In the November 2011 edition of this newsletter, we outlined Australia’s new approach to enforcement of awards. Since that time, there have been a number of further developments in Australian law which shows how international arbitration agreements and awards will be treated in Australia. This article explores some of those legal developments, and their relevance to those involved in an international arbitration with an Australian connection.

Brief refresher on the Australian international arbitration regime

In Australia, international arbitration is regulated by the International Arbitration Act 1974 (Cth) (IAA), which was enacted to give effect to the 1958 New York Convention (Convention). The IAA was amended in 1989 to enact the UNCITRAL Model Law on International Commercial Arbitration (Model Law), and again in 2010 to adopt many of the 2006 revisions of the Model Law.

2012 Developments

Jurisdiction to enforce “non-foreign” international awards

The IAA is clear in conferring jurisdiction on various Australian Courts to enforce ‘foreign’ international arbitration awards – namely awards which the New York Convention applies that are made in a country other than Australia. However, peculiarly the IAA does not expressly provide any Australian Court with jurisdiction to enforce international arbitration awards made within Australia (non-foreign international awards).

The absence of an express conferral of jurisdiction is significant to those who have Australia as the seat of arbitration, and who also wish to enforce the award in Australia. While it seems obvious that such an award must be enforceable in Australia, it creates a risk that proceedings commenced to enforce the award will be challenged on the basis that the particular Court does not have jurisdiction.

Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd (2012) 201 FCR 209 (Castel) has now reduced that risk, at least if the proceedings are commenced in the Federal Court of Australia. In Castel a single judge of the Federal Court found that the Federal Court did have jurisdiction, on the basis that it was a competent court under Articles 35 and 36 of the Model Law.

Unfortunately, the uncertainty remains for the Supreme Courts of each State. While the Court of Appeal of Western Australia acknowledged the issue in Rizhao Steel Holding Group Co Ltd v Koolan Iron Ore Pty Ltd  [2012]WASCA 50 (Rizhao), it did not need to determine it.

Until the position is clarified (either through further case law or legislative amendment), in order to avoid a jurisdictional dispute it may be desirable for persons seeking to enforce ‘non-foreign’ international awards in Australia to commence the enforcement proceedings in the Federal Court rather than a state Supreme Court.

Retrospective effect of amendment to section 21 of the IAA

The 2010 amendments to the IAA included an amendment to s21 to prevent parties to an international arbitration agreement from ‘opting out’ of the Model Law in favour of the state specific domestic Commercial Arbitration Act(s) where the arbitration is held in Australia. One area of uncertainty regarding this amendment has been whether it has retrospective effect. This issue is of relevance both to arbitrations commenced before 6 July 2010 but not yet completed (which may now be uncommon), and also to arbitrations commenced after 6 July 2010 but pursuant to arbitration agreements entered into before 6 July 2010 (which will still be common).

The Western Australian Court of Appeal recently provided some clarification in Rizhao, holding that the amendments do not apply to arbitration proceedings commenced before 6 July 2010.

Unfortunately, however, this clarification is only in relation to the more uncommon scenario, and despite two recent decisions considering the application of s21 to arbitrations commenced after 6 July 2010 but pursuant to arbitration agreements entered into before 6 July 2010, the position for such a scenario remains unclear. In Castel a single Judge in the Federal Court of Australia found that the amendments do apply regardless of when the arbitration agreement was entered into. While not needing to decide the issue, it was also considered in Rizhao. Two justices suggested, while stating that it was not necessary to express a concluded view, that s21 may not operate retrospectively in such a scenario. However, the third member of the Court suggested that he saw no impediment.

In light of the current uncertainty, parties to arbitration agreements entered into before 6 July 2010 should be aware that the effectiveness of an election in the arbitration agreement to opt out of the Model Law is open to challenge.

Application of proportionate liability legislation to arbitrations

When an arbitration concerns a claim for economic loss or damage to property arising from a failure to take reasonable care (whether founded in contract, tort or otherwise), and there is the possibility that multiple wrongdoers being responsible for that damage, a question arises as to what effect this has on the conduct of the arbitration and any award of damages.

Each of the Australian States has a statutory regime of proportionate liability, which requires courts to apportion liability amongst multiple wrongdoers in such claims (Apportionment Legislation). However the recent decision in Curtin University of Technology v Woods Bagot Pty Ltd [2012]WASC 449 (Woods) raises significant doubt whether this requirement applies to international arbitrations.

In Woods, the Supreme Court of Western Australia (WASC) held that the Apportionment Legislation in Western Australia (the Civil Liability Act 2002) did not automatically apply to a domestic arbitration under the Commercial Arbitration Act 1985 (WA). The basis for this determination was that the Apportionment Legislation specifically refers to “courts”, an “action for damages” and in making “judgments”. Further, unlike most courts, an arbitrator can only decide issues between parties to the arbitration agreement and cannot join concurrent wrongdoers as parties to the arbitration. While the decision arose in the context of domestic arbitrations, it is likely that the same reasoning will be applied to international arbitrations.

