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Participating, non-participating and boycotting parties under proposed Article 16(4)

By Albert Monichino QC*

Introduction

On 1 October 2018, the Justice Committee of the New Zealand Parliament (‘Justice Committee’) published its Final Report on the Arbitration Amendment Bill (‘Final Report’), recommending that the Arbitration Amendment Bill (‘Bill’) ‘be passed with the amendments shown’.1  The Bill seeks to amend several aspects of the Arbitration Act 1996 (NZ) (‘Arbitration Act’), including the consequences of failing to seek review of an Arbitral Tribunal’s preliminary ruling on jurisdiction. The Bill awaits a Second Reading before the Parliament.

If passed, the Bill would amend Article 16 of the UNCITRAL Model Law on International Commercial Arbitration (‘Model Law’), which is contained in Schedule 1 of the Arbitration Act,2  by inserting an Article 16(4) that declares that failure to request a review of a preliminary decision on jurisdiction (as allowed by Article 16(3)) constitutes waiver of any right to later object to jurisdiction. Effectively, this would preclude parties that fail to seek court review of an Arbitral Tribunal’s preliminary ruling on jurisdiction from subsequently challenging, or resisting enforcement of, a final award on the merits on jurisdictional grounds.

The Article 16(4) contained in the Final Report is a revised form of the original provision that was contained in the Bill. Notably, the Final Report rejected the advice of the Ministry of Justice annexed to the Arbitration Amendment Bill Interim Report of the Justice Committee (‘Interim Report’)3  to the effect that the proposed Article 16(4) be omitted from an amended Arbitration Act.

This article proceeds as follows. First, the reasons for the amendment to the Arbitration Act are explained. Second, the drafting process of Article 16(4) is outlined. Third, the original Article 16(4) and the revised Article 16(4) are compared, demonstrating that there is no substantive change between the respective versions.  Fourth, the Final Report’s statement that Article 16(4) ‘would not apply when a party does not participate in the arbitration at all’ is analysed.4  Finally, it is argued that Article 16(3) should not have a preclusive effect on boycotting parties (ie parties that withdraw from the arbitration before or immediately following a preliminary ruling on jurisdiction). This article also offers a proposed amendment to the revised Article 16(4) contained in the Final Report.

The Impetus for the Amendment:  First Media

The proposed Article 16(4) is a legislative response to PT First Media TBK v Astro Nusantara International BV (‘First Media’).5  That case emanated from a failed joint venture to provide multimedia services in Indonesia contained in a subscription and shareholders’ agreement (‘SSA’) between certain companies belonging to the Indonesian conglomerate, Lippo, and certain companies belonging to a Malaysian media group, Astro. The SSA was governed by Singaporean law and contained an arbitration clause providing for arbitration in Singapore according to the Rules of the Singapore International Arbitration Centre (‘SIAC’). Notably, certain companies related to the Astro Group, who were not party to the SSA (‘the Additional Astro Parties’), provided substantial funding and services to the joint venture in anticipation of its closing. When it  became clear that the closing of the joint venture would not eventuate, a dispute arose over the provision of continued funding.

In October 2008, the Astro companies that were party to the SSA commenced an arbitration in Singapore against Lippo and applied to join the Additional Astro Parties as co-claimants under the SIAC Rules. The Additional Astro Parties consented to be joined. Lippo opposed the joinder. On 7 May 2009, the Arbitral Tribunal issued an Award on Preliminary Matters granting the joinder application.

At a second preliminary hearing on 25 June 2009, Lippo’s senior counsel informed the Tribunal that there was no challenge to the Tribunal’s Award on Preliminary Matters in Singapore.6  Lippo’s later statement of defence explicitly stated that its actions were to be taken ‘without prejudice to [Lippo’s] position’ that the Tribunal did not have jurisdiction to hear and determine the claims brought by the Additional Astro Parties.7  Lippo ‘strictly reserved’ its rights on this point. 8

However, Lippo did not apply for court review of the preliminary ruling on jurisdiction under Article 16(3) as modified by section 10 of the Singapore International Arbitration Act (CAP 143A).9  Instead, it continued to participate in the arbitration under a reservation of rights.

