Judicial Interpretation on the Public Policy Exception to the Enforcement of Arbitral Award

Number of View: 5062

Introduction

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention[1](‘the Convention’)’s principal aim[2]is that foreign and non-domestic arbitral awards will not be discriminated against and it obliges parties to ensure such awards are recognized and generally capable of enforcement in their jurisdiction in the same way as domestic awards[3]. The Convention however allows the courts on its own motion to refuse to enforce a foreign arbitral award that violates the ‘public policy’ of the state where the enforcement is sought[4].

Public policy is often raised by a losing party in an attempt to manipulate an enforcing Court into re-examining matters which have been decided in arbitration. The public policy ground is thereby invoked to delay the winning party from enjoying the fruits of a victory. Public policy is not defined under the Conventions. Public policy signifies some matter which concerns public good and public interest. It is the fundamental principle of justice in substantive and procedural aspect. In the case of Renusagar Power Plant Co. Ltd vs General Electric Co.[5], the court found it difficult to interpret the term ‘public policy’ in Article V(2)(b) of the Convention as it could be understood both in narrow or wide sense in the absence of a practical definition of ‘international public policy’. It has been observed in this court:

“It is obvious that since the Act is calculated and designed to sub serve the cause of facilitating international trade and promotion thereof by providing for speedy settlement of disputes arising in such trade through arbitration, any expression or phrase occurring therein should receive, consisting with its literal and grammatical sense, a liberal construction.”

This paper intends to examine judicial interpretation on the public policy exception to the enforcement of arbitral award in recent year and also highlight certain cases where the courts refused the enforcement of an arbitration award on the ground of public policy.

Malaysia Position

In Malaysia the arbitration proceedings are governed by the Arbitration Act 2005[6] (‘the Act’) based substantially on the United Nations Commission on International Trade Law (UNCITRAL) model law[7]. Malaysia is a signatory to the Convention. According to section 38 of the Act, an award made in respect of an arbitration where the seat of arbitration is in Malaysia or an award from a foreign State[8] shall subject to the section itself and section 39 be recognized as binding and be enforced.

Under the Act, the term ‘public policy’ appears[9]in three different sections, that are section 4 deals with the arbitrability of subject-matter whereby the arbitration agreement may not be determined by the arbitration if it is contrary to public policy[10]; section 37 deals with the discretion of the court to set aside an arbitration award on public policy ground[11] and section 39 deals with the discretion of the court to refuse the enforcement of an arbitration award irrespective of the State in which it was made on public policy ground[12]. It is the court’s discretion to set aside or refuse to enforce an arbitration award as both section 37 and section 39 uses the word ‘may’. For the court to set aside or to refuse to enforce an arbitration award it must be in conflict with public policy in Malaysia. Public policy is not defined in the Act. However, section 37 specifically provides that the courts’ power to set aside an arbitration award which is in conflict with the public policy of Malaysia where the making of the award was induced or affected by fraud or corruption or a breach of the rules of natural justice occurred during the arbitral proceedings or in connection with the making of the award. However, the similar wording is not found in section 39 of the Act.

Throughout the year, Malaysian courts tend to adopt narrow approach in interpreting public policy as a ground to refuse the enforcement of a foreign arbitral award[13]. The statutory jurisdiction of the court in remitting an award is a limited one and challenge should be allowed only in exceptional circumstances[14]. In a recent decision decided by the High Court in the case of Open Type Joint Stock Company Efirnoye (“EFKO”) v. Alfa Trading Ltd[15], the court also adopted the similar approach. In this case, the plaintiff, a Russian company was the buyer of palm oil products from the defendant, a Malaysian company that was the vendor of the said palm products. The Arbitration clause (‘the Clause’) in the contract provided that:

6.2 If the parties cannot come to mutual agreement, then dispute should be passed for considering and final resolution to international Commercial Arbitration Court at the Chamber of Commerce and Industry of Ukraine… when the plaintiff is the Seller, and the dispute should be passed for considering and final resolution to international Commercial Arbitration Court at the Chamber of Commerce and Industry of Russian Federation… when the Plaintiff is the Buyer.

