Focus: Adjourning the enforcement of a foreign arbitral award
12 September 2011
In brief: A recent Federal Court decision gives insight into the circumstances under which a court may adjourn the enforcement of a foreign arbitral award that is the subject of an appeal in the courts of the seat of the arbitration. Partner Nick Rudge (view CV), Special Counsel Nicola Nygh (view CV) and Lawyer Tom Levi report on a case that deals with the uniformity of recognition and enforcement of foreign arbitral awards.
- The US proceedings
- The Australian proceedings – commencement
- The Australian proceedings – decision
How does it affect you?
- There are limited circumstances in which a court can decline to enforce an arbitral award and, similarly, there are limited circumstances in which a court can adjourn enforcement proceedings.
- In this case1, an Australian court agreed to a short adjournment of enforcement proceedings while an appeal regarding the setting aside of part of the award was being determined in the US. This case demonstrates the court's considerations in ordering an adjournment and the protections, by way of security, that it will order to minimise the risk of prejudice.
The ESCO Corporation (ESCO), incorporated in Oregon, United States, is a manufacturer of metal parts for the mining and construction industries. By a series of agreements an Australian entity, Bradken Resources Pty Ltd (Bradken), acquired rights under a licence agreement with ESCO to manufacture and produce ESCO products in Australia, New Zealand and Papua New Guinea (the licence agreement).
When a dispute arose between ESCO and Bradken, an arbitration was commenced in Portland Oregan, USA, the seat of arbitration agreed to in the licence agreement.
ESCO alleged that Bradken had breached the licence agreement by manufacturing products without including the ESCO trade mark symbol and by promoting products that competed with ESCO's products in the territory in the licence agreement. Bradken counter-claimed that ESCO had breached US anti-trust laws.
The arbitrator issued an award on 11 June 2010 (the award), ordering Bradken to pay US$7.96 million to ESCO, as follows:
- US$210,000 as reimbursement of ESCO's share of the fees of the arbitral process; and
- US$7.75 million as reimbursement of the legal costs ESCO incurred.
Bradken paid US$210,000 to ESCO in satisfaction of the first order but did not pay ESCO's legal costs in accordance with the second order.
ESCO applied to have the award confirmed in the United States District Court, District of Oregon, Portland Division (the US District Court), seeking interest on the US$7.96 million at the Oregon legal rate of 9 per cent per annum from 17 June 2010 until the date of payment. Bradken argued that it should not be required to pay ESCO's legal costs relating to the anti-trust claim, which it said amounted to around US$6 million, as this would be contrary to US public policy.
On 24 May 2011, the US District Court confirmed the award and ordered Bradken to pay US$7.96 million plus interest, at the rate specified in the US federal laws (the US federal interest rate) (which is significantly lower than the interest rate under Oregon law), between the date of the US District Court's judgment and the date of payment in full. The US District Court declined ESCO's application for interest between the date of the award and the US District Court's judgment.
On the same day, Bradken appealed the orders the US District Court made requiring it to pay ESCO's legal costs of the anti-trust claim. ESCO brought a cross-appeal seeking orders for payment to it of additional interest. The appeal and cross-appeal are not likely to be determined before mid-2013.
On 21 June 2011, Bradken sought a stay of execution of the first-instance judgment of the US District Court. The motion for stay was not determined before the judgment of the Federal Court of Australia.
On 9 June 2011, ESCO commenced proceedings in the Australian Federal Court, seeking to enforce the award under section 8(3) of the International Arbitration Act 1974 (Cth) (the IAA). ESCO sought orders for Bradken to pay to ESCO:
- US$7.96 million in accordance with the Award;
- interest on US$7.96 million at the US Federal interest rate from 11 June 2010 until entry of judgment by the Federal Court;
- interest on the amount of the judgment entered by the Federal Court (ie, 1 and 2 above) from the date of judgment until the date of payment in full, at the interest rate specified in the Federal Court Rules; and
- ESCO's costs of the Federal Court proceedings.
