Grounds to refuse enforcement
United Kingdom | Publication | August 2019
An extract from the first edition of GAR’s The Guide to Challenging and Enforcing Arbitration Awards, first published in June 2019. The whole publication is available here
The central objective of the New York Convention is to facilitate enforcement of foreign arbitral awards by subjecting the enforcement to a limited number of conditions. Under Article V of the Convention, the grounds for refusal to enforce an arbitral award are restricted to a narrow list of defects affecting the arbitral procedure or the award. As analysed in detail in the following two sections, these defects must be of a serious nature and include irregularities such as invalidity of the arbitration agreement, lack of due process or violation of public policy of the enforcement state.
The grounds for refusal to enforce an arbitral award under the UNCITRAL Model Law parallel those enacted in the New York Convention. Article 36 of the UNCITRAL Model Law is virtually identical to Article V of the Convention and subjects the enforcement to the exceptions grounded in the Convention. Three fundamental features of the framework concerned must be identified: (1) exhaustive list of exceptions to enforcement excluding review of the merits of the award; (2) discretion to enforce an award notwithstanding the grounds to refuse enforcement; and (3) preclusion of parties’ objections.
With regard to the feature in point (1), above, Article V of the New York Convention (replicated in Article 36 of the UNCITRAL Model Law) provides for an exhaustive list of the objections to enforcement. Under this framework, the recognition and enforcement of the award may be refused ‘only if ’ one of the exceptions applies. Accordingly, a party resisting enforcement cannot successfully bring a defence that is not grounded in the provisions of the New York Convention. In particular, no review of the merits of the award is allowed, and national law cannot be the basis of any such defence against enforcement. The list of possible grounds on which the party may resist enforcement is narrow and allows only for most serious irregularities to form the basis of the party’s defence. The exclusive character of the exceptions to enforcement means that Article V of the New York Convention must be interpreted narrowly.1
Turning to the second feature, both Article V of the New York Convention and Article 36 of the UNCITRAL Model Law are drafted in a permissive, rather than mandatory fashion. The provisions in question state that enforcement ‘may be’ (rather than ‘shall be’) refused on one of the specified grounds. Consistent with the pro-enforcement policy of the New York Convention, nothing in that act requires a contracting state to deny enforcement of the award. Instead, the court may overrule the defence to enforcement and give effect to the award, even if one of the objections in Article V of the New York Convention has been established. This notion of the enforcing court’s autonomy has far-reaching consequences. It allows the enforcing court to independently assess potential defects of the arbitral award and procedure and, in appropriate circumstances, enforce even those awards that were annulled at the seat.
The third feature of the enforcement framework in question is preclusion of objections to enforcement of the award. In accordance with this principle, a party is barred from invoking Article V defences in the enforcement court, if it failed to bring the relevant objection during the arbitration or before the courts of the arbitral seat. Although the rules governing preclusion are not expressly included in the text of the New York Convention, they are widely recognised in national arbitration laws and considered compatible with the spirit of the Convention. The rules governing preclusion affect almost every ground specified in Article V of the Convention, most notably, jurisdiction objections are typically required to be raised at the outset of arbitral proceedings. Generally, preclusion may extend to both the objections that should have been raised in arbitration, and the objections that must be first exercised in the foreign state’s court proceedings (e.g., for setting aside the award). However, the position on this issue is not consistent in jurisdictions. Under the English authority in Dallah Real Estate and Tourism Holding Company v. The Ministry of Religious Affairs, Government of Pakistan,2 a party is not precluded from relying on a given defence in the enforcement proceedings even if it failed to bring the same defence in an action to set aside the award at the seat. A different conclusion has been reached in other jurisdictions, where the courts held that a party who failed to bring certain defects by way of an action to set aside an award may not rely on the same defects in the enforcement procedure.3
Article V(1) of the New York Convention prescribes grounds that need to be proven by a party to successfully resist enforcement of the award. It provides that enforcement of the award may be refused if :
Each of these grounds is discussed in this chapter.
Under Article V(1)(a) of the New York Convention, an award may be refused enforcement on the basis that the award debtor lacked the capacity to conclude a binding arbitration agreement. Two issues require special attention. First, Article V(1)(a) provides that the parties’ capacity must be determined by reference to the law ‘applicable to them’. However, the provision does not specify the choice of law rules relevant to this determination, leaving it to the court of the enforcement state to deal with any conflicts of law rules.
