Arbitrability and Public Policy Challenges

Introduction

Party autonomy is at the core of international arbitration. However, it is not without its limits. Two of the most notable limitations to party autonomy are on grounds of arbitrability and public policy.

Arbitrability and public policy defences are often raised by parties to an arbitration either during proceedings brought to challenge an award or to resist its recognition or enforcement (subject to the applicable procedural rules). Challenges on arbitrability and public policy grounds are generally made in accordance with the provisions of the applicable domestic arbitration legislation^[2] or the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the New York Convention) (or both).^[3]

A different regime applies to the annulment, recognition and enforcement of awards rendered pursuant to the International Centre for Settlement of Investment Disputes (ICSID) Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 1965 (the ICSID Convention), pursuant to which awards (1) can be challenged in accordance with specific and limited grounds provided in the ICSID Convention itself,^[4] and (2) must be recognised as if they were final judgments of the courts of ICSID Convention contracting States.^[5]

For awards issued outside the ICSID Convention context, such as those pursuant to the rules of other international arbitral institutions or those by ad hoc arbitral tribunals, set-aside, recognition and enforcement will generally be governed by the law of the arbitral seat, law of the recognition or enforcement forum, and the rules under the New York Convention, where applicable.^[6]

Definitions and concepts^[7]

Arbitrability

A dispute is arbitrable if it can be submitted to arbitration^[8] (i.e., if it is not a type of dispute that has been specifically reserved for resolution by domestic courts notwithstanding an arbitration agreement between the parties). National laws usually restrict access to arbitration for specific types of disputes on account of either the wider public interest involved in the consideration of the dispute, or because the dispute involves the rights of specific individuals that require additional protection by the state.

The question of arbitrability may be raised during an arbitration or after an award has been issued.

Arbitral tribunals are empowered to determine the arbitrability of a dispute should the issue be raised during an arbitration. The silence of international arbitration conventions and national laws as to the law applicable to such a determination has resulted in conflicting views. It is generally accepted that arbitrators should assess arbitrability pursuant to the law applicable to the merits of the dispute. However, arbitrators have also considered the question from the perspective of the law of the seat, on the basis that arbitrators derive their powers from that law,^[9] and it is even argued that the law of the personal jurisdiction of the parties ought to apply.^[10]

As regards the issue of arbitrability raised during any post-award challenge, or recognition or enforcement stage, that issue is considered by the competent domestic courts, and the New York Convention is clear that arbitrability is to be assessed under ‘the law of that country’ where recognition or enforcement is sought.^[11] Thus, any non-arbitrability question will be resolved based on the laws of the jurisdiction where the award is sought to be recognised or enforced. Similarly, the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration, 1985 (as amended in 2006) (the Model Law), which has been adopted by more than 80 countries as the applicable arbitration law,^[12] provides that the applicable law is the law of the state where the award is challenged or where recognition or enforcement is sought.^[13]

Most contracting parties to the New York Convention have set out in their national laws the matters that are arbitrable and the matters that fall under the exclusive jurisdiction of the national courts, while also providing for general standards to assist with determining which matters are arbitrable.^[14] In the case of common law jurisdictions, ‘the standards for arbitrability appear to be established by the courts through precedent’.^[15] As such, each country has its own approach to arbitrability and domestic courts have assisted with creating and developing standards that are specific to each jurisdiction.

In general, commercial disputes are deemed arbitrable in the vast majority of countries,^[16] whereas criminal matters^[17] and matters dealing with ‘the authority to commence and administer bankruptcy proceedings’^[18] are considered to be non-arbitrable. Disputes relating to competition, succession, employment and insolvency, however, are considered as non-arbitrable in some jurisdictions but deemed arbitrable in others.^[19]

On the whole, challenges to awards based on inarbitrability are rather infrequent. Indeed, there has been a ‘relatively small number of cases’ dealing with challenges to an award based on arbitrability, and national courts have refused recognition and enforcement of an award in ‘only a handful of instances’ on the basis of the arbitrability exception.^[20]

