Dispute Resolution, International Law, RMLNLU International Legal Essay Competition

Enforceability of International Arbitral Awards in Light of the New York Convention

By: Tarini D. Prabhu

INTRODUCTION

International arbitration is growing as a means of dispute resolution today. Arbitration is considered a more cost-effective, timely, and flexible means of resolving disputes, without having to resort to litigation and its accompanying inconveniences. Although there is an effort to shift away from litigation and the regular courts, arbitration cannot completely sever itself from the courts as it ultimately depends on them for enforcement of the award.

Enforcement is the process of executing the award, using the official means of the state. If the award debtor refuses to pay the damages, the award creditor may seek recognition and enforcement of the award in the place where the debtor has assets. The court can then use regular legal coercive mechanisms like seizing or attaching the assets of the debtor if they fail to pay.

The enforceability of international arbitration awards is a significant issue because it poses a potential challenge for the development of international arbitration as a common means of dispute resolution. If a foreign award is not enforceable in the enforcing jurisdiction, the entire arbitral process is rendered futile. Further, it is something that parties must keep in mind when drafting their arbitration agreement and deciding the seat.

Although enforceability of awards is an issue across the various fields in international arbitration, this essay will focus on international commercial arbitration, with special reference to the New York Convention of 1958.

The U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards or the New York Convention of 1958 laid down a framework for enforcement of foreign and international commercial arbitral awards. This has greatly eased the path of enforcement in the field of international commercial arbitration. There are other conventions such as the Geneva Convention, 1961 (European Convention on International Commercial Arbitration) and the Inter-American Convention on International Commercial Arbitration, 1975 that deal with the enforcement of arbitral awards. However, the New York Convention has the most number of signatories and is the most important in terms of contribution to the enforceability of awards.

This essay seeks to study the enforceability of international arbitral awards in light of the New York Convention (hereinafter the Convention). It will establish the laws that govern enforceability of international arbitration agreements, the application and scope of the Convention, exceptions to the obligation to enforce awards and grounds for denying enforcement. Finally, it will recommend possible improvements in the existing legal framework to ensure an

international legal environment that is more favorable for enforcement of awards.

APPLICABLE LAWS

There are three laws that govern enforceability: the law of the seat, the law of the forum, and any applicable national law or international conventions. The award is made under the law of the seat. Even if the venue is different from the seat, the award is still deemed to be passed at the seat.[1] The law of the seat determines the formal requirements of an award such as the process of making and delivering an award. The law of the place of enforcement determines whether it is an award, based on the definition of “award” in that particular national law. After an award is passed, it can be confirmed in the seat of arbitration and then enforced there or abroad.

The Convention has done away with the double exequatur system that existed under the Geneva Convention, 1961. This was a cumbersome two-tier system whereby an award had to first be confirmed by the courts of the seat before it could be recognized abroad, and then enforced. Most modern arbitration law, including the UNCITRAL Model Law, 2010, does not have the double exequatur system any more.

The Convention casts a general obligation on contracting states to recognize and enforce arbitral awards. Article III presumptively recognizes awards subject to procedural requirements. The most important part of the Convention is that it limits the grounds for non-recognition of an award of a contracting state.[2]

APPLICATION AND SCOPE OF THE NEW YORK CONVENTION

The extent of application of the Convention is pertinent in the matter of enforceability. Being pro – enforcement, if the Convention applies to a given award, it improves it chance of being enforced. Like other similar international conventions, it applies to foreign or non-domestic awards and not purely domestic awards. In order to attract the Convention, international status of an award must be established.

Article I(1) of the Convention states that the Convention applies to awards made outside the country where enforcement is sought, or are not considered domestic awards in the country where it is sought.[3] The first half of the article refers to foreign awards and the second half refers to non-domestic awards.

A foreign award is an award that is made outside the country where enforcement is sought. Such awards are protected by the Convention. Recognition and enforcement of it can be refused only on grounds listed in Article V. On the other hand, the Convention does not apply to an award that is not foreign. Hence, recognition and enforcement for such an award can be denied on any grounds present in the relevant national arbitration law of the state.

A non-domestic award includes:

  1. a) an award that is made in the country of enforcement but which was made under the procedural law of another state.
  2. b) an award made under arbitration law of the enforcing state but regarding a dispute involving an international element.
  3. c) an ‘a-national’ award, i.e., one that is not governed by any arbitration law.

If an award is non-domestic, it can be denied recognition and enforcement if Article V applies, provided that the award is annulled in the arbitral seat.

