High Court unanimously rejects constitutional challenge to International Arbitration Act 1974 (Cth)

The High Court of Australia’s judgment in TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5 (13 March 2013) is the most important development in arbitration in Australia in the past 12 months, and has been keenly awaited by arbitration users and practitioners.

By that judgment, the High Court unanimously rejected a constitutional challenge to Australia’s adoption in the International Arbitration Act 1974 (Cth) (IAA) of the enforcement provisions contained in Chapter VIII (Articles 35 and 36) of the UNCITRAL Model Law on International Commercial Arbitration (Model Law).

The case arises out of litigation between a Chinese air conditioner company and Australia’s Castel Electronics, which had agreed to refer disputes under an exclusive distributorship agreement entered into in 2003 to arbitration seated in Melbourne according to Victorian law. Arbitration proceedings were commenced in July 2008, and in 2010 an arbitral tribunal awarded Castel about A$3 million plus costs.

Castel sought to enforce the awards in the Federal Court. TCL contended that the Federal Court did not have jurisdiction to do so. In a judgment handed down on 23 January 2012 Murphy J held that the Federal Court is a ‘competent court’ for the purposes of enforcing an international arbitral award under Article 35 of the Model Law.[1]

In April 2012 Murphy J heard an application by Castel to enforce the awards, and also an application by TCL to set them aside on the basis that were contrary to the public policy of Australia because a breach of the rules of natural justice had occurred in connection with the making of the awards – in particular, a breach of the (supposed) “no evidence” rule and the “hearing” rule.

On 2 November 2012 Murphy J handed down a second judgment in which he enforced the awards.[2] In the meantime, TCL brought an application in the original jurisdiction of the High Court for the issue of constitutional writs of prohibition and certiorari directed to the judges of the Federal Court – first, to restrain the judges of the Federal Court from enforcing the arbitral awards and, secondly, to quash Murphy J’s first judgment holding that the Federal Court had jurisdiction to enforce the awards.[3]

Reflecting the importance of the case, the Solicitor-General of the Commonwealth and the Attorneys-General of each of New South Wales, Victoria, Western Australia and South Australia intervened in the High Court proceeding. Further, Australia’s peak arbitration bodies, ACICA, IAMA and CIArb Australia made a joint submission as amici curiae.

Regulatory Framework

The Model Law is given the force of law in Australia by section 16 of the IAA. Australia adopted the original 1985 draft of the Model Law in 1989 by amendment of the IAA. In 2010 the IAA was further amended to adopt the 2006 revision of the Model Law.

Foreign awards made in New York Convention countries may be enforced in Australia under sections 8 to 9 of the IAA, which implement Articles IV and V of the Convention. On the other hand, foreign awards made in non-Convention countries, and also international awards made in Australia (like the awards in favour of Castel), have to be enforced under Chapter VIII (Articles 35 and 36) of the Model Law.[4]

Article 35 of the Model Law provides that an arbitral award shall be recognised as binding and upon application to a competent court shall be enforced subject to the provisions of Articles 35 and 36. Relevantly, Article 35 requires the award creditor to produce to the enforcement court the original or copy of the arbitral award. Article 36 sets out a list of exhaustive grounds for refusing recognition or enforcement of an arbitral award. They mirror the grounds contained in s 8(5) and (7) of the IAA, which implement Article V of the New York Convention. Error of law is not one of the grounds.

TCL’s challenge

TCL alleged constitutional invalidity on two grounds. First, it said that Articles 35 and 36 effectively render international arbitration awards determinative, having regard to the very limited grounds for resisting enforcement under Article 36, and thus impermissibly purport to confer the judicial power of the Commonwealth on arbitral tribunals, as opposed to a court specified in Chapter III of the Australian Constitution. Secondly, TCL argued that the Federal Court’s discretion to resist enforcement of an international arbitration award was so limited under Articles 35 and 36 that it constituted an impermissible interference with the judicial power of the Commonwealth. It said this was because Articles 35 and 36 in effect require Australian courts to act administratively in ‘rubber-stamping’ international arbitration awards when entertaining applications to enforce them.

Underlying both grounds of attack was TCL’s argument that an Australian court is mandated to enforce an international arbitration award made in Australia even if, on its face, it containsa manifest error of law, and that to oblige an Australian court to enforce an award in those circumstances was to require the court to act in a fashion that is repugnant to the judicial process.

The court’s reasoning

The majority judgment was given by Hayne, Crennan, Kiefel and Bell JJ. Chief Justice French and Gageler J handed down a separate concurring joint judgment.

The court noted that the international origins of the Model Law require it to be interpreted without any assumptions that it embodies common law concepts – including the somewhat haphazard common law rule that an arbitral award could be set aside for error of law on the face of the award.

Like the New York Convention, the Model Law operates on the basis that an arbitral award satisfies the parties’ accord to refer their disputes to determination by arbitration, which supersedes (by agreement) the original rights and obligations of the parties.

Article 28 Model Law

Article 19 of the Model Law empowers the parties to choose rules of procedure applicable to the arbitration, while Article 28 allows the parties to choose the rules of law according to which the substance of their dispute is to be determined.

TCL argued that Article 28 required an arbitrator to decide the dispute correctly in accordance with the rules of law chosen by the parties. Alternatively, it contended that there was an implied term in the arbitration agreement to that effect.

The court held that there is nothing to suggest that Article 28 requires an arbitral tribunal to decide a dispute in accordance with the substantive rules of law chosen by the parties in a manner that a competent court would determine to be correct.  The absence of an error of law ground in Article 36 strongly militated against TCL’s submission concerning the interpretation of Article 28.

Nor was there any implied term of every arbitration agreement governed by Australian law that required an arbitral award to be correct in law.

No delegation of judicialpower

The court rejected the contention that the making of the arbitral award pursuant to the Model Law amounted to an exercise of the judicial power of the Commonwealth. The essential distinction between judicial power and arbitral authority is that arbitral authority is based on the voluntary agreement of the parties, whereas judicial power is conferred and exercised by law and coercively, and operates independently of the consent of the parties. Moreover, unlike a judgment, an arbitrator’s award is not binding of its own force. The exercise of judicial power in the present case arose upon the court entertaining an application for enforcement under Articles 35 and 36 of the Model Law.

No impairment of institutional integrity

As to the second ground of attack, the court held that the inability of the Federal Court as a competent court under Articles 35 and 36 of the Model Law to refuse enforcement of an arbitral award on the ground of error of law did not undermine the institutional integrity of the Federal Court. This was because a court undertaking the task of enforcing an award pursuant to the IAA has power to refuse enforcement of an award (under Article 36) in a variety of circumstances, including if the award is in conflict with the public policy of Australia.  Those provisions are protective of the institutional integrity of courts in the Australian judicial system called upon to exercise jurisdiction under the IAA to enforce international arbitration awards. Moreover, enforcement of the arbitral award was the enforcement of the binding result of the parties’ agreement to submit their dispute to arbitration, not enforcement of any disputed rights submitted to arbitration.

Comment

The High Court judgment underlines that the Model Law is to be interpreted according to its international origins, harmoniously with New York Convention, and not in a parochial common law fashion. The judgment confirms that Australia is an arbitration-friendly jurisdiction.

Albert Monichino QC – CommBar profile