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The risky business of ignoring arbitral proceedings

A recent judgment of the Federal Court of Australia shows the Court will go to great lengths to enforce international arbitral awards.

Irregularities in the arbitral process, that do not materially prejudice the principles protected by Article V of the United Nations Conference on International Commercial Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) (and that are incorporated into s 8 of the International Arbitration Act (1974) (the IAA), will not prevent enforcement in Australia.  

In Energy City Qatar Holding Company v Hub Street Equipment Pty Ltd (No 2) [2020] FCA 1116 (ECQ v Hub), the Court allowed the enforcement of an international arbitral award in circumstances in which notice of the arbitration and appointment of the arbitral tribunal, arguably, contravened the parties’ arbitration agreement. The key finding that appeared to influence the Court’s decision focussed upon the fact that the award debtor had actual notice of the proceedings and was seeking to avoid repayment of money to the award creditor.   

This case shows that the conduct of the parties will be considered by courts in assessing whether to use its discretion in s 8 of the IAA.  

Of course, the motivations of an award debtor should have no impact on an enforcement court’s obligation to determine whether any of the criteria of s 8 of the IAA have been satisfied on the balance of probabilities. An award debtor is entitled to ignore arbitral proceedings until enforcement.  

For users party to an arbitration with assets in Australia, however, this case shows that a strategy of ignoring arbitral proceedings, in which there is actual notice of an award, is a risky business with serious consequences. The better strategy, in most cases, will be to participate in the arbitral proceedings, albeit under protest and noting all jurisdictional and threshold issues, in order to minimise the risk of an adverse award or to minimise the amount of damages awarded.  

The facts

In 2010 Energy City Qatar Holding Company (ECQ) and Hub Street Equipment Pty Ltd (Hub) entered into a ’Contract for the supply and installation of street lighting and street furniture in Energy City’ (the Contract).

Energy City is a business hub intended to be a purpose built cluster dedicated to the hydrocarbon industry. It is in essence a property development focused on providing a single point of access to markets and expertise in the energy sector.  

The Contract included the following relevant provisions, as described by the Court.

  1. Article 44: which provided that any notice to be given by either party under the Contract shall be given by prepaid post or fax to certain addresses, the address for Hub being a street address in Chippendale, Sydney (the Chippendale Address);

  2. Article 46: which provided that any dispute about the Contract which is not amicably settled within 28 days shall be referred to arbitration in accordance with the rules of arbitration in Qatar and that an arbitration committee shall consist of three members, one member being appointed by each party within 45 days of one party receiving a written notice from the other party to start arbitration proceedings. The third member shall be mutually chosen by the first two members and shall chair the arbitration committee and issue the decision of the arbitration committee;

  3. Article 47: which provides that the Contract is made in the State of Qatar and is subject to the laws of the State of Qatar; and

  4. Article 50: which provides that the English language shall be the ruling language of the Contract and accordingly all matters relating to the Contract shall be in English.

ECQ paid Hub US$820,322.16 under the Contract as an advance payment. By 2012, ECQ decided not to proceed with the Contract and sought repayment of the money. Following some email communications and meetings in 2012 in which ECQ continued to seek repayment, Hub informed ECQ that it would identify its position after obtaining legal advice. Hub never communicated again with ECQ and kept the money.  

ECQ never sent a notice to Hub under Article 46 of the Contract giving Hub 45 days to appoint one member of the arbitration committee. Instead, in June 2016 ECQ applied to the Qatar Court seeking orders that the Court appoint an arbitral tribunal of three arbitrators including an arbitrator nominated by ECQ (as was permitted, in certain circumstances, by the then applicable law governing arbitration in Qatar).  

In November 2016, ECQ sent a notice of the Qatar Court proceedings to Hub but this notice was not sent to the Chippendale Address. Rather, it sent the notice to a post office box in Doha which the evidence establishes was the mailing address of a company unrelated to Hub but with which Hub had done business in Qatar known as Elan Urban. On 1 December 2016, Elan Urban emailed the notice to Mr Muraywed who was an employee of a company related to Hub known as Hub Qatar Pty Ltd (Hub Qatar).

Mr Muraywed gave evidence that he translated part of this notice (which was in Arabic not English) and gave it to the directors of Hub later in December 2016 when he returned to Sydney from Qatar. The directors of Hub, Mr Matchett and Mr Williams, denied ever having seen the notice or having been given it by Mr Muraywed.

The Qatar Court made orders in January 2017 appointing an arbitral tribunal. Subsequently, the arbitral tribunal sent to the Chippendale Address, six notices in English about the conduct of the arbitration between 18 April 2017 and 12 July 2017 (with the arbitration being adjourned on three occasions due to Hub’s non-attendance). The evidence shows that the letters were sent by pre-paid registered mail and receipts show that each of the notices was sent to the Chippendale Address.

On 1 August 2017 the arbitral tribunal issued the award in Arabic. Hub never made any appearance in the arbitration.  

