Over half of Australian businesses are doing business overseas through trade, investment and cross-border transactions. The world has become much smaller and closer, and Australian businesses are now fully integrated as part of the greater Asian market. The internationalisation of Australian business brings great opportunities, but also risks associated with operating in different regulatory environments and being subject to unfamiliar laws.
Disputes are part of doing business. Few commercial transactions run absolutely perfectly and businesses are so inundated with regulations that it is difficult for a business to be fully compliant with every law at all times. This reality is magnified when business is conducted across borders. Cross border dispute management is a combination of understanding the legal environment, focusing on commercial outcomes and being flexible in how the dispute is conducted.
In this newsletter series, Moulis Legal’s dispute resolution team will examine the critical aspects of successfully avoiding and managing cross-border commercial disputes. In this first newsletter, Moulis Legal partner Christopher Hewitt and lawyer Alexandra Geelan discuss the legal and commercial advantages of the various options available for Australian businesses to manage commercial disputes outside Australia’s borders.
The changing landscape for managing cross-border disputes
For many years international commercial arbitration has been held up as the best method of resolving cross-border commercial disputes. Arbitration allows parties in a commercial dispute to exercise greater control over the management of the dispute, is generally more efficient and, critically, the arbitration awards are almost universally enforceable. Compared to litigation and domestic courts, arbitration has been characterised as more commercial and less legal.
Despite these advantages, commercial arbitration has not put the courts out of business and the majority of cross-border commercial disputes still find their way into a court room somewhere in the world. The hesitation of many commercial sectors and industries to fully embrace arbitration poses the question of whether arbitration is the best method for businesses to resolve their cross-border disputes. The concerns regarding commercial arbitration come from both ends of the legal spectrum. At one end there is a concern that arbitration is too informal and lacks the sophisticated decision makers of high level courts – this has been a common reason for banking and financial institutions to avoid arbitration. Conversely, many businesses are concerned that arbitration remains too much like a court, with the associated costs and limitations holding it back from being fully commercial.
Recent developments in the international commercial dispute resolution landscape have sought to respond to these concerns, and mean the decision for businesses is no longer simply between arbitration and litigation when resolving a cross-border dispute. The new Singapore International Commercial Court is a model that resolves some of the concerns regarding some of the informalities of arbitration for resolving cross-border disputes, especially regarding the sophistication of the decision makers. For those businesses wanting less formality, the Arb-Med-Arb model is being utilised to provide greater commerciality and control for parties to commercial disputes. However, as we will discuss, both of these models have limitations, especially in relation to the key issue of enforcement.
Arbitration vs litigation: is one just better for cross-border disputes?
Enforceability and efficiency have been the strongest arguments in favour of commercial arbitration over litigation for the resolution of cross-border disputes.
Arbitration allows the parties to have their decision managed by a commercial arbitrator (or team of arbitrators) operating under one of the many sets of arbitration rules available around the world. The arbitration rules and processes are not bound or limited by the evidentiary and process rules of any one jurisdiction or country, which allows the parties to operate on a more balanced and equitable level. The efficiency argument is further supported by the limitation of appeal rights, meaning that parties can be confident that a decision cannot enter into the seemingly endless labyrinth of appellate courts.
With arbitration’s greater flexibility and control by the parties comes less certainty and reliability in the decision making process. The rigid rules of court processes are not designed to prevent justice and fairness, but rather to provide certainty and consistency for all parties. For some businesses engaging in cross-border disputes, the costs and efficiency benefits of commercial arbitration are not sufficient to convince them to trust a decision maker outside of a traditional court system. Arbitration simply may not be suitable for the resolution of every type of commercial dispute, and a business should consider the suitability of arbitration as a dispute resolution mechanism before deciding to rely on it. Lawyers should seek to understand the nature of their client’s business and the potential issues of future dispute before automatically inserting an arbitration clause into a cross-border commercial contract.
The enforceability advantages of commercial arbitration are significant and have been promoted at length by the arbitration hubs of Singapore, Hong Kong and London. The New York Convention of the Enforcement of Arbitral Awards1 provides for arbitral awards from a compliant arbitration in a member country to be directly enforceable by the courts of another member country. In practice, this generally means that an award delivered in a commercial arbitration conducted in China is enforceable in Australia as though it was a court judgment from an Australian court. An award may be challenged only for limited grounds relating to procedural fairness, fraud and public policy. Australia’s courts have consistently and repeatedly enforced foreign arbitral awards and supported the freedom of commercial parties to agree to decide their disputes through arbitration. There are currently 156 countries that are parties to the New York Convention, including all of the major world markets including the United States of America, most European countries, China, India and Russia.
Conversely, a judgment from a country’s domestic court is only enforceable in another country if there is a reciprocal or diplomatic arrangement between the countries. Australia has such arrangements with a number of countries, although that does not include the United States of America, most major European countries and China. The effect of this is that a judgment from an Australian court will generally not be enforceable in China or the United States – many judgments become very expensive pieces of paper because the parties cannot use them to effectually chase the other party’s assets in other countries.
The value of arbitral awards for cross-border commercial disputes was recently confirmed by the Federal Court of Australia. The Federal Court made orders freezing the Australian assets of a party that had lost an arbitration in China and had lodged an appeal against that arbitration through the Chinese courts.2 The Federal Court actively protected the value of the arbitral award by ensuring that the assets could not be disposed of while the award was being reviewed or appealed in China. Australian courts have been eager to support arbitration awards and enforcement under the New York Convention, further highlighting the value of arbitration as a means of getting a commercial (and enforceable) result in cross-border disputes.
