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Focus: International arbitration update

9 September 2014

In this issue: we look at an unsuccessful challenge to the enforcement of foreign arbitral awards in the Federal Court of Australia; recent changes to the arbitration rules of the Institute of Arbitrators and Mediators Australia, the International Centre for Dispute Resolution and the London Court of International Arbitration; and a decision of the English High Court enforcing an obligation to engage in friendly discussions as the first step in a multi-tiered dispute resolution clause.

This issue has been edited by Partner Andrea Martignoni and Special Counsel Nicola Nygh.


Challenging enforcement of arbitration awards in Australia can prove costly

In brief: The Federal Court recently rejected a challenge to enforcement proceedings under Australia's arbitration legislation by a judgment debtor subject to a number of foreign arbitral awards in a decision that continues to reinforce Australian courts' general pro-arbitration approach. Partner Peter O'Donahoo (view CV), Managing Associate Hilary Birks (view CV) and Associate Anna McMahon report.

How does it affect you?

  • Australian courts are not bound to follow decisions of an arbitral tribunal with respect to the tribunal's own composition. However, an Australian court will only exercise its jurisdiction on issues relating to the tribunal's composition where necessary.
  • A foreign award, or part of a foreign award, for a future loss that is not yet binding on the parties is not necessarily contrary to public policy in Australia.
  • Costs may be awarded against a party to enforcement proceedings where the other party substantially succeeds (although not entirely) in its enforcement action.

Background

Gujarat NRE Coke Limited (Gujarat) and Armada (Singapore) Pte Ltd (Under Judicial Management) (Armada) were parties to a contract of affreightment under which Gujarat agreed to ship and Armada agreed to provide tonnage for the transportation of six cargoes of coking coal annually for each of the years 2008 to 2012 inclusive (the COA). Armada commenced arbitration against Gujarat for breach of contract arising from Gujarat's failure to nominate laycans under the COA for the six shipments in 2009 and the first three shipments in 2010. Armada also reserved its rights to allege further breaches in respect of future shipments.

The arbitral tribunal (the Tribunal) made three partial awards in favour of Armada awarding damages for past and future losses incurred and Armada sought to enforce these awards in Australia.

Australian enforcement proceedings

In the judgment Armada (Singapore) Pte Ltd (Under Judicial Management) v Gujarat NRE Coke Limited 1, Justice Foster referred to the three awards of the Tribunal as the First Award, Second Award and Third Award.

The First Award related to the composition of the Tribunal and its jurisdiction to hear the dispute. The Second Award addressed the substantive question of whether Gujarat breached the contract and Gujarat's main defences as well as principles governing the assessment of damages. The Third Award related to Armada's entitlement to damages flowing from Gujarat's breach of the COA.
Prior to the substantive hearing of the issues, on 8 May 2014, Justice Foster granted freezing orders against Gujarat.

The arbitration clause in the COA relevantly provided that each of the parties would appoint one arbitrator and those respective arbitrators would then jointly choose a third arbitrator. The clause also stipulated that the arbitrators must be 'commercial men who are members of the Institute of Arbitrators in London'.

Gujarat challenged the enforcement of the awards on the following five grounds:

  1. The appointed arbitrators were not 'commercial men' as required by the COA. Gujarat argued that Armada had therefore not satisfied the threshold requirement in section 9 of the International Arbitration Act 1974 (Cth) (the Act) which requires the party seeking enforcement of an award to satisfy the court that the award was made by a tribunal which was operating under the arbitration agreement relied upon by it and produced to the court.
  2. As the appointed arbitrators were not 'commercial men', under section 8(5)(e) of the Act, the awards were not made in accordance with the parties' agreement or, failing such agreement, it was not in accordance with the law of the country where the arbitration took place.
  3. Relying on s8(5)(f) of the Act, insofar as the Second Award related to a declaration as to future loss, it had not yet become binding and should be set aside (the relevant declaration by the Tribunal provided that 'The Tribunal declares that Armada will be entitled to damages in respect of future shipments (if any) which Gujarat fails to perform..').
  4. Further or alternatively, insofar as the Second Award related to a declaration as to future loss it was contrary to the public policy of Australia (s8(7)(b) of the Act).
  5. The contract was a 'sea carriage document' within the meaning of s11 of the Carriage of Goods by Sea Act 1991 (Cth) (the COGS Act), and therefore the Tribunal did not have jurisdiction to render Gujarat liable for damages.
The decision

Justice Foster found that Armada had established that each of the First, Second and Third Awards were 'foreign awards' within the meaning of s8(1) of the Act and that Gujarat therefore had the onus of proof in relation to its challenge to the enforcement of the awards.2

