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Public Policy and the Enforcement of Arbitral awards: Should there be a Global Standard?
I. INTRODUCTION
As all arbitration practitioners and scholars know, violation of public policy (or ordre public) of the enforcing State has long been a ground for refusing recognition/enforcement of foreign judgments and awards. This principle is enshrined in Article V.2 of the New York Convention and Article 36 of the UNCITRAL Model Law. The public policy exception to enforcement is an acknowledgement of the right of the State and its courts to exercise ultimate control over the arbitral process. There is a tension, however, which the legislature and the courts must resolve between: on the one hand, not wishing to lend the State's authority to enforcement of awards which contravene domestic laws and values; and, on the other hand, the desire to respect the finality of foreign awards.
Public policy is often regarded as a vague concept which is impossible to define, which varies from State to State. This leads to uncertainty and unpredictability, which encourages the unsuccessful party in the arbitration to resist enforcement of the award on grounds of public policy. He might get lucky, or at least delay the fateful day when he must make payment. But is the application of public policy that unpredictable? And does it vary from State to State?
The International Commercial Arbitration Committee of the International Law Association (of which the writer is a Rapporteur) conducted a six year study into the application of public policy by enforcement courts. The Committee concluded its work last year. Notwithstanding the very different legal and cultural traditions of State courts, public policy is rarely successful in preventing enforcement of international awards. Nevertheless, the Committee concluded that greater harmonisation of approach would lead to greater consistency and predictability, which would dissuade unmeritorious challenges to awards. The ILA Committee made a number of recommendations, which were adopted at the ILA's 70th Conference in New Delhi, in April 2002.
The Committee's Final Report and Recommendations are attached to this paper. The Committee's Interim Report can be found in pdf format at: www.ila-hq.org.
This paper summarises the findings of the ILA Committee.[1]
II. INTERNATIONAL LAW ASSOCIATION
The International Law Association was founded in 1873. It was the result of the combined efforts of several Americans who brought to Europe the idea of an international association to work on a code of international law. The original objectives are still in the current Constitution and include: the study, elucidation and advancement of international law, public and private; the study of comparative law; the making of proposals for the solution of conflicts of law and for the unification of law; and the furthering of international understanding and goodwill.
These objectives are pursued principally through the work of the Association's international committees, with the focal point of its activities the series of biennial conferences. These provide a forum for comprehensive discussion and endorsement of the work of the committees.
The ILA comprises 18 Committees, ranging from International Monetary Law, to Refugee Procedures, to Space Law.
The Arbitration Committee comprises 51 members (including alternates) from 35 countries. During the public policy project, the Committee was chaired by Professor Pierre Mayer.
III. DEFINITIONS OF PUBLIC POLICY
When considering the application of public policy, it is especially important to define one's terms; and, in particular, to distinguish between public policy, international public policy and transnational public policy.
Public Policy
In using the term "public policy", I mean those moral, social or economic considerations which are applied by courts as grounds for refusing enforcement of an arbitral award (either domestic or foreign).
The English House of Lords in 1853 described public policy as "that principle of law which holds that no subject can lawfully do that which has a tendency to be injurious to the public, or against public good".[2]
International public policy
In using the term "international public policy" (or ordre public international), I mean that public policy which is applied by State courts to foreign awards rather than domestic awards. International public policy is understood to be narrower than domestic public policy: not every rule of law which belongs to the ordre public interne is necessarily part of the ordre public externe or international.[3]
But "international public policy" is not to be confused with "transnational public policy". The latter is supra-national (see below); the former is specific and subjective to each State.
Transnational or truly international public policy
By the term "transnational public policy", I mean those principles that represent an international consensus as to universal standards and accepted norms of conduct that must always apply.
The concept of "transnational public policy", or "truly international public policy", is said to comprise 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".[4]
IV. ENFORCEMENT CONVENTIONS
New York Convention 1958
When considering enforcement of awards, the starting point is, of course, the New York Convention. 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."
It refers to "the public policy of that country". Thus, the drafters of the 1958 Convention did not seek overtly to attempt to harmonise public policy or to establish a common international standard.
However, the Drafting Committee noted in its Report that it intended to limit the application of the public policy provision to cases in which recognition or enforcement would be "distinctly contrary to the basic principles of the legal system of the country where the award is invoked",[5] thus endorsing a narrow concept of public policy.
Other Conventions
The 1927 Geneva Convention stated that an award would be enforceable unless "contrary to the public policy or to the principles of the law of the country in which it is sought to be relied upon" (Article 1(e)).