That is because in applying laws and precedents on arbitrability, where they exist, national courts have adopted a narrow interpretation of the exception, favouring a pro-arbitration and pro-enforcement approach championed by the New York Convention itself.^[21] That said, it is still important that parties ‘anticipate problems by attempting to envisage which types of disputes may arise out of their agreement, and subsequently verify whether such disputes could give rise to issues of arbitrability under the law of the contract, the law of the seat and (if known) the law of (likely) enforcement’.^[22]

Public policy

Neither the Model Law (on which many jurisdictions have based their domestic arbitration laws)^[23] nor the New York Convention provide a definition of public policy. Article V(2)(b) of the New York Convention refers to ‘the public policy of that country’ indicating a determination on the meaning of ‘public policy’ to be made from the perspective of the jurisdiction where recognition or enforcement is sought.^[24] The Model Law offers the same formulation in Articles 34(2)(b)(ii) and 36(1)(b)(ii), both referring to the public policy of the state in which a set-aside application has been lodged and where recognition or enforcement is sought.^[25]

Accordingly, states have adopted and developed their own formulations of public policy, in legislation or through jurisprudence. Unsurprisingly, it appears that each state’s fundamental economic, religious, social and political standards that define its legal system inform its definition of public policy. Courts the world over review awards by referring to ‘the core values of [their] legal system or [their] own local domestic standards of morality, justice, and the public interest’.^[26] In exercising their control over the post-award process, they therefore attempt to strike a balance between the parties’ ‘right to autonomy . . . [and] the state’s own interest in the preservation and safeguard of those fundamental values that fall under the scope of public policy’.^[27] Inevitably, this renders public policy a rather flexible concept, which will have to be assessed based on the specific facts of each case.

For example, the Supreme Court of England and Wales once described it as ‘that principle of the law which holds that no subject can lawfully do that which has a tendency to be injurious to the public, or against public good’.^[28] Likewise, in the well-known Parsons case, the US courts defined public policy to encompass the ‘forum state’s most basic notions of morality and justice’.^[29] According to the International Law Association, ‘[i]nfringements of mandatory rules/lois de police; breaches of fundamental principles of law; actions contrary to good morals; and actions contrary to national interests/foreign relations’^[30] are integral to the public policy exception – but this is not an exhaustive list. In other words, it is impossible to provide a uniform and universally accepted definition of what constitutes ‘public policy’.^[31]

One word of caution here. Given that public policy is understood to encompass these most fundamental norms from which no court can depart, public policy also goes beyond the ‘mandatory laws’ concept.^[32] By way of context, although they are not uniformly agreed and applied around the world, rules on competition law, bankruptcy,^[33] consumer protection,^[34] offshore future transactions,^[35] foreign exchange^[36] and export prohibitions^[37] can often be regarded as ‘mandatory’ by states.^[38] Hence, they need to be considered when reviewing, recognising or enforcing an arbitral award to the extent that the dispute triggers, or the parties involved invoke the application of these ‘mandatory’ laws.

However, despite their ‘mandatory’ character regulating matters that may overlap with the public policy exception, not all mandatory rules of a state fall within the scope of the ‘public policy’ exception.^[39] As is widely accepted, only very clear and serious violations of a mandatory law resulting in a conflict with ‘fundamental notions of what is decent and just’^[40] do so.

Domestic, international and transnational public policy and transnational public perspective

As noted above, given the lack of definition in the New York Convention and the Model Law as to what needs to be understood from ‘public policy’ exactly, different concepts have emerged under national laws and in national courts’ practice around the world. For example, depending on the jurisdiction, it is possible to encounter the following variations of the concept applied by national courts or adopted in national legislation:

(i) domestic public policy, which is comprised of ‘the fundamental rules and values which are of utmost importance for [the] state’s society’;^[41]
(ii) international public policy, which is ‘a subset’^[42] of domestic public policy that invites courts to approach the challenge to an award from an international standpoint, but still however ‘through the lens of the state’s own laws or standards’^[43] of public policy;
(iii) transnational public policy or ‘truly international’ public policy, which was described by the International Law Association as a ‘public policy—which it found to be of ‘universal application—comprising fundamental rules of natural law, principles of universal justice, jus cogens in public international law, and the general principles of morality accepted by what are referred to as civilised nations’’.^[44] In that respect, it is thought to represent values that transcend the rules of any national system and are so essential that no state or party can contract out of them. It is said that the existence of a rule of this nature may be identified through international conventions, comparative law, and arbitral awards. Examples of transnational public policy include conducts such as ‘slavery, bribery, piracy, murder, terrorism, and corruption’,^[45] among others;
(iv) ‘a transnational perspective’ to public policy, which differs from transnational public policy as it is not a set of universally accepted principles but an approach taken by states and their courts to widen the scope of their international public policy by adopting a transnational perspective and taking into account the standards that are basic to most just and decent societies when reviewing foreign awards.^[46]

