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Arbitration

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Focus: Smooth sailing for arbitration clauses

30 September 2013

In brief: In a split decision, the Full Court of the Federal Court of Australia has signalled its support for upholding and enforcing arbitration clauses negotiated by sophisticated commercial parties. In this case, the court interpreted legislation that restricted the parties' ability to choose arbitration in 'sea carriage documents' so as to give effect to the parties' choice of arbitration in London as the dispute resolution method in a charter party for shipping goods from Australia. Partner Peter O'Donahoo (view CV), Special Counsel Nicola Nygh and Lawyer Laura Johnston report.

How does it affect you?

  • The judgment1 is the latest Australian decision to adopt a pro-arbitration stance, and further evidences Australian courts' increasing willingness to respect parties' free choice of arbitration over litigation.
  • When interpreting Australian legislation concerning international trade, the Federal Court will look to international conventions and foreign decisions for guidance.

Background

The parties to the dispute had signed a charter party agreement for the charter of the vessel Ocean Beach to carry coal from Australia to China. A dispute, concerning demurrage, arose between the parties and proceeded to arbitration in London under an arbitration clause in the charter party. The arbitral tribunal issued a preliminary decision upholding its jurisdiction to hear the matter, and then made an award in favour of the appellant on the merits of the dispute.

When the appellant came to enforce the judgment in Australia, the respondent challenged the application, on the basis that the arbitral tribunal had no jurisdiction to hear the matter.2 That claim – which the respondent had unsuccessfully advanced before the arbitral tribunal – relied on section 11 of the Carriage of Goods by Sea Act 1991 (Cth) (the COGSA). Section 11 operates to invalidate any provision of a 'sea carriage document' that purports to 'preclude or limit' the jurisdiction of Australian courts regarding that sea carriage document, unless the provision provides for arbitration in Australia.

The central issue before the trial court was whether the charter party was a 'sea carriage document', in which case the arbitration clause would be invalid. The trial judge held that the charter party was a sea carriage document, by reference to the definition of that term in the Hague Rules.3 His Honour reached his decision on the basis that there was no ground to distinguish between charter parties and other forms of agreements relating to carriage by sea, which were explicitly identified in the Hague Rules as 'sea carriage documents'. On that basis, the trial judge held that the arbitration clause was ineffective, and refused to recognise and enforce the award. The appellant lodged an appeal to the Full Federal Court.

The decision on appeal

In a two-to-one decision, the Full Federal Court held that a charter party was not a sea carriage document, overturning the trial judge's findings on that point. Because s11 of the COGSA did not apply to the arbitration clause in the charter party, the respondents could enforce the arbitral award against the respondents in Australia. Justices Rares and Mansfield found for the appellants in separate judgments, with Justice Buchanan dissenting.

Two key points emerge from the majority judgments. First, both adopted a purposive approach to interpreting the COGSA. Both judges distinguished between a charter party agreement (which deals with the hire of a vessel) and other forms of agreement relating to carriage by sea, such as a bill of lading (which covers the conditions of carriage of a vessel's cargo). By legislating regarding 'sea carriage documents', the Parliament intended to protect Australian companies shipping or receiving cargo against provisions that would deprive them of recourse to Australian courts; provisions that they had little power to negotiate. However, the Parliament did not intend to deprive sophisticated commercial parties to charter party agreements of their right to submit their disputes to arbitration, rather than litigation, simply because the vessel in question would be carrying goods to or from Australia.

Second, the court looked to foreign authorities in reaching its decision. While Justice Mansfield acknowledged that the trial judge's interpretation of 'sea carriage document' was 'an available constructional choice', both his Honour and Justice Rares rejected that interpretation in favour of one that better reflects international practice. Both judges relied on a Canadian decision4 that held charter parties to be distinct from other sea carriage documents, as they are commercial agreements relatively free from statutory oversight. Further, both judges referred to the COGSA's stated purpose of creating a legal regime that is 'compatible with arrangements existing in countries that are major trading partners of Australia' and 'takes into account developments within the United Nations in relation to marine cargo liabilities'. Their Honours relied on these provisions in interpreting COGSA to reflect the pro-arbitration stance of the New York Convention and the UNCITRAL Model Law on International Commercial Arbitration.

Summary

The judgment indicates that Australian courts will look to international and foreign arbitration authorities in interpreting Australian law. Even where an Australian law evidences an intention to protect Australian companies' recourse to Australian courts, the court will read those clauses narrowly and in a manner consistent with a broader pro-arbitration policy.

Footnotes
  1. Dampskibsselskabet Nordon A/S v Gladstone Civil Pty Ltd [2013] FCAFC 107.
  2. Dampskibsselskabet Nordon A/S v Beach Building & Civil Group Pty Ltd [2012] FCA 696.
  3. The International Convention for the Unification of Certain Rules of Law relating to Bills of Lading; 25 August 1924, as amended by protocol on 23 February 1968.
  4. Canada Moon Shipping Co Ltd v Companhia Siderurgica Paulista-Cosipa (2012) 223 ACWS (3d) 12; 2012 FCA 284. 

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