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Focus: Arbitration Quarterly

16 May 2012

In this issue: We report on: whether the recent amendments to section 21 of the International Arbitration Act 1974 (Cth) have retrospective effect; India's breach of the Australia-India bilateral investment treaty; a Federal Court of Australia decision enforcing an award made in England despite ongoing setting aside proceedings in India; a Queensland Supreme Court decision setting aside an award on due process grounds; proposed amendments to Singapore's International Arbitration Act; and New South Wales as a venue for international arbitration.

Editors: Partner Andrea Martignoni (view CV) , Special Counsel Nicola Nygh and Lawyers Jim Morrison and Tom Levi.

Making international arbitrations domestic: excluding the Model Law

In brief: The Federal Court and the Western Australia Court of Appeal have recently considered whether amendments made to section 21 of the International Arbitration Act 1974 (Cth) and the ability of parties to exclude the operation of the UNCITRAL Model Law on International Commercial Arbitration 2006 apply to arbitration agreements entered into before 6 July 2010. Senior Associate Justin Simpkins reports.

How does it affect you?

  • Parties entering into an arbitration agreement before July 2010 were able to opt out of the Model Law as enacted in the International Arbitration Act 1974 (Cth) (the IAA) in favour of the domestic arbitration laws of a state or territory or some foreign international arbitration law.
  • The IAA was amended in July 2010 such that contracting parties can no longer opt out of the Model Law for international arbitrations. While any opt-out of the Model Law will likely be effective for disputes which have already commenced after July 2010, it is unclear whether such an opt-out will be effective for contracts entered into before July 2010 and under which no dispute has arisen.

Legislative background

The IAA was amended on 6 July 20101 (see our Focus: International arbitration laws overhauled).The main purpose of the amendments was to implement the 2006 revisions to the Model Law.

One of the changes was to section 21 of the IAA, which has traditionally allowed parties to exclude or opt out of the Model Law in favour of the domestic commercial arbitration Acts (and possibly foreign arbitral legislation or rules).2

Prior to the amendments, that provision provided:

If the parties to an arbitration agreement have (whether in the agreement or in any other documents in writing) agreed that any dispute that has arisen or may arise between them is to be settled otherwise than in accordance with the Model Law, the Model Law does not apply in relation to the settlement of that dispute.

Since the amendments, effective 6 July 2010, s21 provides:

Model Law covers the field

If the Model Law applies to an arbitration, the law of the State or Territory relating to arbitration does not apply to that arbitration.

The effect of this amendment is that, for international arbitrations,3 parties can no longer opt out of the Model Law and the arbitration laws of the states and territories will not apply. The Federal Court and Western Australia Court of Appeal recently considered whether this amendment applied to arbitration agreements entered into prior to July 2010.

The Federal Court decision

Castel Electronics Pty Ltd (Castel), a company registered in Australia, and TCL Air Conditioner (Zhongshan) Co Ltd (TCL), a company registered in China, were parties to an exclusive distributer agreement which contained a clause referring disputes to arbitration in Australia.4 A dispute arose which led to Castel initiating arbitration in July 2008. On 23 December 2010, the tribunal issued an arbitral award in favour of Castel.

Castel applied to the Federal Court for enforcement of the award under the IAA. TCL argued that the Federal Court did not have jurisdiction to enforce non-foreign awards (ie awards made in Australia) because the IAA did not expressly provide so.

Castel said the Federal Court had jurisdiction because the amended s21 applied and the Model Law was intended to cover the field. TCL responded that the former s21 applied to all arbitration agreements entered into before the amendments to s21 came into force. TCL relied on the general presumption in Australian law against retrospectivity of legislation, subject to clear contrary contention.

Justice Murphy found that s21 relates to the capacity to opt in or out of the Model Law and was best described as a procedural rather than a substantive provision. His Honour could not see how TCL's vested rights could be adversely affected by the amendment to s21 in 2010 and, as a procedural provision, should be construed retrospectively unless the amending legislation indicated a contrary intention by express terms or clear intention – which he found it did not.

Further, having regard to the explanatory memorandum and the Second Reading Speech for the 2010 amendments to the IAA, his Honour found that s21 as amended was intended to respond to an immediate difficulty requiring prompt rectification by the legislature, rather than be addressed progressively over the ensuring years as arbitration agreements were entered into in the future.

