The Role of Courts in Arbitration

Justice Steven Rares*

4 August 2012

RTF version

1.    The Australian Centre for International Commercial Arbitration and the New South Wales Bar Association should be congratulated for organising today’s conference.

2.    In a sense, the present topic contains an unstated assumption that the role of the Courts in arbitration is, or should be, in some way distinct from their normal everyday role. It reminded me of what Groucho Marx once said: “I was married by a judge. I should have asked for a jury.” The role of the Courts in a Westminster system is governmental. They exercise the judicial power of the nation to quell controversies finally and authoritatively. The Courts are the ultimate dispute resolution process.

3.    Arbitration on the other hand is a consensual dispute resolution process. And because it is consensual, parties to an agreement to resolve disputes by arbitration may need to resort to the Courts to enforce incidents of their agreement.

4.    The Courts will usually become involved with arbitration at the time that either one party seeks to enforce the agreement to arbitrate a dispute while the other seeks to litigate it, or one party seeks the recognition or enforcement of an arbitral award.

5.    Australia’s parliaments have exercised a legislative choice to promote the use of arbitration as a dispute resolution process. This is reflected in the objects in s 2D of the International Arbitration Act 1974 (Cth) and s 1C(1) of the State Commercial Arbitration Act 2010 (NSW) and its analogues. Relevantly, these state:

“2D     Objects of this Act

The objects of this Act are:

(a)   to facilitate international trade and commerce by encouraging the use of arbitration as a method of resolving disputes; and

(b)   to facilitate the use of arbitration agreements made in relation to international trade and commerce; and

(c)   to facilitate the recognition and enforcement of arbitral awards made in relation to international trade and commerce; and

(d)   to give effect to Australia’s obligations under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted in 1958 by the United Nations Conference on International Commercial Arbitration at its twenty‑fourth meeting; and

(e)   to give effect to the UNCITRAL Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law on 21 June 1985 and amended by the United Nations Commission on International Trade Law on 7 July 2006; and

(f)   to give effect to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States signed by Australia on 24 March 1975.

1C Paramount object of Act

(1)   The paramount object of this Act is to facilitate the fair and final resolution of commercial disputes by impartial arbitral tribunals without unnecessary delay or expense.

(2)   This Act aims to achieve its paramount object by:

(a)   enabling parties to agree about how their commercial disputes are to be resolved (subject to subsection (3) and such safeguards as are necessary in the public interest), and

(b)   providing arbitration procedures that enable commercial disputes to be resolved in a cost effective manner, informally and quickly.

(3) This Act must be interpreted, and the functions of an arbitral tribunal must be exercised, so that (as far as practicable) the paramount object of this Act is achieved.”

6.    So, one role of the Courts is to construe each of those Acts in a way that has appropriate regard to these important objects. And each Act has substantially made part of our domestic law the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law (UNCITRAL).

7.    The International Arbitration Act 1974 (Cth) represents the bedrock for those engaged in international trade and commerce, giving force of law in Australia to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) and the Model Law. Within the context of wholly domestic disputes in Australia, each State and Territory other than Queensland and the Australian Capital Territory has also enacted, or is in the process of enacting, an updated Commercial Arbitration Act^[1]. These various statutes provide an enforcement mechanism for Australian Courts to refer matters to arbitration.

8.    Australian Courts recognise that arbitration clauses should be read, and thus construed, as liberally as possible, as affirmed by the Full Court of the Federal Court in Comandate Marine Corp v Pan Australia Shipping Pty Ltd^[2] per Allsop J (Finn and Finkelstein JJ agreeing). That approach won the endorsement of Lord Hope of Craighead in Fiona Trust & Holding Corporation v Privalov^[3]. There his Lordship referred to it as being firmly embedded in the law of international commerce. That theme has recently been re-endorsed by Allsop P in the New South Wales Court of Appeal^[4].

