AUSTRALIAN GOVERNMENT TO REVIEW ITS BILATERAL INVESTMENT TREATIES

The Australian Federal Government has announced it is reviewing the bilateral investment treaties (BITs) to which Australia is a party.

BITs are typically entered into to promote and protect investments made between the BIT partner States. To that end, Australia is party to 15 BITs with each of Argentina, China, Czech Republic, Egypt, Hungary, Laos, Lithuania, Pakistan, Papua New Guinea, Philippines, Poland, Romania, Sri Lanka, Turkey and Uruguay.

These BITs typically contain provisions requiring Australia (and its counterpart) to: treat foreign investors fairly and equitably; not expropriate the foreign investor’s investment without adequate compensation; provide protection and security to the foreign investor’s investment; honour written agreements between the host State and foreign investors; not treat the foreign investors from the partner State any less favourably than investors from the host State or a third party State; and allow free transfer of funds related to an investment in and out of the State.

Presently, the Department of Foreign Affairs and Trade (DFAT) is seeking submissions by 30 September 2020 on, among other things:

  • the utility of BITs to Australian investors operating overseas;
  • the impact of BITs on foreign investment;
  • concerns with the provisions on BITs presently in force;
  • provisions in BITs which should be renegotiated; and
  • whether the BITs should be terminated.

This community engagement follows on from continued public debate in Australia (which we have commented upon previously) regarding the “investor-state dispute settlement” (or “ISDS”) provisions commonly found in BITs.  Some critics have argued these ISDS provisions, which enable arbitration proceedings to be commenced by foreign investors against Australia, give rise to an unjustified risk of costly and time-consuming arbitration claims made by investors.

The submissions will inform the Government’s position on whether to continue, amend, renegotiate or terminate the BITs to which Australia is a party, or replace them with comprehensive free trade agreements (which may or may not include ISDS provisions). We will issue an update once the submissions are published on DFAT’s website.

For more information, please contact Brenda Horrigan, Head of International Arbitration (Australia), Leon Chung, Partner, Chad Catterwell, Partner, Imogen Kenny, Solicitor, or your usual Herbert Smith Freehills contact.

Brenda Horrigan
Brenda Horrigan
Head of International Arbitration (Australia)
+61 2 9225 5536
Leon Chung
Leon Chung
Partner
+61 2 9225 5716
Chad Catterwell
Chad Catterwell
Partner
+61 3 9288 1498
Imogen Kenny
Imogen Kenny
Solicitor
+61 3 9288 1657

A MATTER OF TRUST: AUSTRALIAN COURT ENFORCES INTERIM MEASURES TO SECURE THE AMOUNT IN DISPUTE

A recent judgment of the Supreme Court of Western Australia, Dalian Huarui Heavy Industry International Company Ltd v Clyde & Co Australia [2020] WASC 132 (available here), demonstrates that the use of interim measures to provide security for an amount in dispute can be a very powerful remedy when structured through the creation of a trust.

In a Singapore-seated arbitration between Dalian and Duro, the tribunal had ordered interim measures to secure (part of) the amount in dispute in the form of orders requiring an amount of money ($AUD27 million) to be placed in a solicitor’s controlled money trust account maintained by Duro’s solicitors, Clyde & Co. Duro subsequently entered voluntary administration, leaving Dalian with little recourse other than to pursue the trust money.

Justice Kenneth Martin of the Supreme Court of Western Australia found that Dalian was entitled to the trust money, thereby removing those funds from the resources available to the voluntary administrators.

Background

The interim measures were made in the course of a Singapore seated arbitration between Dalian (an export company) and Duro (a mining and construction company) regarding an iron ore mine project in Western Australia. An interim procedural order made by the tribunal granted Dalian’s application seeking security for part of its claims in the arbitration and ordered Duro to pay $AUD27 million (‘trust amount’) into its solicitor’s trust account. This order was implemented through the execution of a Trust Agreement, with Clyde & Co holding the money as trustee.

Dalian was subsequently successful in the arbitration, securing a monetary award of $AUD53 million against Duro. Dalian commenced proceedings in the Western Australian Supreme Court seeking an order to compel Clyde & Co as trustee to pay the trust amount to Dalian. Duro entered voluntary administration three days later.

