Pro-enforcement bias does not justify an enforcement court ignoring the primacy of the arbitration agreement

Hub Street Equipment Pty Ltd v Energy City Qatar Holding Company [2021] FCAFC 110

The Full Court of the Federal Court refused to enforce a foreign award on the grounds that the composition of the arbitral tribunal was not in accordance with the agreement of the parties, notwithstanding that the arbitral tribunal had been appointed by the supervisory court of the seat.

The Facts

Energy City Qatar (‘ECQ’), a company incorporated in Qatar, sought to enforce in Australia an arbitral tribunal award made in Qatar against Hub Street Equipment (‘Hub’), a company incorporated in Australia. The award was purportedly made pursuant to an arbitration clause in a contract between ECQ and Hub for the supply and installation of street lighting and furniture in Qatar (‘Agreement’).

ECQ made an advance payment to Hub under the Agreement, which ECQ then sought to recover after deciding not to proceed with it. Following some email communications and meetings in which ECQ sought repayment of the money, Hub informed ECQ that it would identify its position after obtaining legal advice. However, Hub never communicated with ECQ again and continued to retain the advance payment.

Article 46 of the Agreement provided that any dispute not resolved amicably within 28 days would be referred to arbitration, to be conducted in accordance with the rules of arbitration in Qatar, before a three-member arbitral tribunal, with each party appointing an arbitrator and the party-appointed arbitrators appointing the chair.

Article 47 provided that the governing law of the Agreement was the law of Qatar, and Article 50 prescribed that any arbitration would be conducted in English.

Critically, ECQ did not send Hub a notice under art 46 of the Agreement giving Hub the opportunity to appoint an arbitrator within 45 days of the commencement of the arbitration. Instead, ECQ applied directly to the Qatari Plenary Court of First Instance (‘Qatari Court’) to appoint three arbitrators, including an arbitrator nominated by ECQ. Hub was given notice of the Qatari proceeding but did not appear.

The Qatari Court made orders appointing all three members of the arbitral tribunal (‘Tribunal’) pursuant to Article 195 of the Qatari Civil and Commercial Code of Procedure (‘Qatari law’), which relevantly provided (as translated in English, emphasis added):

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.

All three appointed arbitrators were of Arabic descent, albeit ECQ’s nominee was not appointed.  It was apparent from the Qatari Court’s published reasons that in exercising its power of appointment, it laboured under a misapprehension of fact that following the commencement of the Qatari proceeding ECQ had invited Hub to appoint an arbitrator which invitation Hub had declined: [52]-[53].[1]

The Tribunal sent six notices in English about the conduct of the arbitration to Hub, with the arbitration being adjourned on three occasions due to Hub’s non-appearance. Hub did not appear at all in the arbitration (which was conducted in Arabic): [103]. Following the arbitration proceedings, the Tribunal issued an award in Arabic against Hub: [30]-[31]. 

ECQ applied to enforce the award in Australia.

Decision at First Instance

Hub sought to resist the enforcement of the award on several grounds under ss 8(5) and 8(7) of the International Arbitration Act 1974 (Cth) (‘IAA’). The principal ground was that the composition of the Tribunal, as appointed by the Qatari Court, was not in accordance with the Agreement, enlivening s 8(5)(e) of the International Arbitration Act 1974 (Cth) (‘IAA’).[2] A subsidiary ground was that the arbitration was not conducted in English as required by the Agreement.

At first instance, Justice Jagot enforced the award: Energy City Qatar Holding Co v Hub Street Equipment Pty Ltd [No 2] [2020] FCA 1116. She rejected Hub’s submission that the composition of the Tribunal, as appointed by the Qatari Court, was not in accordance with the Agreement. While her Honour accepted that the arbitration was not conducted in English as required by the Agreement, and that therefore a gateway for resisting enforcement had been established, she considered that as a matter of discretion the award should be enforced as the procedural irregularity[3] had not caused Hub any material prejudice: [29] (Jagot J).

Hub appealed the decision to the Full Court.

Appeal to the Full Court

There were two principal issues on appeal:

  1. Was the appointment of the Tribunal in accordance with the parties’ Agreement?
  2. Should the Court exercise its discretion under s 8(5) of the IAA to enforce the award if the Tribunal was appointed contrary to the Agreement (assuming an affirmative answer to the first question) or given that the arbitration was conducted in Arabic (and not in English) contrary to the Agreement?

The leading judgment was delivered by Stewart J, with whom Allsop CJ and Middleton J agreed: Hub Street Equipment Pty Ltd v Energy City Qatar Holding Company[2021] FCAFC 110.