Hub’s arguments

Hub contended that the award should not be enforced by the Court on a number of grounds, including:

  • Hub did not receive proper notice of the appointment of the arbitrator as proper notice required notice to be given to Hub at its Chippendale Address giving it a period of 45 days in which to appoint an arbitrator: s 8(5)(c) of the IAA;

  • Hub did not receive proper notice of the arbitration proceedings as it did not receive any notice of those proceedings. The notice sent to Elan Urban’s post office box in Doha was not notice to Hub. Mr Muraywed was an employee of Hub Qatar and not Hub so the email to Mr Muraywed from Elan Urban was not notice to Hub. The notices from the arbitral tribunal were not received by Hub: s 8(5)(c) of the IAA;

  • Hub was unable to present its case in the arbitration proceedings as it never received notice of those proceedings: s 8(5)(c) of the IAA;

  • The composition of the arbitral authority was not in accordance with the agreement of the parties as the Article 46 procedure in the Contract had not been followed: s 8(5)(e) of the IAA; and

  • The arbitral award involved a breach of the rules of natural justice and thus the award should not be enforced as it would be contrary to public policy to do so: ss 8(7) and 8(7A)(b) of the IAA.

Issue 1 – Proper notice of the arbitration 

Read together, Articles 44 and 46 of the Contract required ECQ to commence the arbitration by sending a notice to Hub by either prepaid post to the Chippendale Address or by fax. It is uncontroversial that ECQ did not send a fax or written notice by prepaid post to the Chippendale Address in order to start the arbitration as required by Article 46 of the Contract.  

Section 8(5)(c) of the IAA provides that a court may refuse to enforce an award if the party opposing enforcement proves to the satisfaction of the court that that party was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his or her case in the arbitration proceedings.  

The key question is what constitutes proper notice of the arbitration proceedings for purposes of s 8(5)(c) of the IAA? Is strict adherence to the notice requirements of a contract required or can they be dispensed with in circumstances in which a court makes a finding of actual notice?

The answer is that proper notice is to be determined having regard to the entirety of s 8(5)(c) of the IAA, which includes the words “was otherwise unable to present his or her case in the arbitration proceedings”.  Rather than focusing on any formal notice requirements, proper notice for purposes of s 8(5)(c) of the IAA is to be considered having regard to:

  1. whether a party had a reasonable opportunity to present its case; and

  2. the consideration in s 39(2) of the IAA, which provides that a court must, in considering whether to exercise its power to refuse enforcement under s 8 of the IAA, have regard to the objects of the IAA and the fact that:

    1. arbitration is an efficient, impartial, enforceable and timely method by which to resolve commercial disputes; and

    2. awards are intended to provide certainty and finality.

In this case, given that Hub had actual notice, the Court found that Hub had an opportunity to present its case, but it chose not to do so. The following passage is demonstrative of the Court’s pro-arbitration policy.

”In these circumstances the evidence that Hub, had it known about the arbitration, may have wished to counter-claim in some way cannot be accepted. Hub had years in which to make a claim and yet never did so. Nor did it ever suggest to ECQ any basis on which it was entitled to retain the money paid to it. It must be inferred, for the reasons given above, that Hub knew about the arbitration but chose not to involve itself or make any counter-claim against ECQ in the arbitration. For these reasons I consider that there would be no unfairness to Hub by enforcement of the award against it. Hub had an adequate opportunity to participate in an arbitration which was constituted and carried out in accordance with the laws of Qatar which governed its contract with ECQ. Even if there was some procedural default within the scope of s 8(5)(c) or (e) of the IAA, the considerations in s 39(2) of the IAA, would support rejection of Hub’s case that the Court should refuse to enforce the award against it.” (Emphasis added)

Issue 2 – Composition of the arbitral authority 

The more difficult issue in this case was that, on a simple reading, the process for appointing the arbitral tribunal in Article 47 of the Contract was not followed. Instead of sending a notice to Hub, which would have triggered a 45 day window for each party to nominate a co-arbitrator, ECQ went directly to the Qatar Court to seek orders appointing the arbitral tribunal.  

Section 8(5)(e) of the IAA provides that a court may refuse to enforce an award if the party opposing enforcement proves to the satisfaction of the court that the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, was not in accordance with the law of the country where the arbitration took place.

It would be difficult to see how an objection to enforcement pursuant to s 8(5)(e) of the IAA could be rejected by the enforcement court if Hub had not received actual notice, in circumstances where the contractual notice requirements were not met.[1] The Court was not inclined, however, to use its discretion in s 8(5)(e) of the IAA having regard to the objects of the IAA due to the fact that Hub had actual notice and had, according to the Court, made a tactical decision to ignore the proceedings.

In deciding that s 8(5)(e) was not appropriate in the current circumstances, the Court had regard to the fact that the Contract was governed by Qatar law and that the arbitration agreement provided that any dispute connected with the Contract that was not amicably settled within 28 days “shall be referred to arbitration in accordance with the rules of arbitration in Qatar”.  

