Enforcement of International Arbitral Awards
Enforcement of international arbitral awards
The issues relating to the enforcement of international awards vary depending on whether the state in which the award is sought to be enforced has ratified the New York Convention on the recognition and enforcement of foreign arbitral awards (“Convention”) or not. The Convention dates from 1958 and the majority of the countries involved in international commerce are signatories. If the state where the winning party seeks to enforce the award is signatory to the Convention, the premise is that an award will be automatically enforced. Where the state has not ratified the Convention, the award would be treated as a foreign judgment.
Grounds for denial under the Convention
The Convention’s main raison d’être is to facilitate international business by expediting enforcement of the international awards. The awards are enforceable in party states without appeal, unless one or more grounds set out in Article V(1) and (2) of the Convention are met.[1]. It is important to observe that Article V does not mandate refusal, but rather suggest that the courts may overlook the grounds while retaining some discretion on whether to enforce[2].
(i) Incapacity and invalidity
If 1) the parties had –under the law applicable to them- some incapacity; or 2) the arbitration agreement is not valid under either the law chosen by the parties, or by the lex arbitri, the award may be denied enforcement.
a) Incapacity
The parties’ incapacity is determined under the “law applicable to them.” This issue is resolved in accordance with the conflict of laws rules of the seat of arbitration.
This is encountered where the agreement was signed by an unauthorized individual (in case of a company) or by an underage or senile individual (if private person).
b) Invalidity
The agreement’s validity is determined under the parties’ chosen law, or the lex arbitri. The issue is, should the courts actually follow the sequence of listed in this article? Most agreements don’t have a choice of law clause. In some jurisdictions the general choice of law provision does not apply to the arbitration agreement. In the absence of an arbitration clause in the agreement, lex arbitri applies.[3] For instance, Supreme Court of Austria decided that the validity of an arbitration award is determined in accordance with the seat of arbitration.[4] However, these are the exception, most courts adopt the sequence of the laws listed in the Article[5]
In general, consent is important for the validity. This is why written agreement is required[6]).
(ii) Lack of notice or fairness
Due process is a concept which was essentially introduced by the United States, now accepted by almost all jurisdictions.[7]
Fairness requires that parties be provided with notice of the appointment of arbitrators, and the proceedings. They must be given full and equal opportunity to present their case. One famous case where this ground was applied is the Iran Aircraft Industries v. Avco Corp.[8]” The US Court opined that due process rights are "[t]he fundamental requirement of due process is the opportunity to be heard 'at a meaningful time and in a meaningful manner'".[9] The enforcement was refused in this case.
(iii) Ultra Petita
A tribunal derives its power from the parties’ consent. Where the tribunal exceeds these powers, the resulting award may be unenforceable.
An example where this ground was successfully used is a US Supreme Court case where the court considered whether a class action was permitted when the parties’ agreement was silent on the issue. The court decided that “the task of an arbitrator is to interpret and enforce a contract, not to make public policy.”[10]
Also a Canadian court refused enforcement where the tribunal awarded a party costs, even though the arbitration agreement provided that they would each assume their own.[11]
(iv) Tribunal or procedure not in accord with the agreement
Awards may be denied enforcement if either
(a) the constitution of the tribunal; or
(b) the arbitral procedure
was not consistent with the agreement of the parties, failing such agreement, was not in accordance with the law of the seat of arbitration.
The clause suggests that the procedure is determined primarily by the parties’ agreement. Some courts, such as the Chinese, have taken a strict approach and refused enforcement where the arbitration institution’s procedural rules or the parties’ agreements were not respected.[12]
(v) Award not yet binding or having been set aside
Courts may refuse enforcement of an award if it has not yet become binding, or has been set aside or suspended by a competent court in which, or under the law of which, that award was made.
