Public policy as a bar to enforcement —
Where are we now?

Authors: Paul Stothard, Alexa Biscaro Publication | May 2018

The public policy exception to recognition and enforcement of international arbitral awards creates uncertainty with respect to enforcement of these awards, particularly because Contracting States have diverse approaches to issues of public policy. In this article, we look at recent global developments in the use of the public policy exception.

What is public policy?

Article V(2)(b) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) and article 36(1)(b)(ii) of UNCITRAL’s Model Law both provide that a State may refuse
to enforce an award if doing so would be contrary to the public policy of the State in which enforcement is sought. Unfortunately, neither provides a definition of “public policy”. In October 2015, the International Bar Association released a Report on the Public Policy Exception in the New York Convention that reaffirmed that public policy remains a nebulous and evolving concept that defies precise definition.

Positive developments

Most major arbitral jurisdictions  define public policy (or “ordre public”) narrowly and apply it exceptionally when an award contravenes fundamental (and largely international) legal norms.  Indeed, in most, the public policy violation must reach a certain threshold to warrant refusing enforcement, such as “blatant”, “flagrant” or “intolerable”. The exception can legitimately apply, for instance, to awards concerning contracts that would be illegal under national laws (such as those concerning crime).

There is a reassuring trend toward the widespread adoption of a narrow interpretation of the public policy exception. For example, the Indian Supreme Court was once notorious for a string of decisions endorsing an ever‑expanding definition of public policy to include mere error of law (an approach rejected by the US and all leading European jurisdictions). The Indian Arbitration Act 2015 now explicitly precludes refusal of enforcement of foreign awards based on “patent illegality” or error of law. The High Court of Delhi affirmed that the amendments “brought about a material change” and that the public policy defence must be construed “extremely narrowly” (Cruz City 1 Mauritius Holdings v Unitech Limited).

In a 2016 case, a Chinese court refused to enforce an ICC award on the basis that it contravened Chinese law requiring that all arbitrations must be institutional (and the Court found that the ICC arbitration was not explicitly institutional). This decision conflates Chinese domestic law with public policy and is therefore open to criticism. Given that, improvements have been noted in China, where, since 2000, any Chinese court decision refusing to enforce a foreign award is subject to the mandatory review of the Supreme People’s Court on a more pro‑ enforcement basis, it is possible that the decision may yet be reversed.

In Sinocore International Co Ltd v. RBRG Trading (UK) Ltd, [2017] EWHC 251 (Comm), the United Kingdom reiterated its “pro‑enforcement bias”, holding that enforcement of awards concerning otherwise legal contracts and awards will not be “tainted” by fraud or bribery. Thus, English courts will not refuse to enforce a contract procured by bribery.

Other outliers

Some jurisdictions do still maintain a parochial approach to the public policy exception. For instance, Egyptian courts recently deemed that the following fall under the public policy exception: late payment interest exceeding the maximum ceiling set out in the Egyptian Civil Code, mandatory approval of the competent minister to arbitrate a dispute arising out of an administrative contract, and the absence of reasoning for damages awarded by the tribunal.
 
Russian courts have also often refused enforcement of awards where the amount of damages was deemed punitive or disproportionate to the breach. Other jurisdictions such as Italy, Poland, Finland, Greece and, very recently, Portugal, have refused to enforce awards on the same basis.

Cautious optimism?

Recent trends in the interpretation of the public policy exception by legislators and national courts invite cautious optimism that major jurisdictions are converging in the practice of adopting a narrow interpretation of the public policy exception.


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