The arbitration produced four further awards on the merits (and costs), culminating in a final award made on 3 August 2010. Those awards required Lippo to pay in excess of USD 130 million. Almost all of the award debt was payable in favour of the Additional Astro Parties.

Lippo did not apply to set aside the awards under Article 34 of the Model Law within the time allowed.10  Astro (including the Additional Astro Parties) applied to enforce the awards in Singapore and elsewhere. Lippo resisted enforcement of the awards in Singapore on the basis that the Tribunal did not have jurisdiction to grant relief against Lippo in favour of the Additional Astro Parties.

In October 2012, the Singapore High Court, at first instance (Belinda Ang J), enforced the awards in favour of the Additional Astro Parties.11  Her Honour held that Lippo, having failed to avail itself of its right to court review of the preliminary ruling on jurisdiction under Article 16 of the Model Law, was precluded from raising a jurisdictional argument at the post-award enforcement stage that it could have raised with the court earlier. Lippo appealed the decision.

The Singapore Court of Appeal allowed the appeal. The Court of Appeal underlined the existence of ‘active’ and ‘passive’ remedies available to an award-debtor under the Model Law. According to their Honours:

(a) Articles 16(3)12  and 34 are ‘active’ remedies, in that they provide for the award-debtor to take a positive step in challenging the jurisdiction of an arbitrator; while

(b) Article 36 involves a ‘passive’ remedy, in that the award debtor can wait until the award creditor brings an enforcement application and, at that stage, challenge the jurisdiction of the Arbitral Tribunal.

For the Court, Lippo’s decision not to apply for review of the Tribunal’s preliminary ruling on jurisdiction under Article 16(3) did not prevent it from resisting enforcement of the awards under Article 36.  In other words, the fact that Lippo had not availed itself of an active remedy did not deny it of a passive remedy.

The Singapore Court of Appeal further opined (without deciding) that an award debtor’s failure to avail itself of the remedy in Article 16 (assuming a preliminary ruling on jurisdiction) would preclude it from raising a jurisdictional objection at the setting aside stage under Article 34 (post-award).13

Apropos the Singapore Court of Appeal decision, Williams and Kawharu observe that:

The Singapore Court of Appeal issued a surprising decision regarding a party’s right to raise eleventh-hour objections to the tribunal’s jurisdiction. The relevant finding in Astro is that failure to apply under art 16(3) to the High Court following an arbitral tribunal’s preliminary jurisdictional decision is not determinative, or even relevant, as to whether a party has waived its right to challenge the subsequent award for lack of jurisdiction. We disagree with the Singapore Court’s finding. This is because the whole thrust of art 16(3) is to finally determine, as early as possible in the arbitral proceedings, the correctness of any ruling by the arbitral tribunal as to its jurisdiction. The evident object is to avoid the unnecessary cost and waste of time caused by carrying on arbitral proceedings when the tribunal has no jurisdiction to do so.14

With respect, this characterisation of the finding to be derived from the decision is too broad. The ratio decidendi of the decision is limited to the absence of the preclusive effect of Article 16(3) vis-a-vis a challenge to the enforcement of the awards. As far as the setting aside of the awards was concerned, the Court of Appeal was inclined to the (obiter) view that Article 16(3) did have a preclusive effect.15

The Legislative Response

The Arbitration Amendment Bill was introduced on 9 March 2017. Article 16(4) provides that the consequence of failing to apply for court review under Article 16(3) is that the right to later challenge jurisdiction (post-award) is deemed to be waived. As originally drafted, Article 16(4) stated that:

For the avoidance of doubt, it is declared that the failure to submit a timely request to the High Court under paragraph (3) to decide the jurisdictional matter must operate as a waiver of any right later to challenge or call into question the ruling of an arbitral tribunal as to its jurisdiction. 16

Parliament then sought submissions from interested parties. All three submissions that considered Article 16(4) supported its inclusion on the basis of increasing arbitral efficiency and reducing costs. 17

Following the receipt of submissions, the Justice Committee published an Interim Report in April 2018.18  That brief report did little more than annex a Departmental Report authored by the New Zealand Ministry of Justice. The latter Report relevantly recommended that clause 6(1) — which introduces the proposed new Article 16(4) — be removed from the Bill.

