Australia: Arbitrating Parties Free To Choose Applicable Law

Introduction

In a landmark decision for international arbitration in Australia, the High Court has affirmed that the autonomy of parties to agree the law and process under which their contractual disputes will be resolved is paramount.

The High Court clarified the boundaries of arbitral power, the intersection between arbitral and judicial power, and the finality of arbitral awards in a recent constitutional challenge to the enforcement of an international arbitral award in Australia under the International Arbitration Act 1974 (IAA).

In summary the court held that:

1. parties are free to choose the system of law under which their dispute will be resolved, including rules of more than one legal system, and rules of law which have been elaborated on at an international level but which had not yet been incorporated into any national legal system;
2. an error of law by the arbitrator is not sufficient to refuse recognition and enforcement of an award; and
3. there is limited scope for judicial review of an arbitral award as it is the ultimate product of the parties' agreement to submit its contractual dispute to arbitration.

Background facts

Castel Electronics Pty Ltd (Castel), an electrical goods distribution company registered in Australia, entered into a general distributorship agreement with TCL Air Conditioner (Zhongshan) Co Ltd (TCL), a Chinese air conditioner manufacturer. Under the distributorship agreement, TCL granted Castel exclusive rights to sell TCL air conditioners in Australia. The agreement contained an arbitration clause which provided for the submission of disputes under the agreement to arbitration in Australia.

Castel claimed that TCL had breached the agreement by manufacturing and supplying non-TCL branded air conditioners to other Australian distributors to be sold in competition to those distributed by Castel. Castel commenced arbitration proceedings and the arbitral tribunal made an award requiring TCL to pay Castel $3.37 million in damages and over $730,000 in costs.

TCL defaulted on payment under the award and Castel applied to the Federal Court of Australia to enforce the award under the IAA.

The relevant provisions of the IAA – enforcing an arbitral award in Australia
The New York Convention and UNCITRAL Model Law on International Commercial Arbitration are given force of law in Australia by the IAA. Article 35 of the Model Law provides for the recognition and enforcement of arbitral awards.

Recognition and enforcement of an arbitral award may only be refused where:

1. a party to the arbitration agreement was under some incapacity when the agreement was made;
2. the arbitration agreement is not valid under the law expressed in the agreement to be applicable to it, or where no law is expressed, the law of the country in which the agreement was made;
3. the party seeking to challenge the enforcement of the award was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings, or was otherwise unable to present their case;
4. the award deals with a dispute that was not contemplated by the arbitration agreement or contains a decision on a matter beyond the scope of the arbitration;¹
5. the composition of the arbitral tribunal was not in accordance with the agreement of the parties or, if no agreement, with the law of the country where the arbitration took place;
6. the award has not yet become binding on the parties; or
7. the subject matter of the dispute is not capable of settlement by arbitration under the law of this state; or the recognition; or enforcement of the award would be contrary to public policy.²

The grounds for refusing to recognise or enforce an arbitral award under the IAA do not include an error of law made by the arbitral tribunal in resolving the dispute.

The Plaintiff's argument

TCL argued that the recognition and enforcement of arbitral awards pursuant to the IAA was unconstitutional because:

1. it interfered with the judicial power of Australian courts; and
2. it impermissibly conferred judicial power on the arbitral tribunal that made the award, by giving the arbitral tribunal the last word on the law when deciding the dispute.

TCL submitted that the enforcement of an arbitral award should be refused where the arbitrator's reasoning contained a legal error, and that the authority of an arbitrator under an arbitration agreement is confined to determining a dispute correctly.

In the alternative, TCL submitted that it is an implied term of every arbitration agreement that the authority of the arbitrator is limited to the correct application of the law.

The decision of the High Court

Choosing the applicable law to govern a dispute

Article 28 of the Model Law recognises the significance of a party's freedom to contract according to the terms on which they have agreed. This freedom extends to allowing parties to decide how to resolve their disputes by choosing the procedural and substantive laws to be applied. It provides as follows:

The Court found that the recognition of the parties' freedom to choose the law governing potential disputes broadened the options available to the parties to choose the law to be applied to their contractual disputes. For example, their Honours cited the ability of parties to choose rules of more than one legal system, including rules of law which have been elaborated at an international level but which had not yet been incorporated into any national legal system .³

Error of Law in the arbitral award

The Court found that Article 28 is directed to the rules of law to be applied, not the correctness of their application. A misapplication (as distinct from a non-application) of the law is not sufficient to refuse recognition and enforcement of an award.

The Court rejected the arguments put forward by TCL noting that they relied on the false proposition that the rights and liabilities which are in dispute in arbitration continue despite the making of an award.

The Federal Court's ability to recognise and enforce an international arbitral award reflects the pro-arbitration bias of both the Model Law and the IAA. It is important to note that this pro-enforcement bias has been reflected in the recently enacted state Commercial Arbitration Acts that extend the application of the Model Law and New York Convention to domestic arbitrations and arbitral awards in Australia.

Judicial v Arbitral power

Their Honours highlighted the important difference between judicial power and arbitral power. Judicial power is conferred by law and coercively made against the will of at least one side. It is not invoked by mutual agreement, but is enforced upon the other side. It exists to be resorted to by any party considering themselves aggrieved. Their Honours reinforced this adding:

TCL's submission that judicial independence was compromised by the absence of scope for substantive review of an award for error of law, misunderstood the relationship between private arbitration and courts by failing to take into account the consensual foundation of private arbitration.

The arbitral award remains one founded on the agreement of the parties in an arbitration agreement. A proceeding for the enforcement of an arbitral award under the IAA, remains one that involves a determination of questions of legal right or legal obligation resulting in an order that then operates of its own force.

Judicial review of an arbitral award?

The majority noted that their conclusions stand unaffected no matter what may be the ambit of permitted judicial review of an arbitral award. If, as was the case for so many years, there could be judicial review for error apparent on the face of the award, the award would nonetheless be the ultimate product of the parties' agreement to submit their differences or dispute to arbitration.

Conclusion

Australia's track record on international commercial arbitration has suffered recent criticism as a result of domestic courts refusing to enforce awards because of the mandatory application of statutes such as the former Trade Practices Act (now the Australian Consumer Law), and the Carriage of Goods by Sea Act.

The High Court's decision in TCL is an important step towards repairing that reputation and affirming the ability of parties to freely choose the law and processes under which they will resolve their contractual disputes.

Footnotes

1. For example, a mandatory law that can only be determined by a domestic court in Australia, such as fraud.

2. For example, in Westport Insurance Corporation and Others v Gordian Runoff Ltd (2011) 281 ALR 593 an arbitral award was set aside on the basis of public policy due to a lack of reasoning in the award.

3. For example, parties could choose an instrument such as the United Nations Convention on Contracts for the International Sale of Goods as the body of substantive law governing the arbitration, without having to refer to the national law of any State party to that Convention.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.