Dalian sought the release of the funds on the basis that it held an absolute beneficial entitlement to the trust money, whereas the voluntary administrators of Duro instructed Clyde & Co to maintain the status quo. The trust amount was the only significant asset held by Duro and the voluntary administrators were concerned that if Duro could not trade out of administration and Dalian were paid the trust amount, it would be impossible to recover the funds which were likely to be remitted by Dalian to a parent company in the People’s Republic of China. The effect would be to frustrate recovery steps by future liquidators against Duro’s assets on behalf of creditors. Conversely, if Dalian was not entitled to recover the trust amount, it faced the prospect of relying solely on enforcing its monetary award as an unsecured creditor.

The key issue was whether the trust amount belonged to Dalian or Duro.

Decision

The power to order security over a disputed amount in an arbitration

Dalian’s key argument was that Clyde & Co had express contractual and fiduciary obligations to pay the trust money to Dalian. Dalian argued that the funds comprising the trust amount were no longer the ‘property’ of Duro (within the broad meaning of Australia’s Personal Property Securities Act 2009 (Cth) (‘PPSA’) and Corporations Act 2001 (Cth) (‘Corporations Act’)). Rather, Dalian argued that, upon the making of the monetary award in Dalian’s favour, full beneficial ownership of the funds held by Clyde & Co vested in Dalian.

Duro’s argument was that, in seeking to implement the interim measures, all the Trust Agreement had achieved was to provide a fund held on trust exclusively and always for Duro (not for Dalian). In effect, (on Duro’s argument) the Trust Agreement was simply a means by which Duro’s assets were ‘frozen’ pending the outcome of the arbitration.

In this context, the Court made instructive comments on the power of arbitral institutions in Singapore to make orders or give directions to any party for ‘securing the amount in dispute’ under s 12(1)(g) of the Singapore International Arbitration Act (‘SIAA’). It rejected Duro’s argument and noted that the tribunal specifically chose to adopt relief by way of ‘security’ instead of lesser relief, such as freezing or asset preservation orders, that were also available under s 12(1) subparagraphs (h) or (i) of the SIAA. The Court considered that the reference to ‘security’ in the tribunal’s orders was a specific reference to the legislative wording ‘securing the amount in dispute’ in s 12(1)(g) of the SIAA.

The Court observed that the power under s 12(1)(g) of the SIAA extends further than to order security for a party’s costs (a more limited power that is a feature of the rules of Court in many jurisdictions). The Court found that the power under s 12(1)(g) of the SIAA was capable of being exercised in such a way as to create equitable rights over an amount of money placed in a trust amount.

What was the nature of the interests held?

Determining who was entitled to the trust amount after its creation depended on how the trust arrangements were construed and the nature of the equitable interests held by Duro and Dalian.

The nature of Dalian’s interest in the trust amount was (initially) a contingent equitable interest which had matured (upon Dalian obtaining the monetary award in its favour) into an absolute and unqualified beneficial entitlement in equity to receive the trust amount. The Court distinguished the holding of ‘security’ over a dedicated fund of money from a creditor’s claim against assets the subject of a freezing injunction. Crucially, the creditors claim against the assets the subject of a freezing injunction is a bare in personam claim whereas the security provided by way of the interim measures created (initially) a proprietary security interested and (after the monetary award) a perfected proprietary right vested to Dalian.

Did the appointment of voluntary administrators change anything?

Duro had a residual equitable interest in the trust money pursuant to the interim measures orders (i.e. the money would have been returned to Duro had Dalian been unsuccessful in the arbitration). Those circumstances gave rise to complex arguments as to whether the trust moneys constituted ‘property’ of Duro and/or a ‘security interest’ for the purposes of the PPSA and the Corporations Act.

The Court concluded that the trust amount was indeed a ‘security interest’ for the purposes of the PPSA (as it was a transaction that in substance secured payment or performance of an obligation). Dalian had not registered that security interest under Australia’s personal property security register. As a result, Dalian’s unregistered security interest under the PPSA was exposed to the potential vitiating effects of s 267 of the PPSA which vests unperfected security interests in the grantor (i.e. Duro) upon the grantor entering administration or an insolvency.

Fortunately for Dalian, Martin J held that Dalian’s security had ‘perfected’ upon the issuance of the monetary award which occurred before Duro went into voluntary administration. This was because the monetary award, supported by an order from the tribunal directing Clyde & Co to ‘immediately’ release the trust amount, transformed Dalian’s contingent equitable interest into a fully vested equitable entitlement to the trust amount. The circumstances satisfied the extended concept of possession in s 21(2)(b) and s 24(2) of the PPSA because Clyde & Co held the trust money (and actually possessed it in an bank account) from that point on exclusively for the benefit of Dalian. Duro’s residual equitable interest had been extinguished. On that basis, the Court rejected other arguments by Duro that the funds were captured by s 440B of the Corporations Act which would prohibit a transfer of any property in which Duro had an interest following the commencement of the voluntary administration without the consent of the administrator or the leave of the Court.

