In an appellate judgment, the Full Court of the Federal Court of Australia has ruled that a foreign arbitral award is not enforceable because the arbitral tribunal was not constituted strictly in accordance with the parties’ arbitration agreement. Notably, the decision also considers the courts’ discretion to enforce an award even where a party establishes a ground for non-enforcement, an issue on which there was previously “no authoritative statement in Australia”.

The Full Court allowed an appeal from its first instance decision that enforced a foreign award pursuant to the International Arbitration Act 1974 (Cth).

Hub Street Equipment Pty Ltd v Energy City Qatar Holding Company [2021] FCAFC 110

The arbitration

The appellant, Hub Street Equipment (Hub), is an Australian company. The respondent, Energy City Qatar (ECQ), is a Qatari company. In 2010, Hub and ECQ concluded a contract for Hub to supply and install goods in Doha.

Article 46 of the contract (Arbitration Agreement) established the process for the appointment of the three-member arbitral tribunal, as follows:

“An Arbitration Committee shall consist of three members, one member being appointed by each party within 45 days of one party receiving a written notice from the other party to start arbitration proceedings. The third member shall be mutually chosen by the first two members and shall chair the Arbitration Committee and issue the decision of the Arbitration Committee which shall be by a majority vote and shall be binding on both parties. If a decision as to the appointment of the third such member cannot be reached within 28 days from the last date of the appointment of the member by the Parties and their appointed Tribunal Members, the matter of appointment of such member shall be referred by either party to the competent Qatari Courts.

Article 47 provided that the law of Qatar governed the contract. Article 50 provided that English was the governing language of the contract.

ECQ paid Hub US$820,322.16 under the contract as an advance payment. In 2012, ECQ decided not to proceed with the contract, and sought repayment of this amount. Hub stated it would obtain legal advice and identify its position, but instead retained the money and ceased communications.

Critically, ECQ never sent Hub a notice under the Arbitration Agreement giving Hub 45 days to appoint an arbitrator. Rather, in June 2016, ECQ filed a statement of claim with the Plenary Court of First Instance of the State of Qatar. ECQ sought orders for the appointment of an arbitral tribunal (including an arbitrator nominated by ECQ). ECQ sought this pursuant to Article 195 of the Qatari Civil Procedure Code, which relevantly provided:

If a dispute arises between the parties prior to an agreement between them as to the arbitrators … the court which has jurisdiction to consider the dispute shall appoint the necessary number of arbitrators at the request of one of the parties, filed in accordance with the normal procedure for filing a claim.

In January 2017, the Qatari Court made orders appointing an arbitral tribunal. The Tribunal sent to Hub’s address six notices in English about the conduct of the arbitration, and the arbitration was adjourned on three occasions due to Hub’s non-appearance. However, Hub never participated. In August 2017, the Tribunal issued an award ordering Hub to pay the value of the advance payment, damages, and the fees of the arbitration.

The Tribunal issued the award in Arabic with an English translation. The award indicated that the Tribunal was satisfied it had notified Hub of the arbitration and adjourned it, but because Hub never appeared the Tribunal determined the dispute and made the award in Hub’s absence.

Enforcement proceedings at first instance

The first instance judge was similarly satisfied that Hub had been notified of the Qatari Court proceedings and the arbitration, and inferred that Hub decided not to participate based on its commercial interests.

In enforcing the award, the judge:

  • rejected Hub’s grounds for resisting enforcement. These were contentions that it had not received proper notice of the arbitration, that it was unable to present its case, and that the Award involved a breach of natural justice and thus its enforcement would be contrary to public policy;
  • exercised the Court’s discretion to enforce the Award even though the arbitral procedure was not strictly in accordance with the parties’ agreement. The judge held that the procedural irregularities had caused Hub no prejudice; and
  • held that Hub had not discharged its burden to prove that Article 195 of the Qatari Civil Procedure Code had been improperly invoked, or its burden to prove that the composition of the Tribunal was contrary to the parties’ agreement.

The appeal to the Full Court

Hub appealed, raising two principal arguments:

  • the judge ought to have found that the appointment of the Tribunal was not in accordance with the parties’ agreement; and
  • the judge should not have exercised the Court’s discretion under section 8(5) of the International Arbitration Act to enforce the award, given the premature appointment of the Tribunal by the Qatari Court and the failure by the Tribunal to conduct the arbitration in English.

