PRACTICE OF USE OF THE PUBLIC POLICY EXCEPTION TO RECOGNITION AND ENFORCEMENT OF ARBITRAL AWARDS

PRACTICE OF USE OF THE PUBLIC POLICY EXCEPTION TO RECOGNITION AND ENFORCEMENT OF ARBITRAL AWARDS

Sergei Losev

Master of Law, Graduate of the Law Faculty of the National Research University Higher School of Economics,

Russia, Moscow

The most important legal document in the sphere of recognition and enforcement of foreign arbitral awards is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). This Convention provides a solid legal basis for recognition and enforcement around the world. However, the New York Convention contains certain grounds on which recognition and enforcement of foreign arbitral awards may be refused.

According to Article V (2)(b) of the New York Convention, recognition or enforcement of the award may also be refused if the recognition or enforcement of the award would be contrary to the public policy of that country. It is worth noticing that this provision of the New York Convention is highly controversial.

One of the biggest problems of the ‘public policy’ exception is that the New York Convention does not give any definition of the term ‘public policy’. International law also failed to provide a statutory definition of ‘public policy’.

Modern legal theorists often try to define ‘public policy’ or at least to frame its scope of application. For example, J. Nuss QC [2, p. 5] claims that public policy “refers to matters which the laws of a state or state courts have determined to be of such fundamental importance that contracting parties are not free to avoid or circumvent them”.

One of the best definitions of public policy was given by the U.S. Second Circuit Court of Appeals in the case Parsons & Whittemore Overseas Co., Inc. v.  Société Générale de l’Industrie du Papier where the Court stated that ‘enforcement of foreign arbitral awards may be denied on this basis only where enforcement would violate the forum state's most basic notions of morality and justice’. Thus, the concept of public policy relates to the most important moral and legal principles that cannot be ignored in any scenario. However, it is almost impossible to come up with a universal definition of the term ‘public policy’ because as has been rightly observed by Moses (2018) “the public policy of one country will not be exactly same as that of another country. Different countries have different standards undergirding their national public policy, and these can result in quite different interpretations of the term.” As a result of that, the term ‘public policy’ is supposed be defined in national legislation of a certain country. However, this does not often happen as well.

Among other issues concerning the public policy exception is the question whether the ‘public policy’ concept relates to domestic or international public policy. Gary Born [6, p. 3652] claims that “although there is debate concerning the topic, there can be little doubt that the public policy which may be invoked to resist recognition of an award under Article V(2) of the New York Convention and Article 36(1)(b) of the Model Law is national public policy”. In other words, according to Born, when interpretation of ‘public policy’ is always based exceptionally on the provisions of national legislation. However, not everybody accepts the position that ‘public policy’ exception concerns national policy of a certain state. For example, Gaillard [3, p. 996] points out “although Article V, paragraph 2(b) is not explicit on this point, there is no doubt that the reference in that provision to public policy is in fact a reference to the international public policy of the host jurisdiction. The provision certainly refers to international public policy and not domestic public policy”.

It should be noted that the Subcommittee on Recognition and Enforcement of Arbitral Awards of the International Bar Association prepared the Report on the Public Policy exception in the New York Convention in 2015. This document summarizes experience of application of ‘public policy’ exception around the world basing on the survey reports provided by more than 40 jurisdictions. The Report [7, p. 2] states that “in none of the covered jurisdictions is public policy statutorily defined, with two notable exceptions, being the UAE and Australia”. Hence, the term ‘public policy’ rests uncertain in statutory law of most of the world’s jurisdictions and is mostly defined by competent national courts. Moreover, there is no consensus among states on the question whether domestic or international concept of public policy should be used with regard to recognition and enforcement of foreign arbitral awards.

Therefore, in some states national courts may use domestic or broad interpretation of ‘public policy’ and unfairly refuse recognition and enforcement of foreign arbitral awards. As has been duly noted by Redfern and Hunter [12, p. 623] “the public policy exception enables some states enables some states to play the game less fairly than others”. To demonstrate this tendency, it is worth analyzing the practice of use of the public policy exception in the UK, France and Russia.

