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Max Bonnell
Partner
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Peter Megens
Partner
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Sydney
Barry Casey
Mark Darian-Smith
Peter Pether
Melbourne
Joanne Cameron
Perth
Ben Luscombe
Brisbane
John Swinson
Canberra
Ian Johnson
Hong Kong
David Bateson
(炳辰)
Paul Starr
(保羅仕達)
Arbitration has a strong tradition in China due to encouragement by the Chinese government and an underdeveloped judiciary, which most foreign parties want to avoid. More arbitrations are handled each year in China than by any other arbitration institution or country. There are currently over 160 arbitration commissions throughout China.
China has a bifurcated arbitration system - domestic and foreign related (international). “Domestic” cases include not only two Chinese parties, but also parties with foreign investors. “Foreign related” means at least one foreign party, or a foreign subject matter, is involved in the arbitration.
The current arbitration regime in China is based on the 1995 Arbitration Act (the ‘Act’) which revised the 2005 CIETAC (China International Economic and Trade Arbitration Commission) Rules. This regime represents a significant advance in arbitration as it has been traditionally practised in China-related disputes. The regime places greater focus on international arbitral “best practice” and as such will provide significant reassurance to parties investing in China and parties in dispute with Chinese counterparts. That being said, Chinese arbitration continues to be in a state of development.
Some important features include:
- If there is a valid arbitration clause, the jurisdiction of the Chinese Courts is precluded and interference by the Courts and government administration is disallowed. Courts usually only get involved at the enforcement stage, with the Supreme People’s Court vetting any decision of a lower court not to enforce.
- The parties are free to appoint Chinese or foreigners as their arbitrators from the CIETAC Panel, which comprises about 1,000 arbitrators, 400 from overseas. Additionally there are specialist panels such as construction (Mallesons Partners Paul Starr and David Bateson are on this panel).
- Foreign lawyers can be employed to act as agents in the process of arbitration.
- The parties are free to choose the proper law applicable to the settlement of disputes, except disputes arising from an Equity Joint Venture, foreign investment enterprise or contracts on joint exploration of natural resources, to which Chinese law must apply.
- Arbitration awards rendered in China are final, and not subject to appeal to the Court.
- It is possible to select an arbitration body other than CIETAC, if this is specified in the arbitration clause of the contract, or by an agreement signed after the dispute occurs (Article 128 of the Contract Law).
CIETAC rules
CIETAC is the main arbitration commission for resolving disputes between Chinese and foreign parties. Some of the main features of the CIETAC rules are set out below:
- In response to some criticism, the 2005 rules adopted many best practice standards of international arbitration bodies.
- Parties may now select an arbitrator by agreement who is not on the CIETAC panel (but who must be approved by CIETAC). There are around 400 foreigners on the CIETAC panels, which include a panel for Foreign Related Disputes and six specialised panels, of which construction is one.
- Parties now have the freedom to adopt their own rules or to modify CIETAC rules, except where such agreed rules conflict with the mandatory laws of the seat of arbitration.
- Parties can select a seat (or venue) of arbitration outside China. However, a note of caution - in arbitrations involving only Chinese parties, an award made outside China may not be enforceable. Under Article 128 of PRC Contract Law, parties to a contract with “a foreign element” have the option to arbitrate inside or outside China, but interpretations of PRC law indicate that the two PRC parties must maintain China as the seat of arbitration. This is a significant issue for foreign investors, because common forms of investment in China are either through an Equity Joint Venture, a PRC incorporated foreign investment enterprise, or a joint exploration of natural resources, where both parties are treated in arbitration as Chinese “domestic parties”, and are therefore subject to the domestic arbitration regime.
- Article 29 provides that the tribunal is to act impartially and fairly, and must afford the parties a reasonable opportunity for presentation and debate. CIETAC attaches great importance to the arbitrators’ neutrality and independence. The tribunal is also permitted to adopt either an inquisitional, or an adversarial approach, subject to any agreement by the parties. This is a significant step for those lawyers from a common law background, who like to have the opportunity to cross-examine witnesses.
- The previous restriction on capping recoverable costs by the winning party (10% of total award) has been removed. The tribunal has wide discretion to award costs to the winning party.
- The time limit for the Arbitral Tribunal to produce an award has been reduced from nine to four months. However this can be extended by agreement.
- One of the only measures that the revised CIETAC Rules has not addressed, is the requirement that the sole or presiding arbitrator be of a different nationality to either party. However if this requirement is specified in institutional rules, it will be honoured. Yet absent agreement, it is inevitable that in any CIETAC arbitration there will be two Chinese arbitrators. This often worries foreign investors. Despite this, unofficial statistics show that for CIETAC arbitrations involving three Chinese arbitrators, or a tribunal of two Chinese arbitrators and one foreign arbitrator, over half of those arbitrations were concluded in favour of the foreign party.
Conciliation as part of arbitration
A positive feature of CIETAC arbitration is the combination of arbitration with conciliation, which has a long history in China. Conciliation depends on mutual agreement of the parties. This process is popular because it avoids a separate conciliation procedure, saves time and costs, enables the parties to keep good relations and guarantees an enforceable settlement arrangement (settlement is made into an award).
Conciliation in arbitrations has had a high success rate. Many western lawyers might question whether parties would, in reality, be willing to disclose their true bottom line to the conciliator, because, if no deal is achieved, this may jeopardise their pleaded claims in the arbitration. Nevertheless, this procedure has proved to be a success in China.