With respect, the analysis of Article 16(4) contained in the Departmental Report was extremely disappointing. It was replete with elementary errors and failed to appreciate the true purpose of the proposed Article 16(4). However, as the Final Report supersedes and does not refer to the Interim Report at all, it is unnecessary to further discuss it.

The Final Report recommends inserting a revised Article 16(4) into the Arbitration Act, worded as follows:

To avoid doubt, it is declared that the failure to pursue a request made under paragraph (3) in a timely manner operates as a waiver of any right to later object to a ruling of the arbitral tribunal as to its jurisdiction.

The Revised Article 16(4):  Same, Same but Not Different.

The Final Report states that revision of the original Article 16(4) is necessary because the original provision left it ‘unclear [by] when a party to arbitration must have raised an objection to the jurisdiction of an arbitration tribunal’.19  However, with respect, it is not at all clear that the revised Article substantively differs from the original version or clarifies its operation.

The principal drafting change is that the ‘failure to pursue a request made under [Article 16(3)] in a timely manner’, rather than the ‘failure to submit a timely request to the High Court under [Article 16(3)]’, operates to trigger a deemed waiver. With respect, it is not apparent that the revised wording is any better than the original wording.

Non-Participating Parties

Moreover, the Justice Committee asserts in the Final Report that Article 16(4) ‘would not apply when a party does not participate in the arbitration at all’.20  As Article 16(4) only operates as an extension of Article 16(3), the Justice Committee is effectively saying that the preclusive effect of Article 16(3) only applies to parties that actively participate in an arbitration.

There are two separate questions involved in relation to Article 16(3). First, may a non-participating party activate the right to apply to the court at the seat to review a preliminary

ruling on jurisdiction by an Arbitral Tribunal? Secondly, having failed to do so, is a non-participating party precluded from raising a jurisdictional objection as a ground for setting aside or, alternatively, resisting enforcement of a later award on the merits?

Apropos the first question, it should be noted that an Arbitral Tribunal may make a preliminary ruling on jurisdiction on its own motion or on application by a party to the arbitration. To this point, the Chartered Institute of Arbitrators’ International Arbitration Guideline on Party Non-Participation — which seeks to set out ‘the current best practice in international commercial arbitration’ — advises arbitrators to ‘consider and ascertain, if necessary, whether they have jurisdiction to determine the matters referred to arbitration, even though no challenge has been raised by either party’.21  There is no good reason why a non-participating party should not be able to come out from behind the woodwork after being served with an Arbitral Tribunal’s preliminary ruling on jurisdiction and apply to the court at the seat to review that ruling. Nothing in the text of Article 16 or the travaux of the Model Law suggests otherwise.

The more difficult question is the second question. The text of Article 16 does not answer that question. On the other hand, the travaux suggests that Article 16(3) should not have a preclusive effect in respect of non-participating parties. Indeed, Belinda Ang J, at first instance, explicitly made this point, albeit in obiter:

if a party does not raise a timely objection to jurisdiction in accordance with [Article 16(3)] of the Model Law ,22 then the party cannot raise the same objection to jurisdiction under Arts 34 and 36. The only exception is where a party has boycotted the proceedings altogether…The jurisdictional award would not be final vis-à-vis the boycotting party, and the opposing party would have ample notice of this from the boycotting party’s absolute refusal to participate. This possibility is hinted at in the UNCITRAL Commentary (A/CN 9/264) on Art 16(2) at para 9. 23

