April 9, 2021

A recent Federal Court of Australia (FCA) decision considers, amongst other things, the interaction between Australian federal laws and international arbitration agreements.

In Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCA 172, Freedom Foods, an Australian incorporated company, held an exclusive license to manufacture and distribute products in Australia using Blue Diamond Group’s (BDG) trade mark, ‘Almond Breeze’. BDG is incorporated in the USA.

The parties’ licensing agreement stated that the agreement was governed by the law of California and that disputes regarding the meaning or operation of the licensing agreement were to be referred to arbitration in California.

A dispute arose between the parties regarding Freedom Foods’ right to distribute products in Australia using alternative branding to Almond Breeze. BDG commenced arbitral proceedings in California.

Freedom Foods commenced interlocutory proceedings in the FCA seeking, amongst other things, to restrain BDG’s pursuit of its arbitral proceedings, and court declarations to the effect that:

  • BDG had engaged in misleading or deceptive conduct in contravention of section 18 of the Australian Consumer Law (ACL) by misrepresenting its ability to supply Australian-sourced almond base to Freedom Foods, and failing to oppose Freedom Foods’ notified intention to launch MILKLAB products in Australia;
  • BDG acted unconscionably in contravention of section 21 of the ACL by issuing a notice to Freedom Foods alleging it had breached the exclusivity provisions in the licensing agreement;
  • Freedom Foods was entitled to pursue its claims under the ACL, notwithstanding that the licensing agreement was governed by the law of California; and
  • further and in addition:
    • the parties’ licensing agreement was a franchise agreement within the meaning of the Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth) (the Australian Franchising Code); and
    • the arbitration clause in the licensing agreement was null and void because, pursuant to section 21 of the Australian Franchising Code, a franchise agreement must not require a party to bring proceedings outside of Australia.

In response, BDG sought a stay of Freedom Foods’ proceedings on the basis that section 7(2) of the International Arbitration Act 1974 (Cth) required the dispute to be resolved in accordance with the arbitration clause, being the law of California.

In considering the applications, the FCA made a number of observations, including:

  • the parties’ dispute related to the meaning or operation of the licensing agreement, and should therefore be resolved by arbitration in accordance with the arbitration clause;
  • the arbitration clause constituted an “arbitration agreement” for the purposes of the International Arbitration Act;
  • the procedural law governing the arbitration should be the law of the forum of the arbitration, being California, USA; and
  • whilst the validity of the arbitration agreement was to be determined in accordance with Californian law, this may be subject to overriding legislation that applies irrespective of the governing law, such as the ACL and the Australian Franchising Code.

In light of these observations, the FCA held that:

  • the licensing agreement did not fall within the Australian Franchising Code, meaning that the arbitration clause remained valid;
  • given that the ACL is a mandatory law in Australia, Freedom Foods was entitled to pursue its claims under the ACL in the Californian arbitration, and the arbitrator would be required to apply that law.

Whilst the FCA ultimately upheld the validity of the arbitration clause in the licensing agreement, this decision nevertheless demonstrates that:

  • where an international arbitration agreement is inconsistent with mandatory local laws, it may be rendered invalid and require that the dispute be determined within Australia; and
  • arbitrators in foreign jurisdictions are capable of applying Australian mandatory laws for the purposes of determining claims brought under international arbitration agreements.

The full decision can be found here.

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