Article: Party Autonomy And The Limits Of Arbitrability: A Stoppable Force Meets An Immovable Object*
Paivi Adeniyi ACIArb
Solicitor, DLA Piper, Brisbane
*Winner, 2025 Ciarb Australia Essay Competition
I Introduction
The High Court’s recent decisions in Tesseract International Pty Ltd v Pascale Construction Pty Ltd[1] and Karpik v Carnival plc[2] illustrate that party freedom to designate the rules applicable to the substance of a dispute is not without limits.
In Karpik, the High Court unanimously confirmed the extraterritorial application of s 23 of the Australian Consumer Law[3] in a manner consistent with “Australian norms of fairness”.[4] That law operated to render a class action waiver clause void as an unfair term.[5] It was of little consequence that the relevant contract granted Californian courts exclusive jurisdiction. Although no arbitration agreement was in issue, the ratio in Karpik would, by analogy, preclude any arbitration agreement from derogating from rights at the core of Australian public policy.[6]
Later, in Tesseract, a majority of the High Court held that South Australia’s proportionate liability regime does apply to an arbitration governed by South Australian substantive law.[7] South Australia’s proportionate liability regime is non-mandatory, and several justices of the High Court acknowledged that the parties could have opted to expressly exclude its operation from their contract.[8] Still, the Court’s conclusion that such regimes are adaptable to arbitration, when they were long considered not to be,[9] calls into question the status of other Australian proportionate liability regimes that either expressly prohibit contractual derogation[10] or are silent on the matter. The arbitration clause in Tesseract was domestic, but the decision, like Karpik, raises important questions about the application of mandatory (and non-mandatory) Australian rules of law in international arbitration.
Given Art 28(1) of the UNCITRAL Model Law on International Commercial Arbitration[11] empowers parties to choose the “rules of law” applicable to the substance of a dispute, as distinct from an entire system of law, how can this freedom be reconciled with a substantive rule of law that might embody “Australian norms of fairness”?
In light of these recent Australian authorities, and other developments in common law jurisdictions, this paper explores the distinctions between three types of rules of law and the limits they place on party autonomy in international arbitration:
- Australian rules of law that are adaptable to arbitration but can be excluded;
- mandatory Australian rules of law that are adaptable to arbitration and cannot be excluded; and
- mandatory Australian laws that are not adaptable to arbitration and are therefore non-arbitrable.
Distinguishing between these categories involves a weighing exercise of, on the one hand, public policy objectives reflected in domestic rules of law, and, on the other, party autonomy and other key imperatives of arbitration. From this, three main conclusions can be drawn.
First, the High Court’s approach in Tesseract as to whether certain matters are adaptable to arbitration aims to give full effect to parties’ objective choice of substantive law. Tesseract illustrates that Australian courts apply a broad model of objective arbitrability, in a manner that tolerates significant distortion of a rule’s application or effect. This approach demonstrates the confidence that Australian courts repose in arbitration as a dispute resolution system; however, in certain circumstances, it can undermine the core objectives of arbitration.
Second, one might expect that, if parties to an arbitration agreement chose to exclude the operation of a mandatory, but arbitrable rule, an Australian court with supervisory jurisdiction over that mandatory rule might not give effect to that exclusion, even where an arbitral tribunal would.
Third, Karpik is an illustration of the kind of rule that Australian courts would consider mandatory and non-arbitrable. Although it is uncontroversial that party autonomy will not usurp non-arbitrability, recent international cases demonstrate that an arbitration agreement can remain operative in respect of certain arbitrable issues in a broader dispute. The determination of such issues in an arbitration proceeding might inform later litigation, even litigation concerning “norms of fairness”. An Australian court might aim to give full effect to the parties’ choice of substantive law in the same fashion.
