2. Remedies, commerce and cross border risk


2.1 Cross border transactions have always attracted legal risks. What has changed is the volume and range of international commerce in which Australia is involved and the complexity and significance for Australia of the legal issues that this commerce generates. Cross border legal issues are emerging as a separate area of commercial risk that need to be more precisely identified and better managed.

2.2 This chapter discusses the nature and extent of the cross border legal issues facing Australian firms. It outlines the trade and investment activity that is giving rise to cross border legal issues in Australia and some economic trends affecting those issues. It then identifies the range and types of legal issues arising and how the law and legal institutions are currently seeking to address those issues. It discusses the business perspective on the significance of those issues and how, ideally, they should be handled. The chapter concludes with the Commission’s recommendation that this is an area that needs systematic law reform.

Australia’s international trade and investment

Increasing regional and international involvement

2.3 Australian firms have become increasingly involved in international trade and investment over the last twenty years. This trend is set to continue.[xvi] It reflects the general international growth in trade and capital flows.[xvii] In broad terms the APEC region has become Australia’s largest and fastest growing regional market for exports but Australian investment flows are still dominated by European economies and the United States.[xviii]

2.4 The increasing involvement is resulting in the growing integration of Australian firms into other countries’ economies or into regional economies. Many Australian firms now have subsidiaries, joint ventures and a well developed network of business relationships outside Australia. They are involved in trade and investment patterns that cross several borders in one project rather than simply two-way transactions. They are involved in markets that are regional rather then national. This is illustrated by the short case studies in this chapter of Australian firms such as Boral, TNT and Telstra and of foreign firms with Australian interests such as ABB and Campbells.[xix]

2.5 The net effect of these changes is an increase in the significance for Australian firms of legal problems affecting their international trade and investment, and an increased exposure to a more complex range of issues. For example, from a legal perspective the export of commodities generally gives rise only to issues of contract and recovery of debts. By contrast a corporate joint venture for the manufacture outside Australia of parts for a complex product to be assembled and sold elsewhere raises numerous potential legal issues. Those issues might include problems concerning corporate governance, insolvency, licensing, employment, intellectual property, distribution agreements or financing as well as fundamental contract and debt recovery issues.

Pattern of trade flows

2.6 In general terms all sectors of the Australian economy have increased their exports over the last ten years.[xx] In relative terms the services sector has increased its share of exports in the last decade.[xxi] It has been suggested that manufactured exports, particularly ETMs, will regain their share in the longer term.[xxii] Manufacturing generally gives rise to a wider range of legal issues than services since it involves longer term investment and a more complex range of distributor, supplier and other supporting business relationships.

2.7 There have also been changes in the regional pattern of trade flows, with differences both in the trade growth rates for each region and the composition of exports and imports for each region.

Box 2A

Boral – overview of operations[xxiii]

Incorporated in 1946 as ‘Bitumen and Oil Refineries (Australia) Limited’, Boral is now one of Australia’s twenty largest corporations. Its core businesses are the manufacture and supply of building products and construction materials and the exploration, production and distribution of gas.

For the financial year 1994-95, Boral’s Australian operations represented approximately 87% of its operating income. Boral also operates substantial building products and construction material operations in the United States and Europe. It is currently expanding into Asia, with particular emphasis on Malaysia, Indonesia and China. Starting in the 1960’s, it added to its product lines by acquiring in 1987 Blue Circle Southern Cement Limited (one of Australia’s largest cement producers), in 1990 Midland Brick Company Pty Ltd (the largest producer of clay bricks in Western Australia) and in 1993 Sagasco Holdings Limited (South Australia’s principal gas utility).

Boral has three main business divisions:

building products – produces a wide range of housing industry products; it holds a substantial market share in the Australian home building product industry and exports woodchips from NSW and Tasmania, to Japan.

construction materials – provides a range of raw materials and services for dwelling, non-dwelling and engineering construction.

energy – Boral Energy supplies LPG (of which it is the leading distributor in Australia) to all states of Australia, New Zealand, and some South Pacific islands.

Boral also has a non-core services and engineering division comprising tyres and tyre re-treading as well as an engineering company.

Boral’s American operations are in the home building and commercial construction industry. It supplies the United States market through brickworks in nine US states. The largest producer of clay bricks in the US, its annual production capacity is 1.5 billion bricks. One of the largest concrete roof tile manufacturers in the US, Boral has plants in four US states. Its Arkansas gypsum plasterboard plant distributes to eastern and central US.

Boral has European operations with almost half of its European sales in Germany. These operations are primarily in home building and secondarily in commercial construction/ civil engineering. Boral has 6 brickworks in northern Germany and 7 in The Netherlands which supply the local markets and export to European countries. It produces clay and concrete roof tiles from four German plants.

In the Asia-Pacific region, Boralhas a 50% joint venture interest in and management of the leading pre-mixed concrete producer in Indonesia, which, in turn, has an 85% interest in Indonesia’s first gypsum plasterboard plant. Through a 51% owned Malaysian subsidiary, it participates in the Malaysian building products market. In China Boral has entered into a joint venture to build and operate a major plasterboard facility in Shanghai. It acquired a screen door manufacturing operation in Singapore and has an electrostatic powder coating plant (with local partners) in Vietnam. In the Pacific, Boral has a 50% interest in an LPG distribution in New Zealand. Boral has gas supply facilities throughout the South Pacific.


  • Australia’s trade in the APEC region is dominated by manufactured exports and imports. Over the last decade the share of manufactured exports in Australian exports to APEC has increased by one quarter while manufactured imports have remained steady.

  • The European Union is Australia’s second largest destination for exports of merchandise and services, and largest source of imports of merchandise and services. The largest segment of merchandise exports continues to be unprocessed primary products but there has been significant growth in exports of elaborately transformed manufactures. These now represent almost a quarter of Australia’s total exports to the EU.[xxvi] Merchandise imports from the EU are dominated by capital goods, industrial supplies and transport equipment.[xxvii]

  • Australia’s merchandise trade with the USA produces a significant deficit. In the 12 months to March 1996 it was approximately $13 billion. Imports from the USA are dominated by machinery and transport equipment, manufactured goods and chemical and related products. Commodities, machinery and transport equipment are the largest segments of Australia’s exports to the USA.

