The Concept of Public Policy in the Judicial Enforcement of Arbitral Awards

Introduction

An arbitral award is referred to as an award given in circumstances where both the claimant and the defendant of a commercial dispute settle their dispute through an arbitration tribunal. The award can result in payment of a sum of money, or it can be non-monetary, where the whole charge fails. Therefore, Arbitration is a popular means of settling disputes. It is a very common means of settling disputes in commercial spheres because, in international trade, it is relatively easy to recognize and enforce an arbitral award in a foreign country than it is to enforce a judgment of a court of law. [1] This process entails the appointment of an arbitrator by the disputing parties. After the hearing, each party presents their case, and then the arbitrator gives his decision, which is usually in form of an arbitral award.

There has been a tendency whereby the parties to an arbitration contract can hardly have confidence with the award, as once granted, it can be overturned. Furthermore, parties in a dispute are discouraged from arbitrating because they cannot be sure that the dispute will not end up in court. These existing uncertainties make enforcement of arbitral awards very uncertain as well. The paper will look at the major issues that face public policy exceptions, during its judicial application. This paper will present, in broad terms, the existing issues affecting the judicial application of the public policy and on the enforcement of the arbitral awards in the view of the English legal system.

Judicial enforcement of arbitral awards

Judicial enforcement of an arbitral award can be described as the application of a court of law to enforce an award granted by an arbitration tribunal. It is particularly applied in instances where the relevant parties to an arbitral award are not willing to comply. The courts, on the other hand, make an order to the parties ordered to comply. The orders made by the court can then be enforced just like the usual court orders depending on the jurisdiction. However, it is important to appreciate the fact that many arbitral awards are fulfilled by the parties very fast and willingly, and they do not have to result in courts enforcement. Enforcement of arbitral awards can be considered a weapon of attack, which entails aggression as well as the use of force.

Judicial enforcement of arbitral awards and public policy

There are many disagreements as to what public policy means. A generally accepted definition of this term is somehow not easy. Some people attempt to define it in terms of what the government does. Others say that public policy is the stated principle that operates to guide the operation of the government. However, it is important to point out the fact that courts, all over the world, are not readily willing to enforce arbitral awards. Nevertheless, before an award can be enforced, it must pass the test of public policy in terms of enforcement if it is to succeed. The biggest headache is defining what constitutes public policy in a particular enforcing state.

Public policy cannot be precisely determined. As such, the enforcement of the awards should be simplified. There have been arguments that this will risk the uniformity of enforcement. The public policy exception is, therefore, a very controversial issue as far as enforcement of arbitral awards is concerned.

This is particularly the case, if the award given by arbitration offends the public policy, or if it is against the rules of natural justice. The public policy exception in arbitral awards enforcement is enshrined in New York Convention. [2] It is also enshrined in the ‘UNCITRAL Model on International Commercial Arbitration 1985,’ as well as the ‘English Arbitration Act of 1996.’ The aforementioned legal instruments are responsible for the promotion as well as the regulation of commercial arbitration internationally.

Controversies surrounding the doctrine of public policy

Public policy is a very controversial exception as far as the enforcement of arbitration awards is concerned. The public policy consideration in question is that of the enforcing state. It is the policy consideration of the state that is responsible for enforcing the arbitral award. It is often viewed as causing judicial inconsistency and as a result unpredictable in its application. The International Law Association’s Resolution is in support of adopting a narrow approach to the application of the doctrine of public policy.

The New York Convention has gained acceptance in the international community. It is the only pillar upon which arbitration rests. The spirit of the convention is in article 111 of the convention. However, under article 2 of the convention, and enforcing state may refuse to enforce an arbitral award if it contravenes public policy. The language is discretionary; hence, the courts can still decide to enforce an award even though it offends the public policy of an enforcing state. This discretionary nature allows courts to enforce arbitral awards in the spirit of commercial transactions.

This concept of public policy is very broad, and it is subject to several interpretations. It also depends to a large extent on politics, thereby making this ground of refusal generate a lot of controversies. The ground is closely intertwined with others like natural justice, which requires that before an arbitral award is enforced, the judicial authority that is enforcing should satisfy itself as to the fact that the arbitral tribunal that made the award followed the due process of law as well as having regard to rules of natural justice. In the case of ‘Parsons & Whittemore Overseas Co. v. Societe Generale de l’Industrie du Papier,’[1] the court held that the issue of public policy should be construed narrowly.

