PRELIMINARY DISCOVERY IN INTERNATIONAL ARBITRATION: AN AUSTRALIAN PERSPECTIVE

The availability and scope of ‘discovery’ or document production significantly differs across jurisdictions, most notably when comparing litigation in common law and civil law courts. In the field of international arbitration, the compromise position adopted by the International Bar Association’s Rules on the Taking of Evidence in International Arbitration is to permit disclosure of documents where it is “relevant to the case and material to its outcome”.[1] This approach has been reasonably effective in practice as a compromise between the extensive discovery generally afforded in common law courts, and the very limited document production orders granted by civil law courts.

But what is the position where, before an arbitral tribunal is constituted, a party needs to obtain documents from a prospective respondent, to determine whether to even initiate a case at all?

Preliminary discovery may fill this gap. It may enable a prospective claimant to compel a prospective respondent to produce documents for the purpose of determining whether to commence legal proceedings. However, while an arbitral tribunal clearly has power to order document production once proceedings have commenced (subject, of course, to any limitations under the arbitration agreement and the applicable law), it is not clear that the tribunal’s powers extend to preliminary discovery.

This blog post will examine whether preliminary discovery is available in arbitrations seated in Australia, and offer some practical insights for litigants considering this.

The Australian position

The general position is that before initiating arbitration proceedings, a prospective claimant may seek preliminary discovery under domestic court procedures: see the New South Wales Supreme Court’s (“NSWSC”) judgment in nearmap Ltd v Spookfish Pty Ltd [2014] NSWSC 1790.

In this case, the plaintiff, nearmap Ltd (“nearmap”), operated a business supplying aerial and geospatial photomosaic images. It relied on innovative and confidential design processes and information. Several employees, including a former Chief Technology Officer and a Chief Operating Officer, left to operate a rival firm in the same industry, Spookfish Pty Ltd (“Spookfish”).

Nearmap was worried that its former employees retained confidential information from their employment, and that Spookfish was unlawfully using that information in its business. It sought preliminary discovery from Spookfish and its directors under the NSWSC’s procedural rules, the Uniform Civil Procedure Rules 2005 (NSW) (the “UCPR”), to determine whether to pursue proceedings against the defendants for breach of confidence (among other claims).

Spookfish resisted the application, arguing that it should be permanently stayed pursuant to an arbitration agreement between the parties, and determined by the arbitral tribunal instead. Spookfish cited s 8 of the Commercial Arbitration Act 2012 (WA) and s 8 of the Commercial Arbitration Act 2010 (NSW) (each, an “Act”), which both provide that:

“A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party’s first statement on the substance of the dispute, refer the parties to arbitration unless if finds that the agreement is null and void, inoperative or incapable of being performed.”

Chief Judge in Equity Bergin (“Bergin CJ in Eq”) refused to stay the court proceedings in favour of arbitration, finding that the motion for preliminary discovery was not a “matter” for the purposes of the cited provisions. A claim that Spookfish’s employees breached their obligations of confidentiality would constitute a “matter”. However, an application for preliminary discovery was of a different kind, being “not a dispute as to the rights or obligations of the parties” but instead “a right independent of the Agreements…arising under the Uniform Civil Procedure Rules and any obligation to produce the documents arises from a judicial determination, having regard to whether the prerequisites in the Rule have been satisfied.”[2]

Her Honour also found that a tribunal’s power to order “discovery of documents” under s 17(3)(b) of each Act relates to discovery relevant to the issues between the parties in respect of any application for the quasi-injunctive relief set out in s 17(2) of the Act, and does not extend to ordering preliminary discovery.[3]

Further, the interim measure referred to in s 17(2)(d) of the preservation of “evidence that may be relevant and material to the resolution of the dispute” is also not a vehicle for preliminary discovery but “to secure evidence in respect of which a party to an already existing dispute of which the arbitrator is seized, may entertain fears of destruction or dissipation in the absence of such an interim measure.”[4]

Although nearmap concerned a domestic arbitration, its principles are likely also applicable to international arbitrations seated in Australia. Section 7(2) of the International Arbitration Act 1974 (Cth) requires a court to refer a “matter” to arbitration where a party has initiated court proceedings which are arbitrable and are subject to a valid arbitration agreement. In light of nearmap, Australian courts are unlikely to find that a preliminary discovery application is a “matter” which engages s 7(2).

The implication is that a prospective claimant to a dispute covered by an arbitration agreement should seek preliminary discovery under domestic court procedures instead of from the arbitral tribunal.

The prospective claimant may rely on rule 7.23 of the Federal Court Rules 2011 (Cth) or rule 5.3(1) of the UCPR. Under those provisions, a court may order preliminary discovery from a prospective defendant in possession of a document which may assist in determining if the applicant has a claim, provided the applicant has already undertaken reasonable inquiries which have not yielded sufficient information for it to decide whether to commence proceedings. The usual limitations arising from privilege and the implied undertaking as to the use of documents also apply.[5]

One interesting open question is whether parties can confer an arbitral tribunal with powers to order preliminary discovery, by expressly stating so in the arbitration agreement. Bergin CJ in Eq ruled that applications for preliminary discovery did not attract the protection of s 8(1) of the Act, not that such applications are not arbitrable. Considering parties’ flexibility to select the arbitral procedure under article 19(1) of the Model Law, it is theoretically conceivable that the parties could expressly confer the power to order preliminary discovery on the tribunal. In practice, however, recourse to domestic courts is likely to be more practical since it would allow prospective claimants to obtain preliminary discovery before an arbitral tribunal has been constituted.

