In a unanimous decision, the High Court of Australia has upheld the constitutionality of Australia’s International Arbitration Act 1974 (Cth) (the “Act”) which gives domestic effect to the UNCITRAL Model Law on International Commercial Arbitration (the “Model Law”) in Australia. The Act and the Model Law are the means by which the successful party to an arbitration can enforce its award as if it were an Order of an Australian Court. Had the challenge to the Act and the Model Law been successful, it would have led to widespread uncertainty in respect of the enforceability of arbitral awards in Australia.

Background

The plaintiff, TCL Air Conditioner (Zhongshan) Co. Ltd. (“TCL”), is a Chinese manufacturer of air-conditioners. TCL entered into an exclusive distribution agreement with an Australian company, Castel Electronics Pty Ltd. (“Castel”), for the sale of airconditioners within Australia (the “Agreement”). The Agreement contained a relatively unsophisticated arbitration clause which provided for disputes arising under the Agreement to be arbitrated in Australia.1

TCL manufactured TCL-branded air-conditioners as well as others that were branded with other equipment manufacturers’ brand names (“OEM”). In 2008, a dispute arose between the parties concerning the nature of the exclusivity clause under the Agreement. Castel claimed that it had been appointed as TCL’s exclusive distributor in Australia for all TCL-manufactured airconditioners regardless of whether they were branded as TCL or OEM. During the term of the Agreement, TCL sold approximately 53,000 OEM-branded air-conditioners to persons other than Castel within Australia. TCL contended that the exclusivity provision in the Agreement was limited to TCL-branded airconditioners and did not restrict TCL to selling OEM-branded airconditioners exclusively to Castel. The dispute was referred to arbitration which was heard September 13-25, 2010.

The arbitral tribunal found in Castel’s favor determining that the Agreement provided Castel with exclusive distribution rights within Australia in respect of all TCL-manufactured air-conditioners regardless of how they were branded. As a result, TCL was found to be in breach of the Agreement and was required to pay to Castel approximately AU$4 million (US$4.2 million) in damages and costs.

TCL refused to pay the sums owed to Castel. Castel sought to enforce the award in the Federal Court of Australia. Castel’s application was made under Article 35(1) of the Model Law which provides that “An arbitral award, irrespective of the country in which it was made, shall be recognized as binding and, upon application in writing to the competent court, shall be enforced”.

Article 36 of the Model Law provides an exclusive list of grounds upon which a court may refuse to recognize or enforce an arbitral award. Relevantly, Article 36(1)(b) entitles a court to refuse to enforce an award if the court finds that “the recognition or enforcement of the award would be contrary to the public policy of this State”.

TCL objected to Castel’s application to enforce the award and contended that the Court was entitled to refuse to enforce it under Article 36(1)(b). TCL contended that the award should be set aside because there had been breaches of natural justice and procedural fairness. The Federal Court dismissed TCL’s arguments and made an Order in the terms of the award.2 TCL obtained leave to appeal the decision to the High Court.

High Court Challenge

On appeal to the High Court, TCL argued that Articles 35 and 36 of the Model Law are inconsistent with Chapter III of the Australian Constitution (“Chapter III”). Chapter III prevents any body other than a court from exercising “judicial power”.3

TCL contended that by limiting the circumstances in which a court could refuse to recognize an arbitral award, the Act and the Model Law were, in effect, enabling an arbitral tribunal to exercise “judicial power” and usurping the power of the Australian courts.

Castel argued that the source of an arbitral tribunal’s authority is not “judicial power” but rather a private agreement of the parties (here the arbitration agreement). Through that agreement, the parties agree that their respective rights and obligations, as owed to one another, will be resolved as described in a valid arbitral award. Following the issuance of an award, it is not open to either party to then seek recourse in the courts to determine anew those same rights and obligations.

The challenge to the Act and the Model Law was considered so significant that the Australian Attorney-General along with the Attorneys-General of five Australian states all intervened in the High Court proceedings and made submissions. Submissions were also made to the High Court by the Australian Centre for International Commercial Arbitration, the Institute of Arbitrators and Mediators Australia Ltd. and the Chartered Institute of Arbitrators (Australia).

In rejecting TCL’s arguments, the High Court confirmed that the making of an arbitral award is not an exercise of “judicial power”. Instead, an arbitral award operates to determine the contractual rights and liabilities of the parties. The High Court noted that “... if parties do go to arbitration and the arbitrator makes an award, the making of the award has legal significance in respect of the parties’ dispute and their rights and liabilities. As the plurality in Dobbs said: ‘if, before the institution of [a court] action, an [arbitral] award is made, [the award] governed the rights of the parties and precluded them from asserting in the [c]ourts the claims which the award determined.’ In such a case, the arbitrator’s award governs the rights of the parties because ‘[b]y submitting the claims to arbitration, the parties confer upon the arbitrator an authority conclusively to determine them’”. 4

The High Court decision serves to reinforce the effectiveness, certainty and reliability of arbitral awards in Australia. Had the High Court determined that the Act and the Model Law were inconsistent with Chapter III, it would have created significant uncertainty in existing commercial contracts that contain arbitration clauses.