The appointment of the Tribunal

Whether Article 195 of the Qatari Civil Procedure Code had been validly invoked was a question governed by Qatari law. Based on expert evidence on Qatari law, the Full Court found that:

  • the Arbitration Agreement required the parties to give notice of the arbitration, inviting the other to appoint an arbitrator;
  • Article 195 of the Qatari Civil Procedure Code allowed the Qatari Court to appoint arbitrators where the parties had failed to agree. That is, Article 195 could only be properly invoked after the process in the Arbitration Agreement had been duly followed; and
  • the Qatari Court acted on the misapprehension that the procedure in the Arbitration Agreement had been followed but had failed to produce the appointment of a tribunal. On that basis, it exercised its power of appointment.

It was not contested that Hub had neither been notified of ECQ’s appointment, nor invited to nominate an arbitrator. Accordingly, the Full Court established that ECQ had gone prematurely to the Qatari Court: “any exercise of jurisdiction of the Qatari Court to appoint arbitrators to the dispute of the parties rested on the parties’ agreement, and since what they agreed was not followed the basis for the exercise of that jurisdiction was lacking”. The Full Court found that Hub had satisfied its burden to prove that the appointment of the Tribunal was contrary to the parties’ agreement, and had valid grounds to resist enforcement under section 8(5)(e) of the International Arbitration Act. In so finding, the Full Court clarified that the standard of proof to establish a ground for non-enforcement under the International Arbitration Act is “the balance of probabilities as ordinarily applied in a civil case”, in accordance with the international approach.

The Full Court rejected ECQ’s key argument that the appointment by the Qatari Court must be deemed valid under the law of the seat (Qatar); ECQ could not rely on the Qatari Court’s judgment to regularise the procedural defect that arose from ECQ’s actions.

The discretion to enforce

The Full Court then discussed the discretion under section 8(5) of the International Arbitration Act to enforce an award notwithstanding that a ground for non-enforcement is established. Drawing upon international arbitration authorities, the Full Court found:

  • The permissive language “may” in Article V of the New York Convention is the basis for this discretion;
  • The exercise of this discretion may be justified by considerations of materiality, waiver and estoppel. Examples include where there was no prejudice caused by the irregularity, or where the award debtor is estopped from invoking the ground for non-enforcement;
  • A court ought not exercise the discretion where there are fundamental Examples include the lack of a valid arbitration agreement, the dispute exceeding the scope of the arbitration agreement, or conflict between the award and public policy.

Here, the Full Court upheld the judge’s finding that the failure to conduct the arbitration in English was immaterial and occasioned no prejudice. However, the Full Court held that there were two fundamental matters that precluded exercise of the discretion:

  • The composition of the Tribunal other than in accordance with the parties’ agreement, which struck at the “very heart of the tribunal’s jurisdiction”; and
  • ECQ’s failure to give notice of the commencement of arbitration.

Accordingly, the Full Court held that the discretion ought not be exercised. The appeal was allowed and the award was therefore not enforced in Australia.

Comment

The Full Court’s statements on the discretion to enforce awards are instructive. A key takeaway is the distinction between procedural irregularities which cause no material prejudice, and fundamental defects. Where procedural irregularities constitute a ground for non-enforcement but do not cause material prejudice, the award is nonetheless likely to be enforced under the residual discretion, which affirms Australia’s pro-enforcement stance.

The Full Court’s consideration of the burden and onus of proof in resisting enforcement is equally instructive. The Full Court’s reasoning emphasises that the limited exceptions to enforcement are “finite and narrow”.

Regarding the failure to follow the parties’ agreement as to the appointment of the arbitral tribunal in this particular case, which was ultimately the determinative issue of the appellate decision, the Full Court’s decision reinforces the primacy of the terms of the parties’ arbitration agreement and that the equal ability of parties to nominate an arbitrator is a fundamental component of due process. The Full Court balanced its pro-enforcement approach with crucial due process safeguards in a sophisticated decision referencing international arbitration authorities.

Australia’s arbitration-friendly legal framework continues to be reinforced by the sophisticated consideration of international arbitration issues by Australian courts, further contributing to the rise of arbitration in Australia.