On 13 March 2013, Australia’s High Court handed down its decision in TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5, unanimously upholding the constitutional validity of the International Arbitration Act 1974 (Cth) (IAA), which by section 16(1) gives the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration (Model Law), the force of law in Australia.  The majority judgment was given by Hayne, Crennan, Kiefel and Bell JJ.  Chief Justice French and Gageler J wrote a separate joint judgment.

History of the matter

The dispute in the lower courts between Castel Electronics Pty Ltd (based in Australia) and TCL Air Conditioner (Zhongshan) Co Ltd (based in the People’s Republic of China) revolved around a standard distribution agreement, 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 Arts 35 and 36 of the 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).

Relevantly, Art 35 of the Model Law provides that an arbitral award “shall be recognized as binding and, upon application ... to the competent court, shall be enforced” subject to the provisions of Arts 35 and 36.  Article 36 states the exhaustive grounds for refusing recognition or enforcement of an arbitral award.

On 23 January 2012, Murphy J ruled that since the Judiciary Act 1903 conferred the Federal Court with jurisdiction in any matter arising under a federal law, it followed that the Federal Court also has jurisdiction to enforce both foreign and non-foreign awards made under the Model Law.

In April 2012, Murphy J heard the balance of the applications, comprising Castel’s application to enforce the awards and TCL’s application to set them aside on the basis that the awards were contrary to public policy because of an alleged breach of the rules of natural justice by the arbitral tribunal.  Judgment was handed down on 2 November 2012 rejecting TCL’s claims of a breach of the rules of natural justice.  That judgment enunciated some guiding principles in relation to “public policy” in the IAA and is the subject of a previous Corrs In Brief.

Before Murphy J’s second judgment was handed down, TCL applied in the High Court’s original jurisdiction for the issue of constitutional writs of prohibition, directed to the judges of the Federal Court, and of certiorari, to restrain the judges of the Federal Court from enforcing the arbitral awards and/or to quash Murphy J’s judgments in relation to the first instance proceedings.

TCL’s submissions

In circumstances where the Federal Court under Arts 35 and 36 of the Model Law has no power to refuse to enforce an arbitral award on the ground of error of law appearing on the face of the award, TCL argued that section 16(1) of the IAA:

  • substantially impairs the institutional integrity of the Federal Court, by enlisting the Court in an arrangement to facilitate arbitration and then enforcing the resulting arbitral awards, thereby requiring the Court to knowingly perpetrate legal error; or
  • impermissibly vests the judicial power of the Commonwealth on the arbitral tribunal that made the award, by reason of the IAA’s enforcement provisions which render an arbitral award binding and conclusive, thereby giving the arbitral tribunal the last word on the law applied in deciding the dispute submitted to arbitration.

TCL’s submissions in relation to both objections were underpinned by the proposition that courts must be able to determine whether an arbitrator applied the law correctly in reaching an award.  In further support of that proposition, TCL argued that Art 28 of the Model Law which requires the arbitral tribunal to “decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute”, confines an arbitrator’s authority under an arbitration agreement to deciding a dispute correctly, and therefore an award founded on an erroneous principle is not binding upon the parties.  Alternatively, it was submitted that such a term could be implied into every arbitration agreement.

Article 28 of the Model Law

Article 28 is primarily directed to questions of choice of law.  French CJ and Gageler J rejected TCL’s argument that Art 28 limits the authority of the arbitral tribunal to a correct application of the chosen rules of law.  Rather, their Honours found that the working papers of the UNCITRAL working group for the preparation of the Model Law reveal that the understanding of Art 28 is that a mis-application (as distinct from a non-application) of the rules of law chosen by the parties does not amount to an excess of power leading to nullification of an arbitral award.  Article 36 makes it plain that recognition and enforcement of an arbitral award could only be denied in limited circumstances and legal error is not one of those circumstances.

The majority judgment rejected TCL’s argument based on a common sense approach – TCL’s argument their Honours said depended on treating the language of part of Art 28 as forming part of the agreement between the parties, whilst simultaneously treating the provisions of the Model Law regulating the recognition and enforcement of awards as not forming part of that agreement.

The High Court also rejected the plaintiff’s alternative argument, that it is an implied term of every arbitration agreement governed by Australian law that the authority of the arbitral tribunal is limited to a correct application of law.  That argument, in French CJ and Gageler J’s judgment, is answered by the combination of the autonomy of the parties guaranteed by Art 28 and the absence from Art 36 of any ground to refuse recognition or enforcement of an arbitral award under Art 35 for error of law.

No impairment of institutional integrity

TCL’s arguments were to the effect that judicial independence was said to be “distorted” by the absence of scope for substantive review of an award for error of law when the Federal Court determines the enforceability of an award under the IAA.  To this, the High Court’s response was unanimous – the submission fails to take into account the consensual foundation of private arbitration.

The distinction is stated clearly in the joint judgment of French CJ and Gageler J: “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”.  To that end, their Honours point out that 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.

The majority judgment also point out that a court undertaking the task of enforcing an award pursuant to the IAA has power to refuse to enforce an award (Art 36) or to set aside an award (Art 34) in a multiplicity of circumstances, including that an award is in conflict with the public policy of Australia.  Those provisions, their Honours held, are protective of the institutional integrity of courts in the Australian judicial system which are called upon to exercise jurisdiction under the IAA.

To the extent that TCL sought to draw support from the existence at common law of a rule that an arbitral award could be set aside for error of law on the face of the award, the High Court found that that common law jurisdiction was an exception to the general rule concerning the finality of awards, and that it operated in haphazard and anomalous ways.  Those circumstances, their Honours found, make it plain that the absence of a specific power to review an award for error of law does not distort judicial independence when a court determines the enforceability of an award.

No delegation of judicial power

Contrary to TCL’s submissions, the High Court ruled that the conclusion that an arbitrator is the final judge of questions of law arising in the arbitration does not demonstrate that there has been some delegation of judicial power to arbitrators.  The High Court was at pains to spell out the essential distinction between the judicial power of the Commonwealth and arbitral authority, of the kind governed by the Model Law, based on the voluntary agreement of the parties.

To conclude that a particular arbitral award is final and conclusive does no more than reflect the consequences of the parties having agreed to submit a dispute of the relevant kind to arbitration.  The majority judgment explained that one of those consequences is that the parties’ rights and liabilities under an agreement which gives rise to an arbitration can be, and are, discharged and replaced by the new obligations that are created by an arbitral award.

Further, it was held that these conclusions stand unaffected no matter what may be the ambit of permitted judicial review of an arbitral award.  Even if there could be judicial review for error apparent on the face of the award, the award would nonetheless be the ultimate product of the parties’ agreement to submit their differences or dispute to arbitration.

Comment

The High Court’s unanimous judgment is a strong confirmation of the commitment of Australian courts to enforce arbitral awards, subject only to the discrete grounds of refusal spelt out in the IAA.  The High Court decision should enhance Australia’s position as an attractive jurisdiction within which private parties can effectively conduct international arbitral disputes.  Justice Murphy’s two first instance judgments also 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 New York Convention.

However, there is also an additional implication.  Where parties engage in commercial activity and voluntarily agree that any disputes will be determined by private arbitration, they must carefully consider whether that is the most appropriate course.  Recourse to the courts in an effort to overturn or nullify an award will, it seems, rarely be effective, except to the extent of the limited exceptions spelt out in the Model Law (and adopted in the IAA).  Thought should also be given by parties as to the binding and determinative nature of arbitral awards and whether it is more preferable to submit their disputes through the domestic judicial system, in which the possibility of an appeal is more likely to be open to the parties.