High Court upholds Australia's international arbitration laws

Peter Ward, partner, Georgia Quick, partner, and Mandy Bendelstein, graduate, Ashurst Australia

Speedread

Earlier this year the High Court of Australia unanimously upheld the constitutional validity of Australia's international arbitration laws (TCL Air Conditioner (Zhongshan) Co Ltd -v- The Judges of the Federal Court of Australia [2013] HCA 5). The case is critically important both to businesses involved in international trade, who require certainty that they can enforce arbitration awards both in Australia and overseas, and to the efforts to promote Australia as a venue for international arbitration.

Full article

Background

Earlier this year the High Court of Australia unanimously upheld the constitutional validity of Australia's international arbitration laws (TCL Air Conditioner (Zhongshan) Co Ltd -v- The Judges of the Federal Court of Australia [2013] HCA 5). The case is critically important both to businesses involved in international trade, who require certainty that they can enforce arbitration awards both in Australia and overseas, and to the efforts to promote Australia as a venue for international arbitration.

FACTS

TCL was seeking to avoid enforcement of an arbitration award against it by arguing that the parts of the Commonwealth International Arbitration Act 1974 that allowed the award to be enforced as a Federal Court judgment were invalid. TCL sought a constitutional writ from the High Court, to prohibit the judges of the Federal Court from making orders that would allow the arbitration award to be enforced.

TCL argued that the relevant provisions of the Act were incompatible with Chapter III of the Constitution, which gives the judicial power of the Commonwealth exclusively to courts. TCL claimed that either:

• the role of the Federal Court under the Act is so limited that it is effectively exercising an administrative function ("rubber-stamping") in enforcing arbitral awards, which is incompatible with the Court's judicial functions or "institutional integrity"; or
• by requiring an award to be enforced as an order of the Federal Court, with no review by the Federal Court of the legal correctness of the award, the Act effectively elevates the award to the status of a Federal Court judgment - in effect, federal judicial power is conferred on the arbitrator contrary to the Constitution.

Decision

The High Court disagreed, holding that there was no constitutional invalidity. In rejecting TCL's arguments, all Justices of the High Court pointed to the distinction between an arbitrator deciding what the rights of the parties are, on the one hand, and the court considering the successful party's right to enforce the arbitrator's decision, on the other.

The High Court pointed out that it is inherent in the agreement to arbitrate that the parties have agreed to accept the arbitrator's decision, right or wrong. Once the arbitrator's decision has been made, the rights of the parties that were in dispute come to an end and are replaced by the arbitrator's decision.

Viewed in that way, it is clear that the Federal Court is not just rubber-stamping the arbitrator's decision and that the arbitrator is not exercising judicial power. Rather, the arbitrator is exercising the private power conferred on him or her by the parties to decide what their rights are, and the Federal Court is then exercising judicial power to compel the parties to comply with the arbitrator's decision. No constitutional invalidity arises.

Commercial relevance

Many international contracts contain an international arbitration clause by which the parties agree to private arbitration of any disputes that may arise. Arbitration is often a more effective alternative to court proceedings, because it provides greater privacy, finality, enforceability internationally and efficiency. By questioning the validity of the legislative implements that underpin Australia's international arbitration regime, this case had the potential to undermine the advantages of arbitration and the enforceability in Australia of all international arbitration awards more generally.

For that reason, a High Court ruling invalidating key provisions of the legislation would have created significant uncertainty for businesses involved in international trade into or out of Australia, or with Australian companies, and would have been likely to damage Australia's international standing and reputation as a venue for international arbitration. Parties to an arbitration taking place in Australia, or parties to an arbitration agreement providing for arbitration in Australia, would have been likely to encounter problems with enforcing the award in Australia.

The judgment of the High Court was sensitive to these commercial issues. The court, in coming to its decision recognised that an international arbitration is a consensual process between the parties, and spoke of the importance of finality of an arbitral award. The court recognised that the ability to enforce arbitral awards with the backing of the court is one of the crucial advantages of arbitration.

Please click on the links below for the other articles in the July 2013 Arbflash:

• English courts can protect agreements to arbitrate even where arbitration not commenced or contemplated
• Interim relief in support of arbitration in court other than court of seat: drafting implications of the Konkola decision
• Disclosure of overseas assets permitted in the English courts
• The IBA Guidelines on Party Representation in International Arbitration: levelling the playing field?
• New arbitration rules for HKIAC
• New governance structure and revised rules for SIAC
• PwC and Queen Mary 2013 survey on industry perspectives on international arbitration
• Paris launches Paris Arbitration Rules
• CIETAC update
• SIAC sets up in Mumbai
• New international arbitration centres in New York, Seoul and Karnataka
• Myanmar accedes to the New York Convention