Second, Article V(1)(a) of the New York Convention is restricted to lack of capacity to enter into the agreement at the time it was made. It does not deal with any lack of capacity to enter into the underlying contract, or lack of proper representation during the arbitral proceedings. This conclusion is particularly important with regard to those jurisdictions whose arbitration laws require special authority to enter into arbitration agreements.4
Article V(1)(a) of the New York Convention provides that enforcement of an award may be refused if the arbitration agreement was not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made. This provision is the expression of a consensual nature of arbitration and one of the commonly invoked grounds for refusal of enforcement for want of jurisdiction.
As has already been mentioned, it is commonplace in modern arbitration legislation and institutional arbitration rules that an objection to a tribunal’s jurisdiction must be raised promptly, failing which it will be considered waived. As a consequence, the enforcement court hearing the defence under Article V(1)(a) of the Convention is likely to be presented with the consideration of the same issue by the arbitral tribunal and, in appropriate circumstances, possibly also by the court of the arbitral seat. Importantly, however, under the New York Convention, the enforcement court is empowered to undertake an independent analysis of the validity of the arbitration clause.
Notably, Article V(1)(a) contains a conflicts of law rule, which states that the law governing the validity of an arbitration clause should be the law chosen by the parties. Absent a parties’ choice, the applicable law is that of the arbitral seat.
The parties’ choice of law applicable to their arbitration agreement may be express or implied and the Convention does not provide for any restrictions in this regard. Absent an express choice as to the law governing the arbitration agreement, the applicable law is typically considered to be the same as the law governing the remainder of the contract. However, failure to specify the law applicable to the arbitration clause may result in a different law being applicable, based on the presumption that an arbitration agreement is separable from the main contract.5
Article V(1)(b) provides a basis for refusal of enforcement of an award if 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 or her case. The defence concerned applies in circumstances where the arbitral procedure was tainted by procedural unfairness. Irregularity contemplated in the above provision must be sufficiently serious to be taken into account. In particular, the defence will not typically be successful if it is beyond doubt that the award could not have been different, notwithstanding the irregularity.
The variety of issues emerging in the jurisprudence of the national courts applying this ground goes beyond the scope of this chapter. However, it is important to note that the enforcement courts in the developed arbitral jurisdictions tend to defer to arbitrators’ procedural decisions and the application of Article V does not typically interfere with procedural informality and flexibility of arbitration. By way of example, omission of evidence by a tribunal or an order to discontinue document production do not on their own satisfy the ground in Article V(1)(b) of the New York Convention.
Active participation in arbitration, notwithstanding procedural defects, may result in waiver of the objection contemplated in Article V(1)(b). On the facts of the English decision in Minmetals Germany GmbH v. Ferco Steel Ltd,6 the party resisting enforcement of an award failed to avail itself of an opportunity to challenge the findings of fact resulting from the investigations undertaken by the arbitrators. The court held that the party waived its right to object by failing to contest the improperly acquired evidence in the course of arbitral proceedings by calling upon the courts of the country concerned to exercise their supervisory jurisdiction. It was concluded that, in such circumstances, no substantial injustice would result from enforcement of the award.
Unlike Article V(1)(a), Article V(1)(b) of the New York Convention does not contain any indication as to the law governing the determination of procedural unfairness. According to the accepted view, the standard of due process for the purposes of Article V(1)(b) is that of the enforcing state. However, the relevant measure must take into account the specificity and international character of arbitration. In particular, having contracted for arbitration, the parties should not expect the same procedural safeguards as those available in the domestic judicial forum.
Article V(1)(c) of the New York Convention is concerned with awards that decide issues falling outside the terms of the submission to arbitration, or contain decisions on matters beyond the scope of the submission to arbitration. Article V(1)(c) deals with jurisdictional defects in circumstances where the arbitrators have exceeded their mandate (as opposed to complete lack of jurisdiction, is governed by Article V(1)(a)). In particular, this provision covers awards ultra petitum (i.e., where the arbitrators granted relief not requested by the party). However, if the tribunal fails to address all the issues presented to it (award infra petitum), the resulting incomplete award is not covered by the language of Article V(1)(c). In these circumstances, the party may resist enforcement of an award on other grounds (e.g., Article V(1)(d)).
Despite the specific wording of the provision, it is widely accepted that Article V(1)(c) also deals with the excess of the arbitrators’ authority, and not merely with the scope of the request submitted to arbitration.7 The provision would therefore be engaged if the award in question decides issues that do not fall within the ambit of the relevant arbitration clause.
