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Article V (1)(e), NYC: A Peculiar Phenomena of Awards being Enforced after being Set Aside

*Manan Shishodia

This is the first part of the blog post dealing with the phenomena of awards being enforced after being set aside.

The origins of Article V(1)(e) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (“New York Convention”) can be traced back to the shortcomings in the 1927 Geneva Convention. Under the 1927 Geneva Convention, a party seeking enforcement or recognition of an award had to prove that the award had become “final” in the country in which it was made. If an award was open to opposition or appeal, it was not deemed to be final. As a result, the finality of the award could only be achieved by obtaining a leave of enforcement in the courts of the country of the seat of the arbitration. This naturally meant higher costs and delayed proceedings as a party was required to effectively obtain two decisions - one at the country where the award was issued and one at the place of enforcement. In furtherance, the requirement that the award could be final only in the country where it was rendered made it easy for the party to obstruct or delay proceedings simply by instituting proceedings for contesting the validity of an award.

Therefore, Article V(1)(e) of the New York Convention was borne out of the necessity to remedy the aforementioned shortcomings. The New York Convention was drafted by abandoning the requirement of an award having “finality” and a non-binding award could be a valid ground for refusing recognition and enforcement. Therefore, the need to obtain two decisions (as mentioned above) was eliminated which reduced delay and costs in the proceedings.

A plain reading of the Article stipulates that national courts may refuse the recognition or enforcement of an award if the party opposing enforcement establishes that the award: a) has “not yet become binding” on the parties or; b) has been set aside or suspended. The setting aside or suspension of the award needs to be ordered by a “competent authority” of the country “in which” or “under the laws of which” the award was made. At this juncture, let us dissect each of the crucial terms in the Article to gain a holistic understanding.

Firstly, “binding nature of award” is an interesting point of discussion as the drafters of the New York Convention have not defined the term “binding” anywhere. This led to multifarious interpretations of the term depending on where the proceedings pertaining to the award took place. For instance, a Swiss tribunal has defined the binding nature of the award when it can “no longer be appealed by ordinary means”. In other jurisdictions, the binding nature has been defined to be when an award is “no longer open to appeal on merits”. Therefore, we see a differing approach in the interpretation of the term “binding nature of an award”. We are aware that an award may be partial or final. Therefore, the interpretation of the United States District Court in Island Creek Coal Sales Company v. City of Gainesville, Florida that notwithstanding the absence of an award that finally disposes of all the claims that were submitted to arbitration, an award that “finally and definitely disposes of a separate independent claim” could be considered as binding. Thus, any interim order(s) passed would not fall within the scope of “binding nature” as the same has not attained finality. Importantly, the New York Convention firstly shifted the burden of proof of proving the binding nature of the award from the party seeking enforcement to the party opposing it. The party against whom an award is passed has to make a request.

Secondly, “competent authority” would mean any Court that has the requisite jurisdiction to suspend and/or set aside the award in each country. This power can be conferred on to a specialised tribunal or a special executive arm of the government. Thirdly, the term “in which” would imply the place of the arbitration. For instance, if the arbitration takes place in Singapore and an award was passed there, then the Courts of Singapore would have the competent authority. The term “under the laws of which” would mean the governing law that has been agreed upon by the parties. In usual parlance, this would be the seat of the arbitration as that is the law that parties have agreed upon under their arbitration agreement. Usually, the situs (place) of the arbitration is determinative of the seat or the applicable law. However, there can be cases where the situs and the applicable laws are of different countries. For instance, an arbitration may take place in Singapore and parties may agree that applicable laws of Philippines should govern the arbitration. In that case, the parties have to explicitly agree on which courts of the country will have the competent authority to pass orders on an award.

A simplistic understanding of the Article by breaking down the terms makes us learn that the recognition or enforcement of an award may be set aside by a competent authority when it is not binding or has been set aside by a competent authority. An interesting question that arises is whether an award can ever be enforced if the same has been set aside by the seat court/ competent authority? The answer to that is in the affirmative as will be evident from the following analysis of cases. After a succinct analysis of the cases, I will do a comparative analysis of the decisions which will help us understand how different jurisdictions have opined.

