Dispute resolution, cross-border deals and the future of Perth...with dispute resolution practice groups expecting more work as a result of the credit fall out, will arbitration emerge as the standard method of dispute resolution in cross-border deals? ALB investigates
The mining boom has transformed Western Australia into a hub of international trade that has attracted companies from across the globe.
While many have invested directly into Australian mining, many others are entering into complex agreements to transfer technology and supply state-of-the-art mining and construction equipment, which is essential for production and the development infrastructure necessary to transport high volumes of resources overseas.
Arbitration clauses on the rise
According to Mallesons' Pathma Nagarajan, as complex as these are, cross-border deals are all beginning to have one thing in common - arbitration clauses, which is one reason why she expects arbitration will become universally accepted as the preferred means of settling disputes in cross-border deals. Or at least those in Western Australia.
"We've had an enormous increase in the inclusion of arbitration clauses in international trade agreements in Western Australia. We've been involved in lots of front-end construction and engineering deals to supply equipment, which involve local companies and corporate entities from other parts of the world," she says.
"These entities have been registered in countries such as Canada, South Korea, Vietnam, the Middle East, and throughout Europe, and they are all insisting on the inclusion of international arbitration clauses in the agreements."
Nagarajan, a chartered arbitrator, is a fellow of the Chartered Institute of Arbitrators (CIA) and construction law expert. In addition, she is a fellow of the Western Australian Institute of Dispute Management and a fellow of the Malaysian Institute of Arbitrators.
Nagarajan expects this trend to result in increased workloads for firms in the business of dispute resolution. However, she notes that those firms that are properly equipped to meet the new challenges presented by this shift towards arbitration will have a distinct advantage in this space. "International arbitration proceedings generally require large legal resources," she says. "The work is intensive and sometime requires total commitment from lawyers to the exclusion of other work, particularly when hearings are on."
Front-end work
Nagarajan's practice group is divided into two distinct areas which are broadly located under the dispute resolution umbrella.
Firstly, the front-end (construction) team is involved in taking instructions and the drafting of complex cross-border agreements for the supply of materials. Secondly, there is what she refers to as the back-end (construction) team, which is involved conducting the actual arbitration proceedings if, and when, contractual disputes arise.
Although the back-end work has been relatively quiet in recent months, Nagarajan does not view this as a problem but rather as an opportunity for firms to better position themselves to meet the future demand for litigators who are skilled in arbitration practices and procedures.
"One can't wait for a brief and then look for resources to handle the work. I think dispute resolution teams in law firms would do well to encourage its lawyers to acquire arbitration-related skills and qualifications," she says. "Such skills and qualifications would be useful not only for conducting arbitration proceedings but also, one day, for sitting as arbitrators themselves," she continues.
When asked how the current market turmoil has affected her practice, Nagarajan enthusiastically responds: "Not at all." This is a trend she says is likely to continue, although she is quick to point out that it would be 'logical' to expect a shift from the front end to the back end as the global market conditions continue to deteriorate.
"At the moment, we're being inundated with front-end work. We haven't seen any increases in the back end," says Nagarajan. "But, as things develop, it would be logical to expect that some of these agreements would end up in dispute, and, therefore, I'd expect to see firms begin to move more resources from the front end into the dispute resolution side," she continues.
Shifting tide
McCullough Robertson partner Guy Humble expects to see that shift to take place sooner rather than later. "We're now coming out of a period when parties were willing to let bygones be bygones, as everyone was too busy making money. Now that the market's tightening, they are interested in exploring their legal rights to collect what was once forgivable debt."
This sentiment has been echoed by Carter Newell dispute resolution partner Mark Brooks: "Our practice group is seeing a significant increase of instructions from clients both in Australia and overseas. As market tensions rise, a change of attitude is apparent. Participants are no longer willing to give ground and move on to the next lucrative project, but are holding their positions and are prepared to take action."
Most law firms ALB spoke to have already begun to see sharp increases in litigation/dispute resolution across the board resulting from the current adverse market conditions.
For example, Mallesons' managing partner Roger Forbes has noted an increase in instructions in regulatory investigations, class action work, breaches of director duties, assets acquisition and insolvency.
Additionally, Humble has adjusted his dispute resolution revenue forecast to account for 25-30% of the firm's gross revenue next year, up from 15% this year. Nevertheless, the soaring costs and the lengthy processes typically associated with running litigation matters have led to the emergence of alternative dispute resolution. Within this context, internationals have embraced arbitration as the option perceived to offer parties more control, better flexibility, quicker access to justice, lower costs and enforceable determinations in local courts, as long as the country in question is one of the 140 that are signatories of the New York Convention 1958.
Greater control
According to Nagarajan, the best thing about alternative dispute resolution from the front-end standpoint is that the parties themselves, depending on their bargaining power, can specify exactly what dispute mechanism they want drafted into the contract, and what rules should apply.
She also notes that, while some parties may choose for Australian law to apply, they will almost always chose a neutral country for arbitration hearings, and may also agree to adopt that country's procedural rules. "Some of our more sophisticated clients come to us knowing exactly what they want, and with others we might go through a range of dispute resolution options, and help them to select the best option under the circumstances," she says.