Bradken filed a notice of motion seeking that the Federal Court proceedings be adjourned until the final determination of the US District Court proceedings. ESCO opposed any adjournment of the Federal Court proceedings.
Prior to the Federal Court proceedings being heard, the parties exchanged letters in which they agreed to adjourn the Federal Court proceedings on the basis that Bradken would provide security for the unpaid monetary component of the award (US$7.75 million) plus some level of interest. However, the parties did not agree on the amount of interest to be covered by the security or the circumstances in which ESCO could call on the security.
Justice Foster considered s8 of the IAA, which provides the mechanism for enforcing an arbitral award. Sub-section 8(8) provides that where an application to set aside or suspend an arbitral award has been made in the country in which the award was made, the court may, 'if it considers it proper to do so', adjourn the proceedings and may also order the other party to give suitable security.
It was clear that the base requirements of sub-section 8(8) were satisfied. Bradken had moved to set aside the monetary component of the award in the District Court in Oregon, the jurisdiction in which the award was made, to the extent that that component included the anti-trust legal costs.
His Honour noted that the discretion to adjourn an enforcement proceeding is a wide one that 'has to be exercised against the background that a foreign arbitral award is to be enforced in Australia unless one of the grounds in s8(5) of the IAA is made out ... or unless the public policy of Australia requires that the award not be enforced.'
Justice Foster considered that if an adjournment was not granted, Bradken would not be able to argue in the Federal Court that the award should not be enforced on the basis that it has not become binding or been set aside or suspended by a competent authority of the country in which the award was made (sub-section 8(5)(f) of the IAA). The parties had selected Oregon as the seat of the arbitration and this was the first forum ESCO had chosen for enforcement proceedings. ESCO only came to Australia after it failed to obtain the higher interest rate provided under Oregon state law.
Justice Foster held that an adjournment would detrimentally affect ESCO's prospects of recovering the amount contained in the award. In this case, however, Justice Foster held that ESCO's interests could be protected by an order for substantial security. His Honour ordered that the Federal Court proceeding be adjourned until early 2012 on condition that Bradken provide a letter of credit or an irrecoverable bank guarantee for the amount of US$7.75 million (the balance of monies payable under the award, excluding interest).
He also ordered that ESCO should have access to the security immediately upon the award becoming a judgment of the Federal Court and that the security should otherwise expire on the earliest of Bradken posting a bond in the US District Court, Bradken making the payment to ESCO, the US Court of Appeals upholding Bradken's appeal, and ESCO and Bradken settling the claim between them.
The New York Convention was established to provide a uniform system of recognition and enforcement of foreign arbitral awards. There are limited circumstances in which a court can decline to enforce an arbitral award and, similarly, there are limited circumstances in which a court can adjourn enforcement proceedings.
This case is a clear example of the manner in which the New York Convention (as implemented in the IAA) streamlines the arbitral process by preventing concurrent proceedings taking place in multiple jurisdictions. Justice Foster's comment that ESCO approached the US District Court first alludes to the fact that it is open to parties to determine the best jurisdiction in which to seek the enforcement of an award, somewhat akin to forum shopping. In order to reduce the risk of ESCO being prejudiced by the fact that Bradken's appeal may take several years to be determined, Justice Foster ordered that Bradken provide security to ESCO. This proceeding is likely to come before the Federal Court early next year, at which point the court will be able to revisit the issue of security and consider whether a further adjournment is appropriate.
- Nick Rudge Partner,
Ph: +61 3 9613 8544
- Nicola NyghSpecial Counsel,
Ph: +61 2 9230 4616
- Andrea MartignoniPartner,
Ph: +61 2 9230 4485
- Tracey HarripPartner,
Ph: +61 7 3334 3215
- Stephen McComishPartner,
Ph: +61 8 9488 3767