AED Oil Limited & Anor v Puffin FPSO Limited [2010] VSCA 37

Court of Appeal (Vic)|2010-03-05|Before: BUCHANAN and BONGIORNO JJA and CROFT AJA

ARBITRATION - Application for stay of court proceedings - Construction of arbitration agreement - Meaning of 'urgent interlocutory or declaratory relief' - Enforcement of declarations made by arbitrators - Claim not urgent - Waiver - International Arbitration Act 1974 (Cth).

1 This application concerns the question whether a dispute arising out of a charter contract between an oil company ('AED Oil'), which was engaged in production from an oil field in the Southern Timor Sea, and the owner of a tanker ('Puffin') should be determined in court or by arbitration.

2 The charter contract was originally made between AED Oil and Puffin. Subsequently, a company ('AED Services'), which was related to AED Oil, succeeded to the rights and obligations of AED Oil. AED Oil guaranteed the performance of AED Services' obligations under the contract. The performance of AED Services' obligations was also secured by a charge over AED Oil's assets.

3 The dispute concerned the Australian tax liabilities of Puffin. Under the charter contract, AED Oil agreed to bear Puffin's tax liability. By Article 15.4 of the charter contract, AED Oil agreed to indemnify Puffin against any claim for a payment under a tax law. AED Oil was to prepare and file Puffin's tax returns. Article 15.5 extinguished AED Oil's liability if Puffin failed to meet certain obligations, including compliance with its obligations under Australian tax laws such as lodging tax returns, providing information to AED Oil to ensure Puffin's liabilities were minimised to the extent legally possible and not making any admission or taking any action in relation to a tax claim without AED Oil's written approval.

4 Puffin alleges that AED Services terminated the charter contract in mid-2009 as a result of a sharp decline in production for the oil field. Shortly prior to the termination, Puffin made a series of demands upon AED Services requiring the payment of money to meet Puffin's liability for income tax and GST. The demands were contested by AED Services.

5 The principal bone of contention between the parties was Puffin's ability to depreciate its assets. AED Services' position was that the effective life of the assets was tied to the life of the oil field. In that event, Puffin's income tax liability would be largely extinguished. Puffin, on the other hand, maintained that the effective life of the assets extended beyond the life of the oil field. AED Services required Puffin to sign income tax returns based on AED Services' view of Puffin's entitlement to claim depreciation. Puffin refused to sign returns it contended were incorrect.

6 On 17 August 2009, AED Oil commenced proceedings against Puffin seeking declarations as to the efficacy of the notices of demand made by Puffin and an injunction to restrain Puffin from taking any step to enforce its charge. AED Oil alleged that the notices of demand served by Puffin were invalid because Puffin had no income tax liability and because Puffin was in breach of its obligations under the charter contract.

7 Puffin counter-claimed, seeking declarations that AED Services had unreasonably withheld its consent to Puffin, inter alia, filing an income tax return, that Puffin had not made an admission of tax liability by an affidavit sworn by an officer of Puffin, that AED Services was obliged to consent to Puffin lodging an income tax return, that Puffin was not obliged to sign the income tax return prepared by AED Services and orders that AED Services give its consent and perform its obligations to pay the amounts of Puffin's tax liabilities to an escrow account. The counter-claim was brought against both AED Oil and AED Services.

8 On 20 August 2009 the trial judge granted an injunction restraining Puffin from relying upon the events of default alleged in the notices served upon AED Services. It was a condition of the injunction that AED Oil provide security for an amount estimated to be Puffin's GST liability.

9 By summonses dated 9 October 2009, AED Oil and AED Services applied for an order that the counter-claim be stayed, relying upon s 7 of the International Arbitration Act 1974 (Cth), s 53 of the Commercial Arbitration Act 1984 (Vic) and the inherent jurisdiction of the Court. The applicants invoked the provisions of Article 33 of the charter contract, which contained an agreement to submit disputes to arbitration.

10 Puffin resisted the applications, pleading, inter alia, that its claim in the proceeding fell within an exception to the article submitting disputes to arbitration. Article cl 33.10 provided:

Nothing in this Article 33 prevents a party from seeking urgent interlocutory or declaratory relief from a court of competent jurisdiction where, in that party's reasonable opinion, that action is necessary to protect that party's rights.

11 The trial judge held that the applicants satisfied the requirements of s 7 of the International Arbitration Act and were entitled to a stay but for the exception contained in Article 33.10. His Honour held that Puffin had brought its case within the exception. He accepted that the adjective 'urgent' applied both to interlocutory and declaratory relief, but held that the relief sought by Puffin was urgent and that there was a reasonable basis for Puffin's opinion that urgency was required to protect its rights. His Honour said there were two reasons for his conclusion that the relief sought by Puffin was urgent:

First, the counter-claims cannot be separated from the claim. If the claim was urgent, so is the resolution of Puffin's response. The proceeding brought by AED Oil was correctly characterised as urgent. Second, the resolution of the counter-claims will clarify Puffin's contractual obligations and assist in the timely performance of its statutory obligation to file true and correct income tax returns.