2.8 These trade flows indicate the increasing importance of international commerce, and thus cross border risks, to the Australian economy. They also highlight the need to consider each region separately and in the context of their different patterns of trade.

Pattern of investment flows

2.9 Traditionally Australia has been a capital importing country. In recent times (except for a brief but dramatic decline during the recession in the early 1990’s) Australia has experienced a marked increase in its outward foreign direct investment. There are several features of this increase in Australian direct investment abroad that are significant for cross border legal issues.

  • The bulk of this investment is by multinational enterprises – firms which control and manage establishments in at least two countries – and these firms account for substantial shares of sales, employment, exports, investment and taxation revenue in Australia.

  • This type of investment grew markedly over the 1980’s at rates quicker than the OECD, including that of Japan, and quicker than Australia’s growth in exports and GDP.

Box 2B

TNT – overview of operations[xxix]

TNT operates a global transport group – ‘The Worldwide Transportation Group’. It provides a wide variety of transport services to all segments of business, the majority of which have an international element.

The business is divided into five main segments:

Domestic time-sensitive freight – This division provides domestic markets with guaranteed time of delivery service where freight does not cross international borders. TNT is a major provider of these services in Australia, the United Kingdom, Germany, Italy, Spain , France with a developing operation in China.

International time-sensitive freight – This division services the international market with guaranteed time of delivery service where the freight does cross international borders and consignments generally weigh less than 30 kilograms. Through GD Express (in which TNT owns a 50% share), this segment of the business operates in 200 countries throughout the world.

Logistics – This division plans, implements and controls the flow and storage of goods, services and related information from point of origin to point of consumption. TNT is a provider of logistics solutions in Australia, the United Kingdom, continental Europe (including The Netherlands, Belgium, Germany and Italy) with a developing capability in North and South America and Asia.

General freight – This division transports heavy freight where it does not cross an international border and delivery is required in 2-3 days. This operation is conducted primarily in Australia, Canada and Brazil where TNT has transport infrastructure.

Aviation – This aspect of TNT’s operations is conducted through TNT’s 50% ownership of each of Ansett Airlines and Ansett Worldwide. TNT’s aviation interests provides passenger services in Australia, New Zealand and the Asian region, as well as operating the world’s third largest aircraft sale and leasing business.


  • The growth of this type of investment was strong in services throughout the 1980, and has also been strong in manufacturing since 1986.

  • The share of this type of investment in English speaking countries doubled throughout the 1980’s, while the share fell for Hong Kong and ASEAN (although since 1988 the latter’s share has increased).

2.10 These features have two significant legal implications. Australian firms now have an increasing exposure to the types of cross border legal issues faced by investors as against borrowers or subsidiaries. Investors are particularly concerned with their ability to recover their loan or equity, and with the level of transaction costs and legal risk associated with the investment. Secondly, the types of firms which have this exposure are generally the multinational enterprises and, given their role in employment, investment and taxation revenue in Australia, their exposure has significance for the Australian economy as a whole.

2.11 In terms of the regional and sectoral distribution of Australian direct investment abroad, as at December 1994

  • approximately half was in services, with about one third in manufacturing and one sixth in mining

  • the vast bulk was in the UK, USA and New Zealand (about 70%) with only a small proportion in ASEAN

  • Australian firms expected to increase their manufacturing investments in Asia at a much higher rate than in other regions.

Economic trends

2.12 In addition to the changes in trade and investment patterns and the growing economic integration described above, there are two other economic trends that are shaping the range and significance of cross border legal issues for Australian firms.

  • Deregulation. This is expressly intended to improve the competitive strength of Australian firms and thereby increase the opportunities for greater exports. It also has the further effect of raising the significance (at least for Australian firms) of the laws that support a ‘level playing field’ such as laws on competition, property, government tendering and dispute resolution. Those types of laws are likely to become, from an Australian firm’s perspective, more important topics for cross border harmonisation.

  • Technology. Changes in technology and communications are opening up new cross border opportunities. This is particularly evident in the finance and telecommunications industries. Issues and problems are arising which do not fit easily into existing legal frameworks and which are not easily resolved by separate, national regulation. This is discussed further in chapter 5.

Box 2C

Telstra – overview of operations[xxxiv]

Telstra is Australia’s major telecommunications supplier. It provides domestic, commercial and international telecommunications products (including service installation and repair, customer service, marketing and billing) for approximately 6.2 million residential customers and a large number of corporate and off-shore customers. It also supplies telecommunications services to Australia’s major corporations and state and federal government departments.

It has a substantial International Business Unit which develops its electronic communication and information services in the international marketplace. It negotiates, makes and manages agreements with various organisations and other carriers for the provision of all international telecommunications traffic. Some examples of the International Business Unit’s activities are:

Telstra is part of an international consortium, Mitra Global Telekomunikasi Indonesia, the successful bidder which will build and operate telephone networks in Central Java.

Through three Vietnam offices, Telstra has a ten year old partnership with a local Vietnam partner, Vietnam Posts and Telecommunications. This partnership upgrades Vietnam’s international telecommunications infrastructure. Telstra has committed $100 million to complete projects including satellite earth stations and international exchanges in Danang, Ho Chi Minh City and Song Be.

Telstra is one of four initial parties (in company with VNPT, Hong Kong Telecom and the Communications Authority of Thailand) in the submarine optical fibre cable system, T-V-H, linking Vietnam with Thailand and Hong Kong and with other connections into the global network.

Telstra has opened an office in Beijing, indicating a commitment to long-term investment in China.

Through Modi Telstra, an Indian joint venture, India’s first cellular to cellular, cellular to PSTN and cellular to international telephone calls were made.

More than 80 multi-national companies have selected Telstra to provide their Asia-Pacific regional communications needs.

Telstra has a contract with L M Ericsson (the Swedish telecommunications company) to establish a communications hub in Australia for Ericsson’s Asia-Pacific corporate communications network.

Telstra’s South Pacific Network Project includes PacRimWest (an optical fibre cable which carries high-speed telecommunications traffic directly into the Asian region), TASMAN 2 (Australia to New Zealand) and PacRimEast (New Zealand to Hawaii), providing high quality digital telecommunications link between Australia and Guam with onwards connections to Asia, North America and Europe via a global network of optical fibre systems.