In considering Gujarat's grounds 1 and 2, Justice Foster held that although Australian courts have the power to determine the jurisdiction of arbitral tribunals, they should only exercise that power where it is necessary to do so.3 His Honour held that the appointed arbitrators, despite being lawyers, were commercial men within the meaning of the arbitration clause due to their commercial arbitral experience. In any event, as Gujarat agreed to their appointment (and even appointed a lawyer as an arbitrator itself) it had waived its right to object to the appointment, or was otherwise estopped from doing so.4

With regard to Gujarat's challenge on grounds 3 and 4 above, Justice Foster determined that it was not appropriate to give effect to a declaration in respect of future shipments.5 However, Justice Foster recognised that the Tribunal may have made additional awards since his Honour reserved judgment in the proceeding. On that basis, Justice Foster granted leave to Armada to amend its application to include any additional awards. His Honour explained that his decision in this regard was not based on s8(7) of the Act (that is, that an award for future loss was contrary to public policy), stating:6

The mere fact that enforcing such a declaration might not be consistent with principles developed in Australia for the exercise of an Australian Court's discretion to make declarations would not, of itself, be sufficient to constitute a reason for refusing to enforce the award on the grounds that to do so would be contrary to public policy.

Gujarat's challenge on ground 5 was submitted in reliance upon the judgment of Justice Foster in Dampskibsselskabet Norden A/S v Beach Building & Civil Group Pty Ltd.7 In that case, Justice Foster held that s11 of the COGS Act rendered the relevant arbitration clause to be of no effect. On appeal, the Full Court overturned Justice Foster's decision on the applicability of s11 of the COGS Act.8 Justice Foster found that the Full Court's reasoning in DKN v Gladstone Civil was a complete answer to Gujarat's ground 5 in this case and, on that basis, rejected Gujarat's challenge.

Finally, Justice Foster held that as Armada had 'substantially succeeded' in the enforcement action, it should have the costs of the action.9

Summary

Similar to other recent Federal Court decisions,10 Justice Foster's decision in this case reinforces the pro-enforcement approach of the Federal Court, and demonstrates the limited circumstances in which a court may set aside an arbitral award under the Act. The judgment is also a cautionary warning to parties resisting enforcement that once the party seeking to enforce the award has satisfied the threshold criteria for enforcement under the Act, the party resisting enforcement has the burden of proof in respect of the challenge to the award. Any such challenge to enforcement may have cost consequences, in this case, leading to an order that Gujarat must pay Armada's costs.

Recent changes to arbitration rules

In brief: A number of commonly used arbitration rules have recently been revised, with a focus on modernisation and creating greater flexibility around arbitration procedure. Special Counsel Nicola Nygh and Associate Freya Dinshaw report.

How does it affect you?

  • For contracts that nominate specific arbitration rules, any new referral to arbitration of a contractual dispute will generally trigger the use of the new rules (provided these rules have come into effect).
  • Parties negotiating contracts now have a wider array of arbitration rules to choose from which allow parties to appoint emergency arbitrators, consolidate multiple disputes into a single arbitration, or join parties to an arbitration.
  • An innovative addition to the LCIA rules has been the establishment of 'general guidelines' for the conduct of legal representatives, which provide a base ethical framework for the conduct of arbitrations governed by those rules.

Which rules?

In commercial contracts, parties often specify which arbitral rules are to be used in the event of a dispute being referred to arbitration. The rules provide parties with some common ground as to the procedure to be followed when engaging in arbitration, and provide a high-level structure for commencing and conducting arbitration proceedings.

Some of the major sets of rules which have been recently revised include:

  • The Institute of Arbitrators & Mediators Australia rules (IAMA rules) (effective 2 May 2014);
  • The International Centre for Dispute Resolution (ICDR rules) (effective 1 June 2014); and
  • The London Court of International Arbitration rules (LCIA rules) (effective 1 October 2014).

The IAMA Rules are generally used for domestic arbitration in Australia while the ICDR and LCIA Rules are used for international arbitration.

The International Centre for Dispute Resolution is the international arm of the American Arbitration Association (the AAA).

What has changed?

