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Focus: Courts uphold arbitration laws in Australia

21 March 2013

In brief: The High Court has upheld the constitutional validity of recent amendments to federal arbitration legislation that were made to strengthen Australia's international arbitration regime by better providing for the finality of arbitral awards. This follows a recent decision by the Supreme Court of New South Wales which preserved corresponding amendments to state legislation governing domestic arbitrations for largely the same reasons. Partner Andrea Martignoni (view CV), Special Counsel Nicola Nygh , Senior Associate Tom Randall and Lawyer Catherine Li report.

How does it affect you?

  • The decisions affirm Australia's adherence to the principles of party autonomy and the finality of arbitral awards.
  • The UNCITRAL Model Law on International Commercial Arbitration (as amended in 2006), which is enacted into Australian law by the International Arbitration Act 1974 (Cth) (the IA Act) at the federal level and the Commercial Arbitration Acts in the states and territories, gives effect to these principles by (among other things) limiting the grounds on which the enforcement of an arbitral award can be resisted.
  • The decisions confirm that these provisions of the Model Law are good law in Australia. 

Background – TCL v Castel

In a final effort to avoid liability for a $3.5 million arbitral award, TCL challenged the constitutional validity of certain amendments to the IA Act that were intended to enhance Australia's standing as an arbitration-friendly jurisdiction,1 including those which:

  • incorporated most of the provisions of the 2006 version of the Model Law; and
  • provided for the mandatory application of the Model Law (except insofar as it can be displaced on its own terms) as the law for international commercial arbitrations seated in Australia.2 

The significance of the case is attested to by the intervention of the Attorneys-General of the Commonwealth and each state and the amici curiae appearances of the Australian Centre for International Commercial Arbitration, the Institute of Arbitrators and Mediators Australia, and the Chartered Institute of Arbitrators.

History

The dispute between TCL and Castel has an involved history. Castel and TCL were parties to an agreement which gave Castel exclusive rights of distribution in Australia of TCL-manufactured air conditioners. In July 2008, arbitration proceedings were commenced under the agreement's arbitration clause, which required any disputes to be determined by arbitration seated in Australia. In November 2009, following a dispute concerning the scope of the arbitration clause, the Supreme Court of Victoria held that only claims under the agreement itself (and not any other agreements entered into under the head agreement) could be arbitrated under the arbitration clause3.

On 23 December 2010, an award was made in favour of Castel (the Award). TCL sought to resist Castel's subsequent enforcement of the Award in the Federal Court, arguing (among other things) that the IA Act did not give the court jurisdiction to enforce non-foreign arbitral awards (ie, those rendered pursuant to an arbitration seated in Australia). This challenge was rejected by the Federal Court (see our report in the May 2012 Arbitration Quarterly).

TCL's case

Before the High Court, TCL submitted that because:

  • the Model Law does not permit a court to refuse enforcement of an arbitral award by reason of an error of law (which was previously possible under the former Commercial Arbitration Acts); and
  • the Model Law now applies exclusively as the law applicable to arbitrations seated in Australia,

the provisions of the IA Act giving effect to the Model Law were constitutionally invalid.

TCL further argued that the IA Act:

  • undermined the institutional integrity of the courts by denying the Federal Court the capacity to refuse to enforce an award containing an error of law; and
  • as a corollary, permitted sovereign judicial power to be invested in a body (ie, an arbitral tribunal) that is not a court organised under Chapter III of the Constitution and which substantively applies the law without the supervision of a Chapter III Court.

Put another way, TCL said that the enlistment of court powers to enforce an arbitral award where the court is incapable of entertaining a claim that the tribunal made an error of law strips the court of "decisional independence" and reduces it to a rubber stamp.

The decision

TCL's case was rejected unanimously by the High Court. The joint judgments of, on the one hand, Chief Justice French and Justice Gageler, and on the other, Justices Hayne, Crennan, Kiefel and Bell, while differing subtly in emphasis, made broadly the following three points.

  • First, the common law recognises the right of parties to voluntarily submit a dispute to an arbitrator. By agreeing to do so, the parties' original rights are extinguished and replaced by the terms of the award which may then be enforced by a court.
  • Second, in making findings of fact and law, an arbitrator is not purporting to exercise the judicial power of the sovereign state. This is because the arbitrator's authority to decide the controversy has been voluntarily referred to her or him by the parties. By contrast, the judicial power of the Commonwealth invested in courts established pursuant to Chapter III of the Constitution is a coercive power levied against the will of at least one party to a dispute.
  • Third, enforcement of an arbitral award by the Federal Court pursuant to Articles 35 and 36 of the Model Law is an exercise of judicial power involving the determination of questions of legal right or obligation as to the existence of an enforceable award in accordance with a set of statutory boundaries as to when such an award will be enforceable. However, enforcement simply provides the parties with the substance of their bargain, namely, that their dispute be determined privately, and that they will be bound by the arbitrator's decision notwithstanding any error in reasoning. The Federal Court does not endorse an arbitrator's reasoning (flawed or otherwise). Instead, the arbitral award and the reasoning behind it are confined to the parties to the award and have no broader application to other disputes of a similar kind.

Accordingly, the decision presents important qualifications to well-publicised comments made by the High Court in Westport Insurance Corp v Gordian Runoff Ltd4 that arbitration is not 'purely a private matter of contract, in which the parties have given up their rights to engage judicial power' and is not 'wholly divorced from the exercise of public authority'.

New South Wales decision

Consistent with the High Court's decision is the judgment of the Supreme Court of New South Wales in Ashjal Pty Limited v Alfred Toepfer International (Australia) Pty Ltd5 (handed down in November 2012). This case involved a constitutional challenge to certain provisions of the Commercial Arbitration Act 2010 (NSW) (the CAA) relating to setting aside and enforcing arbitral awards which were challenged on similar grounds as in the TCL case before the High Court.

In emphasising the primacy of the consensual nature of arbitration, the NSW Supreme Court commented that 'the arbitrator, acting under contract, is not exercising state, judicial, governmental or executive power', and held that the court's 'institutional integrity' or 'decisional independence' was not impaired by the CAA.

Conclusion

TCL and Ashjal have confirmed that Australia's domestic and international arbitration laws are consistent with modern standards generally expected by parties in terms of the finality of arbitral awards. These decisions affirm judicial support for arbitration as a reliable and final means of determining disputes in Australia.

Footnotes
  1. TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5.
  2. For more detail on the amendments, see our July 2010 Focus.
  3. TCL Airconditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd [2009] VSC 553. 
  4. [2011] HCA 37.
  5. [2012] NSWSC 1306. This decision will be reported on more fully in an upcoming Arbitration Quarterly

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