II Parties’ Right to Choose Substantive Rules of Law
The conventional basis for parties’ freedom to choose the rules of law governing the substance of a dispute lies in Article 28 of the Model Law, which has force of law in Australia by dint of s 28 of the International Arbitration Act 1974 (Cth). It is not always the case that the law the parties have expressly or impliedly[12] chosen to govern the contract will govern non-contractual aspects of a dispute, such as tortious liability.[13] Indeed, parties might neglect to consider which rules of law might govern non-contractual issues and which of these rules might have mandatory application.[14]
A fundamental aspect of Article 28(1) of the Model Law is that the use of the liberalising phrase, “rules of law”, means that parties are not restricted to selecting the entire legal system of one jurisdiction. The breadth of Article 28(1) is apparent from the travaux préparatoires to the Model Law, and was acknowledged by the High Court in Tesseract[15] and TCL Air Conditioner (Zhongshan) Co Ltd v Judges of the Federal Court of Australia.[16] Subject to certain limitations, parties are free to select a tailored combination of different national laws (dépeçage), the principles common to multiple legal systems,[17] the lex mercatoria or international soft law instruments.[18] Importantly, it grants parties the freedom to select the laws of an entire legal system, except for certain rules, a fact noted by Edelman J.[19] His Honour stressed that no narrow approach should be taken to the interpretation or application of Art 28(1).[20]
III A Sovereign State’s Right to Limit Arbitrability
Party autonomy will yield where the subject matter of a dispute is not arbitrable under the rules of law governing that dispute.[21]
Article V(2)(a) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NYC) provides that recognition and enforcement of an award may be refused where “the subject matter of the dispute that led to the award is not capable of settlement by arbitration under the law [of the country where recognition and enforcement is sought]”.[22]
The travaux préparatoires to the NYC reveal that the drafters of the Convention intended to allow for a broad range of disputes to be resolved through arbitration, while upholding State sovereignty by carving out certain kinds of disputes from the global arbitration framework. Rather than define the concept of objective arbitrability in the Convention, the content and parameters of objective arbitrability remain the purview of contracting States. Those matters falling beyond a State’s limits for objective arbitrability may be expressly identified in domestic laws, or may arise through implication.[23]
A corollary of States’ flexibility in identifying what subject matter is arbitrable, and how it should be so identified, is that States have adopted diverse conceptions of arbitrability. Often the arbitrability of certain subject matter is only clarified once it has received judicial consideration. The answer to this question may depend on whether it is being decided by an Australian court, or an arbitral tribunal (which might be governed procedurally by a foreign lex arbitri but is tasked with considering the application of Australian rules of substantive law).[24] Although objective arbitrability is addressed in the NYC, a party may still assert that a mandatory rule under the law of the contract, or of another jurisdiction connected to the dispute, renders the dispute non-arbitrable.[25]
There is a dearth of Australian case law testing the outer limits of objective arbitrability,[26] but two recent Privy Council decisions are worth highlighting. In FamilyMart China Holding Co Ltd v Ting Chuan Holding Corporation,[27] the Privy Council unanimously overturned an earlier ruling that no aspect of a dispute about a winding up petition was susceptible to arbitration. There, the Board agreed with the parties that an arbitral tribunal lacked competence to determine whether a winding up order should be made, and joint liquidators be appointed for the insolvent company. The Board acknowledged the general consensus across common law legal systems that courts have exclusive jurisdiction to order the winding up of a company,[28] noting previous consideration in Australia,[29] Singapore,[30] Hong Kong[31] and the United Kingdom.[32]
However, the Board still found that an arbitral tribunal was competent to determine whether the appellant had lost trust in the respondent and its management of the insolvent company’s affairs and whether the fundamental relationship between the parties had irretrievably broken down as a result. The Board granted a discretionary stay of the winding up petition pending the determination of those arbitrable issues.[33]
That does not mean that where an issue is arbitrable, common law courts will automatically defer to an arbitration clause. Even more recently, the Privy Council, in Sian Participation Corp v Halimeda International Ltd,[34] held that an agreement to arbitrate a claim for a debt which was subject to a winding up petition, does not automatically justify a stay in favour of arbitration. The Committee found that a stay or dismissal is only appropriate where the debt is genuinely disputed on substantial grounds, overturning the approach taken by the English Court of Appeal in Salford Estates (No 2) v Altomart.[35]
Exceptionally, the Privy Council made a Willers v Joyce (No 2)[36] direction that its decision reflects the law of England and Wales.[37] The decision in Sian restricts a party’s ability to interfere with winding up proceedings where a dispute over a debt lacks bona fides. It gives primacy to a court’s function in supervising insolvency matters, rather than deferring to the parties’ all-encompassing arbitration agreement. It shows that, while party autonomy is broad, it is secondary to a State’s right to limit arbitrability.
