Disputes that Raise Public Policy Issues: Special Problems in International Disputes.

AuthorWorthy, Mica Nguyen

ONE of the primary benefits of international arbitration is that many countries have ratified treaties that allow for the enforcement of arbitral awards, whereas there are hardly any similar treaties allowing for reciprocal enforcement of civil judgments. The most recognized treaty allowing for arbitral awards to be enforced is the 1958 "Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the "New York Convention." Due to the wide acceptance globally of the enforcement of international arbitral awards, a great majority of awards are voluntarily accepted and paid.

However, Article V of the New York Convention outlines specific grounds for vacatur of an arbitral award, including most notably the "public policy" exception. This article argues that by looking to the "end" of the dispute at the beginning of the contractual relationship, parties can often address and avoid "public policy" issues that can subsequently affect enforceability of the award. Thus, counsel should consider public policy issues at the onset of the international business relationship as a risk mitigation and cost-savings measure.

  1. Background and the Public Policy exception

    Arbitrators do not enforce their own awards. Rather, a successful party must resort to a court, usually in a foreign country, to recognize and enforce the arbitral award. 1 Domestic courts decide which arbitral awards they will enforce and which they will reject; the ones that are enforceable enjoy the full protections and resources (and police powers) of the country. In the United States, that would mean the full enforcement powers of the state in which the award is confirmed would be applied, allowing the sheriff to levy on assets and potentially garnish funds from local financial institutions to satisfy the arbitral award.

    Recognition of foreign awards are mandated under the New York Convention. They are treated much like a judgment under the Full Faith and Credit Clause of the U.S. Constitution. 2 However, there are exceptions to the New York Convention's mandate. The public policy exception recognizes that each country (or "State" as it is often referred to the international arbitration context) reserves the right for its courts to exercise ultimate control over both the procedure of an arbitration held within its borders and to the arbitral award being enforced within its borders often against its own citizens. In this regard, scholars agree that "public policy" considerations are less about the question of the "arbitrability" of the disputes, and more about the "compulsory jurisdiction of national courts prompted by public policy." 3

    While there are other treaties between states that may apply to various international agreements and disputes in addition to the New York Convention, the discussion of public policy considerations in international disputes will have more practical implications when viewed in the context of the New York Convention.

    1. Public Policy exception: New York Convention Article V(2)(b)4

      As of July 2018, there were 159 parties to the New York Convention including the United States, which ratified the treaty with certain reservations, and for which the treaty became effective on December 29, 1970. Under the Supremacy Clause of the U.S. Constitution (Article VI, Clause 2), treaties made under its authority, constitute the "supreme law of the land," applicable to all 50 U.S. states without further adoption requirements by each state. Accordingly, the New York Convention and its "public policy" exception to enforcement is relevant to every state.

      The relevant language of Article V states:

      1. 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:

      (a) The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or

      (b) The recognition or enforcement of the award would be contrary to the public policy of that country.

      The interpretation of the phrase "public policy" in Art. V (2) (b) has varied by country. It is helpful to consider the drafting history of the phrase to determine the intent of the language ultimately agreed upon by the delegate-drafters. The United Nations Conference on International Commercial Arbitration proposed the language for adoption by UNCITRAL, which would then be open to accession by the member states of the U.N. Each member-state that ratified the Convention subjected itself to these terms. 5

      Prior to the New York Convention, the "Geneva Convention on the Execution of Foreign Arbitral Awards" of 1927 ("Geneva Convention") essentially stipulated that arbitral awards made under the Geneva Protocol in conjunction with the International Chamber of Commerce, would be binding and enforced in accordance with the rules of the territory where sought. However, the Geneva Convention was only ratified by 24 countries and did not include some of the most significant trading economies in the world at the time. Thus, it had limited effectiveness. However, under this prior convention, there existed a "public policy" precondition for enforcement. It was not specifically a ground for refusal of recognition and enforcement, rather the award would not even be examined if it was contrary to public policy.

      The concept of "public policy" or "public order (ordre public)" had long been familiar in Europe whereas phrases such as "illegal" or "void" appeared in India and other countries. 6 There were also proposals to include the language "fundamental" violation of public policy. The discussions between the delegates reflected that they were concerned that a contract might not be in conformity with a country's law while being fully compatible with the general principles of contract law and being in conformity with the parties' desires for the contractual relationship. Ultimately, some delegates wanted to give national courts broader power while others wanted to limit the courts' ability to review such awards, in order not to undermine the effectiveness of arbitral award enforcement.7

      Importantly, Art. V (2)(1) and Art. V(2)(b) of the New York Convention require different levels of scrutiny. The first pertains to the State's jurisdiction, which would serve as an absolute bar to the recognition of an arbitral award, irrespective of its findings. However, the second pertains to the merits of the case, and "sets standards to be respected by the arbitrators." 8

    2. The fundamental conflict between the parties' "freedom of contract" and the "public policy" of domestic law

      The public policy exception language of the New York Convention was eventually adopted to recognize that there may be objections to enforcement of an award in a domestic court despite the technical compliance with the arbitral procedure of the seat of the arbitration and the parties' agreement to the terms of the contract and arbitration. The delegates recognized that the parties to a contract generally have a right to the "freedom of contract" and "party autonomy" to decide on their own the terms and scope of their agreement. However, it has long been recognized globally that this "freedom of contract" is in fact limited by the "public policy" of the domestic courts. Arbitration and its awards would not be allowed to strip courts of the fundamental right to oversee and protect its citizens from matters that violate public policy.

      The concept of "public policy" was intentionally not defined by the New York Convention, and the language finally adopted allows the courts in a forum State the discretion to refuse to enforce the award: "Recognition and enforcement... may also be refused..." 9 The New York Convention certainly has a "pro-enforcement bias" as a result of the language the delegates chose.

      The drafting history also makes clear that "public policy" was not meant to reference any international concept of the term. Parties should not equate the term to "lex mercatoria" or seek guidance on its interpretation from UNCITRAL or...

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