12 The second reason advanced by his Honour had less to do with Puffin's interests than those of the revenue, for his Honour was dismissive of Puffin's expressed fears for the deteriorating financial position of AED Oil and said:

[I]t is the need to ensure compliance with statutory obligations and the protection of the revenue that compels an urgent resolution of the issues.

It is difficult to see how protection of the revenue could be related to protection of Puffin's rights.

13 His Honour ordered that Puffin could prosecute in court all its claims save its claims for declarations that AED Services had unreasonably withheld its consent to Puffin filing an income tax return and that the applicants were obliged to consent to Puffin filing an income tax return.

14 It is common ground between the parties that the order made by the trial judge was made in an interlocutory application and accordingly leave is required pursuant to the provisions of s 17A(4) of the Supreme Court Act 1986 .

15 For the reasons set out hereafter, we are of the opinion that the decision at first instance was wrong and as substantial injustice will be done if the decision stands, we will grant leave to appeal.

16 The first question is the construction of Article 33.10. Counsel for Puffin contended that the trial judge erred in holding that the adjective 'urgent' in the Article qualified both interlocutory and declaratory relief. It was submitted that the exception applied to an application for a declaration provided only that the applicant believed it was necessary to protect its interests.

17 While counsel for Puffin conceded that an arbitrator does have jurisdiction to make a declaration, it was submitted that it was doubtful whether the courts will recognise and enforce a declaration contained in an arbitral award, and that, in the light of this uncertainty the parties intended to leave themselves free to seek from the Court any declaratory relief which they thought necessary, urgent or not.

18 Counsel relied upon the decision of the English Court of Appeal in Margulies Brothers Ltd v Dafnis Thomaides and Co (UK) Ltd.[1] In Tongyuan International v Uni-Clan Ltd Bick-Moore J in the Queens' Bench Division of the High Court said that Margulies was 'authority for the proposition that an award which is effectively couched in pure declaratory terms cannot be enforced as a judgment.'[2]

19 Margulies can be distinguished on the ground that the award in that case was not merely a declaratory award but an order for the payment of money, which was unclear in that it referred to payment to be made to one party of an amount that was dependent upon the result of various set-offs. Russell on Arbitration states:

Provided the terms of the award are sufficiently clear there is now no reason why a declaratory award cannot be enforced under s 66. Indeed, the courts do enforce declarations under s 66. Previously expressed doubts about whether an award which is couched in purely declaratory terms can be enforced as a judgment under s 66 of the Act are, it is suggested, no longer applicable. [The authors referred to Margulies and Tongyuan.] The Court will not however enforce an award for the payment of money which does not specify the sum due.[3]

Section 66 of the English Arbitration Act 1996 is in substantially the same terms as s 8 of the International Arbitration Act 1974 (Cth).

20 There is Australian authority which supports the proposition that declaratory awards made by arbitrators are enforceable. In Electra Air Conditioning BV v Seeley International Pty Ltd, the Full Court of the Federal Court said:

It may be assumed that an arbitrator can make an award which contains injunctive or declaratory relief provided that the arbitration agreement signed by the parties gives the arbitrator that power ...

We think the Model Law gives an arbitrator appointed under that law power to make an order in the nature of an injunction and, if necessary, a declaration.[4]

21 Counsel for Puffin submitted that interim or interlocutory declaratory relief was not available at common law or in equity and thus the word 'urgent' cannot sensibly be construed as qualifying the word 'declaratory'.

22 In The Principles of Equitable Remedies, Dr Spry stated:

Further, the court may, on an interlocutory application, grant an interim or interlocutory declaration of right. But although this latter power exists, it is exercised only when in exceptional circumstances it constitutes the most just method of providing adequate protection; for ordinarily a declaration should not be granted before the final hearing.[5]

23 In Royal Bank of Scotland v A Ltd[6] Lord Woolf CJ said that, while it was at one time thought that interim declarations could have no practical purpose,[7] developments in other jurisdictions showed that that was not the case and now the Civil Procedure Rules acknowledged that interim declarations could be granted.[8]

24 Even if it were accepted that an interlocutory or interim declaration is not available in Australia, this would not, in our opinion, exclude the possibility of a declaration of rights in the course of interlocutory proceedings where the declaration finally determines an aspect of matters in dispute and does not operate only as a declaration for the interim.[9] In our opinion a declaration of this type could sensibly be described as 'urgent'.

