Australia: Federal Court Of Australia Grants Stay In Favour Of US District Court Proceedings, But Requires Parties To First Mediate In Australia

Armacel Pty Limited v Smurfit Stone Container Corporation [2008] FCA 592 (2 May 2008) Jacobson J

In brief

An American company has partially succeeded in evading its (apparent) contractual obligation to mediate and submit to litigation in Australia, by "getting in first", i.e. filing an application for declaratory relief in the US District Court.

However, the American company was not able to avoid its contractual obligation to first submit to mediation in Australia

The Facts

Armacel, an Australian company, licensed Smurfit to use its technology in the United States. The parties fell out, and it appeared that Armacel would commence legal proceedings. The contract provided that the parties submitted to the jurisdiction of the courts of New South Wales, and that any dispute would first be mediated in Sydney, Australia.

Smurfit moved first: On 5 October 2007 it commenced proceedings in the United States District Court seeking negative declaratory relief that it had no remaining obligations to Armacel under the agreement, other than payment of certain monthly instalments and return of Armacel's equipment.

On 7 November 2007, Armacel commenced proceedings in the Federal Court of Australia, seeking damages for pre-contractual representations by Smurfit (pursuant to the Trade Practices Act 1974), and for breach of contract.

Armacel then moved the US District Court to dismiss the proceedings before it for want of jurisdiction. On 27 December 2007 the US District Court dismissed this motion, holding that the jurisdiction clause in the contract was non-exclusive.

Smurfit then filed a Notice of Motion in the Federal Court of Australia seeking a stay of the Australian proceedings. Armacel filed a cross-application for an anti-suit injunction against Smurfit. The motion and application were heard by Jacobson J in Sydney.

Whether the decision of the US District Court gave rise to an issue estoppel

Armacel challenged the finding of the US District Court that the jurisdiction clause in the contract was non-exclusive. Jacobson J noted that the High Court of Australia has adopted the test used by Lord Guest in Carl Zeiss v Rayner¹, which includes a requirement that a decision be "final", before an issue estoppel is created.

Jacobson J deferred to Lord Brandon's judgment in The Sennar (No 2)² as authority that a final decision must be both "final and conclusive" and "on the merits". On this basis, Lord Brandon and other judges in England and Australia had decided that an issue estoppel can arise from an interlocutory judgment of a foreign court on a procedural issue, where there has been an express submission of the procedural or jurisdictional issue to the foreign court and the specific issue of fact has been raised and decided by that court³.

Armacel submitted that the instant case could be distinguished from that of the Sennar (No 2), in that the US District Court had applied the law of the United States (the lex fori), in accordance with rules of American private international law, instead of the law of New South Wales, being the proper law of the contract. This was arguably an error in the American court's reasoning, since it was not disputed that the law of New South Wales governed the contract.

Nevertheless, Jacobson J noted and concurred with the concern expressed by Kerr LJ in the English Court of Appeal in The Sennar (No 2)⁴, that to permit re-litigation of an issue decided by a foreign court on such a basis risked removing the possibility of issue estoppel ever arising from a decision on a jurisdiction clause. He accordingly refused to reconsider the finding by the US District Court that the jurisdiction clause was non-exclusive.

Whether the US District Court could or would hear the trade practices claims

Under Australian law (Part V of the Trade Practices Act 1974), Armacel was entitled to rely on the pre-contractual behaviour of Smurfit, in certain circumstances⁵. Jacobson J accepted that, if a US Court did not allow Armacel to bring such a claim before it, Armacel would be deprived of a legitimate forensic advantage available to it in an Australian court.

The US counsel for Smurfit gave evidence that Armacel would be able to bring its claim under the Trade Practices Act 1974 in the US District Court proceedings⁶. He further stated that Smurfit had indicated to the US District Court that it would not challenge that court's ability to hear the trade practices claims, although it would challenge them on their merits.

An expert on US law for Armacel was not prepared to state that the trade practices claims fell outside the supplemental jurisdiction of the US District Court under 28 USC SS 1367, but expressed concern as to whether that court might in fact decline jurisdiction over the claims.

Decision Stay granted on conditions: Smurfit must mediate first in Australia, and Court may lift stay if Trade Practices claim not entertained by the US court.

Jacobson J accepted the evidence of Smurfitt's US counsel. He was therefore not satisfied at the present time that Armacel would be deprived of a legitimate forensic advantage by being forced to bring its claim in the United States. Nevertheless, there remained a real possibility that the US District Court might decline to hear the trade practices claim.

His Honour further noted that Smurfit was in breach of the jurisdiction clause in the contract, in two important respects: (a) it had refused to submit to the jurisdiction of the courts in New South Wales by not filing an appearance in the Federal Court of Australia proceedings; and (b) it had not submitted the dispute to mediation in Sydney. In fact, there was evidence that Smurfit was unwilling to mediate in Sydney at all.

Jacobson J therefore granted Smurfit's application for a stay of the proceedings in the Federal Court of Australia, but conditionally upon:

(a) Smurfit entering an appearance in the Federal Court of Australia within 72 hours;

(b) The parties doing all things necessary to arrange mediation of the dispute in Sydney, and attending that mediation.

He further granted liberty to the parties to apply to the Court on 7 days notice, thus leaving it open to Armacel to apply to lift the stay,

in the event that the US District Court declined to hear its trade practices claims.

Implications

• The Federal Court of Australia has followed decisions of the Queensland Court of Appeal and the English House of Lords, by holding that an interlocutory decision of a foreign court on a procedural issue can amount to a "final and conclusive" decision, and therefore can ground an issue estoppel in an Australian court.

• On the facts, a US company has forced an Australian company to bring its case in the United States, by applying for declaratory relief in the USA before Australian proceedings were commenced.

• Nevertheless, the Federal Court of Australia has required the US company to first mediate the dispute in Australia.

• The Federal Court of Australia also gave a clear signal that, where a contract is governed by Australian law, litigants must be permitted to pursue rights available under Australian law, in particular rights granted under the Trade Practices Act 1974 in relation to pre-contractual representations. If the foreign court declines to hear such matters, the Australian court may revive the proceedings before it.

1 Carl Zeiss Stiftung v Rayner & Keeler Ltd (No 2) [1967] 1 AC 853 at 935; Kuligowski v Metrobus [2004] 220 CLR 363.

2 The Sennar (No 2) [1985] 1 WLR 490 (HL) at 499.

3 See also Desert Sun Loan Corp v Hill [1996] 2 All ER 847 at 858 per Evans LJ; Castillon v P&O Ports [2007] QCA 364 at [55] per Holmes JA.

4 [1984] 2 Lloyd's Rep 142 at 150.

5 E.g. if a litigant can show that it entered into a contract or particular clauses of a contract as a result of "conduct that is misleading or deceptive or likely to mislead or deceive" and "in trade or commerce", per section 52 of the Act.

6 Citing Rule 13 of the US Federal Rules of Civil Procedure and the "supplemental jurisdiction" provision of 28 USC SS 1367.

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