9.    The importance of arbitration in the exercise of jurisdiction by Australian superior courts under the Admiralty Act 1988 (Cth) is underpinned by s 29. That provision empowers the Court to stay proceedings on the ground that the claim concerned should be determined by arbitration, whether in Australia or elsewhere, while the ship or other property under arrest in the proceeding, or security provided for its release, is retained by the Court as security to satisfy any arbitral award. The arrest of vessels to obtain security for foreign arbitrations is a commonplace in the Federal Court^[5].

10.    And, in recent times, there have been some positive, but tentative signs, that, in particular, Australian traders are requiring arbitration clauses providing for the seat of their arbitration to be in Australia.

11.    That brings me to one theme on which I want to touch today. The New York Convention and Model Law are vital servants of international trade and commerce. About 12 per cent of the world’s trade by volume is carried into and out of Australia by sea. Our country must develop and support efficient, skilled and internationally acceptable arbitrators who can bring their commercial abilities to bear in resolving disputes. With so much of world trade focused in the Asia-Pacific region, the need for us to develop a reputation as a centre for arbitration is manifest. Our nation has a very long history of impartial, independent and incorruptible courts with a well regarded jurisprudence. These are capable of providing, and do in fact provide, support to the conduct of international arbitrations.

12.    In 2007, Lord Hoffmann explained how much arbitration had itself become an important business for the European Community saying in West Tankers Inc v RAS Riunione Adriatica Di Sicurta SpA (The “Front Comor”)^[6]:

"Finally, it should be noted that the European Community is engaged not only with regulating commerce between Member States but also in competing with the rest of the world. If the Member States of the European Community are unable to offer a seat of arbitration capable of making orders restraining parties from acting in breach of the arbitration agreement, there is no shortage of other states which will. For example, New York, Bermuda and Singapore are also leading centres of arbitration and each of them exercises the jurisdiction which is challenged in this appeal. There seems to me to be no doctrinal necessity or practical advantage which requires the European Community handicap itself by denying its courts the right to exercise the same jurisdiction.”

13.    The clear sub-text of his Lordship’s remarks is that the business of London arbitration required protection. Accordingly, the House of Lords affirmed the grant of an anti-suit injunction restraining the defendant from pursuing court proceedings it had instituted in Syracuse, in Italy. This remedy was appropriate and it is likely that an Australian court, in similar circumstances, would also have given such relief.

14.    However, his Lordship’s plea fell on deaf ears in Luxembourg, because in February 2009 the European Court of Justice resoundingly reversed the House of Lords^[7]. The Luxembourg Court held that once the Italian Court had become seized of the proceedings (including the question of ordering a stay in favour of arbitration under the New York Convention) the Courts of another member State of the European Union could not order an anti-suit injunction restraining the moving party from pursuing its proceedings.

15.    English lawyers and commentators greeted this decision without their traditional stiff-upper lip. Professor Adrian Briggs in a casenote entitled “Fear and Loathing in Syracuse and Luxembourg”^[8] wrote that:

“[t]he tactic of launching these obstructive proceedings before an Italian Court is known in the trade, if perhaps a little unfairly, as firing the ‘Italian torpedo’.”

Another Oxford don, Edwin Peel said that:

“[t]here is little merit in detailed assessment of the reasoning of the court, and not only because there is not much of it.”^[9]

16.    The Luxembourg Court’s judgment was a further development of its destructive handiwork against anti-suit injunctions seeking to restrain proceedings that have been commenced in another member State of the European Union vexatiously or oppressively to defeat or forestall (English) proceedings. This began in Turner v Grovit^[10] on which Justice Hugh Williams gave his 2005 FS Dethridge address^[11] to the Maritime Law Association of Australia and New Zealand.

17.    The House of Lords made a reference to the Luxembourg Court of the question whether an anti-suit injunction restraining breach of an arbitration clause could be made in relation to a proceeding in a court of a member State of the European Union.

