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Minmetals Germany Gmbh v. Ferco Steel Ltd
(England and Wales) High Court of Justice (Commercial Court),
Colman J., 20th January 1999
New York Convention Award -
application for leave to enforce as a judgment - CIETAC Rules -
Arbitration Act 1996, s. 103 - whether objections to procedural errors
by tribunal could be waived - principles to apply when considering
whether enforcement should be refused on grounds of public policy - Adams
v. Cape Industries [1990] 1 Ch 433 applied.
Facts:
The Claimant ("Minmetals"), as buyer, and the Respondent
("Ferco"), as seller, contracted in March 1993 for steel
channels of various dimensions for delivery in Shanghai, China. The
contract gave Minmetals the right to apply to the China Commodity
Inspection Bureau for inspection after discharge and for Minmetals to
be able to lodge claims if the quality or quantity of the goods did
not conform to the contract or invoice. The contract provided for
CIETAC arbitration in China. A month later Minmetals contracted, under
a sub-sale, to sell steel of the same quantity, quality and
description to China Resources Metals and Mineral Company (China
Resources").
Disputes arose over the quality and dimensions of the channels and
were referred to arbitration. In the arbitration Minmetals claimed
that the actual loss it had suffered included loss of profit and the
amount of compensation it had paid China Resources for breach of the
sub-sale. Minmetals contended that damages should be based on the
scrap value of the steel because, in the absence of heat numbers, it
could not be tested and could not be used. This had been China
Recourse's contention in a CIETAC arbitration under the sub-sale.
The tribunal in the Minmetals and Ferco arbitration held that,
although the steel channels did not comply with the contract because
they did not have heat numbers and because of their dimensions, they
were still suitable for use and were not scrap. The tribunal assessed
damages on the basis of diminution in price obtained for the steel
plus expenses and interest using, for this purpose, the award in the
sub-sale arbitration, which the tribunal had seen shortly before
making its award. The sub-sale award had not, however, been referred
to or put in evidence in the arbitration between Minmetals and Ferco.
Ferco applied to the Beijing court to revoke the award on a number
of grounds including that it had not had the opportunity to consider
the sub-sale award and make representations on it and that Minmetals'
claim had been advanced on the basis that the steel had been disposed
of as scrap, and there was no evidence that this was happened. The
Beijing court directed that the case should be remitted to CIETAC for
a "resumed arbitration" and proceedings to revoke the award
should be suspended. The basis for this decision was stated to be that
"for reasons for which it was not responsible" Ferco was not
able to state its views.
The tribunal gave directions in the resumed arbitration but Ferco
failed to provide it with a copy of the Beijing court's judgment or to
ask for or take any points with respect to the sub-sale award and, in
particular, did not submit that the tribunal had been wrong to look at
the sub-sale award. The principal points Ferco took before the
tribunal were that it should, itself, go to Shanghai to investigate
and obtain evidence as to whether the steel had been melted down as
scrap. It also contended and that the contract was not back to back
with the sub-sale contract and that there had been an agreement
between it and Minmetals to dispense with heat marks. Ferco also
contended that Minmetals had not proved or had not mitigated its loss.
By award made in March 1997, the tribunal rejected Ferco's
submissions that it should go to Shanghai to investigate the evidence,
since it had already concluded that the steel was not scrap and
considered that Ferco could have carried out its own investigations to
make good its case. The tribunal held that its earlier award should be
maintained. It did not consider the propriety or otherwise of its
reliance on the sub-sale award.
Ferco applied to the Beijing court to revoke this award on the
grounds that the tribunal had wrongly continued to rely on the
sub-sale award although it had never been disclosed to Ferco and Ferco
had not been permitted to comment on it. The Beijing court rejected
this application. Its reasoning was that, by its initial order, it had
given Ferco the opportunity to challenge the tribunal's reliance on
the sub-sale award but Ferco had failed to do so. Ferco challenged
this decision in the Beijing court, seeking a retrial, but its
challenge was yet to be heard.
Minmetals applied to enforce the tribunal's awards in England and
Wales under s. 101 of the Arbitration Act 1996 ("the 1996
Act"). Ferco applied to set aside the ex-parte order for
enforcement obtained by Minmetals. The basis of the application was
that the tribunal's awards were defective because Ferco had not been
provided with a copy of the sub-sale award or given the opportunity to
make representations on it. Ferco contended that it was for Minmetals
to adduce the sub-sale award if it wished to rely on it, not for Ferco
to put it in issue. It submitted that what the tribunal had done, in
effect, was to reverse the burden of proof. Ferco submitted that, in
consequence, there had been a breach of natural justice within s.
103(2)(c) of the 1996 Act and, because the tribunal had acted
inconsistently with the CIETAC Arbitration Rules by not disclosing the
sub-sale award, a lack of jurisdiction within s. 103(2)(d) of the 1996
Act. It submitted that, in all the circumstances, enforcement would be
contrary to public policy within s. 103(2)(f) of the 1996 Act.
Held:
It was common ground that the awards were New York Convention
awards. It was not disputed by Ferco that, unless it could persuade
the Beijing court to order a retrial of its application in that court
and obtain an order, on the retrial, revoking the awards, then the
awards were final and enforceable under Chinese law.
