19 March 2013  Albert Monichino SC

On 13 March 2013, the High Court of Australia, in TCL Air Conditioner (Zhongshan) Co. Ltd v The Judges of the Federal Court of Australia [2013] HCA 13, rejected a constitutional challenge to Australia’s adoption in the International Arbitration Act 1974 (Cth) (‘IAA’) of the enforcement provisions contained in Chapter VIII (Arts 35 – 36) of the UNCITRAL Model Law on International Commercial Arbitration (Model Law). The High Court’s judgment is the most important development in arbitration in Australia in the past 12 months, and confirms that Australia is an arbitration-friendly jurisdiction.

The Model Law is given the force of law in Australia by s 16 of the IAA. International awards made in Australia lie to be enforced under Chapter VIII (Arts 35 – 36) of the Model Law.

The case arises out of litigation between a Chinese party (TCL) and an Australian party (Castel) who had agreed to refer disputes under an exclusive distributorship agreement to arbitration seated in Melbourne, Australia. In 2010, an arbitral tribunal awarded Castel about A$3 million (plus costs). In 2012, Castel successfully enforced the awards (as to damages and costs) in the Federal Court of Australia. TCL brought a proceeding in the High Court to restrain the judges of the Federal Court from enforcing the awards.

TCL alleged constitutional invalidity on two grounds. First, it said that Arts 35 – 36 effectively render international arbitration awards determinative, having regard to the very limited grounds for resisting enforcement under Art 36, and thus, in substance, impermissibly purport to confer the judicial power of the Commonwealth on arbitral tribunals (as opposed to a court specified in the Australian Constitution). Secondly, TCL argued that the Federal Court’s discretion to resist enforcement of an international arbitration award was so limited under Arts 35 – 36 that it constituted an impermissible interference with the judicial power of the Commonwealth. This is because Arts 35 – 36 in effect, it argued, require Australian superior courts to “rubber stamp” international arbitration awards.

Underlying both grounds of attack, TCL emphasised that an Australian court is mandated to enforce an international arbitration award made in Australia even if, on its face, it manifests an 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 High Court unanimously dismissed the challenge.

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. On the contrary, the exercise of judicial power (in the present case) arose upon the Court entertaining an application for enforcement under Articles 35 – 36 of the Model Law.

As to the second ground of attack, the Court held that the inability of the Federal Court as a competent court under Articles 35 – 36 of the Model Law to refuse enforcement of an arbitral award on the ground of error of law did nothing to undermine the institutional integrity of the Federal Court. This was because enforcement of the arbitral award was the enforcement of the binding result of the agreement of the parties to submit their dispute to arbitration, not enforcement of any disputed rights submitted to arbitration.

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). The High Court’s judgment recognises that a common global standard for the enforcement of international arbitration awards is an essential feature of an effective international arbitration system.