Accordingly, Justice Murphy decided that the amended s21 was intended to have retrospective application.

The Western Australian decision

Rizhao Steel Holding Group Co Ltd (Rizhao), a company registered in China entered into contracts for the sale and purchase of iron ore with each of two Australian companies, Koolan Iron Ore Pty Ltd and Mount Gibson Mining Ltd (collectively Mount Gibson).5

Each contract referred disputes to 'arbitration in accordance with the Commercial Arbitration Act 1985 (WA)' (the CAA). That is, the parties opted-out of the Model Law, which would have otherwise applied to the arbitration seeing as Rizhao and Mount Gibson's respective places of business were in different states.6

When a dispute arose in 2008, the matter was referred to arbitration and awards issued in favour of Mount Gibson (the awards), which then sought and obtained orders enforcing the awards in the Supreme Court of Western Australia under the CAA.

Rizhao appealed to the Court of Appeal on the basis that jurisdiction to enforce the awards arose from the IAA and not the CAA. Rizhao argued that the IAA has never permitted parties to opt out of the provisions of the Model Law relating to the recognition and enforcement of awards made in international arbitrations and, even if it did, it did not permit this after the 2010 amendments that applied to this case.

The court dismissed the appeal finding that Rizhao should have raised these issues before the primary judge. Having found against Rizhao on this basis, the court nonetheless proceeded to consider a number of the parties' other substantive arguments, including whether the amended or original s21 applied.

Rizhao asserted that the amended s21 applied to all agreements for international arbitration irrespective of when those agreements were entered into. Alternatively, Rizhao argued that the amended s21 applies to all proceedings for enforcement of international arbitral awards commenced after 6 July 2010, even if the parties had agreed prior to that date to exclude the Model Law.

Chief Justice Martin (with whom Appeal Justice Buss agreed) held that the amended s21 did not apply in the circumstances of this case, where the arbitration was well underway, and almost complete, at the time that the amendment came into effect.

He noted that it was arguable that the amendment to s21 of the IAA should not be given retrospective effect so as to affect adversely the rights of parties to have a dispute resolved under the legal regime they had chosen (and so would not apply to contracts entered into before July 2010).

His Honour further noted that this argument becomes stronger if the dispute or difference between the parties had crystallised before the amendments came into force. However, it was not necessary for the court to express a view on those issues.

Comment

In Castel v TCL, Justice Murphy indicated that the amendments made to s21 applied retrospectively to arbitration agreements entered into before July 2010. In Rizhao v Koolan, the Western Australia Court of Appeal indicated that the amendment to s21 applied prospectively, at least in circumstances where the arbitration process had begun at the time that the amendments had commenced operation.

Both cases were decided on different grounds and the judges' comments on the retrospective application of amendments of s21 did not, in both cases, form the basis of the decision and are therefore only of persuasive value in any subsequent proceedings that deal with the issue.

It is possible to distinguish the Castel decision from the Rizhao decision on the basis that the arbitration clause at issue in Castel did not purport to exclude the Model Law. The specific agreement to opt out of the Model Law in Rizhao meant that the amendments to s21 affected the vested rights of the parties and, therefore, absent express provisions or intention to the contrary, applied prospectively. Nonetheless, it remains unclear whether the amended s21 applies to arbitration agreements entered into before the legislation amending the IAA came into force in July 2010.

Australian company succeeds in investment treaty arbitration against India

In brief: An arbitral tribunal recently found that the Indian Government was in breach of the Australia-India Bilateral Investment Treaty following a nine-year delay by the Indian courts to determine the enforceability of an award in favour of an Australian mining company. Lawyers Jim Morrison and Catherine Li review White Industries Australia Limited v The Republic of India.

How does it affect you?

  • Investors who face undue delay in enforcing awards before national courts may have an alternative means of proceeding directly against a host state under an investment treaty.
  • In this case, an Australian investor used a most favoured nation (MFN) clause in the Australia-India Bilateral Investment Treaty (BIT) to obtain protection granted to investors under the Kuwait-India BIT.
  • This decision places additional pressure on the Indian Government to reform award enforcement processes in India.
  • This case may also prompt India to exclude investor-state dispute resolution provisions from future investment treaties7 (in the same manner that the Australian Government has proposed),8 which would limit the remedies available to foreign investors in India.

