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Australia reforms international arbitration legislation

22 September 2010

Just as Australia has modernised its international arbitration legislation, two state courts have distanced themselves from the infamous Queensland Court of Appeal decision of Eisenwerk Hensel Bayreuth Dipl-Ing Burkhardt Gmbh v Australian Granites Limited [2001] 1 QD R 461 (Eisenwerk), one finding it was “plainly wrong”.

On 17 June 2010, the Australian Federal Senate passed amendments to the International Arbitration Act 1974 (Cth) (the Federal Act), which are intended to improve the efficiency of arbitration proceedings in Australia and thus enhance the attractiveness of Australia as an international arbitration venue.  These reforms anticipate new legislation by Australian states to conform domestic arbitration laws to the UNCITRAL Model Law on International Commercial Arbitration (the Model Law).  A significant change is that the old s 21, which permitted parties to opt-out of the Model Law into more permissive state arbitration laws, has been replaced by a new s 21 with the title “The Model Law covers the field”, which provides “if the Model Law applies to an arbitration, the law of a State or Territory relating to arbitration does not apply to that arbitration”

The former s 21 was the subject of two cases decided in August 2010, both of which are consistent with the objective of the new legislation to encourage use of the Model Law.

In Cargill International SA v Peabody Australia Mining Ltd [2010] NSWSC 887, the New South Wales Supreme Court was faced with a challenge to an arbitration award.  The threshold question to be decided was whether the applicable law for the challenge was the Federal Act/Model Law, or whether the parties had opted out of the Model Law in favour of the New South Wales domestic arbitration legislation.  This required reconsideration of the Queensland Court of Appeal decision in Eisenwerk, which had held that an arbitration clause incorporating procedural arbitration rules (in that case, the ICC Arbitration Rules) must be understood as implicitly opting out of the UNCITRAL Model Law. 

Eisenwerk was initially followed by the Singapore High Court in John Holland Pty Ltd v Toyo Engineering Corp (Japan) [2001] SGHC 48, but that decision was swiftly reversed by a legislative amendment (s 15A of the International Arbitration Act, Chapter 143A).  Although there has been a general consensus in the arbitration community that Eisenwerk was wrongly decided, it has remained good law in Australia. 

In revisiting this issue, the Cargill Court held that, due to the deference owed to decisions of state appellate courts, it could only depart from Eisenwerk if that decision were “plainly wrong”.  It held that Eisenwerk was, indeed, plainly wrong.  The Court reasoned that the Eisenwork principle was founded on a belief in the “perceived inconsistency and irreconcilability as between” the Model Law and ICC Arbitration Rules (at [60]), but that this belief resulted from misunderstanding the distinction between the national law which governs an arbitration and the procedural rules which apply to it.  The Court concluded the Federal Act applied and that there was no proper ground for challenge to the award.

One week later, the Queensland Court of Appeal came to a similar conclusion in Wagners Nouvelle Caledonie Sarl v Vale Inco Nouvelle Caledonie Sas [2010] QCA 219, in which the question was whether adoption of the UNCITRAL Arbitration Rules was an implicit exclusion of the Model Law.  This contention was even more extreme than the situation in Eisenwerk itself, given that the two instruments are expressly designed by UNCITRAL to be compatible.  The President of the Court of Appeal gave a two paragraph judgment, holding that there was no exclusion of the Model Law.  The more lengthy decision of Muir JA traversed the history of the Model Law and concluded that any reasonable person would have been aware that the UNCITRAL Arbitration Rules and the Model Law “were capable of operating together” (at [33]).  Muir JA thus distinguished Eisenwerk, but did not overrule it entirely (at [46]). 

It is to be hoped that this debate will now become academic as Australian state and federal laws apply Model Law principles to all arbitration proceedings in Australia.