Ad hoc arbitration
Ad hoc arbitration is invalid in China by reason of Article 16 of the PRC Arbitration Law which provides that the arbitration agreement must designate “an arbitration commission” selected by the parties. Article 18 further provides that if the arbitration agreement does not reference an arbitration commission, absent the parties reaching a supplemental agreement, the arbitration agreement shall be invalid (Peoples Insurance Company of China, Guangzhou Branch v Guangdong Guangzhe Power Co Ltd [2003]).
Despite these provisions, it should be noted that foreign ad hoc arbitration awards have been enforced in China. Guangzhou Ocean Shipping Company v Marships of Connecticut (1990) recognised three arbitral awards made by an ad hoc tribunal in London.
A question often asked by foreign investors is whether the International Chamber of Commerce (ICC), and any other foreign arbitration institution is recognised as an “arbitration commission” that may conflict with Chinese judicial decisions. Two Supreme Court decisions have deemed foreign arbitral institutions as “arbitration commissions”. However Guangzhou Maritime Case (2005) held that a clause specifying the ICC clause was invalid.
Parties should note that if they specify that UNCITRAL (United Nations Commission on International Trade Law) Rules apply as the commission, the arbitration clause would be held invalid as UNCITRAL is not an “arbitration commission” under Chinese arbitration law.
Invalid arbitration clauses
Based on the above laws, it is likely that poorly drafted arbitration clauses are invalid for the reasons set out below:
- clause provides the option to submit dispute to arbitration or to the Court
- clause specifies more than one arbitration institution - void unless the parties reach agreement on one institution
- clause provides for “arbitration at the commission in Shanghai.” There is more than one institution in Shanghai - void unless parties reach agreement on one institute, and
- clause inaccurately states the name of the arbitration commission - void unless one can reasonably infer the name, eg. CIETAC spelt CETAC.
Enforcement of foreign awards
China ratified the New York Convention in 1987 with a reciprocity reservation and commercial reservations. Therefore, recognition and enforcement of foreign arbitral awards in China is limited to awards made in other contracting states to the NY Convention, or states with which China has entered into a bilateral treaty concerning enforcement of awards. Further, China will only enforce “commercial awards” as convention awards, but “commercial” is given a wide definition in the convention.
CIETAC awards or foreign arbitration awards may be enforced in China upon direct application to the Intermediate Peoples Court.
- a) The Civil Procedure Law sets out the rules and procedures governing the recognition and enforcement of foreign arbitration awards. An application must be made within six months of the publication of the award in the case of companies, and one year for individuals.
- b) Once the court accepts the application it will examine the case, but this does not involve any investigation of the facts or on the application of the law.
- c) Pursuant to Article 58 of Chinese Arbitration Law, enforcement may be refused only on limited grounds, in accordance with the NY Convention which includes:
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- d) In the past, foreign companies have experienced difficulty in enforcing arbitration awards in China, due to cosy connections between the courts and local companies, against whom an award has been issued. Notwithstanding, the current law makes it much more difficult to resist enforcement, due to the limited grounds available, and the supervisory role of the People’s Supreme Court.
- e) Hong Kong and China international (foreign) awards are enforceable in both jurisdictions pursuant to a 1999 Memorandum of Understanding.
It should be noted that it is still extremely difficult to enforce a foreign court judgment in China. Given this, arbitration is to be preferred as a method of binding dispute resolution.
Conclusion on Arbitration in China
Chinese arbitration laws are often subjected to criticism, much of if it unwarranted. Current China arbitration laws, and CIETAC Rules, are now in line with international practice and the efficiency and effectiveness of the process will continue to improve. Problems do remain however, including with enforcement of awards in China due to a weak and undeveloped judiciary, but there have been noticeable improvements, particularly in relation to the People’s Supreme Court’s overall supervisory role.
Foreign investors should also beware that adopting certain structures for investment will make Chinese law mandatory, and consequently the arbitration must also be held in China.
Author
David Bateson, Partner
Australia-Chile Free Trade Agreement: Developments in Australia’s Foreign Investment Protection Regime
On 30 July 2008, Australia and Chile signed a free trade agreement (Chile FTA). The Chile FTA contains, amongst other things, comprehensive provisions relating to the promotion and protection of foreign investment and the management and resolution of investor-state investment disputes.
The provisions supersede the previous investment treaty regime contained in the Australia-Chile Bilateral Investment Treaty (Chile BIT). They provide an interesting insight into the ways in which Australia’s approach to investment protection and investor-state dispute resolution is developing.
Background
Australia’s bilateral investment treaties or BITs (and the investment sections of various FTAs, including the Chile FTA) - like the 2,500 other BITs around the world - provide foreign investors of one country with substantive protections against unfair or improper treatment of their investment by the government of another country (the host government in the country where the investment is made). They also provide the investor with the ability to make a claim for compensation in respect of such treatment by means of international arbitration.
Chapter 10 of the Chile FTA is the section devoted to investment. The chapter has many of the features of Australia’s other BITs but with some significant additions and changes.
An “investor” is defined simply as “a national or an enterprise of a Party [i.e. of Australia or Chile as the case may be] that attempts to make, is making or has made an investment in the territory of the other Party”. An “investment” is defined widely to include companies, shares, debentures, futures, contractual rights, IP, concessions and all forms of property. Significantly, the investment must have the “characteristics of an investment” which are stated to include commitment of capital, the expectation of gain or profit, or the assumption of risk.