Telstra (UK) Limited provides services to UK companies with significant telecommunications requirements in Australia and the Asia-Pacific region.


Cross border legal issues

Identifying cross border legal risk

2.13 Cross border legal risk can be assessed by identifying the particular legal issues arising from Australia’s international trade and investment and evaluating their impact on Australian firms. For the purpose of this feasibility report, the Commission has gathered information and based its comments on three sources: the track record of particular cross border litigation; comments in consultations and submissions; and the analysis and research in Part II of this report. These sources point consistently to the inability of current laws and practices to deal adequately with the cross border legal issues that are now emerging. Civil remedies are rarely a realistic commercial option because of the difficulties involved in cross border litigation. Other mechanisms which deal with these issues are sporadic and limited.

Glimpses through cases

2.14 Australian firms experience cross border legal problems in their most direct and distressing forms when they are involved in an insolvency, litigation or arbitration that has a cross border element. These are rare cases. Very few disputes can withstand the costs involved in a cross border litigation or arbitration and most bankruptcies and insolvencies involve small businesses, not the larger enterprises that are the major cross border participants. Nonetheless these cases give a glimpse of the types of legal problems that can affect Australian firms involved in international trade and investment.

2.15 Some of the sharpest illustrations are found in the high profile insolvencies and court cases outlined separately in chapters 1 and 2, including litigation concerning Alan Bond, Christopher Skase, Linter, Robert Maxwell and CSR.[xxxv] They illustrate some general points

  • all of these cases are very expensive, very complex and slow

  • in all of them the outcome at each stage of proceedings turned on the precise details of the case and relevant law, sometimes involving technicalities peculiar to the case – there is no single, straightforward solution to cross border legal problems

  • nonetheless there are some common areas of difficulty, notably jurisdiction, service, collecting evidence and tracing assets – these are discussed further in chapter 4.

Box 2D

ABB – overview of operation[xxxvii]

ABB Asea Brown Boveri Ltd (ABB) is a Swedish/Swiss group of over 1000 companies consisting of 36 business areas organised into 4 business segments operating in Europe, the Americas, Asia, Australasia and Africa. Group revenues for 1995 came to $US33.7 billion. ABB’s business activities include

power transmission and distribution

industrial and building systems


financial services.

An example of the cross border aspects of ABB’s activities is found in the financial services arm, ABB Financial Services, which deals in the delivery of a wide variety of financial services and financial products on a global basis. Its business is divided into five areas

treasury centres

project & trade finance

leasing & financing


stockbrokerage & investment management

Some examples of services provided which have inherent cross border elements include

a cross-border lease transaction with a German transportation authority, including an American investor and a German lessee – the transaction was in US dollars

a $US24 million sales support lease agreement, financing a combined heat and power plant in Sweden – this sixteen year lease will involve equipment from Sweden and Finland

insurance with a protection period that is longer than is traditionally offered by the political risk insurance market – ABB arranged for the risk to be offset in offshore capital markets.


2.16 A high profile insolvency or defendant is not, however, a pre-requisite for a cross border dimension. Cross border issues can arise in a wide range of civil and commercial claims and even litigation which begins as wholly or largely domestic can develop a cross border issue. For example

  • in Connop and Another v Varena Pty Ltd and Others, a case about a babaco (starfruit) growing venture in New Zealand, the NZ defendants successfully sought security for costs in NSW against the NZ plaintiffs for the NSW litigation

  • in Temilkovski v Australian Iron & Steel Pty Ltd, a NSW workers compensation case, the law of Yugoslavia became an issue

  • in Laurie v Carroll & Others, a breach of contract case concerning division of profits from theatrical performances given by Dame Margot Fonteyn and other artists in Australia, the English defendant was held not to have waived his right to object to the court’s jurisdiction, having been served after the court had made an order for substituted service – the defendant had been in Victoria for business purposes but only for a matter of days and he had no other connection with Australia.


2.17 At a broader level consultations and submissions on bankruptcy and insolvency issues indicated that Australian trustees and liquidators need more judicial assistance in collecting evidence and in tracing or freezing assets before litigation is commenced. There was also some discussion on other ways of improving cross border insolvency administration including giving the courts greater ability to liaise directly with the courts of other jurisdictions concerned with the insolvency. These are discussed in chapter 4.

Cross border litigation

2.18 Consultations and submissions dealing with cross border litigation overwhelmingly confirmed that the major concerns are costs, complexity and delay. The general view was that cross border litigation is bedevilled by jurisdictional limits, cumbersome and fragile procedures for collecting evidence and tracing assets, and inadequate enforcement. From a cross border perspective, inter-government arrangements for dealing with international litigation are primitive. This results in forum shopping, costs and lack of confidence in the law.[xli] Consultations and submissions confirmed and extended the list of procedural difficulties noted in Part II of this report and suggested various changes to Australian law to help streamline cross border litigation and make it more effective. These are discussed in chapter 4.

Box 2E

Arnotts Limited and the Campbell Soup Company

Arnotts is a listed Australian company with a substantial biscuit manufacturing operation as well as involvement in engineering and the manufacture and distribution of jams.[xlii]

The Campbell Soup Company (Campbell) is a US based international grocery, bakery and confectionery group most well known in Australia for its range of soups. Campbell has extensive operations in Europe and Australasia. In 1995 it had total sales of $US 7.28 billion.[xliii]

In 1992 following a contested takeover bid Campbell obtained 57.99% of Arnotts seeking to benefit from Arnotts’ advanced processing technology and marketing in the Asian region.[xliv] One of the conditions imposed by the Foreign Investment Review Board at the time of the proposed takeover offer was that Arnotts’ headquarters and manufacturing operations must remain in Australia.

