An Australian court has recently considered whether a failure to compose a tribunal in accordance with an arbitration agreement rendered the relevant awards unenforceable by operation of Australia's international arbitration legislation. The court was also asked to consider a number of other issues, including when a declaration made in an award will be contrary to Australia's public policy and whether the awards were void due to the operation of the Carriage of Goods by Sea Act 1991 (Cth).

What does this decision mean for you?

  • The Federal Court of Australia's decision in Armada (Singapore) Pty Ltd (Under Judicial Management) v Gujarat NRE Coke Limited [2014] FCA 636 (the Armada Decision) offers some timely lessons in respect to drafting arbitration agreements and enforcing foreign arbitral awards under the International Arbitration Act 1974 (Cth) (IAA). Parties to an arbitration agreement must take care if and when they prescribe particular criteria for a tribunal to meet, for example, a requirement that members of the tribunal hold specific qualifications. Any uncertainty may give an unsuccessful party grounds to challenge an arbitral award.
  • Where an opposing party has failed to comply with an arbitration agreement, it is important to object at the time or risk waiving the right to object later
  • From a broader perspective, the Armada Decision demonstrates Australian courts' pro-enforcement approach to foreign arbitral awards. This is significant as it reinforces arbitration as an effective form of dispute resolution for cross-border contracts.

Background

Gujarat manufactured metallurgical coking coal in India and engaged Armada to ship the coke between 2008 and 2012. Armada experienced financial trouble during the global financial crisis and was placed under judicial management by the High Court of Singapore, however, it still continued to operate.

When Armada was placed under judicial management, Gujarat ceased to nominate "laycans" under the contract between the parties between 2009 and 2012. Laycans were days to be nominated by Gujarat under the contract during which Armada was to arrive in port and pick up Gujarat's shipments.

Armada instituted arbitration proceedings in London for losses arising as a result of past shipments, which had not gone ahead, as well as future losses resulting from Gujarat failing to nominate laycans, which prevented further shipments. The tribunal made three separate awards in favour of Armada, which Armada then sought to enforce in the Federal Court of Australia.

The first award related to the arbitrators' jurisdiction, the second award dealt with the substance of Armada's claims and Gujarat's main defences (including a declaration that Gujarat would be liable for any future losses) and the third award determined the damages Armada was entitled to for the years 2009 and 2010.

Of primary relevance to the proceedings (and the first award), was that the parties' arbitration agreement required the tribunal members to be "commercial men".

Early in the arbitration, the parties' solicitors negotiated the appointment of lawyers Mr Isaacs QC and Mr Hill QC as "commercial" arbitrators to the tribunal. The arbitrators provided substantial reasoning for the validity of their appointment in the tribunal's initial award on jurisdiction.

When Armada sought to enforce the awards in Australia, Gujarat relied on the following five grounds (some of which overlap) to resist enforcement:

  1. neither Mr Isaacs nor Mr Hill were "commercial men" within the meaning of the contract and therefore the awards were not made in accordance with the relevant arbitration agreement (section 9 of the IAA);
  2. as neither Mr Isaacs nor Mr Hill were "commercial men" within the meaning of the contract, the tribunal had not been composed in accordance with the relevant arbitration agreement (section 8(5)(e) of the IAA);
  3. the second award, in respect of its declaration regarding future losses, had not become binding as the declaration purported to bind the parties in the future in relation to damages that had not yet been suffered (section 8(5)(f) of the IAA);
  4. enforcement of the second award, in respect of its declaration regarding future losses, would be contrary to Australia's public policy (section 8(7)(b) of the IAA); and
  5. the contract was a "sea carriage document" within the meaning of the Carriage of Goods by Sea Act 1991 (Cth) such that the arbitration agreement was of no effect and the arbitrators had no jurisdiction to render Gujarat liable for damages.

Grounds 1 & 2 – were the arbitrators "commercial men"?

Under Australian and English law, an arbitral tribunal (domestic or international) has the power to determine its own jurisdiction. However, a court in Australia is not bound by this determination and may determine the tribunal's jurisdiction itself, where necessary (here, the court referred to the commonly cited decision in IMC Aviation Solutions Pty Ltd v Altain Khuder LLC [2011] VSCA 248). Inthe Armada Decision, the court held that it had jurisdiction to determine whether the appointment of Mr Isaacs QC and Mr Hill QC was valid. Invalid appointment would render the award unenforceable in Australia under the IAA.

