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28 Mar 13
High Court of Australia confirms constitutional validity of international arbitration legislation

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Arbitration is an increasingly popular method of dispute resolution that has some advantages over traditional court proceedings.  It allows sophisticated commercial parties to resolve their claims in a way that is potentially faster and less expensive than litigation while still allowing for a considered decision that is reflective of the legal merits and resistant to challenge.  In cross-border disputes, an international arbitration award may be considerably easier to enforce than a court judgment.

The High Court of Australia has recently confirmed the viability of international arbitration and rejected a challenge to the enforcement of international arbitration awards in Australia.  In the case of TCL Air Conditioner (Zhongshan) Co Limited v The Judges of the Federal Court of Australia & Anor [2013] HCA 5, the High Court heard an application in which TCL Air Conditioner (TCL), an award debtor, argued that the Federal Court of Australia lacked jurisdiction to enforce an arbitration award.

TCL’s contention was based around the adoption in the International Arbitration Act 1974 (Cth) (IAA) of articles 35 and 36 of the UNCITRAL Model Law.  The effect of these articles is that the grounds on which a court may refuse to recognise or enforce an award are very narrow, and a court may not refuse to recognise or enforce an award on the basis it contains an error of law that is apparent on the face of the award itself.

TCL argued that this state of affairs is incompatible with Chapter III of the Australian Constitution.  Chapter III states that the ‘judicial power of the Commonwealth shall be vested in ...... federal courts’ such as the High Court and the Federal Court.  TCL made two arguments in this vein, both of which the High Court rejected.

TCL’s first argument was that Chapter III requires federal courts to be independent, and the IAA purported to remove this independence by ‘co-opting’ the courts in the enforcement of an arbitrator’s decision. 

The High Court rejected this argument on the basis that arbitral power is not judicial power: judicial power operates without a party’s consent whereas arbitral power does not, and a court’s decision is enforceable in and of itself whereas an arbitrator’s decision becomes enforceable only because of the underlying law.  In enforcing an arbitrator’s decision, a court is simply enforcing an agreement between parties.  It is permissible for the IAA to place limits around this enforcement.

TCL’s second argument was that the IAA effectively imbues arbitrators with the Commonwealth’s judicial power, and that this is incompatible with Chapter III.  This argument, too, was unsuccessful on the basis that arbitral power is not judicial power.  Accordingly, an arbitrator’s exercise of such power is not incompatible with Chapter III.

The High Court’s decision preserves a key feature of international arbitration’s appeal: the fact that decisions are easy to enforce across jurisdictions and open to challenge on only very narrow grounds.

In light of the High Court’s decision, commercial parties can enter arbitration agreements with confidence that the arbitration award will be recognised and enforceable in Australia, subject only to the satisfaction of certain threshold requirements.

Arbitration therefore remains an attractive proposition for parties who seek an alternative to litigation.  It empowers the participants to tailor the dispute resolution process to ensure (as far as that is possible) that the relevant ‘transaction costs’ of dispute resolution do not become disproportionate.  It can produce outcomes in which all participants have confidence (where some other alternative dispute resolution options generally do not).  And, as the decision in the TCL case confirms, the relative ease with which international arbitration awards can be enforced throughout the world remains a significant point of distinction.

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