Comment

The case highlights that, in a subsequent administration or insolvency, a freezing injunction does not confer any superior interest in favour of the party which obtained those orders above that of any other unsecured creditor, whereas a security may create proprietary rights that would more effectively place the Award-creditor ahead of other creditors.

Much credit needs to go to the Singapore seated arbitral tribunal (comprised of Sir Vivian Ramsay QC as a Chair, with Dr Michael Hwang SC and Dr Robert Gaitskell QC) for, in the first instance, crafting the interim measures in the form of a security interest rather than the more traditional freezing order and then, subsequently, making orders requiring the ‘immediate’ release of the trust money (perfecting the equitable transfer of the property to Dalian).

Dalian was ultimately fortunate that the monetary award (and order for the ‘immediate’ release of the trust money) occurred prior to Duro entering voluntary administration. Dalian had a security interest under the PPSA which remained unregistered. Dalian therefore faced the risk that it’s secured interest over the trust money would be relegated to no more than an unsecured claim (pursuant to 267 of the PPSA) upon Duro entering administration. It was only a fortunate sequence of timing which had the result that Dalian’s interest had transformed from a contingent equitable right in the form of a security interest into an equitably owned proprietary right before Duro entered administration.

The case therefore serves as a cautionary tale to parties who obtain interim measures of protection from an arbitral tribunal providing security over assets to which Australia’s PPSA applies that they should take steps to register their security interest to best preserve the protection they have obtained in the event of a voluntary administration or insolvency.

For further information, please contact Brenda Horrigan, Head of International Arbitration (Australia), Chad Catterwell, Partner, Harry Thompson, graduate, or your usual Herbert Smith Freehills contact.

Brenda Horrigan
Brenda Horrigan
+61 2 9225 5536

Chad Catterwell
Chad Catterwell
Partner
+61 3 9288 1498

Harry Thompson
Harry Thompson
Graduate
+61 2 9322 4951

 

 

DON’T COUNT YOUR CHICKENS: AUSTRALIAN COURT FINDS UNLIQUIDATED DAMAGES CLAIM OUTSIDE THE SCOPE OF A NARROWLY DRAFTED ARBITRATION AGREEMENT

In Inghams Enterprises Pty Limited v Hannigan [2020] NSWCA 82, the New South Wales Court of Appeal found that a claim for unliquidated damages for breach of contract could not be referred to arbitration because it was not within the scope of a narrowly drafted arbitration agreement. Relevantly, the scope of the arbitration agreement was confined to disputes concerning “any monetary amount payable and/or owed by either party to the other under this Agreement.”

The case is a further reminder to parties that they will almost always be best served by drafting the scope of the submission to arbitration broadly.

Background

Inghams entered into a ‘chicken growing contract’ with Mr Hannigan (Agreement), under which Inghams paid Mr Hannigan to receive batches of chicks, grow them into chickens, and return them. Clause 23 of the Agreement contained a multi-tiered dispute resolution clause requiring a dispute first to be mediated and then submitted to arbitration under clause 23.6 if:

  • the parties “fail to resolve the Dispute in accordance with Clause 23.4 within twenty eight (28) days of the appointment of the mediator”; and
  • the dispute “concerns any monetary amount payable and/or owed by either party to the other under this Agreement, including without limitation matters relating to determination, adjustment or renegotiation of the Fee” under certain sections of the contract.

Inghams purported to terminate the Agreement. Mr Hannigan was successful in seeking a court declaration that the purported termination was wrongful and Inghams resumed supplying batches of chicks to him. Mr Hannigan did not seek damages in the proceedings, but made express reservations of his right to do so.

Mr Hannigan then issued a dispute notice to Inghams seeking damages due to loss of profits for the failure to supply chicks to Mr Hannigan between the date of the purported termination and the date supply resumed. The parties unsuccessfully attempted to mediate and Mr Hannigan contended that clause 23.6 the Agreement entitled him to refer the dispute to arbitration. Inghams commenced proceedings in the New South Wales Supreme Court to restrain the arbitration, seeking declarations that:

  1. Mr Hannigan’s damages claim did not fall within clause 23 of the Agreement; and
  2. even if it did, Mr Hannigan had waived any entitlement to arbitrate the dispute under clause 23 because of his commencement of the wrongful termination proceedings.