The Contract between the plaintiff and the defendant was performed in part when the disputes arose. The plaintiff alleged a breach of a series of contractual obligations relating inter alia, to late delivery while the defendant complained equally of a breach arising from late payment for the palm products supplied and delivered. Both parties had initiated arbitral proceeding in the respective arbitration court as provided under the Clause and an arbitration award had been obtained respectively by the plaintiff and the defendant. The Russian award is in favour of the plaintiff and the Ukrainian award is in favour of the defendant. The plaintiff seeks to register and enforce an Arbitration Award issued by the International Commercial Arbitration Court of the Russian Federation (‘the Award’) via section 38 of the Act. The defendant objected the enforcement of the Award on the grounds inter alia,that the Award is in conflict with the public policy in Malaysia under section 39(1)(b)(ii) of the Act that is to enforce an award which is contradictory to another existing award between the same parties in respect of the same subject matter. The court held that the arbitration tribunal had already considered the issued raised by the defendant, namely that once a party had initiated arbitral proceedings in the forums of its choice under the carried arbitration clause, then the other party was bound to submit to that jurisdiction. The court also recognized that the fact the when the arbitrators handed down the Ukrainian award they expressly stated that the arbitral proceedings initiated in Russia by the plaintiff were different from the issues dealt with in the Ukraine. Thus, the court allowed the enforcement of the foreign arbitral award. The court stated that:

‘The provisions of s.39, particularly the contravention of public policy argument ought not to be utilized as a guise to re-open settled matters in the arbitration.[16]

            However, the Malaysian courts have in few instances upheld public policy to refuse enforcement of arbitral award[17] as shown in the case of Equitas Limited v Allianz General Insurance Company (Malaysia) Berhad[18]on the ground that the enforcement of an arbitral award against a person not a party to the arbitral proceeding is a clear case of breach of natural justice. In this case, the arbitral award was awarded in UK against one Malaysia Company in favour of the plaintiff. However the plaintiff sought to enforce the award against the defendant on the ground that a vesting order has been granted by the court whereby the rights and liabilities of the Malaysia company was transferred and vested to the defendant. The court held that the conduct of the plaintiff has failed to give proper opportunity to the defendants to arbitrate the matter in UK. Therefore the enforcement of the award would contravene the public policy as it is a blatant abuse of rules of natural justice by the plaintiff. It is of the view that the court was correctly refuse the enforcement of the arbitral award as the plaintiff should not have enforced an award where the defendant is not a party to the arbitration proceeding. The defendant obviously was denied the right to be heard and to defend their case.

            The courts also can invoke public policy as a ground in refusing the enforcement of a domestic award as decided in the case of Sami Mousawi v Kerajaan Negeri Sarawak[19]. In this case, the court held that the award by the arbitrators is clearly against the statutory provisions[20]and the public policy which the enactment of such laws aims to achieve, ie to regulate the professions involved and to protect the public from unqualified and unregistered engineers, architects or quantity surveyors. This is a case whereby professionals engaged in providing professional services. There was a comprehensive consultancy services for the design and supervision of a proposed new Sarawak State mosque submitted to the Respondent by the Appellant. The Appellant in the agreement described itself as ‘a group of Consulting Architects and Engineers of reputable standing and expertise and is able and capable to undertake and provide all the necessary services to effectively and satisfactorily perform and complete the design and supervision of the project’ but in fact the appellant was not registered nor approved to practice the disciplines covered by the legislations. Dispute arose and the matter was referred to arbitration. The award was in favour of the appellant. The Respondent challenged the award and the award was set aside by the High Court and the appellant appealed to the Court of Appeal. The Court of Appeal upheld the decision of the High Court and was of the view that the courts must jealously guard the goals of the said laws which have been enacted to regulate the professions and protect the public interest.

United Kingdom Position

            The United Kingdom (UK) signed and ratified the New York Convention in 1975, subject to the ‘reciprocity’ reservation, viz: the UK courts will enforce awards made in a state which is also party to the Convention[21]. The arbitration proceedings in UK are governed by the Arbitration Act 1996 (‘the 1996 Act’) which covers domestic arbitration as well as international arbitration. The UK legislation brought English law significantly closer to the UNCITRAL Model Law, but it is not a wholesale adoption[22]. Section 103(3) of the 1996 Act sets public policy as one of the grounds for refusal of recognition of a New York Convention[23].

English decided cases have shown a reluctant attitude in refusing enforcement of an award on the basis that it is against public policy. For instances, in the Court of Appeal case of Fulham Football Club (1987) Ltd v Richards and another[24], the court held that no authority which suggest that an agreement to resolve a dispute between shareholders which might justify a winding-up order on just an equitable grounds would either infringe the statute or be void in the grounds of public policy. In another Court of Appeal case of Westcare Investments Inc v Jugoimport – SDPR Holdings Co Ltd and others[25] the court distinguished the domestic public policy and international public policy. The court held that a contract involving having of influence would only be contrary to English domestic public policy if the contract will contravene the domestic public policy of the country where it is to be performed. Therefore, a contract for the purchase of personal influence[26] was contrary to public policy in Kuwait, but its enforcement would not be contrary to Swiss public policy. Thus, there were no public policy objections to enforcement of the award on its face.

However, there were cases decided by the English courts relying on the ground of illegality in the underlying contract to refuse to enforce a foreign arbitration award. Yet it is not every case where there is illegality that the enforcement of a foreign award will be refused. The difficulty is in determining when illegality will defeat enforcement and when it will not.