Background

In 1989, White Industries Australia Limited (White) entered into a contract with the state-owned Coal India Limited in relation to the development of a coal mine in Piparwar, India. Disputes arose and the parties proceeded to the International Chamber of Commerce (ICC) arbitration in accordance with the contract, following which, in March 2002, White was awarded compensation of A$4.08 million (the ICC award).

Subsequently, in September 2002, Coal India applied to the Calcutta High Court to set aside the ICC award, while White applied to the Delhi High Court to have it enforced. White appealed from the unfavourable decision of the Calcutta High Court to the Supreme Court in July 2004. The Delhi High Court stayed White's enforcement proceedings pending the outcome of this appeal.

In July 2010, nine years after the parties initially commenced proceedings before the Indian courts, and with no reasonable estimate provided by the Supreme Court as to when the appeal might be heard, White commenced an arbitration against the Government of India, relying on the investor protections and dispute resolution provisions of the Australia-India BIT. The place of arbitration was London.

The decision

White first needed to convince the tribunal that the ICC award was an 'investment' in order to qualify for protection under the treaty. After considering that 'investment' was defined broadly under the Australia-India BIT, the tribunal concluded that White's rights under the ICC award were part of White's 'investment', being the crystallisation of its rights and obligations under the original contract.

White then needed to establish that the delay it experienced in obtaining a decision from the Indian courts on the enforceability of the ICC award was a breach by the Indian Government of its obligations to protect White's investment under the Australia-India BIT.

While the Australia-India BIT does not expressly address delays in the host state's judicial system, it does contain a MFN clause which, relevantly, permits Australian investors to rely upon protections provided in other investment treaties signed by India. White relied on the Kuwait-India BIT requiring the host state to provide investors of the other state with 'an effective means of asserting claims and enforcing rights with respect to investments'.

The tribunal 'had no difficulty in concluding' that the nine years taken by the Indian judiciary to deal with the ICC award's enforceability (including the six-year wait for the Supreme Court appeal) amounted to an undue delay and constituted a breach of India's 'effective means' obligation under the Kuwait-India BIT.

Finally, the tribunal held that the ICC award was enforceable under Indian law and decided that White was entitled to the compensation provided under the ICC award.

The implications

This case was a significant win for White (although protracted and costly) and confirms that investor-state dispute resolution provisions can provide an alternative avenue for recovery under arbitral awards that are languishing for years before national courts.

However, investors should not assume that all awards are capable of attracting protection under investment treaties where enforcement is delayed. In this case, White would probably not have succeeded if it were not for the MFN clause, with the tribunal rejecting White's alternative arguments, including that the delay constituted a denial of justice in breach of India's 'fair and equitable treatment' obligations under the Australia-India BIT.

The uncertainty surrounding the ability of Indian courts to set aside foreign awards is still very much alive in international arbitration (as seen in From England to Australia following). However, following a judgment of the Calcutta High Court dated 20 March 2012 holding that Indian courts cannot set aside foreign awards,9 it seems that the Indian Supreme Court is finally set to clarify this contentious issue at the same time it determines White's appeal.10

From England to Australia: keeping sight of your adversary's assets

In brief: The Federal Court of Australia recently recognised and enforced a foreign award made in England, despite the alleged non-existence of assets in Australia and ongoing proceedings in India to set aside the award. Lawyer Tom Levi and Law Graduate Sephora Sultana report on this pro-enforcement decision.

How does it affect you?

  • In recognising and enforcing foreign awards, Australian courts will apply the New York Convention strictly.
  • The fact that a losing party has no assets in Australia will not, of itself, prevent an Australian court from granting a judgment to enforce a foreign award.
  • It is not against Australian public policy to enforce a foreign award that is the subject of setting aside proceedings in a jurisdiction other than the place of arbitration where the award was rendered.

