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Levelling the playing field – enforcement of arbitral awards vs foreign court judgments

30.09.2016

Achieving success in a formal legal dispute is only half the battle. Despite a resounding legal victory in a court or arbitration, a business may still lose the war if they are not able to enforce their hard won judgment or award against the defeated party. Many successful disputes have actually resulted in substantive monetary losses for the victorious party because they failed to ensure ahead of time that the judgment or award would be valid in a jurisdiction where the other party has assets.

Arbitration has traditionally been preferred over litigation for resolving cross-border disputes because of an established and simple framework for enforcement of foreign arbitral awards. However as the costs of arbitration continue to rise – and even at times outweigh the costs of litigation – there has been increased focus on improving the international framework for the enforcement of foreign court judgments.

Governments have been looking at ways to develop a strong and commercially practicable regime for the recognition and enforcement of foreign court judgments. The development and implementation new conventions and draft conventions by the Hague Conference on Private International Law has been a step forward in encouraging greater judicial co-operation and supporting international enforcement of domestic court judgments.

In this newsletter series, Moulis Legal has been examining critical aspects of managing cross-border disputes – see the past articles here. In this latest newsletter, Moulis Legal senior lawyer Emily Murphy and lawyer Alexandra Geelan examine the recognition and enforcement of foreign court judgments and arbitral awards, and how businesses can avoid turning victory into defeat.

Enforcing foreign arbitral awards – the longstanding and popular choice

For the past decade arbitration has been the preferred method of cross-border dispute resolution, in large part because of the relative ease of enforcing arbitral awards overseas in comparison to enforcing court judgments. The widespread adoption of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards1 (“the New York Convention”) has created a robust framework for the recognition and enforcement of foreign arbitral awards globally.

The New York Convention facilitates enforcement by requiring signatory states to ensure that foreign arbitral awards are recognised and enforceable in their own jurisdiction in the same way as domestic court judgments. Under the New York Convention, arbitral awards may only be challenged on limited grounds which largely relate to any procedural defects of the arbitration and not the substance of the decision made by a foreign arbitrator. The grounds include procedural fairness, fraud and public policy.

Some states have adopted the New York Convention with reservations including:

  • “reciprocity reservation” where the state will only recognise and enforce arbitral awards made from other parties to the New York Convention (this includes China, Japan, Singapore, the UK and the US); and
  • “commercial reservation” where the state will only apply the New York Convention to commercial disputes (such as Canada, China and the US).

Parties to arbitration should be aware of any reservations which may apply to both the state where the award was made and the state where enforcement is required. This will help ensure that, once an award is made, there are fewer hurdles to enforce the award in the relevant country.

In Australia, the New York Convention was enacted into domestic law in the International Arbitration Act 1974 (Cth) (“Arbitration Act”). The Arbitration Act is a useful example of how the wording and provisions of domestic legislation can vary a state’s commitments under the New York Convention. When Australia signed the New York Convention, it did so without any reservations. However, section 8 of the Arbitration Act states that a foreign arbitral award will only be capable of recognition and enforcement in Australia if:

  1. the award was made in a New York Convention signatory state; or
  2. if the state is not a party to the New York Convention, then the party seeking recognition and enforcement of the award must be either domiciled or ordinarily resident in Australia or another New York Convention signatory state.

For a corporation, “ordinary residence” refers to its place of incorporation or principal place of business. This section introduces a reciprocity element into Australia’s enactment of the New York Convention even though no intention for a reciprocity requirement was indicated when Australia signed the New York Convention. The Arbitration Act demonstrates how the relevant domestic legislation plays an important role in how the New York Convention is applied in certain jurisdictions. Legal advisors should take the time to review the domestic enforcement legislation in all relevant countries before making strategic decisions regarding a commercial arbitration.

With the use of the New York Convention, arbitration remains a strong and effective method of resolving cross-border disputes, particularly where it is anticipated that enforcement may be problematic. However, for all its advantages in enforcement, there are some complex, international commercial disputes which are simply not suitable for arbitration. For these matters, courts and governments are increasingly recognising the need for an effective and coordinated approach to the enforcement of foreign court judgments.

Enforcement of foreign court judgments – a challenging and risky option?

Currently, enforcing a court judgment outside of the country where the judgment was made can be challenging. In most instances a foreign court judgment will only be enforceable if there is a reciprocal or diplomatic arrangement between the relevant countries. For example, Australia has a bilateral treaty relationship with various countries for the reciprocal enforcement of court judgements, including Hong Kong, Japan, Singapore and the United Kingdom. Australia has no treaty or arrangement with its key trading partners the United States and China.2

Specialist international commercial courts such as the Singapore International Commercial Court and the Abu Dhabi Global Market Courts are often preferred over domestic courts or arbitration because of the expertise and structure of the courts. However, even these specialist courts have similar enforceability issues as their judgments generally have the same status as a judgment from a court in their respective countries. For example, a judgment from the Singapore International Commercial Court is enforceable internationally as a judgment from the Singapore High Court. This means that parties still need to rely on reciprocal or diplomatic arrangements with the state where the specialist international commercial court is based to enforce judgment.