The appellant was contending that such enforcement of the arbitral award was against public policy. The court relied on article v 9(b), of the New York Convention. [2] The court, on this basis, declined to enforce the arbitral award sought to be enforced by the appellant. The court went ahead to explain that public policy as enshrined in the convention ought to be construed narrowly. It was also held that enforcement should only be declined where the very basic notions of morality, as well as justice, are undermined. The court went on to state that it would be derogating from the terms of the convention if it relied solely on the assertions that the United States and Egypt were not on friendly terms and refused enforcement on such grounds. Since the public policy is relative, there are very many instances where it is given a very broad interpretation. Therefore, it is prudent to carefully examine this concept.

The question as to what constitutes public policy is wholly dependent on the enforcing state. The state has rules and regulations that govern the fundamentals of justice. These fundamental issues involve socio-political as well as economic interests. It is as a result of these existing differences that it is not possible to define public policy. However, it is good to note that many states, especially developed jurisdictions, have a consensus as to what constitutes public policy.

Writers on the subject argue that the defense of public policy has been sparingly used owing to the distinction that has been drawn between domestic public policy and international public policy. They argue that what constitutes public policy in the domestic sphere will not at the all-time result in public policy in the international sphere. Therefore, this means that issues falling under the public policy in the international sphere are relatively smaller than the public policy cases in domestic cases. There are arguments that public policy should only be construed to the confines of the territorial boundaries of a particular state. Article v (2) (b) of the convention provides for the place that the recognition, as well as enforcement, is being sought.

Draft recommendations contributing to the reforms that were being advocated as regards enforcement of arbitral awards provided that a court verifies whether an arbitral award conforms to the fundamental principles as provided in its legal system, but not in the context of the law under which a particular contract falls under. [3] It further states that it should be governed by the law of the place of the performance of the contract as well as the law, where the arbitral proceedings took place. This means that the public policy should be adopted, but should not be limited to the scope of the enforcing state. The argument is that they should extend to the state where that particular law was made – this is the intention of this convention.

Many courts in England are not willing to prevent an award from being enforced on public policy grounds. However, in Soleimany v Soleimany, the court refused to enforce an arbitral award that involved an agreement between father and the son.[4] The contract in question involved exportation of carpets outside Iran, which was contrary to Iranian laws. The two parties in the contract had an arbitration clause in the contract. They had agreed that the applicable law for the contract was Jewish law. The court held that whether there was illegality on the contract or not, this did not in any way hinder abuse of public policy on behalf of the parties seeking enforcement of an illegal contract.

There are instances where there has been resistance to base refusal of enforcement on public policy.[5] In this case, the arbitrators who were sitting in Switzerland dismissed the defendant’s claim involving agreement for contract of military equipment that had been procured through bribing of government officials. Therefore, the contract was deemed illegal. During the proceedings, the arbitral tribunal found that the evidence of corruption could not be proved. It also held that, under Swiss laws, it was not illegal to lobby for contracts. When the matter was subsequently challenged at the Federal Court in Swiss, the court thereafter refused to do away with the arbitral award.

The court cited the defendant’s arguments to the effect that there were contraventions of Kuwait law. It also held that the issue of public policy had been heard and decided on by the tribunal. When the matter went for appeal to England, the defendant raised the issue of illegality yet again. He said that the contract was procured through corruption as well as personal influence. He also brought up issues of fraud as well as dishonesty as a result of perjury of the witnesses. He cited that all these factors were within the public policy.

However, the court refused to agree with him on the claims of the defendant’s influence as well as lobbying. This is because the court was of the opinion that this was not an issue in the English Legal system, with regard to public policy exception.[6] The court argued that England was not the place where the performances of the obligations in the contract were to take place. The court went on to reject new evidence since the allegations of perjury could not be admissible under the arm of law in question.

