In part one of this article we considered public policy with respect to arbitrability. We will continue this discussion with the issue of public policy and procedure, the conduct of the hearing and natural justice as well as public policy and the substantive dispute.
PUBLIC POLICY AND PROCEDURE
Generally and in various jurisdictions, there is a broad consensus on which procedural flaws or failures to follow the rules of natural justice are so important and fundamental as to justify the non-enforcement of an award, pursuant to the New York Convention. The following are grounds under this heading for resisting an award under this heading:
- The right to be heard and the opportunity to present ones case in conformity with the rule of audi alteram partem
- The right to equal treatment
- The composition of the tribunal according to the agreement of the parties,
- The impartiality, independence and integrity of the arbitrators.
- An award, which is, in whole, or in part, ultra petita.
However, there are instances were courts in different states differ in their determination of what constitutes a fundamental flaw.
International consensus seems just as elusive on the scope of the principle of party equality in the appointment of arbitrators. For example, in the DUTCO v SIEMENS & BKMI Paris, the Cour de Cassation of France was asked to rule upon the constitution of an arbitral tribunal, where the two co-respondents, who had divergent interests in the dispute, were forced to cooperate to jointly appoint one arbitrator while the sole claimant enjoyed the right to individually appoint an arbitrator of its own choice. The Court de Cassation held that such a mode of appointment was contrary to the principle of equality between the parties and hence violated public policy. As a result the court returned the matter to the lower appellate court for re-adjudication. Faced with a similar dispute, the Geneva Court of Justice held that the apparent inequality in the mode of appointment of the arbitrators did not violate public policy since the parties has explicitly provided for, and agreed to, the said mode of appointment. Various institutional rules provides for the minimum requirements where an award can be challenged if the tribunal fails to comply with the rules of natural justice in the conduct of the reference. See Article 12, 22(4) AND 26 of the ICC rules, Article 5.2, 5.4 and 14. Section 14 of the Nigeria Arbitration and Conciliation Act provides thus: “ in any arbitral proceedings, the arbitral tribunal shall ensure that the parties are accorded equal treatment and that each party is given full opportunity of presenting his case”
Though the above section is based on Article 18 of the Model law it is amplified in 15(1) of the Arbitration Rules thus:
Subject to these Rules, the arbitral tribunal may conduct the arbitration in such manner as it considers appropriate, provided that the parties are treated with equality and that at any stage of the proceedings each party is given a full opportunity to present his case.
The relevant parameter to apply in ascertaining whether or not there has been a procedural breach material enough to invoke a public policy consideration is the reasonable man’s test. See HAGOP ARDAHALIAN v UNIFERT INTERNATIONAL S.A (1984) 2 Lloyds Rep 84 at 89.
On interesting case worthy of reference is the decision of the Higher Regional Court of Karlsruhe in (docket No Sch/02/09) schieds VZ 2012. The respondent in the arbitration sought to prevent the enforcement in Germany of an award rendered by a tribunal seated in San Diego, California, by alleging that one of the arbitrators had slept during the hearing and hence that the conduct of the proceedings violated the respondent’s right to be heard and was contrary to public policy. The court held that the respondent’s complaint could not prevent the enforcement of the award, nor did the sleepy arbitrator’s nap during the hearing violate public policy, since the respondent failed to raise this objection promptly during the hearing.
The principles underlying a state courts refusal to order enforcement of an international arbitral award, or its rendering a judgment of annulment for failure to follow procedural requirements such as those concerning the constitution of the tribunal, have universal acceptance. So too do the principles of natural justice in the conduct of the hearing as well as the necessity for the impartiality and independence of the members of the tribunal. However, the application of these principles may nonetheless vary amongst different states.
PUBLIC POLICY AND THE SUBSTANTIVE DISPUTE.
Each state may determine those particular subject matters, which, as a mater of public policy it considers should only be dealt with in certain ways. In other words, agreements to arbitrate and arbitral awards which deal with the matter in a way contrary to public policy will be refused in its state courts. The subject matter of public policy considerations in the various states covers a wide range which includes, amongst others, matters of energy supply, shareholders agreements, consumer protection, class actions, restraint of trade or competition, corporate management and real estate transactions. It is the tendency of the courts globally to interpret the public policy exception to enforcement narrowly as international public policy and to allow it to be successfully used to contesting enforcement only in cases of non-conformity with the most basic notions of morality and justice. A typical example is the case FRANCELINO DA SILVA MATUZALEM v FIFA where the Federal Tribunal partly annulled an arbitral award by the court of arbitration for sport that ordered football players francelino da silva Matuzalem to pay his former football club an amount of approximately 12m Euro for having terminated his employment contract. The obligation to pay this amount was accompanied by a ban in the award. The Swiss Federal Tribunal decided that the terms of the award, and the threat of a ban on the player’s football activities in particular, constituted a grave encroachment on Mr Matuzalem’s privacy right and on his economic freedom such that his very economic existence was jeopardized. The award was in breach of public policy exception by restricting it to cases where the result of the award contradicts fundamental legal principles and generally recognized values, which should be the basis of any legal order. There is different between domestic or national and international public policy as an exception to enforcement of international arbitration awards. In WESTACRE v JUGOIMPORT (1999) 3 ALL ER 864, although the court was not unanimous in the result, all of the judges agreed that the public policy invoked to defeat the enforcement of an international arbitral award had to be considered by examining, in addition to the prevailing law in England, the public policy of the law of the contract (lex contractus) and that of the seat of arbitration. (lex loci arbitri).
The 2011 decision in PHULCHAND EXPORTS LIMITED v 000 PATRIOT, the Indian Supreme Court held that an international arbitration award could also be set aside if it is patently illegal. Most practitioners remarked that the inclusion of patent illegality among the heads of public policy in an international arbitration context could encourage a widespread review of the merits of arbitral awards at the enforcement stage and turn arbitration into an expensive precursor to litigation. The uncertainty surrounding the possible application of its sweeping definition of public policy in the context of foreign arbitration was at least partly cleared up in 2012, when the Supreme Court, in the BHARAT ALUMINIUM Case, overturned its previous decision and held that Part 1 of the Arbitration and Conciliation Act does not apply to international arbitrations seated outside India. In July 2013, in the case of Shri Lal Mahal Ltd v Progetto Grano Spa (2013), the Supreme Court held that the public policy exception should be interpreted narrowly in the context of international arbitration as opposed to domestic arbitration. In so ruling, the court overruled its decision in PHULCHAND EXPORTS and held that the ground of patent illegality could not be invoked to contest the enforcement of an international arbitral award.
Public policy is indeed an unruly horse, as there seem to be no universally accepted standard that constitutes a legitimate public policy consideration in the context of the enforcement or validity of an international arbitration award. Particular attention must be paid to the interpretation of public policy and its application in the courts of the state where an arbitration is seated as well as those states where it is contemplated an award may be enforced.