Australian Court clarifies approach to scope and arbitrability of ambiguous arbitration agreements

A recent judgment of the Supreme Court of Queensland is a useful reminder of the willingness of Australian Courts to enforce broadly drafted arbitration agreements. The judgment also demonstrates the expansive view taken by Australian Courts with respect to arbitrating non-contractual claims. Whereas often in such cases the issue relates to whether the arbitration agreement is wide enough to capture the substantive dispute, this case is unusual in that the issue was whether the arbitration agreement was too widely drafted, so as to be unenforceable.

In this judgment, Justice Henry concluded that a contract between two Australian entities that contained an arbitration agreement was referrable to arbitration under the Commercial Arbitration Act 2013 (Qld) (CA Act). Consequently, the proceeding was stayed pending the outcome of the arbitration.

Cheshire Contractors Pty Ltd v Civil Mining & Construction Pty Ltd [2021] QSC 75

Background

The applicant, Civil Mining & Construction Pty Ltd (CMC), was the principal contractor for a government roadworks construction project. CMC sub-contracted the respondent, Cheshire Contractors Pty Ltd (Cheshire), to assist with civil engineering on the project (Contract). A dispute arose regarding whether the parties had agreed to depart from the terms of the Contract, such that CMC would make payment to Cheshire for work not contemplated under the subcontract works.

Clause 12 of the Contract contained a multi-tiered dispute resolution clause. If “disputes or differences arising between the parties” (emphasis added) could not be resolved by informal negotiations, executive-level negotiations or mediation, clause 12 required the “disputes or differences” to be referred to arbitration (the Arbitration Agreement). Relevantly, the wording did not qualify the “disputes or differences” by reference to the Contract.

A mediation of the dispute, commenced by Cheshire, was unsuccessful. Cheshire did not refer the dispute to arbitration and instead commenced proceedings in the Supreme Court of Queensland. CMC subsequently filed an application for the proceeding to be stayed and referred to arbitration.

Decision

Justice Henry’s decision focussed on whether the arbitration agreement fulfilled specific conditions under ss 7 and 8 of the CA Act and therefore obliged the dispute to be referred to arbitration (equivalent sections exist in international and domestic arbitration legislation throughout Australian jurisdictions).

The issues considered by the judge are broad and likely applicable to the interpretation of both domestic and international arbitration agreements in Australia.

The key issues before Justice Henry were:

  1. Given the wide, unqualified wording of the arbitration agreement, does it indicate an agreement between the parties to submit to arbitration disputes which have arisen between the parties “in respect of defined legal relationship” (an element of the statutory definition of “arbitration agreement”)?
  2. Were Cheshire’s non-contractual equitable and statutory claims subject to the arbitration agreement?

A “defined legal relationship”?

Generally, challenges to the scope of an arbitration agreement tend to focus on whether the terms of the agreement are wide enough to cover the subject of the dispute – for example, in wording such as “arising out of or related to this agreement”. In IBM Australia Ltd v National Distribution Services Pty Ltd (1991) 22 NSWLR 466, for example, the New South Wales Court of Appeal concluded this language indicated an intention for equitable and statutory claims related to the agreement to also be the subject of the arbitration clause.

Unusually, in this case, Cheshire contended that the arbitration agreement failed to qualify or define the “disputes or differences” to which it referred and therefore did not identify a “defined legal relationship”. In other words, the scope of the arbitration agreement was too broad – could it apply to any dispute or difference that could ever arise between these parties under any circumstances whatsoever?

After tracing through a history of relevant English, Australian and New Zealand cases, Justice Henry confirmed that the scope of an arbitration agreement should be construed broadly and informed by the context of the contract as a whole – the very fact that the clause was part of the Contract meant that it should be interpreted to mean disputes or differences relating to the defined legal relationship created by the Contract. Only in exceptional circumstances, for instance where there was no executed agreement between the parties and a lack of intention to be bound, could an arbitration agreement be too vague or uncertain to be enforced.

Claims outside the Contract?

A further point raised by Cheshire was that the substance of its claims against CMC – estoppel by convention, and also a claim for damages under ss 236 and 237 of the Australian Consumer Law to remedy CMC’s unconscionable conduct – were rights it was pursuing outside of the Contract.

Justice Henry observed that, “… a dispute pursuing rights said to arise outside a contract should nonetheless be regarded as arising out of or closely connected with the contract where the dispute turns upon the strict operation of the terms of the contract.” His Honour concluded that there was nothing in the arbitration agreement that suggested it should be read down as applying only to amounts payable under the Contract, as distinct from any amounts otherwise payable by law. This conclusion was distinguished from the scope of arbitration agreements that by their terms are narrowed only to disputes concerning money payable “under the agreement” where Australian courts have held that extra-contractual claims were not referrable to arbitration.

In this case, Justice Henry concluded that because the Contract’s purpose was the performance of paid works, the dispute about payment had a “sufficiently close and consequential connection” with the Contract and was therefore referrable to arbitration under the arbitration agreement. Ultimately, Justice Henry concluded that s 8 of the CA Act required the Court to refer the parties to arbitration in accordance with the arbitration agreement and ordered that the proceeding be stayed.

