in the event of a dispute, and also limited Fonterra’s liability in the event of a breach.

Danone AP and the seven other parties (all of whom were related to Danone AP) gave notice of a dispute and sought to invoke the arbitration process. While Danone AP was a party to the supply agreement prescribing arbitration, the other seven parties were not, and therefore had no right to be a party to that arbitration.

In addition to the commencement of the arbitration, Danone AP and the other seven parties commenced a High Court action against Fonterra.

Fonterra sought to stay the High Court proceeding arguing that it was a contrivance brought to embarrass Fonterra, and an attempt to evade the negotiated limitations of liability contained with the supply agreement it had with Danone AP.

It also resisted the High Court claim on pragmatic grounds, arguing that the same witnesses, documents and evidential inquiries would be involved in the arbitration as well as the Court proceeding.

The nub of the argument was that it would be a significant and unnecessary strain on both parties to be required to litigate the same matter simultaneously in two separate fora.

Fonterra was also concerned that there would be a risk of inconsistent factual and legal findings if there were to be an arbitration, and a Court process running simultaneously.

Generally, where parties have agreed to an arbitration process, the Court can stay Court proceedings, and require the parties to undergo arbitration.

Significantly, the Court in this case ruled that even where the parties to the Court proceeding are not all parties to the arbitration, the Court retains jurisdiction to stay proceedings including for reasons of sensible case management. 

The Court noted that parties do not enjoy an unfettered right of access to the Courts; rather the Court is entitled to impose procedures that are appropriate in the circumstances having regard to the nature and content of the litigation as a whole.

The Judge cautioned that the jurisdiction to stay a Court proceeding should only be exercised in rare and compelling circumstances. Such circumstances would involve a real risk of unfairness or oppression to the defendant if the proceedings were allowed to continue.  Consideration of costs, convenience and interests of justice must weigh in favour of a stay.

The Judge analysed the allegations made in the Court proceedings against Fonterra and found that there was considerable overlap between what could be addressed through the arbitration, and what was proposed to be addressed through the Court proceedings.

Ultimately, the Court held that given the substantial degree of factual overlap between the claims in the Arbitration, and the High Court proceeding, it was not in the interests if justice for both claims to proceed in tandem.  Predominantly, this was for reasons of cost, convenience and justice which required the underlying facts of the dispute to be determined first.

The Court had real concerns that being involved in two proceedings simultaneously would result in a real duplication of resources, and inconsistent findings between the parties.

This decision reinforces the need to seek advice before the commencement of an action whether there are multiple parties, and the potential for some parties to be bound by an arbitration agreement.