Australian Court upholds primacy of the arbitral fact finding process

On 16 July 2014, the Full Federal Court of Australia handed down its reasons for dismissing TCL Air Conditioner (Zhongshan) Co Ltd’s (TCL) appeal[1] from the Court’s decision in in Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd (No 2).[2] The decision clarifies the circumstances in which an arbitral award will be set aside or denied recognition or enforcement under the Model Law as a result of a failure to accord a party procedural fairness in connection with making the award.

TCL and Castel Electronics Pty Ltd (Castel) were parties to an agreement for the distribution in Australia of air conditioning units manufactured by TCL in China. Castel was the exclusive Australian distributor. The agreement provided for arbitration in the event of any dispute that could not be resolved by mutual agreement.

A dispute arose between the parties, and was submitted to arbitration for resolution in accordance with the agreement. An arbitral panel delivered an award in Castel’s favour. TCL sought to set aside the award under Article 34 of the UNCITRAL Model Law, which has the force of law in Australia by s 16 of the International Arbitration Act 1974 (Cth). Castel sought to enforce the award under Article 35 of the Model Law, and TCL resisted enforcement under Article 36 of the Model Law. The grounds for TCL’s claims to set aside the award and resist enforcement were an alleged failure by the arbitrators to accord TCL procedural fairness amounting to a breach of the rules of natural justice in connection with making the award, such that the award was in conflict with, or contrary to, the public policy of Australia.[3] The primary judge rejected TCL’s resistance to enforcement of the award, and TCL appealed to the Full Federal Court.

The Full Federal Court found that an international commercial arbitration award will not be set aside or denied recognition or enforcement under Articles 34 and 36 of the Model Law (or under Article V of the New York Convention) unless there is “demonstrated real unfairness or real practical injustice in how the international litigation or dispute resolution was conducted or resolved, by reference to established principles of natural justice or procedural fairness.”[4] Such unfairness or practical injustice in the conduct of international arbitration should, if it exists, be able to be “expressed shortly and, likewise, demonstrated tolerably shortly.”[5] In the Court’s view, in most cases, if not all, a party who says it has suffered such unfairness or practical injustice should be able to demonstrate that unfairness or injustice without a detailed re-examination of the facts. Specifically, such unfairness or injustice will not be demonstrated as a result of a detailed factual analysis of evidence brought forward, involving asserted conclusions of facts different to those reached by the arbitrator.[6]

In reaching this conclusion, the Court reasoned that if the rules of natural justice encompass requirements such as the requirement of probative evidence for the finding of facts or the need for logical reasoning to factual conclusions, there is a grave danger that the international commercial arbitral system will be undermined by judicial review in which the factual findings of a tribunal are re-agitated and gone over in the name of natural justice, in circumstances where the hearing or reference has been conducted regularly and fairly.[7]

In applying this principle to the circumstances of TCL and Castel’s arbitral hearing, the Full Federal Court found that ATCL received a “scrupulously fair hearing in a hard fought commercial dispute”. TCL’s complaints were found to concern the evaluation of factual material, and no rule of natural justice had been breached.[8]

In recognising the danger that judicial review of factual findings of arbitral tribunals poses to the system of international commercial arbitration, and by limiting the extent to which the factual findings of an arbitration will be re-examined, the decision reaffirms the pro-arbitration stance taken by Australian courts and the integrity and finality of international arbitration in Australia more broadly.

The text of the decision is available here.

Article written by Leon Chung, Partner, Jamie Stollery, Senior Associate, Erin Christlo, Solicitor and Kate Lindeman, Solicitor

[1] TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd [2014] FCAFC 83.

[2] [2012] FCA 1214.

[3] See articles 34(20(b)(ii) and 36(1)(b)(ii) of the Model Law, and ss 16 and 19 of the International Arbitration Act 1974 (Cth).

[4] See paragraph [55].

[5] See paragraph [113].

[6] See paragraph [113].

[7] See paragraph [54].

[8] See paragraph [167].