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Focus: International Arbitration – Australian courts' power to grant interim freezing orders

2 November 2018

In brief: The WA Court of Appeal has taken an expansive view of the power that Australian courts have to grant interim orders in support of international arbitrations. Specifically, it has confirmed that their power to grant interim freezing orders is not limited to orders that extend only until the arbitral tribunal is constituted – meaning that such an order might continue to apply whether or not the arbitral tribunal agrees that it is appropriate. Partner Jeremy Quan-Sing (view CV) and Lawyer Caitlin Moustaka report.

How does it affect you?

  • Duro Felguera Pty Ltd v Trans Global Projects Pty Ltd (in liq) [2018] WASCA 174 confirms that Australian courts play a role in supporting arbitral proceedings that can continue beyond the constitution of the arbitral tribunal.
  • It creates a precedent for the grant of a freezing order by a court before, or at any stage of, arbitral proceedings where:
    • a party to an arbitration agreement is a subsidiary of an overseas entity;
    • there is evidence of the subsidiary previously advancing/lending surplus funds to the parent; and
    • there is evidence that the parent is in financial difficulty and may be unlikely to repay the loans.
  • It confirms that a court is not limited to making a freezing order that only applies until the arbitral tribunal is constituted.
  • If you are involved in potential arbitration proceedings and want to obtain a freezing order, you should consider seeking it from an Australian court (and not waiting until the arbitral tribunal has been constituted).
  • If you are a party to an arbitration agreement, you should be aware that not all important decisions (such as whether a freezing order is appropriate) will necessarily be determined by the arbitral tribunal appointed under that agreement. The Australian courts still have an important role to play.

Background

The case concerned whether Trans Global Projects (TGP) was entitled to a freezing order over the assets of Duro Felguera in Australia. TGP sought the freezing order in relation to potential arbitration proceedings and before the dispute was referred to arbitration.

The underlying dispute concerned a subcontract related to the Roy Hill project. TGP claimed approximately $30 million from Duro Felguera, which counter-claimed approximately $26 million from TGP. The International Arbitration Act 1974 (Cth) applied to the arbitration.

At first instance, the primary judge granted a freezing order requiring Duro Felguera to hold assets in Australia with an unencumbered value of at least $20 million. The freezing order was made before the constitution of the arbitral tribunal, and stated to be effective 'until further order' – meaning that it prima facie extended until after the constitution of the arbitral tribunal.

The Court of Appeal decision

There were two key issues on appeal:

  • whether there was a real danger that a prospective judgment based on an arbitral award would be unsatisfied (wholly or partly) due to Duro Felguera's assets being removed from Australia or diminished; and
  • whether any freezing order should have operated only until the arbitral tribunal had been constituted and had a reasonable opportunity to consider for itself whether to grant relief equivalent to a freezing order.
Risk of judgment based on arbitral award being unsatisfied

In relation to the first issue, the Court of Appeal found that the requirements for the grant of a freezing order were met, as there was a real risk that Duro Felguera might 'act in a manner that will have the effect of frustrating a prospective order of the court' and therefore prevent enforcement, in Australia, of any arbitral award.

The Court based its decision on the following:

  • Duro had a history of making loans to its parent company, Duro SA (located in Spain);
  • there was a risk, on the evidence, that if Duro held funds in excess of its operational requirements (eg through success in its separate arbitration against Samsung), it would lend those funds to Duro SA;
  • evidence of Duro SA's financial reports and directors' reports showed that it was in such financial difficulties that it would not have the capacity to repay any loan to Duro when it became due; and
  • Duro's financial position and limited presence in Australia would otherwise be insufficient to satisfy a judgment.
Whether the freezing order should only operate until the tribunal is constituted

In relation to the second issue, the Court of Appeal concluded that it was appropriate for the freezing order to continue 'until further order of the Court'. That is, it need not be limited by the constitution of the arbitral tribunal.

Duro had essentially argued that whether the court was granting a freezing order under its inherent power or under Article 17J of the Model Law, it was doing so to aid the parties' agreement to refer all disputes to arbitration. As such, any court orders should not unnecessarily intrude into the arbitral process. Duro asserted that if a freezing order were to be made, it should only operate until the arbitral tribunal was constituted.

The Court of Appeal disagreed with this submission, on the basis of Article 9 of the Model Law, which provides that it is not incompatible with an arbitration agreement for a court to grant an interim order during arbitral proceedings. It found that this provision was very broad-ranging and inconsistent with Duro's submission.

Ultimately, while the Court of Appeal accepted that the court's power to grant a freezing order should be exercised sparingly, it found that if the onerous requirements for such an order were met, there was no reason for a court to adopt a default position that the freezing order should only last until the arbitral tribunal was constituted.

It did note that Duro had not appealed the primary judge's decision that TGP had 'a good arguable case' (one of the preconditions of any freezing order being granted). The Court of Appeal suggested that a court might be more reluctant to grant a freezing order that extended beyond the constitution of the tribunal if there were a serious contest as to the merits of the applicant's underlying claim.

Conclusion

It is clear from the decision that Australian courts' ability to grant interim relief in support of an arbitral process is not confined to the period before the arbitral tribunal is constituted. In particular, courts may grant freezing orders that extend beyond the constitution of the tribunal.

This gives rise to some interesting issues. Potentially, a court might grant a freezing order, or other interim relief, that the arbitral tribunal (once constituted) does not agree with. Exactly how such a situation would be dealt with is not clear from the decision.

Importantly, the Court of Appeal's decision was made in the context of Duro having not appealed the primary judge's decision that TGP had a 'good arguable case' in the dispute to be referred to arbitration. The Court implicitly recognised that in circumstances where the merits of the underlying claim were contested in a freezing order application, a freezing order that extends beyond the constitution of the tribunal might not be appropriate. Such an order would, arguably, be encroaching on the arbitral tribunal's jurisdiction to determine the merits of the dispute being referred to it.

 
 

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