In the case of Laminoirs – Trefileries – Câbleries de Lens,S.A. v. Southwire Co,[7] the defense of public policy was also successfully invoked where South-wire was opposing a motion that was seeking to confirm an arbitral award that was brought by a French company. There was a provision in the arbitral award for interest to accumulate from the date of making of the award. The court was of the view that charging interest amounted to penalty. The court declined to enforce that part of the award. The court cited Article V 2 (b) of the New York convention on the enforcement of arbitral awards. The court stated that ‘a foreign law will not be enforced if it is penal only, and relates to the punishing of public wrongs as distinguished from redressing of private injuries.’[8]

There is a lot of uncertainty existing in public policy. It is suggested that there should be a narrow approach. An enforcing state is allowed to shield its judicial process from abuse. It has an entitlement to maintain the integrity of its judicial system. Therefore, it refuses to enforce the award if it could eventually defeat this objective. Enforcement would be refused where arbitrators give an award that no reasonable arbitrator would give. The convention has not provided any guidelines on the application of the exception of public policy. This creates a problem, where the courts that are tasked with enforcement come up with new situations.

However, it is good to emphasize that the ambit of public policy should be stretched to ensure due regard to the interest of justice. It recommended international public policy to be the yard stick with which to determine whether an award that has been made internationally is enforceable or not. Nevertheless, the International Law Association has fallen short as it has failed to get a universal consensus on the approach to public policy.

The legislative policy under the act is geared towards minimizing curial intervention especially for international arbitration as well as errors of law and fact made during arbitration. In the present situation, errors of fact and law cannot be said to engage public policy in the English system. They cannot be set aside by invoking the provisions of article 342 of the English Arbitration Act. The courts have been seen to adopt the above approach and held that, after having considered all facts set forward by parties in arbitration tribunal, public policy would be a mere error of fact, which cannot be invoked to set aside an arbitral award. A mere ground of error of fact or law on the part of the court does not set aside the arbitral award.

As can be seen from the foregoing, it is evident that each case depends on a particular set of facts. These are facts upon which the court determines whether a particular arbitral award falls under public policy. If the court finds out that the rule has been characterized as falling under public policy as far as the exception is concerned, and if an award violates this rule, it is undisputed that the enforcement of such an award should automatically come under public policy exceptions. The doctrine of public policy is a very narrow one. In fact, it is a very narrow ground upon which to impugn an arbitral award.[9] The court held that the object of the New York convention was to foster enforcement of arbitral awards, especially for international contracts a well as seeking to unify the standards for enforcing the agreements.

There have been attempts to simplify the enforcement of the awards. But there have been arguments that this will risk the uniformity of the enforcement. Therefore, the public policy exception is a very controversial issue as far as enforcement of arbitral awards is concerned. There should be some uniformity so as to do away with the misunderstanding as to what constitutes public policy and consequently as to certainty as to enforcement of arbitral awards. An attempt has been made by the International Law Association (ILA) to resolve the uncertainty existing in public policy. It suggested that there should be a narrow approach.

There have been attempts at attainment of the object of the convention without having to rely on the courts for enforcement of the arbitral awards. Article V 2(b), with regard to public policy gives it a narrow construction. This is contrary to morality as well as justice of that particular forum.[10] The expression of the convention was considered the basic notion of morality as well as justice. It is also similar to the formulation adopted by a Singapore court in cases where upholding an arbitral award would ultimately shock the conscience.[11] It should also be considered if it eventually turns out to be injurious to the public, or offensive to the reasonable members of the public.[12] Public policy is also considered as violating forum’s very basic notion as far as morality and justice is concerned.

In the English legal system, when a national court has been called upon to enforce an arbitral award, the court is required to determine whether it meets the entire formal requirement needed to enforce it. As it does so, it might require its own motion, or do it on a respondent’s defense if a given award is contrary to public policy. The courts have shown unwillingness to refusing enforcement, solely on the basis that enforcing such an award is contrary to public policy. English courts view the pro-enforcement bias present in the New York Convention as a public policy issue.

The English courts have thus, though impliedly, adopted the principle of international public policy that favors a restrictive approach. [13] In Westacre Investment Inc, the parties had entered into a contract that was governed by Swiss law. The contract was for selling military equipment to Kuwait. The appeal court held that the contract involving the buying such influence would only be contrary to public policy of the country where it was to be performed.