The Chile FTA provides for a number of familiar protections to a foreign investor with a qualifying investment. These are:
- national treatment (a foreign investor must be given treatment no less favourable than domestic investors)
- most favoured nation treatment (a foreign investor must be given treatment no less favourable than given to investors from a third country)
- civil strife (a foreign investor must be given treatment no less favourable than a domestic investor in respect of losses suffered due to civil strife or armed conflict, and
- expropriation (a foreign investor cannot have its investment expropriated directly or indirectly unless the government does so under proper terms including providing prompt, adequate and effective compensation).
Unlike nearly all of Australia’s BITs and FTAs, the Chile FTA has replaced the obligation to provide “fair and equitable treatment” to investors with a requirement to provide a minimum standard of treatment in accordance with customary international law. This standard of treatment is more restrictive than the standard which has often been applied under the phrase “ fair and equitable” in other BITs.
In addition to these more usual provisions, the Chile FTA has also added certain “mandatory performance requirements” in respect of investments which prevent the host government from enforcing requirements on companies (in which the foreign investor has a stake) such as a fixed level of exports, a given amount of domestic content or supply to a specific market or region.
Similarly, governments cannot require an investor to appoint individuals of a particular nationality to senior management positions although they can require a majority of a board to be of a particular nationality as long as this does not “materially impair” the ability of the foreign investor to control its investment.
Like the Singapore and Thai FTAs, the Chile FTA also contains a denial of benefits provision which allows a government to deny benefits to an investor that is not Chilean or Australian (as the case may be) or is, in reality, a domestic investor of the host government (albeit that the investor may technically qualify as an investor under the FTA by virtue of its incorporation in either Chile or Australia).
Like all other FTAs and BITs to which Australia is a signatory (apart from, significantly, the US FTA), the Chile FTA provides for resolution of any dispute between an investor and the host government by means of international arbitration.
A pre-condition of recourse to arbitration is a requirement to consult and negotiate to resolve the dispute. A claim can be made in arbitration if the dispute is not resolved after six months.
The arbitration provisions of the Chile FTA are significantly more detailed than in most other Australian BITs and FTAs. They provide for arbitration under the ICSID Rules (including the Additional Facility Rules), the UNCITRAL Rules or any other rules that the parties may agree upon.
The Chile FTA requires that arbitrators who are appointed have “the expertise or experience in public international law, international trade or international investment rules” and provides that the costs of arbitration will be borne equally unless otherwise decided by the tribunal.
The tribunal will have important powers in respect of the conduct of the arbitration. In particular, the tribunal may consider submissions from third parties (and, in addition, the government of the investor may, in certain circumstances, make submissions concerning the interpretation of the FTA as it pertains to the dispute) and may consider a preliminary submission that the claim is “manifestly without legal merit”. In addition, there are a number of other detailed provisions in respect of procedural matters such as expert reports, consolidation of other disputes and rendering of awards. This level of detail is not present in most other Australian BITs and FTAs.
Importantly, arbitration proceedings are required to be open to the public (subject to a number of safeguards in respect of confidential or privileged information) and the respondent government must make available to the public all of the documents in the dispute, including copies of pleadings, memorials and transcripts. Provision for transparency of this sort is a significant departure from the provisions contained in other Australian BITs.
The Chile FTA provides for a Joint FTA Committee to issue interpretations on any provision of the FTA and such an interpretation is binding on any tribunal considering a dispute under the FTA. Again, this is a new development in Australia’s FTA and BIT practice and follows the example of, amongst others, the North American Free Trade Agreement (NAFTA) in having a body which resolves issues of meaning (something doubly important as any tribunal is required to apply, as the governing law, the terms of the FTA and international law). In this regard, it should be noted that the two governments have confirmed that:
- The minimum standard of treatment of aliens under customary international law includes all such customary law in relation to the protection of economic rights.
- Expropriation must involve an interference with tangible or intangible property.
- Indirect expropriation requires a fact-based enquiry considering the economic impact of government action, interference with reasonable “investment-backed” expectations and the character of government action. Critically, in respect of such indirect expropriation the two governments have agreed that it will only be in “rare circumstances” that non-discriminatory regulatory actions designed to protect legitimate public welfare - such as public health, safety and the environment - will constitute expropriation.
Comment
The investment provisions of the Chile FTA represent a significant advance on other Australian BITs and FTAs in both scope and detail. It is likely that these changes were driven by a desire for greater certainty about the process of investor-state dispute processes on the part of the signatory governments and a need to respond to the developments in this area of international law over the past few years.
Some of these changes reflect the unusual, and often political, nature of investment disputes. Nowhere is this more apparent that in the treatment of third parties and confidentiality. In recent years investment tribunals have been increasingly open to the participation of third parties (such as NGOs and other advocacy bodies) bearing in mind the often controversial issues of public policy which may be dealt with in an investor-state dispute. Sometimes the power of the tribunal to do this has been called into question; the Chile FTA has embraced the idea by providing the tribunal with an explicit power to admit such third party briefs. In respect of confidentiality, the two governments have opted for a very comprehensive “open” regime. This underlines the trend in investor-state arbitration for proceedings to be transparent given their political importance and to meet criticism of the process from some quarters that the traditional confidential nature of arbitration was inappropriate for investment disputes.