In Australia, if a judgment meets the criteria under the Foreign Judgments Act 1991 (Cth), it will be registered and can then be enforced in the same way as a judgment from an Australian court.

Where there are no arrangements in place, parties are required to establish their case for enforcement of a foreign judgment through common law processes which can be complex and protracted. The party seeking to enforce the foreign judgment must establish:

  1. that the parties are the same;
  2. that the judgment is for a fixed debt (meaning a definite financial amount);
  3. the foreign judgment is final and conclusive; and
  4. the foreign court had and validly exercised jurisdiction over the defendant and the defendant submitted to the foreign jurisdiction.

The criteria – especially elements 3. and 4. above – can be difficult to establish and often require technical legal arguments. This means that enforcing a foreign court judgment under common law can be difficult, costly and slow. This can potentially undermine the benefits of obtaining a foreign court judgment at all.

Watch this space – ongoing developments to improve the enforcement of foreign court judgments

With the rise of cross-border disputes, there has been a noticeable shift towards judicial co-operation to better manage critical aspects of cross-border transactions and disputes. Governments and courts are now recognising the need for a strong and effective framework for the recognition and enforcement of foreign court judgments that reflect the commercial reality of a global marketplace.

The Hague Conference on Private International Law’s “Judgments Project” is focused on the international jurisdiction of courts and the recognition and enforcement of court judgments abroad. The Judgments Project has already led to the Hague Convention of 30 June 2005 on Choice of Court Agreements (“Choice of Court Convention”). Australia is not currently a signatory3 but major signatories include the European Union, Singapore and the United States.

The Choice of Court Convention has been described as a ‘mini version of the New York Convention for the enforcement of court judgments’4 with a key feature being that where parties nominate a certain jurisdiction in a contract, a judgment from that jurisdiction should be recognised and enforced by the courts of other member States. This principle is based on the idea that, where parties choose to be governed by a particular jurisdiction, that decision should be accepted and enforced.

Early in 2016, the Hague Conference released a Preliminary Draft Convention for the recognition and enforcement of judgments relating to civil or commercial matters (“the Draft Judgment Convention”)5. The Draft Judgment Convention provides that a judgment given by a court of a contracting state shall be recognised and enforced in another contracting state. This is an improvement on the Choice of Court Convention because it will apply to all judgments from signatory states and not just judgments resulting from disputes where parties have nominated a specific jurisdiction. This also means that the Draft Judgment Convention will apply to disputes that do not arise from a written contract, or arise from a contract that does not have a valid jurisdiction clause.

The Draft Judgment Convention will have a much wider scope than the Choice of Court Convention and will support existing conventions and initiatives demonstrating increased cooperation including:

  • the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters which provide international processes for the service of documents from a foreign court;
  • the Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters which provide international processes for taking evidence locally for use in a foreign jurisdiction; and
  • the UNCITRAL Model Law on Cross-Border Insolvency which creates a framework for dealing with cross-border insolvency including allowing foreign creditors to take part in insolvency proceedings.

If the Draft Judgment Convention is widely signed and ratified, it would be a big step forward in the utility and viability of domestic courts for complex international commercial disputes.

Backing a winner – picking the best environment for your dispute

Regardless of how and where the dispute is determined, businesses need to consider how a court judgment or arbitral award can be effectively enforced in the relevant jurisdictions. This requires careful analysis of the jurisdictions involved, applicable international conventions and treaties, domestic legislation and laws and the costs associated with enforcement actions.

While there is still some way to go, courts and countries are committed to developing effective and commercially attractive mechanisms for the enforcement of judgments and awards resulting from cross-border dispute resolution. With the existing strong framework for the enforcement of arbitral awards through the New York Convention and the emerging regime for the enforcement of foreign court judgments, parties to international commercial disputes can have greater confidence that the time and expense of international dispute resolution will result in meaningful and powerful outcomes.

 

Moulis Legal’s dispute resolution team guides businesses across Australia and Asia in the management and resolution of cross-border and domestic commercial disputes in a way that is commercially focused and business-centric. We represent Australian and international organisations in various domestic and international jurisdictions on matters including contractual disputes, cross-border intellectual property disputes, competition law issues and managing and responding to regulatory investigations.

For more information, please contact Emily Murphy (+61 7 3367 6900 or emily.murphy@moulislegal.com) or Alexandra Geelan (+61 7 3367 6900 or alexandra.geelan@moulislegal.com).

This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.

 

[1] United Nations Commission on International Trade Law, New York, 1958

[2] The full list of courts Australia has reciprocal or diplomatic arrangements with is contained in the Foreign Judgments Regulation 1992 (Cth).

[3] In March 2016, the Australian Government tabled a National Interest Analysis proposing that Australia accede to the Convention on Choice of Court Agreements. The Joint Standing Committee on Treaties is currently conducting an inquiry into the proposal and is accepting submissions from interested persons and organisations. More information is available at: http://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Treaties/ChoiceofCourts

[4] Hwang M, ‘Commercial courts and international arbitration – competitors or partners?’ (2015) Arbitration International, 31, 193-212

[5] A Special Commission of the Hague Conference is currently considering the Draft Judgment Convention.