TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd [2014] FCAFC 83

The Full Court of the Federal Court has refused to set aside or resist enforcement of an international arbitral award on the basis of an allegation that there was a breach of natural justice in making certain findings of fact and that the award was therefore against Australian public policy.

TCL and Castel were parties to an exclusive distribution agreement for the distribution in Australia by Castel of air-conditioning units manufactured by TCL in China.  A dispute arose between the parties with respect to alleged breaches of the agreement by TCL by distributing non-branded competing products in Australia.  The dispute was submitted to arbitration in Victoria in accordance with the parties’ agreement.

An arbitral tribunal comprising three arbitrators issued an award in favour of Castel.  TCL then sought to set aside the award pursuant to Art 34 of the Model Law, which has the force of law in accordance with s 16 of the International Arbitration Act 1974 (Cth) (the “IAA).  Conversely, Castel sought to enforce the award under Art 35 of the Model Law.  TCL resisted enforcement under Art 36 of the Model Law. On both fronts, TCL argued that the arbitral tribunal breached the rules of natural justice by making findings of fact on the assessment of damages in the absence of probative evidence, alternatively without affording it the opportunity to make submissions in respect of the proposed findings.[1]

A breach of public policy is one of the limited grounds in Articles 34 and 36 for setting aside or alternatively resisting enforcement of an award. Section 19 of the IAA informs the meaning of “public policy” by providing that it encompasses a breach of the rules of natural justice in connection with the making of the award. Hence, TCL contended that the award was contrary to public policy and therefore should be set aside, alternatively should not be enforced. At first instance, the Federal Court found against TCL.[2]  The Full Court dismissed TCL’s appeal.

Full Court’s Key Findings

The Full Court confirmed that there is no technical “no evidence” sub-rule of the rules of natural justice in an international arbitration context.

The Court stated that the making of a factual finding by an arbitral tribunal without probative evidence may, in certain circumstances, reveal a breach of the rules of natural justice: This would be so when the fact was critical, was never the subject of attention by the parties to the dispute, and where the making of the finding occurred without the parties having an opportunity to deal with it. That is unfairness; the parties have not been given an opportunity to be heard.”[3] However, the Court emphasised that a factual conclusion unsupported by probative evidence does not necessarily breach the rules of natural justice.

The Full Court disagreed with the view of the primary judge that any breach of the rules of natural justice amounted to a breach of public policy.  Rather, the Court held that a substantial denial of natural justice was required to enliven the Court’s discretion to set aside, alternatively resist enforcement of, an award under Articles 34 and 36 of the Model Law.

The Court opined that an international arbitration award would not be set aside unless there is “real unfairness or real practical injustice” in the way that the arbitration was conducted or resolved, by reference to established rules of natural justice or procedural fairness.[4]

The Full Court stressed that this would not ordinarily involve the detailed re-examination of evidence or the tribunal’s fact-finding process and reasoning. In this context, the Court indicated that the primary judge ought not to have allowed TCL to spend three days on the setting aside/ enforcement application re-agitating factual matters canvassed before the arbitral tribunal “when the substance of the complaint is the evidential foundation for, and reasoning process towards, facts as found”.[5]

Implications of the Decision

This latest decision of the Federal Court on international arbitration highlights the unwillingness of Australian courts to permit award debtors to re-agitate factual findings made by an arbitral tribunal under the guise of allegations of breach of public policy.

More broadly, the decision illustrates the pro-arbitration approach adopted by Australian Courts and their support for the integrity of the international arbitration system.