Singapore International Commercial Court – the new kid on the block
The Singapore International Commercial Court (“the SICC”) was officially launched on 5 January 2015 as a speciality court for resolving cross-border commercial disputes, especially in the banking and financial sectors. However, the SICC is not the exclusive domain of bankers and financiers, with its first written judgment on 12 May 2016 actually being a mining contractual joint venture dispute between companies from Australia, Singapore and Indonesia.3
While the SICC sits outside the traditional Singapore court structure, its decisions have the same status as decisions of the Singapore High Court. The SICC generally has jurisdiction for particular cross-border disputes because the parties to the dispute have agreed to resolve the dispute through the SICC. This is the same model as commercial arbitration. Additionally, the Singapore High Court may transfer a dispute to the SICC where the court believes that the SICC is a more appropriate forum for the case to be heard.
The advantages of the SICC over traditional domestic courts and arbitration are substantial. SICC is a highly sophisticated legal forum that utilises a panel of renowned international judges with varied and impressive experience. This includes the former president of the Austrian Supreme Court, senior justices from the United Kingdom, judges specialising in intellectual property and the former chairman of the Appellate Body of the World Trade Organization Dispute Settlement Body. Relevantly for Australian businesses, the panel also includes a former Justice of the High Court of Australia, the Chief Justice of the Supreme Court of New South Wales and a former Judge of the Court of Appeal of the New South Wales Supreme Court. Businesses entering into agreements to submit to the jurisdiction of the SICC can do so confident that some of the best judicial minds in the world will be hearing their dispute.
Other advantages of the SICC include:
- the decisions have been released efficiently, especially in comparison with traditional courts;
- parties may have foreign legal representatives (this is highly restricted in traditional courts);
- determinations relating to foreign law are based on legal submissions instead of expert evidence;
- parties may agree to vary or limit appeal rights, meaning decisions may have greater finality and certainty; and
- Singaporean rules relating to evidence may be excluded by the parties.
Despite the advantages of the SICC, the legal sophistication and associated costs of the SICC is a negative for many businesses who are eager to find a resolution to their decision through a commercially focused process.
The other drawback of the SICC is that its decisions have the same problems with enforceability as any other court judgment. As discussed above, court judgments are enforceable in foreign jurisdictions only if there is a treaty or reciprocity relationship between the countries. Decisions of the SICC are enforceable in Australia under the Foreign Judgments Act 1991 (Cth) because they are judgments from a division of the High Court of Singapore. However, the list of countries with similar arrangements for the enforcement of decisions of the SICC is limited4 and does not include critical business hubs such as the United States of America, most major European countries and China. As with all litigation and traditional courts, parties must carefully consider the enforceability of a judgment of the SICC before agreeing to submit their dispute to its jurisdiction.
Arb-Med-Arb – trying to get the best-of-both-worlds
Arb-Med-Arb (also known as Arb-Med) is a growing alternative cross-border dispute resolution process which allows parties to combine the commercial advantages of mediation with the enforcement benefits of arbitration. Under Arb-Med-Arb, arbitration proceedings are commenced and then (with the parties consent) the proceedings are stayed and the parties attempt to resolve the dispute through mediation. If the mediation is successful, the parties return to the arbitrator or arbitral tribunal for a consent award on the terms agreed by the parties. If the mediation is not successful, then the arbitration proceedings resume and an arbitration award is made.
Arb-Med-Arb allows businesses to overcome some of the main concerns with both traditional mediation and arbitration and seeks to be a best-of-both-worlds approach to cross-border dispute resolution. Parties benefit from the more informal and collaborative nature of mediation, and can exercise greater control over the process to achieve a commercial outcome. The parties can also take advantage of the greater enforceability of arbitration awards (as discussed above), particularly in international jurisdictions.
Generally in Arb-Med-Arb processes, the same person acts as both the mediator and arbitrator, so that the mediator becomes the final decision maker if arbitration recommences. This raises concerns for some businesses about the ability of the arbitrator to maintain impartiality and act without actual or perceived bias when they switch hats to act as the arbitrator. It is also important for parties to be open and transparent with the person when they are acting as a mediator to maximise the likelihood of the parties reaching a mediated settlement. If the parties are aware that the mediator may later determine the issues, they may hesitate to disclose or discuss all the relevant facts or issues. This can hinder the mediator in their role and potentially jeopardise the ability of the parties to reach an agreement.
The Singapore Arb-Med-Arb Protocol seeks to overcome this issue by providing for separate individuals to act as the mediator and arbitrator. Under the Protocol, independent arbitrators and mediators are appointed under the applicable arbitration and mediation rules. This model may make Arb-Med-Arb a more attractive option for some businesses and can potentially improve the effectiveness of the dispute resolution process.
Each business, and its legal advisors, should consider the appropriate and most commercially expedient dispute resolution method when faced with a dispute or when preparing cross-border contracts. Recent developments in international commercial law have meant that the options for cross-border dispute resolution are not limited to litigation and arbitration, with the growth in the Arb-Med-Arb model and the opening of the Singapore International Commercial Court expanding the options to resolve cross-border commercial disputes.