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

*Manan Shishodia


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


COMMON THREAD IN ALL THE ABOVE CASES AND COUNTERING VIEWS


In all the above cases, a common thread that exists is the principle of ‘public policy’. The awards have been challenged at the seat court largely on two grounds: a) validity of an arbitration agreement; and b) award was passed against ‘public policy’ or in violation of a particular law. At this juncture, it is important to analyse the latter aspect to gain a holistic understanding of why awards are challenged. Moreover, there are multifarious interpretations of “public policy” in different jurisdictions. For instance, some jurisdictions construe it broadly and some construe it narrowly as we will discuss further.


Let us take the example of India (my home country). India is one of the few jurisdictions to statutorily define ‘public policy’ in the Arbitration and Conciliation (Amendment) Act, 2015. While some countries consider public policy to mean international public policy, Indian courts have held that there is no workable definition of international public policy. Thus, it should be construed to be the doctrine of public policy as applied by courts in India. In the definition of ‘public policy’, India has statutorily included the grounds of fraud, corruption, fundamental policy of Indian law and basic notions of justice and morality.


While public policy has no definition and its elements have been identified statutorily in Section 48(2)(b)(ii), additional elements have been sufficiently postulated by judicial interpretation. In light of the above analysis, the following practical deductions can be made about public policy. These will be helpful while assessing an application resisting enforcement of a foreign award. The expression ‘fundamental policy of Indian law’ calls for a violation that is beyond mere statutory violation. In one case, the Indian Supreme Court held that Article V(2)(b) of the New York Convention had omitted the reference to “principles of law of the country in which it is sought to be relied upon” while replacing the Geneva Convention of 1927. Since the expression "public policy" covers the field not covered by the words "and the law of India" which follow the said expression, it was held that contravention of law alone will not attract the bar of public policy and something more than contravention of law is required.


It is important to assess the nature, object and scheme of a statute to determine if the violation of such statute would constitute a violation of the fundamental policy of Indian law. In Vijay Karia. v. Prysmian Cavi E. Sistemi SRL[1], the Supreme Court held that any rectifiable breach under the FEMA cannot be said to be a violation of the fundamental policy of Indian law. It held that the Reserve Bank of India could step in and direct the parties to comply with the provisions of the FEMA or even condone the breach. However, the arbitral award would not be non-enforceable as the award would not become void on this count. Citing its judgment in Renusagar Power Company Limited v. General Electric Company[2], the Supreme Court held that the fundamental policy of Indian law must pertain to “a breach of some legal principles or legislation which is so basic to Indian law that it is not susceptible of being compromised. “Fundamental Policy” refers to the core values of India’s public policy as a nation, which may find expression not only in statutes but also time-honoured, hallowed principles which are followed by the Courts.”


The ground of public policy is available in India both for challenging to an India-seated award and to resist enforcement of a foreign award. However, in an international commercial arbitration conducted in India, the ground of challenge relating to the public policy of India would be the same as the ground of resisting enforcement of a foreign award in India. This is because Section 34, Arbitration & Conciliation Act, which deals with challenges to awards made by India-seated arbitral tribunals differentiates between international commercial arbitrations held in India and other arbitrations held in India. Thus, after the Arbitration and Conciliation (Amendment) Act, 2015, grounds relating to patent illegality appearing on the face of the award do not apply to (i) international commercial arbitration awards made in India; and (ii) foreign awards being resisted in India.


In light of the above discussion, we note that the resistance to the enforcement of foreign awards must be approached with circumspection. The question of whether enforcement of a foreign award violates the public policy of India must be considered in the context that India is a signatory to the New York Convention. It is the sovereign commitment of India to honour foreign awards except on the exhaustive grounds provided under Article V, New York Convention.


While it may be tough to construe public policy without a workable definition, judicial interpretation offers sufficient guidance, whilst maintaining that judicial interference remains minimal. It is essential to recognize the need for restraint in examining the correctness of a foreign award or a domestic award tendered in an international commercial arbitration as opposed to a domestic award. The concerns of international comity, respect for the capacities of foreign and transnational tribunals and sensitivity to the need of the international commercial system for predictability in the resolution of disputes require that we enforce the parties' agreement even assuming that a contrary result would be forthcoming in a domestic context.


