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Arbitration as an Alternative Method of Dispute Resolution and the Role of Public Policy Considerations

Introduction

Arbitration is an alternative method of dispute resolution (ADR) that is the closest to the litigation process amongst all the ADR methods as it provides an adjudicatory method of dispute resolution, which involves the setting up of an arbitral tribunal, which gives a binding arbitral award. It is designed to provide an expeditious resolution of legal disputes with the application of procedure that is not as formal or rigid as litigation, while providing a legally binding award. These advantages of arbitration has made it a popular resolution method even in international commercial disputes. The admissibility of dispute to arbitration requires a prior arbitration agreement between the parties. The agreement is binding, whether contained in the main contract between parties, or a separate agreement. Even if the main agreement is void, the arbitration agreement is considered to be binding (doctrine of separability). However, public policy considerations may be used by the parties to contest successfully the admissibility of dispute to arbitration, even if the agreement is valid. This led an early scholar to say that there is only one limit on the doctrine of separability, and that is public policy.

In recent times, however, there has been a different trend that is being witnessed with respect to public policy. There are instances where courts have preferred to review the award on the basis of public policy considerations at the enforcement stage, rather than at the admissibility stage. The result of that is that despite the dispute being admitted to arbitration, the award is not enforced because its enforcement is contrary to public policy. On the other hand, objections on the basis of public policy are rarely successful at the admissibility stage.

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This essay agrees that the trend shows that instead of ruling upon the non arbitrability of the issue in the jurisdiction stage of admissibility of dispute to arbitration, the question is being brought to the courts in the enforcement stage, when the arbitral proceedings have been successfully conducted and an award given. Arbitral awards are enforceable but public policy is an effective objection to enforceability of the award. This essay takes a critical position on this trend.

Arbitration agreement - Basis for admissibility & public policy considerations

The admissibility of dispute to arbitration, depends primarily on the existence of an arbitration agreement between the parties. The English Arbitration Act 1996 (EAA 1996), defines arbitration agreement as “an agreement to submit to arbitration present or future disputes”. The legislation also requires the agreement to be in writing. Similarly, the UNCITRAL Model Law on

  • Arthur Nussbaum, ‘The Separability Doctrine" In American And Foreign Arbitration’ (1940) 17 N.Y.U. L. Q. Rev. 609, 616.
  • The English Arbitration Act, s.6.
  • ibid, s.5(1).
  • The admissibility of dispute to arbitration, depends primarily on the existence of an arbitration agreement between the parties. The English Arbitration Act 1996 (EAA 1996), defines arbitration agreement as “an agreement to submit to arbitration present or future disputes”. The legislation also requires the agreement to be in writing. Similarly, the UNCITRAL Model Law on International Commercial Arbitration 198, Article 7, also lays down the principal elements of arbitration agreement, wherein “arbitration agreement is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship.” Therefore, it is first clear that for there to be an arbitration, there must be an arbitration agreement. The next question that arises in context of this essay is, whether the arbitration admissibility be refused despite there being a valid arbitration agreement. It is pertinent to mention here that public policy considerations provide important grounds wherein the admissibility of the arbitration may be disallowed despite arbitration agreement.

    For the enforceability of an arbitration agreement, it is necessary for the arbitral tribunals to consider whether the subject matter of the dispute is arbitrable or not. Here considerations of public policy can be used to deny arbitrability of the dispute despite a valid agreement. However, lesser and lesser recourse is being made to this concept. Courts and tribunals consider that it is not appropriate to deny the tribunal an opportunity to arbitrate even if there are elements of public policy involved. Emphasis is put on upholding the validity of the arbitration agreement, where it is clear and unambiguous as in Aughton Ltd v MF Kent Services Ltd. Even if the main agreement is void due to public policy consideration, the arbitration clause survives because it has been held by the courts to be separable from the main agreement as was the case in El Nasharty v J Sainsbury PLC.

    The case of Fiona Trust & Holding Corporation and ors v Privalov and ors is relevant here. In this case, the House of Lords held that even if the contract has been concluded by fraud, misrepresentation or bribery, the validity of the arbitration agreement within the main contract, or as a separate contract, can only be considered by the arbitral tribunals. In this case, the main contract was vitiated because of bribery allegations that ultimately were proved in the court. Despite the invalidity of the main contract due to public policy considerations, the court upheld the arbitral agreement. In Beijing Jianlong Heavy Industry Group v Golden Ocean Group Limited & Ors,the Court upheld the arbitration agreement, despite the apparent illegality involved in the main contract making it contrary to public policy.