The primary judge held that Mr Hannigan was entitled to refer his damages claim to arbitration under clause 23.6 of the Agreement. Inghams appealed, arguing the primary judge erred by:

  1. construing the contract such that the damages claim fell within clause 23.6 and could be referred to arbitration; and
  2. not finding that Mr Hannigan had waived his right to refer the dispute to arbitration.

Decision

Meagher and Gleeson JJA agreed with Inghams and allowed the appeal with costs, finding:

  • The claim for damages was not an amount that was “payable” or “owed” as a result of an express or implied term of the Agreement. The dispute was not one which affected or related to the negotiation, adjustment or determination of any amount “payable” or “owed” under such a term. Accordingly, the dispute did not concern a monetary amount payable under the Agreement.
  • There is an important distinction between monetary amounts which are payable or owed “under a contract” and remedies which arise by operation of law. Whereas liquidated damages are recoverable by a contractual right of recovery, unliquidated damages for breach of contract “are compensation assessed by the court in accordance with common law principles for loss occasioned by breach”.
  • As the dispute was not required to be referred to arbitration, the waiver issue did not arise. If the dispute had been required to be referred to arbitration, Mr Hannigan had not waived his right to do so.

Bell P dissented, holding:

  • The dispute resolution clause should be construed broadly, based on legal principles and textual indications in clause 23.6 which suggest the parties intended it be interpreted liberally, including the use of:
    • the indefinite pronoun “any” in the phrase “any monetary amount”;
    • the alternative formulation “payable and/or owed”;
    • the phrase “including without limitation”; and
    • the broader concept of “monetary amount” instead of “fees”.
  • Mr Hannigan had not waived his right to arbitration because the wrongful termination proceedings did not result in, or occur because of, Mr Hannigan unequivocally abandoning any right claim damages for breach of contract in arbitration at some future time.

Comment

The majority decision follows the recent High Court of Australia decision in Rinehart & Anor v Hancock Prospecting Pty Ltd & Ors [2019] HCA 13, which eschewed adopting the Fiona Trust principle as a principle of Australian law. In Rinehart, the High Court emphasised the importance of construing the words of an arbitration clause, like any clause in an agreement, in its context.

In this case, applying that approach, the narrow formulation found in the arbitration clause (“monetary amount payable and/or owed … under the Agreement”) led to the result that claims for unliquidated damages were outside the scope of the arbitration agreement.

Had the parties used a broader formulation, as is recommended by many arbitral institutions (such as “arising out of or in connection with” or a variant thereof), it is likely the outcome would have been different.

The case therefore serves as another reminder that parties should take care when drafting an arbitration agreement, and seek expert advice from practitioners with expertise in the field when deviating from the model clauses recommended by leading arbitral institutions.

For further information, please contact Brenda Horrigan, Head of International Arbitration (Australia), Chad Catterwell, Partner, Nicholas Brewer, solicitor, or your usual Herbert Smith Freehills contact.

Brenda Horrigan
Brenda Horrigan
+61 2 9225 5536

Chad Catterwell
Chad Catterwell
+61 3 9288 1498

Nicholas Brewer
Nicholas Brewer
+61 3 9288 1049

 

 

HERBERT SMITH FREEHILLS PROMOTES TWO ARBITRATION SPECIALISTS TO ITS GLOBAL PARTNERSHIP

Herbert Smith Freehills has promoted seven disputes lawyers to its partnership, out of a total of 26 worldwide. The promotions in the disputes practice, which take effect on 1 May, 2020, span right across the firm’s global network.

Of these new partners, two are arbitration specialists, reflecting the strength and importance of this ever growing practice area to the firm.

The new arbitration partners are:

Gitta Satryani, Singapore:

Gitta is a member of the firm’s market-leading Asia dispute resolution practice, based in Singapore. She specialises in complex cross-border disputes with particular expertise in international commercial arbitration, investment treaty arbitration, and public international law. Gitta advises commercial entities, states and SOEs on a broad range of issues relating to cross-border projects including dispute avoidance strategies and investment structuring.

Gitta has a particular focus on disputes involving Indonesia, and works closely with Herbert Smith Freehills’ associated firm Hiswara Bunjamin & Tandjung, to advise clients on disputes and dispute-related aspects of transactional work relating to their investments in Indonesia.

Gitta is ranked as an Arbitration Future Leader by Who’s Who Legal (2017-19) and an up and coming / next generation lawyer by other leading directories. She has been described as “an impressive lawyer with unique skills in the market” and “very pragmatic and business-oriented in terms of suggesting strategies to resolve a problem and providing good practical guidance” (Chambers & Partners 2020 (Dispute Resolution: Arbitration (Singapore)).

