Oil Basins Limited vs Esso Australia Resources Pty Ltd [2025] VSC 34

In February 2025, Justice Croft in the Victorian Supreme Court handed down a judgment on staying court proceedings in favour of arbitration under s 7 of the International Arbitration Act 1974 (Cth) and the competence of arbitral tribunal to rule on its own jurisdiction (i.e., the Kompetenz‑Kompetenz principle) – Oil Basins Limited vs Esso Australia Resources Pty Ltd [2025] VSC 34. Justice Croft is regarded as one of the eminent arbitration list judges in Australia and his decisions are well reasoned and instructive for arbitration practitioners.

The dispute involved a historic royalty payable by a consortium of petroleum producers (the Esso Consortium) in the Bass Strait to Oil Basins Limited (now called Emperor Energy Limited). The royalty, which was the subject of prior disputes between the parties, was payable under a “Settlement Agreement”.

The Settlement Agreement contained an arbitration clause which expressly contemplated disputes as to the methodology by which the royalty was calculated. The clause also contemplated the arbitral tribunal making limited modifications to the methodology. But that power was not unfettered: certain parts of the methodology were off-limits to the arbitral tribunal and could only be amended by a Special Referee, and certain parts could not be modified in a way that was inconsistent with prior modifications made by the Special Referee.

Oil Basins disagreed with the way the Esso Consortium was calculating Australian Good and Services Tax (GST) on royalty payments. The parties were also in a separate dispute regarding the appropriate treatment of depreciation and decommissioning (D&D) in the calculation of the royalty.

In March 2024, the parties referred both the GST dispute and the D&D dispute to arbitration; however, the D&D dispute was referred subject to an objection from Oil Basins that the D&D dispute was not arbitral under the Settlement Agreement. Oil Basins objected because the resolution of the D&D dispute (it said) was not arbitral because the subject matter of the dispute was off-limits to the arbitral tribunal under the arbitration agreement.

In April 2024, Oil Basins commenced proceedings in the Victorian Supreme Court seeking declarations that the D&D dispute was not arbitral and an injunction preventing the Esso Consortium from taking steps to progress the arbitration process in respect of the D&D dispute. In May 2024, the Esso Consortium sought to stay those proceedings in favour of arbitration and its application was heard before Justice Croft in November 2024.

The law on the competence of arbitral tribunal to rule on its own jurisdiction is settled in Australia; however, there are different approaches as to the level of proof the court should require as to the validity of the arbitration agreement before staying court proceedings. The authorities on this issue generally state that the court is not to act as a court of summary disposal filtering the matters that are suitable for arbitration. Nor is the court’s role to assess the strength of the case raised by the issue or matter.

In Hancock Prospecting Pty Ltd v Rinehart (2017) 257 FCR 442, [149], the Full Federal Court held that only if there is “no sustainable argument that a matter or dispute can be characterised as falling within the agreement, [then] it should not be referred to arbitration”. However, the Full Federal Court did say that when the jurisdictional challenge was strictly confined to a short question of law that, once determined, would be dispositive of the dispute. In that limited situation, the Full Court held, “it might be less than useful for the Court not to deal with [that question]”.

Justice Lyons in Transurban WGT Co Pty Ltd v CPB Contractors Pty Ltd (2020) VSC 476 subsequently summarised the reasoning of the Full Court as follows:

1. if the issues relating to the proviso were of short compass, it may be appropriate for the Court to resolve the issue. For example, if there is a question of law otherwise affecting the answer to the question of jurisdiction, especially one that is confined, which might be dispositive, then it might be useful for the Court to address the issue.
2. if the issues relating to the proviso are of some legal and/or factual complexity, then it will be generally more appropriate for the proviso issue to be referred to the arbitral tribunal.

What is the rationale for this exception? That is found in Dell Computers Corp v Union des Conformateurs [2007] 2 SCR 801 per Deschamps J in the Supreme Court of Canada “It allows a legal argument relating to the arbitrator’s jurisdiction to be resolved once and for all, and also allows the parties to avoid duplication of a strictly legal debate. In addition, the danger that a party will obstruct the process by manipulating procedural rules will be reduced, since the court must not, in ruling on the arbitrator’s jurisdiction, consider the facts leading to the application of the arbitration clause.”

In support of the stay application, the Esso Consortium relied on the Full Federal Court’s decision in Hancock, and then set about demonstrating why the exception was not applicable. In particular, the Consortium contended that there was a sustainable factual question as to whether the D&D dispute was arbitral (or at least a mixed question of law and fact), and therefore, it was appropriate that the matter be determined by the arbitral tribunal.

Oil Basins resisted the stay application by relying on the threestep test set down by Justice Croft in an earlier decision of Robotunits Pty Ltd v Mennel (2015) 49 VR 323, 336 [21]:

1. What is the matter (or matters) for determination in the present proceeding?
2. Is the matter (or matters) capable of settlement by arbitration in pursuance of the agreement? Or, in other words, what is the scope of the arbitration agreement?
3. Is the matter (or matters) capable of settlement by arbitration?
   
   The elements of these questions are somewhat intertwined; however, in my view, setting them out in this way helps focus attention on the distinct requirements imposed by the statutory language in issue.

In application of the test in Robotunits, the Victorian Supreme Court is required to decide whether the matters in issue are capable of settlement by arbitration (i.e., those matters are within the scope of the arbitration agreement). Oil Basins sought to characterise the exception in Hancock as one but not the only circumstance in which a court might refuse a stay, on application of the three-step test set out above.

Justice Croft sided with the Esso Consortium and made orders an order staying the court proceeding.

In doing so, Justice Croft observed that Robotunits was not relevant as it did not consider the effect of application of the doctrine of Kompetenz‑Kompetenz, unlike the Full Federal Court in Hancock. Applying that principle, which is recognised in Australia common law and in Article 16 of the Model Law (which has force of law in Australia under s 16 of the International Arbitration Act), leads to the conclusion that the arbitral tribunal, rather than the court, should determine whether the D&D dispute was arbitral.

Importantly, in reaching that conclusion, Justice Croft stated that this was not a case where the Esso Consortium actively submitted to the court’s jurisdiction for it to determine the merits of D&D dispute, participating without objection in the court’s case management procedures and interlocutory applications, and then only belatedly raised the issue of the effect of an arbitration agreement (as was the case in Dialogue Consulting Pty Ltd v Instagram, Inc [2020] FCA 1846). The Esso Consortium’s objection was ventilated early, and the stay application was brought promptly.

This case demonstrates that Australia continues to be an arbitration-friendly jurisdiction, upholding principles that support the autonomy and effectiveness of arbitral proceedings. Justice Croft delivered the judgment in less than three months, which is timely, particularly over the holiday season in Australia. The actual proceeding itself took nine months to resolve. Parties should be encouraged (and if not willing, pushed) to bring these types of applications on faster for a hearing because it delays the underlying arbitration.

Robin Chai, Law Graduate, assisted in the preparation of this briefing.