Arnotts has continued to improve its share of the Asian market by further acquisitions (eg the Kohi Biscuit Company in New Zealand) and regional joint ventures (eg 50% interest in PT Helios Arnotts Indonesia) to become the largest biscuit manufacturer in the Asia Pacific region with sales of more than $650 million annually.[xlv]

More recently Campbell and its associates have gradually increased their holding in Arnotts to 70% after institutional shareholders sold out. If Campbells acquires 85% of voting shares in Arnotts the restrictions in a 1985 agreement that limit its board positions and voting rights will be able to be removed.[xlvi]


2.19 The Commission also sought comment on international and government initiatives relating to cross border litigation, particularly on the continuing inter-government negotiations on the recognition and enforcement of foreign judgments. Australian firms had different attitudes on these issues depending on the particular countries involved. Many who participated in the inquiry were concerned at what they saw as the exorbitant jurisdiction claimed by US courts and their punitive damages awards. In relation to some countries in the Asia Pacific region those same commentators argued for greater extraterritorial effect for Australian court orders. Not surprisingly their views depended on the general legal framework in that country – in particular the level of confidence they had in that country’s courts – and on whether they were, for that country, an investor or borrower, exporter or importer, manufacturer or distributor, service provider or purchaser, or had some other role. This indicates the need for a more systematic assessment of the cross border legal risk faced in each country and of Australia’s interests in its commerce with each country.[xlvii]


2.20 The comments in submissions and consultations indicated that Australian law on international arbitration was generally sufficient but that further clarification of some provisions in the International Arbitration Act 1974 (Cth) and of some principles established in the case law would assist. These are discussed in chapter 4. Generally the major concern was lack of effective enforceability of foreign arbitral awards in some countries, particularly in the Asia Pacific region.

Broader business concerns

2.21 Several other key points emerged from the consultations and submissions.

  • The two legal issues that Australian firms directly identify as of concern for their cross border trade and investment are tariffs and intellectual property.

  • Many business concerns on cross border legal issues are industry specific. For example, particular issues were raised with the Commission on aviation treaties, maritime liability and financial market practices. Each of these issues requires specific industry solutions.

  • In general the industry specific issues relate to the support that can be provided by a regulatory regime, for example legal support for the registration of ownership or security interests in property or rules on the allocation of liabilities. In some cases they are concerned with regulation that is stifling business opportunities by being too restrictive or poorly coordinated with parallel regulation in other countries.[li]

  • A number of consultations indicated that many of the larger cross border investment transactions, particularly in the Asia Pacific region, involve host government entities or affiliates either as investors or as important participants. This adds a further complication to the legal issues.

  • The level of comfort with legal systems varies according to the country, based partly on general familiarity and reputation and partly on specific (usually adverse) experiences. Australian firms and advisers generally seemed to have a high level of confidence in the legal system in England but were more cautious about other countries. There was a general perception that, as a rough rule of thumb, a local firm usually had a ‘home town’ advantage.

Implications of background research

2.22 The analysis of Australian remedies and Australia’s international arrangements in Part II of this report supports and supplements this sketch of cross border legal issues. Each cross border claim can give rise to a multiplicity of legal issues. The mix of issues will vary according to the particular countries involved. In broad terms the issues relate to common hurdles – how to commence proceedings, get evidence, preserve assets and so forth. But in their detail the issues are idiosyncratic and usually unfamiliar. The overall picture is one of an Australian legal system that is fundamentally national in perspective and effect with only a limited overlay of international agreements on civil procedure.

The range of legal issues

2.23 More generally the comments received in the inquiry, together with the growing involvement of Australian firms in international trade and investment, point to a broad range of current and emerging cross border legal issues. At one end there are issues about dispute resolution – cross border litigation and arbitration – and closely related issues on cross border insolvencies. These are direct, immediately visible and severely damaging for the firms involved but they are relatively rare. At the other end there are issues about the adequacy of aspects of the legal systems that facilitate and provide a framework for cross border transactions, such as intellectual property, government tendering procedures, foreign investment laws and industry regulatory regimes.[liv] These issues are of concern to a much wider group of Australian firms. They relate more to risk management than to dispute resolution.

2.24 The issues about the adequacy of legal systems can be illustrated by a financing example. It is common for a financier or investor to require security. Where the enforceability of a security arrangement in a cross border transaction is unclear because of inadequate or inconsistent laws on property and securities, that is likely to result in delays, higher pricing to cover the added risk and possibly cancellation of the transaction. This affects business opportunities not just the resolution of disputes.

The inadequacy of current law and arrangements

2.25 Assessed on a risk management basis, Australian law and international arrangements provide inadequate support.

  • Australian firms remain exposed on virtually all aspects of a cross border transaction that give rise to legal risk. For example, if a firm is not paid a debt owing to it when the debt is due, recovery of the debt using the Australian legal system will be difficult in all except a few countries. Conversely if the firm is subject to an exorbitant product or other liability claim, there is little in Australia’s international agreements that will protect it.

  • The international arrangements supporting cross border transactions, whether on procedural or substantive law, are sporadic and limited in scope. This means that in many situations cross border transactions do not benefit from the support that an effective legal system can provide. This affects business opportunities.

2.26 The size of these exposures should not be underestimated. A rough indication can be gained by comparing the transaction costs, pricing and speed of trade and investment across Australian state borders as against trade and investment across international borders (ignoring distance costs). There are many factors involved in that comparison but in most industries the level of confidence in the enforceability of the law, and the support given by the law to the processing of transactions, are material elements.

Legal initiatives and responses

A vast amount of continuing work

2.27 The inadequacy of current law and international arrangements arises from the complexity of the issues, not lack of attention. There is a vast amount of work undertaken at a national, regional and international level to address these issues. The range of current legal initiatives and responses to cross border legal issues is outlined below to illustrate the extent of the current work and the factors that need to be taken into account in any systematic reform of the law.

Local courts and local advice

2.28 It can easily be overlooked that most of the work in dealing with cross border issues happens at a local level. The first step for an Australian firm with a cross border legal issue is to seek advice from a local lawyer either in Australia or in the other jurisdiction where the issue has arisen. Many issues will be resolved at that level. If a court order is required, the initial application is likely to be made to the local court. In many instances no further proceedings will be taken. Local practitioners and local courts are therefore in the frontline of dealing with cross border issues. It is often their individual approaches and solutions which guide the development of laws and practices on cross border problems.

2.29 Work at this level is enhanced by professional associations like the Inter Pacific Bar Association, Lawasia and the International Bar Association. These assist lawyers to become more familiar with cross border issues, to track down sources of legal advice in other jurisdictions, and collectively to help develop better solutions to cross border problems. There are also several international judicial conferences which assist in a similar way.