In the case of Soleimany v Soleimany[27], the English Court of Appeal refused to enforce a Beth Din[28] arbitration award on the ground of public policy. In this case, the relationship between the parties is son and father. The son purchased quantities of carpets and exported them illegally out of Iran to be sold by the father in UK or elsewhere. Disputes arose between the parties over the division of the proceeds of sale. The parties referred the matter to the Beth Din whereby the son was awarded a sum of £576,574. The court was of the view that the contract between the parties was illegal in nature. Thus the award was unenforceable. The court further held that enforcing the award would tarnish the honor of the English judicial process and opined that the alleged public policy bordered on criminality. The court concerned to preserve the integrity of its process and to make it is not abused. It is stated that:

‘The parties cannot override that concern by private agreement. They cannot by procuring arbitration…to enforce an illegal contract. Public policy will not allow it… parties were, it would seem, entitled to agree to an arbitration before the Beth Din. It may be that they expected that the award, whatever it turned out to be, would be honoured without further argument. It may be that the plaintiff can enforce it in some place outside England and Wales. But enforcement here is governed by the public policy of the lex fori.’

            In another Court of Appeal case of David Taylor & Son Ltd v Barnett[29], the court also refuse to enforce an arbitration award on the ground that the contract between the parties is illegal and therefore in conflict with the public policy of the country. In this case, the seller agreed to sell and the buyers agreed to buy Irish stewed steak at a certain price and the good to be delivered in a future date. Prior to the delivery date, there was an order prohibiting the purchase or sale of stewed steak at the price as agreed by the parties. The seller therefore failed to deliver the meat to the buyer. Dispute was submitted to the arbitration. The award was in favor of the buyer despite the prohibiting order that issued before the delivery date. The court decided that the contract was illegal and opined that:

‘The parties could not contract lawfully for future deliveries at a price exceeding the maximum existing at the date of the contract even though at a date before the deliveries were due to begin the law was altered and the amount of the maximum price was raised to that of the contract price…’

Australia Position

            Australia assented to the Convention in 1975 and has enacted it into Australian domestic law in the International Arbitration Act 1974 (‘the 1974 Act). According to section 8(7) of the 1974 Act, a foreign award may be refused recognize by the court on the ground of public policy[30] that is only limited to circumstances where the making of the award was induced by fraud or corruption or a breach of the rules of natural justice[31]. The Australian courts also adopted the same restrictive approach as can be seen in many other jurisdictions in interpreting public policy ground as a ground of refusal enforcement. In the Federal Court case of Uganda Telecom Ltd v Hi-Tech Telecom Pty Ltd[32], the court was of the view that the 1974 Act does not give the court a general discretion to refuse to enforce a foreign award which is brought to the court for enforcement. The court further held that section 8(7)(b) of the 1974 Act is to be read narrowly and cannot be relied upon to deal with the party’s complaint that the assessment of general damages in the award was excessive[33]. Also, in another Federal Court case of Traxys Europes SA v Balaji Coke Industry Pvt Ltd (No.2)[34], the applicant obtained an arbitration award against the judgment debtor in United Kingdom and the applicant sought to enforce it in Australia. The judgment debtor objected the enforcement on the ground that the applicant failed to establish that he has asset available within Australia therefore the enforcement of the award would contravene to the public policy of Australia. The court held that the expression of ‘public policy’ when used in section 8(7)(b) of the 1974 Act meant elements of public policy of Australia which were ‘so fundamental to notions of justice’ that courts left obliged to give effect to them. The court further held that public policy ground did not reserve to enforcement court broad discretion and should not be seen as catch-all defence of last resort.

            However, the Australian courts have in limited circumstances upheld the public policy ground to refuse the enforcement of a foreign arbitration award as decided in the case of IMC Aviation Solutions Pty Ltd v Altain Khuder LLC[35]. In this case the issue is how the International Arbitration Act 1974 applies in a situation where the alleged award debtor is not expressly named as a party to the arbitration agreement pursuant to which the award was made. One of the grounds[36]where the Court of Appeal of the Supreme Court of Victoria decided not to enforce the arbitral award was that the enforcement of the award would be contrary to public policy as the Mongolia Arbitral Tribunal made the award without giving prior notice to the plaintiff that it proposed to make any order against it. Thus, the tribunal breached the rules of natural justice and accordingly, enforcement of the Award in Australia would be contrary to public policy.

New Zealand Position

            International arbitration in New Zealand is governed by the Arbitration Act 1996 (‘the 1996 Act’) (as amended in 2007) and it adopts, with slight modifications, the UNCITRAL model law[37].  Public policy as a ground for refusal enforcement of an arbitration award by the court is enacted in Article 36 of Schedule 1 of the 1996 Act[38]. The Court of Appeal in the case of Amaltal Corporation Ltd v Maruha (NZ) Corporation Ltd[39]held that the term ‘public policy’ covered only ‘fundamental principles of law and justice in substantive as well as procedural aspects.’ Also, in the case of Reeves v One World Challenge LLC[40], the court was of the view that a higher threshold is required to invoke the public policy ground exception[41].

