The New Australian International Arbitration Regime in Practice - Less Court Intervention, Greater Enforceability, Lower Costs

Overview

by Jesse Kennedy and Dimity Maybury

The 2010 amendments to Australia's international arbitration regime have already seen a reduction in costs and court intervention in 2011. This update highlights four key developments in international arbitration in Australia for the first quarter of 2011:

1. The Australian Centre for International Commercial Arbitration (ACICA) has become the authority able to appoint arbitrators where other agreed mechanisms fail
2. The enforcement of a Mongolian arbitration award by the Victorian Supreme Court reveals a push in Australia for minimal intervention and review by a court in enforcement proceedings
3. Indemnity costs may now be awarded as a matter of course where a party seeks to oppose the enforcement of an arbitral award
4. The enforcement of a Ugandan award in the Federal Court of Australia has highlighted that even poorly drafted arbitration agreements can still lead to enforceable awards in Australia.

ACICA becomes the appointing authority

On 2 March 2011, the International Arbitration Regulations 2011 (Cth) (Regulations) came into force, prescribing the Australian Centre for International Commercial Arbitration (ACICA) as the sole competent authority to perform the functions set out in arts 11(3) and 11(4) of the UNCITRAL Model Law on International Commercial Arbitration (Model Law).

The Model Law is the procedural law that applies to international commercial arbitrations held within Australia (see s 16 of the International Arbitration Act 1974 (Cth)). Articles 11(3) and 11(4) of the Model Law confer power on a court or other authority to appoint an arbitrator where the parties, the arbitrators, or an institution fail to appoint, or reach agreement on the appointment of, an arbitrator.

ACICA is a peak body for international commercial arbitrations in Australia. By being prescribed as the sole appointing authority, parties will not need to resort to the courts to appoint arbitrators. The Regulations therefore provide a more timely and cost effective means of appointing arbitrators where the parties, arbitrators or an arbitral institution fail to do so or are otherwise unable to. ACICA also has more experience and knowledge of arbitrators than the courts such that it is best placed to appoint an appropriate person.

Pursuant to art 11(5) of the Model Law, any appointment made by ACICA is unreviewable by a court, further reducing the potential for delays or increased costs. However, it remains to be seen whether the High Court's original jurisdiction found in s 75 of the Constitution would nonetheless entitle it to review any decision made by ACICA.

For arbitrations governed by the ACICA Arbitration Rules (Rules), rule 9.3 of the Rules provides that, in appointing an arbitrator, ACICA shall have regard to such considerations as are likely to secure the appointment of an independent and impartial arbitrator and shall take into account as well the advisability of appointing an arbitrator of a nationality other than the nationalities of the parties. ACICA can also require such information from the parties as it deems necessary prior to making an appointment (rule 12.2 of the Rules).  

For arbitrations not governed by the Rules, the chosen rules of arbitration may similarly provide for relevant considerations ACICA is to take into account when appointing an arbitrator. Where such rules are silent (or where the parties have chosen no rules), art 11(5) of the Model Law requires ACICA to nonetheless have due regard to any qualifications required of the arbitrator by the agreement of the parties and to such considerations as are likely to secure the appointment of an independent and impartial arbitrator, as well as the advisability of appointing an arbitrator of a nationality other than those of the parties.

Enforcement of a Mongolian award and the application of Dallah in Australia

On 28 January 2011, the Supreme Court of Victoria (Croft J) enforced a Mongolian Award under the new regime provided in s 8 of the International Arbitration Act 1974 (Cth) (IAA). In doing so, the Court (Altain Khuder LLC v IMC Mining Inc [2011] VSC 1) covered a number of topical, complex and controversial issues on the application of the New York Convention.

The Facts

Altain Khuder LLC (AK) and IMC Mining Inc (IMC Mining) entered into a contract for the Tayan Nuur Iron Ore Project in Mongolia. A dispute arose which was referred to arbitration in Ulaanbaatar, Mongolia. On 15 September 2009, the arbitral tribunal made orders against IMC Mining, and its related Australian entity, IMC Mining Solutions Pty Ltd (IMC Solutions). IMC Solutions was not named as a party to the contract which contained the arbitration agreement.

The enforcement proceedings

In August 2010, AK obtained ex parte orders for the enforcement of the award against IMC Solutions in the Supreme Court of Victoria. IMC Solutions sought to set aside the orders for the enforcement, its main complaint being that it was not a party to the arbitration agreement.  

In rejecting IMC Solution's arguments and upholding the enforcement of the arbitral award, Croft J made a number of important observations on the IAA and enforcement proceedings generally.

