Privity of Interest: When Can Arbitral Awards Bind Third Parties in Australia?

In common law legal systems, the doctrine of “privity of interest” is a narrow exception to the general rule that only parties to an arbitration are bound by the award. If it can be established that a third party shares the same “legal interest” as a party to a prior proceeding, that third party will be bound by the decision. The traditional test is whether the third party can claim “through or under” the party to the prior proceeding. If the answer is “yes”, there is what is called a “privity of interest”.

The doctrine of privity of interest is well-settled in Australian law, but has rarely been applied in the context of arbitral awards. While Australian courts have applied the “through or under” test (set out in domestic arbitration legislation) to determine whether third parties can be bound to arbitration agreements (following the High Court of Australia’s decision in Rinehart v Hancock Prospecting Pty Ltd (2019) 267 CLR 514), attempts to apply privity of interest to bind third parties to arbitral awards are uncommon.

The recent Queensland Court of Appeal decision of KGLNG E&P Pty Ltd v Santos Toga Pty Ltd [2025] QCA 114 is an illustration of the limits of this doctrine as applicable to arbitral awards.

1.  Background

The case concerns the GLNG Project situated in Queensland, Australia. Santos Toga, the operator, and other Santos entities (“Santos Parties”) commenced an action in the Supreme Court of Queensland against other entities that were part of an unincorporated joint venture (“JV Parties”) seeking to bind them to an arbitration award – issued pursuant to arbitral proceedings in which the JV Parties did not participate.

The arbitral award related to the calculation of a royalty which was payable by the Santos Parties to a third party pursuant to a settlement agreement containing an arbitration clause. The third party had been the former operator under certain joint operating agreements that came to form part of the GLNG Project, in which the JV Parties subsequently acquired interests. In settling the dispute with the former operator, the Santos Parties agreed to pay a monthly royalty to the third party. The JV Parties subsequently entered into three sets of deeds with the Santos Parties under which they purchased interests in the tenements subject to assuming an obligation to pay a proportionate share of the royalty to the Santos Parties.

The calculation of that royalty became contested in an arbitration between the Santos Parties and a third party (former) operator. The Santos Parties were unsuccessful, and were ordered to pay additional royalties of approximately AUD 57 million.

The Santos Parties commenced court proceedings seeking to pass on the additional royalties pro rata to the JV Parties. In those proceedings, the Santos Parties alleged that the JV Parties had assumed the obligation to pay the monthly royalty (as adjusted in the arbitration) in the three sets of deeds that they entered into (“Deed Dispute”). In the alternative, the Santos Parties alleged that the JV Parties were bound by the arbitration award on account of them being “privies” of the Santos Group (“Privity Dispute”).

2.  First Instance Court Decision

In Santos TOGA Pty Ltd v KGLNG E&P Pty Ltd [2024] QSC 169, the Santos Parties were successful in relation to the Deed Dispute, and the JV Parties were ordered to pay their proportionate share of the amount awarded to the third party in the arbitration.

However, the Santos Parties’ Privity Dispute allegation, the focus of this post, was unsuccessful. The Santos Parties submitted that the JV Parties were “privies” because they: (i) shared an interest in the JV; (ii) were obliged to “share the burden” of the royalty; (iii) knew of the arbitration agreement in the settlement agreement; (iv) communicated with the Santos Parties in the course of the arbitration; and (v) demonstrated an interest in the progress of the arbitration.

Having considered the case authorities on a privity of interest, the Court concluded that, subject to certain limited exceptions (addressed below):

“[F]or there to be a privity of interest, the interest protected in the earlier litigation must be a legal interest, and it must be identical to the interest sought to be protected in the later litigation. The mere fact that a party’s legal interests were affected by the earlier litigation is insufficient”.

The exceptions related to having control over the earlier litigation or where the interests of the party were represented by a party who owed them fiduciary obligations.

The Court considered that:

• the Santos Parties’ obligations to pay the third party the royalty under the settlement agreement was not identical to the JV Parties’ obligations under different deeds to pay Santos a pro rata share of that royalty, meaning that there was no “identical legal interest”;
• the fact that the Santos Parties had kept the JV Parties informed about the arbitration, including providing updates and documents, and the JV Parties demonstrated an interest in the progress of the dispute did not amount to an exercise of control over the Santos Parties’ conduct of the arbitration; and
• the Santos Parties did not owe any fiduciary obligations to the JV Parties with respect to the arbitration, nor was there any evidence from the conduct of the Santos Parties that they considered themselves as owing fiduciary duties to the JV Parties in respect of the arbitration.

Having found that there was no “identical legal interest”, and that none of the exceptions applied, the Court concluded that the JV Parties were not “privies” of the Santos Parties in respect of the arbitration or the award.

3. Appeal Decision

The JV Parties appealed, alleging that the primary judge had misconstrued their obligations under the relevant deeds. That appeal, which concerned the Deed Dispute, failed.

In relation to the question of privies of interest, the Court of Appeal agreed with the primary judge’s decision. The Court of Appeal reaffirmed that under Australian law, a person is only a privy if they are claiming “through or under” the person for whom they are said to be a privy. The primary judge had not erred in applying that test.

The Court of Appeal rejected the Santos Parties’ reliance on the obiter dicta of Megarry V-C in the English case of Gleeson v J Wippell & Co Ltd [1977] 1 WLR 510. In that case, Megarry V-C had sought to apply a broader concept of “sufficient degree of identification” to establish privity of interest, but the Court remarked that that test does not reflect Australian law and has been subject to judicial criticism.

Notwithstanding the above, the Court of Appeal went on to conclude that even if that test applied, the Santos Parties had failed to establish a “sufficient degree of identification” between the parties. The JV Parties’ interests in the GLNG Project were not a sufficient basis to establish a “shared legal interest” in the outcome of the arbitration. “At best”, the JV Parties had an “economic” interest in the outcome of the arbitration – which was not sufficient.

In relation to the “control” exception, the Court of Appeal held that updating the JV Parties about the arbitration did not establish control. Critically, the Santos Parties did not seek any substantive input from them during the arbitration – hence no “control”. This reflected the contractual reality. The Court of Appeal observed that it was evident from the relevant deeds that the Santos Parties alone would deal with the third party former operator in respect of the royalty.

4. Key Takeaways For Practitioners

This case is a helpful reminder that the doctrine of “privity of interest” is a very narrow and fact-dependent doctrine. Under Australian law, a party must establish that the privy is claiming “through or under” a party to the prior proceeding for there to be a “privity of interest” – subject to certain limited exceptions. Evidently, an economic interest in the outcome of the arbitration will not suffice. For there to be a privity of interest, a legal interest must be identifiable.

In practical terms, however, the case demonstrates how a third party may nevertheless be held to the outcome of an arbitration (even if they are not parties or “privies in interest”), if they have a contractual obligation to pay an undefined amount (such as a royalty) that is subject to final determination in an arbitration.

Practitioners should keep this decision in mind when advising clients who are acquiring joint venture interests (or making some other purchase), which is subject to the purchaser assuming a liability from the seller – if final determination of that liability is through arbitration. By agreeing to an arrangement that guarantees its involvement in any future arbitration, the purchaser would be safeguarding its procedural rights (and potential liabilities). Such arrangement could involve becoming a party to the arbitration agreement itself (if all parties, including the beneficiary of the liability, agrees). Alternatively, it could involve agreeing with the seller that the purchaser’s assumption of the liability be subject to it having a right to participate in all strategic decisions that concern any future arbitration concerning that liability.