"Federal Court On Appeal Finds No Requirement To Arbitrate Pursuant To The New York Convention, Where An Arbitrator Would Be Unable To Issue Immediately Binding Orders Due To A Constitutional Limitation"

Electra Air Conditioning BV v Seeley International Pty Ltd [2008] FCAFC 169

In brief

An Australian importer sought orders from the Federal Court of Australia to compel a Dutch exporter to comply with the contract between them. The exporter sought to stay the proceedings pursuant to the New York Convention, as there was a commercial arbitration clause in the contract. The Full Court of the Federal Court held that the parties did not intend that this particular dispute should be subject to international commercial arbitration.

The fact that a swift and final resolution of the dispute could be achieved by issuing immediately-binding orders, and that an arbitrator lacks power to make such orders under the Australian Constitution, may have contributed to the decision.

The facts

Electra is incorporated in the Netherlands. It manufactures and exports refrigerated air conditioners to Australia and New Zealand. On 15 May 2007 Electra and Seeley entered into an exclusive distribution agreement whereby Electra appointed Seeley as its exclusive distributor of certain products in Australia and New Zealand for a period of at least three years commencing from 1 July 2007.

Under the agreement, Seeley agreed not to import or sell or promote competing products during the contract period. In turn, Electra was obliged to accept purchase orders from Seeley within two days except in defined circumstances. Seeley was granted extended credit terms of 180 days for the first year of the Agreement, and reduced credit terms in the subsequent years. Clause 7.4 dealt with the credit line provided by Electra as follows:

The Dispute Resolution clause in the Agreement (clause 20) provided for:

1. Written notice of dispute followed by friendly discussions between senior management for 30 days;
2. If such discussions were unsuccessful then the dispute would be: "...referred to arbitration in accordance with the Rules for the Conduct of Commercial Arbitrations of the Institute of Arbitrators and Mediators Australia..." and "The arbitral award shall be final and binding upon both parties";
3. Clause 20.3 provided that: "Nothing in this [clause 20] prevents a party seeking injunctive or declaratory relief in the case of a material breach or threatened breach of this Agreement."

Within four months (i.e. in the first year of the Agreement), Seeley informed Electra that some of the credit insurance was no longer in place. Electra thereupon refused to accept further purchase orders from Seeley.

Seeley commences court proceedings, and Electra relies on the arbitration clause

Seeley commenced proceedings against Electra in the Federal Court of Australia. Orders sought by Seeley included a declaration that Electra was obliged to Seeley's purchase orders in the first year of the agreement, and a declaration that this was not conditional upon the amount of credit insurance that Seeley had in place during that year. Seeley also sought orders for summary judgment on the ground that its main claim was based purely on the construction of clause 7.4. Electra responded by seeking an order that the proceeding be stayed pursuant to the International Arbitration Act 1974 (Cth)¹, as being inconsistent with the arbitration clause in the contract.

Decision

Electra argued that in the construction of an arbitration clause, the commencing point is that the parties would have intended that all disputes arising out of the contractual relationship would be decided by the same tribunal, relying on e.g. Premium Nafta Products Ltd v Fiji Shipping Co Ltd [2007] 4 All ER 951. The Court² accepted that argument, but held that on the facts of this case the presumption was rebutted. The parties did not intend that this particular dispute should be subject to arbitration under the New York Convention.

The Court accepted that Article 17 of the UNCITRAL Model Law³ would normally give a commercial arbitrator power to make orders in the nature of a declaration or injunction (subject to a contrary agreement by the parties). However, in Australia the Constitutional requirement that judicial power may only be exercised by a Court means that such orders by an arbitrator are not immediately binding, and must be enforced by separate order of a Court⁴.

Electra argued that clause 20.3 of the Agreement should be construed as only allowing the parties to apply to the duly-appointed arbitrator for injunctive or declaratory relief. However, the Court noted:

1. the constitutional limitation on the arbitrator's ability to make immediately-binding orders,
2. the necessary hiatus between a dispute arising and the appointment of an arbitrator,
3. the fact that the Model Law itself contemplates the assistance of the local Courts being sought to resolve legal difficulties relating to the appointment of the arbitrator, and
4. The wording of clause 20 in its entirety indicated against the construction sought by Electra.

The Federal Court therefore found that clause 20.3 was intended to accord the parties the right to apply to a Court for injunctive or declaratory relief. The Court also found for Seeley on its application for summary judgment, and accordingly determined the proceedings by issuing declarations requiring Electra to accept Seeley's purchase orders.

Implications

• Whilst the decision could be seen as an unusual limitation (in international terms) on the application of the New York Convention, it is suggested that it must be read in light of the particular facts and circumstances: Seeley's case for summary judgment based solely on the construction of the Agreement appeared strong (and was ultimately vindicated). Seeley required a remedy that would cause Electra to immediately comply with its obligations under the contract. Such a remedy would be difficult to obtain from an arbitrator owing to the constitutional limitation.

• It is possible that the Federal Court also took into account the possibility of delay in the appointment of an arbitrator which, whilst minimal under the New York Convention, would be to the detriment of the successful party in this particular case.

• This decision of a senior Appellate Court emphasises that commercial entities doing business in Australia (and their advisers) must take into account the constitutional restriction on a commercial arbitrator from exercising judicial power. Where immediately enforceable orders are appropriate to bring a swift and final end to a dispute, an Australian court may be more inclined to allow the matter to be dealt with quickly in a Court rather than under the New York Convention.

Footnotes

^{1. Which gives effect to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 ("the New York Convention") in Australia.}

^{2. Mansfield J at first instance, confirmed by the Full Court of the Federal Court of Australia (Gray, Branson & Lander JJ) on appeal}

^{3. UNCITRAL Model Law on International Commercial Arbitration 1985. Note that this has the force of law in Australia: section 16 International Arbitration Act 1974 (Cth).}

^{4. See e.g. R v Kirby; Ex parte Boilermakers' Society of Australia (1956) 94 CLR 254 and CFMEU v Australian Industrial Relations Commission & Anor (2001) 203 CLR 645}

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