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Focus: Arbitration – November 2005

Regional wrap-up of arbitration issues

In this issue: Welcome to Allens Arthur Robinson's inaugural regional round-up of arbitration issues in Australia and the Asia Pacific region.

Australia

Imposing conditions on a stay of proceedings

Walter Rau Neusser Oel und Fett v Cross Pacific Trading Limited [2005] FCA 1102 (Federal Court of Australia, 15 August 2005, Allsop J)

This case concerned an application for a stay of court proceedings under section 7 of the International Arbitration Act 1974 (Cth) (IAA). The claims by the applicant included, among other things, allegations of misrepresentation under the Trade Practices Act 1974 (Cth) (TPA) and fraud against multiple respondents; however, an arbitration clause stipulating the seat of the arbitration in London was contained in a contract between the applicant and the first respondent only. The arbitration clause applied to any dispute 'arising out of' the contract, which was a contract for the purchase of copra.

Justice Allsop considered the operation of the words 'arising out of' in the arbitration clause. He noted that they covered every dispute, except a dispute as to whether there was a contract at all. However, he held that TPA claims relating to events and conduct arising after the formation of the contract were arbitrable and could be stayed but those claims that related to events and conduct arising before the contract was formed could not be stayed. Justice Allsop noted that the words 'in relation to' or 'in connection with' are wider.

Where some claims must be stayed by virtue of s7(2), the court also has a discretion to stay all claims – so that any remaining claims are dealt with after the arbitration is complete. This is aimed at furthering the arbitration process objectives and reducing the prospect of inconsistent findings of fact. However, in this instance, there were substantial disputes involving parties who were not party to the arbitration agreement. These included serious fraud allegations, which were in the public interest to resolve sooner, rather than later. In the circumstances, Justice Allsop was not prepared to stay any part of the proceedings other than what was mandated by s7(2).

Importantly, his Honour held that conditions could be imposed on any stay under s7(2) and he requested the parties consent to orders giving effect to his reasons and two conditions in particular. First, in light of the seriousness of the fraud claims and the number of respondents who were not parties to the arbitration agreement, he required that the arbitration be delayed until after the determination of court proceedings of the non-arbitrable matters, in the interest of avoiding inconsistent findings between the court and the arbitration tribunal. Secondly, Justice Allsop requested that the parties consent to orders that all TPA claims be decided in the arbitration, despite some of these claims falling outside the scope of the arbitration agreement.

Shortly after this decision was delivered, leave to appeal to the Full Federal Court was granted to the respondents, and the hearing of this appeal is pending.

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Party seeking security of costs held to waive right to insist on arbitration

La Donna Pty Ltd v Wolford AG [2005] VSC 359 (Supreme Court of Victoria, 31 August 2005, Whelan J)

This case concerned an application for a stay of proceedings under s7 of the International Arbitration Act 1974 (Cth) (IAA). Justice Whelan considered whether the defendant, in seeking security for costs from the court, had waived the right to arbitrate. The dispute concerned a distribution agreement for the sale of lingerie, which contained an arbitration clause covering disputes 'arising out of' the agreement or 'related to' the agreement's 'violation, termination or nullity'.

La Donna initiated proceedings in relation to a claim for wrongful termination and other related contractual claims, followed by applications for interlocutory relief and ex parte injunctions. Wolford sought security for costs, then applied for a stay of proceedings under the IAA, on the basis that the proceeding involved a matter capable of settlement by arbitration.

The two principal issues considered by the court were:

  1. whether the proceedings involved the determination of a 'matter' that was capable of settlement by arbitration; and
  2. whether the arbitration agreement was null and void, inoperative or incapable of being performed.

La Donna further contended that Wolford's conduct in the proceeding had produced a position where the arbitration agreement was inoperative.

Justice Whelan followed previous Australian authority in construing the arbitration clause broadly so as to encompass the variety of claims. On the issue of whether Wolford had abandoned its right to a stay by its conduct in the proceedings, his Honour referred to ACD Tridon Inc v Tridon Australia Pty Ltd1 in concluding that, despite taking the following steps in the litigation:

  1. failing to reserve its position or foreshadow a stay application;
  2. contesting the injunction;
  3. acquiescing to the directions; and
  4. participating in a mediation,

Wolford's conduct was insufficient to constitute an unequivocal abandonment of the right to arbitrate. He made this finding despite the distinction in Tridon that the relevant party had expressly reserved its position and Wolford had not.

