Australia is shaping up as a proximate, reliable and neutral seat for international arbitration stemming from China’s Belt and Road. When it comes to enhancing this appeal, recent judicial decisions show that Australian courts remain steadfast in their support of international arbitration.

Most notably, in the dispute between Woolworths Ltd and Lowe’s Companies, Inc in WDR Delaware Corporation v Hydrox Holdings Pty Ltd,[1] the Federal Court of Australia ruled that matters related to the winding up of a company could be determined by arbitration. In another decision, Kaspersky Lab UK Ltd v Hemisphere Technologies Pty Ltd,[2] the New South Wales Supreme Court upheld an agreement to arbitrate despite the resulting practical challenges for the parties’ dispute. Finally, the Federal Court’s decision to award indemnity costs in Sino Dragon Trading Ltd v Noble Resources International Pte (No 2)[3] sent a strong message that only challenges to arbitral awards with real prospects of success will be tolerated by the courts. These are discussed in greater detail below.

The arbitrability of winding up orders

The commercial benefit of confidentiality in arbitration proceedings remains a serious consideration for parties drafting dispute resolution clauses. The Australian media frenzied over the demise of the Masters Home Improvement business (Masters Business), but this was brought to a halt when Foster J of the Federal Court of Australia ordered the joint venture parties to resolve their dispute in arbitration. Lowe’s Companies, Inc., through its subsidiary WDR Delaware Corporation (together, Lowes) and Woolworths Ltd (Woolworths) ran the failed Masters Business through Hydrox Holdings Pty Ltd (Hydrox). In WDR Delaware Corporation v Hydrox Holdings Pty Ltd[4]*, Lowes sought from the Federal Court:

  • a declaration pursuant to the Corporations Act 2001 (Cth) (Corporations Act) that the affairs of Hydrox had been conducted in a manner “oppressive to, unfairly prejudicial to or unfairly discriminatory” against Lowes; and

The Federal Court held that the ultimate question of whether a winding up order should be made needed to be determined by a court. However, Foster J stayed the proceedings pending the Arbitral Tribunal’s determination of all matters involved in the question of whether a declaration of oppressive conduct should be made.[6]

The subject matter capable of arbitration used to be clearly defined. In Australia, it was well-established that disputes involving certain intellectual property, competition law, bankruptcy and insolvency issues could not be subject to private arbitration. Lowes sought to draw parallel arguments with these non-arbitrable categories, and argued that a winding up order under the Corporations Act is not arbitral because it affects a number of third parties and there is a public interest in ensuring that procedural steps are governed by the Court’s public processes.[7]

The Court rejected Lowes’ arguments and emphasised that “[b]lanket propositions in support of the proposition that all claims in a Corp[orations] Act proceeding are not arbitrable will not usually find favour with the Court”.[8] Foster J pointed to the difference between compulsory windings up and voluntary windings up which are initiated by the members rather than the court. Although the Court accepted that “a winding up order [generally] operates to affect the rights of third parties”,[9] Foster J distinguished the dispute in question as one that was between parties who were the sole shareholders of Hydrox (i.e. there were no other shareholders whose rights would be affected by the dispute). The Court also noted that no creditor had attended Court hearings or had sought leave to participate in the dispute, despite considerable press coverage. As such, there was “no substantial public interest element” or effect on third parties that warranted a departure from the arbitration agreement.[10]

Recognition of bespoke dispute resolution clauses

As far as practicable, Australian courts will honour parties’ contractual arrangements, including the decision to tailor their dispute resolution process. In the recent New South Wales Supreme Court decision Kaspersky Lab UK Ltd v Hemisphere Technologies Pty Ltd[11] the parties’ dispute resolution clause referred all disputes, except for royalty claims, to arbitration in Stockholm under the Stockholm Chamber of Commerce Arbitration Rules. One of the parties later brought a claim for royalty payments in the Supreme Court of NSW.