Each state defines non-domestic differently. In the USA, under the Federal Arbitration Act, 2006 an award is non-domestic, even if between US citizens, if the relationship involves property that is aboard, enforcement abroad, or any international aspect involving the legal system of another country.[4] Many other states such as Japan, Netherlands and Portugal, only enforce an award under the Convention if it has been rendered in a foreign state.

Other requirements to apply the Convention to an award are as follows: it must constitute an “award”; it must arise from a commercial relation and a defined legal relationship; and it must satisfy any applicable reciprocity requirements. Most conventions and national laws on enforceability of international awards have similar requirements to these.

EXCEPTIONS TO THE OBLIGATION TO ENFORCE

There are certain exceptions to the obligation to enforce imposed by the Convention.

RECIPROCITY PRINCIPLE

The reciprocity principle constitutes one such exception. The Convention permits contracting states to deny an otherwise valid award if the state where it was passed has not ratified the Convention[5] but it must provide a reciprocal reservation in its national law to do this. This only applies to cases where the country where the award is passed has not ratified the Convention. It does not depend on the nationality of the parties. For example, if a party from Iran and a party from Germany enter into an arbitration agreement and the award is passed in France, the award will be enforceable against the Iranian party and against the German party in Convention countries, since France has ratified the convention. However, if the award is passed in Iran, which is not a party to the Convention, it will not be enforceable against either of the parties in other Convention countries.

The rationale behind this is multifold. Firstly, there is the basic principle of mutual and reciprocal obligations: it is unfair to expect a country to enforce the awards of a country that in turn does not enforce its awards. Secondly, it incentivizes non-signatory states to ratify the Convention. Thirdly, it prevents unfair interpretation of the Convention in local laws. Article XIV states that the rights of a signatory are the same as the rights it allows to other countries. This discourages signatories from having domestic laws that allow a very narrow scope for enforcement through excessive reservations. It means that such provisions have a cost: other countries will retaliate to such treatment of foreign awards with similar treatment towards this country’s awards.

The problem with the reciprocity provisions is that it is based on the place where an award is passed. The party most likely to be the subject of enforcement proceedings is the party belonging to the country of enforcement, since their assets would be present in that country. For example, take a case where there is an agreement between two parties, from a signatory and non-signatory country respectively, say from the US and Iran.  If the award is passed in France, the party from Iran benefits, as they are able to enforce their claims against the US party. This is because the award was passed in a signatory country (France) and the reciprocity provision only considers the place where the award is passed and not the nationality of parties. However, if the party from the USA seeks to enforce their claims against the other, they cannot as Iranian courts can refuse to enforce the award, not being a signatory. This creates a scenario where a party from a signatory country loses out to one from a non-signatory country.  Thus, the reciprocity principle as it is, creates an anomaly that is unfair to the individual parties, although it may be in line with the foreign policy considerations of the country’s government.[6]

Instead, the principle of reciprocity could be based on the nationality of the parties. This can be applied to the earlier example of an Iranian party and a USA party entering into an arbitration agreement. Now, irrespective of whether the award is passed in Switzerland, Iran or the USA, the Iranian party cannot enforce its award against the US party in the US court, as Iran has not ratified the Convention. In any case, the Iranian court has no obligation to enforce an award against the Iranian party. This would put more pressure on non-signatories to ratify the convention since their parties will otherwise be unable to enforce any claims against another party in a foreign jurisdiction.  It will also avoid the scenario created by the present method, which favors a non-signatory party and is disadvantageous to the party belonging to the Convention state.

DEFINITION OF “COMMERCIAL”

As per Article I(3) of the Convention, contracting states may declare that they will apply the convention only to disputes arising out of legal relations, (whether contractual or not) which are commercial.[7] At least 44 states have included this provision in their arbitration laws.[8] The Convention itself provides no definition of “commercial” so the law of the enforcing jurisdiction will apply in determining this. Different states have differing definitions. Generally, criminal matters and family matters such as divorce, wills and adoption are not considered commercial.

REQUIREMENT OF PERSONAL JURISDICTION

Usually, if the award debtor has assets in a country, it is sufficient for its courts to exercise jurisdiction and enforce the award. However, in the US, some courts have refused to enforce foreign arbitration awards on the grounds that they lacked personal jurisdiction over the award debtor. In Base Metal Trading Company Ltd. v. OJSC Novokuznetsky Aluminum Factory,[9] the U.S. Fourth Circuit Court of Appeals held that it had no personal jurisdiction as the property contended to be the basis for jurisdiction was unrelated to the claimant’s cause of action.