To start with, the UK can serve as an example of a country where national courts almost never refuse recognition and enforcement of foreign arbitral awards due to the violation of public policy. Public policy exception is implemented in the UK’s national law in the Article 103 (3) of the Arbitration Act (1996). This article states that ‘recognition or enforcement of the award may also be refused if the award is in respect of a matter which is not capable of settlement by arbitration, or if it would be contrary to public policy to recognize or enforce the award.’

British legislation as well as the New York Convention does not offer any definition for the term ‘public policy’. Despite the fact that English courts are quite reluctant to defining the term “public policy” [7, p. 8], they quite often interpret ‘public policy’ in an international context. For example, in case Tamil Nadu Electricity Board v ST-CMS Electric Company Private Ltd (2007) the defendant claimed that the arbitration agreement could not be enforced and arbitration itself could not be held in London because it violated ‘public policy’ due to the prohibition imposed by the Indian Law. The Court did not agree with the position of the defendant and claimed 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’ and most importantly the Court also stated that ‘public policy means international public policy and differs from public policy in a domestic context” (Tamil Nadu Electricity Board v ST-CMS Electric Company Private Ltd (2007), para. 42).  

Fortunately, due to many factors the UK’s national courts have set a high threshold for the public policy exception to be triggered. The British courts take a highly cautious approach towards public policy exception as a ground for refusal to recognize or enforce a foreign arbitral award. Therefore, despite the fact that English legislation and court practice do not give a precise definition of public policy, English courts usually use narrow interpretation of ‘public policy’ and rarely refuse to recognize and enforce foreign arbitral awards on that basis.

Moreover, twenty years ago the High Court of England and Wales in case Minmetals Germany GmbH v. Ferco Steel Ltd (1999) established quite a strict legal test that national courts should apply in cases where there is a possibility of a public policy violation. The Court stated that “in a case where an enforcee alledges that a New York Convention award should not be enforced on the grounds that such enforcement would lead to substantial injustice and therefore be contrary to English public policy the following must normally be included amongst the relevant consideration: (i) the nature of the procedural injustice; (ii) whether the enforce has invoked the supervisory jurisdiction of the seat of the arbitration; (iii) whether a remedy was available under that jurisdiction; (iv) whether the courts of that jurisdiction have conclusively determined the enforcee’s complaint in favour of upholding the award; and (v) if the enforce has failed to invoke that remedial jurisdiction, for what reason, and in particular whether he was acting unreasonably in failing to do so” (Minmetals Germany GmbH v. Ferco Steel Ltd, 1999, para. 30). Harris, Planterose and Tecks [14, p. 466] also point out that “any defect in the award or the conduct of the arbitration must first be sought to be remedied by the supervisory jurisdiction”. Nevertheless, it should be noted that the described case mostly concerned procedural violations and, in my opinion, the test established by the Court cannot be applied in cases with exceptionally substantive issues of public policy.

Notwithstanding the above, there are scenarios in which English courts would refuse recognition or enforcement of a foreign arbitral award because of the breach of public policy. One of the cases in which an English court refused to enforce foreign arbitral awards on the basis of public policy violation was Soleimany v. Soleimany (1999). Redfern and Hunter [12, p. 540] claim that this case was exceptional because it first example where the public policy exception was applied by an English court. Soleimany v. Soleimany (1999) was a dispute between a father and son (Abner and Sion) that concluded a contract to import carpets from Iran. However, this contract was illegal and violated certain Iranian laws. Eventually a dispute arose from this contract which parties submitted to arbitration. Therefore, when Abner decided to enforce the arbitral award in England the Court of Appeal refused to do so because it was against public policy to enforce an illegal contract. The Court of Appeal also indicated that arbitral awards that contain obvious illegal element should be strictly reviewed by an English court prior to the enforcement of such an award.