The 1975 Panama Convention makes reference to the "public policy of that State". The 1979 Montevideo Convention goes further: it requires that the award be "manifestly contrary to the principles and laws of the public policy ['orden publico'] of the exequatur State" (Art 2(h)).
The 1983 Riyadh Convention[6] provides that enforcement may be refused if the award is "contrary to the Moslem Shari'a,[7] public policy or good morals" of the signatory State where enforcement is sought (Art. 37). On the other hand, the 1987 Amman Convention[8] refers simply to "public policy".
Thus, the New York and other enforcement conventions leave open the possibility for enforcement courts to apply public policy widely or narrowly, although the drafters of the New York Convention preferred a narrow application.
The 1965 Washington (ICSID) Convention does not expressly refer to "public policy". Article 52 sets out various grounds for annulment, which include: corruption on the part of a member of the tribunal; serious departure from a fundamental rule of procedure; and failure to state the reasons on which the award is based. The first two of these would generally fall within the scope of domestic and international public policy. Enforcement of an ICSID award cannot be challenged in the courts of the enforcement country, save on grounds of sovereign immunity. In Société Ouest Africaine des Bétons Industriels -v- State of Senegal,[9] the French Cour de Cassation affirmed unequivocally that public policy (international or otherwise) was not an issue that the judge should consider when dealing with enforcement of ICSID awards.[10]
V. NATIONAL LEGISLATION
UNCITRAL Model Law
The 1985 UNCITRAL Model Law owes its origins to a request made in 1977 by the Asian-African Legal Consultative Committee for a review of the operation of the New York Convention. The Committee maintained that there was an apparent lack of uniformity in the approach of national courts to the enforcement of awards. The Secretary-General of UNCITRAL concluded that harmonisation of the enforcement practices of States, and the judicial control of the arbitral procedure, could be achieved more effectively by promulgation of a model or uniform law, rather than by any attempt to revise the New York Convention.[11] The final text was adopted in 1985. The Model Law includes "public policy" as a ground for setting aside an award by the courts at the seat of the arbitration (Art. 34) and as a ground for refusing recognition and enforcement of a foreign award (Art. 36), in essence reflecting Article V.2 of the New York Convention. The Model Law does not, however, define "public policy".
During discussions concerning Article 34(2)(b)(ii), the United Kingdom delegation expressed concern that "public policy", as understood in Common Law jurisdictions, might not cover all cases of procedural injustice. It gave as examples awards tainted by fraud, corruption or perjured evidence.[12] Doubts were raised as to whether the requirements of equality of treatment (Art. 18) and of giving the parties a full opportunity to present their respective cases (Arts. 18 and 34(2)(a)(ii)) adequately covered these situations. The discussions highlighted the difference between the Common Law concept of public policy and the Civil Law concept of ordre public (which would undoubtedly encompass breaches of procedural justice).[13] It was eventually decided not to expand the list of the grounds for setting aside but that the position should be clarified in the Commission's Report. The Report stated:[14]
"It was understood that the term 'public policy', which was used in the 1958 New York Convention and many other treaties, covered fundamental principles of law and justice in substantive as well as procedural respects. Thus, instances such as corruption, bribery and fraud and similar serious cases would constitute a ground for setting aside. It was noted, in that connection, that the wording 'the award is in conflict with the public policy of the State' was not to be interpreted as excluding instances or events relating to the manner in which it was arrived at."
Article 36, like Article V.2(b) of New York Convention, refers to the public policy of the State in which enforcement is sought. Again, there was no overt attempt to harmonise the definition or application of public policy.
OHADA Uniform Act
L'Organisation pour l'Harmonisation en Afrique du Droit des Affaires (OHADA) was created by the Treaty relating to the Harmonisation of Laws in Africa, signed on 17 October 1993, in Port-Louis. OHADA is open to members of the Organisation of African Unity, and to date sixteen States have joined.[15] On 11 March 1999, the Council of Ministers of OHADA adopted a Uniform Arbitration Law. Article 31 provides that recognition and enforcement shall be refused if the "award is manifestly contrary to a rule of international public policy of the member States".[16] The Cour Commune de Justice et d'Arbitrage, based in Abidjan, Côte d'Ivoire, is to supervise the application and interpretation of the Law, and a decision not to allow enforcement may be appealed to that court. This is the first attempt, of which I am aware, to harmonise public policy within several sovereign States.[17] It also notable that it is to be "international public policy" that should be applied.
State legislation
The terminology used in referring to public policy in national legislation varies considerably, from expressly stipulating "international public policy" through to referring to national norms.
