The terms of reference
1.1 On 19 July 1995 the then federal Attorney-General, Michael Lavarch, asked the Commission to review the civil remedies available under Australian law and under multilateral or bilateral instruments or arrangements to which Australia was or could be a party. The Commission was asked to report on the feasibility of the systematic development and reform of the law in relation to those remedies. The terms of reference are set out at the front of this report.
The impetus for the inquiry
1.2 The inquiry arose out of concerns about the effectiveness of the legal remedies available when commercial transactions cross international borders. Attention had been drawn to cross border issues by a number of high profile insolvencies, including insolvencies relating to the interests of Alan Bond, Christopher Skase, Abraham Goldberg and Robert Maxwell.[i] At a broader level it was recognised that the growing involvement of the Australian economy in regional and international trade and investment was creating challenges that the Australian legal system, like all other national legal systems, was having difficulty meeting and that these difficulties would persist.
1.3 In essence the Commission’s inquiry has been a feasibility study. The Commission has reviewed an aspect of Australian law not previously considered as a separate topic and has been asked to report on the scope for law reform in this area. In doing this the Commission has sought to identify whether there is any need for law reform and, if so, how it might best be undertaken and what issues should be addressed as a matter of priority.
The Commission’s findings and recommendations
1.4 The key finding of the Commission’s inquiry is that Australian firms are exposed to cross border legal problems that are costing them money and inhibiting business opportunities. These problems are set to increase in volume and significance with the growth in Australia’s international trade and investment.
Direct and indirect risks
1.5 The cross border legal problems create two types of risk for Australian firms. The first is the risk of being involved in a dispute that involves the laws or courts of more than one country. These disputes are marked by intolerable levels of cost, complexity and delay. From an Australian business perspective they are a direct legal risk of doing business outside Australia.
1.6 The second risk is where the law fails to provide the support an Australian firm needs or expects in its international commercial transactions. This may be, for example, a failure to provide certainty of ownership or compensation for loss or a lack of facilities to order and process transactions, such as exchange trading rules. The failure may result from a lack of local laws or local enforcement or from complexities and gaps in the way the laws of different countries apply to the transaction.
The need for reform
1.7 These legal risks are not new but they are increasing in importance. Australian firms are coping with them currently through pricing or other arrangements but they are an impediment to business. They are a source of inefficiencies, delays and increased costs. In the Commission’s view they can and should be addressed through law reform, including both the reform of Australian laws and practices and reform at an international level through international agreements and other arrangements.
Beyond civil remedies
1.8 The inquiry was initiated by concerns about the difficulties in obtaining effective civil remedies. The issues raised with the Commission indicate that effective law reform needs to address not only cross border litigation and dispute resolution procedures but also the substantive laws and principles applied to international commercial transactions and the ways in which those principles are implemented. Procedures, the substance of the law, and implementation are all interrelated when assessing the effectiveness of civil remedies and options for dealing with legal risks.
International Commercial Law Advisory Committee
1.9 In the Commission’s view law reform on this topic will require a mix of business and government input. The priorities, timing and options considered should be driven by Australian business requirements and perspectives. To achieve this the Commission recommends that an advisory committee of business leaders should be established to guide the government. The committee would have a particular brief to advise on the priorities for international negotiations and to identify a range of options for dealing with cross border legal issues, including non-legal solutions. The committee and its work are discussed further in chapters 2 and 3.
Litigation, finance law and electronic commerce
1.10 The Commission also recommends that priority be given to a review of several specific reforms raised during the inquiry. These reforms fall into four categories
short term cross border litigation reforms that can be addressed immediately
longer term cross border litigation reforms that will require more extensive consultation
finance law reform
an electronic commerce safe haven’ project, designed to develop a different and quicker way of addressing cross border legal issues that require a rapid response.
The cross border litigation reforms are discussed in chapter 4. The finance law reform and safe haven project are discussed in chapter 5.