Quick justice
According to Nagarajan, the speed of justice tends to be dependent on the complexity of the matter. "In addition to arbitration, we have seen a rise in expert determinations. Under these circumstances, documentary evidence will be tendered to an expert agreed to by the parties, and the matter can be resolved [typically] within 21 days," she says. "However, some issues are much more complex, and will require much more time as well as oral evidence in order to be properly resolved."
While the shift towards arbitration is becoming more prevalent in international agreements, the same cannot be said for domestic construction-related disputes. "The Australian court system works fairly efficiently and there's clarity in the rules and procedures applicable to litigation," says Nagarajan.
"As such, there's not much incentive to resort to arbitration in domestic disputes in Australia as opposed to the prevailing situation in some jurisdictions in Asia."
It appears that, unlike international arbitration, domestic arbitration is not thought to have inherent advantages. "There's a perception that domestic arbitration does not often result in saving time or costs compared to litigation in the courts. Under Australian law, there are grounds upon which it's possible for a court to review awards in domestic arbitrations. Hence, a large proportion of disputes that are referred to domestic arbitration end up in the courts anyway," she continues.
The difference is, in domestic construction-related disputes, if negotiation fails, the matter is referred to mediation but once mediation fails, then parties tend to file court proceedings. Conversely, in international disputes, if mediation fails, the matter is referred to arbitration where the parties would have agreed on the arbitration venue.
Regardless of whether the venue is in Australia or overseas, Nagarajan is expecting to see an increasing workload for well-positioned Australian legal practitioners. "If the venue specified in the arbitration clause is an Australian city, the arbitral proceedings resulting from any dispute arising between the parties would be held in Australia and thus provide work for Australian international arbitration practitioners, as counsel, solicitors and/or arbitrators," says Nagarajan.
"Even if the venue is outside Australia, the Australian contracting party may choose to use the services of an Australian law firm to prepare and argue its case at the arbitration hearing," she continues.
Choosing a venue
Typically, parties to international agreements have chosen 'neutral' countries for arbitration purposes with London, Paris, Geneva and Stockholm ranking high on the list of established arbitration destinations in Europe.
Meanwhile, in Asia - although Singapore and Hong Kong have established themselves as the region's premier international arbitration centres - the rise of international arbitration means that there is still plenty of room for competition.
Mallesons partner David Bateson has noticed some strides by China in recent years which have helped improve its credentials as a future arbitration destination. "PRC companies have become notably more comfortable dealing with foreign lawyers in the past 12 months, as they are heavily investing overseas - particularly in resources in Western Australia - and getting involved in disputes."
Bateson, a China International Economic and Trade Arbitration Commission (CIETAC) arbitrator working out of Mallesons Hong Kong office, notes some of the steps being taken in China to improve the country's reputation as a centre to attract and conduct regional arbitration matters.
"The Supreme People's Court now automatically vets all decisions where a local court declines to enforce an arbitral award. This counters any perception that local courts may decide these matters in an impartial manner," he explains.
Other improvements made to Chinese arbitral law include allowing foreigners to act as arbitrators and allowing non-Chinese legal advisors to assist with disputes. "Parties can also choose to apply laws other than Chinese law, although there are certain exceptions, and Chinese arbitral law has become increasingly aligned with best practice," he says.
Perth as an arbitration centre
Considering Australia's political stability, common law tradition and sophisticated legal system, are we likely to see the emergence of Australia as a possible regional arbitration centre? According to Nagarajan, although Australia generally has some inherent disadvantages, Perth has all of the hallmarks of an ideal location for international arbitration.
"Australia's biggest disadvantage is the tyranny of distance. International parties have to travel further, often with less transport options, than they have to in order to get to Singapore. Also, the time zones of the eastern states, especially during daylight saving, are out of step with the Asian centre," says Nagarajan.
"This is where Perth has advantages. It's closer to Asian capital cities and centres; it's in a more comparable time zone. It should, with its speedy and efficient court systems, at both federal and state levels, have significant advantages over the eastern states."
Although Nagarajan views the emergence of Perth as an international arbitration centre as achievable, she notes that it would require a greater awareness of the benefits of international arbitration by the Australian judiciary to succeed. "Australians tend not to be as aware of the advantages of international arbitration as they could or should be. Therefore, until recently, the climate hasn't been as conducive to international arbitration here as it should be," she explains.
"Recently, however, things have begun to change and Australian courts have become more 'user friendly' for and supportive of international arbitration. Judges in Australia now give greater effect to arbitration clauses, deal with arbitration cases more quickly and enforce international arbitration awards more readily than in the past."
Although the back end of construction work has remained relatively quiet in WA in recent months, global market forces would strongly suggest that this is likely to change in 2009 and beyond. Consequently, Nagarajan expects to see international arbitration work continue to increase in tandem with the global economic downturn currently picking up steam.
So far, several construction projects in WA have been delayed as a result of financing problems and the sudden downward spike in commodities prices. Nevertheless, the question remains: Will these events help to propel the transformation of Perth into a regional centre for international arbitration alongside the likes of Singapore and Hong Kong?
Although Nagarajan thinks Perth still has quite a way to go to compete in this space, she does not see any reason why this could not be achieved. ALB