25 In the context of an arbitration agreement this is likely to be the type of urgent declaratory relief contemplated, as the authorities indicate difficulty in enforcing awards that do not finally determine a matter in dispute, even though the award may only be a partial award with respect to the totality of matters in dispute.[10]

26 In our opinion, the authorities do not support Puffin's contention that limitations upon an arbitrator's power to award declaratory relief or urgent declaratory relief affect the construction of Article 33.10. We agree with the trial judge that the word 'urgent', like the word 'relief' in the Article, was used distributively.

27 A contention advanced on behalf of Puffin was that the only requirement imposed by Article 33.10 was that it be reasonably open to a party to determine that relief be urgent. We do not agree. In our opinion, the Article, by its terms, contained two requirements. First, that the relief was in fact urgent, a matter to be determined objectively. Secondly, that the party claiming the relief form the reasonable opinion that the relief was necessary to protect that party's rights.

28 Article 33.10 is to be read in the context of the dispute resolution provisions of the charter contract. Those provisions demonstrate the parties' preference that disputes arising under the charter contract were to be decided by expert determination or arbitration.[11] This preference may be set at nought if Article 33.10 is not limited to cases which are in fact urgent.

29 Further, as Article 33 disclosed that the parties' first preference was to determine their dispute by arbitration and provide an exception to enable urgent claims to be determined in Court, we are of the opinion that in determining urgency it is relevant to consider the relative ability of courts and arbitrators to determine disputes swiftly. In this connection we note that Article 33.7 applies the rules for the conduct of commercial arbitration most recently published by the Institute of Arbitrators and Mediators Australia. The most recently published rules are those made on 1 June 2007. Rule 22 incorporates the UNCITRAL Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law on 21 June 1985. Articles 9 and 17 of the Model Law contemplate application to a court for an interim measure of protection and provide for the arbitral tribunal granting interim relief.

30 The next question is whether the relief sought in Puffin's counter-claim answered the description of urgent declaratory relief. As we have said, the trial judge held that as AED Oil's claim was urgent, the counter-claim by Puffin was also urgent. In our opinion this conclusion is not borne out by an analysis of AED Oil's claim and Puffin's counter-claim.

31 AED Oil's proceeding was brought to restrain the appointment of a receiver to AED Oil's assets pursuant to the guarantee and charge given by AED Oil. In that proceeding, it was alleged that the demands referred to in paragraph 4 hereof were not valid because the amounts claimed by Puffin did not constitute tax claims as that term was defined in the charter contract and so were not moneys owing under the guarantee or charge. The counter-claim, on the other hand, sought to resolve the question whether AED was required to consent to Puffin filing income tax returns and raised the underlying issue of the approach to be taken to the depreciation of Puffin's assets. The claim by AED Oil can be determined without canvassing the merits of Puffin's counter-claim. In any event, the urgency in the proceedings brought by AED Oil was resolved by the grant of an interlocutory injunction.

32 If Puffin's counter-claim did not derive urgency from AED Oil's claim it did not fall within Article 33.10, for standing alone, the counter-claim hardly appears urgent.

33 We consider that Puffin's conduct throws some light on the questions whether its claim was urgent and whether Puffin's opinion that the claim was necessary to protect its rights was reasonable. Puffin received advice from its Australian tax advisers in October 2007 that Puffin was liable to pay Australian income tax and GST. It made no claim in any court in relation to that liability until 14 September 2009, and then only in response to AED Oil's claim. Puffin received advice from counsel, which was before the trial judge, in which counsel stated his opinion that Puffin should ask AED Services to consent to Puffin seeking an extension of time from the Commissioner of Taxation to lodge its tax returns. Puffin has not proffered to AED Services a tax return in a form capable of being filed.

34 We think, with respect, that his Honour was correct in discounting urgency said by Puffin to arise from AED Oil's financial position. Puffin relied upon evidence that AED Oil's financial position was deteriorating. AED Oil reported a nett loss of $103,600,000 for the year which ended on 30 June 2009 and reported to the Australian Stock Exchange that its cash position had deteriorated by $43,700,000. The auditor's report qualifying the financial statements for the year which ended on 30 June 2009 expressed doubt as to the viability of AED Oil as a going concern. As oil production from the field operated by Puffin has ceased, AED Oil has no current source of income, although it has continuing obligations.

35 On the other hand, AED Oil's chief financial officer deposed that AED Oil had $95 million in cash and, apart from an obligation to holders of notes of approximately $71 million, had no further capital requirements or obligations. The amounts the subject matter of the notices of demand served by Puffin are the subject matter of a dispute between the accountants acting for the parties. Further, AED Services provided security for the payment of Puffin's GST liabilities pursuant to an order of the Court in an amount of $21 million and it appears that that sum is no longer required. In fact, the Taxation Commissioner has indicated that a substantial refund will be available in respect of overpaid GST. An assertion by Puffin that the field operated by Puffin in the South Timor Sea has no substantial value is contested by the AED parties.

