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Challenges in Enforcing Arbitration Awards: A Comparative Analysis with Litigation

Introduction

Arbitration is the closest dispute resolution method to litigation, in terms of the process as well as the binding nature of the final award. For this reason, arbitration has become the new litigation. In recent period of time, arbitration has been utilised to find resolutions to virtually every kind of civil dispute, and is seen to be become popular in commercial and international commercial disputes as well. Therefore, it is a matter of some not little concern that at times despite the final award given by the arbitrator, it is nullified or found unenforceable at the enforcement stage.

Common reasons for the non-enforcement of arbitral awards are: consideration of public policy grounds at the enforcement stage, exercise of jurisdiction when the dispute is not arbitrable, not following natural justice principles, etc.

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The essay discusses the question of arbitrator’s liability in the given situation by having recourse to the duties of the arbitrator, as well as the reasons why the award may not be enforced. Under the Arbitration Act 1996, s.29, the arbitrator is immune from liability unless he has acted in bad faith. The essay argues that liability of the arbitrator must not arise because this would go to defeat the purpose of arbitration and make arbitrators hesitant to decide the cases before them in an independent manner. Moreover, the reasons for the award being null or unenforceable may at times be outside the control of the arbitrators.

Significance of Enforcement of Arbitral Awards

Arbitration has become a popular method of dispute resolution because of its inherent benefits in combining the good qualities of dispute resolution both from the tradition of litigation as well as alternate dispute resolution methods. Due to this, arbitration has become a recourse for both domestic disputes, as well as the disputes involving foreign and non-domestic parties. As such, the value and significance of arbitration cannot be overstated.

The significance of arbitration as a method for dispute resolution can also be gauged from the fact that there are a number of international treaties that seek to regulate the rules regarding arbitration. One of the most important concerns of such international measures is the enforcement of arbitral awards, as arbitration is also a method for resolving international commercial disputes, wherein the enforcement of arbitral award in one jurisdiction may become problematic.

  1. Thomas J Stipanowich, “Arbitration: The “New Litigation”, (2010) 1 University Of Illinois Law Review, accessed .
  2. Ibid.

The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention 1958), Article III provides the duty of states to enforce the awards within their jurisdiction as follows:

“Each Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon under the conditions laid down in the following articles. There shall not be imposed substantially more onerous conditions or higher fees or charges on the recognition or enforcement of arbitral awards to which this Convention applies than are imposed on the recognition or enforcement of domestic arbitral awards.”

The UNCITRAL Model Law on International Commercial Arbitration 1985 as amended in 2006, is also an important international instrument applicable to international commercial agreements.

The theories with respect to arbitrator helps to understand the different dimensions of the enforceability of the award. The status theory provides that a special status to arbitrators is granted by the states, therefore arbitrators are regarded as resembling judges of national courts, and they have similar authority for themselves and the award made by them. The contract theory provides that the relationship between parties and the arbitrators is based on contract, that is, the arbitration agreement. The hybrid theory uses elements of both status as well as contract to show the relationship between the arbitrators and the disputing parties. This theory proposes that arbitrators are creatures of statute (status), but their ability to conduct arbitration depends upon the arbitration agreement (contract).

  1. UNCITRAL Model Law on International Commercial Arbitration 1985, accessed .
  2. United Nations documents A/40/17, annex I and A/61/17, annex I.
  3. Emilia Onyema, International Commercial Arbitration and the Arbitrator’s Contract (Oxon: Routledge 2010) 57.
  4. Ibid.
  5. Emilia Onyema, International Commercial Arbitration and the Arbitrator’s Contract (Oxon: Routledge 2010) 57.
  6. Ibid.

Awards that are Subsequently Annulled or Unenforceable: How far Tribunal liable

As per the Arbitration Act 1996, a domestic arbitration award can be challenged on the ground that the arbitral tribunal lacked jurisdiction, or procurement of the award was contrary to public policy, or where the award itself is contrary to public policy. The first two require an active challenge to the award and the last requires a passive challenge, that is, the award by itself is not challenged, but its enforcement is challenged.