Conclusion

The decision is a useful reminder of the pro-arbitration stance adopted by Australian courts and should be welcomed by practitioners and commercial parties alike. It also serves to highlight the importance of carefully drafted arbitration agreements that capture the intended scope, including the following principles:

  1. Courts will interpret arbitration agreements broadly, having regard to the context of the contract as a whole.
  2. Notwithstanding that a dispute may relate to rights arising outside the terms of the contract, to the extent the dispute turns upon the strict operation of the terms of the contract, it will likely be regarded as arising out of or closely connected with the contract (unless explicitly excluded or restricted).

 

Chad Catterwell
Chad Catterwell
Partner, Melbourne
+61 3 9288 1498
Laurence Terret
Laurence Terret
Senior Associate, Brisbane
+61 7 3258 6504
Oliver Cook
Oliver Cook
Solicitor, Brisbane
+61 7 3258 6321

Hong Kong court sets aside award for wrongful identification of party

In arbitral proceedings where the respondent was wrongly named, the Hong Kong Court of First Instance has set aside the arbitral award on the basis that the named respondent is not a party to the arbitration agreement and was not given proper notice of the proceedings. This rare example of a successful set-aside application demonstrates that the courts will be prepared to overturn an award where a statutorily prescribed ground is clearly established.

AB v CD [2021] HKCFI 327

Background

The dispute arose out of an agreement between AB Bureau and CD (Agreement). Pursuant to the arbitration clause in the Agreement, CD issued a Notice of Arbitration in April 2019. Consistent with the Agreement, the Notice of Arbitration named AB Bureau as respondent. However, after the Notice of Arbitration was issued, a series of events occurred which ultimately led to the set-aside application:

  • In July 2019, CD submitted an Amended Notice of Arbitration revising the name of respondent from “AB Bureau” to “AB Bureau also known as AB Bureau Co, Ltd”.
  • The critical event took place in November 2019, when CD applied to the sole arbitrator to “correct” respondent’s name from “AB Bureau” to “AB Engineering”. In support of its application, CD relied on AB Engineering’s website which, CD submitted, showed that AB Bureau was the predecessor of AB Engineering.
  • Following CD’s request, the sole arbitrator issued a procedural order giving effect to the name change and ordering that no further service of notice was necessary.
  • In March 2020, the final Award was issued, with AB Engineering named as the respondent. Neither AB Bureau nor AB Engineering participated in the arbitration.

AB Engineering, the award debtor, applied to set aside the Award on the basis that:

  • AB Engineering was not a party to the Agreement, and there was no valid arbitration agreement between AB Engineering and CD (Article 34 (2)(a)(i) of the UNCITRAL Model Law);
  • the Award contained decisions on matters beyond the scope of the submission to the Arbitration (Article 34(2)(a)(iii) of the Model Law); and
  • AB Engineering was not given proper notice of an arbitrator or of the arbitration proceedings (Article 34 (2) (a) (ii) of the Model Law).

It was not disputed that if AB Engineering succeeded on any of the above grounds, the Court could set aside the Award.

Decision

It became clear at the court hearing that AB Bureau and AB Engineering were at all times two separate and distinct legal entities. CD nevertheless sought to enforce the Award on the grounds that AB Engineering was a party to the agreement and was estopped from applying to set aside the Award. Mimmie Chan J rejected both arguments.

CD’s primary case was that AB Engineering was a party to the Agreement by virtue of the definition of AB. In the Agreement, AB is defined to mean “AB Bureau or any other Affiliated entity”. On a proper construction of the Agreement, the Court found that the Agreement was made between CD and AB Bureau only and there was no evidence that AB Engineering had had any role in the performance of the Agreement. This distinguished the case from Giorgio Armani SpA v Elan Clothes Co Ltd [2020] 1 HKLRD 354, where the underlying agreement was expressly made “by and between” the parent company, SpA, “together with its branch offices and Affiliates”. The Court disagreed with CD’s “self-drawn conclusion” and found that there was no statement on AB’s website capable of indicating that AB Bureau and AB Engineering were the same legal entity.

The Court further noted that, even if AB Engineering could be said to be a party to the Agreement, it had not been given proper notice of the arbitral proceedings. The two notices of arbitration were never sent to the proper registered address of AB Engineering and were in any case addressed to AB Bureau. As such, no adequate notice of the arbitration had been given to AB Engineering, the award debtor.

CD also contended that AB Engineering was estopped from applying to set aside the Award because its employees had misled CD to believe that AB Bureau and AB Engineering were the same entity. This argument was rejected by the Court on the grounds that CD had not relied on the employees’ statements. On the evidence, CD relied solely and erroneously on AB Engineering’s website rather than on the alleged misrepresentation. In this connection, the Court emphasised that “it is incumbent on a claimant and its legal advisers to identify the proper defendant/respondent and to verify its name, particularly after query has been raised. It is no excuse for CD and its legal advisers now to put the blame on employees of Bureau/AB Engineering for any misnomer in the name of the party CD seeks to bring proceedings against.

In light of the above, Chan J held that the Award should be set aside under Article 34(2)(a)(i) and (ii) of the Model Law.

Comment

It is rare for a Hong Kong court to set aside an arbitral award, but it will not hesitate to do so if the award debtor can clearly demonstrate a statutory ground for set aside and the court considers set aside is justified.