2.30 Work at this level should be strongly supported. It was pointed out in the consultations that for the vast bulk of Australian firms local legal advice and local court action is the only realistic option for dealing with cross border legal issues.[lv] Cross border litigation of the kind described in Part II of this report is simply too expensive and complex. The best legal support for small to medium size Australian firms is improvements in local courts and procedures, either in Australia or in other jurisdictions in which they are involved. Furthermore many of the legal problems faced by Australian firms in their dealings outside Australia arise out of the interpretation by local officials of the detail of particular laws (eg tariffs) or the local procedures and practices involved in applying and enforcing them (eg licensing procedures). These can only be addressed through detailed local initiatives.

Arbitration and ADR

2.31 Where a dispute is sought to be resolved beyond the local level, there is a growing trend to use international arbitration rather than litigation. For example, the number of arbitrations commenced under the supervision of the International Chamber of Commerce has doubled over the last 10 years to approximately 7 000. It currently has an active caseload of approximately 800 arbitrations.[lvi] The primary factor driving this is that for both parties it is preferable to determine the dispute by rules other than the laws of the other party’s country and in a place other than the other party’s home town.

2.32 Arbitration can, however, be as expensive and as damaging to business relationships as litigation.[lvii] This has prompted a greater interest in alternative dispute resolution methods, such as mediation, and in dispute avoidance techniques like partnering.[lviii] While this is an appropriate response to cross border disputes, it is largely ad hoc and does not lend itself to legal or government initiatives.

Industry practice

2.33 There has been considerable work in many industries to develop standard practices and codes on matters of common international concern. This should be strongly supported. Standard industry practices can be more flexible, and are likely to be developed with more expertise and more rapidly, than any formal international legal initiative. They may give as much international consistency or cooperation as is needed, not requiring further legal support. Even where further laws are needed, standard industry practices are a valuable basis for those laws.

2.34 One example that illustrates the advantages of standard industry practices, albeit with some shortcomings, is the ISDA agreements – the master swap agreements developed by the International Swap Dealers Association. These agreements standardized the main terms and conditions in interest rate and currency swaps. They are used as the basis for several other over-the-counter derivative transactions, including interest rate caps, collars and floors, swaptions, bond options and currency options. There are some shortcomings. The agreements are rarely put in place as quickly as they should be for the transactions they cover, and there is some concern that too many variations are being made.[lix] Nonetheless they have undoubtedly addressed many of the cross border legal risks involved in derivatives transactions and have significantly streamlined and reduced the costs of managing those issues. They also illustrate that standard industry practice may not be able to deal with all legal risks – for example, the ISDA agreements cannot by themselves resolve issues like netting or questions about capacity to enter into a swap or other transactions.[lx] Supporting legislation is needed for this.

International harmonisation

2.35 There has also been much work over many years directed at harmonizing commercial laws. Some of this is at a global level through bodies such as UNCITRAL, the Hague Conference on Private International Law (Hague Conference) and Unidroit. Outlines of these institutions and their work are set out in chapter 3. More recently there has been considerable work at a regional level. This has been particularly evident in the European Union with the immense legislative program required for the single market. This has comprised more than 250 EU Directives which effectively operate as a regional legal regime.[lxi] In the Asia Pacific region there is little support for supra-national authorities or laws but there has been a wave of national law making on commercial issues that has been driven by common commercial considerations and has been informed by the laws on those topics in other countries both within and outside the region. There is also regional activity in the Americas through NAFTA and other initiatives, as well as high levels of activity on corporate and securities law issues in most English speaking jurisdictions.

2.36 Much of the success of harmonisation seems to depend upon careful selection of the topic, the type or level of harmonisation that is sought, and the ebbs and flows of political will. Several factors need to be taken into account.

  • Internationally, the political will for formal international conventions aimed at unifying laws seems to be waning. The APEC region is not seeking unification of laws and for the most part the legal systems in the region are so disparate that unified laws would not be feasible. The European Union is digesting the lawmaking required for the single market and in some respects seems to be moving away from strict conformity of laws throughout the EU.[lxiii] More generally the focus of political energy now seems to be implementation of international agreements rather than settling new principles, as indicated for example by US activity on enforcement of intellectual property laws.

  • Nonetheless conventions are very effective when they are widely adopted and implemented. Cross border commerce cannot rely solely on contracts where there is a failure in documentation, or torts or fraud are involved, or there needs to be adjustment to laws on a multilateral basis to support the commercial arrangements.

  • In addition harmonisation initiatives can be less demanding than conventions aimed at unifying laws. They may aim, for example, at the lower threshold of sufficient similarity in standards to allow reciprocal treatment. Alternatively they may focus more on assisting in enforcement of comparable regulatory regimes rather than on demanding the same or similar laws. This type of harmonisation is illustrated by the regulatory cooperation between the ASC and other securities regulators, and by recent AUSTRAC initiatives.

  • Clearly bilateral agreements are likely to be reached more quickly, to be more responsive to Australian firms’ interests, and to be able to deal with more detailed issues than any multilateral agreement. Some issues may still lend themselves to global or regional negotiations, given the nature of the markets developing in some industries. However for the most part it may be more productive in the current political climate to focus on developing a network of bilateral agreements on a particular issue rather than directly seeking a multilateral agreement.

  • There are some topics which are not suitable for international agreement and where countries have an interest in preserving their own laws free from any external impact, even where they may have a commercial impact. Laws relating to censorship are an example. On those topics ‘harmonisation’ should focus on helping to build or preserve mechanisms that ensure those laws are quarantined.

  • Information about, and familiarity with, each country’s laws is a pre-requisite to any harmonisation initiative. Some commentators have suggested that one of the major barriers to harmonisation in the Asia Pacific region is lack of adequate information on what the laws and regulations actually are.

  • A major issue for Australian firms in relation to international initiatives is ensuring proper implementation, both of international agreements (such as the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards 1958) and of local laws. This requires agreement to commit resources and political will to enforce laws, rather than agreement on substantive law.

These factors are discussed further in chapter 3.

Australian government

2.37 The federal government has primary responsibility for cross border legal issues because it has responsibility for external affairs. It addresses these issues through several administrative arrangements. In general terms these arrangements are as follows.