Most of these issues pertain to the beginning of the arbitration stage. The Arbitration Act 1996 provides that objections to the substantive jurisdiction of the tribunal may be made by either party, which may be decided by the court. One of the principal grounds for the setting aside of arbitral award is the involvement of public policy considerations in the case. Public policy may include awards that are obtained by perjury or fraud, the risk of payments by losing party in England as well as some other jurisdiction, illegality of award, breach of natural justice principles, and ambiguity and lack of clarity of award making it unenforceable, all impact the enforcement of the award negatively. Here, the areas that are specifically within the control of the arbitrator are, public policy consideration, ensuring of natural justice principles and clarity in the award. At this point, with reference to natural justice, it may be added that there is a general duty upon the tribunal to act fairly and impartially.

The arbitrators have an important function to perform at the admissibility stage, which is where the public policy consideration can be dealt with by the arbitrators. Here, they have to decide whether the matter is admissible or not. As mentioned in the introduction, one of the reasons for nullifying the award may the admission of a dispute to arbitration, which the arbitral tribunal did not have the jurisdiction to admit.

The admissibility of the dispute, first and foremost depends on the arbitration agreement between the parties. If there is such an agreement, then the arbitral tribunal must admit the dispute, as the tribunal is obliged to act in accordance with the agreement. Two points are also of significance here. First, the legality of the main agreement and the separability doctrine. Second, the public policy considerations that are involved in the case, due to which the award may become unenforceable even if finally decided.

  1. The Arbitration Act 1996, s.67.
  2. Ibid, s.68 (2)(g).
  3. Ibid, ss.66 and 81 (1)(c).
  4. AG Tweeddale, “Enforcing Arbitration Awards Contrary to Public Policy in England”, (2000) Construction Law Review 159.
  5. Ibid, s.31.
  6. Ibid, s.32.
  7. Robert Merkin and Louis Flannery, Arbitration Act 1996 (5th ed) (CRC Press 2014) 403.
  8. The Arbitration Act, s.33.
  9. Ibid, s.34(1).

It is pertinent to first consider the arbitration agreement. The arbitration agreement does not have to be in writing. If there is any record of the arbitration agreement as between parties, then the agreement exists. This may also include an exchange of letters between parties, where the intent of their agreement to submit disputes to arbitration may be inferred. Where such an agreement exists, it is binding on the parties, irrespective of the validity of the main contract between parties. The doctrine of separability applies to make the arbitration agreement binding even if the main contract is void. At this point, it is pertinent to consider the role of the arbitral tribunal at the admissibility stage that may help them to prevent the admission of a case, the award of which may not be enforced at the enforcement stage.

The principle of competence-competence/kompetenz kompetenz/ compétence de la compétence is relevant here. This is the underpinning principle that applies at the stage of admission. This principle is applicable in international arbitrations and provides that the arbitral tribunal can rule upon its competence at the admissibility stage.

In domestic arbitrations, public policy considerations may be used by the parties to contest successfully the admissibility of dispute to arbitration, even if the agreement is valid, making public policy an exception to the rule separability. However, it is seen that arbitral tribunals consider agreement to be valid even if the main contract is a fraud, and indeed they are the best authority to decide upon the admissibility question on the basis of the arbitration agreement. This is also accepted by the House of Lords in Fiona Trust & Holding Corporation and ors v Privalov and ors, where the main contract, even if concluded by fraud, misrepresentation or bribery, would not affect the jurisdiction of the arbitral tribunal to decide upon the validity of the arbitration agreement. The decision indicates that even if the main agreement or contract is void, the arbitration agreement may still be valid, which means that very few objections to admissibility are actually successful. The problem this poses for the enforcement stage are obvious. Therefore, there is a good ground for considering the imposing of a greater liability for the arbitral tribunal for them to pay more attention to the admissibility of the dispute and avoid admitting cases that may result in unenforceable awards.

  1. Neil Andrews, Arbitration and Contract Law: Common Law Perspectives (Switzerland: Springer 2016) 27.
  2. UNCITRAL Model Law, Article 16; Also, Gary Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing (Kluwer Law International 2010).
  3. Arthur Nussbaum, “The Separability Doctrine in American and Foreign Arbitration” (1940) 17 NYUL Q. Rev. 609, [616].
  4. [2007] UKHL 40.
  5. Ayten Mustafayeva, “Doctrine of separability in International Commercial Arbitration”, (2015) 1 Baku St. U.L. Rev. 93.