The London arbitration

Traxys Europe SA (Traxys), a Luxembourg-based provider of financial and distribution services to the mining industry, commenced arbitral proceedings relating to breach of contract against Balaji Coke Industry Pvt Ltd (Balaji), an Indian coal and coke importer.

The arbitration was held in London under the auspices of the London Court of International Arbitration. The tribunal ultimately found in favour of Traxys and ordered Balaji to pay compensation of GBP 427,576.

Court proceedings in India, England and Australia

Following the tribunal's award, both parties commenced national court proceedings:

  • Balaji in India to set aside the award and restrain Traxys from enforcing the award (the latter being successfully obtained); and
  • Traxys in England to recognise and enforce the award and restrain Balaji from challenging the award in Indian courts (both being successfully obtained).

Traxys then applied to have the foreign award enforced in Australia as a judgment or order of the Federal Court under the IAA, against assets alleged to belong to Balaji (being shares in an Australian company).11 Balaji resisted this application, arguing, among other things, that:

  • the court did not need to make any order or declaration that the award was enforceable as a judgment under the IAA as requested by Traxys because the award was automatically 'deemed' to be a judgment or order;
  • it is a pre-requisite to enforcement and consistent with public policy under the IAA that the applicant first prove that there are assets within the enforcement jurisdiction, which Traxys failed to do; and
  • to enforce the award in Australia notwithstanding the existence in India of the proceedings to set it aside and an interim court order restraining Traxys from enforcing the award would be contrary to public policy under the IAA.
The decision of the Federal Court

Justice Foster did not accept Balaji's arguments and granted judgment to Traxys to enforce the award.

His Honour confirmed that the New York Convention, as reflected in the IAA, has a clear pro-enforcement bias and its public policy exception is to be interpreted narrowly, applying only to those aspects of public policy that go to the fundamental, core questions of morality and justice in Australia.

Justice Foster found that there is nothing in the IAA, including the public policy exception, that prevents an Australian court from directing the entry of judgment (or the making of an order in the terms of an award) if at the time judgment is entered no assets exist in Australia against which the award may be executed. Once the judgment is entered (or order made), the existence of assets will be considered when that judgment/order is sought to be executed.

His Honour noted that the New York Convention and the Indian Arbitration Act both provide that a foreign award can only be suspended or set aside in the courts of the country in which, or under the law of which, that award was made, being in this case the English courts and not the Indian courts. In these circumstances, the existence in India of setting aside proceedings or an interim court order restraining Traxys from enforcing the award do not enliven the discretion to refuse enforcement of the award.

Conclusion

This decision should give further comfort to parties seeking to enforce foreign awards in Australia that the courts will apply the public policy exception in the New York Convention narrowly and will not entertain attempts by parties seeking to escape their award obligations by commencing setting aside proceedings in jurisdictions outside the place of arbitration. It also confirms that whether the award debtor has assets in the jurisdiction at the time is not relevant to the court's decision to grant judgment to enforce a foreign award.

Queensland's Supreme Court upholds a party's right to be heard

In brief: The Supreme Court of Queensland recently remitted a dispute to an arbitrator on the basis that the arbitrator did not give the parties a reasonable opportunity to address a point which was a critical element in his reasoning. Lawyer Tom Levi and Law Graduate Sephora Sultana report on the obligation to allow the parties to make submissions on points in dispute.

How does it affect you?

  • An arbitral award may be set aside if the parties did not have a reasonable opportunity to address a point which was a critical element in the reasoning of the arbitrator.
  • In this case, the court exercised its discretion under the current Commercial Arbitration Act 1990 (Qld) to remit the matter to the arbitrator for redetermination after having set it aside. Such a discretion is not available under the proposed uniform Commercial Arbitration Act (the uniform CAA) currently before the Queensland Parliament and already enacted in several other states and territories, or under the IAA.

Background

Sugar Australia Pty Ltd was the manager of a joint venture operating a sugar refinery. Mackay Sugar Ltd (Mackay) was a joint venture participant and also owned an adjacent sugar mill.