  • The Attorney-General has oversight of Australia’s international law obligations and international law policy. This is administered through his Department.

  • As part of that function the Attorney-General’s Department administers Australia’s participation in international institutions such as UNCITRAL, the Hague Conference and Unidroit. It also administers Australia’s bilateral civil procedure agreements, and the international treaties falling within the Department’s legal policy areas (eg intellectual property).

  • The Minister for Foreign Affairs administers through his Department service of process through diplomatic channels and Australia’s bilateral investment protection and promotion agreements.

  • Other Ministers and Departments deal with the international agreements and arrangements relating to their portfolios. For example, the negotiation of environmental treaties, their incorporation into Australian law and all related monitoring activity is handled by the Minister for the Environment and his Department.

  • There is no agency or policy unit directly responsible for cross border legal issues. However there are two agencies within the Attorney-General’s portfolio that are concerned with Australian legal services and training outside Australia: the International Legal Services Advisory Council (ILSAC) and the Australian International Legal Cooperation Committee (AILEC). AILEC’s brief is limited to strengthening relations between Australia and Vietnam, Cambodia and Laos in the field of law.

Business perspective

Avoiding legal issues

2.38 Cross border legal issues do not rate highly on the agenda of most Australian firms involved in international trade and investment. This is partly because in many countries they have little confidence in the law and do not rely on it and partly because their natural commercial focus is on building a business relationship and avoiding disputes, not on litigation or legal problems. The bottom line impact of cross border legal risk is rarely separately identified and this limits its profile as a business issue.

Managing cross border risk

2.39 Nonetheless Australian firms are having to deal with cross border legal risk. Currently they appear to be doing so in one of four ways

  • by transferring the risk to another party – for example, an exporter may transfer payment risk to its bank by using documentary credits, or a joint venture agreement may allocate particular legal risks between the joint venturers

  • by trying to avoid or quarantine the impact of foreign laws on their business – for example, a firm may design its corporate structure to quarantine legal risk to a particular subsidiary

  • by pricing the increased risk into the fees or return they require

  • by taking the risk without compensation or protection.

Improvements sought

2.40 A number of those consulted during the inquiry were pleasantly surprised that something was being done about cross border legal issues. The exposure to unpredictable risks of indeterminate magnitude inhibits business activity and raises costs. However commentators saw no ready solutions. They generally viewed these risks as part of the political risk that made business in a particular country difficult for all foreign firms not just Australian firms.[lxviii]

2.41 It was also widely commented that any initiatives aimed at reducing cross border legal problems should focus primarily on risk management rather than dispute resolution. The emphasis should be on generating the necessary level of comfort in the business relationship and on dispute avoidance so as to help in providing business opportunities rather than simply solving problems after they have occurred. Thus legal initiatives should focus on clarifying and supporting the terms and conditions of the commercial arrangement, on providing ready access to good local advice, and on ensuring quick attention to differences of opinion or operational error. This translates into initiatives like prudential safeguards, secure payments systems, and clear and accessible commercial laws.

Business consultation

2.42 It was apparent from the consultations that Australian firms are generally not involved in the development of international conventions or other initiatives, sometimes even where they are directly relevant to their own industry. This is a major shortcoming. Greater business involvement is essential both to ensure that the convention or initiative properly reflects Australian interests and also to enable it to be adopted and implemented promptly and effectively. Lack of business involvement also inhibits the ability of Australian firms to identify the cross border legal risks they are facing and the potential solutions. Both business and government should actively seek to ensure business involvement to a detailed degree and at all stages. Ongoing business consultation should be a key feature of federal legal policy on this topic.

Risk and perceptions

2.43 The business perspective also highlights the importance of general impressions and perceptions. In a business context the assessment of cross border legal risk is in some respects made on the basis of general beliefs and understandings about another country’s legal system rather than detailed analysis. Sometimes this leads to inflated fears.

2.44 In addition perceptions run both ways. To an observer from, say, Indonesia the Australian legal system can appear to be highly litigious and expensive, with social welfare laws creating barriers for business and regulatory traps for an unwary foreign investor. This will affect that Indonesian firm’s assessment of the cross border legal risk involved in Australia/Indonesia transactions and the options available in any bilateral negotiations to manage that risk. From all perspectives it is clearly important to improve the level of knowledge and familiarity with the various legal systems affecting cross border transactions and to correct misguided or outdated perceptions.

Box 2F

Maxwell – a cross border insolvency

The collapse of the Maxwell corporate group following the death of Robert Maxwell in 1991 is most often associated with the subsequent revelations of misappropriation of funds from employee pension funds. A less well known aspect is the innovative cross border insolvency arrangements that were put in place to salvage the assets of the Maxwell group.

The Maxwell group of companies spanned numerous jurisdictions. The group was ultimately controlled by Maxwell Communications Corporation (MCC). MCC shares were traded on the London Stock Exchange, its corporate books were kept in English pounds and it owed most of its estimated US$2.4 billion debt to UK banks and London branches of foreign banks. However, when it was apparent that the Maxwell companies were insolvent MCC was able to file for protection under Chapter 11 of the US Bankruptcy Code in the Southern District of New York because 80% of MCC’s operations were in the US. The US court appointed an examiner to investigate the final position of MCC. At the same time MCC took UK bankruptcy proceedings to appoint an administrator over the group.[lxix]

There are some significant differences between UK insolvency administration and Chapter 11 procedures. In the US under Chapter 11 the present management generally remains in control and attempts to create a repayment and restructuring plan to satisfy creditors and resume business. All asset sales must be approved by the US courts. In a UK insolvency administration management of the insolvent company is vested in the court-appointed administrator who develops a reorganisation plan with creditors. The plan may include the sale of assets and the removal and appointment of directors. Court approval of assets sales is not required.

The UK administrator, Price Waterhouse, was thus faced with the difficulty of trying to administer an insolvent UK company where the bulk of the company’s assets came under US jurisdiction. As there were no relevant international laws governing joint US and UK insolvencies the parties (the US examiner and the UK administrator) drafted their own in the form of a ‘protocol.’ Under this agreement the US courts suspended normal bankruptcy proceedings and the UK administrators effectively served as MCC’s board of directors and began selling off the smaller MCC assets that were not part of its core operations (such as Macmillan Publishing). In return, the administrators agreed to consult with the US courts and the US examiner on asset sales over $45m, new borrowings by subsidiaries and other matters.[lxx]

Once the US and UK courts approved the protocol, it required creditor approval which was given in January 1992.

