In TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [ 2013 ] HCA 5 (13 March 2013), the High Court has confirmed that arbitral awards are final, and can be enforced in the Federal Court of Australia.
International Arbitration in Australia
Arbitration is a system of dispute resolution through a process determined by the parties to a commercial agreement. International commercial arbitration also offers parties from different legal systems the ability to choose the seat of the arbitration. The enforceability of an arbitral award will usually be relevant to that choice.
In Australia, the Federal Court has jurisdiction to recognise and enforce arbitral awards that are governed by the United Nations Commission on International Trade Law (UNCITRAL) Model Law (Model Law). This jurisdiction is conferred by the International Arbitration Act 1974 (Cth) (IA Act).
The IA Act gives effect to three international conventions: the Model Law, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted by the United Nations Conference on International Commercial Arbitration in 1958 (the New York Convention), and the Convention on the Settlement of Investment Disputes between States and Nationals of other States (1965).
In Australia, commercial arbitration is also used for domestic disputes and is governed by relevant State laws.
Background and controversy
TCL Air Conditioner (Zhongshan) Co Ltd (TCL) and Castel Electronics Pty Ltd (Castel) entered into a distribution agreement for air conditioners. TCL is registered and has its principal place of business in the People’s Republic of China. Castel is registered and has its principal place of business in Australia.
In accordance with the distribution agreement, Castel submitted a dispute for arbitration in Australia. The arbitration tribunal made two awards, requiring TCL to pay Castel $3,369,351 and costs of $732,500. TCL failed to pay, and Castel applied to the Federal Court under the IA Act to enforce the awards.
TCL then applied to the High Court in its original jurisdiction, seeking to prevent the judges of the Federal Court from enforcing the award. TCL brought its challenge on two constitutional bases:
- that the jurisdiction conferred by the IA Act requires the judges of the Federal Court to act in a manner which substantially impairs the institutional integrity of the Court; and
- that the IA Act impermissibly vests the judicial power of the Commonwealth in arbitral tribunals because the enforcement provisions of the IA Act render an arbitral award determinative.
Essentially, TCL argued that the Federal Court should not have jurisdiction to enforce an arbitral award where the Court has no power to overturn the award for error of law.
The High Court found that:
- where parties confer on an arbitrator the authority to conclusively determine the rights of the parties, an award made by an arbitrator pursuant to such authority is final and conclusive;
- the award by the arbitrator extinguishes the original cause of action and imposes new obligations on the parties; and
- those obligations can be enforced by the Federal Court under the IA Act, subject to exceptions provided by the IA Act (including where the award would be against the public policy of Australia).
Fundamental to the Court’s reasoning was the view that an arbitral award is binding upon parties because the parties consent to the arbitration process. Although arbitration is not a judicial process, that alone does not prevent the award being enforced as though it were an order of the Federal Court.
- This case is a useful reminder that when drafting dispute resolutions clauses, the parties should carefully consider whether an arbitration process, with restrictions on appeal rights, is appropriate to all forms of disputes in commercial agreements. For example, where the amount at stake is very significant, the parties may prefer to have disputes resolved in a Court with the consequent preservation of appeal rights.
- Given that the High Court gave primacy to the agreement between the parties, parties could consider limiting the disputes or issues that are submitted to arbitration, so as to exclude particular questions, such as particular questions of law from the arbitral process, to preserve a limited recourse to the Courts.