However, his Honour considered the application for security of costs to fall into an entirely different category, as it was based on the explicit premise that the litigation would proceed to trial in the absence of settlement and the dispute would be determined by the court. He accordingly held that Wolford had waived its right to arbitrate, thus rendering the clause inoperative, and rejected the application for a stay.

This case provides a useful illustration of the kind of conduct that will give rise to a waiver of the right to arbitrate. Whenever steps are taken that are inconsistent with the exercise of that right, it would be prudent for the party to expressly reserve its right to arbitrate. However, once substantive steps are taken on the path of litigation, it may be difficult for a party to preserve the right to have the dispute arbitrated.

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Enforcement of foreign arbitral awards – where no appearance by defendant

ML Upase Holdings Co Limited v Trigem Computer Inc [2005] NSWSC 224 (Supreme Court of New South Wales, 17 March 2005, Einstein J)

This case concerned an application for the enforcement of a foreign arbitral award in New South Wales. The parties were both overseas corporations who participated in an arbitration in New York. An award was made in favour of the plaintiff against the defendant and the defendant failed to pay the award. The plaintiff commenced proceedings in the NSW Supreme Court, seeking orders for leave to enforce the arbitral award in the same manner as a Supreme Court judgment. The defendant failed to file a notice of appearance in the proceedings.

Justice Einstein first considered whether or not the defendant had been properly served with the proceedings. The court confirmed that service was to be judged by compliance with the NSW Supreme Court Act 1970 (NSW) and the NSW Supreme Court Rules, not compliance with the local law of the defendant company (Korea). The court accepted that service was effected by personal service on the president of the defendant company at its registered place of business, which was effective service under Part 9 Rule 3(2) of the Supreme Court Rules. Justice Einstein noted that it would also have been permissible under the Supreme Court Rules for the plaintiff company to serve the proceedings on the defendant in accordance with the Treaty on Judicial Assistance in Civil and Commercial Matters between Australia and the Republic of Korea. This was, however, an alternative permissive (not mandatory) mode of service sanctioned by the NSW Supreme Court Act and Rules.

Having satisfied itself that the defendant company had been properly served, the court then considered whether the requirements for the enforcement of foreign arbitral awards had been met. These requirements are that:

  • there is a written arbitral award;
  • each party to the arbitral award is a party to the convention on the Recognition and Enforcement of Foreign Arbitral Awards; and
  • the arbitral award was handed down outside Australia.

The court held that each of these requirements had been met and, therefore, the plaintiff was entitled to a grant of leave to enforce the award in Australia.

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No waiver of right to arbitrate

Stericorp Limited v Stericycle Inc [2005] BSC 2003 (Supreme Court of Victoria, 30 March 2005, Whelan J)

This case considers waiver of arbitration agreements, and whether an arbitrator had jurisdiction to hear a Trade Practices Act 1974 (Cth) (TPA) claim.

Stericorp agreed to buy from Stericycle Inc (a US company) some medical waste-treatment and recycling equipment, under a supply agreement. Stericorp alleged breaches of an express performance warranty and misleading and deceptive conduct concerning the equipment's performance and other matters. There was also a dispute as to whether Stericycle was entitled to serve a notice of default under a convertible note agreement.

The supply agreement contained an 'agreement to arbitrate' clause. That clause was expressed to apply to all disputes 'concerning or arising out of' the supply agreement. Under that clause, on 8 December 2004, Stericorp served a notice of dispute. Stericycle claimed the notice was defective. On 23 December 2004, Stericorp's solicitors informed Stericycle that it was considering Stericycle's assertion that the notice of dispute was defective. It was common ground that no step was taken by either party to advance the arbitration up until mid-April 2005, at which time Stericorp began proceedings in the Victorian Supreme Court, alleging breaches of the agreement, together with a claim for misleading and deceptive conduct under s52 of the TPA.

Stericycle lodged a conditional appearance and sought a stay under s7 of the International Arbitration Act 1974 (Cth). Stericorp alleged that Stericycle had abandoned the arbitration and, alternatively, that at least the misleading and deceptive conduct claims and the convertible note claim were outside the arbitration agreement.

