Australian courts will not lightly set aside arbitral awards, including on public policy grounds.

The recent case of Sino Dragon Trading Ltd v Noble Resources International Pte Ltd [2016] FCA 1131 demonstrates the Court’s systematic appraisal and ultimate dismissal of the applicant’s challenge to the arbitral award.

The Court also confirmed in the separate costs judgment of Sino Dragon Trading Ltd v Noble Resources International Pte Ltd (No 2) [2016] FCA 1169 that unmeritorious challenges to arbitral awards, with no reasonable prospect of success, will likely attract indemnity costs orders against the unsuccessful party.

Background

The case involved an unsuccessful challenge to set aside an arbitral award rendered on 12 May 2016 (Final Award) in favour of Noble Resources International Pte Ltd (Noble Resources), a Singaporean subsidiary of the Noble Group. The Final Award ordered Sino Dragon Trading Ltd (Sino Dragon), a Hong Kong company, to pay damages of US$1,861,073.44 plus costs and interest to Noble Resources. The challenge was brought under article 34 of the UNCITRAL Model Law (Schedule 2 to International Arbitration Act 1974 (Cth) (the Act)). The challenge was heard by before Justice Beach of the Federal Court of Australia.

On 1 May 2014, Noble Resources issued a notice of arbitration to Sino Dragon, pursuant to the arbitration clause in a contract for the supply and delivery of 170,000 dry metric tonnes of iron ore (Contract of Sale). The Contract of Sale was governed by the laws of Western Australia. The language of the arbitration was English.

The dispute arose as a result of Sino Dragon’s notification that it could not open an irrevocable and workable letter of credit by an agreed deadline. The key issue was whether Noble Resources could accept that notification as repudiation of the Contract of Sale.

Final Award and enforcement in Hong Kong

The dispute was heard by an arbitral tribunal of three arbitrators. Sino Dragon did not engage in the process of appointing the arbitrators. Nonetheless, Sino Dragon made five separate and unsuccessful challenges to the appointment of the arbitrators, arguing that they were not independent and impartial.

On 4 July 2016, Noble Resources successfully enforced the Final Award in Hong Kong. The Hong Kong High Court ordered Sino Dragon to pay Noble Resources the sums stipulated the Final Award. The High Court subsequently issued a statutory demand for the Final Award which was not satisfied. Noble Resources then filed a winding-up petition. The winding-up proceedings are currently pending.

Challenge to set aside award in Australia

On 11 August 2016, after the Hong Kong High Court had enforced the order, Sino Dragon sought to set aside the Final Award in the Australian courts.

Referring to TCL Air Conditioner (Zhongshan) Company Ltd v Castel Electronics Pty Ltd (2014) 232 FCR 361 (TCL case), the Court emphasised that it should exercise “significant judicial restraint” in considering a set aside application and that it was not to conduct a merits review. In the TCL case, the Court had emphasised that there must be a “real unfairness” or “real practical injustice” for a procedural fairness challenge to succeed.

Sino Dragon challenged the Final Award on three bases, all of which ultimately proved unsuccessful:

  • Tribunal acted beyond its jurisdiction: Sino Dragon argued that the Tribunal admitted extraneous and irrelevant evidence beyond the Tribunal’s jurisdiction. The Tribunal had found that the notification relied upon by Noble Resources for its rectification claim was in Chinese. Sino Dragon argued that the Tribunal should not have relied on this notification because the language of the contract, notices under the contract and the arbitration was English. The Court rejected this argument emphasising that it was merely an attempt to run a merits review and that legal and factual errors are not grounds for challenge. The Tribunal was entitled to determine the admissibility of any evidence.
  • Award was contrary to public policy (natural justice): Sino Dragon argued that the award was contrary to public policy because it did not have an equal opportunity to be heard and the Tribunal failed to accord equal treatment to the parties. This natural justice argument was based on the difficulties Sino Dragon faced in presenting witness evidence via video conference as well as alleged difficulties with the translation of the proceedings. Sino Dragon had not organised professional video conferencing services but had attempted to utilise the video call facility on WeChat, the Chinese social media platform (akin to Skype). Due to a poor connection, the witnesses needed to be examined through the use of a telephone, but with the WeChat video facility turned on. This resulted in dislocations between video and voice. Sino Dragon prepared a marked-up transcript of the tribunal hearing for the Court (by an interpreter who had listened to the audio recording of the hearing) to identify alleged discrepancies with what evidence had been presented in the hearing. However, the Court found that there was no denial of justice as there was no “real unfairness” or “real practical injustice” in the circumstances. The technical difficulties were partly the result of Sino Dragon’s own conduct and, in any event, more acutely disadvantaged Noble Resources. Sino Dragon also failed to demonstrate that there were problems with the translation of the proceedings. The Court noted that Sino Dragon had not raised these evidentiary issues before the Tribunal during the hearing. They were raised for the first time in the challenge proceedings.
  • Composition of the Tribunal did not accord with the arbitration agreement: Sino Dragon claimed that two of the arbitrators were not independent and impartial. Challenges had been brought during the arbitration proceedings (including a challenge before the Court) which had been unsuccessful. Sino Dragon argued that two of the arbitrators had worked for an Australian law firm that had acted for a company that was connected to Noble Resources. The Court emphasised that the test for challenging an arbitrator under section 18A of the Act is that there is a “real danger of bias” rather than the apprehension of bias principles found in Ebner v The Official Trustee in Bankruptcy (2000) 205 CLR 337 applicable in the domestic setting.[1]

Costs

Notably, the Court ordered Sino Dragon to pay two-thirds of Noble Resources’ costs on an indemnity basis,[2] on the basis that two of the three grounds of challenge had no reasonable prospect of success.[3] The Court disagreed with Noble Resources that there was a special rule for indemnity costs for parties who made unsuccessful challenges to awards under article 34 of the UNCITRAL Modal Law, effectively reversing the onus and thus, requiring the unsuccessful party to establish why an indemnity costs order should not be made.

Takeaways

This case demonstrates that the Australian courts will not treat lightly spurious claims to try to set aside an arbitral award. The Court emphasised the high threshold that must be satisfied to overturn an award. Any concerns about the conduct of arbitration proceedings should be raised in a timely fashion, preferably at the time of any alleged incident not during the challenge proceedings. Parties that unsuccessfully attempt to challenge an award may find they are subject to a costs order on an indemnity basis.

The Court also emphasised the high threshold for seeking to challenge an arbitrator. Challenging arbitrators after choosing not to be involved in selecting the panel will not be looked upon favourable by the courts.