    Public policy considerations at enforcement stage

    • United Nations documents A/40/17, annex I and A/61/17, annex I.
    • Margaret L. Moses, The Principles and Practice of International Commercial Arbitration (Cambridge University Press 2012) 230.
    • [1991] 57 B.L.R. 1.
    • [2007] EWHC 2618 (Comm); Also see, Fiona Trust & Holding Corporation and ors v Privalov and ors [2007] UKHL 40.
    • [2007] UKHL 40 .
    • Ayten Mustafayeva,‘Doctrine of separability in International Commercial Arbitration’, (2015) 1 Baku St. U.L. Rev. 93.
    • [2013] EWHC 1063 (Comm).

    Public policy has become a popular and common ground for resisting and challenging the award’s enforcement. In international arbitrations, this leads to complications, because the arbitral award may be made by an international tribunal, while the national courts may have different views about the enforceability of the award due to considerations of public policy. It is pertinent to note that the courts are usually the last source of appeal against the enforcement of the award, on the grounds of public policy. Complications in international arbitrations are compounded by the fact that perceptions of criminality and legality may be varied in different states.

    In the UK, enforcement of awards can be challenged on public policy grounds where it is shown that perjury or fraud was used for the obtaining of the award; the award being illegal; natural justice principles not being followed for the making of the award or in the arbitral process; award being ambiguous or unclear. Here, the complication may arise because of the differing perceptions of these issue in the seat of the arbitral proceedings, where certain aspect may not involve public policy considerations and the UK, where public policy gets engaged. In such situations, UK courts may refuse to enforce the arbitral award.

    Differences in arbitrability are seen in Intellectual Property disputes that are sought to be resolved through arbitration. This is taken as an example in the essay to demonstrate how differing perceptions on public policy are seen in different jurisdictions. In France, those matters that relate to public policy are not arbitrable, therefore even if the arbitration agreement is valid, the invalidity go the main contract due to public policy will lead to the rejection of admissibility of dispute. In France IP matters come within public policy domain and therefore are considered unarbitrable. In Germany, infringement issues are arbitrable, but validity issues are not arbitrable on public policy grounds. The contrast between the UK on one hand and France and Germany on the other, is clearly discernible. Where in the latter states, public policy issues will lead to inadmissibility of dispute to arbitration, in the UK, the matter is left to the arbitral tribunal’s discretion.

    Ironically, at the enforcement stage, the courts may refuse enforcement of the award on the grounds of its being contrary to public policy. However, the court may put the onus on the alleging party that the enforcement of the award is contrary to the principles of public policy. This is seen in the case of Deutsche Schachtbau-und Tiefbohrgesellschafl MB.H (D.S.T.) v. Ras Al Khaimah Nat'l Oil Co.

    • Sattar S, ‘Enforcement Of Arbitral Awards And Public Policy: Same Concept, Different Approach?’, accessed .
    • Robert Merkin, Louis Flannery, Arbitration Act 1996 (5th ed) (CRC Press 2014) 403.
    • French Civil Code, article 2060.
    • Steven A Curtilman, Joel Lutzker, ‘Arbitrability of Intellectual Property Disputes’ in Thomas Halket (ed), Arbitration of International Intellectual Property Disputes (Juris Publishing, Inc., 2012 ) 93.

    (Rakoil), where the court held that the burden of proof is on the party claiming that the enforcement of the award is contrary to public good or public policy.

    In Soleimany v Soleimany the Court of Appeal refused to enforce the arbitral award. The case concerned smuggling of careless from Iran. The court held that because of the illegality of the award in Iran, it would be non enforceable in the UK on account of the principle of public policy.

    In Westacre Investment Inc V Jugoimport-SPDR Holding Co Ltd it was held that the defence of public policy for non enforcement of award can be applicable only when the award was contrary to the public policy of the state where the contract was to be performed.

    It is important to note that arbitral award are legally enforceable. There is an exception to this rule in the form of non enforcement on grounds of public policy. Here, the power is given to the courts to decide upon enforcement issues, even in cases that involve international arbitration awards.

