Redefining public policy in international arbitration of mandatory national laws.

• Author: Curtin, Kenneth-Michael

The health of international trade depends on a viable arbitration system that respects the parties' intentions and national laws

With the increase in international trade, arbitration has become the preferred method of dispute resolution by international commercial participants. As international arbitration has increased, arbitration law has evolved. The 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards,(1) known as the "New York Convention," is a prime example of this evolution. Its international acceptance has grown, and national systems of law continue to interpret its provisions. About 50 nations are signatories, including major world trading powers such as Canada, France, Germany, Japan, the United Kingdom, and the United States.

Two of the major provisions of the New York Convention are the public policy exceptions to both the recognition and enforcement of arbitral awards. This article discusses the application of these public policy defenses by various national courts and advocates the formation of new "international" and "transnational" public policy exceptions to replace the single, parochial "national" public policy approach.

ARBITRABILITY OF MANDATORY NATIONAL LAWS

The New York Convention, despite its long-form title that appears to limit its applicability to the recognition of arbitral awards, also commits contracting states to recognize arbitration agreements. Article II(1) requires the recognition of agreements to arbitrate that involve "subject matter capable of settlement" by arbitration. The "capable of settlement" language contemplates that some disputes will not be subject to arbitration because of public policy concerns. The convention also provides in Article II(3) that the courts of contracting states will refer parties to arbitration in accordance with arbitration agreements, unless the court finds that the "agreement is null and void."

Thus, a national court must compel the parties to arbitrate, unless the agreement is "null or void," or in other words, unless the agreement is subject to internationally recognized defenses such as duress, mistake, fraud, waiver, or is contrary to the public policy of the forum nation.(2) These defenses can be avoided through careful draftsmanship of arbitration agreements, but the parties have little control over the public policy exception to the recognition of an arbitral agreement. Nevertheless, this lack of control does not represent a major obstacle, since courts are reluctant to strike down arbitration agreements in the name of public policy.

1. United States

   American courts traditionally expressed a hostile attitude toward arbitration and refused to recognize agreements to arbitrate unless compelled by statute.(3) Seeking to reverse this judicial animosity, Congress enacted the Federal Arbitration Act (FAA) in 1924, 9 U.S.C. [sub sections] [sub sections] 1-14. The declared intention of the FAA is to "place arbitration agreements upon the same footing as other contracts."(4) When the United States acceded to the New York Convention in 1970, it incorporated the convention into the FAA at 9 U.S.C. [sub sections] [sub sections] 201-208. Although differing in wording, the two acts are similar, and American courts usually refer to the FAA-by citing the New York Convention to buttress their conclusions.

   Spurred by the FAA and the New York Convention, the U.S. Supreme Court has recognized agreements to arbitrate even when the dispute may implicate mandatory national laws. Within the last two decades, American courts have not only reversed the judicial hostility to arbitration, but have placed the United States on the road to becoming one of the most favorable jurisdictions for the recognition of arbitration agreements, especially international agreements.

   1. The Beginning

      In 1953, the Supreme Court in Wilko v. Swans refused to enforce an agreement to arbitrate a domestic dispute alleging violations of the Securities Act of 1933. The Court held that the effectiveness of the Securities Act would be "lessened in arbitration as compared to judicial proceedings" and declared securities issues non-arbitrable on public policy grounds. Wilko demonstrates that judicial hostility to arbitration still was present in 1953, close to 30 years after the passage of the FAA.

      However, in 1974, in Scherk v. Alberto-Culver Co.,(6) the Court allowed the arbitration of a dispute alleging violations of the Securities Exchange Act of 1934. The case concerned the sale of three European companies by a German citizen to an American company. The contract was negotiated in the United States, England and Germany and signed in Austria. It provided for arbitration of all disputes in Paris according to Illinois law.

      The court relied heavily on the international nature of the contract in distinguishing Scherk from the purely domestic situation in Wilko, stating that to refuse enforcement would "surely damage the fabric of international commerce and trade, and imperil the willingness and ability of businessmen to enter into international commercial agreements" by destroying the certainty of the applicable law the arbitration clause sought to provide. Scherk confined Wilko to domestic situations.