FamilyMart and Sian also demonstrate that the commonly proposed bright-line approach to arbitrability, by expressly identifying non-arbitrable subject matter in a statute,[38] will not always create certainty or reduce the risk of fractured disputes in all cases.
IV When is a Rule of Law Adaptable to Arbitration?
Mason J recognised in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales[39] that for a substantive rule of law to be applied to an arbitration, that rule may need to be “modified … in order to take account of those characteristics which distinguish an arbitration from court proceedings”. These modifications often entail trivial and semantic changes, like replacing “judgment” with “award”. In other cases, the required modification is so substantial that it could no longer be said that the law being applied was that which was “determined by the conflict of laws rules”. Even though Art 28(3) of the Model Law is concerned with an entire system of “law”, “it does not operate to require that every substantive law within that system be applied”.[40]
The five justices in the majority in Tesseract confirmed that the features of a domestic rule need not be perfectly conformable to an arbitration to be adaptable to an arbitration context. It is acceptable for certain features of a domestic rule of law to be quite radically changed in this moulding process. As remarked by Edelman J, echoing concerns raised by Steward J:
the magnitude of the modification required to adapt for arbitration the proportionate liability laws applicable in South Australia may change the essential meaning of those laws, leading to the conclusion that it was no longer those South Australian laws that would be applied by the conflict of laws rules.[41]
On the approach favoured by the majority, non-arbitrability and potential impacts on third party rights and interests are the key constraints on adaptability. It is an approach that defers to the object of Australian rules of law. By contrast, Edelman J articulated the appropriate limits as follows:
If some of the laws of that legal system operate in a manner that militates against the paramount object of arbitration to facilitate final resolution of the parties’ disputes, then the natural implication may be that those rules of law would not be included within the scope of the implied choice.[42]
That approach prioritises the object of arbitration and recognises the public policy rationale that underpins it.
V Distinguishing Mandatory And Non-arbitrable Rules of Law
A Mandatory Rules
A mandatory rule of law is one which must be applied to a contractual relationship irrespective of the law the parties choose to govern that relationship.[43] There is a lack of international consensus as to whether, and how, an adjudicative body should defer to mandatory substantive rules. An arbitral tribunal has no forum and is constrained by the lex arbitri in exercising its functions.[44] Therefore, its application of mandatory laws might be filtered through “accepted” principles of transnational public policy, determined by reference to conflict of laws rules, or even decided in accordance with parties’ “legitimate expectations”.[45]
By contrast, it is not surprising that courts exercising supervisory jurisdiction would tend to enforce the mandatory laws of that forum.[46] Even if the non-application of that mandatory law would not give rise to grounds to challenge an award, a court’s tendency to enforce a mandatory law depends on the nature of the public policy interests that law seeks to protect.[47] Consistent with growing recognition of international arbitration’s central role in the global dispute settlement framework, a court considering the application of a mandatory rule should do so with a focus on transnational public policy.
B Non-arbitrable Rules
It is trite to say that private relationships can have public consequences, and that sovereign States have an interest in regulating areas of law that have consequences for third parties or the general public. Disputes concerning anti-corruption, insolvency or bankruptcy, crime, family matters and consumer protection are often non-arbitrable. A State may wish to guarantee that parties to an arbitration agreement, especially vulnerable parties like consumers and employees, receive the same substantive rights and protections no matter how a dispute resolution clause is written.
The legislature could draft the relevant law such that it must apply to any dispute. Alternatively, the legislature could grant its local courts sole jurisdiction over disputes involving the application of that law. The first approach goes to whether the rule of law is mandatory, but if that rule can be adapted to an arbitration, it nonetheless remains arbitrable. The second approach would render that rule both mandatory and non-arbitrable. As a matter of statutory construction, it can be difficult to distinguish between these two kinds of mandatory rules, yet both sets of rules curtail party autonomy in vastly different ways.
