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New Zealand recent decisions on international sales and arbitration

22 September 2010

Three New Zealand court decisions helpfully illustrate the legal frameworks which can apply when disputes arise with overseas business partners.

New Zealand traders and exporters are often surprised to learn that many of their sales contracts (including with parties based in Australia, China, the United States and Singapore) are governed by an international treaty – the United Nations Convention on Contracts for the International Sales of Goods (CISG).  This is so by virtue of the Sale of Goods Act (United Nations Convention) Act 1994, which annexes the CISG as a Schedule and provides that the CISG has the force of law as a code in New Zealand in place of other New Zealand laws (such as the Sale of Goods Act 1908).  Article 1 of the CISG provides that the CISG will apply by default to any international contract for the sale of goods where the two parties are from different Contracting States, or where private international law rules lead to the application of the law of a Contracting State.  (Its provisions may, however, be excluded by agreement: Article 6.)

This conclusion seemingly came as a surprise to the trans-Tasman parties in Smallmon & Transport Sales & Anor (High Court Christchurch, CIV-2009-409-000363, 30 July 2010, French J).  The Smallmons operate a road transport and earthmoving business in Queensland.  In 2006, they purchased four trucks to use in their business from a New Zealand company, Transport Sales Limited.  The trucks were then shipped to Queensland where the Queensland authorities refused to register them on the grounds of alleged non-compliance with Australian vehicle standards.  Although an exemption was later granted, the trucks are registered only on a restricted basis.  As the contract did not address registration requirements, the Smallmons contended for an implied term that the trucks must be fit for purpose. 

Justice French held there was no question that the CISG applied to the contract.  Thus, the several claims of the Smallmons which invoked domestic contract law were struck out.  The question was whether the implied warranties of fitness for purpose in Article 35(2) of the CISG were breached.  As an interpretative aid, both parties had sought to rely on domestic law; again, however, French J confirmed that such law was inapplicable.  Instead, her Honour distilled the applicable principles from international cases (including a prominent German case dealing with a New Zealand product: the “New Zealand Mussels Case”, German Supreme Court, 8 March 1995) and commentary.  According to these authorities, a seller is not generally responsible for compliance with the buyer’s regulatory standards unless special circumstances applied.  Here, none did.  Thus, the claim failed.

In Hi-Gene Limited v Swisher Hygiene Franchise Corporation [2010] NZCA 359 the Court of Appeal confirmed the high threshold for refusing recognition and enforcement to an arbitral award pursuant to Article 36 of the First Schedule to the Arbitration Act 1996.  Hi Gene is a New Zealand company which became the master franchisee in Australasia of an international cleaning system operated by Swisher, based in the United States.  A dispute arose and Hi-Gene commenced arbitration proceedings against Swisher.  Representatives of both parties initially agreed to hold the arbitration in Charlotte, North Carolina.  Hi-Gene then sought to change the place of arbitration to New Zealand.  (This aspect of the case is a reminder of the utility of fixing the seat of arbitration in the arbitration clause, rather than waiting for a dispute to arise.) 

Swisher progressed the arbitration in North Carolina, and successfully applied to the North Carolina courts for orders appointing Hi-Gene’s arbitrator.  Hi-Gene’s New Zealand counsel did not attend any of the preliminary conferences and sought to adjourn the main hearing.  This request was rejected and an award was rendered against Hi-Gene. 

Swisher then sought to enforce the award against Hi-Gene in New Zealand.  Hi-Gene opposed enforcement on the ground that the arbitrators’ refusal to adjourn the proceedings prevented Hi-Gene from presenting its case (Article 36(1)(a)(ii)) and constituted a breach of public policy/natural justice (Article 36(1)(b)(ii) and (3)(b)).  The Court of Appeal confirmed, by reference to the leading case under Article 34 (Amaltal Corporation Ltd v Maruha (NZ) Corporation Ltd [2004] 2 NZLR 614), that the public policy exception to enforcement is to be narrowly interpreted.  It also indicated that the Article 36(1)(a)(ii) standard (derived from international conventions) and the public policy/natural justice standard (a New Zealand innovation), should be interpreted consistently as requiring serious grounds to intervene.  This is a reassuring confirmation that the latter standard does not lower the overall threshold for challenging arbitral awards.  The Court concluded that Hi-Gene was adequately notified of the hearing and there was no breach of natural justice.   

Finally, in LJS Management Limited v Amirco Limited (in Liq) (High Court Auckland, CIV 2010-404-004018, 12 August 2010, Keane J), the High Court confirmed the scope and process for obtaining leave for an appeal of an arbitration award.  Although involving a domestic dispute, the guidance in the case is of general application. 

Clause 5 of Schedule 2 of the Arbitration Act 1996 provides that an arbitration award can be appealed only on a question of law.  Clause 5(10), added in October 2007, provides that this comprises “an error of law that involves an incorrect interpretation of the applicable law (whether or not the error appears on the record of the decision)”, but not collateral attacks on fact-finding by the arbitrator.  Clause 5(1), which is optional, provides that an appeal is permitted where the parties have so agreed or with leave of the High Court, such leave to be granted only where the issue is significant (Clause 5(2)).  The principles governing leave under Clause 5(2) were set out by the Court of Appeal in Gold and Resource Developments (NZ) Ltd v Doug Hood Limited [2000] 3 NZLR 318 at [14].  In LJS Management, Keane J conventionally applied the Doug Hood principles and concluded that none of the issues raised by LJS (including alleged valuation and tax errors) were sufficiently significant to justify the grant of leave to appeal.