Victorian Court of Appeal affirms arbitrators' authority to determine their own jurisdiction: Oil Basins Ltd v Esso Australia Resources

2 March 2026

In Oil Basins Ltd v Esso Australia Resources, the Victorian Court of Appeal delivered a significant judgment regarding relating to an application for a stay under s 7 of the International Arbitration Act 1974 (Cth) (IAA) and the UNCITRAL Model Law in a Melbourne seated international arbitration. The decision provides important guidance for parties to cross-border contracts with arbitration clauses, confirming the limited role of courts in determining arbitral jurisdiction at the interlocutory stage in Australian seated arbitrations.

Background

The dispute arose out of long‑standing royalty arrangements, which entitled Oil Basins Ltd (OBL) to a royalty in respect of hydrocarbons produced within a designated area in Bass Strait. The current producers responsible for royalty payments (the Producers) are Esso Australia Resources Pty Ltd, Woodside Energy (Bass Strait) Pty Ltd and Woodside Energy (North West Shelf) Pty Ltd (the first, second and third respondents, respectively).

In 1994, after ongoing disputes about the amount of royalty payable, the parties entered into a settlement agreement, which set out a special referee's modified methodology for royalty calculation, provided for arbitration in Melbourne under the Commercial Arbitration Act 1984 (Vic), and specified New York law for interpretation, except where Australian law required otherwise (the Settlement Agreement).

In 2023, disputes arose concerning the treatment of GST, depreciation, and decommissioning (D&D Issues) in the royalty calculation. An arbitral tribunal was appointed in March 2024. However, OBL commenced proceedings in the Supreme Court of Victoria in April 2024, seeking declarations that the D&D Issues were not arbitrable and injunctive relief restraining the Producers from pursuing arbitration in respect of those issues. The Producers then applied under s 7 of the IAA for a stay of the proceeding. On 12 March 2025, the stay was granted by Justice Croft of the Supreme Court of Victoria. OBL appealed this decision.

OBL advanced two principal arguments on appeal:

The disputes about the D&D Issues could not be arbitrated because the Settlement Agreement entrenched the methodology for these issues, preventing further modifications "by arbitration".
By specifying New York law for interpreting the Settlement Agreement, the parties had agreed that disputes about the scope of the arbitration agreement would be decided by a court rather than an arbitral tribunal.

In the alternative, OBL argued that the arbitration agreement was "inoperative" pursuant to section 7(5) of the IAA in respect of the D&D Issues.

In response, the Producers argued that:

The IAA and the Model Law (specifically Article 16) gave arbitrators the authority to rule on their own jurisdiction, including disputes about the scope of the arbitration agreement (the competence principle).
When determining the grant of a stay under s 7 IAA, the court was required to adopt a "light‑touch" approach and should not finally determine contested issues of contractual construction or arbitrability, particularly where those issues were complex.
Although the Settlement Agreement referred to New York law for interpretation, the procedural law of the arbitration was Australian, because the seat of arbitration was Melbourne. This meant that the competence-competence principle was mandatory and could not be excluded by agreement.

Decision

On 9 February 2026, the Court dismissed OBL's appeal (save as to costs) and upheld the stay of the Court proceedings.

Scope of Arbitration Agreement and s 7(2) IAA

The Court held that under the IAA and Model Law, arbitrators are granted the power to rule on their own jurisdiction by force of statute. Even if parties agree that disputes about the scope of an arbitration agreement will be decided by a court and not by arbitrators, such disputes are capable of settlement by arbitration under s 7(2)(b) of the IAA. Parties to an arbitration agreement in Australia cannot exclude the operation of art 16(1) of the Model Law and accordingly, even if the parties agree that a court and not arbitrators will determine the scope of the arbitrators' jurisdiction, the arbitrators retain that power pursuant to the competence-competence principle.

The Court confirmed that, in determining an application for a stay under section 7 of the IAA, a court is not required to finally decide whether the dispute falls within the scope of the arbitration agreement.

The "light touch" approach is appropriate in determining whether a matter falls within the scope of an arbitration agreement where the issue involves factual complexity and provided there is sufficient connection between the matter and the arbitration agreement. Where there is a prima facie arbitration agreement and the issues raised are legally or factually complex, it is appropriate to defer those questions for consideration to the arbitrators.

Choice of Law

The Court rejected OBL's reliance on New York law, holding that the choice of New York law in the Settlement Agreement applied only to its interpretation and application. The curial law of the arbitration was Australian law, which requires application of the Model Law.

Operation of s 7(5) IAA

The Court emphasised that in most circumstances, the question who should determine issues pertaining to s 7(5) of the IAA is a practical one which will depend on the nature of the relevant issues, including its legal and factual complexity. OBL argued that the agreement was inoperative because of the exclusion of the subject matter from the definition of 'dispute' in cl 19(b) by reference to cl 5(b) of the Settlement Agreement. The Court considered that the question of whether the arbitration agreement was "inoperative" with respect to the D&D issues required evaluation of OBL's arguments. The question is legally and factually complex and therefore was a matter for the arbitral tribunal.

Comment

This decision reinforces the robust application of the competence-competence principle in international arbitration in Australia. Courts will generally defer to arbitral tribunals to determine the scope of their own jurisdiction, especially when the issues raised are legally or factually complex. When entering into agreements (especially with broad arbitration clauses), parties should be aware of the mandatory nature of art 16(1) of the Model Law.

When drafting arbitration clauses, this case is also a reminder that selecting a foreign governing law for the underlying contract will not necessarily affect the allocation of jurisdictional questions where the seat of arbitration is Australia.

Oil Basins Ltd v Esso Australia Resources [2026] VSCA 6