What a party seeking enforcement needs to show

Justice Croft held that the party seeking enforcement need only produce to the Court the award and arbitration agreement pursuant to s 9 of the IAA and did not need to first establish that the award or arbitration agreement are binding.

The onus on the party resisting enforcement

Although a party need only show "on the balance of probabilities" that one of the grounds in ss 8(5) or 8(7) of the IAA was made out (those grounds correlating to art V of the New York Convention),¹  Croft J held that the strength of the evidence needed to satisfy that onus is high. In other words, a party has a "very heavy burden" in resisting enforcement and can only do so with "clear, cogent and strict proof" that one of the grounds in ss 8(5) or 8(7) applies. In reaching this conclusion, his Honour noted the pro-enforcement policy of the New York Convention and the need to reduce unnecessary costs and delay in arbitrations.

Law governing the arbitration agreement

Although not dealt with in detail by Croft J, IMC Solutions argued that the validity of the arbitration agreement was to be considered under the law of Queensland, as the contract in which the agreement was found was governed by the law of Queensland.

Croft J applied the well known principle of separability - that an arbitration agreement is separate to the agreement in which it is contained - to find that a choice of law clause that applies to the contract does not automatically apply to the arbitration agreement. Although that principle is not controversial, it had been generally accepted that the proper law of the contract will ordinarily be the proper law of the arbitration agreement.² Although a recent decision in the United Kingdom (C v D [2007] EWHC 1541) threw some doubt on this, it is interesting that Croft J dismissed the issue without delving into what remains a complex and controversial issue.

Even more interesting is that Croft J appeared to apply renvoi to resolving the proper law of the arbitration agreement. Renvoi is where a court, having decided the proper law of the dispute is that of a foreign jurisdiction, applies the conflict of law rules of the foreign jurisdiction as well, which may in turn lead to the conclusion that a different jurisdiction's law is the proper law governing the dispute. In this case, Croft J reasoned that Mongolian law governed the validity of the arbitration agreement because it was the proper law of the arbitration (but not necessarily the proper law of the arbitration agreement), and under the conflict of law rules of Mongolia, questions as to the validity of the arbitration agreement were to be determined in accordance with the law of Mongolia. It is somewhat intriguing reasoning as renvoi has generally been considered to be excluded from the New York Convention.

Re-litigating issues before the tribunal and the application of Dallah in Australia

Arguably the most important part of Croft J's judgment concerns the application of the principles discussed in the controversial case of Dallah Real Estate & Tourism Holding Co v Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46 (Dallah) to Australia (a more detailed explanation of Dallah can be found here).

Dallah concerned the enforcement of an ICC award in the United Kingdom. The award was made pursuant to an arbitration agreement entered into between Dallah Real Estate & Tourism Holding Co and a Trust established by the Government of Pakistan. The Trust ceased to exist at the relevant time and the arbitral tribunal found that it nonetheless had jurisdiction to make an award against the Government of Pakistan. The Supreme Court of the United Kingdom disagreed, found that the Government was not a party to the agreement under the applicable law (French law) and the award was, therefore, unenforceable. The Court also endorsed the view that a party could conduct a full rehearing on the question of the tribunal's jurisdiction in enforcement proceedings.

One reading of Croft J's judgment suggests that Dallah would be applied in Australia. His Honour supported the conclusion that the tribunal's power to rule on its own jurisdiction (the competence-competence principle) did not mean that a court could not review whether the tribunal had jurisdiction, and he stated that Dallah was consistent with other cases applying the New York Convention.

On the other hand, his Honour concludes that a party seeking to resist enforcement of an award is not entitled to re-litigate and revisit issues the subject of the arbitration - a conclusion that does not sit entirely well with Dallah.

To the extent that Croft J was merely confirming that, on an application for enforcement of a foreign arbitral award, an Australian court cannot review the award or the tribunal's findings, that is uncontroversial and is consistent with the position in Singapore,³ Hong Kong,⁴ the United Kingdom⁵ and the United States.⁶ But his Honour does not make the clear distinction made in Dallah between a merits or legal review, on the one hand, and a review of a tribunal's decision with respect to its jurisdiction, on the other.

In considering whether IMC Solutions was a party to the arbitration agreement (and therefore, whether the tribunal had jurisdiction to issue an award against IMC Solutions), Croft J follows the approach of Prakash J of the High Court of Singapore,⁷ which advocated affording a level of deference to the findings of the arbitral tribunal, even on issues of jurisdiction. His Honour then seems to place some emphasis on the fact that the issue of IMC Solutions being a party was argued and ruled upon in the arbitral tribunal, and IMC Solutions then had an opportunity to raise the issue before the courts of Mongolia.  