Aims and themes
An outline of factors shaping the report
1.11 During the inquiry a number of themes and guiding principles emerged. These are reflected in the specific issues and recommendations discussed in the report and are outlined briefly below. They are
the need to adopt a commercial focus
the need to put civil remedies in a broader legal context
the need to look to local and bilateral solutions, not just multilateral conventions
the need to respect sovereignty and to be cautious in giving laws extra territorial effect.
1.12 The Commission has taken an Australian business perspective as its touchstone for this inquiry: what are the problems and exposures that Australian firms are facing in their cross border commercial transactions? How can Australian law better support Australian firms in those transactions, either domestically or through international arrangements?
Alan Bond – overview of litigation[ii]
In 1988 the Bond corporate group was at its zenith. Alan Bond’s private company, Dallhold Investments, was the largest privately owned gold miner in the world with gold mines in the US and South America. As at 30 June 1988 Dallhold owned just over 50% of Bond Corporation. The main areas of Bond Corporation’s corporate activity were brewing, international property, media, energy and property. Dallhold also had shareholdings in other companies through which it controlled large gold properties in Australia and the Queensland Greenvale Nickel joint venture.[iii]
From late 1988 problems arose on a number of fronts. In December 1989 lenders to Bond Brewing appointed a receiver. In August 1991 Bond Corporation entered into a scheme of arrangement. The specific events which led to Alan Bond’s bankruptcy related to a default on a personal guarantee supporting part of the corporate group’s activities.
In 1990 companies associated with Alan Bond held an interest in the Greenvale Nickel joint venture. Alan Bond had guaranteed those companies’ obligations to their financiers. On 20 March 1991 the financiers purported to serve a demand upon Bond as a guarantor requiring him to pay $US194 644 443.97 (the limit of his guarantee) in New York by 10 am New York time on 25 March 1991. Mr Bond did not pay any amount in response to this demand. As a result, a series of proceedings were instituted which culminated in Mr Bond’s bankruptcy.
The financiers brought proceedings in the NSW Supreme Court for recovery of the amount claimed under the guarantee. Mr Bond responded with a series of technical defences which were rejected by the trial judge in September 1991. The financiers then served a bankruptcy notice based on the form of judgment obtained from the trial judge. Mr Bond appealed to the Court of Appeal. Although rejecting his appeal, it upheld a technical challenge to the form of the judgment pronounced by the trial judge. Mr Bond successfully took proceedings in the Federal Court to set aside the bankruptcy notice as technically deficient because the Court of Appeal had altered the form of judgment. A new bankruptcy notice was served. By April 1992 Mr Bond was made bankrupt by the Federal Court. His appeal failed. In February 1995 Mr Bond achieved a settlement with his creditors under which they accepted less than one cent in the dollar. Mr Bond’s bankruptcy was annulled.
The steps and proceedings taken by Alan Bond’s trustee in bankruptcy and others who seek to locate assets allegedly held by Mr Bond, particularly those said to be located overseas, are complex and are taking some time to pursue.
Mr Bond and his trustee in bankruptcy have litigated over his superannuation fund, permission granted to him to leave Australia, and the proper characterization of payments to him by family members.
His trustee in bankruptcy has sought the assistance of Australian and overseas courts and agencies in investigations in Switzerland, Jersey and elsewhere.
The Attorney-General has relied on the Mutual Assistance in Criminal Matters Act 1987 (Cth) to support investigations by the Commonwealth DPP and AFP in Switzerland and Jersey. In February 1996 the Federal Court rejected Mr Bond’s application to restrain those investigations.
1.13 The aim in doing this is to ensure that any legal work undertaken in this area has practical significance and that it is cost effective. A business perspective allows this to be assessed. This is important not only for the setting of priorities but also for implementation. A legal initiative that is of little practical significance or is not cost effective is less likely to be implemented.
1.14 The Australian business perspective also necessarily takes into account the commercial interests of trading and investment partners outside Australia. The aim is to develop legal support for cross border commercial transactions that is of mutual benefit to all parties involved. Anything less would not serve Australian business interests.