Justice Whelan accepted that, as a matter of principle, parties by their conduct may waive an arbitration agreement and that a party could conduct itself so as to become subject to a procedural estoppel precluding an application for a stay. However, the delay in this matter was not sufficient to give rise to such a waiver. In relation to the s52 TPA claims, Justice Whelan held that these fell within the scope of the agreement to arbitrate and, therefore, the arbitrator had jurisdiction to consider such claims. As a result, the proceedings were stayed, except for a number of claims (including the convertible notes claims) that were outside the terms of the arbitration agreement.

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ACICA launches recommended rules

The Australian Centre for International Commercial Arbitration (ACICA) has formulated its own set of rules based on the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules. They contain the following special features:

  1. Article 2.3 expressly preserves the operation of the UNCITRAL Model Law. This is intended to overcome the decision of the Queensland Court in Eisenwerk v Australian Granites Ltd [2002] Qd R 461, where the court held that, by choosing particular arbitration rules, the parties must have intended to exclude the Model Law.
  2. Where there is more than one arbitrator, article 17.3 allows the chairperson to decide questions of procedure.
  3. Article 18 expressly preserves confidentiality of the proceedings and documents produced.
  4. In the absence of agreement, the seat of arbitration is Sydney (of course, any other city may be specified as the default).
  5. Article 27.2 provides that the arbitrator shall have regard to the International Bar Association rules on taking of evidence for international commercial arbitration. These rules embody commonsense principles designed to ensure that the arbitration is conducted efficiently without undue wastage of costs in giving discovery etc. The rules are not lengthy and can be accessed through www.ibanet.org.
  6. Article 28 permits the arbitrator to order interim measures, for example, security for costs, or orders preserving assets.
  7. Article 40 provides for the arbitrator to be remunerated at an hourly rate.

Under the rules, the ACICA has a role in helping to establish an arbitration, challenging arbitrators, and depositing and determining arbitrator fees if there is a dispute. All the rules are, of course, subject to the agreement of other parties.

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China/Hong Kong

New  rules of arbitration

The China International Economic and Trade Arbitration Commission (CIETAC) has made significant amendments to its arbitration rules that came into effect on 1 May 2005. Key features of the new rules include:

  • freedom to appoint arbitrators of any nationality outside the CIETAC Panel of Arbitrators (but still subject to the CIETAC chairman's confirmation);
  • freedom to select both the place (or seat) of arbitration and the place of hearing (previously not distinguished under the old rules, resulting in China being the seat of all arbitrations and Chinese procedural law applying to all CIETAC arbitrations). Arbitration hearings may now take place more easily at a venue outside China;
  • freedom to conduct proceedings of arbitrations administered by CIETAC under rules other than CIETAC arbitration rules, except where any agreement is incapable of performance or in conflict with the mandatory law of the place of arbitration;
  • more stringent disclosure obligations on arbitrators to inform CIETAC and parties of potential conflicts of interest, whether they arise before or during the arbitral proceeding;
  • tighter timetables for the arbitration process. Respondents must also file their counterclaims at the same time as any defence, which is due 45 days after receipt of the Notice of Arbitration. Additionally, the time limit to render an award has been reduced to six months (from nine months);
  • freedom by arbitrators to award costs against the losing side at his or her discretion (previously, under the old rules, this was limited to 10 per cent of the award);
  • the ability of CIETAC to delegate the power to determine jurisdictional matters to the arbitral tribunal (the Arbitration Law) confers this power on CIETAC, not the tribunal);
  • the mechanism for a greater role for parties to resolve a failure to agree on a presiding arbitrator (under the old rules, this was solely at the discretion of the CIETAC chairman). The new 'list' procedure involves the parties submitting a list of their preferred suitable candidates to CIETAC. A presiding arbitrator is chosen from among any common candidates. Where only one candidate is listed, he or she is the presiding arbitrator. Where more than one candidate is listed, CIETAC would choose the most suitable candidate according to the case's circumstances. CIETAC will only impose an individual if no common candidate is listed; and
  • express confirmation that the tribunal has the power to make rules and issue orders for procedural matters, including the freedom to adopt an inquisitorial or adversarial process for hearings.