36 When the evidence is viewed as a whole, we do not consider that AED Oil's financial position warranted the conclusion that Puffin's claim was urgent.

37 The trial judge evidently felt some sympathy for Puffin, which was obliged by law to lodge a tax return which might deprive it of the indemnity conferred by the charter contract. The position adopted by AED Oil, that Puffin should comply with its tax obligations and then see whether, as a result of having done so, it had lost its entitlement to indemnity, was not attractive. Nevertheless, that was the position in which Puffin was placed by the terms of the charter contract. The contract extracted as the price of the indemnity an agreement that Puffin's tax affairs would be handled by AED Oil. Puffin did not refer the dispute to arbitration when the dispute first arose. The question was not whether Puffin ought to be relieved from the consequences of the terms of the contract and its own conduct, but whether its claim was urgent.

38 Although AED Oil was not a party to the arbitration agreement, it claimed that, because it had guaranteed the obligations of AED Services, its wholly owned subsidiary, under the charter contract, AED Oil had standing to apply for a stay as a party 'claiming through or under a party' within the meaning of s 7(4) of the International Arbitration Act. Puffin responded that AED Oil had waived any right to apply for a stay by bringing its claim for declaratory relief in respect of the charter contract. It was submitted on behalf of Puffin that AED Oil had waived the right to have the claims it made in the proceeding heard and determined by arbitration.

39 The trial judge rejected this contention. With respect, we agree. Counsel for Puffin submitted that AED Oil did not merely claim an interlocutory injunction, which might be justified by Article 33.10, but also sought declarations raising the question of the validity of Puffin's demands. We think that is a somewhat inaccurate description of AED Oil's allegations in the proceeding. AED Oil did not seek declaratory relief in respect of obligations under the charter contract. Rather, it claimed that the amounts set out in Puffin's notices of demand were not 'moneys owing' as that term was defined in the guarantee or 'secured moneys' as that term was defined in the charge. Those notices were served pursuant to the guarantee and the charge, not the charter contract. AED Oil's proceeding did not seek to determine any obligations under the charter contract or the validity of the notices served by Puffin under the charter contract.

40 For the foregoing reasons, we will grant leave to appeal, treat the appeal as heard instanter and allowed, set aside orders below and in lieu hereof grant a stay of the proceedings in order that the dispute may be referred to arbitration.

41 Puffin has intimated that before any order is made, it wishes to be heard as to conditions of the stay, which might be imposed pursuant to s 7(2) of the International Arbitration Act.

[3] Sutton, Gill and Gearing, Russell on Arbitration, 23rd ed, 455.

[4] [2008] FCAFC 169. See also Cufone v Cruse [2000] SASC 304, [30]-[36] (Williams J); Tridon Australia Pty Ltd v ACD Tridon Inc (2004) BCL 413, [2004] NSWCA 146, where the Court did not doubt the enforceability of declarations made in an arbitral award, but where no question of enforcement arose.

[7] See International General Electric Co of New York Ltd v Commissioner of Customs and Excise [1962] Ch 784; R v IRC, ex parte Rossminster Ltd [1979] UKHL 5; [1980] AC 952, 976 (Lord Denning), 1007 (Viscount Dilhorne), 1014 (Lord Diplock); Underhill v Ministry of Food [1950] 1 All ER 591.

[8] See also Waterways Authority of New South Wales v Cole and Allied Operations Pty Ltd [2006] NSWSC 183.

[9] See Clarke v Chadburn [1985] 1 WLR 78, 81 (Megarry VC), referring to International General Electric Company of New York Ltd v Customs and Excise Commissioners [1962] Ch 784 (CA); Sutherland v Take Seven Group Pty Ltd (1998) 29 ACSR 201, 205 (NSWSC, Young J); Graham Barclay Oysters Pty Ltd v Ryan [2002] HCA 54; (2002) 211 CLR 540, 590-1 (Gummow and Hayne JJ).

[10] See Resort Condominiums International Inc v Bolwell [1995] 1 Qd R 406; and see Blackaby and Partasides with Redfern and Hunter, Redfern and Hunter on International Arbitration, 5th ed, 2009 (OUP), 446-451, particularly with reference to the requirements of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (The New York Convention).

[11] See Commondate Marine Corp v Pan Australia Shipping Pty Ltd [2006] 57 FCR 45, [164]-[166] (Allsop J); Premium Nafta Products Ltd v Fiji Shipping Co Ltd [2007] EWCA Civ 1329; [2007] 4 All ER 951, [9]-[13] (Lord Hoffman).

Arbitration Act 1974

Arbitration Act 1984

Arbitration Act 1996

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