18.    The ECJ’s answer appears to have all but ended the reign of terror UK courts exerted over continental Europe through the remedy of the anti-suit injunction. Professor Briggs added to his panegyric:

“[w]e should all reflect that it is possible to expect the worst and still be disappointed^[12].”

19.    One can see that this air of disappointment results not simply from the stifling of an esoteric remedy unique to the common law, or more properly, Equity, but also from the possible consequences of the outcome on the London arbitration industry. In their speeches referring the question to the ECJ, Lords Hoffmann and Mance unsubtly pointed out the impact they feared that the answer eventually given by the ECJ might have. In the Front Comor^[13] Lord Hoffmann warned:

“The courts are there to serve the business community, rather than the other way around. No one is obliged to choose London. The existence of the jurisdiction to restrain proceedings in breach of an arbitration agreement clearly does not deter parties to commercial agreements. On the contrary, it may be regarded as one of the advantages which the chosen seat of arbitration has to offer. Professor Schlosser rightly comments that if other Member States wish to attract arbitration business, they might do well to offer similar remedies.”

20.    And Lord Mance added that the opinion of advocate-general Darmon for an earlier decision of the ECJ:

“… highlighted the “fundamental importance” of modern arbitration, its essential deliberate independence of litigation and the role of major international arbitration centres like London. All are potentially affected^[14].”

21.    The Luxembourg Court silently rejected their Lordships’ arguments premised on maintaining London as a prominent seat of arbitration.^[15] At the moment international trade has not been completely cut adrift.

22.    Thus, while at a doctrinal level the ECJ’s decision turned on a rather narrow analysis of a European Union directive, as the House of Lords recognised, it is a case that promises to have a lasting effect on the ability of London to provide its previously reliable seat of arbitration.

23.    In this respect, England's loss may be Australia’s gain. Australia faces none of the same obstacles to the grant of anti-suit injunctions to restrain a breach of an arbitration clause. Indeed, all things being pre-Front Comor-equal it is likely that Australian courts will be called on to deploy the important remedy of anti-suit injunctions to complement and uphold international traders’ bargains providing for arbitration.

24.    The jurisdiction to order anti-suit injunctions restraining breach of an arbitration agreement is firmly part of Australian law as a result of the High Court of Australia’s decision in CSR Ltd v Cigna Insurance Australia Ltd^[16]. And the Australian courts will also enforce international arbitration agreements by staying their own proceedings, as the High Court did in Tanning Research Laboratories Inc v O’Brien^[17].

25.    The jurisdiction and willingness of a nation’s courts to respect and uphold the parties’ contractual choice of an international arbitration agreement for resolution of their disputes by granting remedies consistent with that choice, such as stays of domestic proceedings or the grant of an anti-suit injunction, is a key consideration for the commercial community in choosing a seat of arbitration. The latter remedy may involve potentially complex issues of comity with a foreign court, as Allsop J has observed^[18]. The recognition that the courts in Australian now give to international arbitration agreements and awards should inspire confidence in those involved in Admiralty and maritime matters and other international traders to provide in their contracts for local seats for their arbitrations.

26.    The remedy of an anti-suit injunction has assumed a position of prominence with the rise of large transnational litigation. The grant of an injunction restraining a breach of, either, an arbitration or exclusive jurisdiction clause is founded on a basis distinct from an anti-suit injunction restraining proceedings in an inappropriate forum. The former will be granted to restrain a breach of contract, while the latter is concerned with the prevention of vexatious and oppressive litigation^[19].

27.    Unlike the position now in Europe, if an anti-suit injunction is sought to prevent an actual or threatened breach of an arbitration clause it may be granted if it will be, what Steyn LJ once described as, “the only effective remedy” for breach of an arbitration agreement^[20]. Unsurprisingly, in the past English judges had been bold enough to suggest that in this context “comity has a smaller role” to play^[21], and that a reticence to grant anti-suit injunctive relief stemming from concern about a possible breach of comity should not trouble the Court in restraining a party from litigating in breach of contract.

