The excitement which usually surrounds the start of the Formula 1 season was overshadowed at the recent Australian Grand Prix by a legal wrangle in the week leading up to the race between the Sauber team and driver Giedo van der Garde. It provided a high profile reminder of the important advantages arbitration proceedings can have over normal court proceedings and the strategic commercial drivers.
The arbitral award (the Award) which was the subject of the dispute heard in the Australian state court was made under Swiss International Arbitration Rules in favour of Mr van der Garde after he was dismissed from his role as a test driver at the end of 2014. Mr van de Garde said he had proof he had been offered a race seat for 2015, which the arbitral tribunal agreed with, and the tribunal’s Award required Sauber to honour its contractual obligation to nominate him as one of their two race drivers for the upcoming season.
The key provision of the Award was as follows:
‘[Sauber is refrained] from taking any action the effect of which would be to deprive Mr van der Garde of his entitlement to participate in the 2015 Formula One season as one of Sauber’s two nominated race drivers.’
Yet Sauber had contracted with drivers Marcus Ericsson and Felipe Nasr because they had offered more sponsorship money for the team subsequent to the agreement Sauber had made with Mr van de Garde. Clearly, Sauber did not want to lose this vital source of funding at a time of great financial pressure for the teams not at the top of the F1 grid, and was prepared to forcefully fight to block Mr van der Garde from driving for Sauber. However, Mr van de Garde had paid his sponsorship money up front and both he and his backers, armed with the Award, launched enforcement proceedings in the Supreme Court of Victoria, Australia.
Relevant arbitration law
One of the key advantages of arbitration as a form of dispute resolution, in addition to confidentiality and flexibility of the process, is the ease of enforcement of arbitral awards under The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (more commonly known as the New York Convention) which requires courts of contracting states to give effect to an arbitration agreement and recognise and enforce arbitral awards made in other countries. Switzerland and Australia are both signatories to the New York Convention, with the latter being a common law country with a similar legal system to England and Wales.
Article V of the New York Convention does provide very limited circumstances in which the enforcement of an award may be legitimately challenged. These are principally procedural non-compliance and public policy grounds. Under Australian law these are provided for in the International Arbitration Act 1974, sections 8 and 9 (the IAA 1974) (while in England and Wales, the equivalent provisions can be found in the Arbitration Act 1996, section 103).
At the enforcement hearing, which took place on Monday 8 March before the race was due to take place on Sunday 15 March, Sauber put forward a number of reasons under s.8 IAA 1974, to persuade the court to refuse to enforce the Award, which can be grouped into the four categories below.
All of their submissions were rejected when judgment was handed down by Croft J just 2 days later on 10 March 2015:
1. Award beyond the scope of submission to arbitration
The Award was beyond the scope of submission to arbitration because Mr van der Garde did not have an enforceable personal contractual right, rather his management company did who were the actual contracting party with Sauber.
Croft J rejected this argument on the basis that the submission of this matter to arbitration was clearly made on the assumption of all parties that the relevant contracts were entered into in order (among other things) to facilitate Mr van der Garde’s involvement as a driver for Sauber.
2. Certainty of the key provision from the Award
Sauber argued that the wording of the key provision of the Award requiring it to refrain from taking any action cannot be said to contain sufficient precision as to be translated into a judgment of the court. In any event, practically Sauber could not modify the car for Mr van de Garde to drive in time for the weekend’s Grand Prix.
Croft J responded first by saying that although the key provision of the Award is cast in negative terms, it is not devoid of meaning when it is considered that all parties are well aware of the nature of the dispute. He then went on to stress that any practical problems with respect to enforcement were not a public policy issue and that enforcement of the Award applied to the whole of the 2015 season, not just the upcoming Grand Prix.
Their third category of argument ran along the lines that enforcement of the Award may endanger lives, place people in danger of serious injury, or negligently cause serious injury as Mr van der Garde had not driven the 2015 Sauber car and had not had the appropriate seat fitting. This was perhaps the most contentious of all the grounds as many of what would be his competing drivers, including former F1 World Champion Jenson Button, said this was not a risk at all.