      In Shearson/American Express Inc. v. McMahon,(7) the Supreme Court held an arbitration clause in a purely domestic suit enforceable, notwithstanding that the plaintiff asserted statutory rights under both the 1934 Securities Exchange Act and the Racketeer Influenced and Corrupt Organizations Act. The Court stated that the burden is on the party opposing arbitration to show that Congress intended to preclude a waiver of judicial remedies either through the statute's text or legislative history or from an inherent conflict between arbitration and the statute's underlying purposes.

      After McMahon, the continued viability of Wilko was highly suspect. Two years later, in Rodriguez de Quijas v. Shearson/ American Express Inc.,(8) the Court finally conceded that Wilko was "incorrectly decided" and held that both international and domestic securities suits arbitrable.

      Scherk was the first major Supreme Court case upholding the FAA and the New York Convention by recognizing the arbitrability of securities claims. Scherk, McMahon and Rodriguez were controversial decisions. The dissenting judges in all three cases believed that national public policy concerns should have foreclosed the possibility of arbitration. Nevertheless, in all three cases a majority concluded that the strong policy in favor of arbitration overrode public policy concerns-first, solely in international disputes, but later in purely domestic disputes.

   2. Antitrust and Arbitration

      In Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc.,(9) the Supreme Court declared antitrust claims under the Sherman Act arbitrable. The claims arose from an agreement among Japanese, Swiss and Puerto Rican corporations to grant distribution rights to vehicles manufactured by Mitsubishi and bearing both Chrysler and Mitsubishi trademarks. The agreement contained a Japanese arbitration clause and a Swiss choice-of-law clause.

      A dispute arose, and Soler brought an antitrust claim in the U.S. District Court for Puerto Rico. Mitsubishi and the Swiss corporation requested the court to compel arbitration in accordance with the agreement. The Supreme Court held the issue arbitrable, reversing the First Circuit, which, following the previous Supreme Court case of American Safety Equipment Corp. v. J.P. Maguire & Co.,(10) had ruled the issue nonarbitrable.

      The court reasoned that the needs of international commerce for predictability in the resolution of disputes required the enforceability of the arbitration agreement, although a contrary result might be reached in domestic context. An arbitration agreement does not destroy a statutory right, the Court stated, but only submits the resolution of the dispute to an arbitral, rather than judicial, forum.

      The Court also seriously questioned the American Safety doctrine, but it placed a caveat on the arbitrability of antitrust issues by reserving the right at the award-enforcement stage to ensure that the legitimate interest in the enforcement of national antitrust laws has been addressed. This right to review an award has become know as the second-look doctrine.

      The importance of Mitsubishi in the international commercial arbitration arena cannot be overemphasized.(11) Its impact goes well beyond the confines of the United States, influencing judicial decisions in Canada, Australia and New Zealand. It is probably safe to state that one would be hard pressed to find anywhere in the world a jurist specializing in international arbitration who had not heard of Mitsubishi. The Supreme Court desired to increase the efficiency of international arbitration by placing public policy concerns in the international context on a higher level than that of domestic situations. By doing so, it finally threw off the old judicial hostility to arbitration.

   3. ERISA--The Limit?

      The arbitrability of mandatory labor and employment laws is a highly debated topic. In Bird v. Shearson Lehman/American Express Inc.,(12) a purely domestic case, the Second Circuit first held that claims under the Employee Retirement Income Security Act (ERISA) were not arbitrable. But after remand by the Supreme Court for further consideration in the light of Rodriguez,(13) the Second Circuit reversed itself and held ERISA claims arbitrable.(14)

      On remand, the Second Circuit reasoned that courts could no longer presume that arbitration was an inadequate forum in which to resolve disputes based on a complex federal statute. Employing the McMahon test, it determined that neither the text nor the legislative history of ERISA demonstrated a congressional intent to preclude arbitration. Cases following Bird have seized on the Second Circuit's analysis in upholding the arbitrability of ERISA claims.(15) Academic...