Australia: Court delivers landmark judgment for Australian arbitration

Last Updated: 14 March 2013
Article by Doug Jones

This morning the High Court of Australia delivered the landmark decision, TCL Air Conditioner v The Judges of the Federal Court of Australia [2013] HCA 5, that confirmed the constitutionality of the International Arbitration Act 1974, the legal framework which governs international arbitration in Australia.

The decision reaffirms Australia as a highly desirable neutral seat for the hearing of international arbitration in the Asia-Pacific region.

The nature of TCL's objections to the International Arbitration Act

The proceedings arose out of a dispute under a distribution agreement entered into between TCL Air Conditioner ("TCL") based in China and Castel Electronics based in Australia and involved the intervention of the Commonwealth Solicitor General, the Western Australian, South Australian, New South Wales, Queensland and Victorian Attorneys General, and a coalition of Australia's arbitral institutions.

TCL argued that to the extent section 16(1) of the International Arbitration Act gave the force of law to Arts 5, 8, 34, 35, and 36 of the UNCITRAL Model Law (the "Model Law") this provided for the exercise of the judicial power of the Commonwealth in a manner contrary to Chapter III of the Australian Constitution. TCL made two objections in this respect.

The first was that the jurisdiction conferred under the International Arbitration Act requires judges of the Federal Court to act in a manner which impairs the institutional integrity of the Court by not allowing the Court to consider an error of law on the face of the Award as a valid reason to refuse enforcement.

The second was that the International Arbitration Act vests the judicial power of the Commonwealth in arbitral tribunals because the enforcement provisions of the International Arbitration Act render an arbitral award determinative.

The High Court unanimously rejected both of these constitutional arguments in two judgments, one of Justice French and Justice Gageler, and the other of Justices Hayne, Crennan, Kiefel and Bell.

Did the Model Law co-opt the Federal Court?

In relation to its objection regarding institutional integrity of the Federal Court, TCL submitted that the effect of the Model Law was to co-opt the Federal Court to assist the arbitral process and to enforce resulting awards without providing the Court with the powers of substantial review. TCL's fundamental proposition was that for the Federal Court to carry out its powers in accordance with the Constitution it must be able to determine whether an arbitrator applied the law correctly in its reasons for an award.

To further support its argument, TCL submitted that Art 28(1) of the Model Law confined an arbitrator's authority under an arbitration agreement to deciding a dispute correctly and therefore an award founded on an error of law is not binding on the Parties, or alternatively that an arbitral agreement between parties limits an arbitrator's authority to the correct application of law.

The Court unanimously rejected TCL's proposition. Chief Justice French and Justice Gageler found that the enforcement of an arbitral award by a competent court on an application under Art 35 of the Model Law was an exercise of the judicial power of the Commonwealth and that the inability of the Federal Court to refuse enforcement of an arbitral award on the ground of error of law appearing on the face of the award did nothing to undermine the institutional integrity of the Federal Court.

Justices Hayne, Crennan, Kiefel and Bell found that a court undertaking the task of enforcing an award pursuant to the International Arbitration Act has the power to refuse enforcement or set aside an award in a number of circumstances and that these provisions are protective of the institutional integrity of the courts in the Australian judicial system which exercise jurisdiction under the International Arbitration Act . Their Honours also noted that the Federal Court's determination of the enforceability of an award upon criteria which does not include the power to review an award for error of law serves a legitimate legislative policy, that of encouraging efficiency and impartiality in arbitration and finality in respect of arbitration awards.

The effect of Art 28(1) of the UNCITRAL Model Law

The High Court also unanimously rejected TCL's argument regarding Art 28(1) of the Model Law. Chief Justice French and Justice Gageler found that this argument had "no foothold in the text of Art 28" and that it "runs counter to the autonomy of the parties to an arbitration agreement and is opposed by the drafting history of Art 28", noting that Art 28 is directed to the rules of law to be applied and not the correctness of the application.

Justices Hayne, Crennan, Kiefel and Bell rejected TCL's argument on the basis that it depends on treating the language of part of Art 28(1) as forming part of the agreement between the parties, whilst simultaneously treating the provisions of the Model Law regulating the recognition and enforcement of awards as not forming part of that agreement.

TCL's argument that each arbitration agreement contained an implied term restricting an arbitrator's authority to the correct application of law was also rejected on the ground that such a term was not necessary to give business efficacy to an arbitration agreement and was not so obvious on its face that it goes without saying.

Were the Commonwealth's judicial powers impermissibly delegated to arbitral tribunals?

The High Court rejected TCL's argument that the judicial powers of the Commonwealth had been delegated to arbitral tribunals through the International Arbitration Act in contravention of the Chapter III of the Constitution.

Justices Hayne, Crennan, Kiefel and Bell found that this submission reflected a failure to acknowledge the consensual foundation of private arbitration and that to conclude that a particular arbitral award is final and conclusive does no more than reflect the consequences of the parties having agreed to submit a dispute of the relevant kind to arbitration.

Chief Justice French and Justice Gageler reached the same conclusion. Their Honours went on to say that the consensual basis of an arbitrator's power is what distinguishes its character from judicial power. The fundamental characteristic of judicial power is a sovereign or governmental power, exercisable in the absence of consent of the subjects whose rights are affected.

Implications of the High Court's decision in TCL

This decision highlights that the International Arbitration Act does not inhibit the judiciary's power in a manner inconsistent with Chapter III of the Constitution reinforces the judicial support for the international arbitration regime in Australia.

The decision further indicates the Court's reception to the use of international instruments and commentaries in interpretation of the IAA which promotes uniformity with international practice.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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