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Focus: Arbitral award enforced against a company in administration

30 November 2011

In brief: In two recent related decisions, the NSW Supreme Court has lifted the statutory moratorium on proceedings against a company in administration and allowed a plaintiff to enforce an arbitral award against the company. Partner Michael Quinlan , Special Counsel Nicola Nygh and Lawyer Jonathan Adamopoulos report.

How does it affect you?

  • Depending on the nature of the award, a court may lift the statutory stay of proceedings to allow a party to enforce an arbitral award against a company in administration. The limited grounds on which a court may refuse to enforce an arbitral award was a consideration in favour of lifting the statutory stay.
  • The court will refuse to enforce an award on public policy grounds only where the award offends notions of morality and justice.

Background and facts

Larkden Pty Limited and Lloyd Energy Systems Pty Limited were parties to a licensing agreement in relation to certain technologies (the technologies). Their agreement contained an arbitration clause.

In 2010, a dispute arose between the parties regarding the ownership of certain improvements to the technologies. These improvements included a patent application filed in a number of jurisdictions (the patent application family) by Solfast Pty Limited. Lloyd was Solfast's sole shareholder. The dispute was arbitrated.

On 7 September 2011, the arbitrator published draft reasons finding in favour of Larkden on the intellectual property aspects of the arbitration. After the arbitration began, Lloyd granted a charge in respect of its shares to a related body corporate, Graphite Energy Pty Limited (GEPL), and GEPL assigned the charge to Graphite Energy NV (GENV). The day after the arbitrator published his draft reasons, GENV gave notice of a default under the charge to Lloyd and the shares in Solfast were transferred by Lloyd to GENV. Lloyd then went into voluntary administration on 13 September 2011.

Voluntary administration creates a stay of proceedings in a court1 unless the administrator gives consent or the court grants leave.2 On 21 September 2011, the arbitrator issued his arbitral award. The orders included a declaration that Lloyd's rights, title and interest in Solfast were to be held on constructive trust for Larkden and an order that Lloyd procure Solfast to transfer its patent application family to Lloyd.

Larkden commenced proceedings in the NSW Supreme Court seeking to have the arbitral award recognised and enforced against Lloyd under section 35 of the Commercial Arbitration Act 2010 (NSW) and seeking leave to proceed against Lloyd to enable it to do so. Justice Hammerschlag delivered two separate decisions: the first on the leave application;3 and the second on the application to enforce the award.4

The application to lift stay

Lloyd's administrators opposed Larkden's application for leave to lift the stay. They contended that the proceedings would distract the administrators and lead to costs being incurred by Lloyd. Justice Hammerschlag lifted the stay allowing Larkden to continue with the proceedings. His Honour noted that, unlike court proceedings, arbitrations are not stayed by voluntary administration. A court can only refuse to enforce arbitral awards in defined circumstances.5 While a stay is not a refusal, it is an impediment to enforcement. For an analysis of Justice Hammerschlag's decision to lift the stay of proceedings against Lloyd from an insolvency perspective, see our other Focus on these proceedings.

Recognition and enforcement of award

Lloyd objected to the recognition and enforcement of the award asserting that:

  • the orders in the award relating to Lloyd's interests in Solfast were matters outside the scope of the arbitration clause in the licensing agreement;6 and
  • recognition or enforcement of the award would be contrary to public policy.7

Justice Hammerschlag made orders to recognise and enforce the award.

Scope of arbitrated dispute

Under the licensing agreement, if Lloyd develops any improvements or modifications to the technologies, it must allow Larkden to own such improvements and modifications. Justice Hammerschlag noted that the arbitrator had found that Solfast was used as a vehicle by Lloyd for developing improvements and modifications to the technologies. As a result, he found the relief in relation to the Solfast shares was clearly connected with the licensing agreement and arbitrable.

Public policy

Lloyd argued that it was no longer the owner of shares in Solfast and that a declaration that it held the shares on trust would be futile and therefore against public policy. Justice Hammerschlag noted that public policy objections under s36 of the Commercial Arbitration Act really related to notions of 'morality and justice.'8 The public policy exception has been read narrowly by Australian courts, particularly in recent years.9 However, there are previous authorities that have held that the exception would include situations where an award is so vague that it would be impossible for the court to enforce the award.10 Lloyd also argued that recognition and enforcement of the award was contrary to public policy because it was vague and uncertain. In particular, Lloyd took issue with some parts of the award that required it to 'take all necessary steps' in relation to certain patent applications and proceedings before the Patents Office, without articulating or defining what those steps were.

His Honour did not consider the award to be vague and he did not consider that any difficulties in Lloyd complying with the award were a ground for not registering the award. His Honour noted that orders in similar terms are commonly made in suits for specific performance.

New Commercial Arbitration Acts

Justice Hammerschlag's decisions were made under the Commercial Arbitration Act which adopts the Model Commercial Arbitration Bill agreed to by the Standing Committee of Attorney-Generals in 2010. Legislation adopting the Model Commercial Arbitration Bill has also commenced in Victoria and has been enacted but has not yet commenced in South Australia, Tasmania and the Northern Territory. The Bill has been introduced into parliaments in Queensland and Western Australia but is yet to be passed. The Bill is yet to be introduced into the ACT parliament.

The Model Commercial Arbitration Bill largely implements the UNCITRAL Model Law on International Commercial Arbitration and so aligns the laws governing domestic arbitration more closely with the International Arbitration Act 1974 (Cth) which governs international arbitration. In particular, the Model Arbitration Bill adopts the grounds for refusing to recognise and enforce an arbitral award in the UNCITRAL Model Law and the International Arbitration Act which are more limited than the grounds in the former uniform Commercial Arbitration Acts. This, together with the public policy objectives expressed in both the International Arbitration Act and the Model Arbitration Bill to facilitate the recognition and enforcement of arbitral awards,11 are factors which Australian courts may take into account in deciding whether to grant leave to bring proceedings to enforce an arbitral award against a company in administration.

Footnotes
  1. Corporations Act 2001 (Cth), s440D(1).
  2. Arbitrations are not court proceedings and are not stayed by a voluntary administration: Auburn Council v Austin Australia Pty Limited (Administrators Appointed) (2004) 22 ACLC 766.
  3. Larkden Pty Limited v Lloyd Energy Systems Pty Limited [2011] NSWSC 1305.
  4. Ibid. 1331.
  5. see Commercial Arbitration Act 2010 (NSW) s36.
  6. Commercial Arbitration Act 2010 (NSW) s36(1)(a)(iii).
  7. Commercial Arbitration Act 2010 (NSW) s36(1)(b)(ii).
  8. [2011] NSWSC 1331, [25].
  9. See Yang v S & L Consulting & Anor [2009] NSWSC 223, [26] (Justice White).
  10. See Resort Condominiums International Inc v Bolwell (1993) 118 ALR 655, 676 (Justice Lee).
  11. International Arbitration Act 1974 (Cth) s2D and Commercial Arbitration Act 2010 (NSW) s1C.

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