International Commercial Arbitration – the Courts and the Rule of Law in the Asia Pacific Region

In 2012, in delivering the Clayton Utz Sydney University International Arbitration Lecture, David W Rivkin gave a scholarly and interesting speech on the impact of international arbitration on the rule of law. He spoke of the place of arbitration in Ancient Greece, in Europe in the Middle Ages, in Europe and the United States from the 17^th to the 20^th centuries, of state-to-state arbitration, of the creation of the Permanent Court of Arbitration and the International Court of Justice, of contemporary commercial arbitration and investment arbitration. Importantly, for some emerging debates, he discussed some of the criticisms of the investment arbitration system. The Chief Justice of Australia has recently ventured into discussion of the relationship between national court decisions and their examination by investment arbitral tribunals.^[1] I do not wish to enter these particular waters. The currents in them are strong and driven by deep public policy – both national and international.

What I would prefer to do this morning is to discuss some aspects of the activities of, and relationships between, courts and arbitration as they affect the rule of law, in particular in the Asia Pacific Region.

My hope is that you will find it interesting, but also that you find it familiar, unthreatening and resonant with your conceptions of international civil society. If that be the case, it means that we all share important beliefs in respect of civil society and commerce, and that these shared views are widely held.

What you should also appreciate, however, is that there are people who do not come to conferences such as this and who doubt the value of, and question the faith or confidence of others in, international commercial arbitration as an instrument of the rule of law.

Such views and such people should not be consigned by a careless brush of the arm to the category of the ill-informed or uninformed. Some of these people are very well-informed; some by nature and training distrust private adjudication away from the scrutiny and sunlight of public hearings.

The existence of these doubts in some is why the existence of reliable and skilled commercial supervising courts is of such importance to arbitration.

Those in this room who have an interest and belief in commercial arbitration should always recognise the importance of that relationship; and, as fully symbiotic, the development of commercial courts of excellence and arbitral procedures and institutions of excellence. This relationship between courts and arbitral structures is critical for the development of broad and deep trust (a mutual trust) among commercial courts, arbitrators and the commercial community about the arbitral process.

Let me begin with the obvious: globalised and regional trade and development (economic and societal) in the Asia Pacific Region in the last 30 years has created a diverse and active economic sphere of vast importance. It is diverse in its peoples and societies, in its political structures and philosophies, and in its stages of economic development. It is a region which will create a demand in the next 20 to 30 years for commercial dispute resolution that will be enormous.

These matters have created the requirement, in order that civil society grow, within and across these countries, for the development of a regional justice system. By this I mean the development of a trusted and reliable body of courts, and of trusted and reliable arbitral activity and institutions. Involved in the building of such a regional justice system is the building of structures and jurisprudence of quality and the creation of a deep regional goodwill in the manner in which disputes are resolved and enforced in the region.

Utterly central to this process is the acceptance of the autonomous character of the arbitral legal order. There may competing theoretical conceptions underpinning this: those that give primacy to the national legal order; those that see the model anchored in a plurality of national orders; and those that see an autonomous and authentically separate legal order.^[2]

For now, putting theory to one side, the practical reality is that arbitration requires the court system for its efficacy – either as a positive force or by its benign non-interference with arbitral activity.

Thus, the acceptance of the arbitral legal order requires legal and cultural acceptance by the judiciary and by national laws of the legitimacy and trustworthiness of the arbitral order. The legal and cultural acceptance of international (i.e. foreign) commercial arbitration by most court and legal systems in the region is a given. Hopefully, no one has to defend the pro-arbitration approaches of courts in Japan, Hong Kong, Singapore, Malaysia, Australia and New Zealand. The position in India after Oil and Natural Gas Corporation v Saw Pipes Ltd 2003 SC 2629, must now be viewed in the light of more recent Indian Supreme Court authority which may limit the effect of that case and may, perhaps, be seen to have a greater pro-arbitration emphasis: see Bharat Aluminium Co v Kaiser Aluminium Technical Services (2012) 9 SCC 552; Shri Lal Mahal Ltd v Progetto Grano Spa (2014) 2 SCC 433; Enercon (India) Ltd v Enercon Gmbh (2014) 5 SCC 1; Swiss Timing ltd v Commonwealth Games 2010 Organising Committee (2014) 6 SCC 677; Reliance Industries Ltd v Union of India (2014) 7 SCC 603; World Sport Group (Mauritius) Ltd v MSM Satellite (Singapore) Pte Ltd (Civil App No 895 of 2014). Further, the recent report by the Law Commission of India on arbitration gives cause for optimism in this regard.^[3]

The coherence of the arbitral order in the region is facilitated by the broad and comprehensive adoption of the UNCITRAL Model Law into domestic laws in the region, by Japan, South Korea, Australia, New Zealand, Singapore, Malaysia, Thailand, Vietnam, The Philippines, India, Sri Lanka and (substantially) Hong Kong.

