International arbitration has become the norm for resolving international commercial disputes. Many commercial parties engaged in cross-border business opt for international arbitration over proceeding through domestic courts due to perceived advantages of arbitration including efficiency, the ability to appoint a specialized arbitrator, and the finality of the process. However, as recent decisions from courts in foreign jurisdictions demonstrate, it is increasingly important that parties choosing arbitration as a dispute resolution method understand the impact that the arbitration process and the venue of the arbitration may have on recourse available to the parties in the event one or both of the parties are dissatisfied with the arbitral award.
Recent Australian Decision Confirms Arbitral Awards are Final
An Australian decision released on March 13, 2013, highlights the commitment of courts in foreign jurisdictions to enforcing arbitral awards as if they were judgments of the court, even if there may be legal errors in the award in issue. In the unanimous decision of TCL Air Conditioner (Zhongshan) Co. Ltd. v. The Judges of the Federal Court of Australia, the High Court of Australia confirmed that Australian courts will not interfere in enforcing arbitral awards except in discrete circumstances such as where an award is contrary to public policy. The High Court emphasized that parties who agree to resolve their disputes through final, binding arbitration should be held to this bargain. By enforcing arbitral awards, the High Court explained that Australia's courts are not enforcing the legal or factual content of the award; rather, enforcement of an arbitral award is enforcement of the binding result of the agreement of the parties to submit their dispute to arbitration.
The underlying dispute that led to the High Court's decision involved a written distribution agreement between TCL Air Conditioner (TCL) (based in the People's Republic of China), and Australian-based Castel Electronics (Castel) whereby TCL granted Castel the exclusive right to sell TCL-manufactured air conditioners in Australia. When a contractual dispute arose between the parties, Castel submitted its claims against TCL to arbitration in Australia pursuant to the arbitration clause in the distribution agreement. The arbitration tribunal made an award upholding Castel's claims and requiring TCL to pay Castel a sum of A$3,369,351. The arbitration tribunal made a further award requiring TCL to pay Castel's costs of the arbitration.
TCL failed to pay Castel the amounts owing under the arbitral awards and Castel proceeded to apply to the Federal Court of Australia pursuant to Australia's International Arbitration Act 1974 (Cth) (IAA) to enforce the arbitral awards in its favour against TCL. The IAA specifically vests jurisdiction in the Federal Court and the State and Territory Courts of Australia to enforce arbitral awards pursuant to the UNCITRAL Model Law on International Commercial Arbitration (UNCITRAL Model Law). Article 35 of the UNCITRAL Model Law provides that an arbitral award "shall be recognized as binding and, upon application… to the competent court, shall be enforced" while Article 36 states the exhaustive grounds for refusing recognition or enforcement of an arbitral award.
TCL opposed the application to enforce the arbitral awards and argued that the Federal Court lacked jurisdiction and, alternatively, if the Federal Court did have jurisdiction, the arbitral awards should not be enforced on grounds of public policy because of an alleged breach of the rules of natural justice by the arbitration tribunal. TCL also applied in a separate proceeding to set aside the awards on the basis that they were contrary to public policy because of an alleged breach of the rules of natural justice. The Federal Court rejected TCL's claims and ruled that it had jurisdiction under the IAA to enforce the arbitral awards.
Parties Will Be Held to Their Agreement to Resolve Matters Through Arbitration
TCL then applied to the High Court for writs of prohibition and certiorari directed to the judges of the Federal Court to restrain the judges from enforcing the arbitral awards and/or to quash the judgments issued by the Federal Court judge presiding over the parties' applications in the Federal Court. TCL argued that the jurisdiction conferred on the Federal Court in an application under Article 35 of the UNCITRAL Model Law was incompatible with Australia's Constitution. Specifically, TCL argued that the inability of the Federal Court under Articles 35 and 36 of the UNCITRAL Model Law to refuse to enforce an arbitral award on the ground of error of law appearing on the face of the award either: (1) undermines the institutional integrity of the Federal Court exercising the judicial power of the Commonwealth by requiring the Federal Court to knowingly perpetrate an error in spite of any legal error that may appear on the face of the award; or (2) impermissibly confers the judicial power of the Commonwealth on the arbitral tribunal that made the award by giving the arbitral award the last word on the law applied in deciding the dispute submitted to arbitration. Alternatively, TCL argued that it was an implied term in any arbitration agreement requiring that an arbitral award must be correct in law. TCL's submissions hinged on the argument that courts must be able to determine whether an arbitrator correctly applied the law in reaching an award.
The High Court dismissed TCL's application concluding that Australia's Constitution does not operate to limit the implementation of the UNCITRAL Model Law in Australia. Ultimately, the court determined that Article 35 neither undermines the institutional integrity of the Federal Court nor confers judicial power on an arbitral tribunal. The court also rejected TCL's argument that it is an implied term of arbitration agreements that an arbitral award must be correct in law.
The High Court recognized that international commercial arbitration is a consensual process. That an arbitrator may be the final judge of questions of law arising in the arbitration does not demonstrate that there has been some delegation of judicial power to the arbitrator. Rather, a final and conclusive arbitral award reflects what the parties have agreed to by submitting their dispute to arbitration. The award will be enforceable because the parties agreed that the arbitral award will be the final decision of the dispute. Enforceability of the award in Australia is not dependent on whether the award is factually or legally correct, and an error in law does not fall within the narrow exceptions of when the court can refuse to enforce the award.
The TCL Air Conditioner (Zhongshan) Co. Ltd v. The Judges of the Federal Court of Australia decision confirms that courts in foreign jurisdictions are committed to enforcing arbitral awards subject only to narrow grounds of refusal. This decision reflects a growing recognition by courts that an efficient and consensual dispute resolution mechanism leading to an enforceable award is an essential underpinning of international commerce and that the courts should not stand in the way of such awards unless serious public policy concerns are in issue.
While the reluctance of the courts to interfere in enforcing arbitral decisions is welcomed by many parties who look to arbitration to provide efficient and final results when a dispute arises, this decision also serves as a reminder that parties who engage in international commercial activity must consider whether arbitration is the most appropriate option for them.
For parties who do agree to resolve disputes through arbitration, the decision highlights the importance of appointing a skilled arbitrator as the arbitrator's arbitral award may be final and enforceable as a judgment. It is also important for parties to an arbitration agreement to consider where the arbitration will take place as the chosen venue may impact what recourse is available if one or more parties wish to challenge the award.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.