The parties entered into a contract whereby, from 1 July 2007 to 1 July 2010, Mackay would supply sufficient raw sugar to meet the requirements of the refinery provided that this amount was no more than the respondent's 'total annual raw sugar production' (the contract). Following the expiry of a subsequent agreement to extend the contract by three months ending 30 September 2010, the parties thereafter continued to deal with each other in the same manner as they had previously. However, in around May 2011, Mackay failed to provide sufficient raw sugar to meet the refinery's requirements and Sugar Australia alleged a breach of the contract.12 The parties agreed to submit the dispute to arbitration.

The parties lodged written submissions but there was no hearing before the arbitrator who ultimately issued an award rejecting Sugar Australia's claims. He reasoned that Mackay's obligation to supply sugar in an amount meeting the refinery's needs but not exceeding its 'total annual raw sugar production' could not apply in circumstances where after 1 July 2010 the parties' agreement was not made on the basis of 'annual production' but something less, ie three months.

Sugar Australia subsequently commenced proceedings in the Supreme Court of Queensland to set aside the award under the CAA on the basis that there had been misconduct on the part of the arbitrator, namely, no submissions had been made by the parties that went to the arbitrator's reasoning excluding Mackay's annual production obligation after 1 July 2010 therefore depriving Sugar Australia unfairly of an opportunity to make its case.

The decision

The court set aside the award. Justice McMurdo held that there had been technical misconduct on the part of the arbitrator. While it was not beyond the power of the arbitrator to make the decision that he did, Sugar Australia should not reasonably have expected the arbitrator would dismiss its claim for this reason without providing it the opportunity to make submissions on that point. As such, the arbitrator failed to provide natural justice to Sugar Australia and Justice McMurdo set aside the award and exercised his discretion to remit the entire dispute to the arbitrator.

In doing so, his Honour did not accept Sugar Australia's submission that the matter should not be reconsidered by the original arbitrator because he would be functus officio, including on the basis that the arbitration agreement provided for determination by that particular arbitrator. He referred to Australian authorities13 where the effect of an order setting aside an award was described as reverting an arbitration to the position in which it stood immediately before the arbitrator published his award, at which stage he was not functus officio.

Justice McMurdo also considered the relative efficiency of remitting the case back to the original arbitrator, finding that he could reconsider the issue of Mackay's annual production obligation in light of further submissions by the parties without having to re-determine the entirety of the dispute and there was no undue risk that the arbitrator would not properly consider those further submissions.

The analysis

In setting aside the award and remitting the dispute for determination by the original arbitrator, this case demonstrates the willingness of Australian courts to protect the due process rights of parties but in a manner which is as efficient and fair as possible in the circumstances.

Importantly, this decision was made under Queensland's current CAA. It is not clear whether the same result would have been attained under the new uniform CAA or the IAA (both of which are based on the Model Law).

First, under the uniform CAA and IAA, awards cannot be set aside for technical misconduct on the part of an arbitrator. However, they can be set aside on public policy grounds which include a breach of natural justice.

Second, while Queensland's current CAA expressly gives the court a discretion to remit matters to the tribunal following the setting aside of the award, there is no such express power in the Model Law and, consequently, neither the uniform CAA nor the IAA.14 Moreover, each of the Model Law, the uniform CAA and the IAA15 provide that no court shall intervene except where so provided in the respective statute.

Amendments to Singapore's International Arbitration Act

In brief: Partner Matthew Skinner and Lawyer Rowan Platt discuss the amendments to Singapore's International Arbitration Act.

The Singapore Parliament recently passed amendments to the International Arbitration Act (the Singapore IAA), consistent with Singapore's objective of being an attractive venue for international arbitration by expanding the scope of arbitral tribunals' jurisdiction and powers.

The amendments include relaxing the current requirement in the Singapore IAA that an arbitration agreement must be in writing, by recognising agreements that are concluded orally (or by other conduct) but put into writing later. For instance, an arbitration agreement made orally, but subsequently documented through an audio recording, will now fall within the scope of the Singapore IAA. This amendment is consistent with the approach taken in the 2006 revisions to the Model Law.

The amendments also allow Singaporean courts to review a ruling by an arbitral tribunal that it does not have jurisdiction to hear a dispute (a negative jurisdictional ruling). The IAA previously has not allowed a Singaporean court to review negative jurisdictional rulings, only positive rulings (rulings by tribunals that they do have jurisdiction to hear the dispute). This amendment remedies the inconsistent treatment of negative and positive jurisdictional rulings, an issue which was heavily criticised during the consultation process.

