In the recent decision of Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd (No 2)  FCA 1214, TCL contended that the arbitral awards delivered against it should be set aside as contrary to public policy because of alleged breaches of the rules of natural justice in connection with the making of the awards. Concurrently, Castel sought enforcement of the awards in reliance on the International Arbitration Act 1974 (Cth) (IAA). In refusing to set aside the arbitral awards (and allowing for their enforcement), the Federal Court enunciated some guiding principles in relation to “public policy” in the IAA.
History of the matter
The dispute in this proceeding revolved around a standard distribution agreement between Castel (based in Australia) and TCL (based in the People’s Republic of China), in which the arbitral tribunal sitting in Australia delivered two awards in favour of Castel.
As the awards were made in Australia, they did not fall within the IAA’s definition of a “foreign award”, one of the criteria being that the arbitral award must be made in a country other than Australia. The IAA specifically vests jurisdiction in the Federal Court and the State and Territory courts to enforce a “foreign award” but, together with the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration (Model Law), is silent as to which court is competent to enforce a “non-foreign award” (as opposed to a “domestic award” which is made in purely domestic commercial arbitrations).
On 23 January 2012, Murphy J handed down the decision of Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd  FCA 21, in which his Honour held that since the Judiciary Act 1903 conferred the Federal Court with jurisdiction in any matter arising under a federal law, it follows that the Federal Court also has jurisdiction to enforce both foreign and non-foreign awards made under the Model Law (the IAA gives the Model Law the force of law in Australia and incorporates it by Schedule 2).
From 23 to 26 April 2012, Murphy J heard the balance of the applications, comprising TCL’s applications to set aside the awards and Castel’s application to enforce them. Judgment was handed down on 2 November 2012, which is the subject of this Corrs In Brief.
Nonetheless, this did not signify the end of the matter. Before Murphy J’s second judgment was handed down, TCL filed an Application for an Order to Show Cause in the High Court seeking orders restraining the Judges of the Federal Court from enforcing the awards and/or orders quashing Murphy J’s judgments in relation to these proceedings. Put simply, TCL contended that the IAA, through the Model Law: (a) substantially impairs the institutional integrity of the Federal Court by enlisting the Federal Court in an arrangement to facilitate arbitration and then enforce the resulting arbitral awards; and (b) impermissibly vests Commonwealth judicial power in arbitral tribunals by making their awards binding and conclusive.
The matter was heard before a seven-member bench of the High Court on 6 November 2012 and judgment is presently reserved. The High Court judgment will be of much interest to the international arbitration community in Australia, particularly in relation to how it would affect the existing IAA framework of enforcing foreign and non-foreign arbitral awards in Australia.
Guiding principles in relation to “public policy” in the IAA
Justice Murphy in his second judgment was mostly concerned with whether the arbitral awards should be set aside as contrary to public policy because of alleged breaches of the rules of natural justice, namely the no evidence rule and the hearing rule, in the arbitral tribunal’s assessment of Castel’s losses. In considering this question, his Honour laid down some guiding principles in relation to “public policy” in the IAA:
- “Public policy” includes procedural questions as well as questions relating to substantive law.
- Under the Model Law, the expression “public policy” has a greater and different role in relation to setting aside an award in the court of supervisory jurisdiction (art 34(2)(b)(ii)), than it does in relation to refusal to enforce an award in the court of enforcement (art 36(1)(b)(ii)), in that an order refusing enforcement is effective only in the State where enforcement is sought, whereas an order setting aside an award prevents its enforcement in all countries which have signed up to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Convention). However, given that the Federal Court is both the court of supervisory jurisdiction and the proposed court of enforcement, and taking into account the circumstances of the case, Murphy J considered that “public policy” has a similar operation in both the setting aside and enforcement contexts.
- The plain words of s19(b) of the IAA unambiguously declare that if any breach of natural justice occurs in connection with the making of an award then, for the purposes of arts 34(2)(b)(ii) and 36(1)(b)(ii), the award is in conflict with or contrary to the public policy of Australia. This is despite authority around the world indicating that a Convention award is only in conflict with or contrary to public policy if it offends fundamental notions of justice and fairness.
