Public Policy as a Limit to the Enforcement of Foreign Arbitral

“… a very unruly horse, and when once you

get astride it you never know where it will carry you.” [1]

International commercial arbitration has had a globalizing impact on the law, being a direct effect of the globalizing trade and commercial relations, and becoming today the norm for dispute resolution in most international commercial transactions.

Thus, arbitration gives the parties substantial control and wide autonomy other the process, moreover, the flexibility, the confidentiality and the opportunity to select the arbitrators make this private system of adjudication particularly attractive. Furthermore, a foreign arbitral award is more easily to enforce, due to the success of international Conventions.

A trend toward delocalization of arbitral law has been underway for the last 50 years, starting with the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”). This shift has increased the focus on public policy as a potential means of control by national courts over international arbitration. The States attitude to arbitration, as liberal as it may be today, imposes by virtue of its sovereign power, one important boundary, the respect of the public policy, this being the ultimate limit to the autonomy of the international arbitration. [2]

Public policy, by its nature, is a dynamic concept that evolves continually to meet the changing needs of society, including political, social, cultural, moral, and economic dimensions [3] . Public policy mediates between the interests of transnational business and those of the State with the closest connection to the contract.

As modern and predictable the attitude of national courts at the enforcement stage may be, and as evidenced by a narrow view of the public policy defence are the doctrinal developments such as: the competence-competence principle, the severability of the arbitration agreement, the arbitral jurisdiction to deal with interim relief and other precautionary measures, complex questions are raised about the interaction between public policy and international commercial arbitration. There is a call for recognition that the liberalization of arbitrable subject matter “comes necessarily at the price of some increase in judicial ex post control of the compatibility of the arbitrators’ product with public policy.” From time to time it is appropriate to revisit the question of public policy as a bar to enforcement of international arbitration awards. [4]

Judicial recognition and enforcement of an arbitral award is necessary when one of the parties to arbitration fails to execute voluntarily the award. In this situation, parties leave the “private sphere” of arbitration and turn to the public courts where one party seeks the coercive power to enforce the award, and the other may request to resist enforcement. [5] The public policy usually intervenes to defend a public interest but when and how these interventions are permitted? This is a crucial question that needs to be clarified in order to give more certainty to the international commercial arbitration and to its participants that need to find justice.

Before studying the application of the public policy limit to arbitral awards, the concept of the public policy should be revealed.

1. The Concepts of Public Policy

Introduction

Public policy is of vital importance – it is the judicial benchmark for the protection of the public interest. [6]

Public policy is a functional concept; therefore it is particularly difficult to give a uniform definition of it [7] . The public policy is more than a law provision; it is an ongoing process, a complex concept and it isn’t a specific fixed notion.

Early in 1853, the House of Lords of England explained that by public policy is understood a “principle which does not permit the doing of anything that could harm the basic principles of any society”. [8]

Chershire and North state that intervention on the basis of public policy is justified by reference to such “moral, social or economic principles” which are regarded as being “so sacrosanct” that they must be protected at all costs and without exception. [9]

For the international private law the public policy is, on the one hand, a reaction to the foreign laws which are contrary to the “ius naturale principles” [10] , on the other hand, public policy appeals to the principles forming the “politic and social foundation” of the specific society civilization [11] or to the “principles of preserving certain legislative policies”. [12]

In civil law systems references to good faith and good morals, as well as to public policy (ordre public) as a bar to parties’ freedom are incorporated in codes. [13] In common law references to public policy are mainly included in judicial practice, but also in legal documents. [14]

In his famous decision in the case of «Parsons End Whittemor», in 1974, U.S. judge Joseph Smith ruled that a foreign arbitral award may be refused on grounds of public policy «only if the award violates the most basic principles of justice and morality ». [15]

The interpretation of the public policy adopted by the German courts is also based on a narrow interpretation of its limitations of the fundamental principles of justice: «there is violation of the foundations of German public policy with regard to foreign arbitral awards only in cases where the award is contrary to the principles that underpin the public or commercial life of Germany, as well as in cases where it is contrary to the fundamental notions of justice. In this context, the violation by the arbitrator of a rule of substantive law is not sufficient for the application of the clause on public policy by Courts». [16]

The Supreme Court of the Russian Federation explains that “the public policy of the Russian Federation’ should be understood as basics of a social policy of Russian state” and this rule “can be applied only in those individual cases when application of the foreign law might cause a result inadmissible from the point of view of the Russian conscience”. [17]

There have been expressed frequently that the “public policy” as understood in Common Law jurisdictions might not cover all cases of procedural injustice [18] , highlighting therefore the differences between the Common Law concept of public policy and the Civil Law concept of ordre public, which includes certainly breaches of procedural justice. However, nowadays the “public policy” term is understood more in the sense of the French “ordre public” than in the restricted Common Law sense, [19] these two terms being generally used today as synonyms.