Civil remedies in context
1.15 When this business perspective is applied to civil remedies, it is apparent that they need to be examined in a broader legal context. At its heart the topic of cross border civil remedies deals with a narrow area of civil litigation – the particular orders available from a court for civil disputes that involve parties or events both within and outside Australia. But for Australian firms this is only an end point. It represents only one option for dealing with disputes and only part of the legal backdrop to commercial transactions.
1.16 It is an important end point because it has great practical significance. Civil remedies are where the law bites. They describe what can in practice be recovered, and what liabilities will in practice be imposed, if the parties refuse to compromise or settle and require the dispute to be finally resolved by the courts. For disputes which reach that level, and for negotiations over disputes that might do so, the civil remedies available are critical considerations.
1.17 Nonetheless few business disputes reach that level. For most business activities the law is more useful where it supports risk management. This helps in avoiding disputes and in creating business opportunities. It requires a focus on substantive laws – laws, for example, which limit the scope for damage from defaults in cross border transactions, such as the prudential safeguards applying to financial markets, and which create opportunities for increasing the speed and volume of trade, such as standard terms and conditions for routine international transactions.
Local solutions and international conventions
1.18 One of the aims of the inquiry is to identify what sort of initiatives should be given priority when dealing with cross border legal issues. Many of the initiatives to date have focused on the international harmonisation of laws through multilateral conventions or the adoption of model laws or standard terms. This is logical. Cross border legal risks and the exposures and lost opportunities they create are common to all firms trading or investing outside their own country, not just Australian firms. In general principle it is in the commercial interests of all countries to reduce these risks.
Christopher Skase – overview of bankruptcy
Christopher Skase became prominent through the Qintex group of companies. At its heyday the assets of the group included the Channel Seven television network and the Mirage chain of resorts. However in late 1989 the group was unable to pay its debts and, despite efforts to maintain the group, receivers were appointed in November 1989.[iv]
Following the collapse of the Qintex group, Mr Skase left Australia for Europe in early 1990, returning on several occasions to contest court actions. He was also charged by the Australian Securities Commission (ASC) with offences for breach of directors’ duties. The ASC sought court orders in May 1991 restraining Mr Skase from leaving Australia. However the Federal Court rejected the application imposing instead a condition that Mr Skase keep the ASC notified of his address and return when required by the courts.[v]
In June 1991 Mr Skase declared himself bankrupt with personal debts of approximately $160 million. Mr Skase’s original trustee in bankruptcy agreed that he could leave Australia in return for an undertaking that he would return to his next creditors meeting in September 1991. While he was away a new trustee in bankruptcy was appointed who sought Mr Skase’s return to Australia for examination.
Mr Skase refused to return on the basis that he was too busy or ill. Warrants were sought by the trustee to have Mr Skase arrested but these were dismissed on the ground that as the warrants could not have been served in Spain, where Mr Skase resided, they would have been of marginal utility.[vi] The ASC then sought to have Mr Skase charged and jailed for contempt for refusing to honour his undertakings to the court. This application was also dismissed.[vii]
In 1994 the Brisbane District Court issued a warrant for Mr Skase’s arrest to require him to answer charges relating to breaches of directors’ duties and bankruptcy offences. Extradition of Mr Skase from Spain was subsequently sought and refused.[viii]
Mr Skase’s trustee has continued his investigations including offshore inquiries through the Australian courts pursuant to letters of request to the UK courts to effect examination of relevant persons under the Insolvency Act 1986 (UK).
1.19 However in the Commission’s view multilateral conventions are only effective as tools in managing cross border legal risk in narrow circumstances. Current conditions suggest that more emphasis should be put on bilateral negotiations and on implementing existing conventions.
