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Australian International Arbitration Act upheld as constitutionally valid
Practical Law UK Legal Update Case Report 6-525-2886 (Approx. 4 pages)
Australian International Arbitration Act upheld as constitutionally valid
by Andrew Robertson, Piper Alderman
| Published on 20 Mar 2013 • Australia |
On 13 March 2013, the Australian High Court handed down its highly-anticipated decision in TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia. The court considered whether the UNCITRAL Model Law, as effected by the International Arbitration Act 1974 (Commonwealth), was unconstitutional in failing to confer on the Australian Federal Court the power to review awards for errors of law in applications for enforcement of awards.
Speedread
The Australian High Court has handed down a landmark decision unanimously rejecting the argument that the UNCITRAL Model Law, as effected by the International Arbitration Act 1974 (Commonwealth), was unconstitutional in not providing the Federal Court with the power to review awards for errors of law in an application for enforcement of an award.
Following the decision of the Federal Court that it had jurisdiction to enforce both foreign and "non-foreign" awards, the award debtor made a separate application to the Australian High Court seeking to challenge the constitutional basis of the Australian courts' power to enforce awards. It argued that the inability of the Australian courts to review errors of law in the award upon an application to enforce meant that the institutional integrity of the courts was compromised; alternatively, that the arbitral tribunal's power to rule on issues of law amounted to an impermissible delegation of judicial power.
Both arguments were emphatically rejected. The decision has been welcomed by practitioners and commentators: a conclusion of constitutional invalidity would have placed Australia so far outside the orthodoxy of arbitral jurisprudence that its credibility would have been significantly, if not fatally, damaged. (TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5.)
Background
The Australian Federal Court is established as a court through the Australian Constitution. The Constitutional structure reflects a separation of powers between the three branches of government:
- The Executive.
- Parliament.
- The judiciary.
Chapter III of the Constitution is concerned with judicial power. In addition to the Australian High Court, which is established by the Constitution, Parliament may also create other courts. Collectively, these Chapter III courts have certain powers and privileges. A Chapter III court can be given Commonwealth judicial power but it cannot be given any function not within, or incidental to, judicial power.
Facts
On 23 January 2012, the Federal Court of Australia ruled that it had jurisdiction to enforce both "non-foreign" and foreign arbitral awards under the International Arbitration Act 1974 (IAA 1974) and the UNCITRAL Model Law (see Legal update, Federal Court of Australia has jurisdiction to enforce both "non-foreign" and foreign arbitral awards). Following that decision, rather than appealing, the claimant (TCL) applied directly to the High Court, Australia's highest court, challenging the enforcement of the awards by the Federal Court on two constitutional grounds. TCL argued that:
- The jurisdiction conferred under the IAA 1974 requires Federal Court judges to act in a manner that impairs the institutional integrity of that court because it does not have the power to review arbitral awards for errors of law. Therefore, the court could be required to enforce legally erroneous awards (unless one of the exceptions in the UNCITRAL Model Law applies).
- Arbitral tribunals' power to rule on issues of law amounted to an impermissible delegation of judicial power.
Decision
Both arguments were unanimously rejected by the High Court (6-0) in two separate judgments.
While expressed slightly differently in the two judgments, the overall approach is harmonious in that the Justices all placed significant emphasis on the fact that the arbitral award reflected the parties' agreement to arbitrate.
The institutional integrity of the Federal Court
The award finally resolves the dispute as agreed however, in doing so creates new rights. The resolution comes through the agreement of the parties, not the legal correctness of the decision reached. The Chief Justice and Justice Geagler reasoned that the inability of the Federal Court to refuse to enforce an arbitral award on the ground of an error of law appearing on the face of the award did nothing to undermine the institutional integrity of the Federal Court. The enforcement of an arbitral award is enforcement of the binding result of the parties' agreement to submit their dispute to arbitration, not enforcement of any underlying disputed right submitted to arbitration. The making of an appropriate order for enforcement of an arbitral award 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.
In other words, the parties had by their agreement agreed to accept the outcome of the arbitration, legally correct or not.
Justices Hayne, Crennan, Kiefel and Bell proceeded on the slightly different basis that TCL's submissions had assumed, wrongly, that rights and liabilities in dispute in arbitration continued, despite the making of the award. In fact, the arbitral award extinguished those rights and liabilities and replaced them with the new rights and liabilities embodied in the award.
Finality of the award
The High Court also rejected TCL's second objection. The fact that an arbitrator is the final judge of questions of law arising in the arbitration does not mean that there has been a delegation of judicial power to arbitrators. To conclude that an arbitral award is final and conclusive does no more than reflect the consequences of the parties having agreed to submit a dispute to arbitration.
Comment
For Australian arbitral law there was nothing to be gained and everything to be lost through this decision. A conclusion of constitutional invalidity would have placed Australia so far outside the orthodoxy of arbitral jurisprudence that its credibility would have been significantly, if not fatally, damaged. Further, the constitutional nature of the argument meant that an adverse decision would have been exceedingly difficult to "correct" to achieve an orthodox outcome.
As it is, the decision as given now seems obvious merely because it is so orthodox in its approach and reasoning.
In some respects the surprise for non-Australians is not the decision as much as the fact that the argument was run. However, it is important to note this was not an appeal. This was an approach by a party direct to the exclusive original jurisdiction of the High Court on constitutional matters. There was no special leave route that might have suggested that the High Court thought that the arguments merited consideration. Rather, it was decided by the court as it was constitutionally required to do.
The decision is an emphatic statement of Australia's orthodoxy on arbitral jurisprudence. The growth of Australian arbitral practice is reflected in two High Court decisions on arbitral law in less than 18 months (see Legal update, Australian High Court decision on standard of arbitral reasons in Australian domestic arbitrations).