The following observations can be gleaned from the categories of disputes considered to be non-arbitrable. First, these areas of law typically strike at the core of public policy and fundamental rights,[48] giving rise to potential enforcement challenges under Arts V(2)(a) and V(2)(b) of the NYC. Second, the more fundamental a rule is to the political priorities of a specific State, the more likely that State is to deny arbitrability.[49] A useful, but not decisive, metric is to consider the impacts of the non-application of that rule on third parties and the State’s public order.
VI The Problem of Fracturing
The ultimate outcome in FamilyMart bears similarities to that in Tesseract. The result in FamilyMart meant that the respondent’s broader dispute with the appellant was fragmented across multiple forums where it may have been less costly and more efficient for all issues to be resolved through litigation. For Pascale, the respondent in Tesseract, the result meant that it would need to pursue litigation against a third party to recover the full extent of its losses. That third party could not be joined to the arbitration without his consent.[50] This suboptimal outcome (from Pascale’s perspective) was noted by the justices of the High Court,[51] but emphasised by Justices Edelman and Steward in their respective dissenting opinions.[52]
Much commentary on Tesseract has focused on whether the decision is “arbitration-friendly”. The answer is a matter of vantage point. The decision promotes a wide conception of objective arbitrability. It affirms that an arbitral tribunal has a broad power to apply Australian rules of law, so long as those rules are adaptable and amenable to arbitration. A party in Tesseract’s position might consider the High Court’s decision a “pro-arbitration” result.
In a different respect, the Tesseract case illustrates that arbitration has its limits. While the powers of an arbitral tribunal are broad, it cannot, for example, compel the joinder of a non-consenting third party. The approach preferred in Tesseract and FamilyMart that aspects of a dispute remain arbitrable despite other aspects falling outside the scope of the tribunal’s power, might promote the fracturing of disputes or spawn further rounds of protracted litigation. In Justice Steward’s dissent, his Honour highlighted that multiple proceedings carry the risk of inconsistent findings.[53] This might jeopardise what Edelman J described as the paramount object of arbitration, being the efficient and final resolution of disputes.
A contrary view is that this risk is always present when parties choose to arbitrate, as they cannot submit every possible dispute between them to arbitration. Nonetheless, the High Court in Karpik recognised that fractured disputes and conflicting outcomes can “bring the administration of justice into disrepute”, when it observed that enforcing the exclusive jurisdiction clause would cause nearly identical claims to be heard in the United States and in Australia.[54]
VII Conclusion
Australian courts have the legitimate domain of safeguarding fundamental rights and interests, especially those which have consequences for third parties and the Australian legal order at large. These public policy imperatives, like the right to participate in class action proceedings, cannot, and should not, be sidestepped through arbitration. Where, however, a rule of law lacks an inherently public character, or does not protect fundamental rights, its adaptability to arbitration should be constrained by the core tenets of arbitration. Ensuring party autonomy, efficiency and finality in international arbitration are also matters of public policy that should not be neglected. The cases explored above expose an uneasy hierarchy in which party autonomy yields wherever a domestic rule is characterised as embodying fundamental public policy yet could still retain scope to inform the application of mandatory rules in ways that are difficult for international commercial parties to predict.
[1] [2024] HCA 24 (‘Tesseract’).
[2] (2023) 98 ALJR 45 (‘Karpik’).
[3] Being Schedule 2 to the Competition and Consumer Act 2010 (Cth).
[4] Karpik (n 2) [36]–[38], [40].
[5] Ibid [68]–[69].
[6] Ibid [67]–[69].
[7] Tesseract (n 1) [70]–[75] (Gageler CJ), [140]–[141] (Gordon and Gleeson JJ), [384] (Jagot and Beech-Jones JJ).
[8] Ibid [225] (Edelman J), [291], [378] (Jagot and Beech-Jones JJ).
[9] Ibid [226] (Edelman J).
[10] See, eg, Queensland: Civil Liability Act 2003 (Qld) s 7(3).
[11] See International Arbitration Act 1974 (Cth) s 28(1).
[12] N Blackaby et al, Redfern & Hunter on International Arbitration (7th ed, Oxford University Press, 2023) §§ 5.09–5.10.
[13] See M Mustill and S Boyd, The Law and Practice of Commercial Arbitration in England (2nd ed, Butterworths, 1989), 72.
[14] J Waincymer, Procedure and Evidence in International Arbitration (Wolters Kluwer, 2012) 1039.
