Originially from: World Arbitration and Mediation Review (WAMR)

INSOLVENT COMPANY’S DEBT SHOULD
BE ARBITRATED, AUSTRALIAN COURT HOLDS
By Professor Michael Pryles, Minter Ellison, Melbourne
Article 11(3) of the New York Convention requires a court to stay proceedings
when faced with a matter that falls within an arbitration agreement. In such a case,
courts “shall, at the request of one of the parties, refer the parties to arbitration,”
unless the court determines that the arbitration agreement “is null and void,
inoperative or incapable of being performed.”
This provision is implemented in Australia by Section 7 of the International
Arbitration Act 1974. Under Section 7(2)(b), the court will stay a proceeding only
if it involves “the determination of a matter that, in pursuance of the agreement, is
capable of settlement by arbitration.” A party to the agreement must apply for the
stay. Section 7(4) expansively defines the term “party” to include “a person
claiming through or under a party.”
Recently, the High Court of Australia, the country’s highest judicial tribunal,
considered these provisions in Tanning Research Laboratories, Inc. v. O’Brien,
(1990) 64 ALJR 211. The case concerns whether the extent of an insolvent
company’s indebtedness is a matter capable of resolution by arbitration under
Section 7(2)(b), and whether a liquidator of an insolvent company that signed an
arbitration agreement is a “party” under Section 7(4).
Background
By an agreement dated June 24, 1975, Tanning Research Laboratories Inc., a
Florida corporation, granted an exclusive licence to Hawaiian Tropic Pty Ltd., a
New South Wales corporation. The agreement was expressed to bind not only the
parties but also their legal representatives, successors, and permitted assigns. It
contained a clause providing for arbitration under the rules of the American
Arbitration Association.
In April 1981, Hawaiian was ordered to be wound up in the Supreme Court of
New South Wales and a liquidator was appointed. Subsequently Tanning
purported to revoke me licence agreement unilaterally. The liquidator then gave
instructions to commence proceedings in a Florida court in the name of Hawaiian.
The action sought a declaratory judgment reinstating Hawaiian’s rights under the
licence agreement and awarding damages.
The Florida court referred the matter to arbitration, and in January 1985 an
American Arbitration Association panel issued an award finding, inter alia, that
Hawaiian had breached the agreement by failing to timely pay US$179,000 that it
owed Tanning for products it had received, and by incurring liquidation under