Consolidation and joinder

Under the ICDR and LCIA rules, but not the IAMA rules, tribunals now have the power to consolidate multiple arbitrations into a single arbitration in circumstances where the parties are the same, and the disputes arise under the same or compatible arbitration agreements.
The mechanisms used to consolidate proceedings differ in approach:

ICDR rules: Under the ICDR rules, a party can request the appointment of a 'consolidation arbitrator' to determine whether two or more pending arbitration proceedings under the ICDR Rules or any other rules administered by the AAA or the IDCR. This mechanism is unique in that, unless the parties agree otherwise, the consolidation arbitrator shall not be appointed to the consolidated proceedings but instead the consolidation arbitrator may select one of the previously appointed tribunals to serve in the consolidated proceedings and the ICDR shall complete the appointment of the tribunal as necessary.11

LCIA rules: Provided LCIA Court approval is granted, a tribunal may order consolidation:

  • with the written consent of all parties; or
  • where no arbitral tribunal has yet been formed in respect of the related arbitral proceedings; or
  • if a tribunal has already been formed, if the arbitrators are the same across the tribunals.12

The LCIA Court may also determine unilaterally, after allowing the parties' view to be heard, that proceedings should be consolidated. This can only occur in limited circumstances, where no arbitral tribunals have as yet been formed and the same parties have disputes under the same arbitration agreement.13

Parties under the ICDR, LCIA and IAMA rules also have the option to join other parties to an arbitration. All the rules contemplate joinder by the consent of all parties (including, for the purpose of the LCIA and IAMA, by prior consent in the arbitration agreement), while the IAMA rules provide that joinder can also occur at the request of a party if the tribunal is satisfied, after giving parties the opportunity to be heard, that the party to be joined will not be prejudiced by the joinder.14

Emergency relief

Under the LCIA and ICDR rules, parties can now apply for an emergency arbitrator prior to an arbitration tribunal being formed.15 This addition is designed to provide parties with an alternative to court injunctions or emergency hearings where the parties would prefer to maintain confidentiality instead of having the matter being heard in open court, or otherwise have concerns around international enforcement of court orders. The IAMA rules do not currently provide for the appointment of emergency arbitrators.

Quicker, faster arbitration

In general, the IAMA, ICDR and LCIA rules have been modernised in order to:

  • shorten time periods for filing documents or handing down awards;
  • allow for electronic submission of certain documents; and
  • prevent formal deficiencies delaying steps, such as the timely formation of an arbitral tribunal.

Code of conduct

While many of the changes to the LCIA Rules are in line with those made by other institutions, the LCIA's reform is unique in that its arbitration rules are the first to provide a basic code of conduct regulating the legal representatives of the parties throughout the arbitration process.

These 'general guidelines' prevent legal representatives from:

  • engaging in activities intended unfairly to obstruct the arbitration;
  • jeopardising the finality of any award;
  • knowingly making false statements to the tribunal or the LCIA Court;
  • knowingly procuring false evidence;
  • concealing documents ordered by the tribunal; or
  • initiating unilateral contact with the tribunal without informing the other parties.

If a Tribunal finds that a party's legal representative has violated the guidelines, it may impose sanctions including, but not limited to, issuing a written reprimand or a written caution as to future conduct in the arbitration.16 Importantly, there may also be adverse cost implications.17

In addition, Article 18 provides that any change or addition to a party's legal representation after the formation of the tribunal requires the approval of the tribunal which can be withheld where such change could compromise the composition of the tribunal or the finality of the award. This is intended to prevent parties from obstructing arbitral proceedings by repeatedly appointing new counsel.

Comment

IAMA, ICDR and the LCIA are the latest in a line of arbitral institutes that have updated their arbitral rules since the 2010 UNCITRAL Rules were issued. The updated rules include the 2011 ACICA Rules, the 2012 ICC Rules and the 2013 SIAC Rules (for further background on this, see our previous Focus articles The UNCITRAL Arbitration Rules 2010, New rules to streamline arbitration process and Arbitration Round-up).

While changes have not been uniform and there are many subtleties in approach between the various rules, recent changes to arbitration rules have demonstrated a distinct shift toward modernising arbitration procedures, catering to the needs of commercial parties, and facilitating more efficient arbitration proceedings where multiple parties or disputes are involved.

The LCIA's move to introduce ethical standards for lawyers' conduct in arbitral proceedings is an interesting development for international arbitration, and it remains to be seen whether other institutions will follow suit.

'Friendly discussions' enforced in England

In brief: Multi-tiered dispute resolution clauses frequently require parties to engage in 'good faith' negotiations before a formal dispute resolution mechanism is engaged. In contrast to the position in Australia and Singapore, English courts have historically found such clauses to be unenforceable. However, in a recent decision the English High Court found that a clause requiring the parties to hold 'friendly discussions' was enforceable. Partner Andrea Martignoni (view CV), Special Counsel Nicola Nygh and Lawyer David Mierendorff comment on the implications for contracting parties.

How does it affect you?