            However the was an earlier decision by the New Zealand court in refusing the enforcement of the arbitration award on ground that the award has been superseded by the settlement agreement between the parties, therefore the enforcement of it would contrary to the public policy of the country. The case was the High Court decision in Kimberley Construction Ltd v Mermaid Holdings Ltd[42]. In this case, the arbitration award required the defendant to pay to the plaintiff a sum of $500,000. Both parties entered into another agreement whereby the plaintiff agreed to accept the satisfaction of the amount by a payment of case, a number of postdated cheques and the sale of certain real estate with the sum owed being accepted as satisfaction of part of the purchase price. The payment if cash and transfer of cheques was effected without cancelled the agreement. The plaintiff filed an application to enter judgment on the arbitral award. The court held that the reach of public policy was not to be confined to the lawfulness of the arbitration process. The award had been satisfied and has been superseded by the settlement agreement. It would be offensive to the ordinary, reasonable and fully informed member of the public and inimical to the interests of justice to enter to attempt to execute judgment. As such, recognition or enforcement of the award would be contrary to public policy. The court opined that a restrictive approach to the function of public policy under the legislation that governs the arbitration is not needed.

            It is of the view that the decision in the Kimberley case was correctly applied to the extent that the court did consider the settlement agreement which has superseded the arbitration award as the defendant has settled part of the award. If the court allowed the enforcement, the plaintiff would have recovered more than what he was awarded. However, the court’s opinion that a restrictive approach is not needed in interpreting the public policy exception that governs the arbitration is discouraged as it would open the flood gate to the losing party to raise the public policy ground in order challenge the enforcement of the arbitration award.

India Position

India has ratified the Convention in year 1960[43]. The arbitration proceedings in India are governed by the Arbitration and Conciliation Act, 1996 whereby section 48 of allows the court to refuse to enforce a New York Convention arbitration award on the ground of contrary to the public policy in India[44].The Supreme Court in the case of Renusagar Power Plant Co. Ltd vs General electric Co[45] decided that an award would be contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.

However the Indian Supreme Court has extended the public policy exception to include patent illegality as a ground to refuse enforcement domestic arbitration as well as foreign award. In the case of Oil & Natural Gas Corp Ltd v Saw Pipes Ltd[46], an domestic award was challenged on the ground that the arbitral tribunal had erroneously applied the law of the land in disallowing a claim for liquidated damages. ONGC had place an order on Saw Pipes for supply of equipment for off shore exploration, to be procured from approved European manufacturers. The delivery was delayed due to general strike. Timely delivery was the essence of the contract. ONGC granted extension of time, but invoked the clause for recovery of liquidated damages by deducting the amount from the payment to the Saw Pipes. Saw Pipes disputed the deduction and matter was referred to arbitration. The award was ruled in favour of Saw Pipes. Hence ONGC has to refund the amount deducted for the breach as per the contractual terms required. ONGC appealed. The Supreme Court set aside the award and the court was of the view that the award is patently illegal[47]and therefore in conflict with the public policy of India. The court held that in arbitration proceedings, the arbitral tribunal is required to decide the dispute in accordance with terms of the contract. The agreement between the parties specifically provided that if the contractor failed to deliver the goods within the stipulated time, the appellant would be entitled to recover liquidated damages. There was no reason for the tribunal not to rely upon the clear and unambiguous terms of the agreement.

In this case, the Supreme Court has broadened the scope ‘public policy’ to include patent illegality which is against the narrow approach decided by the Supreme Court in the case of Renusagar and therefore contrary to the doctrine of precedent. Nevertheless, the court in ONGC distinguished the Renusagar case on the ground that the former dealt with domestic award whereas the latter dealt with foreign award. Also, the court in ONGC has failed to consider the strike happened that causes late delivery by Saw Pipes, something which was beyond control by the parties. The court went on the re-appreciate the question of facts, mixed question of fact and law and pure question of law, which is most undesirable in international commercial arbitration, as it would lead to uncertainty, a factor which no businessman in international business transaction would like to have[48].

