In an unanimous decision, the New South Wales Court of Appeal in Kawasaki Heavy Industries Ltd v Laing O’Rourke Australia Construction Pty Ltd  NSWCA 291 (“Kawasaki v LORAC”) has upheld an order for an interlocutory injunction against the appellant, subject to an order made by an arbitral tribunal (that had not yet been constituted). Both parties had agreed to have all disputes except interlocutory relief determined by international arbitration with seat in Singapore pursuant to the ICC Rules and governed by Singapore law. Allens Partner Nick Rudge, Managing Associate Hilary Birks and Lawyer Jamil Diu report.
On 26 April 2012, the appellant (“KHI”) and the respondent (“LORAC") agreed to jointly and severally perform services for JKC Australia LNG Pty Ltd (“JKC”) as subcontractors (the “Subcontract Agreement”). The Subcontract Agreement required KHI and LORAC to jointly provide an ‘unconditional and irrevocable performance bond’ and an ‘advance payment guarantee’ (the “Securities”) to JKC.
In order to allocate the risk and obligations under the Subcontract Agreement between them, KHI and LORAC entered into a further agreement (the “Consortium Agreement”). In addition to specifying the scope of work for each party, the Consortium Agreement required KHI alone to provide the Securities to JKC. Under the terms of the Consortium Agreement, LORAC was obliged to compensate KHI in proportion to its liability for the event which caused JKC to call upon the security. To ensure payment in such an event, LORAC was required to provide surety bonds to KHI equal to the amount and duration of the Securities.
The Consortium Agreement required that any dispute would be governed by Singapore law and determined by arbitration with seat in Singapore pursuant to the International Chamber of Commerce Rules of Arbitration. Clause 19 of the Consortium Agreement barred either party from commencing court proceedings unless the dispute resolution procedure had been followed. However, the regime allowed for interlocutory relief to be sought by the parties from a court of competent jurisdiction.
A dispute arose between JKC, KHI and LORAC and KHI issued notices of call to LORAC for the surety bonds even though JKC had not called on the Securities. In response, LORAC applied for an interlocutory injunction from the New South Wales Supreme Court seeking to restrain KHI from calling for the surety bonds. The primary judge considered that there was a 'serious question to be tried' in relation to whether KHI was entitled to call for the surety bonds and granted the injunction 'subject to any order to the contrary' by the arbitral tribunal (which, at the time, had not been constituted).
The Court of Appeal held that the primary judge correctly decided that there was a 'serious question to be tried' (paragraph 79). There was a real issue regarding whether, on a proper construction of the Consortium Agreement, the surety bonds were intended to protect KHI only in the event that JKC called on the Securities. The Court rejected KHI's submission that clear words would be required before a court would deny a party that was also the beneficiary of performance bonds from calling upon them.
One of KHI's contentions was that the primary judge should have determined the construction issues ‘as if on a final basis’ rather than limiting consideration of the issues to whether there was a ‘serious question to be tried’ (paragraph 87). KHI submitted that the function of the surety bonds was to act as ‘risk allocation devices’ pending resolution of the underlying dispute by the arbitral tribunal. To restrain KHI from calling upon the surety bonds would therefore substantially alter the commercial bargain agreed to by the parties.
KHI subsequently accepted that the primary judge was never asked to determine the construction issues 'as if' on a final basis (paragraph 95). Even if KHI had sought otherwise, the Court held that the primary judge would be barred from making a declaration on the construction issue by reason of the dispute resolution clause, referring the parties to arbitration (paragraph 96). A declaration would have been inconsistent with clause 19 of the Consortium Agreement which empowered the arbitral tribunal to determine all disputes between the parties.
Further, the Court determined that the form of the primary judge’s order was valid, accepting that a court could ‘craft orders that terminate upon an order made by an arbitral tribunal’ (paragraph 100). In this case, the parties had consented to the order made by the primary judge and it was clear that the injunction’s purpose was to preserve the parties’ positions until the dispute was determined by an arbitral tribunal.
Kawasaki v LORAC is a reminder of a court’s power under Article 17J of the UNCITRAL Model Law (read with section 16 of the International Arbitration Act 1974 (Cth)) and a demonstration of its ability to assist parties on an interlocutory basis with disputes requiring final determination by an arbitral tribunal. The decision reaffirms the capability of an Australian court to fashion interlocutory orders in a way that will not interfere with future orders made by an arbitral tribunal. However, the Court in Kawasaki v LORAC expressed caution as to its ability to issue interim measures, noting that the power to intervene on an interim basis should be exercised ‘very sparingly’ and only in circumstances where it was necessary to protect the position of a party until an arbitral tribunal was convened.
The case also raises the issue of how parties should seek interlocutory relief. Many arbitral institutions, including the International Chamber of Commerce, London Court of International Arbitration, Australian Centre for International Commercial Arbitration and International Centre for the Settlement of Investment Disputes have emergency arbitration procedures in place which provide for the parties to seek emergency relief. However, with uncertainty in some jurisdictions regarding the enforceability and efficiency of emergency arbitration, it is likely that in certain circumstances, parties will continue to seek interim relief from courts.