In this case, the Petitioner, Corporación Mexicana De Mantenimiento Integral, S. De R.L. De C.V. (“COMMISA”) had contracted with Pemex-Exploración Y Producción (“PEP”), a state-owned enterprise, to build oil platforms in the Gulf of Mexico. The contracts provided that arbitration would be the exclusive mechanism for dispute resolution and was governed by Mexican law. COMMISA initiated arbitration proceedings and in 2009, obtained an award of approximately $300 million.

COMMISA filed a petition in United States District Court for the Southern District of New York for confirmation of the award which was done. PEP subsequently appealed that award and simultaneously challenged the arbitral award in Mexican Courts (seat court). The Mexican Court set aside the award on the ground that PEP could not be forced to arbitrate. After the decision, PEP moved the United States Court of Appeal, 2nd Circuit for the purposes of vacating the decision of the Southern District. The Court upheld the decision of the Southern District of New York and stated that the award was enforceable as the objections of PEP were held to be devoid of merit.

The crux of my analysis will deal with the objections raised by PEP for setting aside the award and how the Court reasoned the same. The objections were: a) the personal jurisdiction of the Southern District over PEP and; b) the location of the venue in the district. Regarding personal jurisdiction, PEP contented that it is functionally the Mexican government and can, therefore, not be forced to arbitrate. The Court opined that by application of equitable principles, PEP is an integral part of the Mexican government and would be bound for all portions of the appeal including personal jurisdiction. The Court unanimously decided that the venue is the Southern District of New York because it sought relief from the Southern District of New York and it cannot conveniently reject the forum. The Court analysed provisions of the Panama Convention and stated that as the aim of the Convention is pro-enforcement, the discretion exercised by the Courts would be appropriate as long as it complies with the fundamental notions of what is decent and just. Therefore, it was held that the Southern District of New York did not abuse its discretion and the award was enforced despite being set aside by the Mexican Courts.

In this case, the Petitioner had filed a petition for enforcement of a foreign award arising out of an Agreement between three parties i.e., Cruz City, Burley Holdings Ltd. and Unitech Ltd. The enforcement of the Award was refused on the grounds: a) a decision beyond the scope of the Agreement; b) Unitech did not have proper notice of arbitration for responding to the claim for payment and; c) enforcement of the Award would violate provisions of Foreign Exchange Management Act, 1999 (FEMA).

Here, the award was assailed in the High Court of Justice (England) and it was argued that the present challenge is barred by res-judicata. The Court rejected this argument stating that the decision of another Court would only have persuasive value and it would not have any bearing on the validity of an award in other jurisdictions. Regarding objection (b), the Court opined that Unitech had sufficient notice as they had admittedly undertaken to make sufficient funds available to meet their payment obligations after there was a demand made for payment in the notice. Therefore, the key analysis is of objections (a) and (c). It was held that the conspectus of the dispute was within the scope of Arbitration as the relevant parties had expressly undertaken to make payments equivalent to the ‘put-option’ price as per the terms of the Agreement.

On analysing the Award in light of FEMA, the Court opined that Article V(2)(b) of the New York Convention and Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961 do not postulate refusal of recognition and enforcement of a foreign award on the ground that it is contrary to law of the country of enforcement. The Court stated that the word “public policy” must entail more than a violation of a law of India. Besides that, it was held that FEMA was enacted at the time when India's economy was a closed economy, and the idea was to conserve foreign exchange by effectively prohibiting transactions in foreign exchange unless permitted. Therefore, the objections raised regarding the enforcement of the Award were rejected and the award was eventually enforced.

In this case, Dallah Real Estate and Tourism Holding Company (“Dallah”) sought to enforce an award made in its favour of around $20 million against the Government of Pakistan. The Respondent had challenged the Award on the ground that there was no valid Arbitration Agreement, and it was set aside by the Seat Court. However, the Award was enforced later. Simplistically put, the reasoning given by the Court was as follows:

“The court before which recognition or enforcement is sought has a discretion to recognise or enforce even if the party resisting recognition or enforcement has proved that there was no valid arbitration agreement. This is apparent from the difference in wording between the Geneva Convention on the Execution of Foreign Arbitral Awards, 1927 and the New York Convention. The Article 1 of the Geneva Convention provided (Article 1) that, to obtain recognition or enforcement, it was necessary that the award had been made in pursuance of a submission to arbitration which was valid under the law applicable thereto, and contained (Article 2) mandatory grounds (“shall be refused”) for refusal of recognition and enforcement, including the ground that it contained decisions on matters beyond the scope of the submission to arbitration.”