As the Court in Cruz City has aptly stated, a policy to enforce foreign awards itself forms a part of the public policy of India, the courts should strive to find the right balance between the policy of enforcing foreign awards and considering the grounds for resisting the enforcement of foreign awards.


The Supreme Court upheld the Delhi High Court judgment in Cruz City Mauritius Holdings v. Unitech Limited. It was held that the contravention of any provision of an enactment is not synonymous to the contravention of the fundamental policy of Indian Law. The expression fundamental policy of Indian Law refers to the principles and the legislative policy on which Indian statutes and laws are founded. The expression “fundamental policy” connotes the basic rationale, values and principles which form the bedrock of laws in our country. The objections to enforcement on the ground of public policy must be such that offend the core values of a member State’s national policy and which it cannot be expected to compromise. The expression “fundamental policy of law” must be interpreted in that perspective and must mean only the fundamental legislative policy and not a provision of any enactment.


The Supreme Court held that first and foremost, FEMA – unlike FERA – refers to the nation’s policy of managing foreign exchange instead of policing foreign exchange, the policeman being the Reserve Bank of India under FERA. As grounds were pertaining to violation of Section 47, the Supreme Court held that it no longer exists in FEMA - so the transactions that violate FEMA cannot be held to be void. In addition, if a particular act violates any provision of FEMA or the Rules framed thereunder, the permission of the Reserve Bank of India may be obtained post-facto if such violation can be condoned. Therefore, a rectifiable breach under FEMA can never be held to be a violation of the fundamental policy of Indian Law and the award could not be set aside on that ground alone. In furtherance, if the Reserve Bank of India were to take action under FEMA, the non-enforcement of a foreign award on the ground of violation of FEMA Regulations or Rules would not arise as the award does not become void on that count. Likewise, there have been similar approaches by courts in different jurisdictions. Courts in different jurisdictions have opined that mere violation of a particular provision of law would not tantamount to violation of ‘public policy’ and the standard for the same is much higher.


In light of the above discussion of cases and analysis of ‘public policy’ in India, we note that there are differing approaches by different courts across the world. The above cases can make us lead to the inference that ‘public policy’ is construed very broadly as Courts have not prevented enforcement of awards easily. However, these are rare cases and usually when an Award is set aside by a seat court, it is not enforced.


The second common thread that connects these cases is that the awards were also challenged on the ground that there did not exist a valid arbitration agreement. The validity of an arbitration agreement is often challenged on numerous grounds. It could be for lack of sufficient stamping, absence of clear intention of parties to arbitrate etc. As is obvious, it always depends on the conspectus of the dispute and the wording of the agreement. The Indian courts have shown a liberal approach and opined that even if there is a faint intention to arbitrate, the validity of the arbitration agreement cannot be denied. Often, vague and unclear arbitration agreements are held to be valid as long as there is a clear intention to arbitrate. The Supreme Court of India has clearly enunciated the requirement of a valid arbitration agreement. The two cases enunciating the same are: Jagdish Chander v. Ramesh Chander and K. K. Modi v. K. N. Modi.


I will not delve into the facts of the case and only mention the legal principles enunciated in the case. The same were as follows:

  1. The arbitration agreement must be in writing.

  2. The parties shall agree to refer any dispute (present or future) arising out of a contract to a private tribunal.

  3. The private tribunal should be empowered to adjudicate upon the disputes in an impartial manner, giving due opportunity to the parties to put forth their case before it.

  4. The parties must agree to be bound by the decision of the arbitral tribunal.

  5. The intention of the parties to refer the dispute to a private tribunal must be unequivocally reflected.

  6. There must be ‘consensus ad idem’ between the parties i.e., they should agree to the same thing in the same sense.

  7. The words shall contemplate an obligation and determination on the part of the parties to invoke arbitration and not merely a possibility. For example, use of the words such as “parties can if they so desire, refer their dispute to arbitration” or “in the event of any dispute, the parties may also agree to refer the same to arbitration” shall not be construed as submission to arbitration.

