ReSolution Issue 3
Page 1
THE BIG FREEZE:
EXPOSURE TO ASSET PRESERVATION
ORDERS AROUND THE WORLD
Parties to international transactions are familiar with the need to carefully consider–
when the contract is being negotiated–the types of disputes that may arise, the likely
parties to those disputes, the most appropriate dispute resolution process and the
most appropriate venue for that process.
Author Profile
They may not, however, be familiar with the risk that their assets around the world
may be exposed in the event of a dispute, notwithstanding that:
•
there is no dispute about the venue and method of dispute resolution,
•
the assets are located in a jurisdiction that is otherwise unconnected to the
dispute, and
•
they have given no security over those assets to the person with whom they
are in dispute.
A recent case in the Federal Court of Australia has highlighted the risks for parties
involved in transnational disputes whose assets are geographically dispersed, and the
means by which counterparties can seek to protect their position by freezing assets in
a jurisdiction where they may seek to enforce any judgment or arbitral award.
•
This case is the first time an Australian court has made freezing orders in
relation to a pending arbitration seated outside Australia under Article 17J of
the UNCITRAL Model Law on Commercial Arbitration (the Model Law).
•
The court made freezing orders against the respondent to the arbitration
and its wholly owned subsidiary (which was not a party to the arbitration) in
relation to over AUD$700 million of shares in a publicly listed Australian
company.
•
The case was unique in that it involved only foreign parties. The connection
to Australia was the fact that the assets were located in Australia.
Donald Robertson,
Partner, Freehills
&
Danielle Sirmai, Senior
Associate, Freehills
Donald’s practice involves
all aspects of international
economic law, including
advice, litigation and
arbitration in relation to
international commercial
contracts and transactions,
maritime and shipping law
and the private and public
international law
mechanisms for allocating
country and sovereign risk
in international investments
and cross-border
transactions.
For more information see
the Freehills website
Key issues
www.freehills.com.au
A party to a foreign arbitration can enlist an Australian court’s assistance to freeze
assets that would be available to satisfy a foreign arbitral award, if there is a danger
ReSolution—New Zealand Dispute Resolution Centre / New Zealand International Arbitration Centre
ReSolution Issue 3
Page 2
that those assets will be dealt with in a manner that may result in the award being
wholly or partly unsatisfied.
In ENRC Marketing AG v OJSC "Magnitogorsk Metallurgical Kombinat" [2011] FCA
1371,
Justice
Rares
made
orders
against
OJSC
“Magnitogorsk
Metallurgical
Kombinat” (a company incorporated in Russia) and MMK-Mining Assets Management
S.A. (a company incorporated in Luxembourg). The orders froze those companies’
assets in Australia up to the unencumbered value of over AUD$850 million. Those
assets included approximately 155 million shares in an Australian public listed
company, Fortescue Metals Group Ltd, which represents about 5 per cent of
Fortescue’s listed capital, and which was valued at over AUD$700 million.
ENRC Marketing AG, a company incorporated in Switzerland and the applicant in these
“Parties involved in
proceedings, gave an undertaking as to damages suffered as a result of the freezing
international
orders, and was ordered to provide security for that undertaking.
commerce or
international
The decision is important – and groundbreaking in Australia – because it:
•
is the first time an Australian court has frozen assets located in Australia in
aid of a pending foreign arbitration,
•
is the first time an Australian court has made orders under Article 17J of the
Model Law in aid of a foreign arbitration,
•
recognises that there are some circumstances in which it will be appropriate
to freeze assets of not just the respondent to an arbitration, but also a third
party, in order to avoid the risk that those assets will be dealt with in a
manner that may result in an award being wholly or partly unsatisfied,
•
•
clearly acknowledges that an Australian court will act to protect its own
processes and the integrity of the system of international arbitration
generally, by exercising its power to preserve assets and thereby the
substance of an arbitral award, and
implicitly recognises the important role that international arbitration plays in
transnational commerce and emphasises the supportive role played by
Australian courts as part of the system of international arbitration.
disputes should be
aware of the ability
of courts other than
the courts of the
place where the
dispute is being
resolved to issue
interim measures,
including asset
preservation
orders.”
Key lessons
Parties involved in international commerce or international disputes should be aware of
the ability of courts other than the courts of the place where the dispute is being
resolved to issue interim measures, including asset preservation orders.
ReSolution—New Zealand Dispute Resolution Centre / New Zealand International Arbitration Centre
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A party who fears that its judgment or award may be rendered worthless by a
respondent dealing with its assets in a manner that puts those assets out of reach for
the purposes of enforcement, can approach an Australian court (or other competent
courts around the world) for orders freezing those assets.
International commercial actors – and in particular multinational corporate groups –
should be aware that any attempt to deal with their assets in a manner that would put
“International
them out of reach for the purposes of enforcement may be met with an order by a
commercial actors –
competent court freezing those assets.
and in particular
multinational
Freezing orders:
•
prevent the frustration or abuse of the process of the court through
improper disposal or dissipation of assets by a potential or actual judgment
or award debtor,
•
preserve the assets in the hands of the respondent and in the jurisdiction,
so that they are available for the purposes of enforcing a judgment or
award,
•
do not provide security in respect of a judgment or award, or enable a party
to obtain priority over other creditors.
corporate groups –
should be aware
that any attempt to
deal with their
assets in a manner
that would put them
out of reach for the
Factual background
purposes of
enforcement may be
The case relates to arbitration proceedings in Switzerland, commenced by the
applicant (ENRC) against the first respondent (MMK). ENRC is a company incorporated
met with an order
in Switzerland whose assets are mainly located in the Republic of Kazakhstan. It has
by a competent
no assets in Australia. MMK is a company incorporated in Russia. The second
court freezing those
respondent (MMK LUX) is an associated company of MMK, recently incorporated in
assets.”
