TCL v. Castel: The Constitutionality of the Adoption of the Model Law in Australia

On March 13, 2013, by its decision in TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5 (the TCL Case), Australia’s highest court, the High Court of Australia, unanimously rejected efforts by the losing participant in an international arbitration to challenge, as unconstitutional, Australia’s adoption of the enforcement provisions of the UNCITRAL Model Law on International Commercial Arbitration (the Model Law) in Australian’s International Arbitration Act 1974 (Cth) (the IA Act).

This note summarizes the Australian Court’s decision, and considers it in the context of debates within American legal scholarship regarding the consistency of arbitration proceedings with judicial power provisions of the United States’ own Constitution, which are relevantly the same as those of the Australian Constitution.

Background to the TCL Case

The TCL Case arose out of a dispute between the Australian and Chinese parties to a distribution agreement that provided for the submission of disputes to arbitration.[1]  The distributor and claimant, Castel Electronics Pty Ltd (Castel) prevailed in the arbitration, with two awards made which obliged the Chinese manufacturer, TCL Air Conditioner (Zhongshan) Co Ltd (TCL) to pay Castel A$3,369,351 in damages, and A$732,500 in respect of legal costs.[2]

Castel applied to the Federal Court of Australia for enforcement of the arbitral awards, which TCL resisted, asserting that the Federal Court lacked jurisdiction to enforce the awards, or alternatively, that the awards should not be enforced on public policy grounds relating to alleged breaches of natural justice.[3]  TCL also, by a separate proceeding, applied to have the awards set aside, again on the basis of public policy.[4]  The Federal Court held that it had jurisdiction to enforce the awards, and that there was no justification for refusing to enforce the awards, or for setting them aside.[5]

Application to the High Court

TCL then applied to the High Court, which has original jurisdiction in matters concerning the Australian Constitution.  TCL contended that the IA Act’s adoption of Articles 35 and 36 of the Model Law,[6] in not permitting courts to refuse to enforce an award for error of law:

(a) undermined the institutional integrity of the Federal Court by requiring the Federal Court, as a repository of judicial power by Australia’s Constitution, knowingly to perpetrate a legal error by endorsing legally incorrect awards for execution as if they were judgments of the Federal Court;[7] and/or

(b)  impermissibly conferred judicial power upon the arbitral tribunal (where Australia’s Constitution requires judicial power to be exercised only by courts[8]), by allowing the tribunal “the last word” on the application of the law to the dispute the subject of the arbitration.[9]

TCL also argued that the impairment of the Federal Court’s institutional integrity was aggravated by the fact that Article 28 of Model Law, or alternatively an implied term of the relevant arbitration agreement, required an arbitral award to be correct in law.[10]

In two separate judgments, the High Court rejected all of TCL’s contentions. Chief Justice French and Justice Gageler noted the origins of Articles 35 and 36 of the Model Law in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), and that it was essential therefore to construe the Model Law in the context of the objects of the New York Convention.[11]  They emphasised that the scheme designed by the New York Convention, and thus the Model Law, was directed at facilitating the contractually bargained agreement of the parties to refer their respective rights to arbitration in lieu of national courts, and that this agreement effectively superseded the original rights and obligations of the parties.[12]

In that context, the grounds for refusal to enforce in Article 36 essentially delineate the scope of the authority consensually given to the arbitral tribunal by the parties, and the role of national courts is to uphold the scope of that choice, as distinct from deciding the dispute: “Enforcement of the arbitral award is enforcement of the binding result of the agreement of the parties to submit their dispute to arbitration, not enforcement of any disputed right submitted to arbitration”.[13]  Chief Justice French and Justice Gageler posited that Article 28 reinforced the parties’ autonomous choice of dispute settlement mechanism by granting to the parties the freedom to choose whichever substantive law or rules of law they wish to have applied to their dispute.[14]  It was not the case, therefore, that Article 28 required an award to be legally correct, nor could, therefore, that requirement be implied into an arbitration agreement made in the context of the absence of legal error as a ground to refuse to enforce an award in the Model Law. Such an argument by TCL ran “counter to the autonomy of the parties to an arbitration agreement which infuses the Model Law, and of which Art 28 is a particular guarantee”.[15]

In these circumstances, there could be no difficulty with the Federal Court enforcing an award that could potentially contain a legal error.  In enforcing the award, the Federal Court was not endorsing its reasoning; rather the Court was testing the award’s adherence to the Model Law.[16] The obligations requiring the enlistment of judicial power at the Federal Court level were those created by the award, which in turn was created as a result of the parties’ agreement to refer their dispute to private arbitration.  The existing grounds for refusal to enforce – for example, where the arbitration agreement was not valid, or on the basis of public policy – provided appropriate protection to the integrity of courts in performing their recognition and enforcement roles.[17]