  • Assuming the case of Emirates Trading Agency v Prime Mineral Exports is followed in England, parties that select English law as the law governing their multi tier dispute resolution (MTDR) clause can expect that an agreement to negotiate in good faith, properly formulated, will be enforceable where it is time limited.
  • Parties can therefore expect similar treatment of such clauses under English law as under Australian law.
  • Further, English courts may import an obligation to negotiate in good faith into a MTDR clause requiring the parties to seek to resolve the dispute by 'friendly discussion'.

Background

In Emirates Trading Agency v Prime Mineral Exports18, Justice Teare of the English High Court dismissed an application19 for an order that an arbitral tribunal lacked jurisdiction to hear and determine a claim.

The application centred on the MTDR clause which required the parties to seek to resolve a dispute by friendly discussions in a limited period of time, before the dispute may be referred to arbitration. Justice Teare found that this requirement was an enforceable condition precedent to arbitration, and that on the facts, that the respondents had satisfied that condition, such that the tribunal had jurisdiction.

The reasoning of the court

In reaching this conclusion, Justice Teare largely adopted the reasoning of the NSW Court of Appeal in United Group Rail Services v Rail Corporation NSW,20 broadly bringing the English position into line with the law in Australia, which seeks to give dispute resolution clauses a robust and commercially sensible construction. In that case, the NSW Court of Appeal found that an obligation to engage in good faith negotiations was enforceable. Justice Teare imported an obligation to negotiate in good faith into the requirement to seek to resolve the dispute by friendly discussions.

Justice Teare did depart from the Australian position in one respect, rejecting the view of President Allsop (as he then was) in United Group Rail that negotiations required by a MTDR clause will be 'anchored' to a finite body of rights and obligations referable to the contract. Justice Teare found that the 'friendly discussions' required were not intended to be limited by 'fidelity to the existing bargain', and that the type of matter which can be legitimately raised in such discussions is therefore unlimited.

Distinguishing the relevant English authorities

Justice Teare noted that his decision stands in contrast to previous English authorities, which have historically found dispute resolution clauses requiring the parties to engage in friendly discussion or negotiate in good faith to be analogous to agreements to agree and therefore unenforceable. However, Justice Teare was able to distinguish the relevant appellate authorities sufficiently to allow him to conclude that he was not bound by them.

Further, Justice Teare observed that, while other first instance decisions on this issue were persuasive, they were not binding, and none had considered the 'cogent arguments' expressed in the Australian case United Group Rail. Justice Teare also noted that recent Singapore case law supported his approach,21 as have (at least some) International Centre for Settlement of Investment Disputes tribunals.22

Comments

It remains to be seen whether the decision in Emirates Trading Agency v Prime Mineral Exports will be adopted in other decisions applying English law. However, assuming the case is followed, parties that select English law as the law governing their MTDR clause can now expect that a time-limited agreement in a MTDR clause to negotiate in good faith, properly formulated, will be enforceable. Parties can therefore expect similar treatment of such clauses under English law as under Australian law, and should observe such clauses. Of course, each case will turn on its own facts.

Footnotes
  1. [2014] FCA 636 (Armada v Gujarat).
  2. Ibid, at 15.
  3. Ibid, at 16.
  4. Ibid, at 19.
  5. Ibid, at 20.
  6. Ibid, at 21.
  7. (2012) ALR 161.
  8. Dampskibsselskabet Nordon A/S v Gladstone Civil Pty Ltd (2013) 216 FCR 469 (DKN v Gladstone Civil).
  9. Above, note 1 at 22.
  10. See our previous Focus articles commenting on relevant Australian judgments: Federal Court – another arbitration-friendly decision, Smooth sailing for arbitration clauses and Federal Court confirms pro-enforcement approach to foreign arbitration awards.
  11. ICDR rules, art 8.
  12. LCIA rules, arts 22.1(ix) and (x).
  13. LCIA rules, art 22.6.
  14. IAMA rules, art 17(5); LCIA rules, art 22.1(viii); ICDR rules, art 7.
  15. LCIA rules art 9B; ICDR rules art 6.
  16. LCIA rules, art 18.6.
  17. LCIA rules, art 28.4.
  18. Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2104 (Comm).
  19. Under s67 of the Arbitration Act 1996 (UK).
  20. (2009) 74 NSWLR 618.
  21. Citing International Research Corp. PLC v Lufthansa Systems Asia Pacific Pte Ltd [2012] SGHC 226; HSBC Institutional Trust Service v Toshin Development Singapore Pte Ltd [2012] 4 SLR 378.
  22. Citing Tulip Real Estate Investment and development Netherlands BV v Republic of Turkey (ICSID Case No. ARB/11/28).

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