However, in number of other cases English courts did not support the position established by the Court of Appeal in Soleimany v. Soleimany (1999). English courts quite often allow recognition and enforcement of foreign arbitral awards even in cases where there is a high possibility of substantive breaches of public policy. For example, in cases Westacre Investments Inc v Jugoimport-SPDR Holding Co Ltd (1999) and R v V (2008). Grierson (2009) tried to summarize the approach of English courts reached in these cases.

To sum up, it is evident that the British courts almost never refuse recognition and enforcement of foreign arbitral awards on the ground of public policy violation.

In France, as well as in the UK, quite a narrow approach to public policy is applied. However, the conception of ‘public policy’ with regard to recognition and enforcement of foreign arbitral awards is a bit different in the French jurisdiction. 

To start with, the Article 1514 of the French Code of Civil Procedure states that ‘An arbitral award shall be recognised or enforced in France if the party relying on it can prove its existence and if such recognition or enforcement is not manifestly contrary to international public policy.’ Moreover, Article 1520 (5) of the French Code of Civil Procedure states that international arbitral awards can be challenged and annulled if they are contrary to international public policy.

By analyzing the text of these articles, we can see that the French legislation expressively indicates that enforcement of foreign arbitral awards may be refused only if it is contrary to the international public policy. The Paris Court of Appeal in one of its cases explained that international public policy in relation to recognition and enforcement of foreign arbitral awards include norms and values that cannot be violated within the French legal order, even in the framework of situations of an international nature (SA Compagnie commerciale André v. SA Tradigrain France, 2001).

Moreover, there exists a distinction between procedural public policy and substantive public policy in the French jurisdiction [2, p. 12]. Therefore, French courts would claim that procedural public policy was violated, for example, in case where a party of an arbitration was not able to defend its position during arbitration proceedings or arbitrators severely violated the rules of the process. In the meantime, French courts would state that an arbitral award violated substantive public policy in cases when the reasoning of the award was violating basic principles of competition law or was incompatible with an arbitral award that was declared enforceable by a French court. (Train, 2015) It is worth mentioning, that French courts rarely refuse recognition and enforcement of foreign arbitral awards because of violations of substantive public policy.  

French courts as well as English courts established quite a high threshold for public policy exception to be triggered. There is an established position in French court practice that in order to refuse enforcement of a foreign arbitral award violation of public policy should be flagrant, effective and concrete. (Thales Air Defence v. Euromissile et al., (judgment of November 18, REY.ARB., 751, 2005). In one of the more recent decisions the French Court of Appeal indicated that when there is a possibility of public policy violation especially in terms of corruption courts ‘must investigate all the legal and factual elements that are relevant to deciding the alleged illegality and to determine whether the recognition or enforcement of the award effectively and concretely violates international public order’. (Republic of Congo vs. S.A. Commissions Import Export, 2014) Based on the above, it is possible to state that French courts apply narrow interpretation of public policy with regard to recognition and enforcement of foreign arbitral awards.

However, approach of French courts towards public policy as a ground for refusal to enforсe foreign arbitral awards has changed over time. In his memorandum concerning the public policy concept in French law Charles Nairac pointed out that there were three main stages during which views of French courts on public policy varied. Nairac [2, p. 5] claims that in the course of the first period (the beginning of 1990s) French courts paid particular attention to possible violations of public policy by arbitral awards.

The second period is mainly associated with the appearance of the new legal doctrine that de facto prohibited French courts to revise findings of arbitral tribunals. The establishment of this doctrine is mainly associated with the case Thales Air Defence v. Euromissile in which the Court of Appeal indicated that the French courts must analyze an arbitral award as a solution and therefore evaluate its effect on public policy. In the meantime, the Court indicated that courts should refrain from revaluation of findings of an arbitral tribunal. Other authors also indicate that during this period French courts did not often consider matters of public policy in connection with recognition and enforcement of foreign arbitral awards [13, p. 59].

Nowadays views of French courts are starting to change. While the Paris Court of Appeal claims that the approach of national courts toward public policy should become stricter, the Court of Cassation that is highest instance for the civil cases in France seems to uphold high threshold for triggering public policy exception concerning recognition and enforcement of foreign arbitral awards.