In international commercial transactions, the importance of responding to jurisdiction challenges correctly is amplified by virtue of the fact that arbitral awards enjoy much wider international recognition. This is even more important because such jurisdictional pleas can only be raised at the time of the submission of defence itself. The competence-competence establishes a presumption of chronological priority for the tribunal in matters concerning jurisdictional issues. Therefore, the tribunal has to exercise this power with care and consideration to the possible enforcement issues that may arise later at the enforcement stage.

In domestic arbitration as well, the power to decide jurisdictional matters is with the arbitral tribunal. Here, the principle is the same as has been applied in other jurisdictions prior to when it was applied in the UK. Thus, Germany, Switzerland, USA, etc. all have recognised the doctrine of separability prior to the UK.

Some important American Supreme Court judgements were early in recognising the power of the arbitral tribunal to decide jurisdictional issues on the basis of separability, that is, even if the court could declare a main agreement to be void, it could not decide the same for the arbitration agreement. Such questions should only be addressed by the arbitral tribunal. The court held in Prima Paint Corp that even the claim that arbitration agreement was procured through fraud, would be decided by the arbitral tribunal. For the purpose of applying the principle, there is no distinction between voidable and void main contracts. Therefore, irrespective of the nature of the main contract, where it may even be void and inexistent, the decision of arbitrability is left to the arbitral tribunal. Similarly, early 19th and 20th century decisions in German and Swiss courts have evidenced the same trend.

  1. Amokura Kawharu, “Arbitral Jurisdiction”, (2008) 23 NZULR 238.
  2. UNCITRAL, Article 16 (2).
  3. Amokura Kawharu, “Arbitral Jurisdiction”, (2008) 23 NZULR 238, [243].
  4. The English Arbitration Act 1996, s.30 (1)(a).
  5. See Prima Paint Corp. v Flood & Conklin Manufacturing Co, 388 U.S. 395 (1967).
  6. Stephen J. Ware, “Arbitration Law's Separability Doctrine After Buckeye Check Cashing, Inc.v. Cardegna”, (2008) 8 Nev. L.J.
  7. Ibid, p.108.
  8. 388 U.S. 395 (1967), [404].
  9. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006).
  10. Arthur Nussbaum, “The Separability Doctrine in American and Foreign Arbitration” (1940) 17 NYUL Q. Rev. 609.

As mentioned earlier, the trend of leaving admissibility issues completely to arbitral tribunal has come later into the English jurisprudence, however, it has become crystallised over a period of time. As seen recently in Beijing Jianlong Heavy Industry Group v Golden Ocean Group Limited & Ors, even if the main contract is void on the basis of public policy rule, the arbitration agreement is valid. This applies even when the main contract was tainted by illegality on the grounds of public policy, irrespective of the fact that an award made in such cases may be unenforceable.

Considering this jurisprudence, one would expect the arbitral tribunals to take the matter of public policy considerations very seriously at the admissibility stage in order to avoid nullity or unenforceability of arbitral award at the enforcement stage. However, the trend that is being witnessed with respect to public policy, is that the courts review the award on the basis of public policy considerations at the enforcement stage. On the other hand, the arbitral tribunals rarely if ever allow successful claims against arbitration on the grounds of public policy. The major emphasis of the tribunal at this stage is on the validity of the arbitral agreement, which must be upheld if clear. This leads to the undesirable result of a dispute being admitted for arbitration and final award made, and then the award being declared as null or unenforceable.

The above mentioned problem is a major cause of concern. Courts have considered it inappropriate to deny the tribunal an opportunity to arbitrate even if there are elements of public policy involved. At the same time, public policy is a ground for resisting enforcement of award. In international arbitrations, this is made more complex by the fact that the public policy considerations may differ from one to the other state. For instance, in France, public policy considerations go the root of admissibility and so even if the arbitration agreement is valid, an invalid main contract (on grounds of public policy) will lead to non-admissibility of dispute. Therefore, matters related to Intellectual Property are considered unarbitrable in France due to involvement of public policy. Similarly, in Germany, validity of trademark cannot be admitted for arbitration at all. This is a much clearer state of affairs that what is existing in the UK. In France and Germany, courts will not leave admissibility to the arbitral tribunals when public policy is involved. Therefore, at least on this score there will be an avoidance of an award that cannot be enforced. In the UK on the other hand, admissiblity is left to the arbitral tribunal’s discretion even where public policy is involved leading to situations where the arbitration will proceed, award given and then not enforced, although the onus is on the party claiming violation of public policy. Therefore, the burden of proof is on the party claiming that the enforcement of the award is contrary to public good or public policy.As such, the problem is not a creation of the tribunals, but the entire jurisprudence is leading to this conclusion. It is important to note that arbitral award is 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.