Other changes point towards attempts by the two governments to deal with more problematic areas of international investment law. One of the most keenly debated issues is the extent to which the obligation to provide “fair and equitable” treatment has been expanded in some disputes to cover a broader notion of treatment than the minimum standard prescribed by customary international law.
The two governments have chosen to make it clear that the minimum standard applies thereby making it somewhat harder for investors to succeed in relation to such a claim. In addition, the Chile FTA makes clear that a lot of government regulatory conduct in important public policy areas (e.g. health and the environment) is unlikely to be considered as a measure amounting to expropriation - thereby addressing a trend in recent decisions to bring such conduct within the sphere of indirect expropriation. In both cases the governments have chosen to provide greater certainty to tribunals so as to avoid both speculative claims and unnecessary complication of disputes. Whether that decision is correct, or good for investors, is a matter for debate.
There is much else that is worthy of comment in the Chile FTA but, speaking generally, the new agreement represents very significant development of Australia’s foreign investment practice and a likely template for the investment protection provisions of future FTAs and BITs. Given this, the agreement repays careful study.
Joint proceedings: arbitration and litigation? WesTrac Pty Ltd v Eastcoast OTR Tyres Pty Ltd [2008] NSWSC 894
The defendant in these proceedings entered into two separate agreements with two different parties concerning a related transaction, one of which was governed by an arbitration agreement. When the plaintiff commenced proceedings against the defendant, the defendant joined the third party to the proceedings and sought orders from the court that the entire proceedings be referred to arbitration.
In refusing to grant these orders, His Honour Justice Barrett highlighted the differences between the process of international arbitration governed by the International Arbitration Act 1974 (Cth) and the process of arbitration under the Civil Procedure Act 2005 (NSW).
WesTrac’s claims
WesTrac, the plaintiff in these proceedings, was a company incorporated in Western Australia that sold heavy mining equipment. As part of its business, WesTrac purchased six large second-hand radial tyres for mining dump trucks from Eastcoast, the first defendant and a company incorporated in New South Wales. Upon delivery of the tyres, WesTrac claimed that the tyres were defective and brought proceedings against Eastcoast alleging various breaches of the Trade Practices Act 1974 (Cth) and a breach of an implied condition as to quality or fitness under s 19 of the Sale of Goods Act 1923.
Eastcoast’s claims
Eastcoast acquired the tyres that were supplied to WesTrac from Fordberry, a company incorporated in England and Wales. The invoice for the sale of tyres from Fordberry to Eastcoast contained a valid arbitration agreement.
In response to WesTrac’s claim against it, Eastcoast cross-claimed against Fordberry alleging that Fordberry had breached the contract and had engaged in misleading and deceptive conduct in contravention of the Trade Practices Act by representing that the tyres were in good condition. In addition, Eastcoast sought to have both its claim against Fordberry, and WesTrac’s claim against it, heard together to avoid duplication of costs and the possibility of inconsistent concurrent findings in relation to claims that Eastcoast viewed as inextricably connected.
Pursuant to that application, Eastcoast requested that the court make an order that the whole of the proceedings be referred for determination by an arbitrator under section 38 of the Civil Procedure Act 2005 (NSW). In doing so, Eastcoast indicated that it would agree to submit its cross-claim against Fordberry to arbitration, provided that WesTrac’s claim against it was dealt with in the same way.
Fordberry’s claims
In response to Eastcoast’s applications, Fordberry filed a motion requesting:
- a declaration that the court had no jurisdiction over them in respect of the proceedings or, in the alternative, and
- a stay of Eastcoast’s cross-claim against Fordberry pursuant to section 7 of the International Arbitration Act 1974 (Cth) (the “Act”).
Decision in relation to s7 of the International Arbitration Act 1947 (Cth)
Barrett J first addressed Fordberry’s application on the basis that section 7 of the Act is mandatory. That is, if conditions to which section 7 refers are found to be satisfied, then the court must act. In contrast, Barrett J found that section 38 of the Civil Procedure Act 2005 (NSW) confers a discretion upon the court, and as such, the court should only apply section 38 once it has made a decision under the non-discretionary International Arbitration Act.
Section 7(2) of the Act relevantly provides that where proceedings instituted by a party to an arbitration agreement are pending in a court and the matter is capable of being settled by arbitration, the court shall, upon application by a party, stay the proceedings and refer the parties to arbitration.
Fordberry is a company incorporated in England and Wales, the United Kingdom is a convention country as defined in the Act and it was not in dispute that there was a valid arbitration agreement between Fordberry and Eastcoast. Therefore, Barrett J concluded that Eastcoast’s cross-claim against Fordberry, was caught under section 7(2)(a) of the Act.
The next question that the court considered was whether Eastcoast’s cross-claim was a matter that was capable of settlement by arbitration. In this regard, Barrett J widely interpreted the words “disputes arising out of or in connection with” in line with previous judicial reasoning, concluding that all of Eastcoast’s claims against Fordberry were matters capable of settlement by arbitration. In doing so, Barrett J referred to the decision of Comandante Marine Corp v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45, where the Federal Court held that pre-contractual representations were claims “arising out of” the contract.