To the extent that Croft J was influenced by the jurisdictional issue already being dealt with by the tribunal, it would seem that the reasoning of Dallah does not apply with the same force to an enforcement proceeding in Australia. In Dallah, it was found that the UK courts could revisit the issue in full and decide for themselves whether the arbitration agreement was valid under the relevant law. Such a process necessarily includes not only finding that the tribunal erred in law, but also erred in its application of the facts to the law. Justice Croft, however, seems to give deference to the tribunal's findings, stating it was not for the court in an enforcement proceeding to review the decision of the tribunal to the same extent as a court in the seat of arbitration.

Combining his Honour's reasoning with his finding that the onus on a party resisting enforcement was high, it would seem that, unlike in Dallah, a party would need to provide clear evidence and strong arguments that the tribunal did not have jurisdiction in the face of a finding by the tribunal to the contrary. In other words, a party may need to show that the tribunal was "clearly wrong". If that is the effect of Croft J's finding, then Australian courts would more readily enforce awards and be more reluctant to look behind the award than their counterparts in the United Kingdom.  

Estoppel

In any event, Croft J found that IMC Solutions was estopped from now arguing that it was not a party to the arbitration agreement as the award was verified by the courts of Mongolia. Although accepting that a party will not always be estopped from raising an argument that they unsuccessfully raised before a court of the seat of arbitration, Croft J held that where (as here) the relevant issue is governed by the law of the seat of arbitration and courts of that seat have found the award valid, an issue estoppel would ordinarily arise preventing a party from raising the argument again in an enforcement proceeding. This is consistent with Dallah, which left open the possibility of estoppel applying where the courts of the seat of arbitration had already considered the issue.

Practical implications of the case

The decision of Croft J highlights that parties need to think of issues surrounding enforcement at all stages of arbitration, not just when an award has been rendered.

Where issues of a tribunal's jurisdiction have been considered by the courts of the seat of arbitration, Croft J's judgment suggests a court in an enforcement proceeding will not revisit the issue. Arguably, the same would apply on the basis of Croft J's decision where the issue was raised before the tribunal and not taken up before the courts of the arbitral seat.

Therefore, where it becomes apparent that there may be issues as to the tribunal's jurisdiction (eg, where the arbitration involves a party not a signatory to the relevant agreement, or where the tribunal is dealing with matters not clearly within the terms of the arbitration agreement), a party wanting an enforceable award in the future may wish to take steps to ensure the courts of the seat of arbitration have an opportunity to make a ruling on the tribunal's jurisdiction. In Australia, this can be done under art 16(3) of the Model Law.

Although seeking the court's decision on jurisdiction will in the short term add to the costs of the arbitration, in the long term it will avoid the situation found in Dallah; namely, having a dispute fully arbitrated (with all its associated costs) only to later have enforcement of the award refused.  

Important points to take away from the case:

1. The proper law of the arbitration agreement (and therefore the law that governs the validity and breadth of the agreement) will not automatically be the proper law of the contract in which it is contained.
2. A party seeking enforcement of an award need do no more than comply with the procedural requirements in the IAA and the relevant court rules.
3. A party resisting enforcement bears a heavy onus in making out one of the grounds for refusing enforcement in ss 8(5) and 8(7) of the IAA.
4. An Australian court may be more reluctant than their counterparts in the United Kingdom to reconsider issues dealt with by the tribunal or the courts of the seat of arbitration in enforcement proceedings.
5. A party's failure to pursue all avenues of appeal against an award that are open to it in the courts of the seat of arbitration may prevent that party from relying on the same grounds for resisting enforcement of the award.
6. Parties who wish for an award to be enforceable should ensure that any potential issues as to the tribunal's jurisdiction are raised before the courts of the seat of arbitration at the earliest possible opportunity so as to prevent a party opposing enforcement from successfully raising such a ground in an enforcement proceeding.

IMC Solutions has appealed the decision of Croft J to the Victorian Court of Appeal.

Indemnity costs awarded against party resisting enforcement of foreign arbitral award

Following the decision on the enforcement of the Mongolian award, Croft J handed down another significant judgment (Altain Khuder LLC v IMC Mining Inc (No 2) [2011] VSC 12) on the international arbitration regime in Australia.

Applying decisions of the Hong Kong courts, Croft J held that a party unsuccessful in resisting the enforcement of a foreign arbitral award should as a matter of course pay the costs of the other party on an indemnity basis; that is, they must pay the costs actually incurred by the other party in seeking enforcement rather than costs on a party/party basis.