Not only does this lead to a familiarity and coherence in legislative structure, it also encourages and facilitates a conscious and salutary discussion, and generally adoption, of regional jurisprudence. For instance, recently, in TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd [2014] FCAFC 83, the Full Court of the Federal Court of Australia had occasion to discuss the question of public policy in Art V of the New York Convention and Arts 34 and 36 of the Model Law, and particular provisions of the Australian International Arbitration Act 1974 (Cth) that involved the same concept. The Court adopted and applied the broadly (though not universally) accepted position that public policy in this context is narrow and is limited only to the fundamental principles of justice and morality of the state in question, recognising the international dimension of the context: Parsons Whittemore Overseas Co Inc v Société Générale de l’Industrie du Papier (RAKTA) 508 F 2d 969 (2d Cir 1974); MGM Productions Group Inc v Aeroflot Russian Airlines 91 Fed Appx 716 (2d Cir 2004); Hebei Import & Export Corp [1999] 2 HKC at 215-216 (Bokhary PJ) and 232-233 (Sir Anthony Mason, with whom Li CJ and Ching PJ agreed, in the Hong Kong Court of Final Appeal); Boardwalk Regency Corp v Maalouf (1992) 6 OR (3d) 737 at 743 (Ontario Court of Appeal); Amaltal Corporation Ltd v Maruha (NZ) Corporation Ltd [2004] 2 NZLR 614 at 625-626 [41]-[46] and 630 [59] (New Zealand Court of Appeal); Downer-Hill Joint Venture [2005] 1 NZLR at 568-570 [76]-[84]; Quintette Coal Ltd v Nippon Steel Corporation (1990) 50 BCLR (2d) 207 at 217 (British Columbia Court of Appeal); Deutsche Schachtbau-und Tiefbohrgesellschaft mbH v Shell International Petroleum Co Ltd [1990] 1 AC 295 at 316 (Sir John Donaldson MR); PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2006] SGCA 41; [2007] 1 SLR 597 at 619-622 especially 622 [59] (Singapore Court of Appeal); Attorney General of Canada v S D Myers Inc [2004] 3 FCR 368 at [55] (Federal Court of Canada).

TCL concerned how the rules of natural justice or procedural fairness fitted within the arbitral framework of the Model Law. These conceptions are, of course, at the heart of the arbitral process, and its legitimacy. The central place of Art 18 in the Model Law (reflected by its non-derogable character) epitomises that. A breach of Art 18 is not an individually expressed ground of setting aside or refusing to enforce an award under Arts 34 and 36 of the Model Law; but there can be little doubt that a breach of any consequence of Art 18 would strike at the fundamental norms of justice and fairness for public policy. The civilian concept of ordre public was recognised at the time of the development of the New York Convention and the Model Law to be wide enough to include principles of procedural fairness.^[4] To the extent that there was some doubt about whether “public policy” in common law countries was wide enough to pick up the same concept, legislatures made clear that the Model Law conception of public policy incorporated “natural justice”.

In its reasons, the Full Court of the Federal Court discussed all the equivalent legislation and case law in New Zealand, Singapore and Hong Kong on this topic. What is evident from that discussion is the consistency and coherence in the major common law centres of the region and a willingness in all of them to examine the approaches and authorities of other courts of the region about the Model Law. What is also evident is a diminished incidence of habitual reference to English authorities – not out of the slightest disrespect, but out of the reality that the English legislation is now substantially different from regional legislation, and not being based upon the Model Law.

The development of this kind of consistency and interwoven jurisprudence will encourage the perception, and perhaps over time, even the fact, of a coherent regional law area exhibiting and showcasing the best traits of the international arbitral legal order.

The development of this interwoven consistency will be aided by a recognition that though the Model Law was prepared for its adoption into national legislation, it is a form of international instrument. It is a creature of a United Nations Agency, after all. It should be interpreted in the way treaties are. Article 2A of the Model Law reinforces this – that it is to be interpreted with a regard to international harmony and consistency.

There are a number of areas of importance in international commercial arbitration practice where focus could be sharpened on regional consistency – in legislation, in subordinate legislation such as court rules and procedures, and in jurisprudence. For instance, the relationship between judgments of the courts of the seat and enforcing courts in relation, especially to questions of procedure and fairness (see Gujarat NRE Coke Ltd v Coeclerici Asia (Pte) Ltd [2013] FCAFC 109; 304 ALR 468); the degree of limited confidentiality or at least anonymity to parties in an enforcement case, given the nature of the privacy of the underlying award; the availability of indemnity costs to the successful enforcer of the award (cf MC Aviation Solutions Pty Ltd v Altain Khuder [2011] VSCA 248 at [55]); and a consistent swift show cause procedure in enforcement actions, are all subjects for consideration in relation to regional consistency.

