AUSTRALIAN FEDERAL COURT REAFFIRMS HIGH THRESHOLD FOR REFUSING ENFORCEMENT OF AWARD ON PUBLIC POLICY GROUNDS

In a recent application to enforce an arbitral award, the Federal Court of Australia rejected the award debtor’s arguments that it would be contrary to public policy to enforce the award, where allegations of procedural unfairness had already been determined in foreign courts.  In doing so, the Court reaffirmed the high threshold required for an Australian court to refuse enforcing a foreign arbitral award on public policy grounds, and the importance of international harmony and concordance of approach.

Background

Guoao Holding Group Co Ltd v Xue (No 2) [2022] FCA 1584 (Guoao v Xue) primarily concerned the issue of whether enforcement of an award rendered by a tribunal appointed by the Beijing Arbitration Commission would be contrary to Australian public policy.

Beijing Shanshuilin Ecological Farm Co Ltd (Shanshuilin), an entity entirely owned by Ms Xue, was the owner of a proposed aged care facility (Project). Pursuant to a Cooperative Development Agreement (CDA), Guoao Holding Group Co Limited (Guoao) agreed to provide development funding for the Project, by way of shareholder loans to a new joint venture company in which Guoao would hold a 51% interest. The remaining 49% of the JV was to be held by Beijing Jubaoyang Asset Management Co Ltd (Jubaoyang), another entity controlled by Ms Xue. In turn, by way of separate agreements, Ms Xue agreed to transfer 49% of her interest in Shanshuilin to the JV and 51% to Jubaoyang, giving Guoao an effective 25% interest in the Project.

The JV was formed and Guoao provided the shareholder loans. The parties to the CDA subsequently fell into dispute and development of the Project was halted. Pursuant to the CDA, Ms Xue, Jubaoyang and Shanshuilin commenced arbitration against Guoao. They argued that Guoao had breached the CDA by demanding repayment of the shareholder loans and refusing to continue to provide shareholder loans to fund the development of the Project. They sought dissolution of the CDA.  Guoao counterclaimed for breach of the CDA, and sought repayment of the shareholder loans and interest.

At the hearing of the arbitration, the parties agreed that, if the tribunal upheld Guoao’s counterclaim, the appropriate orders would be for the claimants to repay the shareholder loans and for the CDA to be dissolved (by way of the Chinese-law remedy of ‘jie chu’).

The tribunal issued its award in favour of Guoao, finding that Ms Xue and Jubaoyang had fundamentally breached the CDA. The tribunal ordered the dissolution of the CDA and that the claimants repay Guoao the shareholder loans plus interest, totaling RMB 198 million.  Although the CDA was ordered to be dissolved, the tribunal made no orders for the transfer of Guoao’s equity in the JV or the JV’s equity in Shanshuilin.

Guoao proceeded to partially enforce the award in China. The claimants sought to have the award set aside. They argued that the tribunal had exceeded its authority and that the award was against the public interest. Specifically, they argued that the award resulted in “the imbalance of rights and obligations of all parties” as, pursuant to the tribunal’s orders, Guoao would recover its original investment in the JV while retaining its interest in the JV and, thereby, the Project.

The Chinese courts rejected the claimants’ applications to set aside the award. Guoao recovered some of the award debt from the claimants’ Chinese assets, then applied to the Federal Court to enforce the award in Australia to recover the balance. In the Federal Court of Australia, Ms Xue again resisted enforcement, arguing that enforcement of the award would be contrary to public policy and so should be refused under s 8(7)(b) of the International Arbitration Act 1974 (Cth) (IAA). Ms Xue raised effectively the same arguments that had been rejected by the Chinese courts.

Decision

The Federal Court rejected Ms Xue’s arguments and made orders for the enforcement of the award.

The Court noted that the concept of public policy in the IAA is ‘limited to the fundamental principles of justice and morality conformable with the international nature of … international commercial arbitration’. It emphasised the importance of international harmony and concordance of approach. Drawing upon decisions in Australia, and from other Commonwealth jurisdictions, the Court reiterated that there must be ‘compelling reasons’ to refuse to enforce an award on public policy grounds and that:

before a New York Convention jurisdiction can, in keeping with its being a party to the Convention, refuse enforcement of a Convention award on public policy grounds, “the award must be so fundamentally offensive to that jurisdiction’s notions of justice that, despite its being a party to the Convention, it cannot reasonably be expected to overlook the objection.”

The Court found that, for the following reasons, Ms Xue’s complaints about the award did not rise to this level:

• Outside of exceptional cases (such as where there are limits on the power of the supervising court to intervene even where there has been an obvious and serious disregard for basic principles of justice by the arbitrators), it will be inappropriate for the Court to reach a different conclusion on the same question of asserted defects in the award as that reached by the court at the seat of the arbitration. In this case, there was no evidence that the Chinese courts were limited in their powers to review the conduct of the arbitration. Ms Xue was able to and did contend before the Chinese courts that the award should be set aside as being contrary to public policy. Those arguments were rejected by the Chinese courts.
• During the arbitration, Ms Xue agreed to recission of the CDA, and did not seek any orders for the reconveyance of Guoao’s interest in the JV (which, in any event, Guoao contended would be beyond power, since the JV was not a party to the arbitration). There was no fundamental unfairness in the tribunal dealing with what was before it.
• There was uncontradicted Chinese law evidence before the Court that Ms Xue and the other claimants could still apply to a Chinese court seeking orders for restitution of the pre-contract status quo.

Comment

The Court’s decision in Guoao v Xue confirms that an Australian court will rarely refuse to enforce an arbitral award on public policy grounds, and only ever where there has been a breach of the most basic fundamental principles of morality and justice in the jurisdiction.

Moreover, Guoao v Xue confirms that, where the court of another jurisdiction has already ruled on a challenge to the enforceability of an award, an Australian court, when asked to rule on the same question, will generally reach the same conclusion as the foreign court. The Australian court will only decide differently if it can be shown that the foreign court was limited in its powers to review the tribunal’s process, or where, because of corruption, it has declined to do so.

The outcome is in keeping with decisions from other Commonwealth jurisdictions, fulfilling a fundamental purpose of the New York Convention for the swift enforcement of awards, and reaffirms Australia’s status as an arbitration friendly jurisdiction.

For more information, please contact Elizabeth Macknay, Partner, Christopher Hicks, Senior Associate, Inigo Kwan-Parsons, Solicitor, or your usual Herbert Smith Freehills contact.