In the meanwhile, in the Russian jurisdiction the public policy exception has been the subject of great controversy. This is because the Russian courts often support this ground for refusal in recognition and enforcement of foreign arbitral awards without any objective legal justification.

In Russia the ‘public policy’ exception is recognized in the Article 244.1.7 of the Russian Code of Arbitration Procedure (2002) The text of this article is almost identical to the text of Article V (2)(b) of the New York Convention. Article 244.1.7 of the Russian Code of Arbitration Procedure states that the enforcement of a foreign arbitral award or of a foreign court can be denied if ‘it would be contrary to the public policy of the Russian Federation’. Therefore, it is obvious that the Russian legislation refers to the public policy in domestic concept with regard to recognition and enforcement of foreign arbitral awards.

The Russian procedural legislation also does not define the term ‘public policy’ leaving it entirely to national courts to interpret this concept. Legal scholars note that the concept of public policy is not disclosed in any of the Russian laws [8, p. 12].

Russian legal experts consider that one of the most important steps in defining term ‘public policy’ was the position of the Supreme Court of Arbitration of Russia [9, p. 4]. Thus, in one of its Informational letters the Supreme Court of Arbitration indicated that “under public policy in order to apply standards established by Article V (2)(b) of the New York Convention and Article 244.1.7 of the Russian Code of Arbitration Procedure should be understood fundamental legal principles which have the highest imperativeness, universality, special social and public significance, and form the basis for building the economic, political and legal systems of the state.” This is the most popular definition of public policy that courts often use in their decisions.

Overall, if we look at the statistical data related to recognition and enforcement of foreign arbitral awards in Russia it is obvious that Russian courts much more frequently refuse enforcement of arbitral awards on the basis of public policy violation than English and French national courts. According to the data collected by the Russian Arbitration Association (RAA) in the period 2008-2017 Russian courts refused enforcement of 20 foreign arbitral awards because of the breach of the Russian public policy (RAA, 2018) This number indicates that Russian courts enforcement of 39% of foreign arbitral awards on the ground provided by Article V (2)(b) of the New York Convention. In my opinion, this is the unprecedented situation and hardly any European country has triggered the public policy exception on so many occasions.

Nevertheless, there was a time when Russian courts hardly used the public policy exception to refuse recognition and enforcement of foreign arbitral awards. Before the new Code of Arbitration Procedure came into force in 2002 Russian courts exercised quite a narrow approach to public policy. Some authors claim that the approach of Russian courts toward public policy exception was consistent with the practice of other countries where the system of recognition and enforcement of foreign arbitral awards was based on the UNCITRAL Model Law on International Commercial Arbitration [5, p. 6]. In 2001 the Supreme Court of Russia claimed that ‘a violation of public policy implies a breach of the most fundamental foundations of the rule of law established in the state’ (Judgement of the Supreme Court of Russia N 60pv-02, 2001). The Supreme Court indicated that courts should not equate public policy with any provision of the Russian legislation because only the most fundamental rules of Russian legal system are considered to be a part of public policy. In my view, the above-mentioned positions of the Supreme Court of Russia are very similar to foundations of English and French courts.

However, in 2005 the Supreme Court of Arbitration of Russia in one of its cases offered quite a broad interpretation of the term ‘public policy’. In particular, the Supreme Court of Arbitration refused enforcement of a foreign arbitral award because financial sanction imposed by that award were not proportional and therefore violated the Russian public policy. (Judgement of the Supreme Court of Arbitration of Russia N A40-35343/03-69-221, 2005) In my opinion, as parties of a certain contract have autonomy and themselves agree on all terms of such contract including the size of financial sanctions, this matter cannot be considered as a part of public policy of a state. This example expressively shows how parties of different agreements can unfairly use public policy exception in Russian courts to avoid enforcement of unfavorable arbitral awards.

The abovementioned decision of the Supreme Court of Arbitration of Russia motivated Russian courts to interpret the conception of ‘public policy’ more broadly. As some Russian authors mention ‘such an interpretation of the concept of "public policy" has led, in practical terms, to the fact that the initially limited control function of the court has grown to a complete verification of the decisions of the arbitration court’ [5, p. 3].

