Setting aside public policy: the Pemex decision and the case for enforcing international arbitral awards set aside as contrary to public policy.

Author:Hanson, Jared
  1. INTRODUCTION II. THE ARCHITECTURE OF RECOGNITION AND ENFORCEMENT IN THE INTERNATIONAL ARBITRAL SYSTEM A. Grounds for Refusal of Recognition and Enforcement of Arbitral Awards under the New York Convention and the UNCITRAL Model Law B. Refusing Recognition and Enforcement When the Award has been Set Aside by Courts of the Arbitral Seat C. Setting Aside Awards that Violate the Public Policy of the Arbitral Seat D. Refusal is Permissive Under the New York Convention E. Refusal is Obligatory Under the Federal Arbitration Act III. THE PEMEX DECISION A. A Federal Court Relies on the Discretion Provided by the New York Convention to Enforce an Award Set Aside for Public Policy B. Pemex Creates Uncertainty Regarding the Enforcement of Arbitral Awards and Promotes Recourse to Courts C. Other Jurisdictions Avoid the Pemex Issue by Prohibiting Refusal IV. AMENDING THE FAA TO PROHIBIT THE REFUSAL OF RECOGNITION OF AWARDS ANNULLED SOLELY ON PUBLIC POLICY GROUNDS A. Amending the FAA Would Clarify U.S. Enforcement Law, Remove Judicial Discretion, and Disincentivize Resort to Courts B. The Proposed Amendment Would Be Consonant with the Goals of U.S. Policy and with U.S. Precedent C. The Proposed Amendment Would Be Consonant with the Goals of Arbitration, the New York Convention, and UNCITRAL V. IS PUBLIC POLICY STILL PROTECTED? POSSIBLE COUNTERARGUMENTS TO THE PROPOSED AMENDMENT A. Is Discretion to Refuse Enforcement Necessary to Preserve Procedural Fairness? B. Should U.S. Courts Respect the Public Policy of Foreign States? C. Do Set Aside Awards Still Legally Exist? VI. CONCLUSION I. INTRODUCTION

    This Note will argue that the U.S. Federal Arbitration Act (FAA), which implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), should be amended to mandate the enforcement of arbitral awards that have been "set aside" or annulled by courts in the place of arbitration when those awards have been set aside solely for being contrary to public policy. Such an amendment would advance the purposes of the New York Convention and other international instruments related to international arbitration, as well as U.S. policy goals related to arbitration. This Note also contends that such an amendment will not have a detrimental effect on U.S. courts' ability to assert U.S. public policies when ruling on arbitral awards made in the United States.

    Part II of this Note will discuss the international framework for the enforcement of arbitral awards and how it creates a situation in which a court may have to rule on enforcing an award set aside for public policy reasons, examining in particular the New York Convention and the UNCITRAL Model Law. This Part will include an explanation of how the FAA implements the New York Convention. To see how the preceding legal regime can create problems for U.S. courts asked to enforce annulled arbitral awards, Part III of the Note will consider the recent Pemex case, in which a federal court decided to recognize an arbitral award that had been set aside for public policy reasons, and discuss the incentives such a decision creates for litigants seeking or resisting recognition of an annulled award. In Part IV, I will propose language for the suggested amendment and discuss how such an amendment is consonant with the goals of arbitration, the policies underlying the international instruments addressing international arbitration, the policies of the U.S. regarding arbitration, as well as the practice in other countries and U.S. case law. I will conclude in Part V by addressing possible objections to the suggested amendment, including whether the amendment would limit U.S. courts' ability to ensure procedural fairness, whether the United States has an obligation to respect the public policy decisions of foreign courts, and whether annulled arbitral awards retain the legal existence necessary for recognition.


    1. Grounds for Refusal of Recognition and Enforcement of Arbitral Awards under the New York Convention and the UNCITRAL Model Law

      If there can be said to be a system of international commercial arbitration, then the keystone in that system is the New York Convention, to which most countries in the world are parties. (1) The committee established by the United Nations Economic and Social Council to draft the New York Convention did not envision an agreement that would sacrifice any state's ability to formulate and protect its own public policy, but rather an agreement that would "facilitat[e] the enforcement of foreign arbitral awards [and] at the same time maintain generally recognized principles of justice and respect the sovereign rights of States." (2)

      Under the New York Convention, foreign arbitral awards shall be enforced by the state parties. Thus, in Article II:

      Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration. (3) The language in Article III is also compulsory:

      Each Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon, under the conditions laid down in the following articles. (4) The compulsory nature of the language in Articles II and III is contrasted with the permissive nature of Article V, in which state parties may refuse to recognize and enforce awards in a limited number of enumerated exceptions: "Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if" (5) one of seven enumerated exceptions is met. The first five are those for which the party requesting the refusal must provide proof:

      (a) The parties ... were, under the law applicable to them, under some incapacity, or the said [arbitration] agreement is not valid under the law to which the parties have subjected it ...

      (b) The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or

      (c) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration ...

      (d) The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or ... with the law of the country where the arbitration took place; or

      (e) The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made. (6)

      Article V(2) lists two other reasons recognition of an award may be refused by the courts in the country where recognition is sought:

      (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. (7)

      The above language from the New York Convention established a standard in international commercial arbitration, and Article V was meant to restrict the refusal of enforcement solely to these seven options. (8) These seven enumerated reasons why a court may refuse to recognize or enforce an international arbitral award are repeated in an almost identical form in subsequent international instruments related to international arbitration. In addition to the New York Convention, the United States is a party to the Inter-American Convention on International Commercial Arbitration (the Panama Convention). (9) For all practical purposes, both conventions are interpreted to reach the same results and "achieve a general uniformity." (10) The seven enumerated reasons for refusing awards given in Article V of the New York Convention are repeated almost verbatim in Article 5 of the Panama Convention. (11)

      Another important and very influential instrument of international arbitration is the United Nadons Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration, which provides the template for the domestic arbitration laws of over forty countries and represents an expression of international consensus regarding how the international arbitration framework should be structured. (12) The Model Law mirrors the New York Convention exactly in giving the same seven reasons why a state may refuse to recognize or enforce an arbitral award in Article 36. (13)

    2. Refusing Recognition and Enforcement When the Award has been Set Aside by Courts of the Arbitral Seat

      This Note is largely concerned with Art V(1)(e) of the New York Convention, which creates an exception for arbitral awards which have been "set aside" in the country in which the award was made. (14) The New York Convention itself does not define or limit the term "set aside," and an application of setting aside an award is entirely determined by the domestic law of the place of arbitration. (15) With the exception of those states who have adopted the Model Law, there is no uniformity between domestic arbitration laws, and an award may be set aside under the domestic laws of the place of arbitration for reasons that would not provide a justification for not enforcing an award in the country where enforcement is sought. (16)

      For countries which have adopted it, the UNCITRAL Model Law provides more conformity by designating an application to set aside an arbitral award in the courts of the place of arbitration as the exclusive recourse against an arbitral award. (17) Where Article 34 of the Model Law...

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