Implementing the Theory of Change

Introduction

Arbitration is an alternative method of dispute resolution that provides a binding award with the same strength as litigation outcomes. Commercial disputes are better solved under the arbitration mechanism due to its fast procedure, reasonable cost and flexibility. Although individuals prefer arbitration to solve their commercial disputes due to its flexible nature, this tool has formal procedures and breaching them leads to invalidation of the arbitration award. This essay will first discuss the New York Convention 1958. Second, it will describe Article V, which is the grounds for non-enforcement, in detail. Finally, the essay will discuss some weaknesses that have been found in the system.

Background on the New York Convention 1958

On 10 June 1958, the United Nations adopted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the ‘New York Convention’ hereafter ‘the Convention’), which entered into force on 7 June 1959. The Convention aims to facilitate the recognition of arbitration awards and enforcement among contracting states. One of the Convention’s aims, besides facilitating the enforcement and recognition of awards, is enhancing parties’ abilities to overcome obstacles in order to convince the courts of such enforcement. The first step is recognising and enforcing an arbitral award that has been made in another territory, article I defined this application field in details, andArticle III has drawn the obligation for the contracting states to acknowledge the awards as ‘binding’ and enforce such awards through their rules and procedures. Under Article IV, a party seeking to enforce a foreign award needs to submit documentation to the court, such as the arbitral award and the arbitration agreement.

However, under Article V(1). A party who is against the enforcement of such an award for a legitimate reason can provide proof related to one of the grounds for refusal of enforcement determined under the Article. The court may refuse enforcement for public policy reasons, as listed in Article V(2).

Grounds for non-enforcement under Article V of the New York Convention 1958

As mentioned above, if a party isopposed to the enforcement of an arbitral award due to the breach of an element of the contract, the burden of proof rests upon the defendant based on one of the defences under Article V.There are five types of defences in Article V(1) and two in Article V(2), the latter of which are related to authorities. In other words, these two defences are the court’s action, while the other five must be proven by the defendant party. Looking for further insights on Eyewitness Identification Evidence? Click here.

Briefly, ‘the five Article V(1) defences include:

(1) incapacity and invalidity;

(2) lack of notice or fairness;

(3) arbitrator acted in excess of authority;

(4) the tribunal or the procedure was not in accord with the parties’ agreement; and

(5) the award is not yet binding or has been set aside’.

However, the two Article V (2) defences are:‘(1) lack of arbitrability and (2) violation of public pol- icy’

Defences Raised by a Party Against Enforcement

Article V(1)(a): Incapacity of the Parties or Invalidity of an Arbitration Agreement

‘The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or (…)’

The validity of the arbitration agreement is essential.Award enforcement might berefused if:

The arbitration agreement was not valid under the law of the state where the award was made;

The agreement is not valid under the governing law in which the award was made.

Capacity means that the party can submit a dispute and there is no factor that might hinder his ability to enter a contract. The capacity of a party should be decided at the time of the arbitration agreement. Otherwise, it will be left to national courts to make decisions on such conflicts because the Convention does not regulate this issue.

The validity of the agreement should be examined separately from the main contract.This approach is called the‘doctrine of separability’, which is applied under the Convention and has been adopted in many contracting states’ national laws. Thus, if the main agreement is void, the arbitration agreement remains valid due to the separate treatment. However,this defence has not been convincing for the courts in most jurisdictions.Thus, parties may be estopped from relying on such a defence.

Article V(1)(b): Lack of Notice or Fairness

On this second ground for refusal, an award might be refused if:

A party was not given proper notice of the appointment;

A party was not given proper notice of arbitration proceedings;

A party was unable to present their case.

This ground can be described as ‘natural justice’ because parties are supposed to have full rights to participate in their claims. However, in most of the cases, courts tend to refuse the defence of a claim once it appears that the party has participated in arbitration. There is an overlap between this ground and public policy violations, because national courts consider Article V(1)(b) as procedural public policy. Therefore, parties tend to present their claims under articles V(1)(b) and V(2)(b). In fact, the functions of these two articles are different. For example, the procedures of the due process exception of Article V(1)(b) begin with the party raising the defence and submitting the evidence.The court then examinesthe validity of their evidence.The function of Article V(2)(b) is completely different;although parties can raise a claim under this defence, it must be related to public interest.