Here, the similarities in the names of companies involved, the non-participation of the named respondent, and CD’s reliance on online sources all contributed to CD naming the wrong party and, ultimately, persuaded the court that the Award should not stand.

The judgment turns heavily on its facts, rather than marking any general change to the courts’ pro-enforcement approach. However, it emphasises the need for claimants to identify each counterparty carefully before commencing arbitration, especially when a complex corporate structure is involved, or risk losing the benefit of their awards.

May Tai
May Tai
Managing Partner - Asia
+852 21014031
Simon Chapman
Simon Chapman
Partner
+852 21014217
Kathryn Sanger
Kathryn Sanger
Partner
+852 21014029
Briana Young
Briana Young
Professional Support Consultant
+852 21014214

Arbitration is on the rise in Australia

On 9 March 2021, the Australian Centre for International Commercial Arbitration (ACICA) released the inaugural Australian Arbitration Report. The Report analysed data obtained by ACICA and FTI Consulting in the inaugural Australian Arbitration Survey. The Survey collected data on arbitrations commenced, conducted and concluded in the period between 2017 and 2019 with an Australian ‘connection’ from 111 respondents.

Key takeaways

Please click on our infographic below for a summary of the key takeaways, which include:

  • The total amount in dispute for arbitrations that were active during the relevant period exceeded A$35 billion.
  • For international arbitrations, the Survey indicated that the most favoured arbitration rules were those of the SIAC and ICC and the most popular arbitration seat was Singapore.
  • For domestic arbitrations, the most favoured arbitration rules of Survey respondents were those of ACICA followed by the Resolution Institute, with no particular city leading as a favoured seat.
  • There is significant use of arbitration by ‘other’ industries (about 20%), including property, banking, agriculture and others (in addition to construction, engineering, mining and infrastructure).
  • Regrettably, less than 10% of arbitrator appointments were women.

Booming arbitration industry

Strong international and domestic application

The Report identified 223 unique arbitrations with an Australian ‘connection’, meaning: one or more of the parties involved in the arbitration was an Australian entity; the seat of the arbitration was in Australia; or there were participants based in Australia involved in the conduct of the arbitration. The total amount in dispute for these 223 arbitrations exceeded A$35 billion.

Of these 223 arbitrations there was almost a 50:50 split between international (111) and domestic (109) arbitrations (for three arbitrations this question was not answered). However, the amount in dispute in international arbitrations (approx. A$26 billion) far exceeded that in domestic arbitrations (approx. A$9 billion), with about 75% of the quantum in international arbitrations.

For international arbitrations, the Survey indicated that the most favoured arbitration rules were those of SIAC and the ICC and the most popular arbitration seat was Singapore. However, there was also indication of a growing inclusion of ACICA arbitration clauses (now almost equal to the use of SIAC / ICC rules) in cross-border contracts, which we would expect to translate into a greater proportion of Australian-seated ACICA arbitrations in the future.

For domestic arbitrations, the most favoured arbitration rules of Survey respondents were those of ACICA followed by the Resolution Institute. There was no clear winner on which city in Australia was the most favoured seat. This is likely due to the largely uniform commercial arbitration laws applicable in each State/territory of Australia, and the widespread support of the courts in each State/territory for arbitration.

Broad industry use

The bulk of the 223 arbitrations referenced occurred in relation to construction, engineering and infrastructure (about 43%), oil and gas (about 20%), mining and resources (about 13%), and transport (about 4%) industries. There was also a significant use by ‘other’ industries (about 20%), including property, banking, agriculture and others.

These trends are largely consistent with expected sector trends projected by the Queen Mary University of London in the 2018 International Arbitration Survey: The Evolution of International Arbitration released on 9 May 2018, including a strong use of arbitration in construction, engineering and infrastructure, and oil and gas sectors. However, we expect to see greater uptick in arbitration use by the technology, consumer product and banking and finance sectors in the future given the confidentiality and enforceability of the arbitral process.

Tribunal diversity challenges

The Survey also asked questions about diversity, although not all respondents answered those questions. Of the responses received:

These two data trends indicate a preference to appoint high-profile arbitrators who fall within a narrow demographic. A strong track record and familiarity with the common law legal systems found in Australia and the United Kingdom are desirable characteristics for arbitrators involved in disputes with an  Australian connection. However, a more nuanced approach to arbitrator appointments based on sector and subject matter experience will result in a broader pool of arbitrators, and more desirable results for arbitration users.

Chasing efficiency

While 80% of Survey respondents indicated that they were satisfied with arbitration, two key perceived weaknesses of the arbitration process, for some respondents, were costs and time. Further, users remarked that, particularly in the domestic context, there was a “tendency for arbitration to resemble litigation” and “not always follow international best practice”.

The “tendency to conduct arbitration like litigation” can impede arbitration users from maximising the time and cost efficiencies that arbitration can achieve. To unlock tangible efficiency gains, both arbitrators and party representatives must: embrace the flexibility of arbitration; incorporate only those stages of a dispute resolution process that serve a particular dispute; condense stages of the process where appropriate; and leverage international best practices. This can simply be achieved by appointing arbitrators and representatives who have a deep appreciation of arbitration and who can steer the arbitration process in a way most beneficial to parties.

For further information, please contact Brenda Horrigan, Partner, Chad Catterwell, Partner, Guillermo Garcia-Perrote, Senior Associate, Imogen Kenny, Solicitor, or your usual Herbert Smith Freehills contact.