The MCC cross border insolvency plan was the first of several such cooperative arrangements between the courts of different countries.[lxxi]


Country and industry issues

2.45 The issues raised by Australian firms varied significantly depending on the countries and industries involved. For example, an investor in a manufacturing joint venture in Vietnam would face significant legal risk in relation to any security over plant and equipment in Vietnam. There would not be the same risk if the security was over plant and equipment in, say, Germany. By contrast a pharmaceutical company trading in the USA would face product liability risks of a different order from those applying in, say, Indonesia. For this reason in many situations cross border legal issues need to be assessed on a country-by-country basis, identifying the risk for particular industries in those countries in which Australian firms are involved.

Law reform

Reducing cross border legal risk

2.46 In the Commission’s view the cross border legal issues faced by Australian firms have now reached a stage where they need to be addressed directly. Current law and international arrangements are not keeping pace with Australia’s growing and changing pattern of international trade and investment and the cross border risks and opportunities this is generating. Inadequacies in the law and in international arrangements are creating costs, delay and undue complexity. They need to be addressed as part of the government and business work supporting Australia’s international trade and investment.

Systematic reform

2.47 Systematic reform is required to address these issues effectively. Work is required at various levels. Some work is required on litigation and other formal dispute resolution mechanisms. More work is required on the aspects of law that support cross border transactions where there is no dispute, particularly the substantive principles and regulatory arrangements that are applied to international commerce. There is also work needed on the implementation of existing laws and agreements and on non-legal solutions to cross border risks.

2.48 To achieve reform of this nature, Australia’s priorities and agenda for reform must be set by the particular cross border risks Australian firms are facing – the risks that translate into higher prices and transaction costs, higher provisions for contingencies or simply barriers to entry into new markets. This will result in a more proactive policy that focuses on Australian trade and investment objectives.

Business advisory committee

2.49 The work on cross border legal issues is primarily government work since it is mainly about law reform and inter-governmental arrangements. However to be properly focused it must be driven by the experiences and views of Australian firms. A process is needed that will gather those experiences and views and will involve Australian firms – manufacturers, traders, commodity producers, financial institutions, professional advisers and other sections of the business community – at all stages, not simply in final consultations. One mechanism to do this would be to use a steering committee of business leaders from each industry sector that is involved in Australia’s international trade and investment. These business leaders should have direct and extensive personal experience of international trade and investment. They should include business leaders with experience in small to medium size enterprises as well as larger firms, and with experience generated from a non-Australian perspective as well as an Australian perspective.

Box 2G

CSR – overview of litigation[lxxii]

CSR was established in Sydney in 1855 as a sugar refiner. Since then it has substantially diversified and is now among the world’s largest building and construction materials companies and in Australia is a market leader in each of the sugar and timber industries. It is involved in the aluminium refining industry. In Asia CSR produces concrete products (Taiwan and China) and has ten building materials plants under construction or operating.

From 1944 to 1965 a subsidiary of CSR operated an asbestos mine at Wittenoom, WA. Some of the asbestos mined at Wittenoom was exported to a large US company called Johns Manville (Manville), a manufacturer of gaskets, pipes and other asbestos products.

CSR has since become involved in US and Australian litigation defending claims for damages for personal injury from exposure to asbestos. Some of those claims have been brought by or on behalf of employees of Manville. Other claims are based on non-occupational exposure to products containing asbestos. Some of the claims have been resolved. Others are being litigated or are subject to other resolution processes. As at 15 May 1995 CSR had incurred total indemnity payments on Manville employee claims of approximately US $22 400 000 and was subject to approximately 43 700 claims in the US and 440 claims in Australia.

As a result of these asbestos claims CSR commenced actions against its insurers seeking (among other things) coverage for asbestos-related actions against it. This led to a multiplicity of proceedings, highlighting a number of uncertainties concerning anti-suit injunctions.

In 1992 in NSW and in 1994 in New Jersey, USA, CSR took action against its insurers seeking coverage for asbestos-related commercial exposure in the US between 1955 and 1977. CSR’s insurers sought an anti-suit injunction in NSW to restrain CSR from prosecuting the New Jersey action. The trial judge granted the injunction. CSR appealed but the matter settled before the court handed down its judgment. These suits have now been settled with CSR receiving $A100 million in exchange for a full and final settlement of all claims.

In 1995 CSR commenced proceedings in the US District Court against its insurers seeking coverage for asbestos-related commercial exposure in the US between 1978 and 1985. The insurers successfully sought an anti-suit injunction in NSW restraining CSR from continuing with the US District Court action pending final hearing.

CSR sought a stay of the NSW proceedings. The stay was refused. CSR then sought leave from the NSW Court of Appeal to appeal against both the anti-suit injunction decision and the refusal of the stay application. The Court of Appeal refused this leave.

On 11 April 1996 CSR successfully applied to the High Court of Australia for a stay of proceedings pending the hearing by the High Court of CSR’s application for special leave. On 21 June 1996 the High Court granted CSR’s special leave application against the adverse Court of Appeal ruling. The High Court is expected to hear the case in November 1996.


2.50 This committee would advise the government on options, priorities and timing for reforms relating to cross border legal issues. It is intended that it would put an agenda and particular recommendations for action to the government. In the course of preparing that agenda it would review current government priorities and those indicated in this report, consider any other options and priorities it thought fit, and identify from a business perspective:

  • the major cross border risks that need attention

  • the particular countries and industries where legal issues are of most concern to Australian firms

  • the bilateral, regional and other international agreements and projects dealing with legal matters that Australia should pursue

  • the non-legal solutions and options that Australia should pursue

  • the time frames within which these initiatives need to be completed.

The work program of the committee and the frequency and form of its advice to government should be determined by the committee. However, the Commission considers there are some specific issues that the committee should address. These are identified later in this chapter and in chapter 3.

