Your arbitration agreement should be carefully drafted to maximise the chances of enforcement, particularly when dealing with counterparts who are domiciled in less arbitration friendly jurisdictions.
The finality and enforceability of international arbitration awards are key reasons for the popularity of arbitration in cross-border transactions. However, the recent Federal Court decision in Traxys Europe SA v Balaji Coke Industry Pvt Ltd (No 2)  FCA 276 shows that the enforcement process isn't always easy (particularly if the unsuccessful party is domiciled in less arbitration friendly jurisdictions, such as India).
It is a timely reminder that all arbitration agreements need to be drafted with careful consideration given to which arbitral rules will apply, the appropriate seat, the applicable law of the arbitration and any nuances applicable to the jurisdiction in which your counterparty is domiciled.
The contract and the arbitral award
Traxys is a Luxembourg company which provides financial, marketing and distribution services to the mining industry.
Balaji is an Indian company which imports coal and coke and then manufactures low ash metallurgical coke and coking coal.
Traxys and Balaji entered into a contract for the sale of low ash metallurgical coke in 2009, but Balaji failed to pay for the coke. Traxys then re-sold the coke and commenced an arbitration against Balaji in London under the London Court of International Arbitration (LCIA) Rules. It sought approximately AUD$3 million, the difference between the coke shipment under the contract and the amount realised by the substitute sale. The arbitral tribunal found in Traxys' favour.
Traxys' problem: how can this arbitral award be enforced?
There was a problem for Traxys: Balaji didn't have any assets in the UK or Europe. The arbitration had been conducted in England under the rules of the LCIA only because the contract between Traxys and Balaji had provided for that.
Balaji, rather than attacking the award in England, commenced proceedings in the Indian Court seeking to have the award set aside or have its operation stayed. It obtained an ex parte injunction restraining Traxys from "putting the award into execution".
Traxys did not appear nor take any step whatsoever in the Indian proceedings. Rather, it went to the English Commercial Court and was authorised to enforce the arbitral award in England and obtained interim freezing and anti-suit injunctions against Balaji.
Why Australia? Because Balaji owned shares in an Australian company called Booyan Coal (the third respondent in the Australian proceeding). Booyan in turn was the holder of an exploration permit in the District of Rockhampton issued by the Queensland Government. That permit authorised Booyan to explore for coal in the area covered by the permit which is an area located approximately 30km north west of Bundaberg. We assume another reason was that Traxys did not want to go to India to litigate.
At the hearing of the Australian case Balaji contested the enforcement of the arbitral award on certain technical grounds and tendered some evidence which suggested that it had sold its shares in Booyan to a third party (however the evidence was not conclusive). Ultimately, Traxys won the day in Australia having freezing orders over the shares extended and getting the Federal Court to direct the entry of judgment in favour of Traxys against Balaji for all the sums due under the award plus interest.
There is still an outstanding issue for the next hearing about whether Traxys can get a Court order appointing a receiver to Booyan to deal with the assets of that company in accordance with the award.
Can you avoid a Traxys situation?
The arbitration clause in Traxys' contract with Balaji effectively referred a broad range of disputes to the LCIA. It specified the seat of the arbitration as London and identified the substantive laws of England and Wales as the governing law. The LCIA Rules which applied to the arbitration clearly stated that any award was final and binding upon the parties.
The problem lay with the approach taken by the Indian courts and the behaviour of Balaji. Justice Foster in the Federal Court held that Balaji breached its contract with Traxys when it commenced the proceedings in India (because the parties had agreed that the award was final and binding) and breached the anti-suit injunction which Traxys had from the English commercial court. Additionally, the Indian High Court didn't have the power to order the interim stay because both the New York Convention and the Indian Arbitration Act say that a foreign award can only be set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made. Justice Foster went on to say that Balaji's conducts amounted "to nothing more than a tactic designed to out-manoeuvre Traxys and to avoid its obligations under the Award, obligations which themselves arose out of the contract which it freely made with Traxys in 2009".
To put yourself in the best position to avoid a Traxys situation:
- agree arbitral rules which maximise your chances of enforceability;
- consider the location of the assets of your counterparty and take this into account in advance of finalising your arbitration agreement;
- agree a seat which maximises your chances of enforceability (including by ensuring that the seat is in an arbitration friendly jurisdiction);
- ensure your arbitration agreement specifies that an award is final and binding;
- tailor your arbitration agreement to address nuances of the jurisdiction in which your counterparty is domiciled or in which you plan to enforce the award. For example, if your counterparty is Indian as was the case for Traxys, the agreed seat should be in a country which is officially gazetted by India as a New York Convention country (making it less likely that an Indian court will refuse the enforcement of the award on the basis that it is not a "foreign award" pursuant to Part II of the Indian Arbitration and Conciliation Act) and the arbitration agreement should exclude Part I of that Act (which could prevent the award from being set aside on Indian public policy grounds);
- enforce your award quickly in an arbitration-friendly jurisdiction, such as Australia.
You might also be interested in...
- India: a widening scope to avoid enforcement of foreign awards
- How confidential will your international arbitration really be?
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 bulletin. Persons listed may not be admitted in all states and territories.