1.20 Another component in the development of the law in this area is the approach taken to issues of sovereignty and the extra-territorial application of laws. As Australia’s markets and commerce stretch beyond national borders there are growing pressures to reduce the emphasis on national sovereignty and to have an impact beyond Australia’s geographic limits. When a cross border legal issue arises it is often in the context of a firm’s frustration at its inability to enforce an Australian legal right outside Australia, or in the context of a firm’s difficulties in adjusting a regional or international business to meet separate national regulations. There is a natural tendency to try to solve these problems by extending the extra-territorial effect of Australian laws or court orders, or by creating a supra-national authority or regulatory regime to overcome the inefficiencies of separate national regulation.
1.21 In the Commission’s view this type of solution should be treated with some caution. It will only be appropriate in limited circumstances.[ix] Often it will be more effective, and will better suit Australian business interests, to maintain territorial limits and seek greater cooperation in applying local laws quickly and cheaply.
1.22 Inevitably the preliminary nature of the inquiry has meant that the Commission has not been able to examine many relevant issues in as much detail as they require. Three topics in particular have not been addressed in this report and should be considered further in subsequent work.
Choice of law – choice of law principles are closely related to the jurisdictional issues discussed in chapter 4 and Part II of the report but were not the focus of the issues raised in this inquiry.
Comparative law – the inquiry focused on Australian law and considered the law of other countries only to the extent necessary to understand the nature of the cross border problems faced by Australian business.
Abraham Goldberg – the Linter litigation
The Linter Group was an Australian group of companies associated with Abraham Goldberg. It carried on business primarily as manufacturers and distributors of clothing. By 1988 through a series of acquisitions the group comprised a large number of companies involved in the Australian clothing industry handling well-known names such as King Gee, Speedo, Pelaco, Exacto, Formfit, Kortex, Stubbies and other Australian clothing manufacturing icons.[x] In May 1988 the group needed further funds to pay for some of the acquisitions and to acquire more.
To do this it was decided to raise funds in the USA by way of a subordinated debenture issue. In October 1988 Linter Textiles Corporation issued a prospectus in New York offering debentures maturing in October 2000 and carrying 13.75% interest. The prospectus issue, fully subscribed, raised $US200 million.
In January 1990 the Linter group collapsed. At that time it had an estimated deficiency of $A550 million. Linter Group Ltd and all of its operating companies were put into receivership. The receivers first sought a scheme of arrangement between the companies and their creditors but later sold each of the businesses and brand names. This crystallised a greater deficiency. This loss was eventually borne mainly by the US debenture holders, together with about twenty Australian and overseas banks. The trade creditors largely escaped loss.
During 1991 and 1992 the companies, by then each a shell, were serially put into liquidation under the NSW Companies Code and the Corporations Law. The liquidators held the proceeds of the sale of the businesses, being some $400 million.
These events led to a multiplicity of proceedings in Australia (Sydney and Melbourne) and in the United States (New York), including
proceedings in Sydney to determine whether the subordination was effective in the winding-up of the Linter companies under Australian law[xi]
proceedings in New York by the debenture holders against certain banks and professional advisers
proceedings in Sydney by the debenture holders and also by some banks against other banks and professional advisers[xii]
proceedings in Melbourne by the liquidators of Linter to recover property of Linter paid in breach of director’s duties[xiii]
proceedings in Sydney to determine the distribution of the $400 million held by the liquidators from the sale of the businesses.[xiv]
Each proceeding brought with it a variety of cross-claims, applications for anti-suit injunctions, questions of proper forum and other tactical manoeuvres. These included many pre-trial applications for evidence gathering (documents as well as oral testimony) and considerations of applicable statutes of limitations.
Consumer protection and other issues – the broader context for cross border civil remedies and legal risk includes issues relating to consumer protection, human rights, environmental protection and similar concerns. These should be considered in more detail in subsequent work on this topic.
Consultations and submissions
1.23 The Commission focused its consultations in this inquiry on the sectors of the Australian business, government and professional communities most involved in international trade and investment. It also sought information and comments from legal practitioners, academics and government officers in relevant overseas jurisdictions.