            Unfortunately, the ground of patent illegality has been extended to apply in foreign arbitral award[49] as decided in the Supreme Court case of Venture Global Engineering v Satyam Computer Services Ltd. and Anor.[50]Parties now can challenge the enforcement of a foreign arbitral award before Indian courts on the grounds that they violate Indian statutory provisions and are contrary to Indian public policy. In this case, Venture Global Engineering, a US company entered in to a joint venture with Satyam Computer Services Limited, an Indian company. The agreement provided for arbitration under the rules of the London Court of International Arbitration. Satyam alleged that Venture had breached the agreement. An arbitration proceeding was commenced by Satyam and had secured a favorable award. Venture sought to set aside the award on the ground that the transfer of shares as required by the award would contravene Indian law. The Supreme Court set aside the award on the ground that section 34 of the Arbitration and Conciliation Act 1996 applied to domestic award as well as foreign award[51] that is an award can be set aside if it violated Indian statutory provisions and is thereby against Indian public policy unless the parties clearly exclude the applicability of Part 1 of the 1996 Act. The court also emphasized that the ‘extended definition of public policy’ as decided in ONGC case could not be ‘by passes by taking the award to a foreign country for enforcement’ such that a party would be ‘deprived of the right to challenge the award in Indian courts’[52].

            In the latest case of Indian Supreme Court, Phulchand Exports Ltd v OOO Patriot[53], the issue to be decided by the court is that whether enforcement of the award dated October 18, 1999 given by the International Court of Commercial Arbitration at the Chamber of Commerce and Industry of Russian Federation, Moscow in favour of the respondent is contrary to public policy of Indian under section 48(2)(b) of the Arbitration and Conciliation Act 1996. In this case, the appellant, an India company (the seller) enters into a rice selling contract by way of C.I.F contract[54] with the respondent, a Russia company (the purchaser). The buyer paid the full purchase price but the goods never reach to the seller due to the vessel carrying the goods suffered an engine failure[55]. The buyer brought the matter to the arbitration to have the money paid return and the award ruled in favour of the buyer. The seller objected the enforcement on the ground of public policy as it was patently illegal and his objection was overruled. The seller appealed to the Court of Appeal and later appealed to the Supreme Court. The Supreme Court has accepted the wider interpretation of ‘public policy’ in ONGCas to include patent illegality as one of the grounds resisting enforcement but the court did not find the impugned arbitral award to be patently illegal and therefore dismissed the appellant’s appeal.

            It is of the view that that the latest decision of the Supreme Court has accepted the wider interpretation of the ‘public policy’ in resisting enforcement of foreign arbitral award as to include patent illegality. The introduction of patent illegality as a new ground for challenging the enforcement of a foreign arbitral award in India, without doubt increases the judicial intervention of the Indian Court. Also, liberally interpreting the ‘public policy’ ground to refuse an international arbitral award by the Highest Court in India is discouraged. It did not comply with the principle aim of the Convention to enforce an arbitration award unless it passes the limited public policy test. It curtailed the application of arbitration as one of the methods for dispute resolution for businesses involving Indian parties. 

Hong Kong Position

            The new Hong Kong Arbitration Ordinance (‘the Ordinance’) has come into force on 1 June 2011. The Ordinance accepted the UNCITRAL Model Law with certain modifications and additions[56]. There are separate provisions in the Ordinance differentiate between: (i) awards rendered in Mainland China; (ii) awards rendered in New York Convention states; and (iii) other awards (for instance awards rendered in Taiwan). Section 44(3) of the Ordinance provides that the enforcement of an arbitration award might be refused if it would be contrary to public policy to enforce the Convention award. The Hong Kong courts rarely invoke the public policy ground in refusing to enforce arbitration award. In the case of A v R[57], the court was of the view that public policy was often invoked by a losing party in an attempt to manipulate an enforcing court into re-opening matters which had been determined in an arbitration[58]. The court stated:

‘If the public policy was to be raised, there must be something more, that was, a substantial injustice arising out of an award which was so shocking to the court’s conscience as to render enforcement repugnant.’

In the Court of Appeal case of Karaha Bodas Co LLC v Perusahaan Pertambangan Minyak dan Gas Bumi Negara (Pertamina)[59], Pertamina alleged that the award for was obtained bb KBC was by way of fraud or bad faith as KBC had made false or untruthful representations to Pertamina about the generating capacity and commercial viability of their project, therefore contrary to public policy. The court held that an allegation of fraud should not be used as a ‘hook’ for reopening on public policy grounds the entire case previously determined by the arbitral tribunal in the absence of a clear indication of the existence of fraud. The Hong Kong Court of final appeal decision in Hebei Import & Export Corp v Polytek Engineering Co Ltd[60], the court held that:

‘… there must be compelling reasons before enforcement of the convention award can refused on public policy grounds. This is not to say that the reasons must be so extreme that the award falls to be cursed by bell, book and candle. But the reasons must go beyond the minimum which would justify setting aside the domestic judgment award.’

In the case of Gao Haiyan & Anor v Keeneye Holdings Limited & Anor[61], the Hong Kong court refused to enforce an arbitration award by Xian Arbitration Commission as the award was tainted by the appearance of bias which is contrary to the Hong Kong public policy. The court held that ‘egregious’ acts might be sufficient to resist enforcement of the arbitral award on the ‘contrary to public policy’ ground and the ‘egregious’ act refers to the private communication between a member of the tribunal and a party once arbitration had commenced[62]. However, the decision of this case has been set aside by the Court of Appeal[63]on the ground that no case of apparent bias has been established as contrary to the fundamental conceptions of moral and justice in Hong Kong.

