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Article: March 2014 International Arbitration Update

March 01, 2014
Business Litigation Reports

Australia’s Highest Court Upholds Constitutionality of the Country’s International Arbitration Law. In TCL Air Conditioner (Zhongshan) Co. Ltd. v. The Judges of the Federal Court of Australia [2013] HCA 5, Australia’s High Court unanimously upheld a key provision of the country’s International Arbitration Act (the “IA act”) concerning the enforceability of arbitral decisions. The IA Act gives force of law in Australia to the UNCITRAL Model Law on International Commercial Arbitration. The case arose from an agreement between a Chinese company, TCL Air Conditioner (TCL), and an Australian one, Castel Electronics. The agreement provided that disputes were to be submitted to arbitration in Australia. An arbitration between the companies resulted in an award to Castel. After TCL defaulted, Castel asked the Federal Court of Australia to enforce the award under the IA Act. TCL then petitioned the High Court to block any such enforcement on the ground that the IA Act violated Chapter III of Australia’s Constitution, which vests Australia’s judicial power in courts.

TCL made two interrelated arguments to the High Court: first, TCL argued that the IA Act impairs the institutional integrity of the Federal Court by requiring it to rubber-stamp arbitral awards; and second, TCL claimed that the IA Act impermissibly vests judicial power in arbitral tribunals. Essentially, TCL argued that the IA Act unconstitutionally required courts to enforce an arbitration award, regardless of whether the award was correct or whether the arbitrator made a mistake of law. The High Court disagreed. It reasoned that the IA Act did not demean the integrity of Australia’s courts, because it provided ways for them to set aside an award, including instances when the award conflicts with Australia’s “public policy.” The High Court also emphasized the consensual and private nature of an arbitration agreement, and contrasted it to the nature of judicial power, which is sovereign and independent of consent: “The determination of a dispute by an arbitrator does not involve the exercise of the sovereign power of the State to determine or decide controversies.” The decision puts to rest a serious challenge to the enforceability of arbitral awards in Australia.

U.S. Supreme Court to Decide Whether Courts or Arbitrators Should Determine Whether a Precondition to Arbitration Has Been Satisfied. On December 2, 2013, the U.S. Supreme Court heard argument in BG Group PLC v. Republic of Argentina. 133 S. Ct. 2795 (2013) (granting cert.). The issue before the Court is whether “in disputes involving a multi-staged dispute resolution process, a court or the arbitrator determines whether a precondition to arbitration has been satisfied.” The dispute concerns a Britain-Argentina bilateral investment treaty (“BIT”). The BIT governs disputes between investors in one state against a host state, and provides that disputes can be arbitrated only after they have been submitted to the host state’s courts for 18 months without resolution.

The case arose when the value of a British corporation’s investments in Argentina substantially diminished due to policies that Argentina implemented after the country’s economic troubles in the early 2000s. Instead of submitting the dispute to an Argentinean court, it was submitted directly to an arbitration panel. Pursuant to Article 32(b) of the 1969 Vienna Convention on the Law of Treaties, the arbitral panel found the precondition of first submitting the dispute to a court need not be followed, because doing so would be “absurd and unreasonable” in light of Argentina’s post-crisis reforms, which restricted the investor’s access to the nation’s courts.

On appeal by Argentina, the D.C. Circuit noted that the BIT was silent about deciding arbitrability, and that it called for courts to first attempt to resolve disputes. 665 F.3d 1363, 1369 (D.C. Cir. 2012). It found that there was no clear and unmistakable evidence that the parties wanted to arbitrate arbitrability, and reversed the district court’s ruling. Id. at 1371-72.

Relying on the federal policy favoring arbitration, and Supreme Court cases indicating there is a presumption that arbitrators decide whether conditions precedent to arbitration have been met, the British corporation asked the Supreme Court to overturn the D.C. Circuit. However, Argentina relied on other Supreme Court decisions, which state that “the default presumption is that a court, not an arbitrator, has the final say” as to whether the parties have agreed to arbitrate. Meanwhile, the United States, which is a party to BITs containing similar language to the provision at issue, argued that a new standard should be implemented in disputes between private investors and a sovereign. It argued that courts “should review de novo arbitral rulings on consent-based objections to arbitration,” and requested that the Court remand the case for a decision on whether Argentina’s objection was consent-based. At oral argument, some Justices questioned whether the Government’s position had any precedential support and whether it made sense. Other Justices pondered the implications of one party being a sovereign. Given that there are thousands of BITs, the Court’s decision could impact the way conditions precedent to arbitration are evaluated in numerous investor-state disputes.

California Court Rules that Foreign Company’s Affiliate May Bring Suit, Despite Arbitrator’s Finding that It Was Jurisdictionally Barred from Initiating Arbitration. In Boeing Co. v. KB Yuzhnoye, No. CV 13-730 ABC (AJWx) (C.D. Cal. Oct. 28, 2103), Judge Audrey Collins of the U.S. District Court for the Central District of California found that Old Kvaerner, an affiliate of the Norwegian company Kvaerner Moss, could join Boeing’s claims of unjust enrichment and breach of contract against the Russian company Energia and Ukraine’s Yuzhnoye. Kvaerner Moss, Boeing, Energia, and Yuzhnoye were parties to a “Creation Agreement,” which provided that they and their affiliates would be reimbursed for certain payments they made under the Agreement. Old Kvaerner claims that, as an affiliate, it made payments that should have been reimbursed by Energia and Yuzhnoye, but were not.

Energia and Yuzhnoye argued that a Swedish arbitration award barred Old Kvaerner’s claims. In that arbitration, the arbitrator decided that the Creation Agreement did not give affiliates the right to initiate arbitration. Nonetheless, Judge Collins ruled that the arbitration award “concerned only [arbitral] jurisdiction,” not substantive rights, and therefore it did not bar Old Kvaerner from asserting those rights in court. The decision has potential significance regarding recourses available to parties who are blocked from joining or initiating arbitration.