A consistent philosophical, legislative and jurisprudential approach by regional legislatures and courts to the arbitral legal order will help create confidence the sense of a consistent and coherent legal order.

Even more important than consistency, however, is the creation of confidence in and the reality of the substantive justice to be found in the regional legal order – curial and arbitral. This confidence is important, not only for confidence in the use of arbitral structures, but also for the confidence in the use of curial structures, and also for the confidence in the effectiveness of the support of arbitration by the courts. The three things are separate, but highly connected.

The quality and legal culture of the court of the seat of any arbitration is critical. The court of the seat has a crucial role in the supervision of the procedural conduct of the reference and thus of its fairness. It is the fairness of the arbitral procedure, and the reputation for fairness, of an arbitral centre, of a legal order of a city or a state or a region, that is at the heart of the arbitral process, and its acceptance. The supervising court has a primary role in the assessing of that fairness of the procedure. In Minmetals Germany GmbH v Fierco Steel Ltd [1999] All ER (Comm) 315 at 331, that great commercial judge Mr Justice Colman expressed the strong view that the view of the supervising court as to the procedural legitimacy and fairness of the reference should generally prevail, except in exceptional circumstances. This view has been endorsed in Australia by the Full Court of Federal Court in Gujarat NRE Coke Ltd 304 ALR 468 at [65]. This was not put on the basis, by Colman J or by the Full Court, of issue estoppel; but rather, on the basis of legal policy of the enforcing court. This policy may operate at the level of deferring to the supervising court’s view of fairness and equality by the lex arbitri or, even if of the view that some irregularity occurred, taking into account the view of the supervising court in deciding whether nevertheless to recognise and enforce.

This deference heightens the importance of the quality and reputation of the supervising court and of the choice of the seat by the parties. More difficult questions arise if notions of issue estoppel intrude: see for example as they did the 5^th Circuit Court of Appeals in Karaha Bodas v Pertamina 364 F 3d 274 (2004). Issue estoppel raises difficult questions of theory, policy and comity. One reason for the choice of arbitration, in many cases, is the avoidance of national courts that are not trusted as either reliable or acceptable. A doctrine that gives primacy to the first court (chosen by either party) to produce a decision about an award (whether that court is the supervising court or not) may undermine the internationality of the award, undermine the autonomy of the parties in choosing the seat, and undermine the authority of the arbitrator and of the arbitral process.

Thus, it will be important for courts of the region to develop a broad and flexible approach as enforcing courts to the weight to be given to the views of other courts, including, but not limited to, the court of the seat. This will involve the development of some consistency of approach to enforcement of awards set aside in the seat of arbitration: cf Pabalk Ticaret Sirketi v Norsolor [1985] Rev Arb 431 (Cour de cassation 9 October 1984); Hilmarton Ltd v Omnium de traitment et de Valorisation – OTV (1995) 20 YB Comm Arb 663 (Cour de cassation 23 March 1994). This may also involve a fresh look at comity between courts, which may require a willingness, on proper evidence with the necessary degree of cogency, to examine the reliability and quality of justice in other jurisdictions. In the Kuwait Airlines Case,^[5] Lord Nicholls said that “As nations become even more interdependent, the need to recognise and adhere to standards of conduct set by international law becomes ever more important”. In Yukos Capital^[6] Rix LJ paraphrased Lord Nicholls’ statement by replacing “international law” by “international recognition of proper judicial standards mandated by the rule of law”. Lord Justice Rix went on to refer also to what Lord Hope had said in the same case to the effect that “it is now clear, if it was not before, that the judiciary cannot close their eyes to the need for a concerted, international response to these threats to the rule of law in a democratic society.” Lord Justice Rix then said “Their Lordships were of course speaking about Iraq’s international delinquency in invading Kuwait and despoiling it of its assets; however, their observations are equally pertinent to judicial bias and dependency in the face of state interference in the judicial process.” Lord Justice Rix was referring to a questionable decision of a Russian court that set aside an arbitral award.

A further subject of importance for the development of a consistent approach to problems is the question of procedural fairness as a part of public policy. What is the significance and what are the limits of the rules of natural justice being part of public policy?

The significance of the question is that the fairness of the arbitral process is critical to the acceptance and legitimacy of arbitration. Article 18 of the Model Law expresses the fundamental norms of equality and fairness:

“The parties are to be treated with equality and each party shall be given a full opportunity of presenting his case.”

This has been described as the Magna Carta of arbitration.^[7] It is the short expression of the uncompromising demand of the fairness of the arbitration process. This is not some pernickety body of rules, but the demand for equality and fairness that lie at the root of any legal order.