Since Section 103(2)(b) gives effect to an international convention, the discretion should be applied in a way that gives effect to the principles behind the Convention. One example is where the party resisting enforcement is estopped from challenging the award. As emphasised by a Learned Judge, there is no arbitrary discretion- the use of the word “may” was designed to enable the court to consider other circumstances, which might on some recognisable legal principle affect the prima facie right to have an award set aside arising in the cases listed in Section 103(2).

In this case, an Award was passed on 20th February 2002 in favour of a company registered in Panama (“International Bechtel Co.”) in a dispute against the Directorate General of Civil Aviation of the Emirate of Dubai (“DAC”). The award was subsequently set aside by the Dubai Supreme Court. In the meantime, International Bechtel sought to enforce the award in France, which was granted by an order passed by the First Instance Court of Paris. At the time, the United Arab Emirates was not a party to the New York Convention and the 1991 Convention on judicial cooperation between France and the United Arab Emirates applied to the recognition of arbitral awards. Appealing this decision, DAC requested full recognition on the basis of the 1991 Convention on judicial cooperation of the Dubai Supreme Court decision upholding the setting aside of the Award. It was further argued that the award may not be enforced in France since it did not meet the requirements of the 1991 Convention and was set aside in the application of the law chosen by the parties governing the arbitral procedure.It was also argued that the enforcement disregard of the 1991 Convention constituted an excess of power that the Sole Arbitrator did not comply with his mandate (Article 1502, Code of Civil Procedure) and that the recognition and enforcement of the award was contrary to international public policy (Article 1502).

The Paris Court of Appeal confirmed the enforcement order and dismissed DAC's action. It reasoned that the condition relied upon by DAC whereby all recourse must be exhausted in the country of origin before the enforcement of the award may be granted in France is contrary to French fundamental principles of arbitration aiming at facilitating the international circulation of awards. It noted that these principles are applicable in the context of the 1991 Convention which was also concluded to facilitate recognition of awards between the two States, especially since the United Arab Emirates was not a party to the NYC. This reserves the right to apply more favourable French law allowing for the enforcement of an award having been set aside at the seat of the arbitration. The Cour d'appel de Paris then held that decisions rendered following annulment proceedings (similarly to enforcement orders) do not have any international effect outside the country where they have been rendered. It thus examined the grounds for the enforcement of the award irrespective of the annulment of the award by the Dubai Supreme Court and held that the enforcement of the award was not contrary to the 1991 Convention.

In this case, the claimant, Yukos Capital S.A.R.L. (“Yukos Capital”), was a Luxembourgian company that had once been a member of the Yukos Group (“Yukos”) in Russia. The defendant, OJSC Rosneft Oil Co. (“Rosneft”), was a Russian State-owned company that had acquired the majority of Yukos’ assets. The acquired assets included a former production subsidiary of Yukos, Yuganskneftegaz (“YNG”). Disputes had arisen in respect of certain loan agreements between Yukos Capital and YNG. The disputes were submitted to arbitration pursuant to the Rules of the International Commercial Arbitration Court at the Chamber of Commerce of Trade and Industry in Russia. The arbitral tribunal issued four awards in favour of Yukos Capital. By the time the awards were issued, YNG had been acquired by Rosneft. Rosneft then applied to the Russian courts to have the awards set aside. The Russian courts granted the application. Meanwhile, Yukos applied to the Dutch courts for enforcement of the awards. The Dutch courts ultimately granted enforcement, refusing to recognise the Russian courts’ setting aside of the awards on the basis that it was the product of a judicial process that was partial and dependent. Yukos also applied to the English High Court to enforce the awards pursuant to Section 101(2) of the UK Arbitration Act, 1996. Rosneft objected to enforcement on three broad grounds. First, it maintained that the awards had been set aside by the Russian courts, relying on Section 103(2)(f) of the Act incorporating Article V(1)(e), New York Convention regarding refusal to recognise or enforce an award where, inter alia, the award has been set aside by a competent authority of the country in which, or under the law of which, it was made. Second, it argued that the allegations by Yukos Capital regarding the conduct of the Russian court proceedings raised a challenge to the validity of executive and administrative acts of a foreign sovereign upon which the English courts could not adjudicate under the act of state doctrine and the doctrine of non-justiciability. Third, it asserted that the awards should not be enforced because they gave effect to an “unlawful” tax evasion scheme. Yukos Capital replied first that the Russian courts’ setting aside of the awards was partial and dependent, as the Dutch courts correctly found in their decision granting enforcement and that this decision bound and estopped Rosneft under the doctrine of issue estoppel. Secondly, the doctrine of act of state did not apply because there was no challenge to the validity of any act of state and the doctrine of non-justiciability did not apply because the allegations were concerned with judicial standards, which were justiciable; and thirdly, the allegation of unlawful tax evasion was part of a campaign to strip the Yukos Group of its assets.

