Arbitration was once a commonly used means of resolving construction disputes. It has not been for several decades in many areas. However its use for resolving significant international construction disputes has been growing and Australia has sought to benefit from the growth by fostering arbitration in Australia. This has been done through recent legislative amendments and the establishment of specialist arbitral facilities.

Because of certain international treaties arbitration can be especially effective for resolving disputes between parties in different countries: the arbitration can be held in a neutral country with neither party having the “home town” advantage and then through the treaty can be enforced through the local Courts.

Arbitration has the potential to be a more efficient and private dispute resolution mechanism without the layers of appeal present in litigation and with a more flexible procedure than the Courts. Unlike Courts parties can only arbitrate if they have agreed to.

These developments came under challenge in a recent High Court decision, Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5, in which it was argued that the International Arbitration Act 1974 (Commonwealth) (IAA) was unconstitutional.

The dispute

The case dealt with a dispute between an Australian and a Chinese company under a distribution agreement. While it was not a construction dispute the principals of law it applied are relevant to the construction industry.

The case concerned an arbitral award which when sought to be enforced against it the Chinese company challenged the decision in the High Court.

Background to the law

The IAA, while Australian legislation, is based on a Model Law established by a United Nations body. The Model Law enables countries to pass consistent legislation giving effect to the relevant international treaty, the New York Convention.

The Convention process, and therefore the Model Law process contained in the IAA, provides for no review of a final award for errors of law. That is the arbitral award is final – there is no appeal. Once the parties’ dispute has been resolved by arbitration the role of the Court reflected in the IAA is that it enforces the award.

The Federal Court is established as a Court through power found in the Australian Constitution. The Constitutional structure reflects a separation of powers between the three branches of Government: the Executive, Parliament and the Judiciary. The Judiciary is not meant to perform any role other than being a Court, and anything which is not a Court established under the Constitution is not to exercise judicial power.

The argument was that the structure of the Model Law:

  • Delegated judicial power to arbitral tribunals in that it is the arbitral tribunal which determines issue of law in the award.
  • Impaired the Federal Court from acting judicially in that the Federal Court did not have the “traditional” role of Courts to superintend the arbitral process. This means an award that has the law wrong may be enforced by a Court which, it was argued, is contrary to the nature of a Court.

Decision

Both arguments were unanimously rejected by the High Court (6-0) in two separate judgments.

While expressed slightly differently in the two judgments the approach is harmonious in that the reasoning of all the Justices placed significant emphasis of award reflecting the conclusion of process agreed to by the parties in the arbitration agreement. The forcefully and wholly rejected the approach to arbitration pressed by the Chinese company.

Finality of the award

The Court found that the award finally resolves the dispute as agreed but in doing so creates new rights. The resolution comes through the agreement of the parties not the legal correctness of the decision reached. The Chief Justice and Justice Geagler put it this way:

[34] The inability of the Federal Court, as a competent court under Arts 35 and 36 of the Model Law, to refuse to enforce an arbitral award on the ground of error of law appearing on the face of the award does nothing to undermine the institutional integrity of the Federal Court. 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 the parties had by their agreement agreed to accept the outcome of the arbitration legally correct or not.

Justices Hayne, Crennan, Kiefel and Bell put it this way:

[80] The proposition identified as underpinning TCL’s submissions assumes, wrongly, that the rights and liabilities which are in dispute in an arbitration continue despite the making of an award. That is, it assumes, wrongly, that the courts will not give effect to the discharge of those preexisting rights and liabilities by the accord and satisfaction which is effected by a reference to arbitration and the making of an award.

[108] 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. …

That is the arbitral award extinguishes the rights and establishes new rights embodied in the award.

The reasoning is very similar. It underscores a critical point. Arbitration provides a very flat dispute resolution process without the appeal process of the Courts but it is critically important to choose your arbitrator wisely. If she/he gets the decision wrong it nevertheless stands.

The Court’s role

Further both judgments rejected the characterisation of the Court’s supervisory role over arbitration.

The Chief Justice and Justice Geagler explained that whatever historical references there were to a role of the Court’s to supervision arbitration it was not part of the modern common law. The Courts do have a supervisory role but not in seeing that the arbitrator has got the decision right. Their role is to see that the arbitrator has done what was agreed ie resolve a dispute properly referred to arbitration in an appropriate and fair process. The Court’s role is to see the agreement to arbitrate enforced not to check the award’s legal or factual reasoning.

Similarly Justices Hayne, Crennan, Kiefel and Bell (omitting footnotes) said:

[80] It is the consensual foundation of arbitration which underpins the general rule, settled since the middle of the nineteenth century, that an award is final and conclusive and cannot be challenged either at law or in equity on the ground that the arbitrator has committed an error of fact or of law.

[99] For present purposes, it is sufficient to note that the common law jurisdiction to set aside an award for error of law apparent on the face of the award was an exception to the general rule that parties must abide by their agreement to accept an arbitrator’s determination

What the decision means for the Construction Industry

While expressed differently the two separate decisions are harmonious and highlight the strength and danger of arbitration: finality.

Over the last few years the Commercial Arbitration Act, the legislation that governs arbitrations between Australians in Australia, has been amended so it is now substantially the same as the IAA. This was done to enable people to apply similar skills and law for both international arbitration and smaller local arbitrations. Therefore although this was not a construction case and involved foreign parties it is still relevant to local construction disputes.

Mediation is not always effective and does not always lead to a resolution based on the merits of the parties. Arbitration enables a dispute to be resolved in a more formal and thorough manner than expert determination or adjudication.

However this case shows that what the arbitrator decides is likely to be final. Therefore if parties are seeking a final and reasoned decision to resolve their disputes without the prospect of appeal then arbitration should be considered. But chose your arbitrator wisely as their decision will be final, even if you think it is wrong. This highlights the importance of careful drafting and advice in dispute resolution options for all construction environments to make sure the processes in your contract reflects your needs for the project.