The amendments also clearly define the scope of arbitral tribunals' powers to award interest in arbitral proceedings. It accords 'emergency arbitrators' the same legal status and powers as that of any other arbitral tribunal to ensure that any orders they make are enforceable under the Singaporean IAA regime.

The amendments were passed together with the Foreign Limitation Periods Bill, which clarifies which country's limitation laws apply to disputes litigated in Singapore, which are governed by the law of another jurisdiction. Essentially, the applicable limitation period will be that of the governing law. This latter amendment will clarify the application of limitation laws for all proceedings, including arbitration proceedings.

New South Wales as a venue for international arbitration

In brief: Lawyer Rowan Platt reports on the NSW Supreme Court's new Practice Note creating a stand alone arbitration list run by a judge with arbitration law experience.

The new arbitration list is dedicated to the resolution of disputes arising in the context of arbitration agreements, proceedings or awards and is aimed at providing parties with an efficient, inexpensive and relatively informal procedure for resolving their dispute, consistent with their objectives in agreeing to arbitration.

The recent Practice Note and creation of a separate arbitration list featured significantly in a recent address by the NSW Chief Justice at a forum in India to promote Australia as a venue for international arbitration. Chief Justice Bathurst highlighted these developments as further evidence of the strong commitment in Australia and, particularly, New South Wales, to efficient and responsive judicial support for the arbitral process. His Honour also discussed a number of other factors which have contributed to Australia's growing reputation as a first choice jurisdiction for international arbitration, including Australia's sophisticated legal system, our proximity to, and growing familiarity with, the laws of India and the Asia-Pacific, and the recent updates to our arbitration legislative framework.

The arbitration list commenced in February 2012 and is currently administered by Justice Hammerschlag, who has been involved in a large number of arbitration-related cases to have come before the NSW Supreme Court in recent years.

Footnotes
  1. The amendments were made by the International Arbitration Amendment Act 2010 (Cth).
  2. See Richard Garnett and Luke Nottage, The 2010 Amendments to the International Arbitration Act: A New Dawn for Australia (2011) 7 Asian International Arbitration Journal 29 at 33.
  3. Under Article 1 of the Model Law, the Model Law applies to all 'international arbitrations' as defined in the Article.
  4. Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd [2012] FCA 21.
  5. Rizhao Steel Holding Group Co Ltd v Koolan Iron Ore Pty Ltd [2012] WASCA 50.
  6. Article 3 of the Model Law.
  7. 'India may exclude clause on lawsuits from trade pacts', The Mint, 29 January 2012; 'India seeks treaty revisions to deal with corporate suits', The Indian Express, 4 April 2012.
  8. For discussion on the Australian Government's announcement and how it may affect you, see Hop Dang, Nicola Nygh and Tom Levi, 'New lessons for protecting your overseas investments' (2011) 30(2) Australian Resources and Energy Law Journal 149.
  9. Coal India Limited v Canadian Commercial Corporation (Ap No 172 of 2002), High Court at Calcutta.
  10. White Industries Australia Ltd v Coal India Ltd (Civil Appeal No. 6284 of 2004), Supreme Court of India, which will be heard in conjunction with Bharat Aluminium Co. v Kaiser Aluminium Technical Services Inc (Civil Appeal No. 7019 of 2005). Supreme Court of India case status report (http://supremecourtofindia.nic.in/ accessed 16 April 2012).
  11. Traxys Europe SA v Balaji Coke Industry Pvt Ltd (No 2) [2012] FCA 276.
  12. Sugar Australia Pty Limited v Mackay Sugar Ltd [2012] QSC 38.
  13. Re Scibilia and Lejo Holdings Pty Ltd [1985] 1 Qd R 94 and Alvaro v Temple [2009] WASC 205.
  14. However, it is open to a court under Article 34(4) of the Model Law to suspend setting aside proceedings at the request of a party where appropriate to allow the arbitrator who issued the impugned award to resume the arbitral proceedings in order to eliminate the grounds for setting aside.
  15. Article 5 Model Law; Article 5 Uniform CAA; and, Article 5 IAA.

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