International arbitration clauses in commercial contracts

The recent decision of Traxys Europe SA v Balaji Coke Industry Pvt Ltd (no 2) is a timely reminder of the complexities that can arise both in drafting international arbitration clauses and in enforcing arbitration awards internationally.

When Australian companies enter into contracts with companies that are domiciled overseas or have significant assets outside of Australia, careful thought should be given as to how those contracts are to be enforced in the event of a dispute. Simply saying that a contract is governed by Australian law, and that the parties submit to the jurisdiction of Australian courts, can still lead to problems when it comes time to try to enforce an Australian judgment overseas.

While Australia is a party to reciprocal enforcement arrangements with 36 countries in respect of judgments obtained in Australian courts, the terms of the reciprocal enforcement arrangements differ between countries and depend on the legislation in each particular foreign country. Matters are still more complicated when it comes to enforcing Australian judgments in the many countries where there is no reciprocal arrangement in place (including, notably, the United States).

Partly as a result of these difficulties, international arbitration is an increasingly popular means of resolving disputes in contracts involving cross-border commercial transactions. The main advantage of international arbitration over court litigation is enforceability.  With 146 signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), unlike an Australian judgment, an international arbitration award is enforceable in most countries in the world. Other advantages of international arbitration include the following:

• the proceedings are usually heard more quickly than court proceedings;
• the costs of arbitration can be less than the costs of court litigation;
• the parties are able to select a neutral forum in which to have the dispute heard and determined;
• the parties have considerable flexibility to specify the procedures in accordance with which the arbitration will be conducted;
• the parties have the option to have the dispute determined by an industry specialist;
• arbitration awards are final (with avenues for appeal usually being limited); and
• the parties typically agree to keep the details of their dispute confidential.

However, despite these advantages, enforcement of an award overseas may not always be straightforward. This is illustrated by the recent Australian case of Traxys Europe SA v Balaji Coke Industry Pvt Ltd (no 2) [2012] FCA 276 (Traxys). In this case, the parties to the relevant contract were companies domiciled in Luxembourg and India respectively, and had included an international arbitration clause in their contract.

The arbitration clause specified London as the seat of arbitration and indentified the laws of England and Wales as the governing laws. When Balaji breached its contract with Traxys, Traxys successfully sought an award from the arbitral tribunal in London. The complication arose because Balaji did not have any assets in England. 

Balaji commenced proceedings in the Indian Court seeking to have the award set aside or its operation stayed. Balaji was successful in obtaining an injunction in the Indian Court to restrain Traxys from enforcing the award in India. Traxys then applied to the Australian Federal Court to have the English award enforced in Australia against assets which Balaji allegedly held in Australia. Traxys was ultimately successful in having judgment entered to enforce the award in Australia.

The Australian judge noted that the New York Convention (and the legislation giving effect to the Convention in Australia) permits member states to refuse to enforce an award if it is contrary to 'public policy'. The judge was of the view that for these purposes, 'public policy' meant the public policy of Australia, and would be given a very restrictive meaning i.e. matters going to "fundamental, core questions of justice and morality". Notably, in determining whether or not there was any public policy reason for not enforcing the award in Australia, the judge did not give any weight to the existence of the proceedings in the Indian Court.

Although the judge did not specify what would be a matter going to "fundamental, core questions of justice and morality" which would prevent an award being enforced in Australia on public policy grounds, we consider that an award obtained by fraud would almost certainly fall into this category.

In addition, the Australian judge did not consider it necessary for the party seeking to enforce the award to prove that the other party had assets in Australia. As the judge noted, one practical consequence of this approach is that an award may be recognised in Australia and enforced subsequently against assets which might come into existence later (or which might enter Australia at a later date). All of this tends to confirm that Australia is an 'arbitration-friendly' jurisdiction i.e. one which is likely to recognise and enforce international arbitration awards.

When drafting arbitration clauses, parties are usually well-advised to consider matters including the following:

• which arbitral rules will apply - choose those which maximise your chances of enforceability and ensure the agreement specifies that an award is final and binding;
• the appropriate seat (or legal place) of arbitration;
• the applicable law of the arbitration; and
• where the assets of the counterparty are located.

The Traxys case suggests that it may also be important to tailor the agreement to take into account the local laws which apply in the jurisdiction where the counter-party's assets are located. In Traxys, the counterparty was Indian and accordingly the agreed seat for arbitration needed to be a country which was officially gazetted by India as a New York Convention country. It has also been suggested that the arbitration agreement should have excluded Part 1 of the Indian Arbitration and Conciliation Act (to reduce the risk of the award not being enforceable on Indian public policy grounds).

The Traxys case also illustrates some of the tactical issues that can arise in seeking to enforce an international arbitration award, especially if a party has assets in more than one jurisdiction. Often, one or more of those jurisdictions may be more 'arbitration-friendly' than others, and a party may be well-advised to seek to enforce an award quickly in an arbitration-friendly jurisdiction such as Australia, rather than in another jurisdiction which may be less inclined to recognise and enforce a foreign award on locally-based 'public policy' grounds.