As the court found that all of Eastcoast’s claims against Fordberry satisfied the requirements of section 7(2) of the Act, Barrett J was bound to make an order to stay the proceedings, in as much as they involved the determination of Eastcoast’s cross-claim against Fordberry, and to refer Eastcoast and Fordberry to arbitration in respect of those claims.
Eastcoast requested that certain conditions be attached to the order, namely that:
- the arbitration take place in Australia, and
- Eastcoast’s claims based on the Trade Practices Act were to be determined in the arbitration, and more generally that the arbitration between Eastcoast and Fordberry proceed in conjunction with an arbitration between Eastcoast and WesTrac.
In response to this request, Barrett J did not find it open to the court to impose conditions upon a section 7 stay which detracts from the integrity of the arbitration process mandated by the International Arbitration Act.
Decision in relation to Eastcoast’s claim under s 38 of the Civil Procedure Act 2005 (NSW)
Eastcoast’s claim that the whole of the proceedings (that is, WesTrac’s claims against Eastcoast and Eastcoast’s claims against Fordberry) be referred to determination by an arbitrator under section 38 of the Civil Procedure Act was rejected by Barrett J.
His Honour firmly resisted making such an order encompassing the entire proceedings, stating that the process of arbitration under the Civil Procedure Act and arbitration under section 7 of the International Arbitration Act were substantially different and separate processes. In particular, Barrett J noted that under the later process, the arbitrator must be of a nationality other than that of the parties and the award is final and binding. However, under the Civil Procedure Act, the arbitrator is a person in New South Wales and the award “may be displaced virtually at the whim of a party and replaced by a judicial process and a judicial determination”.
Due to the compulsory operation of the International Arbitration Act as between Eastcoast and Fordberry, His Honour found that there was no scope for a domestic court to shape international arbitration proceedings made obligatory by that Act so as to cause those arbitration proceedings to be compatible with the form of arbitration made available by the Civil Procedure Act. Conversely, Barrett J similarly found that the court did not have the ability to shape an arbitration under section 38 of the Civil Procedure Act so that it corresponds with the form of arbitration provided for in the International Chamber of Commerce (ICC) Rules.
Despite acknowledging the court’s willingness to avoid duplication of effort and expense, His Honour found that in this case, it was not possible to litigate the claims altogether. This was owing to the mandatory application of the International Arbitration Act to the claims between Eastcoast and Fordberry and the fact that there was no mechanism by which the court could order the remaining claims between Eastcoast and WesTrac to be dealt with under the same system. In doing so, the court confirmed that section 38 of the Civil Procedure Act could not be used to rectify inconsistencies between related dispute resolution mechanisms as the Civil Procedure Act was not all encompassing and was subject to the application of the International Arbitration Act.
Barrett J stated that the only way in which this would be possible was if Eastcoast and Fordberry were to agree to this course of action under the auspices of the ICC. However this was unlikely in the present proceedings as Fordberry had indicated that they did not wish to be involved in arbitration in Australia at all.
The court concluded by stating that Fordberry would not incur any liability to Eastcoast unless Eastcoast was found to have liability against WesTrac. This suggested that it was desirable to deal with WesTrac’s claims against Eastcoast in the first instance and that arbitration of Eastcoast’s claims against Fordberry should be deferred until the first proceedings had concluded. The court indicated that there was a possibility of deferring the arbitration proceedings between Eastcoast and Fordberry by way of a making a condition under section 7 of the Act, but declined to make any other comments.
What this means for you
To avoid multiple proceedings in a variety of jurisdictions, duplication of costs and any potential inconsistent findings, ensure that you have similar dispute resolution mechanisms in all associated commercial agreements. This is particularly relevant in cases where there are multiple yet connected commercial agreements concerning a related transaction.
Some thoughts about enforcement of foreign arbitral awards under the International Arbitration Act 1974 (Cth) - Transpac Capital Pte Limited v Buntoro [2008] NSWSC 671
His Honour, Hall J, in the NSW Supreme Court, recently considered an application by a Singapore company, Transpac Capital Pte Ltd for leave to enforce a foreign arbitral award under section 8 of the International Arbitration Act 1974 (Cth). The arbitral award in question was a Final Award under the Singapore International Arbitration Centre (SIAC) for various amounts against three respondents, one of whom, the named defendant Buntoro, was domiciled in New South Wales.
Facts
The parties to the original dispute had entered into two agreements (a Bond Subscription Agreement and an Investment Agreement) which relevantly had provided for the resolution of disputes by arbitration in Singapore under the SIAC Rules as well as recognising the applicability of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
A sole arbitrator handed down a Final Award on 20 August 2007 in favour of the plaintiff, which Award it sought to enforce in New South Wales.
It was established that the defendant was domiciled in New South Wales, had been made aware of the proceedings and chosen not to appear, so the matter proceeded before Hall J as an undefended matter.
Decision
In order to determine whether to grant leave to the plaintiff to enforce the Award as if it had been made in New South Wales, Hall J considered the following questions:
- Should the Singapore Award be characterised as a “foreign award” for the purposes of the International Arbitration Act 1974 (Cth)?
- The answer to (1) depended in turn on the answer to the question, whether the Bond Subscription Agreement and Investment Agreement were arbitration agreements for the purpose of the referral of the dispute to SIAC.
- Having answered the previous two questions in the affirmative, the Court chose to consider whether there were any applicable grounds under section 8 of the International Arbitration Act 1974 (Cth) which might cause the Court to refuse to recognise and enforce the foreign award.
