Arbitration, the creature which can be tamed: the Federal Court of Australia clarifies the interplay between a non-municipal legal system and the statutory regime for enforcement of arbitral awards

A drawcard for arbitration is its flexible nature, which makes it a suitable mechanism for resolving a wide range of bespoke disputes. This flexibility can allow a tribunal to resolve disputes in accordance with specific laws and procedures which the parties select – including non-municipal systems of law.

In Tayar v Feldman [2022] FCA 1432, the Federal Court of Australia was required to consider the degree to which it should intervene in respect of an award resulting from an arbitration conducted in accordance with Jewish law and practice, but to which the Commercial Arbitration Act 2011 (VIC) (CAA) applied.

Facts

The parties to the proceeding were rabbis, each adhering to an orthodox Hasidic movement within Judaism. Consistent with the Hebrew ‘Heter Isko’ practice, the creditor (in this case, the Applicant) advanced funds as an investor, seeking to derive profit from investing capital rather than as a lender seeking to derive interest from the same loan. In exchange for funds advanced, the debtors (here, the Respondents) pledged five parcels of land. In the face of non-payment of moneys owed, several disputes arose.

The Parties entered into an arrangement to refer the disputes to arbitration (Arbitration Agreement). The Arbitration Agreement relevantly provided that:

• the arbitration was to be conducted by a panel of three rabbis…in accordance with the principles of orthodox Jewish law…
• the Arbitral Panel was appointed to determine the “Disputed Matters” which were described in Sch 1 to the Arbitration Agreement which, in turn, provided that (as written):

The matters to be determined by the Arbitral Tribunal are to be determined by the Statement of Claim, Statement of Defence and Cross Claim (if any) and the Reply and Deference to Cross Claim (if any) to be filed in the arbitration as directed by the Arbitral Panel.

• the Arbitral Panel was to act as an arbitral tribunal under the Commercial Arbitration Act 2011 (Vic); and
• the Arbitration Agreement was governed by the laws in force in Victoria.

Consistent with the Arbitration Agreement, the dispute was heard by the Beth Din (a Jewish arbitral tribunal) and conducted by three rabbis, according to orthodox Jewish law. They found that the Respondents were liable to pay moneys owed. Subsequently, relevant parts of the resulting award (Award) were recognised by the Supreme Court of Victoria.

The Applicant obtained a sequestration order to secure repayment of moneys owed pursuant to the Award. The grant of that sequestration order was challenged by the Respondents in the Federal Court, with the Respondents arguing that the Court should exercise its discretion, under section 52(2)(b) of the Bankruptcy Act 1966 (Cth), to dismiss the Applicant’s creditor’s petition.

The grounds relied on by the Respondents related primarily to the question of whether the parties had agreed to, and subsequently engaged in, a ‘Mesadrin’. The evidence was that a ‘Mesadrin’ was a Jewish bankruptcy procedure whereby all assets not required for basic daily living needs and expenses are liquidated and the resulting amount paid to the creditor.

Of particular interest was the Respondents’ argument that it was an abuse of process for the Applicant to seek a sequestration order in a secular court, since, consistently with Jewish bankruptcy law, the creditor had not yet participated in a Mesadrin. Or, in the alternative, that there was allegedly a collateral contract between the Parties by which the parties had agreed to deal with the question of the enforcement of the Award under Jewish law and not in a secular court.

Decision

The Federal Court dismissed the Respondents’ application for review. Central to the Court’s judgment was an acknowledgment that, although the parties had agreed to conduct the arbitration in accordance with Jewish law, the Award had nonetheless been rendered pursuant to the CAA. Accordingly, the Award was subject to the limited grounds for setting aside, or appealing, an award and the statutory enforcement process under the CAA. As the Federal Court recognised, the Supreme Court of Victoria’s orders recognising the Award were (at [111]) “accordingly final orders and are enforceable”.

In that context, the Court held that:

1. it would not be an abuse of process for the creditor to seek a sequestration order from a secular court. The Court acknowledged that, while the Mesadrin process may be favoured by members of the orthodox Jewish community, it was not obligatory. The evidence established that, in this case, the arbitral tribunal was given no role in respect of enforcement of the Award; and
2. there was no bar to approaching a secular court for the purposes of enforcement of the Award. Importantly, the Court noted that: “…it does not follow that, because of their faith and their adherence to orthodox principles, all issues that arise between [the parties] are to be resolved according to Jewish law.”

Observations

This decision highlights the important interplay between arbitral tribunals and the courts. It acknowledges that courts must strike a balance between:

1. on the one hand, ensuring that the flexibility proffered by arbitration remains sacrosanct by respecting parties’ choices of legal system; and
2. at the same time, ensuring that this flexibility does not extend so far as to dictate or influence how an arbitral award will be enforced.

In this instance, the Court was not prepared to read into the Arbitration Agreement that Jewish orthodox custom effectively took precedence over secular law. There was nothing in the Arbitration Agreement that substantiated such a position. In those circumstances, the court did not find anything that prevented the Applicant (creditor) from seeking the support of a secular court to recognise and enforce an award resulting from the application of a non-municipal (in this case, orthodox Jewish) system of law.

The Court’s approach respected, and balanced, both the arbitration agreement reached between the parties and the statutory finality underpinning the CAA. It is an approach which reinforces Australia as an arbitration-friendly jurisdiction.

Key takeaways

Parties involved in, or anticipating, arbitration can take several important lessons from the Federal Court’s judgment:

1. Freedom to choose – Australian courts will generally respect the parties’ freedom to choose the law which will govern the conduct of their arbitration. That choice could include, for example, (as in this case) the principles of orthodox Jewish law. Such a choice cannot, however, without more, be used to undermine the enforcement or legislative finality of an award rendered pursuant to the CAA or its equivalents.
2. Scope of arbitration agreement – parties should carefully consider the scope of matters to be referred to arbitration in any arbitration agreement or arbitration clause. In this case, it was of some significance to the Federal Court that the parties had not included – in the scope of ‘Disputed Matters’ to be determined by the tribunal – any questions of enforcement. Parties will be held to the scope of the matters they have agreed to refer to arbitration.
3. Sufficiency of award – in its judgment, the Federal Court noted the Supreme Court of Victoria’s refusal to enforce certain parts of the Award in respect of which the arbitral tribunal ‘did not provide a means for calculating’ the amount of the Applicant’s entitlement. For example, the Award required the Respondents to pay the Applicant an amount of rent – however, the Award did not specify what that amount was or how it was to be determined. Awards of this type will be difficult, if not impossible, to enforce.

For more information, please contact Elizabeth Macknay, Partner, Stewart McWilliam, Senior Associate, Inigo Kwan-Parsons, Solicitor, Samara Cassar, Solicitor, or your usual Herbert Smith Freehills contact.