Prior the studying the public policy concept it is especially important to mention that, in view of all its varying factors, public policy has been receiving rather different denominations and interpretations in the major jurisdictions by their courts and authors.

Definitions of public policy

Just to mention a few definitions, besides the term public policy, we find denominations such as ordre public, lois de police, and furthermore the distinction between domestic, international, transnational and truly international public policy. All of these concepts, of course, also receive their own distinctive interpretations which are to be distinguished.

Public policy, the common term, is used meaning the moral, social and/or economic considerations which are applied by courts as grounds for refusing enforcement of an arbitral award.

International public policy is used to designate the body of principles and rules recognized by a State, which by their nature may bar the recognition or enforcement of an arbitral award rendered in the context of international commercial arbitration when recognition or enforcement of the said award would entail their violation on account either of the procedure pursuant to which it was rendered(procedural international public policy) or to its contents (substantive international public policy). [20]

International public policy is a French conception of public policy when referring to international arbitration. [21] When commenting the French approach, Fouchard, Gaillard and Goldman note: “the international public policy to which Article 1502.5 refers can only mean French conception of international public policy or, in other words, the set of values a breach of which could not be tolerated by the French legal order, even in international cases”. [22]

It is understood to be narrower than domestic public policy: not every rule of law belonging to the internal public policy is necessarily part of the external or international public policy. [23]

The International Law Association recommended in its “Final Report on public policy as a bar to the recognition and enforcement of international arbitral awards”(ILA Final Report) of 2002 [24] that an international arbitral award can be set aside if it is contrary to the “international public policy”. This term is to be understood, after the ILA Final Report in the sense given in private international law.

If the “international public policy” is specific and subjective to each State, there is another term, which shall not be confused with the former: “transnational or truly international public policy” – being a “supra-national public policy”.

Transnational or truly international public policy means those fundamental rules of natural law, principles of universal justice, jus cogens, in public international law, and the general principles of morality accepted by what are referred to as “civilised nations”. [25]

Today, in regard to the European Union law and jurisprudence of the European Court of Justice, there may be proposed a new term, the “multinational public policy”, which may be interpreted as the public policy of a community of nations that prevails over the national public policies of those nations within that community.

In its first decision on the “European public policy”, as a ground for refusing arbitral awards, the European Court of Justice in Eco Swiss China Time Ltd v Benetton International NV case [26] confirmed that the national courts of the European Union member States should allow a claim for annulment on the ground of non-compliance with article 81 of the Treaty Establishing the European Community [27] . Accordingly to the European Court of Justice, the article 81, which is a provision against anti-competition, “may be regarded as a matter of public policy within the meaning of the New York Convention” because of its mandatory and fundamental nature.

The public policy is used when recognition and enforcement of the arbitral award would entail their violation on account either of the procedure pursuant to which it was rendered – procedural public policy or of its contents – substantive public policy. Therefore, public policy includes both: procedural and substantive aspects.

Though there is no precise definition of public policy, it is an accepted norm that states have the ultimate right to refuse to enforce an arbitral award on grounds of public policy.

National legislation provisions on public policy

The terminology used in referring to public policy in national legislation varies considerably, from “public policy” to “ordre public” [28] or expressly stipulating “international public policy”, etc. The legislation of a number of countries refers simply to “public policy”. [29]

Most countries, however, refer to public policy of “Country X”(“that country”, “the country”), which is the wording of the New York Convention and the United Nations Commission on International Trade Law Model Law on the international commercial arbitration (UNCITRAL Model Law).

The enforcement legislation in France, Portugal, Algeria and Lebanon makes reference to “the principles of international public policy”, or to “the international public policy”.

Some countries such as Japan [30] ; Libya [31] ; Oman [32] ; Qatar [33] ; and The United Arab Emirates [34] refer to public policy (or public order) and good morals. Yemen makes reference to public order and the Moslem Shari’a. [35] Vietnamese legislation requires that the award should not be contrary to the “basic principles of Vietnamese legislation”.