Brenda Horrigan
Brenda Horrigan
Head of International Arbitration (Australia)
+61 2 9225 5536
Chad Catterwell
Chad Catterwell
Partner, Melbourne
+61 3 9288 1498
Guillermo Garcia-Perrote
Guillermo Garcia-Perrote
Senior Associate, Sydney
+61 2 9322 4903
Imogen Kenny
Imogen Kenny
Solicitor, Melbourne
+61 3 9288 1657

 

International arbitration in the South Pacific: a view from Australia

By Brenda Horrigan, Chad Catterwell and Guillermo Garcia-Perrote.

International arbitration is gaining ground across the South Pacific region. There are a wide range of benefits brought about by implementing an effective framework for international arbitration across the region, most prominently increased foreign investment opportunities and the economic advantages that brings.

Presently, eight countries from the South Pacific are parties to the New York Convention: Australia, New Zealand, Marshall Islands, Cook Islands, Fiji, Papua New Guinea, Palau, and Tonga. Three  of those (Palau, Tonga and Papua New Guinea) have acceded to the Convention in the last two years. As more countries in the region accede to the New York Convention and adopt arbitration laws based on the UNCITRAL Model Law, the outlook is increasingly positive in terms of legal certainty and enforcement tools to attract and expand trade and development in the region.

Australia’s proximity, stable political environment, robust legislative framework and resilient economy allow it to be well placed to interact with the South Pacific region in trade and development generally, and in the international arbitration sphere in particular.

International arbitration in Australia

There are multiple factors which make Australia an increasingly active arbitration hub, including its pro-arbitration legislation and judiciary. Australian courts have exhibited a strong commitment to the New York Convention and the Model Law, a tendency towards minimal curial intervention, and widespread citation of international and regional jurisprudence in making decisions supportive of international arbitration.

In addition, Australia has a sophisticated legal profession with considerable international experience and specialist legal skills. Australia is also cost-competitive compared to other arbitral hubs in the Asia Pacific region.

The benefits international arbitration brings for investment and trade in the South Pacific

A stable legislative framework for resolving international commercial disputes creates an environment where foreign investment and trade can flourish.

The Asian Development Bank (ADB) has implemented, in conjunction with UNCITRAL, a regional “technical assistance” program which aims to establish an effective commercial dispute resolution regime among member countries in the Pacific. The reform framework is focused on international arbitration and devised to boost regional and international investor confidence in order to foster greater foreign direct investment and cross-border trade in the region.

A strong international arbitration framework is indeed vital for securing foreign investment, as investors require the assurance of an efficient and enforceable method of resolving project-related disputes. The positive corollaries of increased foreign investment include economic growth and further infrastructure projects and trade deals.

The South Pacific region has some of the fastest-growing economies in the world and the implementation of arbitration frameworks to boost investments in the area is very much a welcome development.

Australia’s impact in the Pacific

Australia’s role in international arbitration in the region follows a similarly significant role in terms of economic and development assistance in the South Pacific.

As an illustration, in 2020-2021 Australia gave an estimated A$1.44 billion to the Pacific for assistance with development. In light of the major economic impacts of COVID-19 on the South Pacific nations, that assistance will hopefully play a role in their economic recovery. In this regard, Australia’s Department of Foreign Affairs and Trade is implementing specific programs, such as the Australian Infrastructure Financing Facility for the Pacific, which will provide financing for transformational energy, water, transport and telecommunications projects.  These commitments solidify Australia’s position as a leading trade, development and legal partner in the region.

Of particular note is the Pacific Agreement on Closer Economic Relations Plus (PACER Plus). PACER Plus is a regional development-centred free trade agreement covering goods, services and investment, which opened for signature on 14 June 2017, and has been signed by Australia, New Zealand and nine Pacific island countries (Cook Islands, Kiribati, Nauru, Niue, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu). PACER Plus entered into force on 13 December 2020 – New Zealand, Australia, Samoa, Kiribati, Tonga, Solomon Islands, Niue and Cook Islands are parties to the Agreement. The Australian Government expects it to provide significant benefits to communities, farmers, fishers, businesses and investors.

As discussed above, the development of effective international arbitration regimes is crucial in order to attract investment and foster development. In this regard, Australian arbitration institutions and practitioners are playing an increasingly relevant role in promoting best practices and awareness of international arbitration in the region.

As an example of such leadership, among other initiatives members of the Australian Centre for International Commercial Arbitration (ACICA) have participated in arbitration and mediation competency-building initiatives for practitioners in Fiji. ACICA recently hosted an event focused on exploring current developments in international arbitration law and practice in the South Pacific, ahead of the Third South Pacific International Arbitration Conference in Sydney on 17 March 2021. These initiatives will hopefully contribute to further progression in the international arbitration space which, in turn, will positively impact the region’s economies.