The Base Metal case has received criticism for violating U.S. obligations under the Convention by preventing recognition of Convention awards. The standards for enforcement are more lenient than standards for jurisdiction and that lack of jurisdiction does not necessitate lack of the power to enforce. As was pointed out in a subsequent case[10]; to attract jurisdiction, it is not necessary that the property should be related to the cause of action; any property in the country is sufficient.

FORUM NON CONVENIENS

Forum non conveniens is another principle that applies to the enforceability of awards. This doctrine allows courts discretionary power to dismiss a case if it determines (based on public and private interest) that an alternative forum is better suited to hear the case. Thus, the court deliberately decides to not exercise its jurisdiction. Civil law jurisdictions do not recognize this doctrine. Common law jurisdictions often use it, although it is rarely used to reject enforcement of an international arbitration award.

So far, it has been used mainly by U.S. courts to deny enforcement of Convention awards In Monegasque de Reassurances v. Nak Naftogaz of Ukraine and State of Ukraine[11] where a key issue depended on Ukrainian law, the court held that a Ukrainian court was a much better forum and refused enforcement. The court held that the grounds provided under Article V. of the Convention are not exhaustive. It stated that Article III of the Convention allows the court to apply rules of procedure of the place of enforcement. Since forum non conveniens is a procedural matter, it could be applied under the Convention. Whether it is procedural or substantive in nature is a debated matter.

Using forum non conveniens to deny enforcement of arbitral awards is problematic. Firstly, it is a principle that applies to trial. Extending it to arbitration under the Convention is questionable, given the complex mesh of reciprocity agreements, the objective of the Convention and the exhaustive list provided in Article V. that does not include forum non conveniens. It would create an inconsistency in the application of the convention and create room for misuse of discretion. It leads to the parties being sent back to the very jurisdiction they are seeking to avoid. In general, if assets are present in the country or can be transferred, the court must refrain from using this principle.

LIS PENDENS

The principle of lis pendens (the matter is pending) is applied in a limited form by the Convention. Article V provides for limited stay of recognition proceedings if an annulment proceeding is pending in the arbitral seat.[12]

AGREEMENT REGARDING FORUM FOR ENFORCEMENT

Parties can come to an agreement beforehand, regarding the forum for enforcement or recognition of the award. The Convention and most national laws do not limit the autonomy of parties to do so.[13]

GROUNDS FOR NON-ENFORCEMENT UNDER THE CONVENTION

RATIONALE BEHIND ARTICLE V

To support the enforcement of awards, the Convention provides only a limited and exhaustive number of grounds or non-recognition in Article V and these are narrowly construed. Further, the Convention does not mandate non-recognition in case any of the grounds in Article V apply. It merely gives contracting states the option to not recognize the award. The burden of proof is on the party resisting enforcement to establish these defenses. This narrows the scope for non-enforcement.

Article V(2) provides 2 more defenses: lack of arbitrability and public policy. These can be raised by the court of its own accord, but are usually raised by the resisting party. It must be noted that none of the defenses are based on the merits of the case; the court cannot decline enforcement because the decision was factually or legally wrong. The defenses are based on due process principles such as fairness to parties and reasonable opportunity to be heard. Even if an award is not covered by the Convention, in many countries it would be subject to the UNCITRAL Model Law, and the grounds found in Article 35 and 36 of the Model Law, 2010 are the same as those in Article V (1) of the Convention.

INCAPACITY AND INVALIDITY

Incapacity refers to incapacity of a party to enter into the arbitration agreement under the law chosen by the parties or, in the absence of chosen law, under the law of the country where the award was made.[14] Incapacity could be due to sovereign immunity or if the arbitration agreement was signed by someone who did not have the authority to act for the party.

Invalidity arises if the agreement or award does not fulfill the formal requirements of the relevant law (chosen law or law of seat if there is no law chosen).  National law of signatories regarding convention awards must conform to the formal requirements of the Convention. Article II lays down the maximum formal requirements that a state may impose for an arbitration agreement to be valid. It states that the requirements “shall include” an arbitration clause in a contract, signed by the parties or contained in exchange of letter or telegrams. The phrase “shall include” indicates that it is not an exhaustive list and alternative requirements may be accepted. The state cannot impose stricter requirements but can impose more lenient requirements. This promotes validity of the agreement and thereby promotes enforceability. Article IV of the Convention states that a copy of the award and the agreement are necessary for enforcement. The party’s consent to arbitrate must be clear and there must be a clear agreement to arbitrate.