In particular, [9] of the Analytical Commentary on Draft Text of a Model Law on International Commercial Arbitration (‘Analytical Commentary’)24  states that consistent with the purpose underlying Article 16(2):

any objection, for example, to the validity of the arbitration agreement may not later be invoked as a ground for setting aside … or for … refusal of recognition of enforcement of an award … these provisions on grounds for setting aside or refusing recognition or enforcement would remain applicable and of practical relevance to those cases … where a party did not participate in the arbitration, at least not submit a statement or take part in hearings on the substance of the dispute. 25

In this regard, Professor Gary Born has said:

The only exception to this requirement, that a party challenge the arbitrator’s positive jurisdictional ruling immediately (or within 30 days) under Article 16(3), is where a party does not participate at all in the arbitral proceedings; in this instance, the Singaporean court would permit a challenge to the final award under Article 34 of the Model Law. 26

It is notable that on appeal the Singapore Court of Appeal in First Media did not doubt Belinda Ang J on this point. Indeed, the Court of Appeal did not consider the position of non-participating parties at all.

Given the fact that the point is not free from uncertainty, it would be preferable for Article 16(4), or an accompanying article, to make it abundantly clear that it is not intended to apply to non-participating parties. Section 72 of the United Kingdom Arbitration Act 1996 is an example of such a clarifying provision. Although that Act is not based on the Model Law, section 72 may provide some guidance for drafters in New Zealand.27

Precluding Boycotting Parties

A serious shortcoming of the present 16(4) is that it reflects a ‘one-size-fits-all’ approach to the rights of parties to an arbitration to set aside or resist enforcement of awards on jurisdictional grounds, in circumstances where they have not sought court review of a preliminary ruling on jurisdiction. As such, it over-reaches. I submit that a more nuanced approach is required.

It is to be remembered that a Respondent may adopt various strategies following a preliminary ruling on jurisdiction. In particular it may:

(1) reserve its rights and continue to participate in the arbitration (as occurred in First Media);

(2) withdraw from (ie boycott) the arbitration following the adverse preliminary ruling;28  or

(3) seek court review of the preliminary ruling under Article 16(3).

There are good policy reasons why the first strategy should not be permitted. It is hardly conducive to promoting efficiency in the arbitration process. As Belinda Ang J noted:

the general principles of international arbitration hold true, viz, it should not be open to a party to hold off bringing a jurisdictional challenge and, at the same time, participate in the arbitration on the merits in the expectation that it can revive its jurisdictional challenge at a later stage should it prove to be unsuccessful in the arbitration. Such behaviour is bound to make a mockery of the finality and effectiveness of arbitral awards on jurisdiction. 29

But it is not entirely clear why a Respondent who withdraws from an arbitration following an adverse preliminary ruling on jurisdiction30   should be shut out from setting aside the award under Article 34 (ie relying on an active remedy), let alone resisting enforcement of the award under Article 36 (ie relying on a passive remedy).

The basic vice that Article 16(4) seeks to correct is inefficiency and wasted costs. Where a boycotting party clearly and promptly exits the arbitration, inefficiencies are unlikely to flow. In such cases, the rationale for Article 16(4) does not support barring a boycotting party from challenging or resisting enforcement of a later final award on the grounds of lack of jurisdiction. In my view, Article 16(3) (and by extension the proposed Article 16(4)) should only have a preclusive effect in relation to parties who continue to participate in an arbitration following a preliminary ruling on jurisdiction. Conversely, Article 16(3) should not have a preclusive effect in relation to non-participating or boycotting parties.

In light of the above, I submit that the proposed Article 16(4) be further amended as follows and that a new Article 16(5) be introduced:

(4) To avoid doubt, and subject to paragraph (5), it is declared that the failure to pursue a request made under paragraph (3) in a timely manner operates as a waiver of any right to later object to a ruling of the Arbitral Tribunal as to its jurisdiction.