Brenda Horrigan
Brenda Horrigan
Head of International Arbitration (Australia)
+61 2 9225 5536
Chad Catterwell
Chad Catterwell
Partner, Melbourne
+61 3 9288 1498
Guillermo Garcia-Perrote
Guillermo Garcia-Perrote
Senior Associate, Sydney
+61 2 9322 4903
Jesse Tizard
Jesse Tizard
Solicitor, Sydney
+61 2 9322 4903

 

Federal Court of Australia clarifies recognition and enforcement of foreign arbitral awards

In a unanimous decision (accessible here), the Full Federal Court of Australia has allowed (on a limited basis as explained below) an appeal by the Kingdom of Spain of the Federal Court decision in Eiser Infrastructure Limited v Kingdom of Spain [2020] FCA 157 (Eiser). The decision at first instance had allowed the recognition and enforcement of two awards issued in investor-state arbitrations conducted under the rules of the International Centre for Settlement of Investment Disputes (ICSID) (ICSID case numbers ARB/13/31 and ARB/13/36).1

The Full Court’s decision clarifies the difference between recognition of an award and its enforcement,2 and the implication of both on whether foreign states (such as the Kingdom of Spain) are immune from ICSID awards in Australia.

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Public consultation underway for new P.R.I.M.E. Finance Arbitration Rules

P.R.I.M.E. Finance provides a specialist platform to resolve complex banking and financial disputes.  Since its inception in 2012, the organisation has been committed to providing users with a market-leading dispute resolution experience.  Following the cooperation between P.R.I.M.E. Finance and the Permanent Court of Arbitration (PCA) in December 2015, cases commenced under the P.R.I.M.E. Finance Arbitration Rules are administered by the PCA.

The current version of the P.R.I.M.E. Finance Arbitration Rules came into force in February 2016.  The rules closely follow the text of the UNCITRAL Arbitration Rules but have been tailored to enhance their applicability in banking and financial disputes.

Following the development of the arbitration landscape over the past few years – particularly in the context of complex commercial arbitrations – P.R.I.M.E. Finance has released a draft of its revised arbitration rules and invited the public to comment.  The changes aim to offer a comprehensive and clear set of best practice procedural rules, with particular features tailored for banking and financial arbitrations.

Some noticeable changes include enhanced efficiency and greater transparency.  The draft rules contain detailed provisions on emergency arbitrator procedures, expedition, joinder and consolidation, as well as the Tribunal’s power to coordinate proceedings and provide early determination under certain circumstances.  The proposed revisions also mandate the disclosure of third-party funding arrangements and encourage the publishing of arbitration awards.

The review of the existing P.R.I.M.E. Finance Arbitration Rules began in 2020 and involved pre-eminent banking experts and dispute resolution practitioners across multiple jurisdictions.  Herbert Smith Freehills Partner Kathryn Sanger is a member of the Drafting Group. Partner Dr Mathias Wittinghofer is a member of P.R.I.M.E. Finance’s panel of experts.

The public consultation is open until 22 March 2021.

P.R.I.M.E. Finance’s release is available here.

Kathryn Sanger
Kathryn Sanger
Partner, Hong Kong
+852 2101 4029
Nicholas Peacock
Nicholas Peacock
Partner, London
+44 20 7466 2803
Mathias Wittinghofer
Mathias Wittinghofer
Partner, Frankfurt
+49 69 2222 82521
Hannah Ambrose
Hannah Ambrose
Senior Associate, London
+44 20 7466 7585
Aaron Tang
Aaron Tang
Associate, Hong Kong
+852 2101 4102

LATEST EDITION OF ASIA PACIFIC DISPUTE RESOLUTION GUIDE NOW AVAILABLE

Disruption, downturn and recovery tend to generate more disputes – and in Asia Pacific cross-jurisdiction operations and investments increase that risk.

Our 2021 Guide to Dispute Resolution in Asia Pacific is your roadmap to potential problems in these fast-changing times, especially for those new to the region’s complex legal landscape.

From the basics of each legal system, including litigation and arbitration procedures, to class actions, fee arrangements, third party funding and electronic/digitisation reforms to court proceedings, the new edition summarises the key dispute resolution procedures and trends in 19 of Asia Pacific’s diverse jurisdictions.

The guide has been compiled by our network of Herbert Smith Freehills disputes specialists, with the assistance of local counsel in certain jurisdictions, led by Gareth Thomas and Priya Aswani.

Click here to request a copy of the guide or contact Priya Aswani.

Gareth Thomas
Gareth Thomas
Partner, Hong Kong
+852 2101 4025
May Tai
May Tai
Managing Partner - Asia
+852 2101 4031
Priya Aswani
Priya Aswani
Professional Support Lawyer, Singapore
+65 6868 8077

China’s top court publishes its first annual report on judicial review of arbitration-related cases

On 23 December 2020, the Supreme People’s Court (“SPC”) of China released its bilingual 2019 Annual Report on Judicial Review of Arbitration Cases in China (the “Report”). It is the very first report issued by the SPC summarising the courts’ approach for judicial review of arbitration-related cases.

The Report aims to promote the SPC’s efforts over the course of last year in standardising judicial review approach in dealing with arbitration-related matters. In particular, it includes the SPC’s summary of its approach for judicial review of arbitration-related matters in 2019, such as on issues of validity of arbitration agreements, enforcement or revocation of domestic arbitral awards, as well as recognition and enforcement of offshore arbitral awards. Whilst the full content of the Report itself has not been made available online at the time of our blog, we set out below the key highlights based on the press release and information provided at the press conference of the SPC.