LACK OF NOTICE OF FAIRNESS

A party must be given notice of appointment of arbitrators and of arbitral proceedings.[15] Both parties must be given full opportunity to present their cases. If no proper notice or fair hearing is given to parties, it will provide grounds for non-enforcement.  In Iran Aircraft Industries v. Avco Corporation,[16] a party was ordered by the court to submit summaries of evidence. Subsequently, the case was decided against them because they failed to provide original documents. Since there was lack of notice and fairness, the award was not enforced.

ARBITRATOR ACTING IN EXCESS OF AUTHORITY

The arbitrator must not exceed the authority given by the arbitration agreement. An award must not deal with a difference that is not within the scope of the arbitration agreement.[17]  If it does, only the part of the award that is out of scope will not be enforced and the rest will be. This defense does not succeed often as the tribunal’s powers are usually construed very widely.  In a recent case,[18] the US Supreme Court vacated an award on grounds of excess authority. The tribunal had to decide if a class action could be allowed when the arbitration agreement was silent on that issue. The tribunal held in the affirmative. The Supreme Court held that the tribunal could not decide public policy and had exceeded its authority by failing to stick to the agreement.

THE TRIBUNAL OR PROCEDURE IS NOT IN ACCORDANCE WITH THE ARBITRATION AGREEMENT

Party autonomy is at the heart of arbitration. If either the constitution of the tribunal or the arbitration procedure is not in accordance with the parties’ agreement, enforcement can be denied. [19] If the agreement does not deal with either of these matters, the law of the country where the arbitration took place (the forum) must be followed.

THE AWARD IS NOT YET BINDING OR HAS BEEN SET ASIDE

An award is not enforceable unless it is binding on the parties.[20] In order for it to be binding, it must be finally decided without scope for an appeal on the merits of the matter. After an award is passed, the court of the place of jurisdiction (the seat) has the option to either recognize it or to vacate or annul it. An award that has been vacated or set aside in the country under whose law it was made, may not be enforced.[21] If it recognizes the award, it can be enforced either in that jurisdiction or in another. However, if enforcement has merely been refused by the court of the seat and not annulled or vacated, it may still be enforced in another jurisdiction where the award debtor has assets.

It is evident that Article V(1)(e) provides a loophole. The law of the country where the award was made will determine whether it is binding or not and may be used to set aside an award. This allows leeway to local courts to vacate an award on grounds other than those provided in Article V. This in turn, allows other contracting states to refuse to enforce such an award under Article V(1)(c).

However, the courts have discretion to decide whether they will or will not enforce such vacated awards. Article V (1) allows the option to courts to decide so. It is further mitigated by Article VII which permits a party to take advantage of any laws or treaties in the enforcing jurisdiction that are more favorable to enforcement of an award.

SUBJECT MATTER NOT ARBITRABLE

The subject matter of an arbitration agreement must be arbitrable for the award to be enforced. This depends on the law of the concerned jurisdiction. Usually criminal matters, child custody, bankruptcy and other matters that impact third parties or the general public, are not arbitrable. Parties must closely consider if the subject of their dispute is arbitrable prior to making an arbitration agreement.  However, there are very few instances where enforcement is denied on the basis of subject matter not being arbitrable.[22]

PUBLIC POLICY

Article V(2)(b) of the Convention provides that recognition or enforcement of an arbitral award may be refused if a court finds that it would be contrary to the public policy of that country. Since it does not define public policy, it creates a loophole by which courts can use their discretion to refuse enforcement. However, in general, courts tend to construe this narrowly, in line with the objectives of the Convention.

 It was held that public policy must be construed to mean only the most basic notions of morality and justice of a country.[23] However, there are instance of either misuse of this provision to further the political or foreign policy interests of a country, or wrongful use of it, if the court does not agree with the decision. The Turkish Supreme Court refused to enforce an ICC award where the tribunal in Zurich had applied Turkish substantive law but Zurich procedural law.[24] It held that by not applying Turkish procedural law too, the tribunal had violated Turkish public policy. Firstly, there was no material difference between Zurich and Turkish procedural law. Secondly, the court used public policy with respect to the determination of applicable law by the tribunal and not the effect of enforcing the award itself.  However, in general, courts refrain from using the public policy clause.

CONCLUSIONS AND RECOMMENDATIONS

The prospects of enforcement of a foreign award are much brighter today than they were before. Yet, certain gaps remain in the legal framework for enforcement. The anomaly created by the reciprocity principle in its current form, can be removed by basing it on the nationality of the party instead of the place where the award is made. Such a provision would mean that non-signatory countries parties would not be able to enforce international awards under the Convention. It would serve as a strong incentive for countries to ratify the Convention.