The judge rejected this submission saying in his opinion there was no relevant issue of public policy at play here as compliance with the Award would not compromise safety or any other requirements for Mr van de Garde to race.
4. Rights of non/third party drivers
Mr Ericsson and Mr Nasr were not joined as parties or otherwise involved in the original arbitration for which Sauber claimed they together had suffered serious prejudice and was a breach of the rules of natural justice
Croft J said that the dispute could not lose its ‘arbitral quality’ merely because other parties have an interest in the outcome, as arbitral proceedings are fundamentally contractual in nature.
Consequently, an Order of the Court was made with the same wording as the key provision of the Award.
Despite their being only three days until the first practice session of the Australian GP, Sauber appealed Croft J’s ruling. The appeal was based on grounds that Croft J erred in each and every aspect of his first instance judgment, with the appeal in essence being a desperate repetition of Sauber’s original submissions. These were heard expeditiously by the Court of Appeal of the Supreme Court of Victoria comprising three judges the very next day on Thursday 12 March, rather than it being held over until after the Grand Prix had taken place.
The three judge Court of Appeal dismissed Sauber’s appeal in its entirety, making the following observations in its judgment of the same day as the hearing:
- In order to establish that the enforcement of an award would be contrary to public policy due to a breach of natural justice what must be shown is real unfairness and real practical injustice. Errors of fact or law are not legitimate bases for intervention. In doing so they stressed to Sauber that the appeal, and many aspects of the original attempt to resist enforcement, was a complaint as to a legal or factual conclusion “dressed up as a complaint about natural justice” which cannot be the subject of an arbitral enforcement action.
- As with Croft J, the appeal judges did not believe enforcement of the Award would require any illegal or unsafe activity to take place. As F1 is highly regulated they assumed that the race organisers (i.e. a combination of Formula 1 and the FIA) would ensure all safety requirements would be complied with. Interestingly it seems nobody from the FIA or Formula 1 gave independent evidence as to the issue of safety, which the Court did specifically mention to Sauber would have been helpful at the appeal hearing.
- They rejected the argument on behalf of Mr Ericsson and Mr Nasr that in circumstances where an injunction was sought in arbitral proceedings, which could significantly affect non (third) parties, either notice to those third-parties would have to be given, or the matter would simply be incapable of arbitration at all.
The final outcome
The legal struggle between the parties did not stop there. Mr van der Garde then launched contempt of court proceedings immediately after the appeal ruling was handed down. This was a powerful bargaining tool as it meant the court could seize Sauber’s assets from the Melbourne circuit and place Sauber’s directors, including the key personnel, in prison just a couple of days before the race if it continued to refuse to comply with the court’s order as it had up until that point.
Unsurprisingly this led to the parties entering into commercial negotiations. Contemporaneously it also became apparent that Mr van der Garde would not be able to race in any event as Sauber had not processed his application in time for a FIA super-licence required to race in F1. Overnight negotiations on the Saturday led to the contempt application being dropped and the team raced with great success on the Sunday, with Mr Nasr finishing fifth and Mr Ericsson eighth, at the end of a tumultuous week and start to the season for the team and the series.
A final settlement was announced the following week with the contract between the parties being cancelled and Mr van der Garde reportedly being paid €15 million by Sauber to end his legal action.
Although this is an example of the use of arbitration in sport, and its potential wide-ranging impact, the principles of using arbitration exhibited in this high profile case in Australia can be applied to all commercial disputes in almost every jurisdiction in the world. As with all alternative dispute resolution, the aim is to get the best commercial outcome for all parties, with certainty, at a reasonable cost. For Sauber, it can move on to the second Grand Prix of the season in Malaysia without the on-going distractions and costs of the legal action, and Mr van de Garde, although not wholly satisfied as he is not driving in F1, has reportedly received a financial lump sum and can obtain work in another motorsport series. Enforcing court awarded judgments abroad can be an expensive and time consuming legal minefield and parties engaged in cross-border activities should consider entering into arbitration agreements as their preferred method of dispute resolution given the speed and ease at which arbitration awards can be enforced in certain jurisdictions.