- Nonetheless, it is important to keep in mind that arts 34(2)(b)(ii) and 36(1)(b)(ii) provide that a court may set aside an award or refuse enforcement if it finds that the award is in conflict with or contrary to public policy. That is, the powers to set aside an award or refuse enforcement are discretionary.
- The proper exercise of the court’s discretion requires that it has regard to the objects of the IAA set out in s2D and the matters set out in s39(2), namely the fact that arbitration is intended to be an efficient, enforceable and timely method of resolving commercial disputes, and that arbitral awards are intended to provide certainty and finality. These considerations indicate that the discretion to set aside an award or to refuse enforcement because an award is in conflict with or contrary to public policy, should be sparingly applied.
- Although the decisions of the courts in Convention countries are not binding, there is an obvious importance to taking them into account, in order to achieve some international uniformity in the meaning and operation of “public policy”.
- The Convention countries have generally adopted a narrow or restrictive approach to the scope of public policy. Accordingly, Murphy J regarded the public policy ground as requiring “offence to fundamental notions of fairness and justice” before a court should exercise its discretion to set aside an award or to refuse to enforce it. This is consistent with the approach taken in the recent Australian decisions in Uganda Telecom and Traxys Europe (both of which are discussed in further detail in the authors’ 2012 Australian chapter of The International Arbitration Review).
- There is no relevant distinction between the requirement for natural justice in the awards as against the reasons underpinning it.
- In relation to the extent of the review necessary for when an award is challenged for breach of natural justice, Murphy J considered that a balance must be struck between the purpose of ensuring certainty and finality of arbitral awards, and the competing purpose of protecting the fundamental procedural rights of each party. His Honour also recognised that the application of the common law principles of natural justice would depend upon the nature of the dispute and the circumstances of the case. To that end, Murphy J considered that the level of review necessary was that which would enable him to determine whether:
- the no evidence rule was breached in the arbitration. That is, whether there was rationally probative evidence in support of the findings TCL complained of; and
- in reaching those findings the hearing rule was breached. That is, whether the arbitral tribunal gave TCL a fair hearing and in particular whether the arbitral tribunal made the findings based upon its own opinions and ideas which were not reasonable corollaries of the opinions and ideas traversed during the hearing and which TCL may, with adequate notice, have been able to persuade the tribunal against
The nature of the dispute and the facts and circumstances of the case led Murphy J to conclude that he should conduct a close examination of the evidence in the hearing, although not to the extent of examining the facts of the case afresh and revisiting in full the questions before the arbitral tribunal. That being said, Murphy J expressed some concerns that the review which he had undertaken may be too deep and therefore unfair to Castel as the beneficiary of the awards, in that it may have paid insufficient regard to the principles of certainty and finality of awards. However, his Honour took some comfort from the fact that he could find no breach of natural justice in connection with the making of the awards even upon such a close review.
Having undertaken this close review of the evidence and the hearing, the Federal Court held that there had been no offence to the fundamental notions of justice and fairness in connection with the making of the awards and that the awards are not in conflict with or contrary to Australian public policy. That decision also applied in relation to TCL’s contention that the Court should refuse to enforce the awards. In other words, the Court could not find any compelling reason for refusing to enforce the awards, and the Court accordingly made orders in the terms of the awards.
Justice Murphy’s two judgments suggest to us that the Federal Court is willing to take a more active role in matters involving international arbitration, by being the gatekeepers to the pro-enforcement bias of the Convention. No doubt the wide scope of the Federal Court’s power to enforce arbitral awards, including “non-foreign awards” as demonstrated in this matter, is exactly the subject of TCL’s complaint in the High Court. Nonetheless, it is imperative that for now, businesses continue to ensure that their international arbitration clauses are water-tight. Until the High Court decides otherwise, Australia remains committed to enforcing arbitral awards, subject to the discrete grounds of refusal in the IAA.