The Convention must incorporate a provision on forum non conveniens so as to remove the present ambiguity regarding its application under the Convention. As of now, it is a principle used in regular trial cases that is being extended by the court’s discretion to Convention arbitral awards. The test to use this principle followed by the U.S. courts, is whether it would be in public or private interest[25]. Such grounds are all encompassing and vague. Alternatively, countries (such as the US) that use this doctrine to deny enforcement of awards must create specific provision for it in their arbitration laws. Such provisions must clearly lay down the grounds when it may be used in the case of arbitration and, more specifically, with respect to Convention awards.

Regarding the defense of public policy, it remains a provision that is barely used by courts to deny enforcement. Some commentators have suggested that the courts must use it to avoid enforcement that would lead to unjust results, as sometimes ensues from alternative means of dispute resolution.[26] However, this would allow the courts to indiscriminately interfere with the arbitral award, especially since the phrase “public policy” is very broad. One of the key factors that distinguishes arbitration from the regular legal process is that there is more scope for flexibility. This will be severely curbed if the courts are allowed too much power to intervene through the process of enforcement.

As the Queen Mary Survey on International Arbitration, 2015[27] reported, a key issue arising in international arbitration today is due process paranoia. This refers to a perceived reluctance by tribunals to act decisively in certain situations for fear of the award being challenged on the basis of a party not having had the chance to present its case fully. Since one of the key advantages of arbitration is that it is supposed to be less cumbersome than the regular court process, this issue does pose a challenge to its viability. However, it must be pointed out that the due process requirements in Article V. (1) are present to ensure the fairness of the arbitral process and cannot be done away with. In other words, they are a necessary evil.

Having presented these recommendations, it must be acknowledged that the New York Convention has been immensely successful in promoting enforceability of international commercial arbitration awards. The party often complies with the award in the first place so enforcement proceedings are not a necessity. This, combined with court enforcement, results in approximately 98 percent of international arbitration awards being carried out. This high rate of enforceability facilitated by the convention encourages people to turn to international arbitration as a means of dispute resolution and is one of the driving reasons behind the increase in its popularity.

The most powerful provision in the Convention is Article V(1) that provides the limited grounds for non-enforcement. This has played a pivotal role in streamlining the enforcement process and preventing countries from including unreasonable requirements for enforcement in their arbitration laws. It greatly reduces the scope for discretion that courts may exercise in enforcing the award. This furthers the ultimate goal of arbitration: to move away from the regular legal process of the courts and gain more independence as a dispute resolution method. Above all, it increases the viability of international arbitration by facilitating enforcement of awards across borders.

[1] UNCITRAL Model Law on Arbitration 2010 art 1(2) & art 31; Swiss Law on Private International Law 1987, art 176.

[2] Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, art V.

[3] Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, art I(1).

[4] United States Code 2002, s 202.

[5] Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, art I(3) and art XIV.

[6] Gary B Born, ‘Legal Framework for International Arbitral Awards’ (2001) 3 KLI 2897.

[7] Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 art I(3).

[8] UNCITRAL, Status: Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) <http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html.&gt; accessed 17 December 2017.

[9] 283 F 3d 208 (2002); 537 US 822 (2002).

[10] Glencore Grain Rotterdam BV v Shivnath Rai Harnarain Co 284 F 3d 1114 (2002).

[11] 311 F 3d 488 (2002).

[12] S 27 03[B][1].

[13] Restatement (Third) US Law of International Commercial Arbitration 2012, s 4-26.

[14] Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 art V(1)(a).

[15] Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 art V(1)(b).

[16] Iran Aircraft Industries v Avco Corporation 980 F2d 141 (2d Cir 1992).

[17] Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 art V(1)(c).

[18] Stolt Nielsen v Animal Feeds 130 S Ct 1758 (2010).

[19] Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 art V(1)(d).

[20] Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 art V(1)(e).

[21] ibid.

[22] JDM Lew, Loukas Mistelis and Stefan Kroll, Comparative International Commercial Arbitration 721 (Springer 2003).

[23] Parsons & Whittemore Overseas Co Inc v Societe Generale De L’industrie Du Papier 508 F2d 969, 974.

[24] Michael Kerr ‘Concord and Conflict in International Arbitration’ (1997) Arb Int 140.

[25] Gulf Oil Corp v Gilbert (1947) 330 US 501.

[26] Eloise Henderson Bouzari, ‘The Public Policy Exception to Enforcement of International Arbitral Award, Implications for Post-NAFTA Jurisprudence’ (1995) 30 Tex Int’l LJ 205, 217-218.

[27] Queen Mary University of London International Arbitration Survey 2015.

(Tarini is currently a student at Symbiosis Law School, Pune.)