The Full Court of the Federal Court of Australia Affirms the Paramountcy of the Parties' Agreement in International Arbitration
The Situation: On 25 June 2021, the Full Court of the Federal Court in Hub St Equipment Pty Ltd v Energy City Qatar Holding Company [2021] FCAFC 116 (Hub v Energy City Qatar) refused to uphold the enforcement of an arbitral award on the basis that the tribunal had not been constituted in the manner prescribed by the parties' agreement to arbitrate. The Full Court refused enforcement notwithstanding the fact that the tribunal had been appointed pursuant to a decision of a court in the seat of the arbitration.
The Result: The Full Court's decision is consistent with a fundamental tenet of the law governing international commercial arbitration: i.e., that the jurisdiction of the tribunal and a party's right to enforce an arbitral award is born out of the precise terms of the arbitration agreement. Procedural defects which contradict the agreement usually cannot be remedied by a decision of a court at the seat of the arbitration or by an Australian court exercising its residual discretion to enforce an award, nor can such defects be ignored on the basis of international comity.
Looking Ahead: The decision affirms the paramountcy of the terms of the arbitration agreement when determining the validity or enforceability of an arbitral award in Australia. In doing so, the decision reinforces the certainty and predictability of international arbitration as a method of resolving international commercial disputes.
Background
The award creditor, Energy City Qatar Holding Company ("ECQ"), entered into a contract with Hub St Equipment Pty Ltd ("Hub") to supply and install street lighting equipment, accessories and street furniture in Doha, Qatar.
The contract contained an arbitration agreement which provided that:
- Any arbitral tribunal was to be constituted by (i) each party appointing an arbitrator within 45 days of a party issuing a written notice to commence arbitration; and (ii) the arbitrators appointed by the parties appointing a third arbitrator to chair the tribunal.
- Any arbitration would be conducted in English.
ECQ made an advance payment under the contract but later decided not to proceed and sought repayment. Over a number of years, Hub resisted requests from ECQ to repay the funds.
ECQ applied to the Qatari Plenary Court of First Instance seeking orders that the Court appoint an arbitral tribunal. Hub was sent a notice of the Qatari proceedings in a manner which was inconsistent with the formal notice requirements of the arbitration agreement. The Qatari Court appointed a tribunal, which proceeded to conduct an arbitration in Arabic ("Qatari Tribunal"). Despite the Qatari Tribunal sending Hub six notices of the arbitration to the address it specified under the contract, Hub did not participate in the arbitration.
Ultimately, the Qatari Tribunal issued an award obliging Hub to repay the advance payment, plus damages and the costs of the arbitration ("the Award"). ECQ then applied to the Federal Court of Australia to enforce the Award against Hub.
First Instance
Hub sought to resist enforcement of the Award in Australia on a number of grounds set out in the International Arbitration Act 1974 (Cth) ("IAA"), including:
- That it had been given inadequate notice of the arbitration and therefore could not present its case (s 8(5)(c)); and
- That the composition of the Qatari Tribunal was not in accordance with the agreement of the parties as the arbitration was conducted in Arabic (s 8(5)(e)).
At first instance, Jagot J underlined that the rationale of the IAA is to enforce foreign awards "wherever possible". Jagot J was satisfied that, since Hub had been notified of the arbitration, and the Qatari Tribunal's appointment had been validly made under the law of the seat (Qatar), Hub bore a high burden to establish that the appointment by the Qatari Court was not permitted given the circumstances of the case. Jagot J considered that Hub had not met this burden and had failed to establish that the appointment of the Qatari Tribunal was not in accordance with the arbitration agreement.
Jagot J entered judgment against Hub for the full amount of the Award.
The Decision of the Full Court
Essentially, two issues were considered by the Full Court (Allsop CJ, Middleton and Stewart JJ) on appeal:
- Whether Hub could resist enforcement of the Award on the basis that the Qatari Tribunal was appointed in a manner that was inconsistent with the parties' agreement; and
- Whether, notwithstanding any defect in the proceedings, the Award could still be enforced by the exercise of the Court's residual discretion to enforce arbitral awards.
