High Court of Australia Rejects Constitutional Challenge to UNCITRAL Model Law, Confirming Australia as Pro-Arbitration Jurisdiction
In TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia (2013) HCA 5, the High Court of Australia—the Court at the apex of the judicial hierarchy in this jurisdiction—has unanimously rejected a constitutional challenge to the Australian domestic legislation, the International Arbitration Act 1974 (Cth) ("IA Act"), that gives the force of law in Australia to, inter alia, the UNCITRAL Model Law on International Commercial Arbitration ("UNCITRAL Model Law").
If successful, the constitutional challenge would have seriously undermined the finality of arbitral awards sought to be enforced in Australia. The gravity of this potential consequence was reflected by the intervention into the proceedings of the solicitors general for the Commonwealth, New South Wales, Victoria, Western Australia, Queensland, and South Australia, together with representatives of the main arbitral bodies in Australia, all of whom supported the constitutional validity of the legislation.
The appellant, TCL Air Conditioner (Zhongshan) Co Ltd ("TCL"), sought to challenge section 16(1) of the IA Act, which provides that "the Model Law has the force of law in Australia." TCL's objection to the UNCITRAL Model Law centered on the enforcement provision, namely Article 35(1), which provides:
An arbitral award, irrespective of the country in which it was made, shall be recognized as binding and, upon application in writing to the competent court, shall be enforced subject to the provisions of this article and of article 36.
Article 36 of the UNCITRAL Model Law sets out limited grounds for refusing recognition or enforcement. In a departure from the common law position, those grounds do not include when error of law appeared or was manifest on the face of an award. It was principally the absence of that ground as a means to contest an arbitral award on which TCL hinged its constitutional challenge in the High Court.
The dispute arose under a written distribution agreement between China-based TCL and Australian company Castel Electronics Pty Ltd ("Castel"). Under the agreement, TCL and Castel agreed to the submission of disputes to arbitration in Australia. Following a commercial arbitration, two awards were made requiring TCL to pay to Castel $3,369,351 and costs of $732,500. In default of payment, Castel applied under the IA Act to the Federal Court of Australia to enforce the awards. In separate proceedings, TCL applied to set aside those awards.
In further proceedings—being those the subject of this commentary—TCL invoked the High Court's original jurisdiction and sought to challenge the constitutional validity of section 16(1) of the IA Act as beyond power because it infringes Ch III of the Constitution. Among other things, Ch III of the Constitution vests the judicial power of the Commonwealth in the High Court of Australia, the Federal Court of Australia, and in Courts of the States invested with federal jurisdiction. That is, arbitral tribunals are not invested with judicial power.
TCL's arguments to the High Court were that (i) the IA Act impairs the institutional integrity of the Federal Court;  and (ii) the IA Act impermissibly vests the judicial power of the Commonwealth in arbitral tribunals. To elaborate, TCL submitted that the effect of the Model Law is to co-opt or enlist the Federal Court into providing assistance during the course of the arbitral proceeding and in enforcing resulting awards while denying the Federal Court any scope for reviewing substantively the matter referred to arbitration, and the ability to act in accordance with the judicial process. Moreover, TCL submitted that under Art 35, no independent exercise of judicial power by the Federal Court was required for the enforcement of an award.
As noted by the High Court, both arguments relied on the proposition that to avoid contravening Ch III of the Constitution, courts must be able to determine whether an arbitrator applied the law correctly in reaching an award. The High Court rejected this proposition.
The High Court considered that a court's institutional integrity—in particular its independence—was not "distorted" by the absence of scope for substantive review of an award for error of law when a court determines the enforceability of an award under the IA Act. That is because a court undertaking the task of enforcing an award pursuant to the IA Act has the power to refuse to enforce an award or, under Article 34, to set aside an award, in a multiplicity of circumstances, including the circumstance that an "award is in conflict with the public policy of [Australia]." Those provisions are protective of the institutional integrity of courts in the Australian judicial system that are called on to exercise jurisdiction under the IA Act.
The High Court considered that TCL's case misconceived the nature of arbitration. The High Court emphasized the distinction between the nature of an arbitrator's function and the nature of a court's function. An arbitrator's role, function, and powers arise from a consensual submission by the parties to the arbitrator's determination of their rights, obligations, and liabilities. By contrast, judicial power is a sovereign power that is exercised independently of the consent of the person against whom the proceedings are brought, and it results in a judgment or order that is binding of its own force. In conclusion, the Model Law and the IA Act do not involve a delegation of judicial power in arbitral tribunals.
The High Court's decision ensures that the intentions of the UNCITRAL Model Law, and the similarly framed New York Convention, will be carried out by the Federal Court of Australia when it is asked to enforce an arbitral award. Put another way, the decision ensures that enforcement of arbitral awards against persons and assets in Australia is relatively straightforward and cannot be held up by the losing side attempting to have another go at arguing the legal merits of the dispute. The decision is a welcome reaffirmation of Australia's pro-arbitration legal environment.
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Steven W. Fleming
Paul A. Smith
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