However, the court in another case refused to enforced an award on grounds that smuggling of carpets was illegal in Iran, therefore, contrary to public policy. To date, there is no consensus as to what approach to be adopted in the English legal system. In reality, even though used as a defense, there has been very little success in the courts, apart from the English legal system, where the doctrine is given a restrictive approach. In view of this discussion, we can conclude that it has been given a very restrictive approach.

The legislative policy under the act is geared towards minimizing curial intervention, especially for international arbitration as well as errors of law and facts made during arbitration. In the present situation, an error of facts and law does not engage public policy in the English system. They cannot be set aside by invoking the provisions of article 34 2 of the English Arbitration Act. The courts have been seen to adopt the above stated approach and held that, after having considered all facts set forward by parties in arbitration tribunal, public policy would be a mere error of fact which cannot be invoked to set aside the arbitral award.

A mere ground of error of fact or law on the part of the court does not set aside the arbitral award. Apparently, the courts in the English system adopt a very narrow interpretation of the public policy doctrine. The court in this case rejected an argument put forward that disproportionate cost in an arbitral award. They are willing to enforce it even if it is injurious to the public.

Other jurisdictions

The New York Convention has witnessed its fiftieth anniversary. Recently, many countries in the South East of Asia have adopted rapid development as well as arbitration as an alternative mode of resolving disputes. The question to consider is “why are these states now adopting arbitration”? The prominent factor that has made these countries adopt arbitration is the fact that there has been an adoption of the UNCITRAL Model Law on International Commercial Arbitration, especially in many jurisdictions in South East Asia. To date, there is no consensus as to what approach to be adopted. In reality, even though used as a defense, there has been very little success in the courts, but at least in the United States, it is given a restrictive approach. It has been interpreted restrictively in many United States cases.

While several states have adopted the position supported by international arbitration, some other states have adopted a rather restrictive as well as relaxed approach as regards public policy. The approach adopted by courts for grounds to set aside an arbitral award under Model Law is identical to the grounds considered when setting aside an arbitral award under the New York Convention. The most important consideration is that a specific award should not in any way violate the municipal laws of the enforcing state.

Future challenges

There lacks universality as to what awards the New York Convention on enforcement of arbitral awards apply to. This is particularly owing to the existence of many definitions as to what constitutes a domestic award in the arbitration context. There are also some reservations made to the convention. Therefore, no one approach is under the approach to be adopted. Article 1(1) is applicable and can be invoked in two circumstances. One, it can be invoked where there is an award of foreign arbitration. This is where an award has been made in a foreign country.

The other potential situation likely to arise in the situation of those foreign awards is the state, where such recognition and enforcement is sought. The model law puts forth an argument that distinction ought to be drawn between awards originating from the domestic and not from the international arbitration tribunals. If a country has adopted model law, parties in arbitration proceedings can be considered as international parties and ultimately subjected to the biases of the New York Convention.

Courts in their attempt to adopt a narrow approach as to what constitutes public policy have attempted to distinguish domestic as well as international public policy as far as allowing public policy in the context of the exceptions. Public policy exception continues to be relative, and relativity continues to increase with time. As a result of this, enforcement of arbitral awards continues to be hard.

Recommendations

There ought to be clear guidelines as to what public policy is in the context of arbitration awards. Currently, there is no clear-cut consensus as to what constitutes public policy. Different countries approach the issue of public policy differently. In a very ideal world, upon parties submitting their dispute to an arbitral tribunal, they indicate their willingness to be bound by the decision of the tribunal. But it is important to appreciate the fact that the party who is unsuccessful may choose to evade carrying forward with the award. That is why the New York Convention was enacted to give remedies to the party who is successful. It gives the successful party the option of enforcing the award, not only in the court where the arbitral proceedings took place but also in other courts where the unsuccessful party holds assets. However, before the award can be enforced, it must pass the test of public policy of the enforcement state if it is to be enforced.

The biggest headache is what constitutes public policy in a particular enforcing state. Public policy cannot be precisely determined. Therefore, there should be attempts to simplify the enforcement of the awards. Since the public policy is relative, there are very many instances where it is given a very broad interpretation. As such, it is prudent to carefully examine this concept. The question as to what constitutes public policy is wholly dependent on the enforcing state.