First question: was the Arbitral Tribunal composed in accordance with the Agreement?

At the crux of the first question was the scope of Article 195 of the Qatari law’; that is, whether the Qatari Court’s power to appoint the tribunal had been validly invoked?

Justice Jagot at first instance was satisfied that a dispute had arisen between Hub and ECQ for the purposes of enlivening the Qatari Court’s jurisdiction under Article 195 by virtue of the fact that Hub had refused to respond to ECQ’s request for repayment.[4] On appeal, the Full Court concluded, in reliance on the expert evidence adduced by Hub, that the Qatari Court did not have a jurisdictional basis to appoint the Tribunal: [82].

The expert evidence on Qatari law was to the effect that in the absence of a notice of the kind contemplated by art 46 of the Agreement, and the failure of the parties thereafter to agree on the appointment of the arbitral panel in accordance with the procedure laid down in Article 46, the Qatari Court’s jurisdiction under Article 195 to appoint the arbitral tribunal was not enlivened: [55]-[59].

In circumstances where the procedure for appointment of the arbitral panel in Article 46 had been ignored, the Full Court held that ECQ had prematurely approached the Qatari Court, which in turn had acted on the misapprehension that the contractual procedure for the appointment of an arbitral tribunal had been followed but had failed: [59]-[60]. Hence, the appointment by the Qatari Court of the Tribunal was not in compliance with the Agreement: [60]. Accordingly, contrary to the trial judge’s reasons, a proper basis for resisting enforcement under s 8(5)(e) of the IAA (equivalent to Article V(1)(d) of the New York Convention) had been established: [14], [59]-[60].

Second question: the nature and exercise of the residual discretion

The structure of Article V of the New York Convention (to which effect is given in s 8 of the IAA) is such that even if one of the limited grounds for resisting enforcement is made out, the enforcement court has a discretion to nevertheless enforce the foreign award. This discretion emanates from the word ‘may’ in Article V(1) and (2) of the New York Convention. The Full Court noted that there was no authoritative statement in Australia of the nature of the discretion to enforce an award conferred in ss 8(5) and (7) of the IAA: [92].

As to the irregularity concerning the composition of the Tribunal, the Full Court held that there was ‘little if any scope’ for the Court to exercise the residual discretion under s 8(5) of the IAA to enforce the award: [82]. This was because the defect was ‘fundamental to the structural integrity of the arbitration [and] it [struck] at the very heart of the [T]ribunal’s jurisdiction’: [104].

As to the irregularity constituted by the conduct of the arbitration in Arabic (as opposed to English), the Full Court held that Hub had not established that the trial judge’s discretion had miscarried. The procedural defect had not caused material prejudice to Hub. Accordingly, the Full Court considered that it was appropriate for the residual discretion contained in s 8(5) of the IAA to be exercised so as to enforce the award: [103]-[104].

In the end result, the Full Court allowed the appeal and refused to enforce the foreign award.

Comment

The Full Court’s decision affirms the primacy of the parties’ arbitration agreement. Where an arbitration agreement provides that each party is entitled to appoint an arbitrator, that right is a fundamental element of due process and is not to be discarded.

The Full Court’s decision is also instructive in addressing the application of the residual discretion to enforce an award, notwithstanding that one of the limited grounds for resisting enforcement has been established. The Full Court drew a distinction between technical procedural defects which cause no material prejudice (on the one hand) and fundamental defects which affect the structural integrity of the arbitration (on the other hand).[5] The judgment confirms that the residual discretion has little or no application to the latter.[6]

Moreover, in terms of comity, the implication of the decision is that Australian courts exercising an enforcement role will not uncritically follow decisions of the court of the seat where the Australian court is persuaded that the court of the seat has made a fundamental error supervising the arbitration which materially affects the rights of the parties as set out in the arbitration agreement. In these circumstances, the Australian court will not blindly enforce a foreign award. That is not to derogate from Australia’s reputation as an arbitration-friendly jurisdiction.

[1] Paragraph references are to the judgments in the Full Court unless otherwise stated.

[2] This ground for resisting enforcement in the New York Convention is expressed in art V(1)(d).

[3] Beyond these procedural irregularities, Hub also contended that it did not receive proper notice of the arbitration proceedings, that it was unable to present its case, and that the Tribunal award involved a breach of procedural fairness: first instance decision, [27].  All of these other challenges were rejected at first instance.

[4] Decision at first instance, [59] (Jagot J). With respect, this reasoning does not withstand scrutiny.

[5] Another example of a fundamental defect is an award made without jurisdiction.

[6] Absent, perhaps, an estoppel arising in an exceptional case.

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