Some jurisdictions, such as India and Hong Kong, favour the domestic public policy concept in recognition and enforcement cases. Indeed, the Supreme Court of India held that public policy should be considered from the enforcement forum’s perspective and not through a transnational definition of the concept, as the latter was unworkable.^[47] The Hong Kong courts, which have shared similar views,^[48] have defined an award that violates public policy as an award that is ‘so fundamentally offensive to [the enforcement jurisdiction]’s notions of justice that, despite it being a party to the Convention, it cannot reasonably be expected to overlook the objection’.^[49]

Other jurisdictions clearly distinguish between domestic public policy and inter­national public policy. For instance, Portuguese law reviews foreign awards only from an international public policy perspective.^[50] In certain civil law countries, such as France and Italy, the concept of international public policy (ordre public international in French) has been specifically incorporated into the practice of the national courts and legislation. Indeed, Article 1514 of the revised French Code of Civil Procedure explicitly refers to ‘international public policy’ for the recognition or enforcement of foreign awards.^[51] The Court of Appeal of Paris has defined international public policy as ‘the body of rules and values whose violation the French legal order cannot tolerate even in situations of international character’.^[52] In the famous Lautour case, the French Court of Cassation also referred to ordre public (international) as the ‘principles of universal justice regarded in France as having an absolute international value’.^[53] Italian courts have also considered that public policy refers to ‘a body of universal principles shared by nations of the same civilisation, aiming at the protection of fundamental human rights, often embodied in international declarations or conventions’,^[54] essentially leaning more towards a ‘transnational public policy’.

Likewise, in Parsons, the US Second Circuit Court of Appeals not only adopted a narrow construction of ‘public policy’ with the view that ‘[e]nforcement of foreign arbitral awards may be denied . . . only where enforcement would violate the forum state’s most basic notions of morality and justice’, but also adopted ‘international public policy’ as the applicable public policy concept by refusing to equate the national policy of the United States with that referenced in the New York Convention.^[55] The Court stated that ‘[t]o read the public policy defence as a parochial device protective of national political interests would seriously undermine the Convention’s utility. This provision was not meant to enshrine the vagaries of international politics under the rubric of “public policy”’.^[56]

In contrast, because some national courts, such as those of Norway and Sweden, ‘consistently view public policy quite narrowly, and construe it restrictively across the board, it may [therefore] not matter whether the decision is based on domestic public policy or inter­national public policy’.^[57] Although refraining from strict classifications, English courts, on occasion, have similarly approached the issue more holistically, holding that enforcement can be denied if ‘the enforcement of the award would be clearly injurious to the public good or, possibly, enforcement would be wholly offensive to the ordinary reasonable and fully informed member of the public on whose behalf the powers of the state are exercised’.^[58]

EU public policy and arbitrability under EU law

In addition to their domestic laws, the Court of Justice of the European Union (CJEU) has taken the firm position that EU Member States must take EU law into account in determining what constitutes public policy within their legal orders. The CJEU has further proclaimed that EU Member States must, on their own accord, review arbitral awards from an EU public policy perspective.^[59] Although the exact contours of EU public policy remain undefined, the CJEU’s jurisprudence to date suggests that depending on whether the public interest underlying an EU law norm has ‘the nature and importance’ sufficient to justify its violation being treated as necessarily a violation of EU public policy, EU public policy might be engaged.^[60] So far, the CJEU has held that EU competition policy, practically as an entire field, is entitled to public policy treatment in the context of annulment and enforcement of arbitral awards at the national level.^[61] This is because the Court regards the protections under EU law against anticompetitive conduct to be ‘fundamental’ and ‘essential for the accomplishment of the tasks entrusted to the [EU] and, in particular, for the functioning of the internal market’.^[62] Likewise, it has also invoked EU public policy for arbitration agreements contravening the provisions of Council Directive 93/13/EEC on unfair clauses in consumer contracts.^[63]