Significantly, although the Court in Woods considered the Apportionment Legislation did not automatically apply by its own force, it did suggest that it could apply by virtue of a term of arbitration agreement (either express or implied). While at first blush the possibility of an implied term may seem to overcome the practical effect of the technical finding in Woods, the position is not clear cut. It is not uncommon that the arbitration agreement is contained in very brief contractual clause, most of the terms of the arbitration agreement are implied and there is little assistance offered by the text of the arbitration agreement in determining implied terms. Further, the precise ‘term’ which must be implied in order to give the Apportionment Legislation effect will need to be carefully considered (albeit the Court in Woods provided some preliminary views). As a result of Woods, parties to current arbitration agreements with a choice of Australian law cannot assume proportionate liability will apply, and will need to engage in a careful analysis of their arbitration agreement to determine the position.

Parties entering into new arbitration agreements with a choice of Australian law should consider whether they want the Apportionment Legislation to apply, and make express provision either way. If the Apportionment Legislation does apply, but the concurrent wrongdoer is not a party to the arbitration agreement, the claimant may be required to commence court proceedings to recover the remaining portion of its loss. This carries the clear risk that the court’s findings on liability and quantum of damages could be different to those of the arbitration.

Enforcement of foreign awards where no assets in Australia

On occasion a party to an arbitration award may see benefit in seeking to enforce a ‘foreign’ award in Australia even though the party it is being enforced against has no assets in Australia (for example, for the purpose of winding up an Australian company).

The right of an award creditor to seek enforcement of their award in Australia where there are no Australian assets was challenged in Traxys Europe SA v Balaji Coke Industry Pvt Ltd (No 2) (2012) 201 FCR 535. However, the Federal Court of Australia confirmed that an award debtor does not need to have assets in Australia before an Australian Court will enforce the award.

Invalidity of arbitration agreements in charter-party contracts

Under the Carriage of Goods by Sea Act 1991 (Cth), any provision in a “sea carriage document” that purports to limit the jurisdiction of an Australian court is invalid, unless it provides for arbitration in Australia.

In Dampskibsselskabert Norden A/S v Beach Building & Civil Group Pty Ltd [2012] FCA 696, the Federal Court of Australia refused to enforce an arbitration award made in London pursuant to an arbitration clause in a voyage charterparty on the basis that the arbitration agreement was invalid. The Court considered the voyage charterparty to be a “sea carriage document” (contrary to previous authority from the Supreme Court of South Australia).

As a result, there is a significant risk that an arbitration clause in a voyage charterparty will be considered invalid under Australian law if the seat of arbitration is not Australia.

Public policy grounds for setting aside or declining to enforce arbitral awards

The public policy ground for refusing to enforce or setting aside arbitral awards under the IAA, and in particular the “natural justice” ground, was recently considered by the Federal Court in Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd (No 2) [2012] FCA 1214 (Castel No 2).

Consistent with the position taken in the United States and Hong Kong, the Court stated that “public policy” ought to be construed narrowly, and encompassing only those that elements which are fundamental to Australian notions of fairness and justice. However, the Court also found that, in relation to natural justice, the wording of s19(b) of the IAA is such that “any” breach of natural justice will be contrary to public policy, and that there did not need to be an assessment of degree to which that breach offends fundamental notions of fairness and justice.

The Court in Castel No.2 expressed some concern that this decision that “any” breach of natural justice was sufficient would be inconsistent with the international interpretation of “public policy”. However, we do not consider that to necessarily be the case. Instead, Castel No.2 merely confirms that Australia considers an award to be contrary to fundamental notions of fairness and justice if there has not been a fair hearing or if there is a reasonable apprehension of bias (these being the natural justice requirements in Australia). It should be kept in mind that whether there has been a fair hearing is not determined by a set of arbitrary rules, but rather is considered in the context of the specific facts and circumstances which exist in each instance.

In any event, as the Court emphasised, even if a breach of natural justice is established and renders the award contrary to public policy, the Courts retain a discretion to refuse to set aside the award, or to enforce the award.

Constitutional challenge to the IAA

Significantly, the enforcement provisions of the IAA were the subject of a recent constitutional challenge. TCL Air Conditioner (Zhongshan) Co Ltd (a party to Castel and Castel No.2 referred to above) commenced proceedings in the High Court of Australia, contending that the limited scope for resisting enforcement of international arbitration awards interferes with the exercise of the judicial power conferred on courts by the Constitution and results in arbitral tribunals impermissibly being conferred powers that are reserved for the federal courts.

On 13 March 2013, the High Court unanimously rejected these contentions. The High Court held that the arbitral tribunal’s authority is not limited by Article 28 of the Model Law or an implied term to a correct application of the chosen law, and the enforcement of an award does not signify endorsement of its legal content. Further, the High Court drew a distinction between arbitration which is founded on mutual voluntary agreement between the parties to submit to the arbitral authority and the judicial power of the Commonwealth which applies independently of consent. As a consequence, the High Court held that the Federal Court’s role in the enforcement of international arbitral awards under the IAA and the Model Law is not incompatible with the integrity of the Federal Court and does not involve any impermissible delegation of federal judicial power.

The High Court’s decision is an important endorsement of the current framework for the enforcement of international arbitral awards in Australia under the IAA and parties to an international arbitration can proceed with the knowledge that enforcement of international arbitral awards remains available in Australia in line the with international standards.

Concluding comments

The law in Australia regarding recognition of arbitration agreements and enforcement of arbitral awards continues to develop as arbitration becomes more common. While some additional certainty is developing in some areas, uncertainty is becoming apparent in others where the legislation is being tested. It is hoped that the areas of uncertainty will continue to be reduced through both legislative amendment and the development of case law. In light of the recent decision of the High Court, it is evident that 2013 will be an exciting year for international arbitrations in Australia.