Constitutional Challenge to the Australian International Arbitration Act dismissed by the Australian High Court

One of the more unusual challenges to the finality of foreign arbitral awards, a constitutional law challenge, was unanimously dismissed by a 6 judge panel of the Australian High Court (the highest court in Australia in TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5. However, if it had succeeded, the repercussions would have been tremendous, as key provisions of the Australian International Arbitration Act 1974 (and perhaps its main rationale) would have been deemed unconstitutional.

Background

The applicant, TCL, had lost its arbitration with Castel Electronics Pty Ltd. TCL was ordered to pay A$2,874,870.00 with A$732,500.00 in costs in two separate awards. TCL’s challenge to those awards failed (see Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd (No 2), [2012] FCA 1214). Its application for a constitutional challenge (“special case“) against the Australian International Arbitration Act was allowed (see TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia & Anor [2012] HCATrans 172).

The Constitutional Challenge

The Australian International Arbitration Act was challenged on the basis that giving the UNCITRAL Model Law force of law in Australia (see paragraph [43] and [56]) was unconstitutional in the following ways:

  • by allowing a tribunal’s award to be enforced as a judgment of the Australia Federal Court, thereby unconstitutionally conferring (or delegating) judicial powers on arbitral tribunals (see paragraphs [4] and [57]); and that
  • preventing an arbitration award from being set aside for an error of law was an unconstitutional infringement on the powers of the court i.e. it “undermined the judicial integrity of the Federal Court” (see paragraphs [4] and [64]]).

TCL also sought to argue that Article 28 of the Model Law either (a) limited the authority of the tribunal to the correct application of law or (b) that there should be an implied term to that effect (see paragraph [68]).

The High Court considered that the key proposition underpinning all of the above arguments was that “to avoid contravening…the [Australian] Constitution courts must be able to determine whether an arbitrator applied the law correctly in reaching an award” (see paragraph [67]).

The Decision of the High Court

The unanimous decision of the High Court affirming the constitutionality of the Australian International Arbitration Act was delivered in two opinions (French CJ and Gageler J in one and Hayne, Crennan, Kiefel and Bell JJ in the other).

The High Court decided as follows.

First, arbitration is a private consensual affair between parties (see paragraphs [9] to [11] and [101], [109]). An arbitrator’s determination of a dispute between parties was a private exercise of power (“a power of private arbitration“) and not a judicial one (i.e. “the sovereign power of the State to determine or decide controversies“) (see paragraphs, [19], [29], [77] and [107]). There is therefore no delegation of judicial power to tribunals or infringement of the judicial integrity of the Federal Court.

Second, under Article 35 of the Model Law, the Federal Court was simply giving effect to and providing procedures for the recognition and enforcement of arbitration awards (which parties had agreed to) and not sanctioning the merits of the award (see generally, paragraphs [17], [31] to [34], [77] to [80]). In this respect, “an error of law on the part of the arbitral tribunal in making the award is irrelevant to the question of legal right or legal obligation to be determined under [Article] 35 of the Model Law” (see paragraph [33]).

Third, the High Court held that in any event, its inability under the Model Law to set aside an arbitral award for an error of law did not infringe on the institutional integrity of the Federal Court. The High Court dismissed TCL’s argument that the courts at common law could set aside an award for an error of law on the face of the award.

(a)             For French CJ and Gagaler J, “[t]he common law rule that an arbitral award could be set aside for error of law on the face of the award…formed no part of, and bore no meaningful resemblance to, the supervisory jurisdiction of the Supreme Court of a State to set aside an exercise of administrative or judicial power for jurisdictional error. It served no systemic end, and was a “defining characteristic” neither of judicial power nor of any court” (see paragraph [39]).

(b)            For the four judge majority, it was the consensual foundation of arbitration which “underpins the general rule, settled since the middle of the nineteenth century, that an award is final and conclusive and cannot be challenged either at law or in equity on the ground that the arbitrator has committed an error of law” (see paragraph [81]). They were content simply to note that “the common law jurisdiction to set aside an award apparent on the face of the award was an exception to the general rule that parties must abide by their agreement to accept an arbitrator’s determination” (see paragraph [99]).

Fourth, the High Court also held that Article 28 of the Model Law did not imply a term into every arbitration agreement that “the authority of an arbitrator is limited to the correct application of the law” (see paragraph [16] and [73]). French CJ and Gageler J further held that Article 28 is really about party autonomy and the right of the parties to choose their governing law (see paragraph [15]).

In this respect, the four High Court judges also pointed out that TCL’s arguments rested on a contradiction (see paragraph [73]),

“TCL’s argument must be rejected: 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”.

Conclusion

The identities of the parties submitting amicus curiae briefs in support of the constitutionality of the Australian International Arbitration Act is testament to how serious the repercussion would have been had the High Court upheld the constitutional challenge. Every Australian state’s Attorney-General including the Attorney-General of the Commonwealth (i.e the Federal Government) as well as the Australian Center for International Commercial Arbitration, Institute of Arbitrators and Mediators and CIArb (Australia) had intervened in support of the constitutionality of the Australian International Arbitration Act.

It is not uncommon for a losing party in an arbitration to try to set aside or challenge an award and/or otherwise resist the enforcement of an award made against it. In fact (and purely by way of example) we see that happening in the Astro v Lippo dispute which is still being played out in various local courts. However, the editors of this blog would consider TCL’s constitutional challenge as one of the more unique challenges that have been made to the finality and enforceability of international arbitration awards.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for DNDR at the KLRCA.
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