Australia: High Court settles heated constitutional challenge to international arbitration

Last Updated: 5 April 2013
Article by Scott McDonald and Kirk Simmons

On 13 March 2013, the High Court of Australia delivered its judgment in TCL Air Conditioner v The Judges of the Federal Court of Australia [2013] HCA 5 (TCL Case), a case that confirmed the constitutional validity of the International Arbitration Act 1974 (Cth) (the IAA) which applies to international arbitration in Australia.

The IAA gives effect to both the UNCITRAL Model Law on International Commercial Arbitration (Model Law) and the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).

The High Court unanimously dismissed TCL's application which, if it had been successful, had the potential to undermine recent efforts taken by both the Australian government and the Australian arbitration community to promote Australia as a regional hub for international arbitration.

Background

In December 2003, Castel Electronics Pty Ltd (Castel), an Australian electrical goods distribution company, and TCL Air Conditioner (Zhongshan) Co Ltd (TCL), a Chinese air conditioner manufacturing company, entered into a distribution agreement which later became an exclusive distribution agreement (the Agreement).

In July 2008, Castel commenced arbitration against TCL for alleged breaches of the Agreement, including the supply by TCL of unbranded air conditioner units to other distributors and the supply by TCL of faulty units to Castel.

In December 2010, the tribunal issued an award of AU$2.9 million in favour of TCL, and Castel sought to enforce the award. In January 2012, the Federal Court of Australia issued a judgment1 confirming the Court's jurisdiction to enforce that award under the IAA.

High Court challenge

Later in 2012, TCL made an application to the High Court of Australia raising two objections: first, whether the IAA substantially impaired the institutional integrity of the court and second, whether the IAA impermissibly vested judicial power in arbitral tribunals.

Impaired institutional integrity

In relation to the first point, TCL submitted that Articles 5,6,8 and 35 of the Model Law (given the force of law by section 16 of the IAA) together with section 7 and Part III of the IAA were invalid because they deny the Australian courts "decisional independence"2 because they assist arbitral proceedings and enforce arbitral awards. TCL in its submissions stated that "[t]he judicial power has been exercised without the judicial process"3 which results in courts giving "judicial imprimatur4 to an award notwithstanding its legal flaws"5.

Castel submitted in response that TCC's position disregards the fact that such legal flaws in the arbitral process may be flaws which arise from the application of a foreign law (as the applicable law of the arbitration) and that in such circumstances it was not for the process to be criticised by reference to Australian Law. Castel also drew a parallel with judicial authority which allows the court to accept a form of certificate from a bank manager as proof of a borrower's indebtedness (i.e. dispensing with the usual form of proof) 6 which, it submitted, is not dissimilar to the enforcement of an arbitration award under the IAA.

Impermissible vesting of judicial power in tribunals

In relation to the second point, TCL submitted that Articles 5,8, 34, 35 and 36 of the Model Law (given the force of law by section 16 of the IAA) impermissibly confer judicial power on arbitral tribunals (which fail to comply with the requirements for courts exercising federal jurisdiction under Chapter III of the Australian Constitution). It was argued that arbitral tribunals exhibit hallmarks of judicial power such as the power to decide upon their own jurisdiction.

The decision

The High Court unanimously (albeit with two sets of reasons given) dismissed TCL's application in relation to both points and made an order for costs against TCL.

Impaired institutional integrity

In relation to the issue of impaired institutional integrity, the Court said that "[e]nforcement of an arbitral award is enforcement of the binding result of the agreement of the parties to submit their dispute to arbitration, not enforcement of any disputed right submitted to arbitration.... [and it] does not signify the Federal Court's endorsement of the legal content of the award any more than it signifies its endorsement of the factual content of the award".

Impermissible vesting of judicial power in tribunals

In relation to the impermissible vesting of judicial power in arbitral tribunals, the court emphasised the private nature of the agreement by the parties to submit to arbitration and held that "[t]he determination of a dispute by an arbitrator does not involve the exercise of the sovereign power of the State to determine or decide controversies".

A case of great significance

The High Court's unanimous pro-arbitration judgment in the TCL Case confirms the constitutional validity of the IAA while reassuring parties that Australian courts will recognise and enforce arbitral awards. The importance of the judgment may be seen in the number of appearances at the hearing. The attorney generals for four (out of six) Australian states appeared, together with an intervener appearing amicus curiae, being a combination of the Australian Centre for International Commercial Arbitration Limited, the Institute of Arbitrations and Mediators Limited and the Chartered Institute of Arbitrators (Australia) Limited.7

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Footnotes

1 Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd [2012] FCA 21

2 Plaintiff's Submissions, TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia and Anor, HCA Case No. s178 of 2012 (Plaintiff's Submissions) at p.13

3 Plaintiff's Submissions at p.14

4 imprimatur: meaning a licence to print or publish

5 Plaintiff's Submissions at p.15

6 Dobbs v National Bank of Australasia [1935] HCA 49

7 The intervener's primary submission was that the Model Law (given effect by the IAA) gives the courts "the classically judicial function of upholding parties' contractual bargains not only to arbitrate their dispute but also... to be bound by the resulting award"[7].

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.


DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com

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