The enforcement legislation in France[18], Portugal[19], Algeria[20] and Lebanon[21]makes reference to "the principles of international public policy".
The legislation of a number of countries refers simply to "public policy".
Most countries, however, refer to public policy of "Country X", which is the wording of the New York Convention and the UNCITRAL Model Law, or else they have simply adopted the New York Convention.
Some countries refer to public policy (or public order) and good morals, for example: Japan[22]; Libya[23]; Oman[24]; Qatar[25]; and The United Arab Emirates[26]. And Yemen[27] makes reference to public order and the Moslem Shari'a.
A number of countries 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.
Given the location of the conference, I should highlight the approach of the local legislators. Australia (in 1989) and New Zealand (in 1996) have both enacted modified versions of the UNCITRAL Model Law. The Australian legislation refers simply to "public policy"[28] whereas the New Zealand legislation refers to the "public policy of New Zealand".[29] 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 …".[30]
Thus, these two countries (and also Zimbabwe[31] and in part India[32]) have included in their legislation the UNCITRAL Commission's "understanding" of the meaning of public policy set out in their report, which resulted from the concerns of the United Kingdom delegation that public policy may not cover all cases of procedural injustice (as mentioned above).
V. APPROACH OF COURTS
Notwithstanding the differences in terminology in national legislation, the case law and commentaries that the ILA reviewed indicated that courts of many countries apply a narrow concept of public policy.
As noted above, the legislation of France[33] and Portugal[34] prescribes the application of international public policy. The courts of several other European civil law countries expressly apply international public policy, for example: Germany; Italy; and Switzerland. Commentators from other countries state that their courts apply public policy restrictively, for example: Denmark; the Netherlands; Norway; Spain; and Sweden.
But the "international public policy" being applied is generally the public policy of the country in question which is applicable to international awards, and not "transnational public policy". When commenting on the French approach, Fouchard, Gaillard and Goldman note:[35]
"The international public policy to which Article 1502.5 refers can only mean the 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."
Some courts have approved the application of transnational public policy but this has not received widespread acceptance. The Milan Court of Appeal (1992) may have had in mind a more transnational concept when it described international public policy as a "body of universal principles shared by nations of similar civilisation, aiming at the protection of fundamental human rights, often embodied in international declarations or conventions".[36] The Swiss Federal Tribunal in W. -v- F. and V.[37] (1994) was in favour of taking into account a "universal conception of public policy, under which an award will be incompatible with public policy if it is contrary to the fundamental moral or legal principles recognised in all civilised countries". However, in Les Emirats Arabes Unis -v- Westland Helicopters[38] (1994), the same court, after a long discussion of academic authority, refused to take a position on the point, preferring instead a "pragmatic approach". In France, the Paris Court of Appeal has expressed a degree of scepticism in relation to applying such a concept, in Fougerolle -v- Procofrance[39] (1990), although it has noted that certain activities, such as corruption, violate both French public policy and international business ethics.[40]
Common Law countries have also restricted the scope of public policy but have not embraced transnational public policy.
The United States applies a restrictive concept of public policy. For example, the definition of public policy most often quoted in the context of international arbitration is that of Judge Joseph Smith in Parsons & Whittemore[41] (United States Court of Appeals, 1974) in which he held that enforcement of a foreign arbitral award may be denied on public policy grounds "only where enforcement would violate the forum state's most basic notions of morality and justice". The same year (1974), the Supreme Court, in Scherk -v- Alberto-Culver Co.,[42] recognised the difference between international and domestic public policy. It enforced an agreement to arbitrate a claim arising in international trade, although arbitration of a similar claim would have been barred had it arisen from a domestic transaction.
Although the English courts have not yet expressly applied the concept of international public policy, they have affirmed the importance of finality of awards when considering an objection to enforcement on grounds of illegality, and have endorsed a restrictive concept of public policy.[43] For example, the English Court of Appeal (Sir John Donaldson MR), in D.S.T. -v- Rakoil[44] (1987), stated:
"Considerations of public policy can never be exhaustively defined, but they should be approached with extreme caution. ... It has to be shown that there is some element of illegality or that the enforcement of the award would be clearly injurious to the public good or, possibly, that enforcement would be wholly offensive to the ordinary reasonable and fully informed member of the public on whose behalf the powers of the State are exercised."
