Today the High Court of Australia dismissed a challenge to the constitutional validity of the International Arbitration Act 1974 (Cth) (Act) and declared the Act valid: TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia & Anor.
The case concerned an agreement between a Chinese company, TCL Air Conditioner (Zhongshan) Co Ltd (TCL), and an Australian company based in Victoria, Castel Electronics Pty Ltd (Castel), for the supply of air conditioners. The agreement referred disputes to arbitration in Australia.
In July 2008, Castel referred claims totalling over $30 million to arbitration in Australia. Castel claimed TCL was in breach of the agreement. TCL counter-claimed. The parties agreed the dispute should be decided in accordance with Victorian law.
On 23 December 2010, the Tribunal upheld Castel's claim. It awarded Castel $3.37 million in damages and over $730,000 in costs (Awards). TCL was awarded approximately $200,000 for its counter-claim.
On 18 March 2011, Castel applied to the Federal Court of Australia (FCA) to enforce the Awards under article 35 of the UNCITRAL Model Law on International Commercial Arbitration (Model Law), which has the force of law in Australia under s 16 of the Act. TCL opposed the application. Separately, TCL applied to the FCA to set aside the Awards under article 34 of the Model Law.
Constitutional Challenge in the High Court
Subsequently, on 5 October 2012, TCL challenged the constitutionality of the Act in the High Court of Australia on the basis that the Act provided for the exercise of judicial power by arbitral tribunals contrary to Chapter III of the Constitution. TCL argued: (1) the Act substantially impairs the institutional integrity of the FCA by requiring the FCA to enforce awards that appear on their face to have an error in law; and (2) the Act impermissibly vests the Commonwealth judicial power on arbitral tribunals. TCL requested the High Court to restrain the FCA from enforcing the Awards.
TCL's first argument: Act substantially impairs the institutional integrity of the Federal Court
TCL claimed that the effect of the Model Law is that the FCA is obliged to enforce an award (even if there is an error of law on the face of the award) so that, the FCA's institutional integrity is impaired.
TCL argued that whilst the FCA is enlisted to assist arbitral proceedings and enforce the resulting awards, it is denied "any scope for reviewing substantively the matter referred to arbitration, and the ability to act in accordance with the judicial process", thereby distorting its "institutional independence" because it cannot undertake a substantive review of an award to correct an error of law.
TCL's second argument: Act impermissibly vests the Commonwealth judicial power on arbitral tribunals
TCL's second argument was similarly based on the FCA's inability to substantively review an arbitral award. TCL argued that since an arbitral tribunal determines its own jurisdiction and its awards are final and binding, the courts are also denied substantive supervision of the arbitral proceedings with the result that the Act has impermissibly vested the arbitral tribunal with the judicial power of the Commonwealth, and denied the courts the exercise of that power.
The High Court unanimously dismissed TCL's application and upheld the validity of the Act and thus, the application of the Model Law.
Split across two judgments, the High Court drew a distinction between the judicial power of the courts and the power of tribunals in private arbitration. Both judgments endorsed the final and binding nature of arbitral awards and rejected any implied requirement that an arbitrator decide a dispute correctly or that an arbitrator's authority is limited to a correct application of the law.
Justices Hayne, Crennan, Kiefel and Bell emphasised that the historic power of the courts at common law to review an award for an error of law was exceptional. They found that the institutional integrity of the courts was protected by the Act, specifically the provisions permitting the court to set aside an award or refuse enforcement. They held that "the absence of a specific power to review an award for error of law does not distort judicial independence".
Hayne, Crennan, Kiefel and Bell JJ noted that TCL's arguments ignored the consensual basis of private arbitration. They emphasised that the conclusiveness of an award simply reflects the consequences of the parties agreement to arbitrate, the award being the "ultimate product" of that agreement. One of those consequences was "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". As such, the fact that the arbitrator determines questions of law conclusively does not distort judicial independence, nor demonstrate a delegation of judicial power.
The High Court's decision is welcomed. Commercial parties may continue including arbitration clauses in their contracts with the confidence that any resulting arbitral awards will be recognised and enforced by the Australian courts under the Act.