Unlike in the case of Article V(1)(a) providing that validity of arbitration agreements should be primarily determined under the law chosen by the parties, there is no guidance in the New York Convention regarding the law applicable to the assessment of the scope of the arbitrators’ jurisdiction. The absence of any conflicts of law provision is particularly problematic in circumstances where the scope of the arbitrators’ mandate raises issues of interpretation of the arbitration agreement.
As with other jurisdictional objections, a party can waive the defence in ArticleV(1)(c) by failing to raise a timely objection.
Article V(1)(d) of the New York Convention is concerned with cases in which the composition of the arbitral tribunal or the arbitral procedure were not in accordance with the agreement of the parties, or, in the absence of such an agreement, with the law of the arbitral seat. The provision confirms the consensual nature of the arbitral procedure, with the law of the seat playing a subsidiary role. The parties have autonomy in determining the procedure to govern their arbitration and may select the national rules of any country, agree to their own rules or refer to the rules of an arbitration institution.
In circumstances where the parties have agreed that their proceedings will be governed by institutional rules, the procedural discretion of the arbitrators warranted by those rules often renders the defence based on the first prong of Article V(1)(d) inoperative. As has already been mentioned, the courts are not prepared to police arbitrators’ procedural decisions and a review on this basis is frequently limited.8 Conversely, the second prong of Article V(1)(d) of the Convention is a more frequently invoked ground and provides a substantial defence in cases where the composition of the tribunal was not in compliance with the parties agreement.
Similarly to the defence under Article V(1)(b) concerning procedural unfairness, in most instances the defence in Article V(1)(d) will be considered waived, if not raised promptly.
Under Article V(1)(e) of the New York Convention, an award may be denied enforcement if it has not yet become binding on the parties.
The New York Convention eliminated the ‘double exequatur’ requirement prevalent under the enforcement regime of the Geneva Convention. Essentially, double exequatur meant that a party seeking enforcement of an award had to prove that it had become ‘final’ in the country it was made, and the country in which enforcement was sought. This could only be proven by obtaining an exequatur (i.e., leave for enforcement) in both countries. Courts and practitioners found this to be an unnecessary, time-consuming hurdle.
The New York Convention accomplished the removal of the double exequatur in two ways. First, it replaced the word ‘final’ with the word ‘binding’, to indicate that it was not necessary to prove an award was ‘final’ in the country it was issued. Second, it shifted the burden of proof from the party seeking enforcement to the party against whom enforcement is sought – to prove that the award has not become binding.9 Nonetheless, the meaning of the word ‘binding’ remains controversial and it unclear whether it should be considered binding according to the law of the country of origin or where enforcement is sought.
Under Article V(1)(e) of the New York Convention, the court may refuse to enforce an award annulled by the court of the arbitral seat. However, as has already been mentioned, the discretionary nature of Article V leaves room for national courts to give effect even to those awards that have been set aside at the seat.
There is no guidance in the Convention as to the requirements that a court should take into account when deciding whether to enforce an annulled award. In the absence of an international standard, the courts in different jurisdictions have taken diverging approaches to this matter. In most jurisdictions, there is an increasingly high burden to satisfy when seeking to enforce an annulled award. In summary, the circumstances in which the enforcement is permissible include:
An example of the above approach is an English decision in Yukos Capital SARL v. OJSC Rosneft Oil Company,10 in which several arbitral awards were given effect despite them being set aside in Russia. However, a different result was reached in Maximov v. OJSC Novolipetsky Metallurgichesky Kombinat,11 in which the court refused to give effect to an arbitral award set aside in Russia. Absent cogent evidence of actual (rather than apparent) bias, the court relied on the Russian annulment and denied enforcement. Notably, the same conclusions were reached by the Dutch courts in analogous cases concerning the same awards as considered by the English courts in the above-mentioned cases.