What are the limits of natural justice or procedural fairness? Those of you familiar with the operation of administrative law will be familiar with the variety of rules against which decisions of a public character are judged.

The expression of the rules of natural justice is often in terms of the fundamental principle that a fair and unbiased hearing be given. There are two traditional “rules”: the hearing rule (audi alteram partem) that requires a decision-maker to hear a person before making a decision that affects that person’s interests; and the bias rule (nemo debet esse iudex in propria sua causa) that no one may be a judge in his own cause.^[8] These are procedural aspects of fairness that are well understood.

There have been developments, however, of the notion of natural justice beyond such a procedural focus, into what might be called “substantive fairness”. For example, in Dranichnikov v Minister (2003) 77 ALJR 1088 a majority of the High Court treated the relevant tribunal’s misunderstanding of the basis on which the applicant’s claim was put as a breach of natural justice.^[9] This can be seen to link with other lines of cases that require the decision-maker (as an aspect of affording natural justice) to act rationally, to respond to the case made by a party and to base the decision on probative evidence.^[10] At least one thread of this (the requirement to have a decision on logically probative and relevant material) has a pedigree in decisions of Lord Diplock in the Court of Appeal and the Privy Council.^[11]

The characterisation of such decisional failures as natural justice is of some consequence for arbitration as it potentially gives an avenue for factual review under the guise of natural justice. This issue was dealt with by the Full Court of the Federal Court in TCL Air Conditioner (Zhongshan).

It may be taken from the discussion by the Full Court at [89]-[109] that this characterisation is not without its doctrinal difficulties. That said, assuming it to be correct, the context of international commercial arbitration (context always being critical to procedural fairness) and the terms of the Convention and the Model Law required that the party seeking to invoke the rules of natural justice in this way to demonstrate real unfairness in how the hearing was conducted and award made. Such demonstration should be able to be done shortly and without a substantial analysis of the evidence on the reasoning: see [113]. In reaching these views, the Court drew on the approaches of Courts in New Zealand, Singapore and Hong Kong.

It is critical that challenges to awards raising questions of natural justice do not degenerate into rehearings of facts. Critical to preventing this is the discretion inhering in the word ‘may’ Art V and Arts 34 and 36. The Full Court in TCL made clear that the award would not be set aside and enforcement would not be refused unless real unfairness was demonstrated. That unfairness was to be judged by the context – international arbitration between the parties, being persons hardly likely to be vulnerable.

The mutual confidence in the courts of the region is reflected in the regular references to each other’s jurisprudence and in the close engagement of commercial law judges with each other in the region. These engagements and recognition are supported by such events as the regular regional conferences of commercial law judges begun by Chief Justice Spigelman and Chief Justice Ma.

The deepening of the contacts among the commercial courts of the region is a matter of great significance. For instance, from 2007 until about 2011-2012, the Federal Court of Australia and the Supreme People’s Court of the PRC engaged in a close working relationship in maritime law, conducting seminars for each other on their respective laws and co-operating to deliver lectures to judges of the Chinese maritime courts. It gave each court a unique insight into the competence and skill of the other.

The setting up by Singapore of an international commercial court is another step of significance. This should not be viewed as competition for, or as somehow undermining of, arbitration. It will help reinforce Singapore’s and the region’s reputations for a city and a region with a high quality judiciary. Its success will be advanced by nations seeing the significance of the Hague Convention on Choice of Court Agreements 2005: see J Spigelman “The Hague Choice of Court Convention and International Commercial Litigation” (2009) 83 ALJ 386. The court is a model that seeks to provide international commercial parties with a curial choice. It is a model that is open to be developed elsewhere in the region.

Such international courts are potentially significant for the development of a regional justice system. If such courts are to be successful, they will be so because of a reputation for quality and speed. If successful, they will enhance the reputation of the region for jurisprudence. If successful, they will enhance the reputation of arbitral institutions in the region by the enhanced general capacity for delivering justice in commercial cases in the region.

The higher the quality of the commercial courts of a seat of arbitration, the higher of the quality of the supervision of arbitration, and the heightened development of a skilled fair legal culture for the enforcement of the values of equality and fairness in Art 18, and the heightened authority thereby given to skilled arbitrators to run references efficiently, knowing that the assessment of the fairness of their procedures will be undertaken by skilled commercial judges.

These qualities of skill, fairness, equality and despatch are essential characteristics of a just legal order. The existence and concurrent development of commercial courts and arbitral structures of great quality creates a symbiotic legal order for the just resolution of commercial disputes. The development of skill and consistency in and among the major legal centres of the region is critical to the creation of a self-conscious and coherent law area and justice system, based on shared values reflected in the Model Law and upon shared experience as judges and arbitrators.

I would like to wish you well for a productive and enjoyable day.

Thank you.