Chad Catterwell, Melbourne:

Chad specialises in cross-border disputes and international arbitration across the Asia-Pacific region. Chad acts as Counsel in cross-border disputes and international arbitrations seated across the Asia-Pacific region. He has advised clients on arbitrations under the HKIAC, ICC, SIAC, CIETAC and UNCITRAL Rules.  He has particular expertise with respect to disputes arising from M&A activity and joint ventures in Asia, particularly China.  He assists clients in a number of sectors, with a strong interest in the energy and resources,  and technology sectors. Chad also advises clients on structuring transactions and drafting dispute resolution provisions to best protect clients engaging in international investment and cross-border transactions.

Now based in Melbourne, Chad was previously based in Hong Kong and his current practice sees him working on matters across Asia, collaborating seamlessly with colleagues in the region and elsewhere.

Chad has well-rounded disputes experience. In his formative years as a disputes lawyer he advised clients on fast track litigation, class actions litigation, Royal Commissions and interactions with regulators whilst under investigation. He acted for electricity distributor SP AusNet in the Royal Commission and long running class actions arising from the 2009 bushfires in Victoria. He also completed an 8 month secondment to Morgan Stanley’s Asia Pacific Litigation and Contentious Regulatory team based in Hong Kong.

Chad regularly speaks and writes on issues relating to international arbitration. He is a founding steering committee member for ACICA 45, the young practitioner’s arm of local arbitration institution, ACICA.

Paula Hodges QC comments, “I am very proud to welcome Gitta and Chad as partners into our global arbitration practice. They are both excellent lawyers, who each possess a deep understanding of our clients across the Asia Pacific region. Gitta and Chad have also undertaken secondments in other offices within the HSF network and embody the cross-fertilisation of arbitration knowhow and legal cultures that enables our global arbitration practice to provide a truly international service to clients all over the world across a range of sectors.”

For more information, please contact Gitta Satryani, Partner, Chad Catterwell, Partner, or your usual Herbert Smith Freehills contact.

Gitta Satryani
Gitta Satryani
Partner
+65 68688067

Chad Catterwell
Chad Catterwell
Partner
+61 3 9288 1498

Australian Court provides guidance on Art 33(3) of the Model Law, the doctrine of functus officio and when a ‘Final Award’ is not ‘final’

In Blanalko Pty Ltd v Lysaght Building Solutions Pty Ltd [2017] VSC 97, Croft J of the Victorian Supreme Court confirmed that a party is not required to rely on, or comply with the time constraint in, Art 33(3) of the Model Law to obtain a further Award in circumstances where the arbitrator has made ‘a conscious decision not to deal with an issue’.  The decision also provides useful commentary on the functus officio doctrine and the circumstances in which an Award labelled ‘Final Award’ is not, relevantly, a ‘final Award.’

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Sydney Arbitration Week: 21-25 November 2016

Sydney Arbitration Week has commenced with an extensive and interesting programme of arbitration conferences, seminars and presentations. One of the key events is the Fourth International Arbitration Conference which is organised by the Business Law Section of the Law Council of Australia, the Chartered Institute of Arbitrators, Australia branch, and ACICA. Singapore partner Alastair Henderson spoke on recent issues in international arbitration. Later in the week, on Thursday, 24 November, Brenda Horrigan, new Head of International Arbitration (Australia) based in Sydney, will be speaking at an ArbitralWomen breakfast event entitled Arbitration in China and the Asia-Pacific Region. She will also be presenting at a Young ICCA arbitration skills workshop on Friday, 25 November.

Sydney arbitration week has quickly established itself as one of the key event weeks in the Australian arbitration calendar attracting every year senior arbitration practitioners from Australia and abroad. Additional events can be found here: sydney-arbitration-week-2016-calendar-of-events.

For more information, please contact Brenda Horrigan, Head of International Arbitration (Australia), Alastair Henderson, Managing Partner – SE Asia, Anne Hoffmann, Senior Associate – Sydney, Chad Catterwell, Senior Associate – Melbourne, or your usual Herbert Smith Freehills contact.

Brenda Horrigan
Brenda Horrigan
Head of International Arbitration (Australia)
+61 2 9225 5536

Alastair Henderson
Alastair Henderson
Managing Partner - SE Asia
+65 68688058

Anne Hoffmann
Anne Hoffmann
Senior Associate
+61 2 9225 5561

Chad Catterwell
Chad Catterwell
Senior Associate
+61 3 9288 1498