The court answered the first two questions in the affirmative and the final question in the negative. Therefore, Hall J granted leave to the plaintiff to enforce the Award.
This case raises an important issue as to what a plaintiff - seeking to enforce an arbitral award under the International Arbitration Act - must show in order for enforcement to be granted. The International Arbitration Act and the New York Convention are clear as to what a plaintiff is required to show but this decision leaves it unclear as to whether a court either is required, or ought as a matter of discretion, to investigate whether there are grounds for refusing enforcement. It is normally considered the defendant’s burden to raise any challenges to an enforcement action so the question remains what a court should do when the defendant does not appear. Should the court consider such matters of its own motion or simply enforce the award on the basis that the plaintiff has met the requirements under the International Arbitration Act and the New York Convention. This case suggests the answer is the former.
However, the latter approach was adopted by Einstein J in ML Ubase Holdings Co Ltd v Trigem Computer Inc [2005] NSWSC 244, where a plaintiff sought leave to enforce a judgment of a foreign award against a defendant that had similarly not appeared before the court. In that case, leave to enforce the award was granted. However unlike Hall J in Transpac, Einstein J did not make any reference to section 8 of the Act and there is nothing in his judgment that indicates that His Honour considered the court’s discretion under section 8 of the Act.
It is relevant that the words used in subsections 8(7) and 8(8) of the Act provide only that the court “may” refuse to enforce the award or adjourn the proceedings in particular circumstances. Therefore there is no obligation requiring the court to consider section 8 of the Act in the absence of an appearance by a defendant, but the court may use its discretion to consider section 8 of the Act.
What this means to you
The judgment is useful because it considers, in summary form, the relevant evidentiary questions concerning enforcement in Australia of foreign arbitral awards which a court can take into account where the party against whom enforcement is sought does not appear before the court.
Author
Mark Darian-Smith, Partner
Actions by governments to address climate change may present significant challenges to foreign investors. In particular, the implementation of environmental regulations, such as the Australian Government’s recently proposed emissions trading scheme, has the potential to trigger investor protections under international investment agreements, including bilateral investment treaties.
Bilateral investment treaties
Bilateral investment treaties (BITs) are agreements between two countries that are designed to protect and promote foreign investment. If an investor from one country makes an investment in the other country, then that investor may take the benefit of certain provisions in the BIT which protects its investment from certain actions by the host state, provided that certain procedural and substantive hurdles are met.
Where such provisions are breached by the host state, then the BIT provides mechanisms for the foreign investor to make a claim directly against the host state, usually by way of arbitration proceedings. In circumstances where an investor brings a claim against the host state, that claim will usually be determined as a matter of international law and will be subject to the language of the particular BIT.
Impact on environmental regulation
The implementation of climate change regulation by governments is typically required on a national level and may target carbon intensive industries, such as coal-fired electricity generators. Amongst the substantive features of climate change regulation is the obligation for carbon emitting industries to reduce their emissions by, for example, imposing an emissions trading scheme. In addition, governments have imposed arguably less onerous energy efficiency standards through initiatives such as abatement.
The ability of foreign investors to challenge environmental regulatory action through the use of international investment agreements is becoming increasingly significant in the wake of the implementation of a raft of environmental legislation following the commitment of many governments to reducing greenhouse gas emissions in line with such initiatives as the well-known Kyoto Protocol.
Expropriation
Amongst the protections offered by some BITs is the obligation that a host state cannot expropriate foreign-owned property, except on a legal, non-discriminatory basis for a public purpose and with adequate compensation. Notably, both direct and indirect deprivation of a foreign investment have been identified as an expropriation of property by international tribunals. Whether or not environmental regulatory action taken by governments amounts to expropriation has been the subject of debate within international tribunals. Some tribunals have identified environmental regulatory measures as a legitimate public welfare objective, affirming that “governments must be free to act in the broader public interest through the protection of the environment” (Marvin Feldman v Mexico, NAFTA Award, 16 December 2002, 18 ICSID Rev-FILJ 488 [2003], at paragraph 103) whilst others have narrowly considered only the effect, not the purpose, of the government action. This was the case in Compañia del Desarrollo de Santa Elena, SA v Republic of Costa Rica, Award, 17 February 200 5, ICSID Reports 153, where the tribunal held that:
“Expropriatory environmental measures – no matter how laudable and beneficial to society as a whole – are in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains.”
Fair and equitable treatment
Many BITs allow foreign investors to challenge the actions of the host state on the basis that the investor was not accorded fair and equitable treatment. The fair and equitable standard has previously been interpreted as a restatement of the customary international law principle that obliges host states to treat foreign investors in accordance with an international minimum standard. However this approach has led some tribunals to impart a higher threshold on behaviour that is not considered fair and equitable, requiring the additional element of “bad faith” (Genin v Estonia, Award 25 June 2001, 6 ICSID Reps 241). Other tribunals have not gone so far. In any event, it is clear that the standard is a high one and each tribunal may exercise a wide discretion in determining whether a particular action is fair and equitable.