The High Court was asked to rule on two preliminary issues namely: (i) whether Rosneft was issue estopped by the decision of the Dutch courts from denying that the Russian courts’ setting aside of the awards was the result of a partial and dependent judicial process and (ii) whether Rosneft was entitled to rely on the act of state and non-justiciability doctrines. The High Court ruled in favour of Yukos Capital on both of the preliminary issues. Subsequently, Rosneft appealed that decision. The Court of Appeal upheld the appeal on the question of estoppel, but dismissed the appeal with respect to the question of the act of state and non-justiciability doctrines. In respect of the first question, the Court noted that the Dutch courts had treated the issue of recognition of the Russian courts’ setting aside of the awards as one of public order. In the Court’s view, the notion of “public order” was inevitably different in each country. In particular, it noted that the standards by which the courts of any particular country resolved the question of whether the courts of another country were “partial and dependent” might vary considerably. It concluded that in an English court, this question fell to be determined as a matter of English law. In respect of the second question, the Court reasoned that the act of state doctrine did not prevent an English court subject to the requirements of an international convention such as the NYC from examining whether a foreign court decision should be recognised or enforced. Therefore, the award was enforced despite being set aside by the Seat Court.

In this case, Malicorp was awarded a contract in 2000 by Egypt for the building of the Ras Sudr Airport on the basis of a “Build, Operate and Transfer” concession contract. In order to be selected, Malicorp took several measures which, after being selected, it decided to cancel. The Contract was signed in November 2000.

Starting in December 2000, Respondent notified Malicorp of its non-performance under the Contract including Claimant’s obligation to set up an Egyptian company within 90 days. In August 2001, Respondent terminated Malicorp’s contract for failure to perform its obligations. As a result, Malicorp filed for arbitration before the ICSID for compensation due to allegedly unfair treatment and expropriation amounting to a violation of the BIT. The Respondent, on the other hand, argued that the ICSID Tribunal lacked jurisdiction and that the Contract was validly terminated.

At the same time, the Claimant commenced arbitration before the Cairo Regional Centre for International Commercial Arbitration. This Tribunal ruled in favour of the Claimant and ordered the Respondent to pay the Claimant. Following this award, the Respondent applied to set this award aside in Egypt and the Claimant filed for enforcement of the award in France.

In the seat court, the judge refused to enforce a Cairo Regional Centre for International Commercial Arbitration award even after it was set aside by a decision of the Cairo Court of Appeal in 2012 because it was opined that the award granted remedies on a basis that was neither pleaded nor argued. The Judge opted not to exercise his discretion under Section 103, Arbitration Act, 1996 to enforce the award in any event. Therefore, the court opined with the ICSID tribunal disabling Malicorp to recover from the Egyptian state.

However, at the proceedings in French Courts, the question that the Court was confronted with was whether there was a violation of “public policy” in the enforcement of the award. As we know, the definition of public policy has really differed in each jurisdiction (discussed in detail later) and the French Court opined that the Award must be enforced because there was nothing in the adjudication of the dispute that defied tenets of public policy.

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