High Court confirms recognition and enforcement in Australia of arbitral awards

Commercial Directions

Advantages of arbitration include the speed at which disputes are resolved, and the confidential nature of the process. However, difficulties can arise in arbitration proceedings once the arbitrator has made a determination and the successful party seeks to enforce the award against the unsuccessful party, particularly in cases where the parties are based in different countries. In Australia, amendments made to the International Arbitration Act 1974 (Cth) (‘IA Act’) have attempted to alleviate some of those difficulties.

In the recent case of TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5, the High Court of Australia considered the constitutional validity of the IA Act and the outcome confirms the importance of commercial arbitration as a means of international dispute resolution. Furthermore, the High Court’s decision arguably acknowledges Australia as being an ‘arbitration friendly’ jurisdiction.

Background

The plaintiff, TCL Air Conditioner (Zhongshan) Co Ltd (‘TCL’) was a company registered in China. It entered into a distribution agreement with the second defendant, Castel Electronics Pty Ltd (‘Castel’), an Australian company. The distribution agreement provided that commercial arbitration in Australia would be the avenue taken to settle disputes arising between the parties.

A dispute arose in July 2008 between TCL and Castel which resulted in Castel exercising the arbitration clause. In the subsequent arbitration in Australia, Castel was awarded over $4 million against TCL. However, TCL failed to pay Castel the awarded amount.

Under the IA Act, a successful party to an arbitration may apply to the Federal Court of Australia to have the arbitral award enforced as an order of the court. Accordingly, Castel applied to the Federal Court of Australia for the award to be enforced.

In response, TCL, amongst other steps, challenged the jurisdiction of the Federal Court to enforce the award. That challenge was rejected by the trial judge. TCL then lodged an application to the High Court, seeking to quash the orders made by the trial judge on the basis that provisions of the IA Act were unconstitutional.

Constitutional challenge made in the High Court

The IA Act provides a process by which an award made by an arbitrator may be enforced by the Federal Court of Australia as though the arbitrator’s award was a judgment of the Federal Court. The process contained in the IA Act only allows the Federal Court very limited grounds to refuse to enforce an award notwithstanding the award may be based on legal error. It was this aspect of the regime that TCL argued was contrary to the Constitution.

The two grounds of TCL’s challenge can be summarised as follows:

  • Objection A – the IA Act requirement that the Federal Court enforce arbitral agreements despite the prospect that those awards contained legal error substantially impaired the institutional integrity of the Court
  • Objection B – by making the arbitrator’s decision final and decisive of the issues in dispute, the IA Act impermissibly conferred judicial power upon the arbitrator.

Decision of the High Court

Objection A

The High Court rejected this objection. It considered that TCL’s challenge ran contrary to the autonomy of the parties who had expressed a preference for a private determination without review rather than to have their dispute before a court where appeal processes would be available.

Further, the effect of the arbitral award was to extinguish the original cause of action and substitute new rights as a result of the award. It is only then that judicial power is enlisted. This did not impair the institutional integrity of the Court.

Objection B

The High Court also rejected objection B. It held that a distinction must be drawn between the making of an arbitral award by an arbitrator (which does not involve the exercise of judicial power) and the application to the court for recognition of the arbitral award as a judgment of the Federal Court (which does involve the exercise of judicial power).

The exercise of power of a private arbitrator did not involve the exercise of the sovereign power of the State to determine or decide controversies. The High Court affirmed the position that judicial power is exercised independently of the consent of the parties and results in a judgment or order that is binding of its own force. In a private arbitration, the arbitrator’s powers depend on the agreement of the parties and the award is not binding of its own force but rather its effect depends on the law which applies to it.

Conclusion

The commercial value of arbitral awards is dependent on the enforcement procedures available to the successful party. In this regard, the IA Act provides the parties to an arbitration with a robust enforcement mechanism drawing upon the powers of the Federal Court of Australia.

In this case the High Court reaffirmed the law permits parties to agree to the private decision making process embodied in an arbitration. Once that process is concluded, Australian law facilitates the enforcement of the award.

Authored by Richard Midgley with the assistance of Robert Malcolm, Legal Office Assistant and Sophocles Kitharidis, Paralegal, Melbourne.


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High Court confirms recognition and enforcement in Australia of arbitral awards

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