The SPC “reporting system”

The SPC “reporting system” applies to enforcement of arbitral awards in Mainland China.[i] Under the reporting system, lower courts are authorised to confirm validity of arbitration agreements, and order enforcement of onshore and offshore awards (or a Mainland Chinese foreign-related award). However, if a lower court is minded to deny validity of an arbitration agreement or to refuse enforcement of an arbitral award, it must refer the case to a higher court to confirm the decision.

For domestic awards, the higher court will conduct the final review without involving the SPC unless where (1) the parties are from different provinces in Mainland China; or (2) the refusal to enforce the award is based on an “infringement of public policy”.

For foreign-related arbitration cases, the higher court must refer the matter to the SPC for a final decision if it agrees that enforcement should be refused.

In 2018, the reporting system was further supplemented by the establishment of the First and Second International Commercial Courts.[ii] These courts are empowered to hear revocation and enforcement cases of foreign-related arbitral awards with disputed amounts exceeding RMB300 million or awards of significance released by five arbitration institutions.[iii]

According to the statistics provided by the SPC at the press conference, PRC courts heard a total of 11,029 cases concerning revocation of arbitral awards in 2019, only 5.8% of which the courts decided to set aside or partially set aside arbitral awards. Among the 201 cases reviewed by the SPC in 2019, 32% of lower courts’ decisions were overruled.

Recognition and enforcement of offshore arbitral awards

Recognition and enforcement of offshore arbitral awards in China is governed by the New York Convention as well as the Civil Procedure Law of China.

The SPC mentioned during the press conference that in 2019, a total of 32 applications were made to recognise and enforce offshore arbitral awards in China, among which 20 applications were successful and 1 application was denied because the award exceeded the scope of the arbitration agreement. The other applications were either withdrawn by the parties or dismissed due to lack of jurisdiction.

Interim injunctions in support of arbitration

The Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region (the “Arrangement”) came into effect on 1 October 2019. Parties to Hong Kong-seated arbitrations administered by an eligible arbitration institution in Hong Kong have the right to apply for interim measures from Mainland Chinese courts.

According to the SPC, between 1 October 2019 and 31 October 2020, 32 applications for interim measures have been granted by Mainland Chinese courts in relation to Hong Kong arbitration, among which 29 cases concern property preservation measures, two cases concern evidence preservation and one case concerns action preservation.

Pro-arbitration principles in judicial review

SPC mentioned at the press conference that the Report summarises the criteria and principles that Mainland Chinese courts should take into account in their judicial review of arbitration-related cases.

Six general principles are emphasised:

  • Courts shall respect parties’ agreement to arbitrate and interpret the arbitration agreements/clauses in favour of validity;
  • The grounds for setting aside arbitral awards shall be strictly limited to those provided by law;
  • Arbitration awards are in principle final and binding and the judicial review of arbitral awards shall only be limited to the extent of necessity;
  • The public policy defence shall be interpreted stringently to avoid being abused;
  • Courts shall accurately identify foreign governing laws, recognise and enforce foreign arbitral awards accordingly to law and create an “arbitration friendly” judicial environment; and
  • Courts shall recognise and enforce Hong Kong, Macau and Taiwan arbitral awards according to law, and assist in interim measures in aid of Hong Kong arbitral proceedings in Mainland China.

According to the SPC, the Report also addresses recent development in arbitration practice, such as the formation of Belt and Road Mechanism for Resolution of International Commercial Disputes[iv] and China Pilot Free Trade Zone Arbitration Mechanism[v].

 

[i]           See the Provisions of the Supreme People’s Court on Issues concerning Applications for Verification of Arbitration Cases under Judicial Review (Fa Shi [2017] No.21).

[ii]          See Article 2 of Provisions of the Supreme People’s Court on Several Issues Regarding the Establishment of International Commercial Court (Fa Shi [2018] No.11).

[iii]         The five arbitration institutions are members of “One-stop” Diversified Settlement Mechanism for International Commercial Disputes in China, including China International Economic and Trade Arbitration Commission, Shanghai International Economic and Trade Arbitration Commission, Shenzhen Court of International Arbitration, Beijing Arbitration Commission, and China Maritime Arbitration Commission.

[iv]         Opinions of the Supreme People’s Court on the Provision of Judicial Services and Guarantee by People’s Courts for the Belt and Road Initiative (Fa Fa [2019] No.29) (Chinese text only).

[v]          Opinions of Supreme People’s Court on the Provision of Judicial Services and Guarantee by People’s Courts for the Construction of China (Shanghai) Pilot Free Trade Zone Lin-gang Special Area (Fa Fa [2019] No. 31).

 

Helen Tang
Helen Tang
Partner
+86 21 2322 2160
Celine Wang
Celine Wang
Senior Associate
+86 21 2322 2159
Stella Hu
Stella Hu
Senior Consultant
+852 2101 4248

UK Supreme Court judgment in Halliburton v Chubb clarifies English law on arbitrator apparent bias

The UK Supreme Court has handed down its judgment in Halliburton Company (Appellant) v Chubb Bermuda Insurance Ltd [2020] UKSC 48, which is the most significant decision on English arbitration law in nearly a decade.

The Halliburton judgment is now the leading English law case on arbitrator conflicts. Importantly, the decision has clarified how apparent bias will be assessed by the English courts, refining the test in the context of arbitration. While the arbitrator challenge was not successful in this case, the judgment has re-emphasised the importance of arbitrator impartiality in English-seated arbitration.      