Singapore Position

            Singapore ratified the Convention in 1986. Domestic arbitrations in Singapore governed by the Arbitration Act whereas the international arbitrations governed by International Arbitration Act (‘the IAA’). The International Arbitration Act has adopted the Model law on International Commercial Arbitration. The strict approach adopted by the Singapore Courts in upholding public policy exception to the enforcement of an arbitral award can be seen in the Court of Appeal case of AJU v AJT[64]which the court confirmed that the public policy ground for challenging an arbitral award will be construed very narrowly by the Singapore Courts, setting aside a previous High Court decision. The Court of Appeal held that an alleged conflict between an arbitral award and Singapore public policy does not entitle a court to re-open the tribunal’s findings of fact. To do so would be contrary to the principle of finality of an arbitral award under the IAA. The court was of the view that a tribunal’s findings can only be re-opened when the tribunal has made an error in deciding what constitutes a violation of Singapore public policy as the state does not give authority to arbitral tribunals to decide what constitutes a violation of Singapore public policy[65]. In another Court of Appeal case of PT Asuransi Jasa Indonesi (Persero) v Dexia Bank SA[66], the court held that the award can only be refused enforcement if it is ‘shock the conscience’ or ‘violate the forum’s most basic notions of morality’.

It is of the view that the approach taken by the Singapore Courts in recognizing and enforcing international foreign award is to be applauded. Public policy exception should not be used as a basis to review findings of fact made by an arbitral tribunal in order to uphold the international arbitration regime as a private dispute resolution to meet the necessities of the international business community.

Conclusion

Judicial interpretations on the ground of public policy by the courts have shown a policy preferring enforcement of an arbitral award. The public policy has been invoked in limited situations. The public policy exception under the Convention is generally construed narrowly in order to promote the Convention’s aim of encouraging the enforcement of awards. In the case of Parsons & Whittemore Overseas Co Inc v Societe Generale de L’Industrie du Papier (Rakta)[67], it was held that the public policy exception was to be given a narrow construction as meaning against the basic notions of morality and justice of the forum that is consistence with the fulfillment of the principle aim of the Convention.

It is of the view that the discretionary power exercised by the courts should be exercised cautiously as the exception on the ground of public policy is not defined in any jurisdiction and public policy may differ from one jurisdiction to the others. In recognizing and enforcing an international arbitral award, the respective jurisdiction must only invoke the ‘international public policy standard’ in refusing enforcement. ‘International public policy standard’ may refer to the violation ofthe most fundamental principle where it is of universal application. The enforcement of an arbitral award should be refused only in exceptional circumstances in order to give effect to the Convention and international comity. In the case of Aloe Vera of Amerika Inc v Asianic Food (S) Pte Ltd and another[68], the court noted the following:

‘… the principle of international comity enshrined in the Convention…strongly inclines the courts to give effect to foreign arbitration awards. As Litton PJ observed in the decision of the Hong King Court of Final Appeal in Hebei IOmport & Export Corp v Polytek Engineering Co Ltd… the concept of public policy as it applies to the enforcement of foreign arbitration award is the principle that courts should recognize the validity of decisions of Foreign Arbitral Tribunals as a matter of comity, and give effect to them, unless to do so would violate the most basic notions of morality and justice.’

It must be used as the last resort to resist enforcement.

 

YONG ANN NEE
DEPUTY PUBLIC PROSECUTOR
WILAYAH PERSEKUTUAN
KUALA LUMPUR
ann@agc.gov.my

03-20825343

 


[1] The Convention entered into force on 7 June 1959.

[2] UNCITRAL official website: http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention.html (viewed on 29.4.2012).

[3]Article III of the Convention – each Contracting State shall recognize arbitral awards as binding and enforce then in accordance with the rules of procedure of the territory where the award is relied upon.

[4]Article V, (2)(b) of the Convention – recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that the recognition and enforcement of the award would be contrary to the public policy of that country.

[5] AIR 1994 SC 860.

[6]This Act only applies to arbitrations commencing after 15 March 2006. Arbitrations that commenced prior to this date are governed by the Arbitration Act 1952.

[7] KLRCA official website: http://www.klrca.org.my/scripts/view-anchor.asp?cat=10 (viewed on 29.4.2012).

[8]Section 38(4) – For the purposes of this Act, “foreign State” means a State which is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted by the United Nations Conference on International Commercial Arbitration in 1958.

[9] The term ‘public policy’ is newly incorporated in the Arbitration Act 2005.