The existence of the autonomous agreement of the parties also disposed of TCL’s contentions that an arbitral tribunal could be impermissibly exercising judicial power. The High Court has long defined “judicial power” as having as a key characteristic the capacity to be exercised coercively, or independently of the consent of the relevant parties, and as resulting in an outcome (an order, or a judgment) which is binding without more.[18]  In both judgments, the Court contrasted this with the nature of private power exercised by arbitrators, which has as its fundamental premise the consent and agreement of the parties,[19] and which is dependent upon the assistance of the courts for its force and binding effect.[20]

Relevance to the United States

The decision should be of interest to lawyers in the United States.  The judicial power provisions of the Australian Constitution were modelled upon those contained in the United States’ Constitution.[21] While all of the relevant provisions are not identical in terms, they both enshrine, in very similar language, the key concept that judicial power is vested in courts established by the Constitution and/or the legislature.[22] Yet despite constitutional challenges to the Model Law in Australia, and also in Canada,[23] as well as to domestic arbitration legislation at state level in Australia,[24] and in some lower courts in the United States,[25] the United States Supreme Court has never had reason to consider in detail whether the Federal Arbitration Act[26] (FAA) is consistent with Article III of the United States Constitution.[27]

However, that has not prevented the issue being the subject of scholarly debate, which has proffered, generally speaking, two theories to justify the FAA’s constitutionality, at least with respect to international commercial arbitration.[28]  The first, chiefly espoused by Peter Rutledge, is that the FAA’s limited grounds for enforcement do not present a judicial integrity problem because courts have developed the ‘manifest disregard’ regime to permit themselves a quick check of the merits of the arbitrators’ decision at a very fundamental level, which, in Rutledge’s view, “rescues the FAA from constitutional infirmity”.[29] Leaving aside the questionable current status of the ‘manifest disregard’ doctrine, including whether it applies at all to international as distinct from domestic arbitration, Rutledge would find little comfort in the TCL case, which not only finds the Model Law constitutional in the absence of a limited merits review, but dismisses the historical existence of (the admittedly broader) review for error of law within English and Australian common law as “obscure in origin[30] and “a matter for regret.”[31]

The second theory, which has been considered in detail most recently by Roger Perlstadt,[32] is also partly in conflict with the TCL Case.  This is because Perlstadt argues that the FAA potentially infringes Article III of the United States Constitution, because the disputes submitted to arbitration do require the exercise of judicial power (deciding the law and applying it to the facts as determined) in order to be resolved.[33] However, as the unconstitutionality in Perlstadt’s view lies in the non-availability to parties of the elevated levels of impartiality and independence of Article III judges (underpinned by the tenure and salary protections of the Constitution), the fact that parties of their own volition choose to waive these elevated decision-makers in favour of a less constitutionally safeguarded arbitral tribunal, is sufficient to cure the FAA’s potential inconsistency with Article III.[34]

For Perlstadt, the real debate is about the standard of the consent required to waive Article III protections: whether it should be assessed by an objective manifestation of intent consistently with contract law, or whether consent needs instead to be subjectively tested – the disputants knew and understood what they were waiving.[35]  Perlstadt’s concerns about consent lie in part with consumer arbitrations, but he also queries whether sufficient consent is given by non-signatories to arbitration agreements who may be required to arbitrate,[36] or by potentially defrauded parties who, pursuant to the separability doctrine endorsed in the United States in Prima Paint Corp v Flood & Conklin Manufacturing Co,[37] may be required to arbitrate the question of the validity of their arbitration agreement.[38]

Emphasising the fundamentally coercive nature of judicial power, the Australian High Court found, by contrast to Perlstadt, that arbitrators do not exercise judicial power. However, the court was similarly reassured that the consensual removal of the issues in dispute by the parties from the purview of courts meant that the Australian Constitution was not infringed. It is not obvious how readily the High Court’s reasoning could be applied to the domestic arbitration,[39] non-signatory and fraud scenarios identified by Perlstadt as perhaps involving ‘compromised’ consent or agreement. Assuming that at some stage an unsuccessful but enterprising arbitrating party has the opportunity and fortitude to assert FAA unconstitutionality arguments at the United States Supreme Court level, it remains to be seen how these competing explanations of judicial power and consent will be analysed.

Beverley Newbold

The author is a Class of 2014 LL.M. student in the International Litigation, Arbitration and Business Regulation program at New York University, having obtained her Bachelor of Laws degree from the University of Adelaide, Australia. She is presently on leave from her position as Partner, Dispute Resolution in the Sydney office of the Australian-based international law firm, Minter Ellison, and she has also previously worked as an associate and senior associate in the London litigation and arbitration department of Freshfields Bruckhaus Deringer.

[1] TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5, ¶ 61.

[2] Id. at ¶ 42.

[3] Id. ¶ 62.

[4] Id.

[5] Castel Electronics Pty Limited v TCL Air Conditioner (Zhongshan) Co Ltd [2012] FCA 21 (the enforcement proceeding); Castel Electronics Pty Limited v TCL Air Conditioner (Zhongshan) Co Ltd [2012] FCA 1214 (the application to set aside the awards).

[6] Section 16(1) of the IA Act provides that: “…the Model Law has the force of law in Australia”.