Bergin CJ of the NSW Supreme Court made it clear that “commercial courts [in Australia] respect commercial parties’ decisions to proceed to arbitration of their dispute”.[12] As the parties had validly concluded a commercial arrangement in which certain aspects of their dispute would be arbitrated and others would not, the Court granted an extension to an injunction to allow part of the claim to be heard in arbitration. However, the Court warned parties to “reflect on what they really can achieve” by their bifurcated dispute resolution clause.[13]

In the dispute between Lowes and Woolworths, the Federal Court also considered the wording of the dispute resolution clause when determining whether the dispute should be characterised as several matters or only one matter.[14] Lowes argued that the dispute comprised of only one matter, involving the question of whether Hydrox should be wound up. The Court preferred Woolworths’ submission that the broad definition of “Disputes” in the joint venture agreement supported the characterisation of the dispute in question as one involving several matters, including the alleged deficiencies of Woolworths in its provision of information to Lowes and the keeping secret of Woolworths’ plans for the wind down of the Masters Business.[15] In the joint venture agreement, “Disputes” had been defined as “any and all claims, disputes, questions or controversies arising out of or in connection with this Agreement….”[16] This broad wording suggests that any dispute between the parties could be segregated, as necessary.

Indemnity costs for unreasonable challenges to arbitral awards

To avoid further losses arising from arbitration, unsuccessful parties to a commercial arbitration should seek sound legal advice before challenging the arbitral award before Australian courts. A recent example of this was seen in a dispute between Sino Dragon Trading Ltd (Sino Dragon) and Noble Resources International Pte (Noble Resources). In 2015, Sino Dragon challenged the arbitral award in a commercial arbitration against Noble Resources before the Federal Court of Australia under Article 34 of the UNCITRAL Model Law.[17] Sino Dragon’s challenge was unsuccessful and Noble Resources made a subsequent application for indemnity costs. In Sino Dragon Trading Ltd v Noble Resources International Pte (No 2)[18], Beach J ordered Sino Dragon to pay two-thirds of Noble Resources’ costs of the Article 34 challenge on an indemnity basis and the remaining one-third on a party/party basis.

The Court ordered partial indemnity costs as Sino Dragon had challenged the arbitral award on two grounds that had no reasonable prospects of success, the first being a contractual merits question disguised as a jurisdictional issue[19], and the second an unmeritorious challenge with respect to the impartiality of the arbitrators.[20] The Federal Court ruled that an unsuccessful Article 34 challenge is a “special circumstance” which justifies an order for indemnity costs where the challenging party had no reasonable prospects of success regardless of whether the party knew or ought to have known this at the inception of the challenge.[21]

Noble Resources had contended that there was a default rule that unsuccessful challengers of arbitral awards always pay indemnity costs.[22] In rejecting this argument, Beach J emphasised that the successful party to an arbitration still bears the onus of establishing that the unsuccessful party had no reasonable prospects of success when challenging an award.[23] This can be a high bar to establish and successful parties to arbitration should not take Australian courts’ willingness to order indemnity costs for granted.

Ultimately, the Federal Court accepted that Article 34 challenges are not ordinary litigation and that public policy considerations warrant the ordering of adverse cost orders so as to discourage the bringing of unmeritorious Article 34 challenges to a valid arbitral award.

What do these cases mean?

The above cases illustrate that:

  • Australian courts are taking a progressive stance on the arbitrability of traditionally non-arbitrable subject matter.
  • Australian courts will show considerable respect to the parties’ decision to arbitrate their dispute.
  • Transactional and dispute resolution lawyers need to have a strong understanding of international arbitration procedures in order to advise on the most appropriate dispute resolution clause for their clients.
  • An unfavourable award in an arbitration proceeding should not be taken lightly and the prospects of success of challenges to arbitral awards before Australian courts should be carefully considered.

Overall, there is little doubt that Australian courts will continue to support international arbitration in Australia. In turn, this will work to increase Australia’s appeal as a destination for the vast number of infrastructure disputes likely to arise from China’s Belt and Road.