[10] Section 4(1) – Any dispute which the parties have agreed to submit to arbitration under an arbitration agreement may be determined by arbitration unless the arbitration agreement is contrary to public policy.

[11]Section 37(1)(b)(ii) – An award may be set aside by the High Court only if the High Court finds that the award is in conflict with the public policy of Malaysia; (2) Without limiting the generality of subparagraph (1)(b)(ii), an award is in conflict with the public policy of Malaysia where (a) the making of the award was induced or affected by fraud or corruption; or (b) a breach of the rules of natural justice occurred (i) during the arbitral proceedings; or (ii) in connection with the making of the award.

[12] Section 39(1)(b)(ii) – Recognition or enforcement of an award, irrespective of the State in which it was made, may be refused only at the request of the party against whom it is invoked if the High Court finds that the award is in conflict with the public policy of Malaysia.

[13] In the case of Harris Adacom Corporation v Perkom Sdn Bhd [1994] 3 MLJ 504 HC, the court held that an award already registered in another jurisdiction would not contrary to public policy when the party sought to enforce the award in Malaysia as long as the enforcement does not constitute double claim. The plaintiff in this case has registered the US award in the Superior Court of Columbia and its registration was done only for the protection of the plaintiff’s interest and not for the purpose of a double claim. In the case of Colliers International Property Consultants (USA) and Anor v Colliers Jordan Lee and Jaafar (Malaysia) [2010] MLJU 650 HC, the court rejected the contention by the defendant that the enforcement of the UK arbitral award is violated the provision of the Valuers, Appraisers and Estate Agents Act 1981. The court further opined that even if they did there was nothing conflicted with fundamental principle of justice or morality or otherwise offensive to the public policy of Malaysia. 

[14]Goldcourse Sdn Bhd v Asaztera Sdn Bhd[2011] 9 MLJ 700, HC

[15] [2012] 1 CLJ 323, HC

[16] Paragraph 42 of the judgment.

[17] Both domestic and foreign awards.

[18][2009] MLJU 1334

[19] [2004] 2 MLJ 414,

[20] Architects Act 1967, Registration of Engineers Act 1967 and the Quantity Surveyors Act 1967

[21] Viewed on 7.5.2012: http://www.globalarbitrationreview.com/know-how/topics/61/jurisdictions/65/england-wales/

[22]Ibid.

[23] Section 103(3) of the 1996 Act provides: Recognition or enforcement of the award may also be refused if the award is in respect of a matter which is not capable of settlement by arbitration, or if it would be contrary to public policy to recognize or enforce the award.

[24][2012] 1 All ER 414

[25][1999] 3 All ER 864

[26] In this case, the parties entered into a contract governed by Swiss law for the purpose of selling military equipment to Kuwait. The respondent alleged that the contract was illegal as it involved the claimants bribing different Kuwaiti representatives. The award was in favor of the claimant. The respondent sought to set aside the award in Swiss court but was rejected. Upon refusal, the respondent sought to have set aside the award in England.

[27] [1999] QB 785, COA

[28] Beth Din is an arbitration applying Jewish law.

[29] [1953] 1 ALL ER 843

[30] Section 8(7) of the 1974 Act provides – In any proceedings in which the enforcement of a foreign award by virtue of this Part is sought, the court may refuse to enforce the award if it finds that (b) to enforce the award would be contrary to public policy.

[31] Section 8(7A) of the 1974 Act provides – To avoid doubt and without limiting paragraph (7)(b), the enforcement of a foreign award would be contrary to public policy if (a) the making of the award was induced or affected by fraud or corruption; or (b) a breach of the rules of natural justice occurred in connection with the making of the award.

[32][2011] FCA 131

[33] The award in question was obtained in Uganda. The complaint in this case is that the assessment of general damages in the award is excessive because the arbitrator failed to consider the costs and expenses that would have to be expended by the party in generating the gross income which he found was likely to be earned. The court held that this type of complaint ought not be allowed to be raised as a reason for refusing to enforce a foreign award.

[34][2012] FCA 276

[35][2011] VSCA 248, Supremes Court of Victoria – Court of Appeal.

[36]The court also refused enforcement on the grounds that the IMC is not named in the arbitration agreement, he is not a proper party to the arbitration and the Altain Khuder has failed to discharge the legal onus proving on the balance of probabilities that the award debtor is a party to the arbitration agreement.

[37] Viewed on 8.5.2012 at http://www.nortonrose.com/files/new-zealand-26270.pdf

[38]Schedule 1 – Rules applying to arbitration generally; Article 36(1) provides – Recognition or enforcement of an arbitral award, irrespective of the country in which it was made, may be refused only – (b) if the court finds that – (ii) the recognition or enforcement of the award would be contrary to the public policy of New Zealand.

[39] [2004] 2 NZLR 614.

