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18 Jun 2010

The enforcement of Chinese arbitral awards in Australia - A case study

by Shun Cheng

The judgment confirms the strict approach by Australian courts in enforcing foreign arbitral awards.

Arbitration has been playing an increasingly important role in dispute resolution in China in recent years. The China International Economic and Trade Arbitration Commission (CIETAC) was set up in 1956. China ratified the New York Convention on the Enforcement and Recognition of Foreign Arbitral Awards in 1987, 13 years after Australia. Since then the number of cases accepted by the CIETAC has increased significantly, particularly since after China's economic reforms began in the 1980s. According to the statistics provided by CIETAC, the number of cases accepted by CIETAC had increased from 638 in 2000 to 1230 in 2008 (both foreign and domestic related).

Despite this growth in arbitration in China, there have been very few instances of parties attempting to enforce a Chinese arbitral award in Australia. Clayton Utz was recently asked to assist a client in enforcing a Chinese arbitral award in an Australian court, and it was a surprise to discover how few cases existed on the enforcement of Chinese arbitral awards in Australia. Thus, despite both Australia and China being signatories to the New York Convention, the enforcement of a Chinese award remained relatively untested in Australia.

How the Chinese arbitral award was made

The case involved the following scenario:

In January 2004 an agreement was entered into between a Chinese national (the plaintiff) and an Australian consulting company (the first defendant). The sole director who was also one of the two shareholders of the Australia company (which was the second defendant) was an Australian national. He signed the agreement as a guarantor and assumed personal obligations under the agreement. The agreement provided that any dispute arising out of, or relating to, the agreement should be submitted to the CIETAC according to that Commission's arbitration rules.

A dispute finally arose and an arbitral award in favour of the plaintiff was delivered by CIETAC on 12 December 2007.

And how the Chinese award was enforced in Australia

The Chinese national sought enforcement of the award in Australia. Before making the application to the NSW Supreme Court he engaged in informal discussions in the hope of resolving the case without going to the court. These were unsuccessful and the plaintiff commenced proceedings in the Supreme Court for the enforcement of the arbitral award.

The defendants did not appear at the hearing and Justice Hammerschlag, in finding that the summons were duly served upon the defendants, entered judgment in the terms of the award pursuant to section 8(2) of the International Arbitration Act 1974 (Cth) and also section 33 of the Commercial Arbitration Act 1984 (NSW).

Section 8(2) of the International Arbitration Act provides that the award may be enforced in a court of a State or Territory as if it had been made in that State in accordance with the law of that State. Section 33 of the Commercial Arbitration Act provides that an award made under an arbitration agreement may by leave of the Court be enforced in the same manner as a judgment or order of the Court to the same effect, and where leave is so given judgment may be entered in terms of the award.

Judgment was subsequently served on the defendants and, not having received any response from the defendants, bankruptcy and winding up applications were commenced separately against the defendants. It was not until the bankruptcy proceedings were commenced that the defendants took actions and filed an application to set aside the judgment of the Supreme Court enforcing the award.

After the defendant provided security for costs, Justice Bergin J ordered that the enforcement judgment be set aside and ordered the parties to serve evidence in preparation for the hearing.

In the hearing the defendants relied on the sole defence that the enforcement of the award would be contrary to public interest. The defendants argued that the giving of a guarantee, which included in the agreement the subject of the dispute, was contrary to public policy and therefore the award which gave effect to that agreement should not be enforced for the same reasons of public policy.

Justice White, who was in charge of the proceedings, found that the enforcement of the CIETAC award was not contrary to public policy. He concluded that a narrower conception of public policy should be applied in construing section 8(2) of the International Arbitration Act than that which apply to the question whether or not the agreement containing the guarantee is enforceable as a matter of public policy.

Strict approach by Australian courts in enforcing awards

The judgment confirms the strict approach by Australian courts in enforcing foreign arbitral awards. The public policy exemption under Article V(2)(b) of the New York Convention (which is implemented in section 8(7) of the IAA) has been used by courts in some jurisdictions to deny the enforcement of foreign arbitral awards.

The NSW Supreme Court made it clear that the threshold for the public policy exemption is significantly higher than if public policy is considered in the context of the validity or enforceability of an agreement. This also accords with section 19 of the IAA which explicitly defines the meaning of Articles 34 and 36 (which is almost identical to Article V(2)(b) of the New York Convention and to section 8(7) of the IAA which states that an award is in conflict with the public policy of Australia if:

  • the making of the award was induced or affected by fraud or corruption; or
  • a breach of the rules of natural justice occurred in connection with the making of the award.
With the growth of trade and investment between Australia and China, there will be an increasing number of Chinese arbitral awards enforced in Australia. Case like this one will give foreign parties confidence in the Australia legal system, which in turn will help to establish Australia in general and Sydney in particular as an international arbitration centre.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.