Appointment of the Tribunal
The Court examined evidence of Qatari law and the facts surrounding the proceedings before the Qatari Court and concluded that the Qatari Court had operated on the misapprehension that it had been asked to exercise its powers to appoint the Qatari Tribunal in circumstances where the parties had been unable to agree. This led the Full Court to find that ECQ had failed to follow the agreed procedure for the commencement of an arbitration against Hub and the appointment of the tribunal.
Although the Full Court agreed with Jagot J's conclusion that the IAA has a bias toward the enforcement of arbitral awards, it characterised this bias as a consequence of the finite and narrow grounds upon which enforcement may be resisted. The Full Court found that this does not extend to imposing a standard of proof on a party resisting enforcement which is any higher than the balance of probabilities.
The Full Court refused to enforce the Award on the basis of international comity, in circumstances where:
- It considered that the Qatari Court has operated on a misapprehension as to the nature of the authority it was exercising (i.e., that ECQ had sought to follow the arbitral procedure, when it had made no such attempt);
- Hub was entitled to ignore the arbitration conducted by the Qatari Tribunal as the tribunal had not been appointed in the manner agreed in the arbitration agreement; and
- The grounds under which Hub could resist enforcement under section 8(5)(e) of the IAA were made out.
Overriding Discretion to Enforce
The Full Court considered whether it had an overriding discretion to enforce the Award, notwithstanding the irregularity in the manner in which the Qatari Tribunal was appointed. Whilst the Court concluded that such a discretion does exist, its description of the scope of discretion was imprecise:
There is, however, no justification in the text and structure of the [New York] Convention to justify a broad-ranging or unlimited discretion to enforce even when one of the narrow grounds for non-enforcement is made out. There is equally, no justification in the text and structure to conclude that there is no discretion, or to limit it to such an extent that in cases of irregularity that has caused no material prejudice the court must nevertheless not enforce the award.
Ultimately, the Court considered that the appointment of the Qatari Tribunal other than in accordance with the arbitration agreement was fundamental to the tribunal's jurisdiction. As such, it was akin to an award made against a person who was not a party to the arbitration agreement or a case in which a party was not given notice of an arbitration which ultimately resulted in an award being made against it. Hub's decision to ignore the arbitration despite receiving notice of its existence did not, in the Court's view, override these defects.
By contrast, the Full Court acknowledged that the conduct of the arbitration in Arabic, as opposed to English in accordance with the arbitration agreement, was not a fundamental defect and would not have, of itself, precluded an exercise of the Court's discretion to enforce the Award.
Four Key Takeaways
- The decision in Energy City Qatar highlights the strict approach that Australian courts will take to the parties' agreement about the manner in which the tribunal will be constituted. Such a defect will be viewed as fundamental to the arbitration, and cannot be overcome by the courts' overriding discretion to enforce arbitral awards or international comity, even in circumstances where the tribunal has been appointed by a court of the arbitral seat.
- Parties which anticipate that they will ultimately seek to enforce an arbitral award in Australia should ensure that the fundamental procedural requirements of the parties' arbitration agreement which relate to the commencement of proceedings or the appointment of the tribunal are adhered to strictly. There is otherwise a risk that an award will not be enforced.
- A procedural defect of this nature is unlikely to be remedied by the decision of a court at the seat of arbitration, unless that court is fully apprised of the attempts that have been made by the claimant to follow the agreed upon procedure.
- Claimants should carefully record all of the steps that they take to ensure that they follow procedures prescribed in the arbitration agreement. Fundamental procedural defects are unlikely to be remedied by notifying the would-be respondent of an irregular arbitration, or of that party demonstrably ignoring the existence of that arbitration.