In practice, this means that a party seeking enforcement in Australia can potentially do so at almost no cost. Conversely, parties seeking to resist enforcement of an arbitral award in Australia should only do so in circumstances where they have a good case for refusing enforcement. Otherwise, they may be subject to a significant costs order awarded against them on top of any award enforced by the court.

Federal Court enforces Ugandan award

Having been conferred jurisdiction under the recent amendments to the International Arbitration Act 1974 (Cth) (IAA), the Federal Court (Foster J) has recently enforced a Ugandan award (Uganda Telecom Ltd v Hi-Tech Telecom Pty Ltd [2011] FCA 131). In doing so, Foster J confirmed that the ground for refusing an award for being contrary to "public policy" does not entitle a court to refuse to enforce an award where the tribunal made an error of law. Instead, a court can only refuse enforcement where to do so "would violate the forum state's most basic notions of morality and justice". In support of this conclusion, his Honour relied on United States authority concerning the interpretation of "public policy" under the New York Convention, including the decision of Karah Bodas Co LLC v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364 F 3d 274 (2004).

The recent amendments to the IAA (s 8(7A)) also clarified that being contrary to public policy includes (but is not limited to) circumstances where the making of the award was induced or affected by fraud or corruption or there was a breach of the rules of natural justice in connection with the making of the award. Foster J did not consider this new provision and, consequently, there remains no judicial deliberation as to what are the rules of natural justice, the breach of which would render an award unenforceable on grounds of public policy.

The decision also highlights the importance of choosing an appropriate seat of arbitration. In this case, the arbitration agreement read "any lawsuit, disagreement, or complaint with regards to a disagreement, must be submitted to compulsory arbitration". It did not provide for the seat of arbitration, number of arbitrators, rules governing the arbitration, or the procedure for appointing arbitrators.

Under general principles of contract law, such a clause would risk being void for uncertainty (and if it was a mediation clause, it would likely be void). However, finding Ugandan law was the law of the arbitration, Foster J held that Ugandan law provided for procedures and mechanisms that covered all matters not dealt with by the arbitration agreement and, accordingly, the arbitration agreement was not void for uncertainty.

Many arbitration agreements entered into in transnational disputes can be vague and merely provide for arbitration, omitting significant details that would ordinarily render such clauses void for uncertainty. However, many jurisdictions around the world (including Australia) have arbitration laws in place that "fill the gaps" left by arbitration agreements to provide for such uncertainty. The decision of Foster J highlights how such laws can be crucial in saving what would otherwise be an invalid dispute resolution clause.

Therefore, although no substitute for a properly drafted arbitration agreement, the chosen seat of arbitration is an important consideration and parties should ensure their chosen seat has adequate arbitration laws that may resolve (and resolve efficiently) any potential issues that arise from an incomplete or improperly drafted arbitration agreement.

1 The grounds for refusal in s 8(5) are, generally speaking, that a party was under some incapacity, the arbitration agreement was invalid, there was no proper notice of the appointment of an arbitrator or the commencement of arbitration proceedings, a party was otherwise unable to present their case, the arbitrator went beyond the scope of the arbitration agreement, the composition of the arbitral tribunal was not in accordance with the agreement or that the award was not yet binding. The grounds in s 8(7) are that the subject matter of the dispute between the parties is not capable of settlement by arbitration or that to enforce the award would be otherwise contrary to public policy, including, under s 8(7A), that the arbitrator breached the rules of natural justice in connection with the making of the award or the making of the award was affected by fraud or corruption.
2 See, eg, Gary Born, International Commercial Arbitration: Commentary and Materials (2001) at 753; Martin Davies, Andrew Bell and Paul le Gay Brereton, Nygh's Conflict of Laws in Australia (8th ed, 2010) at 796.
3 See Aloe Vera of America Inc v Asianic Food (S) Pte Ltd [2006] SGHC 78 at [47].
4  See Xiamen Xinjingdi Group Ltd v Eton Properties Ltd [2008] 6 HKC 287.
5  See IPCO (Nigeria) Ltd v Nigerian National Petroleum Corporation [2005] 2 Lloyd's Rep 326 at 328.
6  See Parsons & Whittemore Overseas Co Inc v Societe Generale de L'Industrie du Papier (Rakta), 508 F 2d 969 (2nd Cir, 1974); Scherk v Alberto-Culver Co, 417 US 506 at 516-17 (1974).
7  Aloe Vera America Inc v Asianic Food (S) Pte Ltd [2006] SGHC 78 at [62]-[63].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.