The US courts apply a similar approach. In Chromalloy Aeroservices v. Arab Republic of Egypt,12 the award concerned was set aside in Egypt following a detailed substantive review. The court reasoned that the US public policy in favour of final and binding arbitration of commercial disputes compelled it to enforce the award despite its annulment at the seat. More recently, the court gave effect to an annulled award in Corporación Mexicana de Matenimiento Integral, S De RL De CV v. Pemex-Exploración y Producción.13 The arbitral award in question was set aside in Mexico on the ground that Pemex, as an entity deemed part of the Mexican government, could not be forced to arbitrate. It was held that the US court’s deference to the Mexican court’s annulment would run against US public policy.14
Different considerations apply in circumstances where annulment of an award is not one of the grounds for refusing enforcement under the national legislation of the enforcing court. In such instances, Article VII of the New York Convention enables contracting states to apply a more liberal domestic regime for enforcement of arbitral awards. This is the case in France, where the approach to enforcement of annulled awards is characteristically less restrictive.15
Article V(2) of the New York Convention provides that the court may refuse enforcement if it finds that the dispute was not arbitrable under the law of the state where the enforcement is sought or if the enforcement is contrary to the public policy of that state. The grounds in Article V(2) may be taken into account by a court on its own motion.
Article V(2)(a) provides that enforcement of an award can be refused if the subject matter is not capable of being arbitrated under the laws of the enforcing state. There is no international definition or uniform standard of non-arbitrable matters. A matter is considered to be non-arbitrable if mandatory national laws provide that certain issues are to be decided only by domestic courts. Although variations exist from country to country, some common examples of non-arbitrable matters include certain categories of criminal disputes, family law matters, bankruptcy, antitrust claims, employment grievances, sanctions and intellectual property disputes.
The reference in the New York Convention to the national law of the enforcing state may suggest that the non-arbitrability ground has given leeway to contracting states to designate particular subject matters, or claims and defences, as non-arbitrable. However, there are only a limited number of cases in which enforcement has been denied on the ground of non-arbitrability.16
Furthermore, national courts, particularly in the context of international arbitrations (as opposed to domestic arbitrations where non-arbitrability is given a broader meaning), generally take the view that a clear statement of legislative intent is needed before determining that a subject matter is non-arbitrable under Article V(2)(a) of the Convention.17 Accordingly, this has led commentators to state that ‘arbitrability is the rule, inarbitrability is the exception’.18
Article V(2)(b) of the New York Convention provides that an award may be denied enforcement if it is contrary to the public policy of the state in which enforcement is sought. The notion of public policy is not defined in the Convention and its meaning varies between the contracting states. Of all the grounds prescribed in Article V, the public policy exception is probably the most unsettled, owing to its indeterminate and evolving nature. Accordingly, various studies have been undertaken to draw up a catalogue of irregularities giving rise to public policy exceptions in different jurisdictions, while underlining the open nature of this notion.
The International Bar Association’s ‘Report on the Public Policy Exception in the New York Convention’ confirms no uniformity in the extent of review of an award by the enforcing courts.19 Notwithstanding the localised nature of the public policy exception, many jurisdictions define it narrowly, in line with the Convention pro-enforcement approach. The violation concerned must therefore be considered sufficiently serious to warrant the refusal of enforcement. A noteworthy example of this trend can be observed in Sinocore International Co Ltd v. RBRG Trading (UK) Ltd.20 In this case, the English Commercial Court held that the public interest in the finality of arbitration awards outweighed an objection to enforcement on the grounds that the transaction was ‘tainted’ by fraud.
However, certain countries continue to maintain parochial approaches to the public policy exception. In those jurisdictions, public policy can be used opportunistically by award debtors as a gateway to review the merits of the award. However, a reassuring trend can be observed towards a more curtailed application of the public policy exception in those jurisdictions that have traditionally displayed idiosyncratic approaches to the interpretation of the New York Convention.21 A notable example is the Indian judiciary which once endorsed an expansive definition of public policy to include even a mere error of law, but has now aligned its application of this ground with the generally accepted view that the public policy exception must be interpreted narrowly.22
Given the role of public policy as an exceptional device, issues of waiver and preclusion of the relevant objection are treated differently from other grounds. Public policy is a matter that a court can take into account on its own motion. Further, it is based principally on the national law of the enforcement court, which may render recourse to the courts of the arbitral seat inadequate. Consequently, failure to seek annulment of the award on public policy grounds should not preclude a party from resisting enforcement on the same basis. Similarly, failure to raise the public policy argument in arbitral proceedings should not constitute a bar to consider the same by the enforcing court. However, different considerations may apply if the arbitrators considered an argument based on public policy and rejected it. In such circumstances, certain courts have considered themselves bound by the arbitrators’ findings and refused to entertain the public policy argument de novo.23
The New York Convention governs enforcement and recognition of arbitral awards within contracting states, of which there are currently 159. Given an almost universal remit of the Convention, instances in which arbitral awards are subjected to a non-New York Convention enforcement regime are inevitably rare. However, in circumstances where a more favourable, alternative enforcement regime is available to a party seeking to enforce an arbitral award, Article VII of the Convention provides that the treaty more advantageous to enforcement should prevail. The same applies to a more favourable domestic law.
