A Case Against Taming the Public Policy Exception in the Context of 21st Century International Arbitration

The Relevance of the Public Policy Exception

The 21st century has seen a shift in the way courts look at their responsibilities. Courts which in the past had exclusive authority to adjudicate on commercial disputes were initially sceptical of arbitration and had a tendency to jealously guard their powers.  This has now given way to a less interventionist approach wherein courts have largely reconciled themselves to the inevitability that privately administered justice is here to stay.

The need for alternatives to the traditional court system cannot be overstated. This is especially true for developing countries that have a vast backlog of cases before domestic courts, and simply do not have the resources to resolve them expeditiously. To meet the needs of international commerce, in commercial disputes having an international element, arbitration and other ADR mechanism have largely taken over the role of the courts (for an elaboration on this development in India and UK see, Sharad Bansal and Divyanshu Agrawal, Are Anti-arbitration Injunctions a Malaise? An Analysis in the Context of Indian Law, Arbitration International, 2015, 31, 616).

Most states acknowledge that law governing international commerce should be emancipated from national law. Parties to arbitration are free to control nearly every aspect of the proceedings. Party autonomy is considered to be the keystone to the edifice of arbitration. Intervention or exercising judicial oversight in the arbitral process is largely looked at as a taboo by proponents of arbitration.

Many academics and practitioners have strongly called for reduced judicial intervention in the arbitral process (see for instance, Funke Adekoya San, The Public Policy Defence to Enforcement of Arbitral Awards: Rising Star or Setting Sun?, 2 BCDR International Arbitration Review 221, 2015). In some countries legislators have paid heed to these calls and amended arbitration laws with a view to restrain judicial interference in commercial disputes (see for instance the Indian Arbitration (Amendment) Act 2015, explanation note to Section 48, where the scope of public policy has been statutorily restricted). There has surprisingly not been much resistance to this trend. Any attempt to resist has been met with widespread criticism and even countries being held liable before investment tribunal courts. The consequence being that the public policy exception provided under the New York Convention to enable refusing enforcement of arbitral awards has fallen into disuse.

There are strong arguments in favour of party autonomy and privately administered justice. The advantages of arbitration are irrefutable and include confidentiality, expediency, cost efficiency and the ability to appoint arbitrators who are specialists in certain technical fields. It is undisputed that courts should generally respect the will of the parties to choose the forum and means of settling their disputes. But putting the public policy exception in the closet and rendering it completely ineffective can be counterproductive.

In some circumstances judicial oversight may be crucial. National courts are obliged to find a balance between respecting party autonomy and ensuring that the basic principles of the legal system are respected. In situations where enforcing an arbitral award would be patently illegal, breach anti-trust laws or unfairly prejudice a party because the tribunal has not acted in a fair and judicious manner there may arise a need for the award to be set aside on the grounds of public policy (ordre public).

Judicial oversight may also be vital to overcome certain dangers which are inherent to arbitration. With near complete immunity for their decisions, and stakes being exceedingly high, arbitrators who often also act as lawyers in their private capacity may be tempted to serve their personal interest by currying favour with potentially important clients rather than – when required – serving the interest of the economically weaker party, for whom the arbitration may be a one-time occurrence. Equity and justice in such and similar cases may end up taking the back seat. In such situations there are very few checks and balances in place to protect the interests of the parties. The IBA rules (IBA Guidelines on Conflicts of Interest in International Arbitration, 2014) do contribute towards encouraging integrity. Although the rules play a vital role, they cannot be a good enough substitute for access to state courts.

The New York Convention and the UNCITRAL Model Law acknowledges the need for judicial oversight, and so do the laws of most states by recognising the public policy exception as a ground for refusing enforcement of international awards. The scope of the exception has however been whittled down. The overly restrictive interpretation has meant that the exception has been in disuse to such an extent that it is no longer an effective tool to protect the interests of weaker parties.

The Diluting of the scope of Public Policy

The UNCITRAL Model Law provides in Article 34(2)(b)(ii) that Awards may be set aside if the court finds that “the award is in conflict with public policy of the state”. Similarly, the New York Convention in Article V (2) (b) provides that recognition and enforcement of an arbitral award may be refused on public policy grounds. The drafting committee when framing this Article had the goal of limiting the ambit of public policy only in situations where recognizing or enforcing of the award would go against the fundamental precepts of the country’s legal system (Report of the Committee on the Enforcement of International Arbitral Awards, March 28, 1955, U.N Doc. E/2704 and E/AC.42/4 Rev. 1). This provision however “caused the most consternation” amongst drafters of the Convention, who thought of it both as a “safety valve” and “major potential loophole” (David P. Stewart, National Enforcement of Arbitral Awards under Treaties and Conventions, 1992, International Arbitration in the 21st Century: Towards “Judicialization” and Conformity).

