Ahan Gadkari
“The idea that the New York Convention would place the seat of the arbitration at the top of a jurisdictional hierarchy for enforcement purposes is counter to its fundamental objectives.“
– Emmanuel Gaillard
I. Introduction
Article V (1) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“NYC“) is a provision that a party may invoke in order to avoid enforcement of the award (Paulsson, 2016, p. 159). According to Article (V) (1)(e), an arbitral award “may” be denied enforcement if it has been reversed in the court of origin. Reiterating the provision’s usage of the word “may” which signifies that it is left up to the court’s discretion (Sanders, 1959, p. 43). Additionally, some commentators feel that refusing an award that has been set aside is a rule of thumb based on the ex nihilo nihil fit concept (Van Der Berg, 2010). Ex nihilo nihil fit means that nothing arises from nothing, some commentators believe that once an award has been set aside in one country, it becomes void; therefore, it cannot be valid in another country. This piece takes a contrary position to the aforementioned view. Consider this paradox: if a foreign court invalidates an award on the basis of public policy in order to advance national interests, a foreign court with a different interpretation of public policy should also consider the award as null/void and refuse enforcement.
Courts will be forced to face such a paradox if a narrow interpretation of Art. (V) (1)(e) is taken. This method is inherently erroneous and is referred to as the NYC enforcement standard (“NES”) (the term coined by Christopher Koch) (Koch, 2009). There is another path which can be taken, which is based on Article VII(1) of the NYC and is referred to as local enforcement standard (“LES”) (the term coined by Jan Paulsson) (Paulsson, 1998). This piece recommends courts to adopt the LES approach towards arbitral awards.
This article is divided into four sections. Section I introduces the subject and establishes the articles’ scope. Section II discusses the LES school of interpretation in greater detail. Section III discusses the difference in approach theorized under the NES and LES. Section IV addresses judgments from the United States, France, and the Netherlands from a comparative perspective. Section V summarizes and concludes the article .
II. Understanding the LES Approach:
Article V of the NYC, according to LES, does not go far enough in preserving international commerce in general and the sanctity of international arbitration in particular. Indeed, Article V is viewed as impeding the development of a process which could be termed as “international arbitration” (Paulsson, 1998). Those who advocate for the recognition of truly “international” awards regret that the NYC did not provide adequate protection for parties against unwarranted annulments by outlining the grounds for annulment in the home jurisdiction (Paulsson, 1998). However, by applying Article VII, an award may still be protected by the court of enforcement. Thus, this provision not only protects favorable enforcement rights for foreign awards that may exist in the enforcement forum, but also allows national jurisdictions to establish domestic procedures for enforcing international awards.
The LES method is logically consistent and adheres to the NYC to the letter. According to the chapeaux of Article VII(1) of the NYC, national courts “may” refuse recognition and enforcement of an arbitral award on the grounds enumerated in letters (a) through (e) of the article, including by applying the more favorable provisions of their domestic laws (Paulsson & Suresh, 2019, 273). When analyzing Article V(1)(e) of the NYC, it is important to emphasize certain issues. The reasons for refusing to recognize and enforce an arbitral award under the NYC must be strictly construed and implemented since the drafters of the NYC intended that such recognition and enforcement be withheld only in extreme circumstances (ICCA, 2011, p. 80; Paulsson, 2016, p. 166).
By enforcing foreign awards in line with its domestic law, there is no need to address the foreign annulment decision; the court of enforcement can simply disregard it because it lacks international force (Koch, 2009). This was exactly the approach taken by the court in Chromalloy, which could disregard the Egyptian ruling while accepting that it was delivered in conformity with Egyptian law. The aforementioned case, along with jurisprudence supporting this school of interpretation, will be discussed in detail in Section IV.
III. Clash Between NES and LES
An award is presumed to have no legal effect under the NES approach if it has been nullified in its country of origin (ex nihilo nihil fit). The burden of proof shifts from the party seeking an annulment to those seeking enforcement of the award in the enforcement jurisdiction (Jan Van Der Berg, 1981, p. 83; Paulsson, 1998). However, if the award was annulled pursuant to LES, one could shift the burden to the party wishing to resist enforcement of the award. It would then be the responsibility of the party arguing nullity to show that the annulment was not contrary to international enforcement norms, which is a high bar to meet.
The attention necessarily moves from the award itself to the judgement vacating it when a court is sought to enforce an award that has been vacated at the place of arbitration. If the court is following the LES approach, it may be able to ignore the annulment decision. However, suppose the court is following the NES approach, it will be required to render a judgement on the foreign vacatur decision, which courts generally prefer to avoid for reasons of comity and reciprocity.
