In 2016, the Australian courts were at the forefront of maintaining Australia's stronghold as a pro-arbitration jurisdiction. This was notably demonstrated in three Federal Court decisions, which also served as a salutary reminder that:

  • Australian courts enforce a high threshold for applications to set aside an arbitral award
  • Australian courts are ready and willing to make an order for indemnity costs against a party that makes a frivolous challenge against an arbitral award
  • Although insolvency is generally non-arbitrable as a matter of public policy, the underlying dispute is arbitrable if it merely concerns an inter partes dispute between the parties arising from their contract

It will be interesting to see whether the Australian courts continue to proactively maintain a pro-arbitration stance in 2017 and whether in doing so they will consider and adopt approaches taken in other pro-arbitration jurisdictions.

Sino Dragon Trading Ltd v Noble Resources International Pte Ltd [2016] FCA 1131

Noble commenced arbitration proceedings against Sino in respect of alleged breaches by Sino of a contract for sale of iron ore. After failing to engage in the appointment process of the three-person tribunal, Sino made a number of challenges in relation to the appointment of two of the arbitrators, including bringing proceedings in the Federal Court for those arbitrators to be removed (Sino Dragon Trading Ltd v Noble Resources International Pte Ltd [2015] FCA 1028). None of those challenges proved successful and the arbitral tribunal ultimately awarded in favour of Noble. Noble successfully enforced the award in Hong Kong, with the Hong Kong High Court ordering Sino to pay to Noble the sums specified in the award.

Sino subsequently applied to the Federal Court seeking an order to set aside the award pursuant to Article 34(2) of the UNCITRAL Model Law, which is given force in Australia under section 16 of the International Arbitration Act 1974 (Cth) (IAA Act). Sino's challenge was made on the following three grounds:

  • The arbitral tribunal acted beyond its jurisdiction by dealing with a dispute not contemplated by the arbitration agreement
  • There was a lack of procedural fairness and equality of treatment arising from technical glitches concerning video images and witness evidence given via videoconference
  • Two of the three arbitrators were not independent and impartial as they worked for an Australian law firm that had previously acted for a company associated with Noble

Beach J emphasized the narrow scope of Article 34 of the Model Law, such that the Court will exercise "significant judicial restraint … in considering and determining" an Article 34 challenge. His Honour noted that it was not an occasion for a merits review, or for assessing the adequacy of evidence presented before the tribunal. Furthermore, His Honour held that there must be "real unfairness" or "real practical injustice" for a challenge based on procedural unfairness to succeed. In dismissing Sino's application, Beach J ordered Sino to pay two-thirds of Noble's costs on an indemnity basis. This was on the basis that the first and third grounds of Sino's challenge lacked reasonable prospects for success.

This case confirms that Australian courts set a high threshold for an application to set aside an arbitral award. Furthermore, indemnity costs may be ordered against a party that makes a frivolous application with "no reasonable prospects of success" (although this will be determined on a case by case basis).

Ye v Zeng (No 5) [2016] FCA 850

Zeng borrowed money from Ye under a loan agreement, guaranteed by the second to sixth respondents. Zeng failed to repay the loan and, as per the dispute resolution provisions in the agreement, the dispute was referred to arbitration at the Xiamen Arbitration Commission in China (the Commission). The Commission awarded in favour of Ye.

Ye applied to the Federal Court of Australia seeking to enforce the award under section 8(3) of the IAA Act (Ye v Zeng [2015] FCA 1192). Meanwhile, the respondents lodged an appeal against the award in the Xiamen Intermediate People's Court, principally on the ground of lack of procedural fairness (the Appeal).

In earlier judgments, Allsop CJ stayed the enforcement application pending the outcome of the Appeal, making freezing orders in respect of several properties owned by the respondents and registered in Australia. On the dismissal of the Appeal, the Federal Court proceeded to enforce the award.

In Ye v Zeng (No 5), Allsop CJ considered the issue of costs. Having applied "entirely conventional and unremarkable authority," His Honour found (among other things) that there had never been an attempt by the respondents "to agitate any legitimate ground to resist enforcement." Accordingly, His Honour awarded Ye full and complete indemnity costs.

Importantly, Allsop CJ also considered whether the Australian courts should adopt a particular approach to costs in respect of applications to enforce international arbitral awards under the Act. His Honour explained that the approach in Hong Kong is to award indemnity costs when an award is unsuccessfully challenged in the absence of special circumstances. Whereas, in IMC Aviation Solutions Pty Ltd v Altain Khuder LLC [2011] VSCA 248, the Court of Appeal of Victoria noted obiter that a decision to award indemnity costs against an unsuccessful party is dependent upon there being "circumstances of the case…such as to warrant the Court…departing from the usual course of awarding costs on a party and party basis." With that in mind, an unsuccessful challenge against enforcement of an arbitral award was not an "established category of special circumstances in Australia" which would justify indemnity costs.

While Allsop CJ found it both unnecessary and inappropriate to decide this matter obiter, His Honour did suggest that there were "powerful considerations" to support the Hong Kong approach being preferred and adopted in Australia. He continued, "[courts] should be astute to distinguish between conduct that reflects no more than an attempt to delay or impede payment and the reasonable invocation of the proper protections built into the [New York Convention] and the [IAA Act]."

It remains to be seen whether the Australian courts will adopt the Hong Kong approach, which by default subjects an unsuccessful party to indemnity costs (indeed, in the Sino Dragon case, Beach J declined to find that there was a rebuttable presumption in favour of indemnity costs). Such an approach would arguably be effective in discouraging parties from bringing frivolous challenges and could thus be said to be reflective of a "pro-arbitration" stance taken by the courts which adopt it.

WDR Delaware Corporation v Hydrox Holdings Pty Ltd; In the Matter of Hydrox Holdings Pty Ltd [2016] FCA 1164

Lowes and Woolworths incorporated a joint venture company, Hydrox Holdings, to operate a chain of hardware stores. Lowes (through its subsidiary, WDR) held one-third of the issued capital of Hydrox Holdings, while Woolworths held the remaining two-thirds. Lowes, WDR, Woolworths and Hydrox Holdings executed a joint venture agreement that included an arbitration clause.

Lowes and WDR subsequently applied to the Federal Court seeking a declaration that the conduct of Woolworths and its nominee directors on the Hydrox Holdings' Board was "oppressive to, unfairly prejudicial to, or unfairly discriminatory against" Lowes and WDR, and sought an order that Hydrox Holdings be wound up pursuant to sections 233(1)(a) or 461(1)(k) of the Corporations Act 2001 (Cth) (Corporations Act). Woolworths sought to stay the proceedings for arbitration pursuant to section 7(2) of the IAA Act. Lowes and WDR opposed the stay application, characterising the parties' dispute as solely involving the question of winding up under the Corporations Act, which is non-arbitrable as a matter of public policy.

Foster J held that the mere fact of the winding-up application did not alter the true nature of the proceedings, which effectively involved a contractual dispute between the shareholders of Hydrox Holdings concerning their rights and obligations under the joint venture agreement. The dispute did not raise any public interest concerns, nor did it involve any third party interests. Accordingly, His Honour held that the dispute was arbitrable, while the ultimate question of winding up was to be left to the Court.

This decision confirms the "policy of minimal curial intervention" by Australian courts in matters governed by arbitration agreements. While public policy is a valid ground for arguing non-arbitrability, it does not apply if the underlying dispute merely concerns inter partes issues between the parties arising from their contract.