[7] TCL Case, ¶ 4.

[8] Section 71 of Australia’s Constitution states, relevantly: “The judicial power of the Commonwealth shall be vested in a Federal Supreme Court, to be called the High Court of Australia, and in such other federal courts as Parliament creates, and in such other courts as it invests with federal jurisdiction.” Section 72 addresses judges’ appointment, tenure and remuneration, and sections 73, and 75 to 77 prescribe the original and appellate jurisdiction of the High Court.

[9] TCL Case, ¶ 4.

[10] Id.

[11] Id. at ¶ 8.

[12] Id. at ¶ 12.

[13] Id. at ¶ 34. See also ¶ 75-78 per Justices Hayne, Crennan, Kiefel and Bell.

[14] Id. at ¶ 13, citing paragraph 39 of an explanatory note by the UNCITRAL Secretariat relating to the 2006 amendments to the Model Law.

[15] Id. at ¶15. Or, as Justices Hayne, Crennan, Kiefel and Bell put it, in their judgment, that argument should be rejected as it depended “on treating the language of part of Art 28(1) as forming part of the agreement between the parties; whilst simultaneously treating the provisions of the Model Law regulating the recognition and enforcement of awards as not forming part of that agreement”, at ¶ 73.  They rejected the alternative argument advanced by TCL, that an implied term should be found in the arbitration agreement that arbitrators only have authority to render legally correct awards, on the basis that it failed to meet the Australian test for implication of terms; namely that such a term must be necessary to give business efficacy to an agreement, and be so obvious that it went without saying, at ¶ 74.

[16] Id. at ¶ 105.

[17] Id. at ¶103.

[18] Id. at ¶ 27-28 per Chief Justice French and Justice Gageler; and ¶ 108 per Justices Hayne, Crennan, Kiefel and Bell.

[19] Id. at ¶ 29-31 per Chief Justice French and Justice Gageler; and ¶ 107-108 per Justices Hayne, Crennan, Kiefel and Bell. For a similar analysis, see also the decision of the Supreme Court of New South Wales in Ashjal Pty Ltd v Alfred Toepfer International (Australia) Pty Limited [2012] NSWSC 1306, in which the plaintiff challenged the enactment of the enforcement provisions the Commercial Arbitration Act 2010 (NSW) in light of the separation of powers provisions of the New South Wales’ state constitution.

[20] Id. at ¶ 105.

[21] For a detailed discussion of the influence of Article III of the United States Constitution on the framers of the judicial power provisions of the Australian Constitution, see William G Buss, Andrew Inglis Clark’s Draft Constitution, Chapter III of the Australian Constitution and the Assist from Article III of the Constitution of the United States, 33 Melb. Uni. L. Rev 178 (2009).

[22] Article III(1) of the United States Constitution begins: “The judicial power of the United States shall be vested in one supreme Court, and in such inferior courts as the Congress may from time to time ordain and establish.” Compare the very similar text of section 71 of Chapter III of the Australian Constitution, in footnote 8 above. Both Constitutions thereafter contain safeguards for the tenure and remuneration of judges of federal courts.

[23] Quintette Coal Ltd v Nippon Steel Corp 1988 CanLII 2923 (BC SC).

[24] See footnote 19.

[25] Although principally in a domestic arbitration context, see Belom v National Futures Association 284 F.3d 795 (7th Cir. 2002); and McCarthy v. Azure 22 F.3d 351, 1994  (1st Cir. N.H. 1994).

[26] 9 U.S.C. §§ 1-14 (2006).

[27] Roger Perlstadt notes the 1932 decision of the Supreme Court in Marine Transit Corp v Dreyfus 284 U.S. 263 (1932) which upheld enforcement of an arbitration agreement in the face of an Article III challenge, but with little reasoned explanation. See Roger Perlstadt, Article III and the Federal Arbitration Act, 62 Am. Uni. L. Rev. 200 at 207.

[28] Domestic consumer arbitration is apparently less likely to be consistent with Article III; see Jean Sternlight, Rethinking the Constitutionality of the Supreme Court’s Preference for Binding Arbitration: A Fresh Assessment of Jury Trial, Separation of Powers and Due Process Concerns, 72 Tul. L. Rev. 1 (contending that the element of ‘choice’ arguably lacking in many standard form consumer arbitration agreements renders the enforcement of those agreements a violation of Art III); while investment arbitration allegedly presents its own difficulties: see Peter Rutledge, Arbitration and the Constitution, 51-53 (Cambridge University Press, 2013).

[29] Id. at 46.

[30] TCL Case, at ¶ 38.

[31] Id. at ¶ 90.

[32] Perlstadt, supra note 27.

[33] Id. at 223-227.

[34] Id. generally but see in particular 241–253.

[35] Id. at 247-252.

[36] Id. at 251-252.

[37] 388 U.S. 395 (1967).

[38] Perlstadt, supra note 27, at 218-219 and 252.

[39] Domestic arbitration in Australia is governed by state legislation, which, for nearly all states and territories, is based upon the Model Law.