Another win for arbitration

In brief

The Full Court of the Federal Court of Australia has upheld an earlier decision rejecting an application to set aside or not enforce an international arbitral award. The appeal was brought on the grounds that the rules of natural justice were breached in making the arbitral award. Partner Peter O'Donahoo, Special Counsel Nicola Nygh and Associate Catherine Li report on a case that clarifies how the rules of natural justice apply to arbitration in Australia.

How does it affect you?

The decision follows a string of recent pro-arbitration decisions by the Federal Court and serves to further illustrate that the finality of an award in Australia can only be successfully challenged for breach of natural justice under the UNCITRAL Model Law and the International Arbitration Act 1974 (Cth) (the IAA) if blatant and serious unfairness or injustice has occurred in the course of an arbitration.

Background

History

The lengthy dispute between Chinese company, TCL Air Conditioner (Zhongshan) Co Ltd (TCL), and Australian company, Castel Electronics Pty Ltd (Castel), has been fraught with challenges to the arbitral awards rendered. TCL and Castel entered into a distribution agreement which gave Castel exclusive rights in Australia to distribute TCL-manufactured air conditioners. In July 2008, a dispute arose after TCL began selling non-TCL branded air conditioning units in Australia. The dispute was submitted to arbitration under the arbitration clause in the distribution agreement. After TCL challenged the arbitrators' interim award on the scope of the arbitration clause, the Supreme Court of Victoria found that the arbitrators had erred in their ruling, as only those claims arising under the distribution agreement itself could be arbitrated.¹

On 23 December 2010, a final award in the sum of $3.5 million was made in favour of Castel (the award). TCL sought to resist Castel's enforcement of the award and to set it aside in the Federal Court. TCL's application that the Federal Court lacked jurisdiction to enforce international arbitral awards made in Australia was rejected by Justice Murphy.

TCL then applied in the original jurisdiction of the High Court to prohibit the Federal Court from dealing with the matter on the basis that certain amendments to the IAA were constitutionally invalid. The High Court unanimously rejected TCL's case.²

In November 2012 Justice Murphy delivered a second judgment dismissing TCL's application to set aside the award on the basis that a breach of the rules of natural justice occurred in connection with the making of the award.³

TCL's Federal Court appeal

Following the High Court decision, TCL abandoned those grounds of appeal that related to whether the Federal Court had jurisdiction to enforce the award. As a result, the substance of TCL's appeal was that Justice Murphy failed to find that the rules of natural justice were breached and the award was in conflict with the public policy of Australia under Articles 34(2)(b)(ii) and 36(1)(b)(ii) of the Model Law and sections 16 and 19 of the IAA.

The rules of natural justice relate to procedural fairness. Specifically, TCL argued that:

• there was no evidence (or no probative evidence) for the three critical factual findings made by the arbitrators (broadly alleged under the 'no evidence rule'); and
• the arbitrators could not reasonably make findings as to loss other than in accordance with TCL's expert evidence, when the arbitrators accepted that Castel's expert witness lacked expertise (broadly alleged under the 'no hearing rule').

The decision

The Full Court (comprising Chief Justice Allsop, Justice Middleton and Justice Foster) unanimously rejected TCL's appeal.⁴ As a starting point, their Honours found that (at [54]):

The application was a disguised attack on the factual findings of the arbitrators dressed up as a complaint about natural justice.

TCL submitted in the first instance that a court must revisit the facts of the case afresh to assess whether the rules of natural justice were followed by the arbitrators. The Full Court criticised this approach for undermining the expeditious and fair enforcement of international commercial arbitral awards. In particular, the court noted that while Justice Murphy rightly rejected TCL's submission, for completeness, his Honour nevertheless spent three days hearing the parties' arguments about the factual findings made by the arbitrators.

The court made the following observations about the rules of natural justice:

• The rules of natural justice are part of Australian public policy. The essence of natural justice is fairness. There can be no breach of any rule of natural justice unless there is real unfairness and true practical injustice in how the dispute resolution was conducted.
• The content of the rules of natural justice vary according to the circumstances and in particular the context of the dispute resolution process in question. In this case, the relevant context is international commercial arbitration, where parties consent to a private arrangement under which errors of fact or law are not legitimate bases for curial intervention.
• Articles 34 and 36 of the Model Law and ss 16 and 19 of the IAA deal with fundamental conceptions of fairness and justice. They are not technical rules that can be invoked by minor, technical breaches.
• In maintaining the balance between swift enforcement of arbitral awards and legitimate testing of those fundamental norms, the Model Law and the IAA require the demonstration of real unfairness, prejudice or practical injustice.
• In most, if not all cases, a party that claims to have suffered such unfairness or injustice should be able to show it with tolerable clarity and expedition, without a detailed re-examination of facts or factual evaluation as occurred in the first instance of TCL.
• There may be real unfairness or injustice if a party can readily demonstrate that it has been denied an opportunity to be heard on an important and material issue that could reasonably have made a real difference to the outcome of the arbitration.

Their Honours canvassed the development of New Zealand, Hong Kong and Singapore legislation (also based on the Model Law) as well as relevant international case law, which support the Australian position outlined above.

Their Honours then found that the first instance judgment in TCL plainly showed that the arbitrators did not engage in 'guesswork or speculation'; there was full cross-examination of lay and expert witnesses, and the arbitrators were entitled to take all of the evidence and make their own assessment of it. TCL received a 'scrupulously fair' hearing and no rule of natural justice was breached.

Conclusion

The latest TCL decision clarifies the application of the notions of natural justice and public policy in the context of the Model Law and the IAA. It is also consistent with a long line of pro-enforcement decisions (most recently, for example, Armada v Gujarat ⁵) that have confirmed the Federal Court's willingness to uphold arbitral awards.