The Court then recognised that whether Hub was given proper notice of the appointment of the arbitrator and whether the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the Contract were subject to the operation of Qatari law.  

As noted by the Court, whilst Australian law governs the enforcement of the arbitral award in Australia, that law is to be applied having regard to the fact that Qatar law determines the validity of the arbitration and its conduct. Nevertheless, an enforcement court must not defer to a court of a foreign jurisdiction such that the enforcement court fails to carry out its proper review function arising from Article V of the New York Convention / s 8 of the IAA.  

In this case, the rules of arbitration in Qatar, at the time of commencement of the dispute in the Qatar Court, included Article 195 of Qatar Law No. 13 of 1990 Promulgating the Civil and Commercial Code of Procedure (the Qatari CCCP), which provided:

“If a dispute arises between the parties prior to an agreement between them as to the arbitrators…the court which has jurisdiction to consider the dispute shall appoint the necessary number of arbitrators at the request of one of the parties [filed in accordance with the normal procedure for filing a claim. The court shall hear the application in the presence of the other parties or in their absence after being summoned to appear before the court. The court's decision in respect of the foregoing may not be appealed in any way whatsoever. However, its decision to reject the appointment of arbitrators shall be subject to appeal pursuant to the relevant provisions of Article 205].”

A similar provision is contained in Qatar’s new arbitration law (which is based on the Model Law) and the IAA. In the old and new Qatari arbitration laws and the IAA, the appointment of an arbitrator by the competent court is not subject to appeal. This point is not made clear in the judgment and the text shown in square brackets above was omitted from the Court’s translation of Article 195 of the Qatari CCCP.

In any event, the Court reasoned that Hub had failed to meet its burden that a dispute had not arisen for purposes of Article 195 of the Qatari CCCP such that the Qatar Court was not validly authorised to appoint the arbitral authority. In so doing, the Court shows deference to the findings of the Qatar Court, but at the same time, in keeping with its obligation of considering Hub’s s 8(5)(e) objection to enforcement, finds that there is a factual foundation in the evidence for the conclusion that a dispute had arisen between the parties prior to an agreement between them as to the arbitrators. Again, this finding is driven by the fact that Hub ignored the proceedings in the face of actual knowledge.  The Court stated:

“… ECQ had sought repayment of the money paid to Hub in 2012. Hub had indicated it would revert to ECQ once it had obtained legal advice. Instead of so doing, Hub remained silent. In my view, refusal to respond to a request for repayment is capable of constituting a dispute within the meaning of Art 195 of the Qatari CCCP. In any event, as I have said the onus of proof lies on Hub and Hub has not proved that Art 195 does not operate in this way. As such, Hub has not proved that the appointment of the arbitrators by the Qatari Plenary Court of First Instance was not in accordance with Art 46 of the Contract which provided for the referral to arbitration to be in accordance with the rules of arbitration in Qatar.”

In such circumstances, and having regard to the following principles,

  1. the onus of proof was on Hub to prove to the satisfaction of the court that s 8(5)(e) of the IAA applied;

  2. “the enforcing court should start with a strong presumption of regularity in respect of the tribunal’s decision and the means by which it was arrived at”; and

  3. “the conduct of the parties to the agreement at each of the various stages prior to an enforcement order being sought in these courts, and its consistency with the defence subsequently asserted, will be a relevant fact to consider when deciding whether that burden has been discharged to the necessary standard”,

the Court decided that, on the balance of probabilities, Hub failed to establish that it was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or that the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties (There were other issues raised by Hub in challenging enforcement, such as the language of the arbitral proceedings but they are not the focus of this Insight).

Conclusion

Choosing not to participate in arbitral proceedings, regardless of procedural irregularities, is a risky strategy in circumstances in which a party has actual notice of those proceedings. Australian courts, as shown in ECQ v Hub, will construe s 8 of the IAA narrowly having regard to the objects of the IAA.  

If it can be said that an award debtor could have rectified procedural irregularities by engaging in the arbitral process, then it appears unlikely that an award debtor can succeed in satisfying the court that any of the circumstances in ss 8(5) or 8(7) of the IAA exist such that enforcement should be avoided.  

The better strategy is to participate fully in the arbitral process with a reservation of rights in order to attempt to avoid an adverse award or minimise any damages awarded.   Jurisdictional arguments can be maintained whilst appearing in the proceedings under protest.  

[1] In this regard the Court’s reference to Uganda Telecom Limited v Hi-Tech Telecom Pty Ltd [2011] FCA 131; 277 ALR 415 [109] can be distinguished.  In the latter case, notice had been sent to the registered address of the award debtor.


Authors

PAFFEY-josh-highres_SMALL
Joshua Paffey

Head of Arbitration

SHLAH Ryan SMALL
Ryan Shlah

Senior Associate


Tags

Arbitration

This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.

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