The essence of this notion is unfairness, yet a tribunal may also have regard to the legitimate expectations of the investor and whether due process has been followed (Waste Management v Mexico (No.2), Award, 20 April 2004, at paragraph 98). Some tribunals have adopted an approach that is more favourable to investors, such as that applied in Tecmed v Mexico, Award, 29 May 2003, 10 ICSID Reps 130, where the tribunal went so far as to hold that the foreign investor is entitled to expect the host state will act in a manner that is totally transparent in its relations with the foreign investor and that the investor ought to know all the rules and regulations that will govern its investment. However this approach has been subjected to harsh criticism and it is unlikely to form the benchmark by which other tribunals will apply the fair and equitable standard.
Unreasonable and discriminatory measures
A further obligation that may be incorporated into BITs is the requirement that host states refrain from interfering with the foreign investor’s use, maintenance and enjoyment of its investment by unreasonable or discriminatory measures. The tribunal in Saluka v Czech Republic, Partial Award, 17 March 2006, stated that “reasonableness” required that the State’s conduct “bears a reasonable relationship to some rational policy”. Central to this concept is the notion that arbitrary and unreasonable actions by the host state, including those where the foreign investment is treated in a way less favourable to a domestic investment, may allow a qualifying investor to brings claims against the host state for breaches of the relevant BIT.
Implication for investors
If you are an investor who makes a qualifying investment in a foreign country to which your home state has entered into a valid BIT, you may have claims against the host government in the event that the host state implements environmental regulations that impact on your investment. In circumstances where a host state has not afforded a foreign investor adequate compensation for the impairment of their investment due to the introduction of environmental regulations, the investor may seek damages for any loss it has sustained in accordance with the relevant provisions of the BIT. Despite this, the process by which the investor may recover from the government is not by any means clear cut and remains an open question. This is particularly the case where governments make environmental regulations for a “proper purpose”. Some BITs have specifically identified that government regulatory action made for a legitimate public purpose may not be considered conduct amounting to expropriation. This approach was recently adopted in the Australia-Chile Free Trade Agreement that is discussed in more detail above.
In the February 2008 edition of the Mallesons International Arbitration Update we considered the decision of Mansfield J in the Federal Court in Seeley International Pty Ltd v Electra Air Conditioning BV (2008) 246 ALR 589. This decision has now been upheld by the Full Federal Court on appeal.
The Court agreed with the first instance judge that a proper construction of the arbitration agreement showed that the parties had agreed to have certain disputes - most particularly, disputes where one party was seeking a declaration - dealt with in Court.
As noted in our initial piece on the case, this construction, whilst arguably correct, produces a strange result where the parties agreed to have similar disputes heard in the different ways (arbitration or litigation depending on whether declaratory relief was involved) and in the context of language that is usually reserved for well-known exceptions to the arbitral regime - namely, where the parties need urgent interim relief, often prior to the commencement of the arbitration.
Whilst the Full Federal Court’s decision upholds an arguably correct interpretation as a matter of law, it is doubtful whether the result is what the parties actually intended. This case reinforces the need for great care when drafting arbitration agreements.
Pathma Nagarajan appointed Chartered Arbitrator
Pathma Nagarajan, Senior Associate, has been appointed a Chartered Arbitrator by the Chartered Institute of Arbitrators. This rank is awarded to practitioners who complete rigorous academic and practical training and who satisfy a panel of peer reviewers of their experience and capability.
Mallesons lawyers presented at the Chartered Institute of Arbitrators (Australia) Diploma Course in International Commercial Arbitration in Kuala Lumpur, Malaysia
Mallesons partner Max Bonnell and Senior Associates Jonathan Kay Hoyle and Pathma Nagarajan all presented at the Diploma in International Arbitration Course held by the Chartered Institute of Arbitrators (Australia) and the Chartered Institute of Arbitrators (Malaysia) together with the University of New South Wales in Kuala Lumpur in June this year. Mallesons was a sponsor law firm and played host to the Malaysian Bar Council.
Max Bonnell and Jonathan Kay Hoyle addressed Malaysian members of the Bar and arbitrators on “International Arbitration, National Courts” at a presentation organised by the Malaysian Bar Council on 5 June 2008 at the Bar Council Auditorium in Kuala Lumpur.
Max Bonnell discussed the problems which arise from inconsistent approaches adopted in the national courts and arbitration in different jurisdictions of the Asia-Pacific region. The question of how practitioners may best approach issues relating to the application of mandatory national laws, jurisdiction and enforcement was also considered. Specific questions were discussed in the context of recent case-law from Australia, the Philippines, Hong Kong, India and Malaysia, including:
- What happens when parties agree to apply one substantive law to their dispute, but the courts of another country determine that their own law cannot be excluded?
- What approach do courts take in determining whether a particular dispute falls within the jurisdiction of the tribunal or the court?
- How effectively do the courts enforce awards that are within the scope of the New York Convention, and what approach is taken to the issue of national "public policy ?"
ADR in Asia Conference, Hong Kong
On 12 September 2008, the Hong Kong International Arbitration Centre (HKIAC), together with the Hong Kong Corporate Counsel Association and the Inter-Pacific Bar Association held the “ADR in Asia Conference”. This conference focused on Arbitration and Mediation as global platforms for dispute resolution and was held at the Four Seasons Hotel, Hong Kong. The outgoing Secretary-General of the Hong Kong Arbitration Centre, Christopher To presented the opening address. Barrister Gary Soo has been appointed the new Secretary-General of HKIAC, effective 1 September 2008.