The case was notable for a significant number of arbitral institutions and organisations being given permission by the Court to intervene, with submissions made by the LCIA, ICC, CIArb, LMAA and GAFTA.

Background 

Claims arising out of the Deepwater Horizon incident were made against Halliburton, which had provided offshore services in relation to the project. Halliburton then sought to claim in turn under its excess liability insurance policy with Chubb. Chubb rejected the claim and in January 2015 Halliburton commenced arbitration against Chubb. The claim was brought under the Bermuda Form policy in question, which was governed by New York law and provided for London-seated ad hoc arbitration.

The parties were unable to agree on the selection of the presiding arbitrator and the English High Court appointed Kenneth Rokison QC in June 2015. Mr Rokison had been proposed by Chubb, but Halliburton had opposed his appointment on the grounds that Mr Rokison was an English lawyer, whereas the policy was governed by New York law.

Before he was appointed in June 2015, Mr Rokison disclosed that he had previously been an arbitrator in arbitrations involving Chubb, including some appointments on behalf of Chubb. The judgment does not set out the number of appointments involved, or the timescales. He also disclosed that he was acting as arbitrator in relation to two current references involving Chubb.

After Mr Rokison took up his appointment in the arbitration between Halliburton and Chubb, he accepted two appointments in additional arbitrations relating to the Deepwater Horizon incident: (a) in December 2015, he was appointed by Chubb in an arbitration relating to a claim under the same excess liability cover, which Chubb had sold to another insured party, Transocean; and (b) in August 2016, he was appointed by Transocean, in an arbitration relating to a claim Transocean was bringing against a different insurer that related to the same layer of insurance. Mr Rokison did not disclose the December 2015 and August 2016 appointments to Halliburton, but Halliburton became aware of them in November 2016.

Halliburton then asked Mr Rokison to resign, but he stated that he did not feel he could do so, as he had been appointed by the court. Mr Rokison noted that the issues under consideration were neither the same nor similar. He stated that he had been independent and impartial throughout and that this would continue to be the case. Halliburton then made an application to the English court for his removal under s24 of the Arbitration Act 1996. The application was unsuccessful and Halliburton then appealed to the Court of Appeal, which also rejected the challenge. Halliburton appealed to the Supreme Court.

The Supreme Court appeal

The two main issues before the Supreme Court were:

  • whether and to what extent an arbitrator is entitled to accept appointments in multiple arbitrations relating to the same or overlapping matters and where there is only one common party, without this resulting in an appearance of bias; and
  • whether and to what extent the arbitrator could accept multiple appointments in this way without providing disclosure.

Halliburton took the position that there was apparent unconscious bias on the part of Mr Rokison. Halliburton’s case was based on the suggestion that the situation “gave Chubb the unfair advantage of being a common party to two related arbitrations with a joint arbitrator while Halliburton was ignorant of the proceedings” in the later arbitrations and “thus unaware whether and to what extent he would be influenced in reference 1 by the arguments and evidence in reference 2”. Halliburton contended that Chubb would be able to communicate with the arbitrator, for example via submissions and evidence submitted in the later proceedings, on questions that might be relevant to the arbitration between Halliburton and Chubb. Haliburton took the position that apparent bias was also made out by Mr Rokison’s failure to disclose his later appointments to Halliburton. There was also a suggestion that Mr Rokison “did not pay proper regard to Halliburton’s interest in the fairness of the procedure”.

Supreme Court decision

The Supreme Court emphasised the importance of impartiality in arbitration, highlighting that impartiality had always been a “cardinal duty” for arbitrators. Given that there was no allegation that the arbitrator was actually biased, the court was only concerned with whether there was an appearance of bias. It was well established that the correct legal test was “whether the fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased.

The Supreme Court considered how the hypothetical observer is taken to be “informed”. This meant, quoting an earlier case, that “before she takes a balanced approach to any information she is given, she will take the trouble to inform herself on all matters that are relevant…She is fair-minded, so she will appreciate that the context forms an important part of the material which she must consider before passing judgment.” When the apparent bias test is applied to arbitrators, the distinctive features of arbitration must therefore be taken into account. This includes a consideration of the private nature of arbitration, and the very limited rights of appeal. The Supreme Court also referred to the appointment process for arbitrators, noting the potential for party nomination and that there may be a “financial interest in obtaining further appointments as arbitrator”. It also observed that arbitrators may be non-lawyers with only limited experience of arbitration and may be from a variety of jurisdictions and legal traditions, with a range of views on arbitrator ethics.

The Supreme Court emphasised that, due to the private nature of arbitration, where an arbitrator is appointed in relation to multiple overlapping references the non-common party cannot discover what evidence or submissions have been put before the tribunal, or the arbitrator’s response. The Court also had regard to the range of understandings in relation to the role and duties of party-appointed arbitrators, recognising that some parties may expect party-nominated arbitrators to be pre-disposed towards their nominating parties, while the chair has a particular role to play in ensuring the tribunal acts fairly. While taking these differing perspectives into account, the duty of impartiality applied in the same way to every member of the tribunal and “the party-appointed arbitrator in English law is expected to come up to precisely the same high standards of fairness and impartiality as the person chairing the tribunal”.

