Australian businesses often enter into contracts whereby in the event of a dispute they submit to arbitration. A recent High Court decision upholds the legality of Australia’s arbitration regime and as such maintains faith in Australia as a venue for international arbitration.

Background on international arbitration

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). The New York Convention provides an international framework for the resolution of commercial disputes between parties in different countries. The practical effect of the New York Convention is that for international disputes (ie where parties are in different countries to 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 “home town advantage”, with relatively well established protocols and the outcome is enforceable as set out in the New York Convention. In practice an arbitral award is often easier to enforce than a foreign judgment.

The New York Convention however is not a law itself and in many countries an Act of Parliament (or equivalent) is needed to make the convention part of the law of the land. To assist countries in this process a United Nations body, the United Nations Commission on International Trade Law (UNCITRAL), has prepared a Model Law that countries can adopt to bring into effect their New York Convention obligations. Many countries have largely adopted the Model Law, although often with minor refinements to reflect local conditions. Approximately 70 nations have adopted the Model Law in some form.

Australia is one country that has effectively adopted the Model Law. Australia has done this through the International Arbitration Act (IAA) a piece of Commonwealth legislation. In addition to adoption at a national level many Federal or similar systems have also adopted the Model Law for arbitrations between their citizens, often referred to as domestic arbitration. Many Australian States have also adopted the Model Law as the basis for their domestic arbitration legislation.

Arbitration

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

However a Judge has the power to resolve the dispute because of the power of the State. An arbitrator only has the power to resolve the dispute because the parties agreed in an arbitration agreement.

Once the decision is made however it is the Court that actually enforces the award. This is done by the Court recognising an award as practically equivalent to a judgment of the Court. The New York Convention makes some effort to limit the review by the Court at this stage. The concern is to ensure that Courts do not interfere with the process that had been agreed to. Otherwise a Court can undo the neutrality of the arbitral process. The Court enforcing the award is often in a different country to that in which the arbitration was conducted. Arbitrations are often conducted in neutral countries for the two parties. It is usually a Court in the country of the party paying under the award which is asked to enforce the award. It is the Courts in the debtor country which have to enforce the award because that is where the assets are located which are needed to satisfy the award.

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

The challenge

The case of TLC Air Conditioner (Zhongshan) Co Ltd v Judges of the Federal Court [2013] HCA 5 dealt with a challenge to the constitutional validity of the IAA. The argument made was that the IAA required Courts to enforce arbitral awards that were legally wrong. Consistent with the New York Convention arbitral awards are to be enforced unless narrow exceptions apply. Those exceptions relate to a failing of the arbitral process and are limited to:

  • a party to the arbitration agreement was not able to enter into the agreement eg they were bankrupt
  • the arbitration agreement was otherwise unenforceable
  • one of the parties was not given notice of the arbitration
  • the particular dispute wasn’t covered by the arbitration agreement the arbitral panel was wrongly formed
  •  the award has been set aside by a Court, but it must be a Court at the place at which the arbitration was held
  • the award is contrary to public policy eg the award is about something illegal or was obtained through fraud  
  • 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 an award wrong in law is, unless one or more of the exceptions applies, to be enforced.

The argument was that the IAA 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 power to interfere with that judicial power. Judicial power required the Court to enforce only legally correct decisions.

Result

The High Court rejected the argument 6-0. While there were two separate judgments all members of the Court confirmed that there was nothing unconstitutional with the Federal Court having to enforce an arbitral award that arose from an agreement between the parties even if that award involved an error of law.

The Court placed significant importance on the fact that the arbitral process is what the parties had agreed to. The Chief Justice and Justice Gageler put it this way:

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.

Significance

This decision is consistent with the common understanding of arbitration internationally. It has confirmed that Australian law is consistent with the law in many other countries in this respect. In that sense the case has merely confirmed what had been understood. The Federal Government has invested considerable effort over the last several years in promoting the Australia as a potential venue for arbitration. In taking an orthodox approach this decision has done nothing to harm those efforts.

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