Jurisdiction - Australia
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Australia – High Court Upholds International Arbitration Laws.

17 March, 2013

 

TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5

 

WHAT YOU NEED TO KNOW

 

  •  The High Court of Australia has on 13 March 2013 unanimously upheld the constitutional validity of Australia’s international arbitration laws.
  • The High Court confirmed that there is no right to court review of an award for errors of law.
  • Businesses involved in international trade again have certainty that they can enforce arbitration awards in Australia.

 

The High Court of Australia has on 13 March 2013 unanimously upheld the constitutional validity of Australia’s international arbitration laws in the case of TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5.

 

The case is critically important both to businesses involved in international trade, who require certainty that they can enforce arbitration awards both in Australia and overseas, and to the efforts of Australian arbitration bodies and law firms, with the support of State and federal governments, to promote Australia as a venue for international arbitrations and for export of related legal services.

 

TCL was seeking to avoid enforcement of an arbitration award against it by arguing that the parts of the Commonwealth International Arbitration Act 1974 that allowed the award to be enforced as a Federal Court judgment were invalid. TCL sought a constitutional writ from the High Court, to prohibit the judges of the Federal Court from making orders that would allow the arbitration award to be enforced.

 

TCL argued that the relevant provisions of the Act were incompatible with Chapter III of the Constitution, which gives the judicial power of the Commonwealth exclusively to courts. TCL claimed that either:

 

  • the role of the Federal Court under the Act is so limited that it is effectively exercising an administrative function (“rubber-stamping“) in enforcing arbitral awards, which is incompatible with the Court’s judicial functions or “institutional integrity”; or
  • by requiring an award to be enforced as an order of the Federal Court, with no review by the Federal Court of the legal correctness of the award, the Act effectively elevates the award to the status of a Federal Court judgment – in effect, federal judicial power is conferred on the arbitrator contrary to the Constitution.

 

The High Court disagreed, holding that there was no constitutional invalidity. In rejecting TCL’s arguments, all Justices of the High Court pointed to the distinction between an arbitrator deciding what the rights of the parties are, on the one hand, and the court considering the successful party’s right to enforce the arbitrator’s decision, on the other.

 

The High Court pointed out that it is inherent in the agreement to arbitrate that the parties have agreed to accept the arbitrator’s decision, right or wrong. Once the arbitrator’s decision has been made, the rights of the parties that were in dispute come to an end and are replaced by the arbitrator’s decision.

 

Viewed in that way, it is clear that the Federal Court is not just rubber-stamping the arbitrator’s decision and that the arbitrator is not exercising judicial power. Rather, the arbitrator is exercising the private power conferred on him or her by the parties to decide what exercising judicial power to compel the parties to comply with the arbitrator’s decision. No constitutional invalidity arises. 

 

Commercial relevance

 

Many international contracts contain an international arbitration clause by which the parties agree to private arbitration of any disputes that may arise. Arbitration is often a more effective alternative to court proceedings, because it provides greater privacy, finality, enforceability internationally and efficiency. By questioning the validity of the legislative implements that underpin Australia’s international arbitration regime, this case had the potential to undermine the advantages of arbitration and the enforceability in Australia of all international arbitration awards more generally.

 

For that reason, a High Court ruling invalidating key provisions of the legislation would have created significant uncertainty for businesses involved in international trade into or out of Australia or with Australian companies, and would have been likely to damage Australia’s international standing and reputation as a venue for international arbitration. Parties to an arbitration taking place in Australia or parties to an arbitration agreement providing for arbitration in Australia, would have been likely to encounter problems with enforcing the award in Australia.

 

The judgment of the High Court was sensitive to these commercial issues. The court, in coming to its decision recognised that an international arbitration is a consensual process between the parties, and spoke of the importance of finality of an arbitral award. The court recognised that the ability to enforce arbitral awards with the backing of the court is one of the crucial advantages of arbitration.

 

Legislative background

 

The United Nations Commission on International Trade Law (UNCITRAL) adopted the Model Law on International Commercial Arbitration (Model Law). The intention at the time was that consenting countries would implement the Model Law, allowing greater certainty to parties conducting cross-border arbitrations, as parties could use their chosen arbitral method or forum that has been contractually bargained in the contract. This was achieved by ensuring greater uniformity in the law ratified in each of the countries. Australia ratified the Model Law by implementing the International Arbitration Act 1974.

 

In 2010 reforms were effected to the International Arbitration Act 1974 to implement Australia’s obligations under both the Convention on the recognition and Enforcement of Foreign Arbitral Awards 1958 (“New York Convention”) and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID“), as well as to give force to the Model Law as the principal arbitral law governing the conduct of international commercial arbitration in Australia.

 

Arbitration awards are able to be enforced in any of the 148 countries, including Australia, that are parties to the New York Convention.

 

Factual background

 

Castel Electronics Pty Ltd (Castel), a company registered in Australia, and TCL Air Conditioner (Zhongshan) Co Ltd (TCL), a company registered in the People’s Republic of China, were parties to a distribution agreement that gave Castel the exclusive right to sell TCL air conditioners in Australia. A clause in the agreement referred all disputes to arbitration in Australia. A dispute arose and the arbitral tribunal issued an award in Castel’s favour.

 

Castel sought to enforce the award under the Model Law in the Federal Court of Australia. Enforcement was opposed by TCL, which argued, among other things, that the Federal Court did not have jurisdiction to enforce the award.

 

In a preliminary decision delivered on 23 January 2012, Murphy J held that the Federal Court had jurisdiction to enforce the award in accordance with articles 35 and 36 of the Model Law by virtue of certain provisions of the Judiciary Act 1903 (Cth) and the Federal Court of Australia Act 1976 (Cth) (see Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd [2012] FCA 21).

 

At a later hearing in April 2012, Murphy J reserved judgment on whether the award in Castel’s favour should in fact be enforced. TCL has argued that the award should not be enforced for several reasons.

 

For further information, please contact:

 

Peter Ward, Partner, Ashurst

peter.ward@ashurst.com

 

Georgia Quick, Partner, Ashurst

georgia.quick@ashurst.com

 

Mandy Bendelstein​, Ashurst

mandy.bendelstein@ashurst.com

 

Ashurst Dispute Resolution Practice Profile in Australia

 

Homegrown Dispute Resolution Law Firms in Australia

 

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