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Non -party to contract held to be party to arbitration agreement within that contract

Incorporated Owners of Sincere House v Sincere Co Ltd [2005] 2 HKC 424 (Lands Tribunal, 18 May 2005, Deputy Judge Wong)

This Hong Kong decision concerned an application to stay a building management application in the Lands Tribunal in favour of arbitration. The dispute related to whether Incorporated Owners of Sincere House (the applicant) could be considered to be party to a Deed of Mutual Covenant (DMO) (which contained an arbitration agreement) between Sincere Co Ltd (the respondent), its successors and assigns, and William Weiyin Wu, his executors, administrators and assigns. The applicant submitted that, despite its entitlement and obligation to enforce the DMO provisions that arose under a separate agreement (the Buildings Management Ordinance (BMO)), it was not party to the DMO and consequently not subject to the arbitration agreement.

Deputy Judge Wong did not accept the applicant's contention. His Honour found that the BMO empowered the applicant to do all things necessary for the enforcement of the DMO obligations and, in exercising this power, the applicant was required to observe all the DMO provisions, including the arbitration agreement. Section 16 of the BMO stipulated that, when the owners of the building have been incorporated, the rights, powers, privileges and duties of the owners in relation to the common parts of the building shall be exercised and performed by the corporation to the exclusion of the owners. His Honour found that the applicant was bound to the arbitration agreement by virtue of this provision. His Honour further held that the applicable test is whether a prima facie case was established that an arbitration agreement exists between the parties. The rationale behind this finding was that the arbitral tribunal is competent to rule on its own jurisdiction under article 16 of the Model Law.

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Court of Appeal considers procedure for appeal of interim awards on jurisdiction

Incorporated Owners of Tak Tai Building v Leung Yan Building Ltd [2005] HKCA 67 (Hong Kong Court of Appeal, 22 February 2005, Tang JA and Sakharani J)

This Hong Kong Court of Appeal decision considers the extent to which a party to an arbitration may appeal to the courts against a tribunals' interim award on jurisdiction.

In this building dispute, arbitral proceedings had been initiated by Leung Yan Building Ltd against Incorporated Owners of Tak Tai Building (Tak Tai). Tak Tai requested a stay of the arbitration on the grounds that the tribunal lacked jurisdiction. The arbitrator issued an interim award in which he determined that he had jurisdiction.

Tak Tai appealed to a court of first instance against the interim award. The originating process in the court of first instance was made under s23 of the Arbitration Ordinance. The court of first instance upheld the interim award. Tak Tai then sought leave of the Court of Appeal to appeal the decision of the court of first instance. In determining whether to grant leave, the court was required to consider the relevant provisions of the Arbitration Ordinance and the Model Law.

Article 16 of the Model Law grants the arbitral tribunal competence to rule on its jurisdiction and paragraph 3 provides that the arbitral tribunal may rule on such questions, either as a preliminary question or in an award on the merits. Paragraph 3 further provides a procedure for an appeal to certain courts of first instance against arbitral determinations of preliminary issues, but disallows any further appeal to a higher court.

The question that the Court of Appeal had to determine in this case was whether the interim award on jurisdiction was a preliminary question (in which case any appeal would be governed by article 16(3)); or an award on the merits (in which case s23 of the Arbitration Ordinance would apply, and the parties would thereby have a right to seek leave to appeal the decision of the court of first instance).

The Court of Appeal held that the originating process was misconceived, because 'it is clear that the arbitrator made a preliminary ruling on jurisdiction. There was no decision on the merits at all'. The originating process should, therefore, have been based on s16(3) of the Model Law. Moreover, not being an award on the merits, no appeal was available against the decision of the court of first instance. Accordingly, the Court of Appeal refused to grant leave to appeal and held that the trial judge's decision was final.

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Singapore

Reconciling conflicts in an arbitration clause

Bovis Lend Lease Pty Limited v Jay-Tech Marine and Projects Pte Ltd [2005] SGHC 91 (Supreme Court of Singapore High Court, 6 May 2005, Prakash J)

This case resolved a conflict arising in the construction of an arbitration clause that designated inconsistent appointing bodies and institutional rules. The arbitration clause provided that the Singapore Institute of Architects would be the appointing authority of the arbitrator, who was to conduct the proceedings according to the Rules of the Singapore International Arbitration Centre (SIAC). Those rules provided for SIAC to appoint the arbitrator and administer the arbitration. The parties also agreed to various matters regarding administration of the arbitration that were inconsistent with the SIAC rules. Jay-Tech served a notice of arbitration on Bovis in accordance with the SIAC rules. The parties could not agree on an arbitrator and an issue arose as to who should be the appointing authority. Jay-Tech applied to SIAC to appoint the arbitrator but this course was objected to by Bovis.

