Marc J. Goldstein Arbitrator & Mediator NYC
September 02, 2009

Public Policy As a Basis to Deny Recognition Under the New York Convention: A Missed Opportunity

US federal district judges who do not frequently grapple with the New York Convention and Chapter Two of the FAA, and in many Circuits lack clear appellate guidance, often struggle to apply the terms of the treaty and the statute to novel and unusual situations. A new case in point comes from the US District Court in Maryland, which reached a correct result in denying recognition of a partial award while confirming the final award, but missed an opportunity to make an explicit and persuasive application of Article V of the Convention to justify denying recognition to the partial award. (In the Matter of the Arbitration Between AO Techsnabexport and Globe Nuclear Services and Supply Ltd., 2009 U. S. Dist. LEXIS 77419 (D. Md. Aug. 28, 2009)).

The contract at issue in the underlying arbitration was for sale of uranium from a Russian state-controlled company to a US company whose principal officers were Russian nationals. When the Russian company discontinued sales, the US company commenced a Stockholm Chamber of Commerce arbitration in Sweden. In the meantime, criminal proceedings had been commenced in the US and Russia concerning the acquisition of the controlling interest in the US entity and the execution of the uranium sale contract with the Russian State entity. The US company obtained a partial award on liability, the Tribunal finding a breach of contract by the Russian entity. But in a procedural order that predated the partial award by a full year, the Tribunal had stated that in even after the partial award on liability it would, if appropriate, review the validity of the contract based on evidence developed in the criminal proceedings.

In the criminal proceedings, evidence emerged of serious fraud by the purported principals of the US entity, and fraud by them in the inducement of the uranium sale contract. Based on this evidence, the Tribunal in the final award held, inter alia, that the arbitration had been commenced by unauthorized representatives of the US company, and that the uranium sale contract was invalid or unenforceable as a matter of Swedish law and international public policy.

The court, after faithfully setting forth in full text Article V of the New York Convention, then proceeded with analysis leading to denial of recognition of the partial award, but did this without further mention of Article V. Mentioned most prominently in this analysis is the Tribunal’s procedural order that bifurcated liability and damages and deferred the issue of validity of the contract until after the partial award. The court then stated that the Tribunal’s findings in the final award concerning invalidity of the contract were “also of significant importance.”

Lawyers knowledgeable about New York Convention will find the analysis here unsatisfying, even if the outcome is clearly right. One may question whether the partial award was in fact an award capable of recognition under the Convention, as it did not finally resolve the issue of liability for breach of contract — the Tribunal having beforehand reserved judgment on that issue. But facing up to that issue would have taken the court into a doctrinal thicket: neither the Convention nor the FAA defines “award”; probably the issue of what is an “award” is governed by the lex arbitri, here Swedish law, and deference is probably due to the Tribunal’s determination on that issue. (The Tribunal may be justly criticized for issuing an “award” after having reserved the issue of validity of the contract. An “interlocutory decision” would have sufficed.)

But why did the Court decline to refer expressly to Article V(2)(b) of the Convention? That section provides that recognition may be refused if it would be contrary to the public policy of the country where recognition is sought. As denial of recognition must be based on an explicit ground in Article V, and the public policy ground was the only one offering a clear solution, it is puzzling that the court did not rely on V(2)(b) expressly. Surely if the Tribunal could conclude, as it did, that a fraudulent conspiracy to procure uranium from the Russian Federation violated international public policy, a US court could have reached the same conclusion explicitly as a matter of US public policy. Perhaps the legacy of the case, through an appeal or otherwise, will be as a clear-cut example of a situation where the V(2)(b) public policy exception to recognition may be applied.

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