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In a recent decision of the Federal Court in BHPB Freight Pty Ltd v Cosco Oceania Shipping Pty Ltd [2008] FCA 551 some interesting issues arose in relation to attempts by a third party to take the benefit of an arbitration agreement in a charterparty. The decision provides some useful insight in relation to a party applying “through or under” another party under section 7(4) of the International Arbitration Act (Cth) 1974 (IAA).

Facts

BHPB Freight Pty Ltd (BHPB) took out a sub-charter on a vessel called the Golden Hawk and retained a shipbroker, Seascope, to offer the vessel for charter. Seascope negotiated with another shipbroker, Cosco Oceania Shipping Pty Ltd (Cosco), for the charter of the vessel to New Century International Leasing (NCI). BHPB entered into the charter as the time charterer with NCI as charterer. In fact, the vessel was delivered to Nera Shipping, not NCI, and the hire charges and other costs which were due to BHPB were not paid by NCI. BHPB successfully pursued an arbitration in London against Nera Shipping but an award of approximately $US1m was left unpaid.

BHPB commenced proceedings in the Federal Court against Cosco and Seascape claiming recovery of the shipping charges or the value of the award on the basis of, amongst other things, section 52 of the Trade Practices Act.

Cosco sought a stay of the proceedings. However, this was only after Cosco unconditionally appeared in the proceedings and subsequently served a defence and participated in discovery. After this, Cosco sought to have the dispute arbitrated and appointed an arbitrator for that purpose. Cosco was the subject of anti-anti-suit injunction (which was protective in nature as it sought to prevent Cosco from seeking anti-suit relief in relation to the Australian court proceedings) as well as an anti-arbitration injunction (seeking to prevent Cosco from continuing the arbitration in light of the steps which it had taken in the court proceedings).

Decision

His Honour Justice Finkelstein rejected the application for a stay. He concluded that Cosco was not a party to the arbitration agreement in the charterparty between BHPB and NCI and it could not rely on the arbitration agreement as a related third party. He did so, on the basis that Cosco was not a party “claiming through or under a party” under section 7(4) of the IAA. As part of that analysis he rejected Cosco’s argument that it was a connected party to the contract by virtue of the application of an English statute, the Contracts (Rights of Third Parties) Act 1999 (Contract Act), which, in certain circumstances, allows a third party to circumvent the privity rule where it can show that the contract in question confers a benefit on the third party.

In addition, his Honour, in obiter remarks, concluded that an Australian court does not have inherent jurisdiction to allow a stay of proceedings in favour of arbitration (in the absence of an applicable statutory power) and, in relation to the anti-arbitration injunction, appeared to suggest that, as a matter of Australian law, an arbitrator - sitting in an arbitration with a foreign seat - who was not the subject of the injunction could, nevertheless, be subject to contempt proceedings if he or she were to proceed with the arbitration.

Comment

This decision has a number of interesting features, not all of them necessarily positive.

The substance of the decision turns on Cosco’s attempt to ride on the coat-tails of another party’s arbitration agreement. His Honour concluded, correctly it is submitted, that on the words of section 7(4) this was not possible. In doing so, his Honour, applying the decision of the High Court in Tanning Research, stated that the phrase “through or under” denoted a derivative cause of action between parties with a sufficient degree of proximity (such as a liquidator, bankruptcy trustee or assignee of a debt). It should be noted that Cosco did not press the argument that such a degree of connection existed by virtue of its role as shipbroker; in fact, Cosco contended that it did not act as NCI’s shipbroker. It is debatable whether the decision would have been different if that point had been pressed. In fact, Cosco sought the requisite degree of connection under the Contract Act but failed on that point as it could not show that the charterparty conferred a benefit on Cosco as a third party.

In coming to this conclusion his Honour was prepared to assume, but not determine, that reference to a foreign statute in this context was permissible.

Cosco sought the court’s intervention on an alternative basis: namely, that the court should, in the exercise of its inherent jurisdiction, order a stay. Leaving aside the issue of whether such a power should be exercised (which the judge decided, correctly it is submitted, that on the particular facts it should not), his Honour considered whether the court did, in fact, have an inherent jurisdiction to order a stay. Such a jurisdiction is considered uncontroversial in the English case law, particularly after the decision of the House of Lords in the Channel Tunnel case (with Lord Mustill confirming the approach in the earlier case of Racecourse Betting that the court will make parties abide by their contracts and restrain a plaintiff from acting in contravention of such an agreement). The principle suggests that a statutory power to stay is, in fact, merely a manifestation of a more general common law power.

His Honour decisively rejected this argument. He was of the view that there was binding High Court authority (Anderson v Michell and Huddert Parker v the Ship Mill) that an Australian court has no such inherent jurisdiction. The consequence of this is that a large number of cases which have found such an inherent jurisdiction are, on his Honour’s reasoning, incorrect (including the decisions in Aerospatiale Holdings, Savcor, Badgin Nominees, HIH and Hooper Baillie). That is a surprising and potentially problematic outcome.

The second, and subsidiary, issue which his Honour considered in passing was whether the arbitrator appointed by Cosco was permitted, in light of the injunction restraining Cosco from pursuing the arbitration, from taking any further steps. His Honour clearly thought that the arbitrator was not allowed to do so despite the fact that the injunction was not directed towards the arbitrator. In his Honour’s view, as a matter of Australian law, anyone who deliberately undermines a court order is guilty of contempt and this applies to foreign nationals acting outside the territorial jurisdiction of the court. Leaving aside the question of whether this point is correct, such an approach complicates the question of what an arbitrator should do when confronted with an order of a foreign court purporting to prevent an arbitration from proceeding. It potentially validates a foreign court’s intervention even where the arbitrator is properly exercising jurisdiction and despite the fact that an arbitral tribunal is, on one view, not an organ of the state and therefore not susceptible to pre-emptive control by a foreign jurisdiction which is not the seat of the arbitration.