2.51 The Trade Policy Advisory Council (TPAC) which reports to the Minister for Trade has a membership that is similar to the membership contemplated for the committee proposed in this report. TPAC’s perspective on trade is also highly relevant to the perspective that the advisory committee would bring to international legal issues. For practical purposes the advisory committee could be established as a sub committee of TPAC. The Attorney-General may wish to discuss with the Minister for Trade whether this would be appropriate.

Recommendation 1 – International Commercial Law Advisory Committee

A business advisory committee should be established to advise the government on options, priorities and timing for reforms relating to cross border legal issues.


Application across portfolios

2.52 Overall responsibility for addressing cross border legal issues should rest with the Attorney-General. However the issues involved cut across other portfolios, particularly where the reform proposed is a multilateral agreement relating to a particular industry. Many of the issues will be relevant not only to the Attorney-General as the Minister responsible for federal legal policy but also to the Treasurer and the Ministers for Foreign Affairs and Trade in connection with their interests in Australia’s international commerce. Some issues will involve other portfolios with a special interest in particular industries, for example telecommunications or aviation.

2.53 The work of the advisory committee is not intended to affect the current procedures and responsibilities for negotiating international agreements. The aim is rather to assist those negotiations by providing a business perspective on cross border legal risk and the options for managing them. For that reason it is recommended that the advisory committee should report jointly to the Attorney-General and the other Ministers who are most broadly involved in international commercial issues.

Recommendation 2 – advising across portfolios

The advisory committee should report to the Attorney-General, the Treasurer and the Ministers for Foreign Affairs and Trade, jointly.


Membership and staffing

2.54 The federal government has many sources of experienced legal advice on international issues. The function of the advisory committee is to provide business, not legal, advice. It is intended that its members will have practical experience of cross border problems and opportunities in a range of industries and countries. Their primary focus should be on assessing, from a business perspective, the importance of those problems and opportunities and on identifying the outcomes that need to be achieved to deal with those problems or to further those opportunities. They will also need to be skilled in identifying non-legal options for achieving those outcomes as well as considering legal options.

2.55 The legal information needed by the committee should be provided by its own secretariat. It is envisaged that the committee would be supported by a small, standing secretariat of two or three staff who would provide specialist legal and economic research and commentary and attend to administrative requirements. This will require appropriate funding and resources as discussed at the end of this chapter.

Recommendation 3 – membership and staffing

The advisory committee should be comprised entirely of business leaders, with participants from each industry sector that is involved in Australia’s international trade and investment. The advisory committee should be supported by a small, standing secretariat.


2.56 Cross border legal issues will need ongoing attention. However much of the advisory committee’s work will be completed when it has settled its views on the major issues to be addressed by government and the legal and non-legal initiatives that should be given high priority. The position should be re-assessed after three years to determine whether an advisory committee of the kind recommended in this report is still appropriate or a different structure is needed to ensure that the impact of cross border legal issues on Australian firms is properly assessed and addressed.

Recommendation 4 – three year review

The advisory committee should be reviewed by the Attorney-General after it has been in operation for three years to determine whether it should continue for any further period.


The benefits of systematic reform

2.57 The major benefit of the Commission’s recommended approach to dealing with cross border legal issues is that it will ensure they receive direct, ongoing attention from a consistent business perspective. This will help in reducing the country and political risk faced by Australian firms in their international dealings, and will have a bottom line impact through the greater opportunities and reduced transaction costs that result from reduced risk.

2.58 The recommended approach will also enable Australia’s work on these issues to be more cost effective. It will ensure that further work is assessed in terms of priorities and net benefits, and by reference to particular country and industry issues. If the further work proposed is not likely to contribute to some degree to the profits of Australian firms then it is unlikely that it is addressing a real risk that needs managing. It is also unlikely that there will be much incentive or interest in implementing the proposal. The legal effort put into it may well be wasted.

2.59 Assessing costs and benefits of legal initiatives requires a broad perspective on how legal systems affect business. The costs include the direct cost of participating in the relevant working groups, of debating and adopting any laws settled by the working groups, and of administering and complying with the new laws. Administration and compliance includes both government and private sector costs and extends to the costs of new business systems, legal advice and dispute resolution. The benefits should be assessed in terms of the contribution to trading and investment objectives. The legal initiatives will usually aim to develop an international agreement or arrangement that will last for many years. The benefits will therefore not only relate to the short term gains of current Australian firms but also to the broader support for an industry or a pattern of trade and any multiplier effect that may have.

2.60 A cost/benefit assessment of this kind will help answer the threshold question of whether the initiative should be pursued. More importantly, it will help set priorities within a range of initiatives that may need attention and it will help identify the best solution in terms of administration and enforcement. This last factor is particularly relevant since many of the business concerns raised during the inquiry relate to the lack of effective administration and enforcement of legal principles.

Further work

2.61 The advisory committee should be established as soon as possible. It is the key element in developing the proper focus and priorities for systematic reform. In subsequent chapters in this report the Commission recommends further work in four other areas

  • short term cross border litigation reform – a set of litigation and related reforms arising directly out of consultations that should be addressed immediately

  • long term cross border litigation reform – a second set of litigation and related reforms that will require more extensive consultation

  • finance law reform – a set of finance law issues that need to be reviewed in detail with a view to developing specific reforms

  • an electronic commerce ‘safe haven’ project – a special project to design and test a ‘safe haven’ model for certain types of commercial ventures.

2.62 The Commission considers that all of this further work has a high priority. The short term litigation reform can be addressed quickly and cheaply and therefore does not need any further ranking. The other work is longer term and the Commission would rank it in the following order: first, the safe haven project; second, the finance law reform; third, the long term cross border litigation reform.

2.63 The cost of each area of work can also be assessed separately.

  • The structure of the advisory committee is similar to the structure of bodies such as the International Legal Services Advisory Council (ILSAC) and the Companies and Securities Advisory Committee (CASAC). Its annual costs can therefore be expected to be in the same range as the annual costs of those bodies.

  • The cost of consulting on and implementing the short term litigation reforms should be low since it would be a short project with limited consultation and could follow procedures for this kind of reform that are well established in the Attorney-General’s Department.

  • The long term cross border litigation reforms, the finance law reform and the safe haven project can each be budgeted as equivalent to an 18 month reference to the Australian Law Reform Commission.