Justice Prakash posed the question of whether, by specifying that the arbitrator 'must' conduct the arbitration in accordance with the SIAC rules, were the parties agreeing that their dispute was to be submitted to the SIAC for arbitration (ie an institutional arbitration) or were they merely directing the arbitrator that, when conducting the arbitration, he must procedurally, as far as possible, follow the SIAC rules (an ad hoc arbitration)? Justice Prakash held the latter. Accordingly, the Singapore Institute of Architects (and not SIAC) was the relevant appointing authority.

 

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Potential for court to order pre-arbitration discovery

Woh Hup (Pte) Ltd v Lian Teck Construction Pte Ltd [2005] SGCA 26 (Supreme Court of Singapore Court of Appeal, 10 May 2005, Chao Hick Tin JA, Lai Kew Chai J, Tan Lee Meng J)

This appeal considered whether an order for pre-action discovery was, in effect, an improper attempt to achieve 'pre-arbitral discovery', and should therefore be overturned for lack of jurisdiction.

Lian Teck and Woh Hup were parties to an arbitration agreement. Lian Teck filed an originating summons in court for orders seeking discovery of documents from the appellants. The registry, and then trial judge, made these orders. The appellants appealed from the trial judge's orders on the basis that the court lacked jurisdiction to order a 'pre-arbitral discovery'.

The Court of Appeal held that the respondent had complied with the Court Rules for pre-action discovery, and the fact that the parties to the action were parties to an arbitration agreement did not, of itself, dis-entitle the respondent from making the application for pre-action discovery. Materially, the court took into account an affidavit filed on behalf of the respondent in which it was stated that the respondents intended to sue the appellants in court (in relation to some matters not covered by the arbitration agreement).

The court also held that parties to arbitration agreements should not indiscriminately apply to the courts to obtain pre-action discovery. Accordingly, where an arbitration clause, on the face of it, covers the dispute in question, the court may refuse to grant discovery to prevent a possible abuse of process by the applicant.

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Other jurisdictions

House of Lords refuses to review tribunal decision

Lesotho Highlands Development Authority v Imperegilo Spa [2005] UKHL 43 (House of Lords, 6 July 2005)

This recent House of Lords judgment confirms the limited ability of courts to review decisions made by an arbitral tribunal. In this case, the court at first instance and Court of Appeal had both held that an arbitral tribunal convened under ICC Rules had exceeded their powers by making an award in a currency other than as stipulated in the contract and awarding interest in circumstances not permitted under the governing law of the underlying contract (Lesotho law).

Lord Steyn emphasised that one of the aims of the Arbitration Act 1996 (UK) (the Act) is to limit the ability of parties to an arbitration agreement to challenge awards through the courts. He noted that, under the Act, awards may be challenged for lack of jurisdiction, serious irregularity or an appeal on a point of law. Parties can, however, agree to exclude the appeal on a point-of-law challenge (which the parties in Lesotho Highlands had done by agreeing to use ICC Rules that expressly exclude appeals on points of law). Lesotho Highlands challenged the award under the serious irregularity provision: the question being whether the choice of currency and interest rate was in excess of arbitrators' powers and a 'serious irregularity'. Their Lordships found that the arbitrators may have made a mistake about the choice of currency but that these were errors of law, and challenges under errors of law had been removed by the parties to the arbitration agreement. In relation to the interest rate, the court found that the arbitrators had broad power to award interest under the Act and the tribunal had acted within that broad power.

The judgment is important because it reinforces the philosophy that courts will be most reluctant to intervene in the arbitral process. While the court has power under the ICC Rules to review an award if there is 'serious irregularity', the House of Lords held that it must be established that this irregularity causes, or will cause, a substantial injustice to the applicant. Moreover, the court emphasised that, where parties agree to exclude error of law challenge, courts must be vigilant to ensure that challenges of serious irregularity are not an error-of-law challenge in disguise.

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