Article V(1)(c): Arbitrator Acting in Excess of Authority

‘Paragraph (c) of Article V(1) is concerned with arbitrability of a submission. This is when arbitration proceedings often fall through, but this paragraph also provides that:

“The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced”’.

To illustrate the provision, arbitrators should not perform tasks other than ones listed in the arbitration agreement, because arbitrators require the parties’ consent due to the nature of arbitration.Deciding whether arbitrators have exceeded their authority should be left to the courts,which should consider the scope of the arbitration agreement and its interpretation ‘rather than the merits of the award’.

Article V(1)(d): The Tribunal or the Procedure is Not in Accord with the Parties’ Agreement

‘The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place’.

As parties have the right to choose the law that covers their arbitration procedures and form the arbitral tribunal, if such composition conflicts with the parties’ agreement or if the law violates the law of the country in which the arbitration takes place, a court will not recognise the award.Thus, enforcement will fail. In other words, this provision presents a fundamental nature problem as it is based on contemporary practice; parties based on their legal adviser choose to hold their arbitration in jurisdiction ‘delocalised arbitration’ its procedural law is mysterious to them.

Article V(1)(e): The Award is Not Yet Binding, or Has Been Set Aside

‘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) explains and deals with suspended, nulled and non-binding awards in the origin country. The word ‘binding’ has been controversial because it has not been expressly defined and as a result, many questions raised of ‘whether this word should be an autonomous meaning or consider the word binding under the law of origin’. Under the autonomous interpretation, an award can be considered binding for Article V(1)(e) purposes‘as soon as it is no longer possible to lodge a genuine appeal on the merits to a second arbitral instance or court in those cases where such means of recourse are available’. However, another perspective on autonomous interpretation claims that if an award is binding under the law of its country of origin, then it should be considered binding, as it is the only way. generally, such varying definitions cause issues in deciding whether the final decision is binding or not. The second part deals with non-binding awards, which means that the award has been set aside in the country in which it was issued.This can be used as a defence to refuse the enforcement of the award, which then makes enforcement difficult or impossible in contracting states. However, the competent authority that can set aside an award is always the law of the country in which itwas issued.The Convention states that it might be possible to set aside or suspend the award under the law, which is the same law that made the award. There are potential laws ‘under which the award was made’: (a) the arbitration law, which is the law that governs the arbitration procedures; (b) the arbitration agreement, or the law that governs the parties; and (c) the law that governs the parties’ dispute.

The second part of the New York Convention, Article V (2)

‘Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that’:

Article V(2)(a): Subject Matter Not Arbitrable

‘The subject matter of the difference is not capable of settlement by arbitration under the law of that country’.

This grounds for refusal discusses the extent to which the order is capable of arbitration. To illustrate, the appropriate court has the right to refuse the enforcement of the award on its own motion when it has found that the matter cannot be solved under the law of the enforcing country. Usually, the enforcing country refuses the award if the matter is related to its interests, such as domestic relations, criminal law, labour law or anti-competition law.This ground and the one following can be raised by either the defendant or a competent authority.This paragraph hasa similar provision in Article 1 (b) of the Geneva Convention; applying such an article has been negotiated among countries.For example, France refused to apply the article claiming that domestic arbitrability standards should not be held true for international awards, while Germany agreed that applying issues in conflict with domestic policies could be addressed by the public policy clause.

Article V(2)(b): Recognition and Enforcement Contrary to Public Policy

‘The recognition or enforcement of the award would be contrary to the public policy of that country’.