In recent years, the issue on EU public policy was revived in the context of setting aside and enforcement of investment arbitration awards. Various EU Member States have faced the possibility of contravening EU competition law – in particular its rules on state aid – with the payment of investment incentives to investors or compensation awarded by arbitral tribunals reinstating the value of those incentives in favour of foreign investors.^[64] It remains to be seen whether an enforcement or a set-aside court in an EU Member State will be able to uphold an arbitral award that is determined to have violated EU state aid rules by the European Commission and the CJEU; thus EU public policy.

In the same vein, with its decision in Achmea in 2018, the CJEU denied arbitrability of investment disputes between EU Member States and investors from EU States ‘which may concern the application or interpretation of EU law’.^[65] The CJEU reasoned that submitting those disputes to a body that is not part of the judicial system of the European Union would ‘have an adverse effect on the autonomy of EU law’,^[66] adopting the policy views expressed by the European Commission in recent years. Thus, any intra-EU investment arbitration award, especially when rendered outside the ICSID Convention context, will face serious obstacles for recognition and enforcement before courts in EU Member States in light of the CJEU’s ruling in Achmea,^[67] although not all EU Member States are on board with the CJEU’s approach to date. Indeed, the exact scope of the CJEU’s ruling on non-arbitrability is yet to be clarified.^[68]

Previously, non-arbitrability emanating solely from EU law has precluded courts in Austria, Belgium, Germany and England from upholding arbitration agreements. These courts have denied arbitrability of disputes regarding contracts of commercial agency because ‘EU agency law is deemed to be necessary for the achievement of the internal market’.^[69]

A word on Brexit

In light of these developments with respect to the CJEU’s approach to arbitrability and public policy under EU law, it remains to be seen whether or not the English courts’ interpretation of arbitrability will change after January 2021, when the United Kingdom officially left the European Union. We wait with interest to learn to what extent the CJEU’s strict interpretation of EU public policy will continue to be upheld by the English courts in set-aside, recognition and enforcement proceedings in the United Kingdom. The Supreme Court’s ruling in 2020, in Micula and others v. Romania,^[70] commenting that the EU treaties did not displace the United Kingdom’s obligations under the ICSID Convention (pursuant to which the United Kingdom had a prior (pre-EU-accession) obligation to enforce ICSID awards), is certainly significant. It appears that England may now be perceived as an even more favourable jurisdiction as a seat of arbitration and for enforcement of arbitral awards.

Arbitrability versus public policy

The concepts of arbitrability and public policy often go hand in hand.^[71] For example, the arbitration laws of countries such as Tunisia, Zambia and Zimbabwe expressly incorporate public policy as a criterion for non-arbitrability.^[72] Similarly, in Finland and Lebanon, non-arbitrable disputes must be simultaneously contrary to public policy to constitute a ground to deny recognition and enforcement of arbitral awards.^[73]

During the drafting of the New York Convention, the French delegation proposed that Article V(2)(a) – dealing with non-arbitrability as a ground for refusing recognition and enforcement – be deleted ‘on the grounds that it unduly attributed international importance to domestic rules and that “(international) public policy” would be sufficient a ground for resisting recognition and enforcement’. This proposal was not adopted by the majority.^[74]

Although there may be instances when the non-arbitrability of a dispute would emanate from public policy concerns, it is perfectly conceivable for disputes to be deemed non-arbitrable, hence reserved for national courts’ jurisdiction, even if the subject matter is not ‘so sacrosanct’ relating to a state’s most basic notions of morality and justice considered to be part of its public policy. Consistent with this view and in line with the objective of the New York Convention for swift and uniform enforcement of arbitral awards, most national courts ‘have consistently addressed the grounds in Articles V(2)(a) and V(2)(b) separately, without questioning whether they refer to the same concept’.^[75]

Examples of challenges based on public policy

Public policy objections can be raised in relation to the procedure leading to the award, or with respect to the substance of the award.