As a quick comparison, English courts adopt a different position with respect to preliminary discovery (there known as “pre-action disclosure”). In Travelers Insurance Company v Countrywide Surveyors Ltd [2010] EWHC 2455 (TCC), the High Court held that it could not order pre-action disclosure under the Court’s procedures where the dispute is subject to a valid arbitration agreement between the parties.

Under s 33(2) of the Senior Courts Act 1981 (the “SCA”), the High Court may only grant an application for pre-action disclosure to “a person who appears to the High Court to be likely to be a party to subsequent proceedings in that court.” Justice Coulson held that the existence of the arbitration agreement meant that the applicant was not a likely party to subsequent proceedings in the High Court.[6] Therefore, the Court did not have the requisite power and the application needed to be made to the arbitral tribunal.[7]

The difference between the positions in Australia and England is in part attributable to the differences in the procedural rules governing preliminary discovery/pre-action disclosure. Rule 5.3 of the UCPR allows preliminary discovery if “the applicant may be entitled to make a claim for relief from the court against a person”, whereas s 33(2) of the SCA is more restrictive in requiring that the applicant is likely to be a party to subsequent proceedings in that court”.

Practical considerations

Prospective claimants should also consider the following when determining whether to pursue an application for preliminary discovery in respect of arbitration.

First, a party who is seeking preliminary discovery is generally responsible for the costs of the discovery. For example, in the Australian Federal Court (see Sites N Stores Pty Ltd v Whirlpool.Net.Au Pty Ltd [2015] FCA 1474), the default position is that an applicant for preliminary discovery should pay the costs of the producing party unless the producing party has acted unreasonably. The costs of the discovery process can be significant and the potential strategic benefits of obtaining helpful documents should be weighed against costs and procedural economy considerations.

Second, it can often be difficult to determine whether a prospective respondent possesses documents which may assist so there is an element of risk involved. This, again, should be weighed against the potential benefit of locating documents which may found a viable claim.

Third, the scope of preliminary discovery is limited. In Australia, preliminary discovery cannot be used by a party to merely strengthen its position where it has already decided to commence legal proceedings, or ‘fish’ for information without believing that a genuine claim exists (see Airservices Australia v Transfield Pty Ltd [1999] FCA 886 at [5]).

This post was first published on Kluwer Arbitration Blog on 6 May 2020. 

For more information, please contact Leon Chung, Partner, Guillermo Garcia-Perrote, Senior Associate or your usual Herbert Smith Freehills contact.

Leon Chung
Leon Chung
Partner
+61 2 9225 5716

Guillermo Garcia-Perrote
Guillermo Garcia-Perrote
Senior Associate
+61 2 9322 4903

 


[1] Article 3(3)(b).

[2] At [72]

[3] At [76]

[4] At [76]

[5] See Ben Kremer and Rebecca Davies, Preliminary discovery in the Federal Court: Order 15A of the Federal Court Rules, (2004) 24 Aust Bar Rev 235, 255-258.

[6] At [17]-[21]

[7] At [30]

 

 

New York district court rejects application for use of confidential documents in LCIA arbitration

Beny Steinmetz Group Resources ("BSGR"), a company based in Guernsey and accused of bribery in Guinea, has been denied permission by a Magistrate Judge of the Southern District Court of New York ("SDNY") to use certain confidential documents. These documents were produced in a lawsuit before the SDNY filed by Rio Tinto, and were sought to be used by BSGR in a separate but related LCIA arbitration.

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English High Court orders disclosure of arbitration documents by agent to principal

In its recent judgment AMEC Foster Wheeler Group Limited v Morgan Sindall Professional Services Limited & Ors [2015] EWHC 2012 (TCC) (available here), the English High Court (the Court) ordered that arbitration documents be disclosed by a party conducting arbitration to a party with a financial interest and practical involvement in the dispute.

The arbitration arose in relation to construction works at a naval base. The Secretary of State for Defence (SSD) had engaged a contractor (TES) to carry out works. Part of those works was subcontracted by TES to the claimant (AMEC). AMEC then sold its business to the defendants, who were assigned AMEC’s rights and agreed to carry out AMEC’s obligations under the relevant subcontract.

Disputes under the main contract and the subcontract arose, and arbitral proceedings between SSD and TES commenced. Under a name borrowing agreement between TES and AMEC (i.e. an agreement under which a party agrees to pursue or defend a legal claim in the name of another), AMEC, agreed to conduct the arbitration between TES and SSD on behalf of TES. AMEC and the defendants then agreed that the defendants would conduct the arbitration as AMEC’s agents.

The defendants conducted the arbitration without any involvement from AMEC. When AMEC sought copies of the arbitration documents, the defendants refused to provide them. The claimant brought proceedings before the Court for orders that the documents be disclosed.

The Court ordered that the documents be disclosed on the basis that they were held by the defendants as agent for AMEC. In reaching this decision, the Court rejected the defendants’ argument that disclosure should be refused on the basis that the arbitration documents were confidential.

The Court’s decision focussed largely on the relationship between the parties and little attention was given to the issue of confidentiality in arbitration proceedings. This in itself makes the decision noteworthy: the Court made clear that the legal obligation to provide the documents to AMEC (by virtue of the relationship between principal and agent) effectively ‘trumped’ any question of a duty of confidentiality owed to a third party (in this case, the SSD), in arbitration proceedings. Whilst the circumstances of this case were unusual, the decision may have broader application where there is an arbitration between an agent (whether disclosed or undisclosed) and a third party.

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