A number of countries, China for example, do not refer to public policy per se, and provide that enforcement of a foreign award should being refused if it goes against “social and public interest”.

Australia (in 1989) and New Zealand (in 1996) have both enacted modified versions of the UNCITRAL Model Law [36] . The Australian legislation refers simply to “public policy” [37] while the New Zealand legislation refers to the “public policy of New Zealand”. [38] Unusually, both enactments go on to provide that “for the avoidance of doubt” and “without limiting the generality” of Articles 34 and 36 (of the Model Law), an award is contrary to the public policy of Australia/New Zealand if:

“(a) the making of the award was induced or affected by fraud or corruption; or

(b) a breach of the rules of natural justice occurred …».

Thus, these two countries have included in their legislation the UNCITRAL Commission’s “understanding” of the meaning of public policy.

Even if the majority of states adopted a narrow and pro-enforcement approach to the recognition and enforcement of foreign arbitral awards [39] , the public policy bar remains a legal provision that is not explained by legislations.

International conventions provisions on public policy

The main international treaty on enforcement arbitral awards is, of course, the New York Convention on recognition and enforcement of foreign arbitral awards of 1958 [40] . Article V.2(b) states:

“Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that:

(b) the recognition or enforcement of the award would be contrary to the public policy of that country”.

Even if the drafters of the New York Convention did not seek overtly to attempt to harmonize public policy by establishing an international standard [41] , the Convention refers to the “public policy of that country”.

It is noted in the Committee’s report that it intended to limit the application of the public policy provision to cases in which recognition and enforcement of the award would be “distinctly contrary to the basic principles of the legal system of the country where the award is invoked”. In this context, it must be realized that art.V.2 of the Convention reduces the application of the public policy in two ways: firstly, in the introductory sentence, by the word “may”, permits, but does not mandate refusal and thus gives the court discretion in this regard [42] ; and secondly, the paragraph (b) requires that not only the award, but the recognition and enforcement itself would be contrary to public policy.

Public policy exception is referred to in most other enforcement conventions. The 1927 Geneva Convention on enforcement of foreign arbitral awards stated that an award would be enforceable unless “contrary to the public policy to the principles of the law the country in which it is sought to be relied upon” [43] .The 1975 Inter-american Panama Convention on international commercial arbitration makes reference to the “public policy of that State”. [44] The 1979 Montevideo Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards requires that the award be “manifestly contrary to the principles and laws of the public policy of the Exequatur State”. [45] While the 1983 Riyadh Convention for judicial cooperation stipulates that enforcement may be refused if the award is “contrary to the Moslem Shari’a, public policy and good morals” [46] , the 1987 Amman Convention on commercial arbitration refers simply to the “public policy” [47] of the state where the enforcement is sought.

The 1965 Washington Convention on the Settlement of Investment Disputes between the States and Nationals of other States (ICSID) doesn’t refer to the “public policy”. Even if it provides grounds for annulment of the award, grounds that usually are included in public policy concept, it was stated that “public policy (international or otherwise) was not an issue that the judge should consider when dealing with enforcement of ICSID awards”. [48]

The European Convention on International Commercial Arbitration of 1961 does not deal with the recognition and enforcement of awards, leaving this to be dealt by other treaties, including the New-York Convention, to which the European Convention is a supplement.

The UNCITRAL Model Law on international commercial arbitration of 1985 includes “public policy” as a ground for refusing arbitral awards [49] , in essence reflecting the New-York Convention. It doesn’t, however, define “public policy”.

The OHADA [50] 1999 Uniform Arbitration Law provides in article 31 that an arbitral award shall be refused if the “award is manifestly contrary to a rule of international public policy of the member State”. This is the first attempt to harmonise public policy concept, by giving the more specific notion of “international public policy”.

The study of the public policy law provisions shows that the legislatures and courts are, understandably, reluctant to define public policy exhaustively, [51] given the ‘great diversity in the vocabulary and ambiguities’ when defining “public policy” [52] .

Nor the New York Convention doesn’t provide any guidance on the interpretation of public policy. Therefore, the UNCITRAL Secretariat has recommended further study on how the Convention countries interpret the public policy exception. [53]

These vague national law provisions and the variety of terms and interpretations indicate the relativity of the very concept of public policy.