Section 103 of the Arbitration Act 1996 provided that such awards
must be enforced unless the party against whom enforcement was sought
proved that the case fell within one of the exceptions in s. 103(2) (note,
the judgment refers to s. 102, but this is clearly a typographical
error). As for the court's powers under s. 103(3) to decline to
enforce or recognise an award on grounds of inarbitrability of the
subject matter or public policy, it was always open to the court to
take an illegality point of its own volition but if a party wished to
rely on matters within this subsection the burden rested on it to make
good that objection.
As for the grounds relied on by Ferco, the contention that the
awards contained decisions on matters beyond the scope of the
submission to arbitration, within the meaning of s. 103(3)(d), would
be rejected. Ferco's complaint was that the tribunal had relied on
evidence derived from its own investigations, not previously provided
to Ferco. But that evidence went to a central issue in the dispute
referred to arbitration, what loss had been caused to Minmetals by
Ferco's breaches of contract. The question of whether or not, in
relying on that evidence or in omitting to disclose it to Ferco, the
tribunal acted in accordance with the CIETAC Rules or with any other
procedural requirements of Chinese law was entirely irrelevant to the
question of whether the tribunal's decision was inside or outside the
scope of the submission.
Ferco's submission, that is had been unable to present a case,
would also be rejected. While many states parties to the New York
Convention had, like China, an essentially inquisitorial system,
article V of that Convention protected the requirements of natural
justice reflected in the audi alterem partem rule. Where the
tribunal was procedurally entitled to conduct its own investigations
into the facts, the effect of article V would be to avoid enforcement
of an award based on findings of fact derived from such investigations
if the party resisting enforcement has not been given any reasonable
opportunity to present its case in relation to the results of such
investigations. As for article 26 of the CIETAC Rules, this provided
that the tribunal might make investigations and collect evidence on
its own initiative. But this was not treated by the Beijing court as
permitting the tribunal to reach its conclusion and make its award
without first disclosing to both parties the materials derived from
its own investigations: such requirements being expressly stated in
the new CIETAC Rules effective from the 1st October 1995.
It was to allow Ferco to deal with such material that the Beijing
had ordered a resumed arbitration. Following that order it was open to
Ferco to ask to see the sub-sale award and the evidence on which it
was based and then make further submissions and, if so advised, adduce
further evidence to persuade the tribunal that it should not base the
recoverable loss on Minmetals' liability to China Resources. Ferco
had, in consequence, every opportunity to present it case. What went
wrong was that it simply failed to take that opportunity.
Section 103(2)(c) contemplated that the party resisting enforcement
had been prevented from presenting its case by matters outside its
control. It would normally cover the case where the procedure adopted
had been operated in a manner contrary to the rules of natural
justice. Where, however, a party had, due to matters within its
control, not provided itself with the means of taking advantage of an
opportunity given to it to present its case, it did not come within
that exception to enforcement.
Neither was there any basis for Ferco's submission that the awards
should not be enforced because they were arrived at by a procedure not
in accordance with the agreement of the parties, in that the tribunal
was in breach of the CIETAC Rules. While it was clear that the
tribunal did not act in accordance with article 53 of CIETAC in making
the first award, in that it did not act in accordance with
"international practices and the principal of fairness and
reasonableness", the position was different following the Beijing
court's order for a resumed hearing. By that time Ferco was fully
aware of the tribunal's failure to act in accordance with the Rules.
When it failed to raise its objections on the resumed hearing, it
waived its right to do so. The possibility of such a waiver was
expressly recognised in CIETAC article 45, was well established in
international arbitration law and was now reflected in s. 73 of the
Arbitration Act 1996.
As for the public policy issue, Ferco had to establish that the
awards were arrived at by a means that was contrary to the
requirements of substantial justice contained in English law, as
explained in Adams v. Cape Industries [1990] 1 Ch 433. Although
this case concerned the enforcement of foreign judgments, it contained
principles relevant to the enforcement of New York Convention awards.
In summary, where it was alleged that a New York Convention award
should not be enforced because such enforcement would lead to
substantial injustice and therefore was contrary to public policy, the
following had, normally, to be included amongst the relevant
considerations:
- the nature of the procedural injustice;
- whether the party resisting enforcement had invoked the
supervisory jurisdiction of the seat of the arbitration;
- whether a remedy was available under that jurisdiction;
- whether the courts of that jurisdiction had conclusively
determined the complaint in favour of upholding the award;
- if the party resisting enforcement had failed to invoke that
remedial jurisdiction, for what reason and, in particular, whether
it was acting unreasonably in failing to do so.
In this case, Ferco's conduct was unreasonable in failing, on the
resumed haring, to inform the tribunal of the reasons for the hearing,
to obtain the sub-sale award or, having done so, to challenge its
evidential basis or the tribunal's reliance on it. Furthermore, by
operation of CIETAC article 45, Ferco waived its rights in respect of
the defects in the original procedure. Thus, the application to the
Beijing court to revoke the second award seemed bound to fail. In
consequence, the enforcement of these awards would not lead to
substantial injustice.
The ex-parte order giving leave to enforce the awards as a judgment
would be upheld but further argument would be allowed on whether judgment
should be stayed pending the Beijing's court's decision on the
re-trial application.
For the Claimant: Mr D Matthews (instructed by Messrs Sinclair
Roche & Temperley). For the Respondent: Mr M Swainston (instructed
by Messrs Ince & C).
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