[40][2005] NZCA 314

[41] In this case the judgment sought to be enforced was a US court judgment. It was contended for the party opposing enforcement that it would be illegal under the New Zealand law to enforce the confidentiality agreement on which the US judgment was based, and hence to enforce the judgment would be an abuse process of the New Zealand Court, therefore contrary to public policy. The Court of Appeal in New Zealand rejected the contention and held that the public policy exception was a narrow one that had necessarily to be confined in line with the comity of nations principle.

[42] [2004] 1 NZLR 386

[43]Signatories of the New York Convention, 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Viewed on 6.5.2012 http://delhiadvocate.tripod.com/arbitration_foreign_award/Signatories_New_York_Convention.html

[44]Section 48 of the Act provides – Conditions for enforcement of foreign awards – (2) Enforcement of an arbitral award may be refused if the courts finds that – (b) the enforcement of the award would be contrary to the public policy of India. Explanation – Without prejudice to the generality of clause (b), it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption.

[45]Renusagar Power Plant Co. Ltd vs General Electric Co AIR 1994 SC 860.

[46][2003] 2 LRI 348, Supreme Court of India

[47] If the award is patently against the statutory provisions of substantive law which is in force in India or is passed without giving an opportunity of hearing to the parties or without giving any reason in a case where parties have not agreed that no reasons are to be recorded, it would be against the statutory provisions.

[48]‘Judicial Intervention In Arbitral Awards on the Grounds of Public Policy’, viewed on10.5.2012 http://www.halsburys.in/judicial-intervention.html

[49]Awards in arbitrations outside India

[50](2008) 2 MLJ 289 (S.C.)

[51] The Supreme Court relied mainly on the decision of Bhatia International v Bulk Trading(2002)4 SCC 105 which held that provisions of Part 1 of the 1996 Act – stated to cover only domestic arbitrations – apply equally to foreign arbitrations. The Bhatia decision was in the context of the power of Indian courts to grant interim measures (e.g., injunctions) in foreign arbitrations.

[52] Paragraph 21 of the judgment.

[53]12 October 2011, Civil Appeal No. 3343 of 2005 at Indian Kanoon website, viewed on 15.5.2012 – http://indiankanoon.org/doc/1049823/

[54] C.I.F. (Cost, Insurance, Freight) is a contract which contemplates the carriage of goods by sea. According to C.I.F. and F.O.B. Contracts (Fourth Edition) by David M. Sassoon, it is stated that essential feature of a C.I.F contract is that delivery is satisfied by delivery of documents and not bu actual physical delivery of the goods. Shipping documents required under a C.I.F. contract are bill of lading, policy of insurance and an invoice.

[55] The owner of the rescue vessel later claimed to the court of Turkish to arrest the vessel with the cargo in action for enforcement of the lien against the vessel. The concerned court agreed to arrest vessel towards the cost of rescue and the entire cargo was sold out to compensate the cost of rescue of the vessel.

[56]New Hong Kong Arbitration Ordinance comes into effect, viewed on 2.5.2012: http://www.herbertsmith.com/NR/rdonlyres/0597DD9B-657D-4DCB-AE56-0B6F7EEA4F1E/21691/0601NewHongKongArbitrationOrdinancecomesintoeffect.htm

[57][2010] 3 HKC 67

[58]In this case, the court held that an error (whether of law or fact did not matter here) by an arbitrator in an award could not by itself counterbalance the public policy bias towards enforcement. The respondent sought to challenge the enforcement of the award on the basis that the US$3 million in damages which the arbitrator awarded to the applicant was based on the liquidated damages figure stipulated in clause 18 was void as a penalty clause (whether one applied Danish or Hong Kong law).

[59][2007] 5 HKC 91

[60] (1999) 2 HKCFAR 111

[61] [2011] HKCU 708

[62]The respondent contended that the dinner meeting among the arbitrators was an attempt to pressure the respondents to pay RMB 250 million to the applicants in return for a decision in the respondents’ favourt upholding the validity of the share transfer agreements.

[63] [2011] HKCU 2399

[64] [2011] SGCA 41.

[65]The court stated that: ‘It is a question of law what the public policy of Singapore is. An arbitral award can be set aside if the arbitral tribunal makes an error of law in this regard,… in the present case, if the Concluding Agreement had been governed by Thai law instead of Singapore law, and if the tribunal had held that the agreement was indeed illegal under the Thai law (as the Respondent alleged) but could nonetheless be enforced in Singapore because it was not contrary to Singapore’ public policy..’

[66] [2007] 1 SLR (R) 597.

[67](1974) 508 F 2d 969.

[68] [2006] 3 SLR 174

You can skip to the end and leave a response. Pinging is currently not allowed.

Leave a Reply


Powered by WordPress and WordPress Themes, thanks to Live Jasmin

Videos, Slideshows and Podcasts by Cincopa Wordpress Plugin