28.    For Australia, the position was clarified in CSR^[22]where Dawson, Toohey, Gaudron, McHugh, Gummow and Kirby JJ said:

“Similarly, as Gummow J pointed out in National Mutual Holdings Pty Ltd v Sentry Corporation^[23], a court may grant an injunction to restrain a person from commencing or continuing foreign proceedings if they, the foreign proceedings, interfere with or have a tendency to interfere with proceedings pending in that court.

The inherent power to grant anti-suit injunctions is not confined to the examples just given. As with other aspects of that power, it is not to be restricted to defined and closed categories^[24]. Rather, it is to be exercised when the administration of justice so demands or, in the context of anti-suit injunctions, when necessary for the protection of the court's own proceedings or processes.”

29.    The anti-anti-suit injunction is a means by which the Court can prevent vexatious or oppressive conduct by a party who threatens to misuse an arbitration agreement in another forum. Obviously, the circumstances in which the Courts are likely to grant this species of relief will be quite limited. And the jurisdiction must be carefully exercised so as not to either frustrate the legitimate invocation of an international arbitration agreement or facilitate an abuse of the arbitral process by the party seeking the relief.

30.    A principal objective of international arbitration is, as Professor Briggs commented, to “keep the resolution of disputes as far away from the court as practicable”^[25]. In today’s globalised business and legal community, this objective will be realised more readily by the parties’ selection as the seat for their arbitration, a State whose courts are independent, efficient and respected. Australia has demonstrated a preparedness in its laws and court systems to facilitate the enforcement both of arbitration agreements and awards.

31.    It will be important to build up a reputation for quality, efficiency and integrity of arbitrators in our nation so that international merchants and traders will be able to exercise an informed choice of an alternative forum, now that London is no longer what it was.

32.    International arbitration is, of course, inherently different from domestic arbitration. Jan Paulsson, a leading French exponent of the former explained the difference as follows:

“…[domestic] arbitration is an alternative to courts, but international arbitration is a monopoly.”^[26]

33.    The reason for this distinction is not far to seek. Those involved in international trade and commerce, including the maritime industry, need a basis to enforce their rights. Defendants will not always, indeed may frequently not, be amenable to the jurisdiction of a judicial system in which the plaintiff will have confidence. The ratification of the New York Convention and Model Law by most nations, however, ensures that international arbitral agreements and awards are likely to be enforceable in many jurisdictions where foreign judgments will not. That is why the Australian Courts’ preparedness to enforce the incidents of international arbitration offers protection against the launching in this region of “Italian torpedoes”.

Arbitration and Certainty

34.    A second theme on which I want to touch is an emerging trend being the absence of detailed contemporary and authoritative guidance by national courts as to the proper construction of frequently used documents in international trade and commerce (such as the NYPE forms or Baltic forms of charter parties, the Hague, Hague-Visby or other similar rules). Because of the confidentiality of private arbitrations, and the frequency with which these are used, awards may be made which are not consistent with one another. This may be because different private arbitrators may, and sometimes do, take different views about the interpretation of standard form contracts or conventions or the appropriate quantification of damages. Awards are not publicly available or subject to scrutiny in the way court judgments are.

35.    Court judgments can set the commercial scene in which arbitrations can later apply settled legal principles, as happened towards the end of the 19^th century. Court decisions can authoritatively resolve issues concerning the nature and scope of international conventions or frequently used contracts or forms of wording.

36.    Moreover, sometimes arbitration can be complex and time consuming. It is not always certain that it will be quicker than contested litigation in providing a resolution. This is not to deprecate arbitration. It obviously plays a vital and indispensable role in international and domestic commerce. Rather, it is important to recognise that without guidance from the courts, arbitration can have its weaknesses and become, in individual cases, productive of unfortunate results.