Luxembourg.
ENRC entered into a long-term supply contract with MMK for the provision of bulk
quantities of iron ore. A dispute arose between ENRC and MMK about MMK’s
obligations under the supply contract. ENRC commenced arbitration proceedings in
Switzerland, alleging that MMK breached the contract by refusing to accept large
quantities of iron ore. At the time of the Australian proceedings, ENRC quantified its
damages in the order of AUD$850 million on various assumptions.
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Any award issued by the arbitrators in favour of ENRC would be enforceable under the
Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New
York Convention) in any jurisdiction that is a party to the New York Convention where
MMK’s assets are located.
ENRC had concerns about a parcel of approximately 155 million shares in an Australian
public listed company, Fortescue Metals Group Ltd, which comprised about 5 per cent
“ENRC commenced
of Fortescue’s listed capital (the Fortescue Shares), and which were worth around
proceedings in
AUD$715 million at the time of the Australian proceedings. Those concerns centred on
Australia for
whether the shares were to be transferred to a subsidiary company in Luxembourg.
ERNC had no security over those shares.
freezing and
ancillary orders
ENRC commenced proceedings in Australia for freezing and ancillary orders because it
because it wished to
wished to ensure that this significant asset was not placed beyond its reach for the
ensure that this
purposes of being able to enforce any arbitration award subsequently made.
significant asset
Those proceedings were commenced under Article 17J of the Model Law, which is
given the force of law in Australia by section 16 of the International Arbitration Act
1974 (Cth). Article 17J of the Model Law provides:
was not placed
beyond its reach for
the purposes of
being able to
Article 17 J. Court-ordered interim measures
A court shall have the same power of issuing an interim measure in relation to
arbitration proceedings, irrespective of whether their place is in the territory of
this State, as it has in relation to proceedings in courts. The court shall exercise
such power in accordance with its own procedures in consideration of the specific
enforce any
arbitration award
subsequently
made.”
features of international arbitration.
Decision
ENRC’s application was heard without notice to MMK. ENRC was successful in the ex
parte hearing before Justice Rares, who held that:
•
the Federal Court of Australia has jurisdiction by force of Article 17J of the
Model Law to make orders so as to prevent parties to arbitration
agreements putting assets beyond the reach of any enforcement mechanism
in the event that awards are made against them, in the same way as they
would be able to be enjoined in domestic proceedings for a freezing order,
ReSolution—New Zealand Dispute Resolution Centre / New Zealand International Arbitration Centre
ReSolution Issue 3
•
freezing orders should be made against both MMK and MMK LUX over any
assets in Australia to the value of around AUD$850 million, including the
Fortescue Shares, and
•
the price ENRC had to pay for the freezing orders was an undertaking as to
any damages that may be suffered as a result of the freezing orders and
security for that undertaking, in the form of AUD$30 million to be paid into
court and later replaced by a bank guarantee.
Following these orders being made, and prior to the date set for the contested
hearing, the parties resolved the underlying dispute by agreement.
Extent of the court's power
Page 5
“As the UNCITRAL
Working Group on
Arbitration
recognised,
As the UNCITRAL Working Group on Arbitration recognised, different legal systems
different legal
take different approaches to the issue of interim measures in support of arbitration
systems take
and to the issue of interim measures generally. The courts of jurisdictions that have
different
adopted the Model Law (or at least Article 17J) should have the same power to issue
approaches to the
interim measures in relation to arbitration proceedings as they have in relation to
litigation proceedings.
issue of interim
measures in support
In Australia, there are uniform court rules in relation to freezing orders, which, by
of arbitration and to
virtue of Article 17J, can be used to support arbitration proceedings, whether seated in
the issue of interim
or outside Australia. These rules:
•
empower the court to make freezing orders against third parties (ie persons
who are not party to the arbitration),
•
empower the court to make freezing orders ex parte or with notice to the
respondent,
•
empower the court to make orders ancillary to the freezing orders as the
court considers appropriate (eg for disclosure of information about the
relevant assets), and
•
permit the application for freezing or ancillary orders to be served on
persons outside Australia if any of the assets to which the order relates are
in Australia.
measures
generally.”
Implications for international commerce and dispute
resolution
Freezing orders can have a major impact on businesses, including their day-to-day
operations, commercial negotiations and financing arrangements.
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In this case, a very large parcel of shares was frozen by the Federal Court of Australia
in support of a dispute that was otherwise being resolved overseas between parties
who were all foreign. This was despite the fact that the person obtaining the benefit of
the freezing order held no security over those shares.
In the increasingly interconnected world of international commerce, this case serves as
a reminder of the risks of operating across national boundaries and of the importance
of carefully and appropriately managing assets and risks in any transnational dispute.
No matter how carefully parties negotiate the venue and method for resolving any
dispute, their assets in other countries may not be beyond the reach of the courts of
those jurisdictions.
ReSolution—New Zealand Dispute Resolution Centre / New Zealand International Arbitration Centre
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