The public policy exception is contentious because its meaning has not been defined either by the New York Convention or the UNCITRAL Model Law, both of which leave defining public policy to individual states. The exception has proven to be controversial right from its inception, to the extent that it was characterised by Borough J. (Richardson v. Mellish [1824-34] All ER 258) as “a very unruly horse, and when once you get astride it you never know where it will carry you”. In the words of practitioners, the exception “has been interpreted erratically by the courts and is probably the most misused ground of all”. (Paulsson, The New York Convention in International Practice – Problems of Assimilation, in M. Blessing (ed.), The New York Convention of 1958 100, 113 (ASA Spec. Series No. 9, 1996)). Such criticisms have quite often proven to be justifiable, for instance the Supreme People’s Court of China in its reply when deciding USA Productions, Tom Hulett & Associates and China Women Travel Service, Supreme People’s Court Ta No.35, 1997, while refusing to enforce CIETAC Award on public policy grounds decided that “a US rock band had […] performed ‘heavy metal music’ in China […] and had ignored the prevailing cultural conditions in China. The band’s conduct was therefore against the public interest.”

It is precisely for the abovementioned reasons that the drafters of the New York Convention sought to limit its scope “they feared that it would be invoked to advance parochial, local interests and […] frustrate the basic objective of fostering the enforceability of foreign and nondomestic awards” (Recognition and Enforcement of International Arbitral Awards in Gary B. Born, International Commercial Arbitration, 2nd edition, Kluwer Law International, 2014, pp. 3394 – 3731). These criticisms have drastically reduced judicial intervention on public policy grounds.

The International Law Association (ILA) in its Public Policy Report suggested that public policy should be given a narrow interpretation (Pierre Mayer, Audley Sheppard, Final ILA Report on Public Policy as a Bar to Enforcement of International Arbitral Awards, Arbitration International 2014; 19(2): 249-263). Courts in most countries prefer to give the exception a uniform narrow construction. The Swiss Federal Supreme Court, (Özmak Makina Ve Elektrik Anayi AS v Voest Apline Industrieanlagenbau GmBH and anor, Case No. 4P_143/2001, Swiss Federal Supreme Court, 18 September 2001 (2002) 20 ASA Bulletin 311) considers public policy to denote fundamental legal principles, a departure from which would be incompatible with the Swiss legal and economic system. In the United States it was held in Parsons Whittemore Overseas Co. Inc. v Société Générale de l’Industrie du Papier (RAKTA, 508 F.2d 969, 2nd Cir, 1974) that enforcement can be refused only “where enforcement would violate the forum state’s most basic notions of morality and justice”.

The public policy exception re-construed as a necessary tool for ethical commerce

The importance of the public policy exception however should not be underestimated. It serves as the last true bastion of state oversight against total private control of the arbitral process. Jurisdictions that restrict the use of the public policy exception and give it a narrow understanding have been considered to be “arbitration friendly”, whereas jurisdictions fail to do so are looked down upon as arbitration unfriendly states which need to change their practices to be in line with commercial reality. This puts a lot of pressure on courts to reduce their oversight on the arbitral process. In India this approach led to a complete amendment of the 1996 arbitration Act, where the legislature sought to define public policy, and take away this prerogative from the courts.

The importance of the exception has been amply elucidated in Soleimany v Soleimany (1999, QB 785) where it was held that it was the courts duty to “preserve the integrity of its process, and to see that it is not abused. The parties cannot override that concern by private agreement. They cannot by procuring an arbitration […] enforce an illegal contract. Public policy will not allow it”. Similar arguments had also been brought to the fore by Judge Lagergren who refused jurisdiction to render an award as a sole arbitrator, instead stating that “case […] involving such gross violation of good morals and international public policy […] can have no countenance in any arbitral tribunal” (ICC Case No. 1110, 1963).

The public policy exception plays a vital role, especially in developing countries to protect the integrity of the legal system and prevent parties escaping judicial scrutiny using the shroud of arbitration clauses (see comments of Member of Parliament Joice George in Lok Sabha Debates, Lower House-Indian Parliament, Sixteenth Series, Vol.XIV, Sixth Session, 2015/1937 – Saka, No. 16, 160). Given that there is a chance that contracts especially with regard to developing countries are influenced by some degree of corruption or fraud (See eg. ICC Case No. 1110, 1963). Also considering that there is a lack of accountable institutional arbitration in many of these jurisdictions (See, Fali Nariman, Ten Steps to Salvage Arbitration in India: The First LGIA-India Arbitration Lecture, Arbitration International, 2014, 27(2), 115 et seq). It is important for courts to draw a fine balance on how to address agreements vitiated by corruption or fraud and simultaneously protect the interests of foreign investors. The public policy exception should not be muffled. It can be a valuable tool which needs to be used proactively but with caution to ensure that arbitration systems in such states function effectively.

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