The enforcing state has the rules and regulations governing fundamentals of justice in its jurisdiction. These fundamental issues involve socio-political as well as economic interests. It is as a result of these existing differences that it is not possible to define public policy. However, it is good to note that many states, specially developed jurisdictions have a consensus as to what constitutes public policy. These existing uncertainties make enforcement of arbitral awards very uncertain as well.

But there have been arguments that this will risk the uniformity of enforcement. The public policy exception is thus a very controversial issue as far as enforcement of arbitral awards is concerned. There should be uniformity to do away with the misunderstanding as to what constitutes public policy and consequently lead to certainty as to the enforcement of arbitral awards. An attempt has been made by the International Law Association (ILA) to resolve the uncertainty existing in public policy. It suggested that there be a narrow approach. It recommended international public policy to be the yardstick with which to determine whether an award that has been made internationally is enforceable.

However, the International Law Association has failed to get a universal consensus on the approach to public policy. The only law that regulates arbitration, even though not satisfactorily is the New York Convention. The New York convention was intended to be the global regime for recognition and enforcement of arbitral awards. It is a very popular convention. The convention has gained acceptance in the international community. It is the only pillar supporting arbitration. The spirit of the convention is hailed in article 111 of the convention. An enforcing state is allowed to shield its judicial process from abuse. It has an entitlement to maintain the integrity of its judicial system. Therefore, it refuses to enforce the award if it could eventually defeat this objective.

Enforcement would be refused where arbitrators gave an award that no reasonable arbitrator would have given. The convention has not provided any guidelines on the application of the exception of public policy. This creates a problem where the courts that are tasked with enforcement can come up with new situations. However, it is good to emphasize that the ambit of public policy should be stretched to ensure due regard to the interest of justice.

Arbitration offers several advantages when compared with litigation. The parties in dispute may prefer arbitration to enjoy the advantages that come with it. The arbitral awards by courts from different parts of the world invade arbitration, as a way of resolving disputes. There has been a tendency whereby the parties to an arbitration contract can hardly have confidence with the award, as once granted, it can be overturned. Furthermore, parties in a dispute are discouraged from arbitrating because they cannot be sure that the dispute will not end up in court. In other words, judicial precedents and other standards do not go down very well with private litigants.

All in all, the English national courts must progressively come up with conventional standards, concerning the statutory basis for judicial review. In addition, the courts should adopt a more standardized manner to deal with the issue of the arbitral award. When this is done, disputing parties could become confident that their arbitration award will conclude successfully. More so, the successful conclusion of arbitration is its primary goal. This can be achieved through respect of the parties’ bargains and ensuring that there are no shortcomings in the process of arbitration. The parties should be given the freedom to select arbitrators of their choice, and arbitration of the awards should not be the final thing.

Conclusion

In conclusion, it is worth noting that there has been an increase in international trade as well as investment. Therefore, there is an increased demand for arbitration. We have seen that what makes it a preferred mode of solving commercial disputes is the fact that parties are given an option to choose a neutral person to make decisions. In principle, an award that has been rendered in favor of a claimant does not ordinarily require to be enforced by a national court. However, as we have seen, the losing party could try to evade meeting their obligations under the award.

That is why the claimant has been provided with a remedy under the New York Convention, where a successful claimant can seek to enforce the award either in a national court as well as the seat of arbitration. But this is only possible if such a claim is not vitiated by public policy. If public policy is successfully invoked, such a claim is rendered unenforceable. Public policy can be invoked by the court on its motion. There are instances where an award may not be contrary to the public policy of the tribunal seat, but contrary to the public policy of an enforcing state. The public policy should be adopted, but should not be limited to the scope of the enforcing state. It should extend to the state where that particular law was made.

Since the public policy is relative, there are very many instances where it is given a very broad interpretation. Therefore, it is prudent to carefully examine this concept. The question as to what constitutes public policy is wholly dependent on the enforcing state. The regulation and principles in a state govern the fundamentals of justice. These fundamental issues involve socio-political as well as economic interests. It is as a result of these existing differences that it is not possible to define public policy. However, it is good to note that many states, specially developed jurisdictions have a consensus as to what constitutes public policy. These existing uncertainties make enforcement of arbitral awards very uncertain as well.