Procedural public policy

Procedural public policy is concerned with fundamental rules of procedure, including for instance, due process,^[76] the right to be heard,^[77] res judicata,^[78] independence of arbitrators,^[79] the absence of procedural fraud or corruption in the arbitral process.^[80] A causal link between the procedural violation and the arbitral tribunal’s decision-making in the award is essential.^[81]

Substantive public policy

Substantive public policy relates to the subject matter of the award and whether it violates the fundamental laws and principles of the state where it is challenged or is sought to be recognised and enforced, as discussed above. Substantive public policy challenges are the only defences that allow national courts to conduct a substantive, albeit, limited review of the award depending on the applicable national arbitration regime.^[82] Despite some exceptions, most national courts do take a limited view of the public policy exception.

Examples of cases in which a substantive public policy challenge was upheld involved the following: grant of unlawful relief, punitive damages^[83] or excessive interests by the arbitral tribunal;^[84] criminal offences such as bribery and corruption;^[85] breaches of competition laws;^[86] violations of rules on consumer protection, foreign exchange regulation or bans on exports;^[87] violations of ‘core constitutional values such as the separation of powers and sovereignty of Parliament’;^[88] or when the award was regarded as ‘contrary to the national interest of the forum State’.^[89]

Burden of proof and standard of proof

Under both the New York Convention and the Model Law regimes, national courts can consider non-arbitrability and public policy defences ex officio in set-aside, recognition or enforcement proceedings. Yet, the burden of proof lies with the award debtor.^[90]

The standard of proof^[91] to succeed in raising a public policy defence is ‘extremely high’,^[92] which is justified by the ‘exceptional nature’ of public policy.^[93]

Some countries require ‘compelling evidence’ (Canada);^[94] that the violations are ‘manifestly contrary’ to public policy (e.g., France and Lebanon);^[95] that the award entails ‘flagrant, effective and concrete’ (France) or ‘evident’ violations (Mexico);^[96] or ‘clearly injurious’ and ‘wholly offensive’ violations that ‘shock the conscience’ (Singapore).^[97] Others require evidence that the award would result in ‘real practical injustice or real unfairness’ (Australia) or in an ‘intolerable breach’ of fundamental values (Austria) or that it ‘offends in an “unbearable manner” the concept of justice’ (Switzerland).^[98]

Estoppel and waiver

There can also be issues of waiver and estoppel when a party fails to raise an arbitrability or public policy issue that exists during the course of the arbitration proceedings.^[99] This is especially the case in circumstances where a party clearly had the opportunity to raise the defence during the proceedings and, as a result, that party will often be estopped from relying on a non-arbitrability or public policy defence in set-aside, recognition or enforcement proceedings or may be considered to have waived its right once the award has been issued.^[100] Courts in countries such as England, Switzerland, Germany and the United States have mostly allowed estoppel or waiver of rights arguments to succeed,^[101] with French courts only allowing the defence if it had been raised before the arbitral tribunal and the relevant party had reserved its rights.^[102] In one known case, however, the German courts considered that neither estoppel nor waiver applies to complaints raised under Article V(2)(b) of the New York Convention.^[103]

Conclusion

It is clear that the law on arbitrability and public policy is evolving and there has been significant development in the interpretation of these two concepts in the arbitral practice of domestic courts around the world. Fortunately, and in line with the objectives of the New York Convention championing a pro-arbitration, pro-enforcement stance, there is a growing trend of national courts moving towards a narrow interpretation of public policy and non-arbitrability.

Nevertheless, uncertainties still remain as to the contours of these concepts and how they are understood within the context of individual disputes and jurisdictions. Thus, parties would be well-advised to remain cautious when drafting their arbitration agreements and contemplating arbitration proceedings; and to consider the implications of these two concepts from the perspectives of the governing law of the dispute, the law of the seat and the laws of countries for potential recognition and enforcement. Additional consideration must be given if EU public policy could also be triggered. Arbitrators themselves also have a role during the proceedings in seeking to ensure as far as is possible that their awards cannot be deemed non-arbitrable or to violate public policy.

Notes