In India, the Supreme Court, in Renusagar Power Co. Ltd -v- General Electric Co. [45] (1994), interpreted public policy more restrictively than it had done previously. The Court held that in order to attract the bar of public policy, the enforcement of the award must invoke something more than the violation of the law of India. It held that the phrase "public policy" must be construed in the sense in which the doctrine of public policy is applied in the field of private international law; and that enforcement of a foreign award would be contrary to public policy if it was contrary to (a) fundamental policy of Indian law; (b) the interests of India; or (c) justice and morality.
A Singaporean judge has said[46] (1996): "the principle of comity of nations requires that the awards of foreign arbitration tribunals be given due deference and be enforced unless exceptional circumstances exist".
A recent decision of the Hong Kong Court of Final Appeal[47] (1999) highlights the issues faced by many courts the world-over, and in respect of which the ILA sought to give guidance. The Court addressed whether the applicable public policy was that of Hong Kong or some shared public policy, and to what extent a national court could or should look at the practice of other courts. The Court rejected the suggestion that public policy under the New York Convention meant some "standard common to all civilized nations". Nevertheless, it construed public policy narrowly. It stated that in order to refuse enforcement of a New York Convention award on public policy grounds, "the award must be so fundamentally offensive to that jurisdiction's notion of justice that, despite it being a party to the Convention, it cannot reasonably be expected to overlook the objection". And the Court accepted that, in many instances, the relevant public policy of the forum would coincide with the public policy of other countries, and that it would be appropriate to examine how far the courts of other jurisdictions had been prepared to go in enforcing Convention awards made in circumstances that did not meet their domestic standards.
VI. ILA RECOMMENDATIONS
Having summarised the ILA's findings, I now turn to the ILA's Recommendations.
Given the extensive practice of legislatures and courts to apply public policy restrictively, and the general "pro-enforcement bias" of the New York Convention, the ILA was able confidently to recommend that:
"The finality of awards rendered in the context of international commercial arbitration should be respected save in exceptional circumstances."
The ILA also recommended the application of "international public policy" (as I have defined it above, namely, that part of a public policy of a State which, if violated, would prevent a party from invoking a foreign law or foreign judgment or foreign award).
Categories of international public policy
It is beyond the scope of this paper to discuss the various circumstances found by courts to have violated their country's international public policy, nor did the ILA in its Recommendations seek to prescribe what should and should not be good grounds for refusing enforcement. The ILA did, however, identify various categories of international public policy and gave examples.
The ILA noted that the international public policy of any State includes:
(i) fundamental principles, pertaining to justice or morality, that the State wishes to protect even when it is not directly concerned;
(ii) rules designed to serve the essential political, social or economic interests of the State, these being known as "lois de police" or "public policy rules"; and
(iii) the duty of the State to respect its obligations towards other States or international organisations.
International public policy includes both substantive and procedural principles.
Substantive public policy (ordre public au fond) goes to the recognition of rights and obligations by a tribunal or enforcement court in connection with the subject matter of the award, as opposed to procedural public policy, which goes to the process by which the dispute was adjudicated.
An example of a substantive fundamental principle is the principle of good faith and prohibition of abuse of rights (especially in civil law countries). Other examples that are cited by courts and commentators include: pacta sunt servanda; prohibition against uncompensated expropriation; and prohibition against discrimination.
There is an ongoing debate whether and to what extent the award of unlawful relief (e.g. punitive or exemplary damages) constitutes a violation of international public policy.
The category of fundamental principles also includes the proscription against activities that are contra bonos mores, such as: piracy; terrorism; genocide; slavery; smuggling; drug trafficking; and paedophilia.
Some fundamental principles, such a prohibition against corruption, may also fall into one or more of the other categories.[48]
An example of a procedural fundamental principle is the requirement that tribunals be impartial. Other examples that are given are: the making of the award was induced or affected by fraud or corruption; breach of the rules of natural justice; and the parties were on an unequal footing in the appointment of the tribunal.
It is widely accepted that procedural public policy should not include mistake as to the law or the facts by the tribunal (unaccompanied by some serious procedural irregularity).[49]
An example of a public policy rule is an anti-trust law.
In New Delhi, some participants at the ILA conference disagreed with this part of the Recommendation. However, the Committee concluded that there were a number of examples of courts considering anti-trust law to be part of public policy. Mitsubushi Motors Corp. -v- Soler Chrysler-Plymouth Inc.[50] (1985) is an example: whilst the US Court of Appeals emphasised its strong presumption of favouring and upholding international arbitration agreements, the Court reserved the right to review any award that violated US anti-trust law. Within the EU, a number of courts have recognised Article 81 EC as a matter of public policy within the meaning of the New York Convention.[51]
Other examples that are often cited are: currency controls; price fixing rules; environmental protection laws; measures on embargo, blockade or boycott; tax laws; and laws to protect parties presumed to be in an inferior bargaining position (i.e. consumer protection laws). [52]
An example of an international obligation is a United Nations Security Council resolution imposing sanctions.[53]
A State is also bound by to comply with the treaties it has ratified.