Mallesons was well-represented at the conference with partner David Bateson participating as a member of the panel discussing “Recent Trends in Construction Arbitration” and Senior Associate, Edmund Wan, a moderator for a Q&A session on “Confidentiality in Mediation”.
Hearing in London
Max Bonnell and Jonathan Kay Hoyle appeared for one of our Australian clients in an ICC arbitration in Geneva in May. The hearing was held at the offices of a Swiss law firm before a tribunal consisting of a Paris-based Australian lawyer, a Belgian lawyer and a Swiss lawyer.
The hearing was adjourned to July where Jonathan Kay Hoyle and Edwina Kwan (Solicitor, Sydney) appeared before the tribunal in Geneva.
International Council for Commercial Arbitration Conference, Dublin, June 2008
Max Bonnell, Peter Megens (Partner, Melbourne) and Jonathan Kay Hoyle recently attended the International Council for Commercial Arbitration (ICCA) annual conference in Dublin in June . This conference coincided with the 50th Anniversary of the New York Convention and was attended by International Commercial Arbitration practitioners from all over the world.
Presentation for Australian Centre for International Commercial Arbitration and the Western Australian Institute of Dispute Management, September 2008
On 9 September 2008, Peter Megens presented a paper on International Commercial Arbitration at a joint conference in Perth organised by the Australian Centre for International Commercial Arbitration and the Western Australian Institute of Dispute Management. The conference was attended by professionals practising international dispute resolution, CEOs and executives of organisations having the need for international dispute resolution services. It was hosted by Professor Gabriel Moens of Murdoch University.
International Bar Association (IBA), Buenos Aires, October 2008
Peter Megens and David Bateson attended the IBA Conference in Buenos Aires in October. The IBA Conference is the largest gathering of the international legal community in the world. This year's conference, as in previous years, offered an arbitration stream as well as streams for other practice areas. These streams allowed practitioners to cover the latest developments in international commercial arbitration, including Bilateral Investment Treaty arbitrations. The conference was well attended (4,500 delegates) and provided an interesting American, Latin American and European focused perspective on the practice of international commercial arbitration. This included canvassing new developments as relevant to those areas.
Upcoming Australian Centre for International Commercial Arbitration (ACICA) Conference in Sydney
On 21 November 2008, ACICA (Australian Centre for International Commercial Arbitration) will hold its annual conference on International Commercial Arbitration at the Intercontinental Hotel in Sydney. The focus will be on “Making International Commercial Arbitration Work for Business” and Justice Allsop will present the afternoon address.
Max Bonnell will act as a commentator for a session on “The Changing Landscape of International Commercial Arbitration in Australia”, Jonathan Kay Hoyle will act as moderator for a session on “Using Treaty Arbitration to Manage Foreign Investment Risk” and David Fairlie (Consultant, Sydney) will act as chair for the opening address by the Attorney General, The Hon Robert McClelland MP.
Mallesons wins Hong Kong Construction Law Firm award for the fifth time
Mallesons Stephen Jaques has been named Hong Kong Construction Law Firm of the Year for the third consecutive year at ALB magazine’s annual Hong Kong Law Awards. This is the fifth time that Mallesons has received the award.
The Awards recognise and promote outstanding professional achievement and the best legal work of the year throughout Hong Kong. The winner of each Firm of the Year category is decided by a panel composed of senior in-house lawyers.
Asian construction practice head Paul Starr said: “In the past year we have gone from strength to strength by focusing on the expansion of our non-contentious business, our PRC and Middle East coverage and our award-winning sustainability practice. We also continued to win instructions for important arbitration, mediation and litigation matters across the region.”
David Bateson is the senior partner in our Hong Kong office where he specialises in construction projects and dispute resolution. David is a founder of the firm's award winning Asian construction practice, which has won the ALB Construction Law Firm of the Year four out of the past six years.
His work involves all forms of project documentation and dispute resolution including arbitration, adjudication, litigation and mediation.
David has been a resident of Hong Kong since 1980. He has extensive experience in acting on major projects in the Asia Pacific region for governments, developers, employers, contractors and sub-contractors.
In recent editions of Asia Law Leading Lawyers, Global Counsel 3000, Asia Pacific Legal 500, and Guide to World’s Leading Experts in Commercial Arbitration, David was named a recommended construction lawyer and an expert in commercial arbitration. In the International Who’s Who of Commercial Arbitrators, David was named as a leading arbitrator. In the 2008 edition of PLC Which Lawyer David was named as a leading construction lawyer in Hong Kong and China, and a highly recommended dispute resolution lawyer in Hong Kong.
Qualifications
- 1976: Bachelor of Arts (Hons) and Law, Cambridge University
- 1980: Master of Law (Hons), Cambridge University
- 1980: Denton Hall & Burgin, Hong Kong
- 1990 - present: Partner, Mallesons Stephen Jaques, Hong Kong
David is the author of the book Commercial Arbitration in Hong Kong and a contributor to Arbitration in Hong Kong: A Practical Guide published by Sweet & Maxwell.
Professional memberships
- Law Society of England, Hong Kong and New South Wales
- Fellow and ex-Vice-President, Hong Kong Institute of Arbitrators
- Chairman, Buildings Appeal Tribunal
- Panels of Arbitrators, Hong Kong International Arbitration Centre, CIETAC (China), Qingdao Arbitration Commission (China), FACT (India) and APRAG (Asia Pacific)