Introduction
Arbitration versus litigation
Case study

Comment


Introduction

Australia, along with 147 other countries, is a party to the Convention on the Recognition and Enforcement of Foreign Awards (commonly known as the New York Convention), which provides an international framework for the resolution of commercial disputes between parties in different countries. Under the convention, for international disputes (ie, where parties are in different countries from each other), arbitration is often a more effective process than litigation in either home country. The arbitration can be conducted in a neutral third country, depriving either side of a 'home-town advantage'. Furthermore, the protocols are relatively well established and the outcome is enforceable, as set out in the convention. An arbitral award is also often easier to enforce in practice than a foreign judgment.

However, as the convention is not a law itself, in many countries an act of Parliament (or equivalent) is required to make the convention part of the law of the land. To assist countries in this process, the United Nations Commission on International Trade Law prepared a model law that countries can adopt to bring into effect their obligations under the convention. Many countries have largely adopted the model law, although often with relative minor refinements to reflect local conditions. Approximately 70 nations have adopted the law in some form. Australia has effectively adopted the model law through the International Arbitration Act, a piece of Commonwealth legislation.

In addition to adoption at a national level, many federal or similar systems have adopted the model law for arbitrations between their citizens, often referred to as domestic arbitration. Many Australian states have adopted the model law as the basis for their domestic arbitration legislation.

Arbitration versus litigation

Arbitration may appear to be the same as litigation in court. One or more people, in this case called arbitrators rather than judges, hear submissions and evidence about a dispute and make a decision that is binding on the parties. The decision is called an award, not a judgment; but for those not legally trained, the difference from a court process might seem to be only in the terms used.

However, a judge has the power to resolve the dispute under the power of the state. An arbitrator has the power to resolve the dispute only because the parties have agreed thus in an arbitration agreement.

Once the decision has been made, it is the court that actually enforces the award, by recognising an award as practically equivalent to a judgment of the court. The New York Convention makes some effort to limit review by the court at this stage. The concern is to ensure that courts do not interfere with the agreed process, to avoid undermining the neutrality of the arbitral process.

The court enforcing the award is often in a different country from that in which the arbitration was conducted. Arbitrations are often conducted in countries that are neutral for the two parties. A court in the country of the party paying out under the award is usually asked to enforce the award (the courts in the debtor country must enforce the award, as that is where the assets needed to satisfy the award are located).

If an enforcement court has too broad a scope to review an award, re-arguing the issues before that court can involve significant additional costs and may in effect amount to a second trial. Furthermore, the other party may be concerned about the impartiality of the courts in the debtor's own country.

Case study

Facts
The case dealt with a challenge to the constitutional validity of the International Arbitration Act. The argument made was that the act requires courts to enforce arbitral awards that are legally wrong. Consistent with the New York Convention, arbitral awards are to be enforced unless narrow exceptions apply. Those exceptions relate to a failure of the arbitral process and are limited to circumstances where:

  • a party to the arbitration agreement was unable to enter into the agreement (eg, it was bankrupt);
  • the arbitration agreement was otherwise unenforceable;
  • one of the parties was not given notice of the arbitration;
  • the particular dispute was not covered by the arbitration agreement;
  • the arbitral panel was wrongly formed;
  • the award has been set aside by a court (although this must be a court at the place at which the arbitration was held);
  • the award is contrary to public policy (eg, the award concerns an illegality or was obtained through fraud); or
  • the dispute was not capable of being resolved by arbitration (ie, a criminal matter).

There is no exception for an error of law; nor is there any appeal from an award. This means that unless one or more of the exceptions applies, an award that is wrong in law will be enforced.

The argument was that the act therefore interfered with the power of the Federal Court. It was argued that as the Federal Court is established through a constitutional mechanism dealing with judicial power, the Parliament does not have the power to interfere with that judicial power. Judicial power required the court to enforce only legally correct decisions.

Decision
The High Court unanimously rejected the argument. While there were two separate judgments, all six members of the court confirmed that there is nothing unconstitutional with the Federal Court having to enforce an arbitral award that has arisen from an agreement between the parties, even if that award involves an error of law.

The court placed significant importance on the fact that the arbitral process has been agreed to by the parties. The chief justice and Justice Geagler phrased it thus:

"Enforcement of an arbitral award is enforcement of the binding result of the agreement of the parties to submit their dispute to arbitration, not enforcement of any disputed right submitted to arbitration. The making of an appropriate order for enforcement of an arbitral award does not signify the Federal Court's endorsement of the legal content of the award any more than it signifies its endorsement of the factual content of the award."

In other words, if you agree to arbitration, you agree to be bound by the outcome, even if it is wrong in fact or law.

Comment

This decision is consistent with the common understanding of arbitration internationally, confirming that Australian law is consistent with the law in many other countries in this respect. The federal government has invested considerable effort in recent years in promoting Australia as a potential venue for arbitration. By taking an orthodox approach, this decision has done nothing to harm these efforts.

International commercial arbitration is not only a viable alternative to litigation for international disputes, it is often to be preferred. The High Court has indicated that parties, both domestic and foreign, can use arbitration and the Australian approach will be consistent with that usually adopted internationally.

For further information on this topic please contact Andrew Robertson at Piper Alderman by telephone (+61 8 8205 3333), fax (+ 61 8 8205 3300) or email (arobertson@piperalderman.com.au).