In Parsons & Whittemore[54] (1974), the United States Court of Appeals held that public policy did not equate with "national policy" (in the diplomatic or foreign policy sense), and it would not refuse to enforce an award in favour of the Egyptian party simply because of tensions at that time between the United States and Egypt. But one wonders whether the outcome in National Oil Corp. -v- Libyan Sun Oil Corp.[55] (Del., 1990) might be different today. In that case, the Delaware court rejected a challenge to an award at the enforcement stage on the ground that it was in favour of Libya - "a state known to sponsor international terrorism". The Delaware court noted that the United States still recognised the government of Libya, had not declared war on it and had specifically given it permission to bring an action to confirm the award. The Court said:
"To read the public policy defence as a parochial device protective of national political interests would seriously undermine the [New York] Convention's utility. This provision was not meant to enshrine the vagaries of international politics under the rubric of 'public policy'".
Extent of review by the courts
One of the issues that the ILA grappled with was the extent to which the enforcement court should review the reasoning behind the award and/or the evidence considered by the tribunal and/or any new evidence.
The majority of the ILA Committee concluded that public policy is of such importance for upholding the values of the State that the enforcement court should be entitled to review the underlying evidence presented to the tribunal and, in exceptional cases, any new evidence. However, the court should undertake a reassessment of the facts only where there is a strong prima facie argument of violation of international public policy.
The ILA further concluded that a party may be considered to have waived its right to raise fundamental principles as a ground for refusing enforcement, if that party could have raised relied on any such principle before the tribunal but failed to do so. A public policy rule of the enforcement State cannot, however, be waived - intentionally or not.
The United States case of AAOT Foreign Economic Association (VO) Technostroy Export -v- International Development and Trade Services, Inc.[56] provides an interesting example. The losing party (IDTS) sought to resist enforcement in the United States of a Russian award on grounds that it had evidence that the arbitration court which had appointed the tribunal was corrupt, relying on Article V(2)(b) of the New York Convention. The United States Court of Appeals rejected that argument on the basis that a party who has knowledge of facts possibly indicating bias or partiality cannot remain silent and later object. Even if IDTS thought that seeking relief through the arbitration court would have been futile, it was incumbent upon it at least to notify opposing counsel.
Finally, the ILA recommended that any part of the award that offends public policy should be severed (if possible) and that part that does not should be recognised or enforced.
VII. CONCLUSION
An English judge in 1824 described public policy as:[57]
"... a very unruly horse, and when once you get astride it you never know where it will carry you. It may lead you from sound law. It is never argued at all, but when other points fail".
Whilst the New York Convention has been acclaimed by many,[58] it was considered by some that the public policy exception would undermine the objectives of the Convention. There was concern that it was affording an unsuccessful defendant and/or the State a "second bite" at frustrating enforcement.[59] Others saw it as a necessary "safety-valve". The draughtsmen of the New York Convention sought to limit the scope of the public policy clause as far as possible.[60] A review of the cases shows that Article V.2(b) has not created any serious mischief. Attempts to resist enforcement on grounds of public policy have rarely been successful.[61] As another English judge said in response to his distinguished predecessor's observations: "With a good man in the saddle, the unruly horse can be kept in control."[62]
Nevertheless, uncertainty and inconsistencies concerning the interpretation and application of public policy by State courts encourage the losing party to rely on public policy to resist, or at least delay, enforcement. Perhaps the only way ultimately to keep the "unruly horse" in control would be to adopt the radical proposal of Holtzmann and Schwebel that an International Court of Arbitral Awards be set up.[63] That proposal will very likely seem too great a step for States jealous of their sovereignty to contemplate - at least at the present time (although the attempts by OHADA to harmonise arbitration law, including international public policy, within its sixteen member States is a very positive indication of what might be achievable in the longer term). Another and perhaps more workable way forward towards the achievement of greater predictability would be for the international arbitration community to reach a broad consensus as to which "exceptional circumstances" would justify a national court denying enforcement of a foreign arbitral award, and for the courts to have regard to any such consensus.
The time has not yet come for there to be a global standard of "public policy", but it is hoped that the ILA Recommendations represent a broad consensus, and if applied will lead to greater consistency in the interpretation and application of public policy as a bar to enforcement of international arbitral awards.