  8. The agreement clauses shall not in any way specifically exclude any of the aforementioned essentials. For example, a clause permitting the tribunal to decide a claim without hearing the other side.

In light of the above-enunciated principles, the Courts have taken a liberal approach and often construed a valid arbitration agreement in most cases. The benefit of the doubt is usually in favour of the existence of agreement as Courts encourage for the disputes to be adjudicated by a private forum and enable parties to get relief(s) expeditiously.



A. POTENTIAL INFLUENCES IN DIFFERENT COURTS AND EXERCISING DISCRETION UNDER ARTICLE V(1)(E), NEW YORK CONVENTION


Article V (1)(e) allows national courts to refuse recognition or enforcement if it is established that, in the courts of the country in which, or under the law of which, the award was made, the award has been set aside or suspended.


In Article V, the term “may” indicates that national courts have the possibility to refuse enforcement of an award on the grounds listed but they are not obliged to do so. Under Article VII, a court will not breach the Convention by enforcing an arbitral award pursuant to more favourable provisions found in its domestic laws in accordance with Article VII (1). Accordingly, a number of courts have accepted to enforce awards suspended or set aside at the seat of the arbitration either on the basis of the use of the term “may” in Article V (1) or on the basis of a more favourable provision in the domestic law than Article V(1)(e) in accordance with Article VII (1).


a. Award set aside


This ground for refusal “seldom occurs and is almost never successful”, in a number of instances, national courts have rejected this ground for denying enforcement by applying national laws more favourable to enforcement than Article V (1)(e) of the Convention. On the other hand, the Convention does not obligate courts to enforce awards that have been set aside at the place of arbitration, and in some cases, courts have denied enforcement pursuant to Article V(1)(e) on this ground.


b. Award suspended


Article V (1)(e) of the Convention also allows parties to challenge the enforcement of an award if the award has been “suspended”. The Convention does not provide guidance as to the definition of the term “suspended”; nevertheless, with very few exceptions, the majority of courts agree that this refers to a formal suspension resulting from a court decision. The Swiss Federal Tribunal, for instance, held that this rule covers a situation in which a court, “noticing that a fault is likely to impact the award, prevents its enforcement until such time as the issue is settled substantively by the court examining the action to set aside the award”. In that case, a court decision dismissing the Claimant’s request to wind up the Respondent was found not to call into question the validity of the award or to formally suspend its enforcement.


It is understood that the automatic suspension resulting from the initiation of an action to set aside the award in the court of the originating jurisdiction does not meet the requirement of Article V (1)(e). As noted by some commentators, if the term “suspension” were to refer to the automatic suspension of an award in the originating jurisdiction pending an action to set aside, this would defeat the whole system of the Convention, as it would suffice that the party opposing enforcement could initiate an application to set aside the award at the place of arbitration so that the award be refused enforcement everywhere. In Switzerland, for instance, a party challenged the enforcement pursuant to Article V(1)(e) on grounds that the initiation of setting aside proceedings at the courts of the place of arbitration in France automatically suspended the effects of the award. The Swiss Federal Tribunal held that the correct interpretation of the Convention should be that the suspension of the award in the originating jurisdiction would only constitute a ground for a challenge if it were granted by a judicial decision. It will not be when it simply arises from an action brought against the award. A Swedish Supreme Court once held that the reference to a “suspended” award under Article V (1)(e) refers to “a situation where, after specific consideration of the matter, the foreign authority orders the setting aside of a binding and enforceable award or the suspension of its enforcement”. As a result, the court rejected the Respondent’s contention that enforcement should be denied on the ground that a recourse to set aside had been initiated in France, the country where the award was issued. The same principle led a United States Court to deny the enforcement of an award. After confirming that “Article V(1)(e) of the Convention requires a ‘competent authority’ to suspend the award, not just a statutory stay”, the court held that the stay ordered by the Argentinian courts was not merely an “automatic” stay resulting from the initiation of setting aside proceedings or a “pre-ordered” formality and on that basis enforced the award despite it being set aside by seat court.


