Australian Full Federal Court decision highlights the importance of explicitly binding all parties to an arbitration agreement

On 25 January 2017, the Full Federal Court of Australia dismissed Trina Solar US, Inc.’s (Trina) appeal from an earlier decision of a single Federal Court Judge not to exercise residual discretion to refuse Jasmin Solar Pty Ltd (Jasmin) leave to serve an originating application on Trina in the US, while arbitration proceedings were ongoing in New York. As discussed below, the decision highlights the importance of ensuring that all parties to a transaction are bound by the relevant arbitration agreement from the outset of the transaction.

Background

The contract

The parties to the dispute were:

• Trina Solar US, Inc., a wholesale seller of solar panels;
• JRC-Services LLC (JRC), a marketing company incorporated in Nevada; and
• Jasmin, an Australian company which sells and installs solar panels.

Jasmin wished to procure new solar panels from Trina. In order to avoid tax-related issues for Jasmin, JRC agreed to buy the solar panels from Trina instead, with Jasmin acting as the guarantor. JRC had an on-going agency agreement with Jasmin.

The resulting agreement between Trina and JRC was governed by New York law and contained an arbitration clause (seated in New York), as well as a clause to the effect that the agreement did not intend to confer rights to enforce any term on an entity not a party to the agreement.

Arbitration proceedings

The solar panels eventually supplied were allegedly defective, leading to Jasmin refusing to pay Trina. Trina then commenced arbitration proceedings against JRC and Jasmin. Jasmin refused to participate in the arbitration, arguing it was not bound by the agreement.

The arbitrator found that Jasmin was a party to the contract (and bound by the arbitration clause). The arbitral award was upheld by US District Judge Caproni in the Southern District of New York, who held that Jasmin was bound by the arbitration clause as:

• Jasmin entered the contract as principal through its agent JRC; and
• Jasmin was estopped from denying the arbitrator’s jurisdiction, as it had received direct benefits from the contract.

The first instance proceedings

While the arbitration was on foot, Jasmin sought leave in the Federal Court to serve an originating process on Trina in the US to commence court proceedings in Australia, claiming Trina (and its Australian subsidiary) had engaged in misleading and deceptive conduct contrary to Australian consumer law, causing loss to Jasmin.

The Federal Court has the power to grant such leave by virtue of rule 10.43 of the Federal Court Rules 2011 (Cth). However, even where the preconditions of rule 10.43 are met, the Federal Court still retains residual discretion to refuse an applicant’s application for leave.

Decision at first instance – 17 December 2015

Justice Edelman found that the preconditions for granting leave were satisfied and that the issue was whether to exercise residual discretion to refuse leave. Such discretion can be exercised if the proceeding for which leave is sought is liable to be stayed.

Pursuant to section 7(2) of the International Arbitration Act 1974 (Cth) (Act), courts shall stay proceedings and refer them to arbitration, if the parties are parties to an arbitration agreement and the proceedings involve matters that can be settled by arbitration.

The question was then ostensibly simple: was Jasmin a party to the contract between JRC and Trina? This involved a preliminary question of whether New York law (as the law of the disputed contract) or Queensland law (the law of the forum – lex fori) applied. The judgment states that

• Under New York law, Jasmin would likely be found to have been a party to the contract, by reason of the doctrine of estoppel. That is to say, a company may be bound by a contract that it has not signed where it ‘knowingly accepted the benefits’ of that contract, by exploiting the contractual relationship of the parties.
• Under Queensland law, JRC would likely be found to have entered into the contract as principal and not as Jasmin’s agent.

Justice Edelman drew a distinction between the questions of whether there is a contract and whether a contract is valid. The law of a disputed contract is applied to determine its validity, but the law of the forum is applied to determine whether an agreement was in fact reached. Applying Queensland law, his Honour found that Jasmin was not a party to the contract, and that the proceedings would not inevitably be stayed. Hence, his Honour held that there was no reason for the Court to exercise residual discretion to refuse leave to serve out an originating process abroad.

Decision on appeal – 25 January 2017

Trina appealed Justice Edelman’s decision on the ground that his Honour erred in applying the law of the forum (Queensland law), instead of the law of the contract (New York law).

Trina’s main submission was, given that s 8(5)(b) of the Act provides that the validity of an arbitration agreement is determined by the law expressed in the agreement (or where no law is expressed, the law of the country where an arbitration award is made), the determination of whether an entity is a party to an arbitration agreement should likewise be made by applying the law of the disputed contract (and not of the forum).

Justice Beach rejected this submission. His Honour approved of Justice Edelman’s distinction between the law to be applied to determine whether there is a contract, and the law to be applied in determining the validity of, and rights and obligations arising from, a contract. His Honour’s reasoning was that, to apply the law purportedly chosen by the parties in an agreement to which an entity claims not to be a party, in order to prove that the entity is a party to that agreement, would be ‘to assume what was to be proved.’

Hence, the Full Federal Court affirmed the first instance decision to grant leave to serve an originating application on Trina outside of Australia. However, the Court highlighted that it was still open to Trina to make a formal application for a stay of the proceedings under s 7 of the Act and seek recognition and enforcement of the arbitral award under s 8 of the Act.

Lessons learned

The decision highlights the importance of ensuring that all parties to a transaction are bound by the relevant arbitration agreement from the outset of the transaction.

There are risks for Australian businesses in contracting with parties in foreign jurisdictions, where the laws of those jurisdictions differ from those of Australia. For example, the concept of privity of contract is much stronger in Australia than it is in New York. This means that a party is more likely to be bound by a contract governed by New York law (even if it has not signed that contract) than a contract that is governed by Australian law.