1.24 There were several stages to the inquiry.
In the second half of 1995 the Commission distributed to various individuals and groups a circular outlining the scope of the inquiry and seeking comments on the main issues raised by the terms of reference. The individuals and groups included:
Accounting Firms/Insolvency Practitioners Insurers
Banks Law Reform Commissions
Business and Professional Associations Law Societies/Bar Associations
Chief Justices Legal Academics/Law Schools
Consumer Groups/Public Interest Groups Legal Practitioners/Firms
Corporate Advisers Schools/Departments of
Corporate Lawyers/In-house Counsel Economics
Ethnic Communities Councils Trade Specialists/Research
Government Agencies Institutes
Trading and Investment Firms
In March 1996 the Commission held half day seminars in Sydney and Melbourne introducing the issues in the inquiry through guest speakers to an invited audience of lawyers, accountants, business executives and government officials.
The Commission distributed at those seminars, and subsequently to other interested parties, background papers analysing the issues involved in cross border litigation and arbitration from an Australian perspective.
The Commission also held a number of private consultations during 1995 and 1996 with individuals involved in international trade and investment as principals or advisers. A list of the consultations is set out in Appendix D.
1.25 The Commission received 45 submissions. A list of the submissions is set out in Appendix C.
Outline of the report
1.26 This report is in two parts.
Part I sets out the Commission’s findings and recommendations on improving Australian law on cross border civil remedies, including systematic reform directed more broadly at cross border legal risks.
Part II outlines Australian law and practice on cross border litigation and arbitration and gives an overview of relevant international agreements and arrangements. These chapters address the specific issues raised in sections 2 and 3 of the terms of reference and also provide background information to the comments in Part I.
1.27 The structure of Part I of the report is as follows.
Chapter 2 puts civil remedies and cross border legal issues in context, outlining the relevant business and economic factors, the legal issues arising from those factors, the current legal responses and the Commission’s view on the scope for reform to address cross border legal risks.
Chapter 3 discusses Australia’s current involvement in international agreements and initiatives and further initiatives that could be pursued to address cross border legal issues.
Chapter 4 discusses particular litigation, arbitration and insolvency initiatives that could be pursued to improve the remedies available in cross border disputes.
Chapter 5 discusses finance law and electronic commerce as two areas of high priority for law reform on cross border issues.
1.28 The structure of Part II of the report is as follows.
Chapter 6 introduces the legal issues involved in international litigation, commenting on jurisdiction, service outside jurisdiction, judicial assistance and the recognition of foreign judgments.
Chapters 7 and 8 summarise the civil remedies available in Australian courts under Australian law for the six types of claim specified in the inquiry’s terms of reference: debt recovery, corporate insolvency, misappropriation of assets, breach of contract, negligence and breach of fiduciary and statutory duties.
Chapter 9 summarises other civil remedies available for those six types of claim under international treaties or arrangements to which Australia is a party, and other relevant international arrangements that are available to be considered.
Chapter 10 comments on the application of those remedies in Australia’s external territories.
Chapter 11 outlines Australian law on international commercial arbitration.
1.29 For simplicity the analysis in Part II of the report adopts two limits. First where it is necessary to consider other legal systems to illustrate the application of Australian civil remedies outside Australia, the report refers only to the legal systems in one or more of the following
California, USACook Islands
Secondly, when analysing Australian law, the report only considers the civil remedies available to a party in the District and Supreme Courts of New South Wales and the Federal Court of Australia.
1.30 The Commission was assisted in this inquiry by many people. It particularly wishes to thank Freehill Hollingdale & Page and the Australian Securities Commission for making secondments of key staff available, Baker & McKenzie for its assistance in preparing the background papers, Blake Dawson Waldron and Mallesons Stephen Jaques for their help in organising the seminars in Sydney and Melbourne in March 1996, the speakers at those seminars – Mark Chapple, Trevor Morling, Patrick Kilroe, Les Andrews, Alan Oxley, Terry Cutler, Michael Pryles and Michael Schoenberg – and Margaret Ryan in preparing the indices.