B. COUNTERING VIEWS


At this juncture, we need to analyse the countering views and the rationale why a ‘seat’ court is given precedence. Firstly, we will delve into two views of determination of a seat and gradually progress to our discussion on seat court.


According to one view, which has long been dominant and still remains strong in England, the seat of arbitration is the equivalent of a municipal jurisdiction’s forum. Under this view, the law of the seat necessarily governs the arbitration agreement, either directly or by designating the applicable law. Similarly, the law of the seat governs the formation and composition of the arbitral tribunal as well as the procedure and the form of the award. The courts at the seat of the arbitration oversee the proper functioning of the procedural aspects of the arbitration and, at the end of the process, confirm or set aside the award. In other words, under this approach, the seat anchors the arbitration to the legal order of the state in which it takes place.

In a second conception of arbitration, dominant in France and other countries with civil law traditions, the seat of arbitration is chosen for little more than the sake of convenience. Arbitral tribunals need not operate like the national courts of a particular state simply because they have their seat there. Arbitrators do not derive their powers from the state in which they have their seat but rather from the sum of all the legal orders that recognize, under certain conditions, the validity of the arbitration agreement and the award. This is why it is often said that arbitrators have no forum.


The seat court is decided mutually by parties and the common practice has been for the awards to not be enforced after the same are set aside by the seat court. This is primarily because the decisions of the Courts, even today, are given more precedence over any other private forum. Courts, being institutions of prestige and having reputed judges, are treated at a higher pedestal because of the enormous experience that they have in dealing with such issues and cases. However, the cases that we analysed in the paper are exceptions to the general rule. These are few cases in the world where awards were enforced because the decision of the tribunal was given precedence as the awards were not held to be violative of public policy in any manner whatsoever and the validity of arbitration agreement was upheld.


C. CONCLUSION


It is worth emphasizing in conclusion that arbitral awards should be considered to be “delocalized’ or “floating,” in the sense that they would draw their legal authority solely from the will of the parties or from their de facto existence. Contrary to what an excessive interpretation of the internationalist view of arbitration might lead one to believe, it is indeed in legal orders of states that the arbitration agreement and subsequently the award, acquire their binding nature.

The source is not exclusively the legal order of the seat of arbitration but rather the sum of all of the legal orders which, on certain conditions which they set, are willing to recognize the arbitral award, a private act. It remains true that “lex facit arbitrum”, but this law is the law of a community of states rather than the law of just one state, be it the state of the seat or the state of enforcement. It is certainly the law of different states, if not transnational rules, that lend the arbitral award its legal authority.


D. RECOMMENDATIONS


The Convention does not establish grounds for the annulment of arbitral awards. Although the Convention does not explicitly distinguish between denial of enforcement and annulment of an award, Article V(1)(e) implicitly recognizes this distinction, providing that a party may oppose enforcement of an award when “the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.”


Article V(1)(e) presupposes the existence of a different procedure for annulment by the courts of the seat of the arbitration in accordance with the laws of the seat.


Significantly, Article V(1)(e) of the New York Convention fails to specify the grounds upon which the rendering State may set aside or suspend the award. While it would have provided greater reliability to the enforcement of awards under the Convention had the available grounds been defined in some way, such action would have constituted meddling with national procedure for handling domestic awards, a subject beyond the competence of the Conference. Therefore, including grounds for annulment in the Convention would impose an “authority and scope which the document’s framers and signatory states not only did not intend, but likely that they did not foresee.”


 

*Manan Shishodia (He/Him/His) LL.M. Candidate University of Pennsylvania Carey Law School Class of 2022. [1]2020 SCC OnLine SC 177 [2] 1994 Supp (1) SCC 644

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