High Court of Australia dismisses challenge to legislation incorporating the UNCITRAL Model Law

The High Court of Australia this morning dismissed a challenge to legislation incorporating the UNCITRAL Model Law on International Commercial Arbitration (Model Law) in Australia, holding that s.16(1) of the International Arbitration Act 1974 (Cth) (IAA) is not invalid.

Background

The matter arose out of a distribution agreement between TCL Air Conditioner (Zhongshan) Co Ltd (TCL), a company registered in the People’s Republic of China, and Castel Electronics Pty Ltd (Castel), a company registered in Australia. The distribution agreement contained a clause referring disputes to arbitration in Australia.

In July 2008 Castel commenced the arbitration process against TCL on the basis that TCL had breached the distribution agreement. TCL denied the claims made and made a counter-claim.

The parties agreed that the substantive law to be applied to the dispute was Victorian law.

Following a 10-day hearing in Melbourne, an arbitral tribunal (the Tribunal) made an award which required TCL to pay to Castel around A$3 million. The Tribunal also made a separate award concerning costs.  These awards are referred to below collectively as ‘the Awards’.

Enforcement

In March 2011 Castel commenced proceedings in the Federal Court of Australia seeking to enforce the Awards. This was the first case in Australia in which enforcement had been sought in an Australian court pursuant to art 35 of the Model Law.

TCL opposed Castel’s enforcement application, including on the basis that the Federal Court of Australia did not have jurisdiction under art 35 of the Model Law.  TCL made further applications to set aside each of the Awards pursuant to art 34 of the Model Law.

Justice Murphy held that the Federal Court of Australia had jurisdiction under art 35 of the Model Law and s 39B(1A)(c) of the Judiciary Act 1903 (Cth) as a matter arising under a federal law to enforce the Awards: Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd (2012) 201 FCR 209.

In a subsequent judgment Justice Murphy refused TCL’s application to set aside the Awards and upheld Castel’s application to enforce the Awards.

Constitutional challenge in the High Court

TCL brought a challenge in the High Court against Justice Murphy’s decision that the Federal Court had jurisdiction to enforce the Awards. TCL argued that s 16(1) of the IAA, which gives force to the Model Law in Australia, and which designates the Federal Court as having jurisdiction to recognise and enforce arbitral awards governed by the Model Law, was invalid, as it was not in accordance with the Australian Constitution. 

The foundation of TCL’s challenge was that arbitration is based on an agreement between two parties to resolve a dispute, and that the involvement of the Federal Court in the enforcement of arbitral awards conferred Commonwealth judicial power on arbitral tribunals, which is an exclusive power of the federal courts in Australia.  The conferral of Commonwealth judicial power was said to arise by reason of the fact that an arbitral award is enforced as a judgment of the Federal Court.  It was further submitted that the regime contained in the IAA for enforcement of arbitral awards impermissibly fettered the judicial power of the Federal Court on the basis that there is limited scope for the Federal Court to refuse to enforce the award. 

In its submissions, TCL recognised that, whilst arbitral awards under treaties and conventions need to be enforceable, they should be enforced through actions for breach of contract, rather than having awards enforced as a judgment of the Federal Court.  Had this submission been accepted, the efficient and well-established enforcement regime for international arbitral awards could have been substantially disrupted in Australia. 

The High Court rejected the challenge brought by TCL, and held that s 16 of the IAA was not invalid.

The importance of this case is reflected by the fact that the Attorneys-General for each of the Commonwealth, New South Wales, Victoria, Western Australia, Queensland and South Australia made submissions before the High Court as interveners.  Furthermore, Australian arbitral institutions, namely, Australian Centre for International Commercial Arbitration (ACICA), Institute of Arbitrators and Mediators Australia Ltd (IAMA) and Chartered Institute of Arbitrators (Australia) Ltd (CIArb Australia), also made a joint submission to the Court as “friends of the court”. 

The challenge brought by TCL in the High Court was particularly significant given that the Federal Government had only recently introduced amendments to the IAA which sought to promote Australia as a pro-arbitration seat for parties wishing to arbitrate their dispute, rather than taking the more conventional route of resolving their disputes in domestic courts. 

If you would like further information on the TCL dispute and its significance to your business, please contact Bronwyn Lincoln (+61 3 9288 1234) or Richard Garnett (+61 3 9288 1234).