While the professional reputation and experience of an individual arbitrator was a relevant consideration in assessing whether there was apparent bias, the Court noted this was likely to be a factor accorded only limited weight.

Duty of disclosure

The Supreme Court confirmed that an arbitrator is under a duty to disclose facts and circumstances which would or might reasonably give rise to the appearance of bias. The Supreme Court held that compliance with this duty should be assessed with regard to the circumstances at the time the disclosure fell to be made.

The Court noted that the LCIA, ICC and CIArb, as organisations having “an interest in the integrity and reputation of English-seated arbitration”, had all argued in favour of the recognition of a legal duty of disclosure. The Court stated that this legal duty furthered transparency in arbitration and was in alignment with the best practice set out in the IBA Guidelines and the approach taken by arbitration institutions such as the LCIA and ICC. The Court said that the IBA Guidelines “assist the court in identifying what is an unacceptable conflict of interest and what matters may require disclosure” but emphasised that they are non-binding.

The Supreme Court stated that an arbitrator may have to disclose acceptance of appointments in multiple overlapping references with only one common party, depending upon the customs and practice of the type of arbitration in question. The judgment explores in some detail the need to consider the duty of confidentiality in determining what information about potential conflicts may be disclosed.

The Court also explored the relationship between the duty to disclose and the duty of impartiality and concluded that failure to disclose will be one factor which the fair-minded and informed observer will take into account in considering whether there was a real possibility of bias. However, the Court held that questions of disclosure and apparent bias fell to be assessed at different times. Whereas the question of whether there was a failure to disclose was analysed as at the time the alleged duty of disclosure arose, the question of whether the relevant circumstances in any case amount to apparent bias must be assessed at the time of the hearing of the challenge to the arbitrator.

The Supreme Court held that failure to disclose overlapping references is capable of demonstrating “a lack of regard to the interests of the non-common party” and may in certain circumstances therefore constitute apparent bias.

Rejection of challenge

The Court held that, in the context of the Bermuda Form arbitration between Halliburton and Chubb, the Arbitrator was required to disclose the multiple appointments in question. This was because there was no established custom or practice in Bermuda Form arbitration of allowing an arbitrator to take on multiple and overlapping appointments without disclosure. Mr Rokison was therefore under a legal duty to disclose his appointment in the subsequent overlapping proceedings because, at the time of appointment in those arbitrations, those appointments might reasonably give rise to the real possibility of bias.

However, the Supreme Court concluded that the fair-minded and informed observer would not determine that there was a real possibility of bias. This was because:

  1. At the time the disclosure fell to be made there had been uncertainty under English law about the existence and scope of an arbitrator’s duty of disclosure;
  2. The time sequence of the arbitrations may have been an explanation for the non-disclosure to Halliburton;
  3. Mr Rokison had explained that both the subsequent overlapping arbitrations would be resolved by way of preliminary issue, which meant there would in fact be no overlapping evidence or submissions. Mr Rokison had offered to resign from the subsequent arbitrations if that was not the case and it was therefore unlikely that Chubb would benefit as a result of the overlapping arbitrations;
  4. Mr Rokison had not received any secret financial benefit; and
  5. Mr Rokison’s response to the challenge had been “courteous, temperate and fair…and there is no evidence that he bore any animus towards Halliburton as a result”.

Comment

This judgment has emphasised the importance of arbitrator impartiality and has both clarified and refined the law on apparent bias in the context of arbitration. The case is of real significance for the wider international arbitration community, and should allay potential concerns as to London’s status as a leading seat of arbitration.

The decision is the latest case to demonstrate the robust approach of the English courts to arbitrator challenges, in line with the courts’ non-interventionist and pro-arbitration stance. In this case the Supreme Court noted that challenges of this kind have “rarely succeeded” and also noted that the objective observer at the heart of the apparent bias test will be “alive to the possibility of opportunistic or tactical challenges”.

For more information, please contact Craig Tevendale, Head of International Arbitration London, Chris Parker, Partner, Vanessa Naish, Professional Support Consultant, Rebecca Warder, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

Craig Tevendale
Craig Tevendale
Head of International Arbitration London
+44 20 7466 2445
Chris Parker
Chris Parker
Partner
+44 20 7466 2767
Vanessa Naish
Vanessa Naish
Professional Support Consultant
+44 20 7466 2112
Rebecca Warder
Rebecca Warder
Professional Support Lawyer
+44 20 7466 3418

HERBERT SMITH FREEHILLS – SMU ASIAN ARBITRATION LECTURE

This year marks the tenth edition of the Herbert Smith Freehills – SMU Asian Arbitration Lecture Series.

We are delighted that Ms Loretta Malintoppi from 39 Essex Chambers will deliver the lecture on Thursday 22 October, on the topic “Don’t Shoot the Sheriff: The Threat of Legal Claims Against Arbitrators and Arbitral Institutions”.

The Herbert Smith Freehills-SMU Asian Arbitration Lecture Series was established in 2010 through funding from Herbert Smith Freehills, and promotes collaborative forms of dispute resolution and access to justice. It also aims to promote Singapore as a leading centre for dispute resolution in Asia, particularly in arbitration and mediation. Each year, a distinguished jurist delivers the lecture, which is also published in a leading global arbitration journal.

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