(5) Paragraph (4) applies only to a party that takes an active step in the arbitration following the publication by the Arbitral Tribunal of a preliminary ruling on jurisdiction (emphasis added).

Conclusion

In summary:

(a) the revised formulation of Article 16(4) in the Final Report does not substantially differ from its original version contained in the Bill;

(b) the Final Report asserts, without supporting reasoning, that Article 16(4) would not apply to parties that choose not to participate in the arbitration. This assumption is somewhat questionable. The revised Article 16(4) would benefit from an accompanying provision that makes it absolutely clear that the preclusive effect of Article 16(4) does not apply to non-participating parties;

(c) moreover, and perhaps most significantly, the revised Article 16(4) over-reaches by applying to boycotting parties.  Article 16(3) should only have a preclusive effect in relation to parties who continue to participate in an arbitration following a preliminary ruling on jurisdiction.

About the author

Albert Monichino practises as a barrister, arbitrator and mediator practicing in Australia. He has over 20 years experience. He is a Chartered Arbitrator and is accredited as an advanced mediator. He was appointed Senior Counsel in 2010.

He has a general commercial litigation practice in the superior Court of Australia, and also in commercial arbitrations (domestic and international). Types of matters handled include:

  • Construction and engineering disputes (e.g. acting as senior junior counsel for Fluor in the Fluor v Anaconda arbitration, 2001 – 2003, involving claims exceeding $A1billion);
  • Fnancial services and investment disputes;
  • Contractual disputes;
  • Minority shareholder and joint venture disputes; and
  • Intellectual property disputes.

To request the appointment of Albert Monichino, please contact

registrar@nzdrc.co.nz or registrar@nziac.com

End Notes

* LLM (Cambridge), Chartered Arbitrator, Barrister and Mediator, Immediate Past President of the Australian Branch of the Chartered Institute of Arbitrators. The author gratefully acknowledges the valuable assistance of Alan de Rochefort-Reynolds, MIR (Melb), JD (Melb) in the preparation of this article.

1  Justice Committee, Parliament of New Zealand, Arbitration Amendment Bill:  Commentary (2018) 1.

2  Arbitration Amendment Bill 2017 (NZ) Pt 6. The Bill is available online at: http://www.legislation.govt.nz/bill/member/2017/0245/latest/DLM7153602.html?src=qs.

3  The Interim Report can be accessed online at: https://www.parliament.nz/en/pb/sc/reports/document/SCR_80473/arbitration-amendment-bill.

4   Justice Committee, Parliament of New Zealand, Arbitration Amendment Bill:  Commentary (2018) 3.

5  PT First Media TBK v Astro Nusantara International BV [2013] SGCA 57; [2014] 1 SLR 372.

6  PT First Media TBK v Astro Nusantara International BV [2013] SGCA 57; [2014] 1 SLR 372, [210].

7  Astro Nusantara International BV v PT Ayunda Prima Mitra [2012] SGHC 212; [2013] 1 SLR 636, [32].

8  PT First Media TBK v Astro Nusantara International BV [2013] SGCA 57; [2014] 1 SLR 372, [203], [219].

9  Under s 10, a party may apply to the supervisory court to review both a positive and negative preliminary ruling on jurisdiction. In contrast, Article 16(3) only permits court review of a positive preliminary ruling on jurisdiction.

10  Article 34 of the Model Law requires an application to set aside an award to be made within three months of the publication of the award.

11  Astro Nusantara International BV v PT Ayunda Prima Mitra [2012] SGHC 212; [2013] 1 SLR 636.

12  Article 16(3) provides that:

The arbitral tribunal may rule on a plea referred to in paragraph (2) of this article either as a preliminary question or in an award on the merits. If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court specified in article 6 to decide the matter, which decision shall be subject to no appeal; while such a request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award (emphasis added).