To provide an illustration, consider that a court in Country “Y” seeks to enforce an award annulled by the courts in Country “X” for public policy reasons. Assume that the interpretation of public policy is different in Countries “X” and “Y”. Under the NES approach, the court in Country “Y” would have to analyze the judgement of the courts in Country “X” and whether their annulment met international standards for setting aside the award. As mentioned above, courts are reluctant to analyze the reasoning provided by courts of another country for reasons of comity and reciprocity. Under the LES approach, the court in Country “Y” would analyze if the award should be set aside or enforced based on public policy considerations within their own country. Courts would naturally turn to their own country’s guidelines for setting aside an award as theorized under the LES approach.
IV. International Jurisprudence
While “at first blush” it may appear that an award that has been annulled by the court of origin cannot be enforced in another jurisdiction, a growing corpus of case law argues otherwise. The evolving case law does not accord the seat the primacy that one may believe it deserves in determining the legitimacy of the award. This section provides (i) American, (ii) French and(iii) Dutch jurisprudence supporting the enforcement of an award which has been set aside at the court of origin.
i. American Jurisprudence
One of the major cases in American jurisprudence laying down the precedent for enforcing an award set aside in the court of origin is the Chromalloy case (para. 914). A tribunal whose seat was in Egypt passed an award which was subsequently annulled by a court in Egypt (the defendant in this case was the State of Egypt). Egypt then tried to worm its way out of enforcement of the award in the United States, relying on Article V (1)(e) of the NYC. The American court held that the United States upholds a public policy which stands by final and binding arbitration (para. 913).
In TermoRio, the court held that if a foreign judgement setting aside an award is contaminated, the award will be executed. Following the TermoRio decision, in Pemex, an American court was dealing with an award that had been set aside by a Mexican court on the basis of a statute enacted after the arbitral award was rendered. The award was enforced since the judgement that set it aside went against the basic notions of American justice.
ii. French Jurisprudence
The first case which must be discussed while examining French jurisprudence is the Hilmarton case (para. 663-665). The arbitral tribunal’s award was enforced in France after being set aside in Switzerland. The Paris Court of Appeal initially highlighted that while implementing Article VII of the NYC, the court must enforce an award set aside in another country only if the national law permits so, rebutting the use of the Article V (l)(e) reasoning. The court then noted that Article 1502 of the New Code of Civil Procedure does not include the provision that an award that setting aside an award in its country of origin is a cause for refusing to enforce it. Finally, and perhaps most critically, the court stated that the recognition in France of an award that had been set aside in its place of origin did not violate the French understanding of international public policy.
Therefore, the award was enforced, although it was annulled in the court of origin. According to French case law concerning Hilmarton, the NYC is interpreted in a manner that enforcement of arbitral judgements voided abroad is conceivable under the NYC. However, a closer examination of the French case law reveals that the French judge does not base his unconventional view on an interpretation of the NYC itself but rather on French domestic law governing the recognition and enforcement of international arbitral awards rendered abroad. Certain commentators have even argued that even if an award is declared invalid by a court of origin, it does not cease to exist legally (Lastenouse, 1999). Such a view also can be supported by the Hilmarton judgement.
iii. Dutch Jurisprudence
Dutch courts apply a straightforward doctrine: if the judgement annulling the award is contrary to Dutch national policy, the award may be enforced. This doctrine was determined by the Dutch Supreme Court in the landmark Yukos case (para. 703-714). The court held that since the decision by the Russian courts annulling the awards is not recognized in the Netherlands, the awards can be enforced.
V. Conclusion
International arbitration is a transnational legal order in which no state should have the final say on the validity of the award. It cannot be in the interests of international trade or international commercial arbitration if awards in favour of a foreign party obtained via costly arbitral proceedings are rendered worthless by a local court aiming to safeguard local interests. A more enforcement-friendly approach would be to judge the foreign annulment decision not against the lofty standard of international public order but rather, as Jan Paulsson suggested over a decade ago, against the international annulment principles that have emerged in international commercial arbitration as a result of the NYC (Paulsson, 1998).
The judgement of a foreign court on the merits of a case is not the same as the judgement of a foreign court on an award given by an arbitral tribunal. The arbitral award arises from private proceedings that, while they may be conducted within the general framework of the lex arbitri, are purely contractual in nature, in contrast to a foreign decision on the merits, which is issued by state courts in proceedings which are entirely governed by the procedural law of the country of origin, wherein a state court’s ruling has the entire weight of the state’s judicial authority since it has been upheld through two or more layers of appeals. Therefore, it is reasonable to expect the enforcement court to give deference to the foreign judgement and set a high threshold for non-recognition. It is less clear why the same level of deference is accorded to a foreign judgement vacating an award that resulted from a private action in which the courts at the seat had a minimal role. The pro-enforcement bias of the NYC may be used by the enforcement court according to the permissive wording in Article V(1)(e), rather than just recognising foreign judgements or having to delve into their validity under foreign considerations.
The author is a student from O.P. Jindal Global Law School.
NUALS Law Journal 