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  1. [2013] EWHC 1063 (Comm).
  2. Aughton Ltd v MF Kent Services Ltd, [1991] 57 B.L.R. 1.
  3. El Nasharty v J Sainsbury PLC, [2007] EWHC 2618 (Comm); See also, Margaret L. Moses, The Principles and Practice of International Commercial Arbitration (Cambridge University Press 2012) 230.
  4. Sattar S, “Enforcement Of Arbitral Awards And Public Policy: Same Concept, Different Approach?”, accessed .
  5. French Civil Code, article 2060.

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 violating of public policy, leading the courts to refuse to allow the enforcement of award, despite the validity of the arbitral proceedings.

In Soleimany v Soleimany the arbitral award was held unenforceable by the Court of Appeal, as the case concerned smuggling of carpets from Iran. It is surprising that the arbitral tribunal did not come to the same conclusion, that because the subject matter of the arbitration is illegal, therefore, the matter cannot be admitted to arbitration.

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.

  1. 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.
  2. Deutsche Schachtbau-und Tiefbohrgesellschafl MB.H (D.S.T.) v. Ras Al Khaimah Nat'l Oil Co. (Rakoil), 2 Lloyd's Rep. 246, 254 (K.B.) (1987).
  3. 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.
  4. (1998) 3 WLR 811.
  5. (1999) 3 ALL ER.

Conclusion

The practice of testing public policy considerations at the stage of enforcement instead of admissibility 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. However, holding the arbitral tribunal solely responsible for a jurisprudence that has been developed over a period of time that allows such a state of affairs to continue, is not reasonable. Therefore, it is right that the arbitral tribunal is not liable for null and unenforceable awards. Moreover, enforcing such liability will only make the task of the arbitrators harder and may even impede their independence and defeat the purpose of arbitration.

Word Count: 2998

Bibliography

  • Andrews N, Arbitration and Contract Law: Common Law Perspectives (Switzerland: Springer 2016)
  • 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, 49
  • Aughton Ltd v MF Kent Services Ltd, [1991] 57 B.L.R. 1.
  • Beijing Jianlong Heavy Industry Group v Golden Ocean Group Limited & Ors, [2013] EWHC 1063 (Comm)
  • Born G, International Arbitration and Forum Selection Agreements: Drafting and Enforcing (Kluwer Law International 2010)
  • Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006
  • Curtilman SA, Joel Lutzker, ‘Arbitrability of Intellectual Property Disputes’ in Thomas Halket (ed), Arbitration of International Intellectual Property Disputes (Juris Publishing, Inc. 2012)
  • Deutsche Schachtbau-und Tiefbohrgesellschafl MB.H (D.S.T.) v. Ras Al Khaimah Nat'l Oil Co. (Rakoil), 2 Lloyd's Rep. 246, 254 (K.B.) (1987).
  • El Nasharty v J Sainsbury PLC, [2007] EWHC 2618 (Comm);
  • Kawharu A, “Arbitral Jurisdiction”, (2008) 23 NZULR 238
  • Merkin R and Flannery L, Arbitration Act 1996 (5th ed) (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 NYUL Q. Rev. 609
  • Onyema E, International Commercial Arbitration and the Arbitrator’s Contract (Oxon: Routledge 2010)
  • Prima Paint Corp. v Flood & Conklin Manufacturing Co, 388 U.S. 395
  • Sattar S, ‘Enforcement Of Arbitral Awards And Public Policy: Same Concept, Different Approach?’, accessed
  • Soleimany v Soleimany, (1998) 3 WLR 811
  • Stipanowich TJ, “Arbitration: The “New Litigation”, (2010) 1 University of Illinois Law Review, accessed http://www.illinoislawreview.org/wp-content/ilr-content/articles/2010/1/Stipanowich.pdf
  • Tweeddale AG, “Enforcing Arbitration Awards Contrary to Public Policy in England”, (2000) Construction Law Review 159
  • Ware SJ, “Arbitration Law's Separability Doctrine After Buckeye Check Cashing, Inc.v. Cardegna,” (2008) 8 Nev. L.J.
  • Westacre Investment Inc V Jugoimport-SPDR Holding Co Ltd, (1999) 3 ALL ER

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