13  PT First Media TBK v Astro Nusantara International BV [2013] SGCA 57; [2014] 1 SLR 372, [130].

14  Sir David A R Williams and Amokura Kawharu, Williams & Kawharu on Arbitration (LexisNexis, 2nd ed, 2017) 216 [7.4.2] (emphasis added).

15  PT First Media TBK v Astro Nusantara International BV [2013] SGCA 57; [2014] 1 SLR 372, [130].

16  Paul Foster-Bell, Arbitration Amendment Bill 2017, Members Bill 245-1 [Part 6], http://www.legislation.govt.nz/bill/member/2017/0245/latest/DLM7153602.html?src=qs.

17  Sir David AR Williams, Arbitration Amendment Bill (2018) [6.10]; Russell McVeagh, Submission: Arbitration Amendment Bill (Bill No 245-1) (2018) [11]–[12]; Arbitrators’ and Mediators’ Institute of New Zealand, Submissions Justice and Electoral Select Committee Arbitration Amendment Bill 2017 (No 245-1) (2018) 6–7.

18  Justice Committee, New Zealand House of Representatives, Arbitration Amendment Bill Interim Report (2018). The Report can be accessed online from the Parliament of New Zealand at:  https://www.parliament.nz/resource/en-NZ/SCR_77959/f80351f9e75d33d0351d14991ff81d0c5386112e.

19  Justice Committee, Parliament of New Zealand, Arbitration Amendment Bill:  Commentary (2018) 3.

20  Justice Committee, Parliament of New Zealand, Arbitration Amendment Bill:  Commentary (2018) 3.

21  Chartered Institute of Arbitrators, International Arbitration Practice Guideline: Party Non-Participation (2011) 1 [1], 3 [2]. Available online at https://www.ciarb.org/media/1311/2011partynonparticipation.pdf

22  It is quite clear that in referring to a party ‘[failing to raise] a timely objection to jurisdiction’, Her Honour was referring to a party that holds off making an application to the Court for review of an Arbitral Tribunal’s preliminary ruling on jurisdiction.

23  Astro Nusantara International BV v PT Ayunda Prima Mitra [2012] SGHC 212; [2013] 1 SLR 636, [141] (emphasis added). See also [133].

24  United Nations Commission on International Trade, Analytical Commentary on Draft Text of a Model Law on International Commercial Arbitration, 18th sess, UN Doc A/CN.9/264 (25 March 1985).

25  United Nations Commission on International Trade, Analytical Commentary on Draft Text of a Model Law on International Commercial Arbitration, 18th sess, UN Doc A/CN.9/264 (25 March 1985) 39 [9] (emphasis added).

26  Gary B Born, International Commercial Arbitration (Kluwer, 2nd ed, 2014) 1105.

27  Section 72, entitled ‘Saving for rights of person who takes no part in proceedings’ reads:

(1) A person alleged to be a party to arbitral proceedings but who takes no part in the proceedings may question –

  1. Whether there is a valid arbitration agreement,
  2. Whether the tribunal is properly constituted, or
  3. What matters have been submitted to arbitration in accordance with the arbitration agreement.

(2) He also has the same right as a party to the arbitral proceedings to challenge an award –

  1. By an application under section 67 on the ground of lack of substantive jurisdiction in relation to him, or
  2. By an application under section 68 on the ground of serious irregularity (within the meaning of that section) affecting him;

And section 70(2) (duty to exhaust arbitral procedures) does not apply in his case.

28  This situation is expressly considered in the Chartered Institute of Arbitrator’s International Arbitration Practice Guideline: Party Non-Participation (2011) 1 [2]: ‘party non-participation’ should be understood to encompass both a situation where a party never takes any steps in arbitration and a situation where it has initially participated but ceases to do so later’.

29  Astro Nusantara International BV v PT Ayunda Prima Mitra [2012] SGHC 212; [2013] 1 SLR 636, [146].

30  As occurred in Dallah Real Estate and Tourism Holding Co v Pakistan [2010] UKSC 46; [2011] 1 AC 743.