When no international regime is available,24 a party seeking enforcement of an arbitral award will have to rely on the domestic legislation of the enforcing state. Some jurisdictions incorporate the New York Convention grounds into their domestic framework by repeating the relevant provisions in national legislation, without distinguishing between Convention awards and non-Convention awards. This approach has been adopted in the UNCITRAL Model Law. In such instances, the framework originating from the New York Convention will apply with minor or no modalities incorporated in the national legislation.25
However, a number of states prescribe different enforcement rules for Convention awards and non-Convention awards. A notable example of the latter approach is the English Arbitration Act 1996.26 Consequently, in circumstances where a foreign arbitration award is not a New York Convention award, a variety of provisions under which it can be enforced in England may apply.27
Other examples of subjecting enforcement to the requirements extrinsic to those prescribed in the New York Convention are less straightforward and include deviating from the Convention standard. This may occur primarily by way of (1) application of internationally recognised non-New York Convention grounds for refusal of enforcement; (2) disregard of the New York Convention by the courts of the contracting states, contrary to their international law obligations; and (3) enacting in national legislation grounds for refusal of enforcement inconsistent with the New York Convention.
The most notable example of the practice described in point (1), above, is defence of state immunity. In most jurisdictions, foreign states are granted certain immunities (typically from suit and execution) that protect them against proceedings brought against them before the courts of another state. Although the defence of state immunity is not mentioned in the New York Convention or the UNCITRAL Model Law, it is frequently invoked in practice by unsuccessful state parties resisting enforcement of awards rendered against them. Pursuant to the widely accepted doctrine, the existence of state immunity depends on whether the acts of the state giving rise to a dispute are regarded as iure imperii (understood as the exercise of the state’s sovereign functions) or iure gestionis (i.e., acts undertaken in the state’s commercial capacity).
In England, the position is set out in the State Immunities Act 1978. Section 9 of that Act deals specifically with arbitration and clarifies that where a state has agreed in writing to submit disputes to arbitration, it has waived immunity from both the arbitration proceedings and the arbitration-related proceedings before English courts. A similar rule is adopted internationally. However, notwithstanding the principle that the state is deemed to have waived its immunity from suit by entering into an arbitration agreement, this may not implicate a waiver of the state’s immunity from execution. Under English law, waiver of immunity extends to court proceedings relating to the recognition and enforcement of foreign arbitral awards28 but it does not ordinarily extend to execution measures following recognition and enforcement, for which a separate, explicit waiver of immunity is required (Section 13 of the State Immunities Act 1978).
The second example of a departure from the New York Convention enforcement standard entails disregard of the provisions of the Convention by the courts of the contracting states. Although discrepancies in interpretation are inevitable in any area regulated by way of a transnational legal instrument and over which no supreme body exercises adjudicative power, certain instances of blatant violation of the Convention’s standards have been reported in various jurisdictions.29 However, these anomalous results are contrary to the practice of the vast majority of the contracting states that adhere to the Convention and uphold its pro-enforcement policy.
Finally, certain states prescribe in their legislation exceptions to enforcement of arbitral awards that depart from the language of , and go beyond the list of exclusions permitted by, the New York Convention. By way of example, Article 459 of the Vietnamese Code of Civil Procedure prohibits enforcement of a foreign arbitral award that is contrary to basic principles of Vietnamese law. In a similar fashion, the new UAE Arbitration Law30 allows refusal of enforcement of an arbitral award on grounds that are not envisaged in the New York Convention. These include, for example, circumstances where ‘the arbitral award excludes the application of the parties’ choice of law for the dispute’ or ‘was not issued within the specified time frame’.31
It remains to be seen whether the courts will apply these additional restrictions to enforcement of Convention awards. As emphasised by A J van de Berg, the New York Convention should supersede domestic law concerning the enforcement of foreign awards and should be applied directly (or, as the case may be, by way of reference to the implementing act), leaving no room for the application of lex fori of the enforcing court.32
Publication
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