    The practical implications of this is that the arbitral tribunal may decide to admit the matter and ultimately give an award. Later the award may be challenged on grounds of being violative of public policy, leading the courts to refuse to allow the enforcement of award, despite the validity of the arbitral proceedings.

    This is an undesirable trend, which leads to confusing and unnecessary results. It is an obvious waste of time for the parties as well as the tribunal to arbitrate a matter, where the award of the process is non enforceable. In France, matters involving public policy are non-arbitrable, as compared to the UK, where the matter may be arbitrated upon, because of the reluctance of the courts to intervene in what they view as the jurisdictional issue for the tribunal to decide.

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    Conclusion

    Arbitration is a result of an arbitration agreement, which creates a binding obligation on the parties to submit their dispute to arbitration. However, the admissibility of the dispute to arbitration may be questioned despite there being a binding arbitration agreement. The ground of public policy may be used to deny admissibility of the dispute. However, in recent times, the trend of the courts is to allow the arbitral tribunal alone to make the decision regarding admissibility, despite the main agreement being invalid on the grounds of public policy. As the decision of the court in Fiona Trust & Holding Corporation and ors v Privalov and ors indicates, the court may declare the main agreement or contract to be void, yet the arbitration agreement to be valid, under the doctrine of separability. This means that very few objections to admissibility are successful. For a greater part, the courts leave the matter to the arbitral

    • 2 Lloyd's Rep. 246, 254 (K.B.)(1987).
    • Veena Anusornsena, ‘Arbitrability and Public Policy in Regard to the Recognition and Enforcement of Arbitral Award in International Arbitration : the United States, Europe, Africa, Middle East and Asia’, Theses and Dissertations. Paper 33, 49.
    • (1998) 3 WLR 811.
    • (1999) 3 ALL ER

    Arbitration is a result of an arbitration agreement, which creates a binding obligation on the parties to submit their dispute to arbitration. However, the admissibility of the dispute to arbitration may be questioned despite there being a binding arbitration agreement. The ground of public policy may be used to deny admissibility of the dispute. However, in recent times, the trend of the courts is to allow the arbitral tribunal alone to make the decision regarding admissibility, despite the main agreement being invalid on the grounds of public policy. As the decision of the court in Fiona Trust & Holding Corporation and ors v Privalov and ors indicates, the court may declare the main agreement or contract to be void, yet the arbitration agreement to be valid, under the doctrine of separability. This means that very few objections to admissibility are successful. For a greater part, the courts leave the matter to the arbitral tribunals. The practical implications of this is that the arbitral tribunal may decide to admit the matter and ultimately give an award. Now the award by itself can be challenged on grounds of being violative of public policy. Here, the courts refuse to allow the enforcement of award, despite the validity of the arbitral proceedings. This trend is undesirable. It is an obvious waste of time for the parties as well as the tribunal to arbitrate a matter, where the award of the process is non enforceable. It would be infinitely better and less confusing if the matter is not admitted to arbitration in the first place if there are principles of public policy, which vitiate the main contract. In France, matters involving public policy are non-arbitrable, as compared to the UK, where the matter may be arbitrated upon, because of the reluctance of the courts to intervene in what they view as the jurisdictional issue for the tribunal to decide.

    Bibliography

    • Anusornsena V, ‘Arbitrability and Public Policy in Regard to the Recognition and Enforcement of Arbitral Award in International Arbitration : the United States, Europe, Africa, Middle East and Asia’, Theses and Dissertations. Paper 33
    • Curtilman SA, Lutzker J, ‘Arbitrability of Intellectual Property Disputes’ in Thomas Halket (ed), Arbitration of International Intellectual Property Disputes (Juris Publishing Inc. 2012 )
    • Merkin R, Flannery L, Arbitration Act 1996 (CRC Press 2014)
    • Moses ML, The Principles and Practice of International Commercial Arbitration (Cambridge University Press 2012)
    • Mustafayeva A,‘Doctrine of separability in International Commercial Arbitration’, (2015) 1 Baku St. U.L. Rev. 93
    • Nussbaum A, ‘The Separability Doctrine" In American And Foreign Arbitration’ (1940) 17 N.Y.U. L. Q. Rev. 609
    • Sattar S, ‘Enforcement Of Arbitral Awards And Public Policy: Same Concept, Different Approach?’, accessed .

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