[15] Tesseract (n 1) [333] (Jagot and Beech-Jones JJ).
[16] (2013) 251 CLR 533, 548 [13].
[17] Tesseract (n 1) [161]. See, eg, Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334, 368 (Lord Mustill).
[18] See, eg, 2016 UNIDROIT Principles of International Commercial Contracts (4th ed). See also A Connerty, ‘Lex Mercatoria: Reflections from an English Lawyer’ (2014) 30(4) Arbitration International 701.
[19] Tesseract (n 1) [170].
[20] Ibid.
[21] G Born, International Commercial Arbitration (Kluwer Law International, 3rd ed, 2009) 2913–2915, cited with approval in PT Prima International Development v Kempinski Hotels SA [2012] SGCA 35, [72].
[22] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 3 (entered into force 7 June 1959).
[23] F Gélinas and Leyla Bahmany, Arbitrability: Fundamentals and Major Approaches (Kluwer Law International, 2023) 5–18 §33; See É Bruc, ‘Nonarbitrability and Mandatory Rules: Brothers, Not Twins’ (2024) 41(5) Journal of International Arbitration 599, 621.
[24] See B Hanotiau, ‘The Law Applicable to Arbitrability’ in A Jan van den Berg (ed), ICCA Congress Series No. 9: Improving the Efficiency of Arbitration Agreements and Awards: 40 Years of Application of the New York Convention (1998, Paris, Volume 9157) 153.
[25] See, eg, Mitsubishi Motors Corp v Soler Chrysler-Plymouth, Inc (1985) 473 US 614. Waincymer (n 14) 1016.
[26] See Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332.
[27] [2023] UKPC 33 (‘FamilyMart’).
[28] Ibid [75].
[29] WDR Delaware Corporation v Hydrox Holdings Pty Ltd [2016] FCA 1164, [26].
[30] Larsen Oil and Gas Pte Ltd v Petropod Ltd [2011] 3 SLR 414, [44] (V K Rajah JA); Tomolugen Holdings Ltd v Silica Investors Ltd [2015] SGCA 57, [83].
[31] Quiksilver Greater China Ltd v Quiksilver Glorious Sun JV Ltd [2014] 4 HKLRD 759, [14] (Harris J).
[32] Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855, [76], [83].
[33] FamilyMart (n 25) [105].
[34] [2024] UKPC 16 (‘Sian’).
[35] [2014] EWCA Civ 575. See Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2023] HKCFA 9; Re Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426.
[36] [2016] UKSC 44.
[37] Sian (n 32) [124]–[127].
[38] See É Bruc, ‘Nonarbitrability and Mandatory Rules: Brothers, Not Twins’ (2024) 41(5) Journal of International Arbitration 599, 621.
[39] (1982) 149 CLR 337, 368–369.
[40] Tesseract (n 1) [183] (Edelman J).
[41] Ibid [152] (Edelman J).
[42] Ibid [179].
[43] Pierre Mayer, ‘Mandatory Rules of Law in International Arbitration’ (1986) 2(4) Arbitration International 275; Waincymer (n 14) 1013.
[44] See Hanotiau (n 23).
[45] Waincymer (n 14) 1033–1035, 1038.
[46] See Bruc (n 36) 618–620.
[47] See Tesseract (n 1) [342] (Jagot and Beech-Jones JJ).
[48] See Comandate Marine Corp v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45, 98 [200] (Allsop J, with whom Finkelstein J agreed).
[49] A Barraclough and J Waincymer, ‘Mandatory Rules of Law in International Commercial Arbitration’ (2005) 6(2) Melbourne Journal of International Law 205, 238.
[50] Tesseract (n 1) [286] (Jagot and Beech-Jones JJ).
[51] Ibid [84], [118], [126]–[127], [133] (Gordon and Gleeson JJ), [359]–[361], [363] (Jagot and Beech-Jones JJ).
[52] Ibid [145], [168], [184] (Edelman J), [228], [261]–[262], [266] (Steward J).
[53] Tesseract (n 1) [266], [279], [281] (Steward J), citing Curtin University of Technology [2012] WASC 449, [86] (Beech J).
[54] Karpik (n 2) [69].