The Convention does not provide a definition of the word “binding.” Some argue that an award is binding when an appellate court may not review the merits. Whether an award is binding is determined under the lex arbitri. The majority of the courts refuse enforcement of annulled or set-aside awards. But there are exceptions. A few jurisdictions have taken the view that in appropriate circumstances an annulled international award may be enforced. Canada, United States and France are among jurisdictions that have enforced annulled awards.[13]
The next two grounds may be raised by the courts sua sponte:
(i) Arbitrability
Courts are said to be concerned with public interest, and arbitrators with the parties’ interests. Typically matters that affect public life are left to courts, like penal matters, bankruptcy, consumer contracts, competition, corporate affairs, construction liens, fraud, work related injuries, tortuous liability, tax related issues, inheritance matters, intellectual property disputes, family law. These matters are deemed to be non-arbitrable in general.
In general disputes involving freely transferable rights may be settled by arbitration as codified by some countries, such as Brazil, Croatia, Peru, Korea and Netherlands.”[14]
Some other countries adopt even a broader view like Germany and Switzerland [15] that any claim involving an economic interest is arbitrable. Another example is Australia where insurance contract disputes are not arbitrable, but post-dispute agreements are.[16]
In the United States, the Supreme Court has decided that Federal Arbitration Act applies to statutory claims involving U.S. antitrust law.
(ii) Public Policy
Enforcement can be denied if the award violates public policy in the jurisdiction where the enforcement is sought. The Convention does not define public policy. In most developed countries this rule is rarely successful, whereas in the developing countries uncertainty prevails. For example in the United States, courts declared that an award will not be refused enforcement merely because it is contrary to public policy, unless it would offend “the most basic notions of morality and justice.”[17] Whereas in other jurisdictions public policy is construed more broadly like in Qatar, where the Court of First Instance refused to enforce an ICC award seated in Paris on the grounds that it violated the country’s public policy by not being issued in the name of His Highness the Emir of Qatar.[18] The difference between the American and Qatari approaches demonstrate to what extent “public policy” can be a nebulous concept.
[1] Duferco SA v Ningbo Arts & Crafts Import & Export Co Ltd., 2008. A Chinese court enforced an award which was contested as invalid under Chinese law. Court decided the grounds for refusal were not met.
[2] The Article states “recognition and enforcement of [an] award may be refused….. if”
[3] Act, sec. 46(1)(a).
[4] Decision of March 30, 2009, docket no. 7 Ob 266/08f.
[5] BGH, III ZB 69/09, BGHZ 187, 126
[6] Article II of the Convention requires the arbitration agreement to be in writing.
[7] E.g. Chinese Constitution does not guarantee procedural due process rights
[8] US 980 F.2d 141
[9] Mathews v. Eldridge, 424 U.S. 319, 333, 96 S.Ct. 893, 902, 47 L.Ed.2d 18 (1976) (quoting Armstrong v. Manzo, 380 U.S. 545, 552, 85 S.Ct. 1187, 1191, 14 L.Ed.2d 62 (1965)
[10] 559 U.S. __; 130 S. Ct. 1758 (2010).
[11]Telestat Canada v. Juch-Tech Inc., 2012 ONSC 2785, 3 BLR (5th) 282.
[12] Recognition and Enforcement of Foreign Arbitral Awards: The Application of the New York Convention by National Court by George A. Bermann. P. 58. Footnote 180.
[13] Eg., Chromalloy Aeroservices v. Arab Republic of Egypt, 939 F.Supp. 2d 907 (1996); Hilmarton, Cass. Civ. 1er, Mar. 23, 1994, Rev. arb. 1994. 327, JDI, 1994, 701.
[14] (a)Under Article 3 of the Croatian Law on Arbitration, Article 1020(3) of the Netherlands Arbitration Act and Article 2 of the Arbitration Law of Peru, rights that they may freely dispose of can be arbitrated; (b) under Articles 1 and 3, section 1 of the Korean Arbitration Act any disputes in private law may be arbitrable; (c)Article 1 of the Brazilian Arbitration Act provides that “Persons capable of contracting may settle through arbitration disputes related to patrimonial rights over which they may dispose
[15] Civil Procedure Code (sec. 1030); Article 177 of the Swiss PILA
[16] Insurance Contracts Act 1984.
[17] Fotochrome, Inc. v. Copal Co., 517 F2d 512, 516 (2d Cir. 1975).
[18] Qatari Court of First Instance Deceision No. 2216 of 2013.