A recent unsuccessful challenge to the validity of the enforcement regime in Australia’s international arbitration legislation put the spotlight on the legal framework surrounding international arbitration in Australia. It is now clear that an error of law on the face of an arbitral award does not provide grounds for refusing to enforce the award. Dylan McKimmie acted for the party challenging the legislation. He explains, with Joseph Johnson, the arguments raised to challenge the law, and the ruling of the High Court of Australia.
The legislative regime
The High Court of Australia, earlier this year, ruled on the constitutional validity of the legislative regime for the enforcement of international arbitral awards in Australia.
The High Court, in TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia  HCA 5, ultimately ruled that the enforcement regime was valid and that it did not violate Australian constitutional principles concerning the exercise of judicial power.
In Australia, the International Arbitration Act 1974 (Cth) (IAA) gives effect to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted in New York in 1958 by the UN Conference on International Commercial Arbitration (New York Convention) and to the UNCITRAL Model Law on International Commercial Arbitration (Model Law). The IAA was amended in 1998 and 2010 to reflect changes to the Model Law.
The IAA provides for the enforcement of awards in Australia by the Federal Court. Upon a party making an application for enforcement of an award, if the court is satisfied that an award has been made and that none of the grounds for refusing to enforce an award apply, then it will enforce the orders of the arbitral tribunal as if they were orders of the Federal Court itself.
The IAA provides for limited circumstances under which a court may refuse to enforce an award, which are modelled on Article 5 of the New York Convention. These grounds primarily relate to the independence and impartiality of the arbitrator, the fairness of the arbitration process and whether enforcement would be contrary to the public policy of Australia.
Under the IAA, error of law, whether generally or on the face of the award, is not a basis on which to refuse enforcement.
The challenge to the constitutional validity of the IAA
The limited ability of the Federal Court to refuse to enforce an order, and in particular the inability to refuse enforcement on the grounds of substantive error on the face of the award, was the basis on which the constitutional validity of the IAA was challenged.
In TCL, the IAA was challenged on two grounds. First, that by requiring the Federal Court to enforce awards, even in circumstances where there is error of law on the face of the award, the Federal Court was denied the judicial independence which is an essential characteristic of a court exercising Commonwealth judicial power. It was argued that this impaired “the institutional integrity” of the Federal Court.
The second ground on which the IAA was challenged was that in effect it impermissibly delegates the courts’ exercise of judicial powers stemming from the Constitution to arbitral tribunals by giving the tribunal “the last word” on the law applied in deciding the dispute submitted to arbitration.
In its judgment on TCL, the High Court unanimously rejected both of these arguments.
The Court’s reasoning
The Court placed importance on the distinction between judicial power and the power exercised by an arbitrator. The point was made that, while judicial power is a power exercised coercively and irrespective of whether the parties have consented, arbitral authority is based on the voluntary agreement of the parties and involves the parties submitting their claims to arbitration to be conclusively determined.
The Court did not accept the argument that the parties’ consent to arbitration is predicated on an assumption that requires the arbitrator to apply the law correctly. The Court noted that such a finding would be at odds with the need for commercial certainty that drives international arbitration.
The Court also placed importance on the distinction between the arbitrator making an award and how that award is enforced. While an award binds the parties, it does not touch upon the exercise of the judicial power of the Commonwealth until a party seeks to have it enforced through the Federal Court. The Federal Court then exercises the judicial power of the Commonwealth in determining an application for the enforcement of an award.
The judicial power of the Commonwealth is exercised in determining questions of legal rights in relation to the existence of an award, who the parties to that award are, and whether there are any grounds for refusing to enforce the award. Whether there is an error of law on the face of the award is irrelevant to the legal question that the Federal Court is required to determine.
The Court found that the arbitrator’s making of an award extinguishes the original cause of action and imposes new obligations on the parties in substitution for the rights and liabilities which were the subject of the dispute referred to arbitration. The Federal Court’s role in enforcing an award therefore involves enforcing the new rights created by the arbitrator as distinct from the original cause of action. Accordingly, it follows that a court’s institutional integrity is not affected by enforcing an award even where there is an error of law on its face.
The other basis on which the Court rejected the argument was the historical role of the courts in reviewing awards for errors of law on their face. The concepts of judicial power and “institutional integrity” are closely linked with the functions and procedures that courts have traditionally performed. Courts under the common law have historically had some capacity to review for errors of law on the face of the award, but it was a function that was performed “haphazardly” and “depended upon matters of chance and caprice”. Whether the courts could review for errors of law was influenced by factors such as whether the arbitrator chose to include reasoning on the face of the award, what the parties had agreed to refer to the arbitrator, and whether the parties had elected to exclude review by a court. It was therefore found that while there was ability at common law for a court to review errors on the face of the award, it was not a defining characteristic of the exercise of judicial power or of any particular court. Preventing the Federal Court from reviewing for error on the face of the award does not affect its institutional integrity.
The IAA remains constitutionally sound
The High Court’s decision, in upholding the constitutionality of the IAA, confirms the mechanism for enforcing international arbitral awards in Australia. The Court has confirmed that the Model Law’s processes for having a court enforce an award and the limited grounds on which a court can refuse to enforce an award are consistent with the Australian Constitution and the restrictions it places on courts exercising the judicial power of the Commonwealth.