37.    Courts have an important role to play which is complimentary to arbitration. Courts systematise and explain the legal principles applicable in particular, as well as frequently occurring, situations faced by those involved in commerce. This gives guidance to the broader international, and domestic, commercial community concerning the incidents of their actual or proposed contractual relationships. Arbitrations cannot offer that perspective because they are conducted confidentially. And, no matter how eminent the arbitrator(s) may be, an award in one arbitration does not bind any other arbitrator or relationship between contracting parties. One possible weakness of universal resort to arbitration may be the loss of certainty. An old reproach of the jurisprudence in the English Court of Chancery before Lord Eldon LC’s systematisation of its principles was, as he once said “… the equity of the court varies like the Chancellor’s foot”^[27]. He emphasised that the doctrines of courts of law and equity should not change with every judge who hears a dispute.

38.    The final theme I will touch on is a second role that a court can have. This is to use its independent statutory power to refer proceedings in the Court to arbitration, for example, under s 53A of the Federal Court of Australia Act 1976 and its analogues. Importantly, such a referral can only be made in the Federal Court by the consent of the parties by force of s 53A(1A). However, when the Court makes such a reference, the status of the outcome or award of the Court appointed arbitrator is not analogous to an award made by an arbitrator pursuant to an arbitration agreement, as Stephen J and Jacobs J explained in Buckley v Bennell Design & Constructions Pty Ltd^[28].

39.    A reference of a matter, or part of a matter, to arbitration by a consent order has the effect of empowering the arbitrator to try the subject matter of the reference. Once the Court appointed arbitrator makes an award, a party to it may apply to the Court for a review of the award on a question of law under s 53AB(2). This is, of course, quite a different role for the Court from that under the Model Law; and for good reason. The Court appointed arbitrator will conduct a separate mode of trial of proceedings that are in the Court, just as if the proceedings or a separate question had been referred for a trial by a jury or court appointed referee.

40.    In Buckley^[29], Stephen J explained that the character of such a reference by the Court to a referee or arbitrator was as follows:

“As Mr Quintin Hogg, as he then was, said in Law of Arbitration (1936), p 193, such a reference ‘is a species of trial, and the decision is now equivalent to a form of judgment or verdict and not an award’. In such a reference the court’s procedures of adjudication are not abandoned in favour of extra-curial settlement of the dispute by arbitration. Instead the court directs that, for the better resolution of the particular proceedings initiated before it, resort should be had to this special mode of trial which the legislation has made available.” (emphasis added)

41.    Stephen J described the reference powers of the Court as “procedural tools for the trial of issues or of whole cases” that were distinct from conventional arbitration. That was because references were conducted subject to Rules of Court by persons deemed to be officers of the Court and whose decisions were subject to judicial review^[30].

42.    An important decision in this area is that of the Court of Appeal of the Supreme Court of New South Wales in Super Pty Ltd v SJP Formwork (Aust) Pty Ltd^[31]. There, Gleeson CJ, with whom Mahoney and Clarke JJA agreed^[32], discussed an objection to the use of a court appointed referee saying:

“There is a danger in seeking to resolve the present problem by relying upon broad generalisations which pay insufficient regard to the particular context. The proposition that all litigants are entitled to have a judge (or, presumably, a master) decide all issues of fact and law that arise in any litigation, is unsustainable. It ignores the existence, in many civil cases, of trial by jury.” (emphasis added)

43.    The Courts of common law and in Chancery had and exercised power to refer proceedings to arbitration by consent as Jacobs J explained in Buckley^[33]. This power was the precursor of that now found in s 53A.

Conclusion

44.    The Courts and arbitration have a symbiotic relationship in resolving commercial disputes. Ordinarily, as reinforced by the Federal, State and Territory Arbitration Acts, the Courts can be expected to hold parties to their bargains to arbitrate their disputes. That role is an incident of the judicial function of enforcing rights and obligations according to law. Australia has an opportunity to broaden its international reputation as a seat for arbitration. At the same time, the Courts can also be a source of certainty and guidance for arbitrators on the construction of standard form agreements used in trade and commerce. Finally, the Courts have their own, distinct, powers to refer matters before them to arbitration.