To enforce or not to enforce, that is the question

This article was first published on Practical Law’s Arbitration Blog.

The enforcement of international arbitration awards that have been set aside or annulled at the seat of arbitration has always been a contentious subject. Primarily it is the New York Convention 1958 that applies. Other provisions may be applicable on a case-by-case basis, such as Article IX of the European Convention on International Arbitration 1961.

Article V(1)(e) of the New York Convention provides that recognition and enforcement of an arbitration award may be refused if the party against whom it is invoked furnishes to the competent authority proof that the award is not yet binding or has been set aside or suspended by a competent authority of the country in which, or under the law of which, the award was made.

Under Article III, a contracting state is required to recognise and enforce awards in accordance with its own rules of procedure. It follows that there is a presumption that foreign awards must be recognised and enforced. The enforcing authority may refuse to enforce the award where a party resisting enforcement provides proof that the award has been set aside by a competent authority at the seat of arbitration.

“May” is the operative word in the text. For any lawyer reading this provision, the obvious conclusion is that a discretion exists. The question that follows is how such discretion should be exercised. Countries have differed in their approaches to answering this question.

At this point, I should state that Article VII(1) states that the convention must not deprive any enforcing party from benefiting from a more favourable, domestic provision. The best example is France, where the application of Article 1502 of the French Civil Code does not include as a ground for refusal the requirement that an award has been set aside at the seat of arbitration. The decisions in Hilmarton v Omnium de Traitement et de Valorisation and Arab Republic of Egypt v Chromalloy Aero Services are demonstrative.

Broadly speaking, the different approaches are based on two factors:

• Whether there is a perception that international arbitration operates in a supranational realm or is anchored to the seat of arbitration.
• Attitude towards comity.

There will continue to be varying outcomes until there is agreement on the role of the arbitral seat.

If we are searching for bright line principles of how to exercise the discretion conferred by Article V(1)(e) of the New York Convention, I would suggest a two-limb test.

First limb: whether the decision to set aside is itself subject to recognition or enforcement

In England, Simon J framed the test in terms of whether the court, in considering whether to give effect to an award, can treat the award as having effect notwithstanding a later order of a court annulling the award.

In an earlier incarnation of the Yukos case, the Amsterdam Court of Appeal held that the annulment of the arbitral award by the Russian courts could not be recognised on the grounds of public policy, because it was the product of a “partial and dependent” judicial process. When the matter came before the English courts, Hamblen J held that the Dutch judgment could give rise to issue estoppel on the issue of the partiality and dependence of the Russian judiciary. This issue is tricky in Europe, where Brussels Recast applies. In both cases, no valid annulment was found to trigger the application of Article V(1)(e). In the US, the Southern District of New York enforced an annulled award when it considered that a Mexican annulment decision had “violated basic notions of justice”.

By contrast, in Brazil the enforcing court in EDF International SA v Endesa LatinoAmérica S/A and YPF SA submitted fully to the principle of comity, choosing not to go back on an Argentinian decision as it constituted res judicata. In my opinion, this was an erroneous decision.

If the annulment decision is enforceable, the enforcing court still has residual discretion. Any exercise of discretion must be carried out with caution where there is no evident irregularity in the annulment decision. I would suggest that the prima facie conclusion that a decision to annul is recognisable or enforceable must rebut the presumption in favour of enforcement.

Second limb: whether the award is impeachable for fraud, contrary to public policy or obtained in breach of the rules of natural justice

All things being equal, the enforcing court must go on to consider the second limb.

In Dana Shipping and Trading SA v Sino Channel Asia Ltd, the Hong Kong Court of First Instance considered its residual discretion, even though ultimately it refused to enforce an award that had been set aside in London. It was said that the discretion survives to enable the enforcing court to achieve a just result in all the circumstances. By contrast, the Singapore Court of Appeal in PT First Media TBK (formerly known as PT Broadband Multimedia TBK) v Astro Nusantara International BV and others and another appeal offered its tentative thoughts that an award that had been set aside would not be enforceable.

In Germany, the Federal Court upheld a decision refusing enforcement on the basis that:

• The court’s discretion was limited by Article IX(2) of the European Convention on International Arbitration (although it failed to identify which ground).
• Enforcement would amount to a violation of the German ordre public pursuant to Article V(2) of the New York Convention.

By means of conclusion, cautious approaches to the enforcement of awards set aside in the arbitral seat can be seen in various jurisdictions. The US courts will only enforce an arbitral award if they consider there to be an “adequate reason” and the Dutch courts will only enforce in “exceptional circumstances”. Other reasons not to enforce an award may exist, such as the validity of an award, but these are beyond the scope of this particular blog.