I already mentioned in this paper the Informational Letter N 156 issued by the Supreme Court of Arbitration in 2013 in which the Court stated that the provisions of Russian that constitute the public policy of the state should be imperative, universal and significant. Asoskov and Kucher claim that the main objective of this Informational Letter was to ‘limit the unreasonably broad interpretation of the concept of public policy by Russian courts’ [1, p. 3]. The Court also gave examples of situations in which arbitral awards do not violate the Russian public policy. For instance, the Court stated that if an arbitral award was delivered by an arbitrator who had been selected by one of the parties in other arbitral proceedings it did not constitute a breach of Russian public policy. However, the Informational Letter N 156 was criticized because it left some controversial issues out of its scope. For example, Russian courts would consider a foreign arbitral award to be contrary to public policy in cases where such an award would be in contradiction with a decision delivered by a Russian court. Therefore, it would allow unscrupulous parties to avoid enforcement of unfavorable arbitral awards by initiating identical legal proceedings in a Russian court.

Nonetheless, it is worth mentioning that the Informational Letter N 156 issued by the Supreme Court of Arbitration in 2013 had quite positive effect on the court practice. As can be seen from the Report of the Russian Arbitration Association, from 2014 to 2016 Russian courts did not use public policy exception to refuse recognition and enforcement of foreign arbitral awards.

Regretfully, nowadays Russian courts more frequently refuse recognition and enforcement of foreign arbitral awards using the public policy exception. For example, in 2017 Russian courts refused to enforce 11 foreign arbitral awards because they violated the Russian public policy. Some of the recent decisions concerning public policy in connection with enforcement of foreign arbitral awards are quite controversial. For example, the Arbitration Court of Moscow District stated that an arbitral award that obliges a company owned by the Russian Federation to pay money in favor of a foreign legal entity is contrary to the Russian public policy. The Court came to that conclusion because such arbitral award harms the Russian federal budget and therefore undermines the national interests of Russia. Nevertheless, such practice is vicious and in the long run does not protect state interests, but, on the contrary, harms them [11, p. 3].

To sum up, the concept of public policy in the Russian jurisdiction has remained a subject of controversy for a long time. Russian courts often come up with such interpretations of public policy that make recognition and enforcement of foreign arbitral awards almost impossible without any adequate legal justification.

In the conclusion, it is possible to state that the public policy exception is indeed a very controversial matter. As we can see, different states exercise quite various approaches towards public policy concept. For example, in the Russian jurisdiction public policy is often use as an escape route to avoid recognition and enforcement of foreign arbitral awards. This circumstance unfairly presents international arbitration as an ineffective method of dispute resolution making it unpopular among Russian entrepreneurs. In the meantime, in England and France as well as in other European countries the public policy exception is triggered extremely rarely. Therefore, some authors believe that it should become more than just a theoretical defense and be used as a basis for refusing enforcement in cases where that such an enforcement would lead to improper results [10, p. 25].

Thus, there is hope that in the future international law will establish a guideline for the reasonable use of the public policy exception to recognition and enforcement of foreign arbitral award so it can become an effective and proper legal instrument in the sphere of international arbitration.

References:

1. Asoskov A.V., Kucher A.N. The Presidium of the Supreme Arbitration Court of the Russia determined approaches to the concept of public policy: a brief commentary on the information letter dd. February 26, 2013 N 156. International Commercial Arbitration Review, 2013.
2. Charles Nairac. Public Policy and Enforceability of Arbitral Awards, 2015.
3. Fouchard, Gaillard, Goldman. On International Commercial Arbitration, 1999.
4. François-Xavier Train. Interpretation et Application de la Convention de New York en France (Interpretation and application of the New York Convention in France), 2017.
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14. Bruce Harris, Rowan Planterose, Jonathan Tecks. The Arbitration Act 1996: a Commentary, 5th Edition. Wiley-Blackwell, 2014.