The relativity of the public policy concept

First of all, public policy has a relativity character [54] and is dependent on the judgment of the respective legal community. The public policy of one state may not be seen as a fundamental standard in another state with a different economic, political, religious or social, and therefore, legal system.

A second relativity is introduced by the time factor. The values and standards of communities are not stable, they change and develop. So public policy it is derived therefrom.

Although sometimes concepts of public policy were widened leading to greater restrictions in arbitrability in certain countries, the general trend is clearly that public policy limits to international arbitration have been reduced considerably. [55] In the modern practice of courts and arbitral tribunals from western countries public policy does not seem to be a major obstacle to international arbitration. At least, that can be said for international as distinct from national arbitration and mainly for the western countries where arbitration has a long standing use.

In the context of international commercial arbitration the question of public policy raises at the final stage of the arbitral procedure: the recognition and enforcement of the arbitral award, as a last resort against the application of agreements, rules and awards which otherwise would have to be respected, its abstract role is indeed a fundamental one from the viewpoint of the respective legal system.

2. Application of the public policy concept as a bar to the recognition and enforcement of foreign arbitral awards

Even if the national legislation have specific provision considering public policy as a limit to the enforcement of international awards, the New York Convention serve as an international instrument that contributed to the harmonisation of the enforcement procedure for foreign arbitral awards.

The New York Convention – an important instrument for application of public policy at the stage of recognition and enforcement of international arbitral awards

In light of the article V(2) of the Convention a court may refuse enforcement of an award on its own motion if it finds that the subject matter of the difference is not capable of settlement by arbitration under its country’s law(a) or enforcement would be contrary to its country’s public policy(b). The division between these two grounds for refusal of the foreign award: lack of arbitrability and public policy is considered by some famous specialist as “superfluous as the question of non-arbitrable subject matter is deemed to form part of the general concept of public policy”. [56] Other specialists agree with the distinction. Thus, although rules limiting arbitrability will always be meant as mandatory rules not subject to change by parties’ autonomy, it is important to note, that mandatory rules are not necessarily identical with public policy rules. [57]

Nevertheless, even if the reason why article V(2)a)figures as a separate ground is historical, this research will consider and will focus on the public policy meant by (b) paragraph. In reality, art.V(2)b) appears to be a provision of residual application of those cases not covered by the other provisions of the New York Convention. [58] It is considered that it takes a “pedestrian lawyer to fail to find some basis for invoking public policy in most moderately complex commercial disputes”. [59] Though, even if in practice it has been interpreted “exceedingly narrowly”, public policy “appears to open an exception broad enough to swallow the New York Convention itself”. [60] In reality, however, the public policy provision of article V(2)(b) co-exists with the other provisions of the Convention.

For the party seeking to resist enforcement, article V of the Convention provides seven grounds for which recognition and enforcement of foreign arbitral awards may be refused. The public policy ground may be accepted if the court finds that “the recognition and enforcement of the award would be contrary to the public policy of that country”. “That country” is to be the forum of enforcement. While some commentators sustain that in article V(2)(b) is referred to “the public policy” in its common sense [61] , other consider that the New York Convention refers to the international public policy and not the internal one [62] .

The state courts may refuse an award ex officio, but aren’t required to.

The public policy bar should be interpreted narrowly and applied exceptionally

The starting point in considering application of public policy is that the test for refusing enforcement of foreign arbitral awards should be that of “international public policy”, [63] this being a narrow concept of public policy.

Even if “the public policy” referred to in the New-York Convention is the public policy of the enforcement state, it is to be understood as the international public policy of the enforcement state. In cases falling under the New-York Convention, the distinction is gaining acceptance by courts. They apply it to both the question of arbitrability (ground a of Art.V(2)) and other cases of public policy (ground b of Art.V(2)). [64]

There are still exceptions to this practice. In a 1983 case the Austrian Supreme Court refused the enforcement of a Dutch award because it violated Austrian public policy(the prohibition of purchases on a margin basis). It held that Art.V2)b) of the New-York Convention doesn’t contemplate a distinction between domestic and international public policy. [65] Another case doubting the narrow interpretation of Art.V(2) was decided by the High Court in Delhi, which said that it was not impressed by the argument making a distinction between domestic and international public policy. [66]

The practice of the courts of ex-sovietic countries shows inconsistencies when applying the public policy concept for refusal of enforcement of awards. Even if the majority opinion is that public policy should be interpreted narrowly [67] , some experts offer a wider interpretation. [