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Focus: International arbitration: dispute remains on Australian shores

20 May 2011

In brief: The Federal Court recently declined to stay or adjourn court proceedings in respect of a shipping dispute pending the outcome of related arbitration proceedings in Singapore. Partner Oscar Shub , Senior Associate Damian Watkin and Lawyer Tom Levi report on the decision in the context of international arbitration in Australia.

How does it affect you?

  • For parties in back-to-back contracts, it will be difficult to obtain a stay of court proceedings in circumstances where those proceedings do not directly involve the party that is common to the contracts.
  • Parties entering into back-to-back contracts intending for their disputes to be resolved by arbitration may wish to consider entering into multi-party or multi-contract arbitration agreements, to enable related disputes between multiple parties to be heard together in a single forum.

The facts

McConnell Dowell Constructors (Aust) Pty Ltd entered into a charter agreement with freight forwarder Skelton Sherbourne to transport a jack-up barge called the Santa Fe from Cape Lambert in Western Australia to Adelaide. Skelton Sherbourne then entered into a charter agreement with Asian Atlas Limited, a Hong Kong company, to transport the jack-up barge aboard the ship Asian Atlas. Both contracts were governed by English law and any disputes were to be submitted to arbitration in Singapore.

Both the barge and ship sustained damage in an unsuccessful attempt to load the barge onto the ship on 5 August 2009 and repairs were made to each. In delay, the barge was finally loaded 13 days later. Upon arrival of the ship into the Port of Adelaide, Asian Atlas issued invoices to McConnell Dowell for demurrage and exercised a lien over the barge. In response, McConnell Dowell had the ship arrested, arguing in the Federal Court that both the damage sustained to the barge and the delivery delay were breaches of contract.1 McConnell Dowell contended that Skelton Sherbourne was agent for Asian Atlas and therefore a direct contractual relationship existed between it and Asian Atlas. Upon McConnell Dowell paying US$1.2 million security into court pending determination of Asian Atlas' demurrage claims, the ship was released from arrest and the barge unloaded.

McConnell Dowell's subsequent statement of claim disclosed that it no longer asserted breach of contract, electing instead to frame its action in the tort of negligence. The party common to both the contracts, Skelton Sherbourne, was not brought into the court proceedings.

Before the witness statements and expert reports became due, Asian Atlas commenced arbitration proceedings against Skelton Sherbourne in Singapore under their contract. Skelton Sherbourne then issued a notice to arbitrate against McConnell Dowell under their contract, before resolving their differences by agreement that McConnell Dowell would indemnify Skelton Sherbourne in relation to any demurrage claim brought by Asian Atlas in the arbitration.

Before the Federal Court, Asian Atlas sought a temporary stay of the court proceedings or, alternatively, an adjournment until the completion of its arbitration with Skelton Sherbourne.

The decision

At the outset of his judgment, Justice Besanko considered the Federal Court's previous decision of Sterling Pharmaceuticals in which a stay of proceedings in favour of pending High Court proceedings in New Zealand was refused.2 His Honour then proceeded to weigh up factors both for and against the granting of a stay or adjournment.

On the one hand, factors favouring the granting of a stay or adjournment:

  • both contracts nominated arbitration in Singapore as the forum for the resolution of any disputes;
  • there is a strong interest in avoiding a multiplicity of proceedings (the court proceedings and the arbitration would both canvass similar factual issues and require the same witnesses, some of whom were coming from Malaysia and Singapore); and
  • the arbitration was more likely to resolve all of the issues in dispute between the parties (as the court proceedings may have only dealt with the duty of care in tort law).

Whereas, on the other hand, factors against the granting of a stay or adjournment:

  • the court proceedings were considerably more advanced than the arbitration;
  • the parties in the court proceedings were not the same as in the arbitration (and if Skelton Sherbourne were joined to the court proceedings, it could obtain a stay of proceedings under the International Arbitration Act 1974 (Cth)); and
  • by resolving factual issues, the court proceedings would assist the arbitration (creating an issue estoppel on matters that had already been determined).

Dismissing Asian Atlas' motion for a stay or adjournment of the court proceedings, Justice Besanko held the determinative factor to be that the court proceedings were considerably more advanced than the arbitration.

The analysis

Pro-arbitration jurists may contend a view that, in preservation of an arbitration agreement, it was open to Justice Besanko to distinguish Sterling Pharmaceuticals on the basis that that case concerned pending court proceedings in another jurisdiction, whereas the present case concerned pending arbitral proceedings. However, the overarching difficulty with such a proposition lies in the fact that, in upholding McConnell Dowell's entitlement to have its action determined by the court, his Honour's decision properly accorded with the applicable international arbitration laws.

The International Arbitration Act only comprehends a stay of proceedings being granted where the litigant parties have entered into an arbitration agreement.3 As a consequence of the contractual matrix that governed the respective relationships of the three parties and, specifically, absent any arbitration agreement between McConnell Dowell and Asian Atlas, a stay of proceedings was unsustainable under the Act.

This type of contractual matrix is relatively common within international trade (and indeed multi-national projects): namely, where there are more than two parties and a number of related contracts. In such circumstances, it may be appropriate when contracting for the parties to consider adoption of a multi-party or multi-contract arbitration clause, allowing related disputes between multiple parties to be heard together in a single forum under the same applicable rules and laws. Such a clause might have assisted McConnell Dowell, Skelton Sherbourne and Asian Atlas to resolve their respective differences together without the need for the inefficient recourse to two arbitrations and related court proceedings. However, adopting parties ought to be aware that multi-party or multi-contract arbitration clauses are fraught with attendant drafting4, practicality and procedural difficulties which must be addressed with care and clarity if their purpose is to be properly achieved.

  1. McConnell Dowell Constructors (Aust) Pty Ltd v The Ship 'Asian Atlas' [2011] FCA 174 (4 March 2011).
  2. Sterling Pharmaceuticals Pty Limited v The Boots Company (Australia) Pty Limited (1992) 34 FCR 287.
  3. Article 8(1) of the UNCITRAL Model Law on International Commercial Arbitration 2006, adopted by s16 and reproduced as Schedule 2 of the International Arbitration Act 1974 (Cth). Also see s7(2) of the International Arbitration Act 1974.
  4. See for example the 'IBA Guidelines for Drafting International Arbitration Clauses'.

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