This article evaluates that, if the enforcement and recognition of the award may conflict with public policy or fundamental rights, a judge in such a case may refuse theenforcement of the award. The public policy concept might differ from one jurisdiction to another due to the unpredictabilityof interpretation by the award-debtor party.If the award-debtor party is a state, the burden of proof would rest on the state and no other entity, whether courts or arbitral tribunals. Moreover, societal ethics are considered part of public policy, and that has also been allowed by Article V as grounds for refusal.For example, under the Saudi Arbitration Law there is an Article provides that:

‘The competent court considering the nullification action shall, on its own iniliative, nullify the award of Sharia and public policy in the Kingdom or the agreement of the arbitration parties, or if the subject matter of the dispute cannot be referred to arbitration under this law’.

To explain the article, in Saudi Arabia where Sharia is the basis of the laws, the court requires to refuse any award the court from its perspective finds that enforcing such award might conflict with the societal ethics. In simple words, the basis of Sharia is preserve societies ethics and any conflict may arise would be treat as public policy case. However, such a broad interpretation of the public policy grounds for refusal may negatively affect the strength of the Convention, as it raises doubtsabout the effectiveness of international arbitration. Many cases have been raised to show that such interpretations may cause misunderstanding of the legislation. The case of Betamax Ltd. (Appellant) v State Trading Corporation (Respondent) (Mauritius) is an example. In 2009, a dispute arose between Betamax Ltd.(Betamax) and the State Trading Corporation (STC) as both party entered into a contract of affreightment (COA).The key element of the issue was the system controlling public procurement, the Public Procurement Regulation 2008/2009 (PR Regulation) and the Public Procurement Act 2006 (PP Act). Applying the public procurement regime to the COA, the contract would not be valid without central procurement abroad (CPB) approval, which is established under the PP Act. The STC argued for the validity of the procedures, while Betamax had another opinion. In 2015,the STC informed Betamax of its decision to stop using its freight services. In April 2015, Betamax stopped using the COA. Following that, in May 2015, Betamax filed a notice of arbitration claiming that due to the breach of the COA, damages reached USD 150 million. An arbitration hearing was held in 2016. In June 2017, the arbitrator brings his award including that STC was responsible for the USD 150 million plus the arbitration costs.

Comments on the Regime

Article V of the New York Convention 1958 has been criticised due to the broad interpretations of its provisions and applications by enforcing courts in specific situations. However, the drawback of the regime is that the authorised reservations might be used as a weapon to restrict the applicability of the Convention to ‘commercial disputes under the enforcing state’s law’ and restrict its scope to allow the enforcement of arbitration agreementsonly in signatory countries’ territories. Moreover, using the term ‘may’ grants discretionary power to competent national authorities. To illustrate, the statement of Article V of theConvention include the word ‘May’ to explain when the award might be refused for example:

‘Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that..]’

It appears, using such a word provide broad scope of interpretation for courts to decide whether is the award valid or not, which that could cause unfair judgments. Whenever the jurisdiction uses concepts such as ‘reasonable, fair, or in good faith’. The judge must consider the scope of the rule and decide whether the case falls within the scope. For example, under Article V(1)(b) of the Convention, the enforcement of the arbitral award may be refused if a party ‘was not given proper notice of the appointment of the arbitrator’.As noted, the Convention does not specify the meaning of ‘proper’ in this provision, so the judge should focus on the case facts in order to exercise their judgment.

Conclusion

Arbitration is an alternative method for solving disputes, and it ispreferable for commercial disputes due to its flexibility, lower cost and fast procedure. However, different grounds for refusal interpretation between countries may affect the strength of the arbitration, which will then reflect negatively on the outcomes. The use of words such as ‘may’, ‘reasonable’, and‘proper’ lead to broad interpretations that cause ambiguity. Moreover, the overlap between Article V(1)(b) and public policy violations might increase fake defences, and entity may exploit these defences as weapons against enforcement. The public policy article is a challenge because such a provision is related to the state, and some states, such as Saudi Arabia, have different interpretations as it includes societal ethics as part of its public policy. However, the need to discuss a new policy to govern the ambiguity of some of the defences in order to avoid exploitation andensure arbitration procedures has never been in doubt.

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