Gujarat submitted that the tribunal lacked jurisdiction on the basis that the appointment of Mr Isaacs QC and Mr Hill QC was invalid as the appointees were lawyers and therefore not "commercial men" as required by the arbitration agreement. 

The court held that the fact that someone is a lawyer 'does not disqualify them from satisfying the descriptor "commercial men"', and that lawyers are able to be commercial where, for example, they have experience as an arbitrator of commercial disputes or are members of a reputable professional arbitral association. Accordingly, the court held that the tribunal was validly constituted in accordance with the arbitration agreement and the court was able to enforce the foreign awards in Australia under the IAA.

In any event, the court considered that Gujarat had waived its right to strictly require the appointment of "commercial men", and thus had waived its right to object to the appointment. The court also referred to the fact that Gujarat had participated in the arbitration for some time (to the point where two awards had been handed down) before attempting to extricate itself from the arbitration:

"It seems quite clear to me that it had decided to participate in the arbitration after the initial ruling on jurisdiction in order to see whether it could procure a favourable outcome on the issues of substance in the arbitration. It was only in the face of an unfavourable outcome that it decided to attempt to resurrect the point which it now takes concerning the composition of the tribunal" (Foster J [60]) (emphasis added)

Grounds 3 & 4 – declaration as to future damages

Gujarat claimed that a declaration in the second award was not permitted under Australian public policy, being "that Armada will be entitled to damages in respect of future shipments (if any) which Gujarat fails to perform" (emphasis added).

Firstly, the court noted that the tribunal's declaration giving Armada an entitlement to future damages may have been "inappropriate or premature" at the time the proceedings had commenced (given the subsequent award and the possibility that other additional awards had been made). However, it permitted Armada to amend its original application "to seek to enforce any additional awards which have been made subsequent" to the court's judgment.

Secondly, the IAA does not allow a foreign award to be enforced where it is contrary to Australian public policy (under section 8(7)). Further, the IAA does not allow enforcement where an award is yet to bind the parties to an arbitration agreement, or has otherwise been set aside or suspended (under section 8(5)(f)).

The court held that enforcing the second award (and the declaration) would not be inconsistent with Australian public policy (under section 8(7)), and further, held that the second award was otherwise enforceable. Interestingly, the court went one step further by stating:

"The mere fact that enforcing such a declaration might not be consistent with principles developed in Australia for the exercise of an Australian Court's discretion to make declarations would not, of itself, be sufficient to constitute a reason for refusing to enforce the award on the grounds that to do so would be contrary to public policy" (Foster J [67])

Ground 5 – was the contract a "sea carriage document"?

The Armada Decision also confirmed the Full Court of the Federal Court's decision inDampskibsselskabet Norden A/S v Gladstone Civil Pty Ltd [2013] FCAFC 107 which found that a "voyage charterparty" (which was the type of contract relevant to this dispute) was not a "sea carriage document" within the meaning of section 11 of the Carriage of Goods by Sea Act 1991(Cth).

The court in Norden held that disputes referred to arbitration under a voyage charterparty may be referred to arbitration outside Australia, whereas disputes in relation to sea carriage documents can only be referred to arbitration in Australia.

Gujarat raised similar grounds to those raised in Norden when submitting that the court should refuse enforcement of the foreign awards. However, the court confirmed the decision in Norden and dismissed Gujarat's grounds for refusal. To read Clyde & Co's report on Nordenclick here.

Conclusion

Given that all five grounds of appeal were rejected, the Armada Decision reinforces the pro-arbitration approach taken by Australian courts. The decision also provides helpful guidance to parties entering arbitration agreements or referring disputes to arbitration. Most importantly:

  • It is difficult for parties to anticipate at the drafting stage, the likely nature, scale and issues of any disputes the parties may have in the future. For this reason, parties must think carefully about whether or not they need to stipulate particular criteria in its arbitration agreement to establish an arbitral tribunal, and should only elect to do so if they have a very good reason. If the parties elect to do so, the parties must ensure the criteria is clear and certain to avoid potential challenges during the award enforcement stage.
  • If a party considers that the arbitration agreement has not been complied with, it must object at the time (not at a later date) otherwise it risks waiving any right it may have had to a remedy or claim.