Australian Appellate Decision: Even Pro-Arbitration Courts Will Not Easily Excuse Fundamental Non-Compliance with The Parties’ Agreement

By Diego Luis Alonso Massa, 6 August 2021

Australian Appellate Decision: Even Pro-Arbitration Courts Will Not Easily Excuse Fundamental Non-Compliance with The Parties’ Agreement

In a judgment handed down on 25 June 2021, the Full Court of the Federal Court of Australia in Energy City Qatar Holding Co v Hub Street Equipment Pty Ltd (No 2) [2020] FCA 1116 overturned a first instance court’s decision and refused to enforce an arbitration award on the basis that (i) the sending of an arbitration notice, and (ii) the composition of an arbitral tribunal, had not occurred in accordance with the parties’ agreement undermining both the structural integrity of the arbitration as well as the tribunal’s jurisdiction.

The full court also held that the discretion to nevertheless enforce the arbitration award was not available in circumstances of such fundamental non-compliance.

The decision is noteworthy because it underscores the importance of observing the parties’ agreed notice and appointment procedures, as a fundamental error – even at such an early stage of proceedings – will not lightly be excused, even by enforcement courts with pro-arbitration reputations.

In 2010, Australian company – Hub Street Equipment Pty Ltd (‘Hub’) – and Qatari company – Energy City Qatar Holding Company (‘ECQ’) – concluded a contract for the supply and installation of street lighting and street furniture in Energy City, Doha. However, in 2012, ECQ decided not to proceed with the contract.

So, ECQ sought the return of the advance payment of US$820,322.16 it had paid Hub in 2011. However, after several meetings, and the exchange of email correspondence, Hub ultimately decided to retain the money and ceased all communications with ECQ.

In response, ECQ initiated arbitral proceedings to recover the advance payment. However, instead of sending Hub a notice to start arbitration proceedings as required by the parties contract,  ECQ filed a statement of claim in 2016 before the Plenary Court of First Instance of the State of Qatar (‘the Qatari Court’), seeking the appointment of an arbitral tribunal pursuant to Article 195 of the Qatari Civil Procedure Code. The Qatari Court ordered the appointment of the tribunal in January 2017.

Between April 2017 and July 2017, this tribunal sent Hub six notices regarding the conduct of the arbitral proceedings. However – despite adjourning proceedings on three occasions due to Hub’s failure to attend – Hub did not participate in the arbitration proceedings.

In August 2017, the tribunal – having been satisfied that it had previously notified Hub of the conduct of the arbitration – issued an award ordering Hub to pay the value of the advance payment, damages, and the fees of the arbitration.

In enforcement proceedings in Australia, Hub failed in its first instance attempt to resist the award’s enforcement, after the first instance judge was satisfied that Hub had been duly notified of the Qatari Court proceedings and the arbitration.

Hub appealed the first instance decision to the Full Court of the Federal Court of Australia.

Decision of the Federal Court of Australia

Hub raised two principal appeal grounds before the Full Court:

(1)   It was not given proper notice of the arbitration, and the tribunal was not appointed, in accordance with the arbitration agreement.

(2)   That the failure to conduct the arbitration in English was a fundamental departure from the agreed arbitral procedure.

As regards the first ground, the Full Court noted that Article 195 of the Qatari Civil Procedure Code only empowers the court at the seat of the arbitration to appoint arbitrators where the parties’ agreed procedure has failed. In this regard, it does not for the appointment of arbitrators contrary to the parties’ agreed procedure.

So, the Full Court found that the Qatari Court had incorrectly exercised its power of appointment because it had done so in the mistaken belief that the procedure agreed in the parties’ arbitration agreement had been followed (albeit unsuccessfully). In reality, ECQ had completely failed to follow the agreed appointment procedure before approaching the Qatari Court.

As a result, the Full Court found that the Qatari Court appointed a tribunal contrary to the parties’ agreement – an error that struck at the root of the arbitration process’ validity as well as the tribunal’s jurisdiction – and that Hub had therefore established valid grounds to resist enforcement.

As regards the second ground, the Full Court agreed that the first instance court had been correct in finding that the failure to conduct the arbitration in English was immaterial because Hub had received notices of arbitration in English.

So, in the end, the Full Court allowed the appeal and dismissed ECQ’s application to enforce the award in Australia.

In doing so, the Full Court also noted the discretion it enjoyed to nevertheless enforce an award despite a valid ground for non-enforcement having been established, observing that the use of the word ‘may’  in Article V of the New York Convention is prima facie permissive. However, after taking pertinent case law and considerations of materiality, waiver, estoppel into account, the Full Court declined to exercise that discretion in this instance.

The Full Court’s decision upholds the fundamental importance of party autonomy as expressed in their arbitration agreement. In this regard, the parties' agreement as to how the arbitral tribunal is to be constituted must be strictly followed, because non-compliance with such fundamental procedural steps risks an arbitration award not being enforced.

In addition, the decision highlights the importance of paying attention to the parties agreed notice and appointment procedures as an error, at such an early stage of proceedings, is likely to be costly given that it is not capable of being easily remedied, nor is it likely to be overlooked by an enforcement court – even if the award debtor completely ignores the arbitration proceedings.

Finally, the decision also highlights the important distinction between fundamental and non-material procedural irregularities. In this regard, procedural irregularities causing no material prejudice might be overlooked in favour of enforcement even if they constitute a ground for non-enforcement, even if this did not occur in this instance.

Such a nuanced approach certainly reinforces Australia’s arbitration-friendly legal framework, even if in this instance the net effect is a decision not to enforce an arbitration award.

URL: https://taobserver.com/news/31/australian-appellate-decision-even-pro-arbitration-courts-will-not-easily-excuse-fundamental-non-compliance-with-the-parties-agreement