Ryland, Michael --- "A Tale of Two Trade Traumas: ALRC Cross Border Civil Remedies Inquiry" [1996] ALRCRefJl 12; (1996) 69 Australian Law Reform Commission Reform Journal 38

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ALRC Reform 69

A TALE OF TWO TRADE TRAUMAS
alrc cross border civil remedies inquiry

Pension fund fraud

On-line clearinghouse collapse

Conclusion

What happens when a legal dispute crosses international borders? A small business seeking payment from an uncooperative debtor can feel exposed, alone and a long way from home. A larger business can find itself at the wrong end of a byzantine liability claim, confronted by a host of lawyers wanting to trawl through its records and tie up its executives in months of tortuous legal proceedings.

For all businesses, the growing integration of the Australian economy into regional and global markets means that cross border legal issues represent unknown and unmanaged risks. The Australian Law Reform Commission is currently looking for solutions as Commissioner Michael Ryland explains in an extract from a speech given earlier this year.

Better legal support for international trade and investment, allowing better management of international legal risks, is the aim of the Australian Law Reform Commission's current inquiry into cross border civil remedies.

The inquiry is looking at a range of options. At one end are improvements in dispute resolution: international litigation, arbitration and ADR. At the other end are commercial arrangements that, with a little bit of support from the law, can prevent or contain cross border problems and in that sense act as a practical, commercial remedy.

The two ends of the spectrum can be illustrated through a couple of fictitious, but entirely plausible, stories of clients in trouble.

Pension fund fraud

The first story is set in 2003 and concerns a pension fund in Indonesia with directors and managers from Australia and almost every other country in the region. It is a story of fraud on a grand scale. They embezzle millions.

Your client is an unhappy senior executive in a Sydney-based investment company which has borrowed $250million from a Hong Kong company. The loan was repaid, but it turns out that this Hong Kong company was the fraudulent vehicle of one of the directors of the pension fund. The $250million was the pension fund's money and it is now gone. The pension fund says that your client should have known it was the pension fund's money and should have repaid it to them, not the fraudulent Hong Kong company.

Your client is in your office because the pension fund has commenced action in Jakarta, threatening both the Jakarta and Sydney assets of his company.

You decide to seek a declaration in the Supreme Court of New South Wales that your client does not owe money to the pension fund. You hope to argue for recognition of this judgment in Indonesia (fortunately a bilateral treaty for recognition of judgments was signed in 1999). This is by no means an easy procedure. Arguments about forum non conveniens and significant evidentiary problems must be overcome.

Much to your and your client's dismay the pension fund obtains an anti-suit injunction in Jakarta. The Indonesian court orders the Australian investment company not to proceed with the action in NSW.

At this stage your client is very unhappy. His colleagues at his office say he is depressed. He kicks the dog more often at home. Nonetheless he is still talking to you.

But then battle is opened on a third front. The pension fund has commenced action for $100million against a Hong Kong company that was a joint venturer in a property development with the Australian company. That company now cross claims against your client's company in Hong Kong and gets an anti-anti-suit injunction.

Your client is now bitter and cynical. He has a very unflattering view of lawyers. This is all getting extraordinarily expensive, taking up an exorbitant amount of time and he is in a vortex from which it seems he cannot escape.

This unhappy story illustrates that cross border litigation can be a nightmare. There are numerous hurdles of jurisdiction, service, evidence, recognition, enforcement and so forth.

The cost, delay and uncertainty are powerful weapons in the hands of a determined litigant with the resources to wage a scorched earth campaign.

Our inquiry is looking at ways in which the Australian legal system can moderate those costs and delays and provide business with more confidence that a dispute taken to law can be resolved in accordance with the law. Some of these issues can be addressed through changes to Australian law. Most will require international and regional cooperation.

On-line clearinghouse collapse

The second story is at the other end of the spectrum. It is also about the fallout from a fraud - but it is more optimistic.

This story is also set in 2003. In this case you have a reassured client because a potential cross border remedy problem was avoided by a careful prudential structure that facilitated commerce.

Your client is the owner of a small business. Her business provides information software services via what used to be called the Internet and is now simply called the OLM or On Line Market.

There was a spectacular collapse yesterday morning (reminiscent of Barings in 1995) of one of the most reputable participants in the On Line Payments System: PT On Line Pay. Your client held ON notes addressed to PT On Line Pay as of course did many other small traders. She is concerned that, with the collapse of PT On Line Pay, she will not get paid for all the transactions that she has undertaken on the On Line Market.

However you are able to reassure your client that these ON notes are purely a matter of form. The clearinghouse arrangements for on line payments now ensure that ON notes are still valid notwithstanding the collapse. The only ones that will suffer are PT On Line Pay shareholders and staff.

These arrangements are an amalgamation of the old bill of exchange and futures markets concepts. They developed in a similar way.

ON notes began as negotiable electronic credit messages on the Internet issued only by the most reputable of institutions. They took off as a financial instrument when a multi-national clearinghouse was set up for these instruments. The structure preserved ultimate recourse to existing currencies through margins and deposits in their currency with the clearinghouse. ON notes became popular because they provided a much cheaper and easier form of credit than the initial clumsy efforts by way of credit card technology or traditional bank finance.

Countries were quick to realise the benefits to their own traders and their own currency of this arrangement and so they made the necessary changes to their law to ensure ultimate enforceability of clearinghouse arrangements.

The net result of this clearinghouse arrangement was that the cross border remedy problem was avoided and your client was happy that the law protected her.

Conclusion

It can be seen that the topic of cross border civil remedies covers a very wide range of issues. In recognition of this the ALRC has only been asked at this stage to produce a feasibility report that identifies areas for further research or action. The ALRC is due to give its report to the Federal Attorney-General, Daryl Williams, in mid-1996.

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