Marc J. Goldstein Arbitrator & Mediator NYC
July 05, 2018

Our “Notions of Morality and Justice”: How “Basic” Must They Be?

Imagine with me, readers:

A sovereign foreign State — India, for the sake of discussion — attracts the interest of a US enterprise to conduct a search for offshore hydrocarbon deposits and, if any are located, to determine their commercial viability. The State cedes aspects of its sovereignty contractually, in a number of ways. First, it gives the exploration outfit rights of occupancy for exploration purposes on a defined block of the State’s offshore waters. Second, it extends the period of the concessionaire’s right to be physically present on the block for an agreed period after hydrocarbon discovery in order to determine commercial viability — two years for oil, five years for natural gas. Third, it agrees to submit disputes under the contract to international arbitration before a three-member Tribunal having its seat in Malaysia. Other voluntary incursions upon the State’s sovereignty— the exploration firm’s right to profit-share, for example — are presumably explicit or implicit in the contract. Among those that are implicit in the arbitration agreement, in tandem with India’s accession to the New York Convention, are the ceding of control of the arbitration process and the legal validity of the Award to the arbitrators and to the courts and arbitration laws of Malaysia, and the acceptance of the enforceability of the Award in the courts of those New York Convention Contracting States in which India is not immune from a suit brought for that enforcement purpose – – in the United States for example.

Readers who have already read Hardy Exploration & Production (India), Inc. v. Government of India, 2018 WL 2758220 (D.D.C. June 7, 2018), know how this not very unusual contractual compromise between State sovereignty and natural resource extraction plays out. Hydrocarbons are found. The State claims it is oil, which if true triggers merely a two-year commercial assessment term. The concessionaire believes its discovery to be natural gas, triggering a five-year period for assessment. The State, after two years, revokes the concessionaire’s right to operate on the block. Effectively, there is a physical as well as commercial ouster. The concessionaire files an arbitration, and wins a Final Award – from three retired Justices of the Supreme Court of India – that includes most notably a decree of specific performance ordering India to allow the concessionaire back on the block for the five-year assessment term associated with a natural gas discovery. But when enforcement of the Award is sought in the United States under the New York Convention, a federal district judge holds that enforcement should be refused because it would violate the US public policy of showing respect for a foreign State’s sovereignty in regard to the State’s control over its own “territorial integrity.” (In the same decision, the court also refuses on the basis of the public policy exception in Convention Article V(2)(b) to enforce an award of interest.  Discussion of that portion of the Award is reserved for another day and another post).

Given the rather richly-developed jurisprudence of the New York Convention’s public policy exception in US courts, we would reasonably expect such an exceptional refusal of enforcement to be grounded in that case law. But such is not the case. Instead the main premise of the Court’s decision is the principle of foreign sovereign immunity as embodied in the Foreign Sovereign Immunity Act, in sections of the FSIA other than the “arbitration exception.”

While the decision acknowledges the FSIA’s exception for enforcement of foreign arbitral awards, the court asserts that whereas that FSIA arbitration exception does not address in specific terms the recognition and enforcement of an arbitral award of specific performance against a State, the arbitration exception is not the sole or even the decisive articulation of the US public policy that is germane to the case. The decision purports to find its rationale for denying confirmation of the Award’s specific performance decree in two sources: (1) judicial decisions expressing reluctance to grant extraterritorial injunctions in plenary actions in US courts, and (2) the FSIA’s limitation of attachments against the assets of a foreign State to the State’s property located in the United States and used for the State’s commercial activity. Said the Court: “[T]he spirit of the United States policy preference against specific performance is clear from the exclusion from the statutory text [of the FSIA] of any mention of specific performance or extraterritorial enforcement, apart from the terrorism and expropriation exceptions.”

But the district court does not explain why this supposed “policy preference” rises to the level of a “most basic notion[] of morality and justice” — the enduring phrase coined 44 years ago by the Second Circuit to capture the notion that refusal of award enforcement under the Convention’s public policy exception should be justified only when the enforcement would offend a universal and fundamental legal or societal norm. (Parsons & Whittemore Overseas Co. v. Societe Generale de L’Industrie du Papier, 508 F.2d 969, 974 (2d Cir. 1974)). And the fact, noted prominently in the decision, that certain US federal statutes as construed by the courts generally prohibit a contract claim for injunctive relief or specific performance against the US government, does not convincingly advance the position that enforcement of a foreign arbitral award of specific performance against a foreign State violates a bedrock US legal norm. The foreign State’s consent by contract to broad remedial powers of the Arbitral Tribunal, coupled with its accession to the New York Convention, would seem to be a crucial distinction. That the US has not consented to be a defendant in contract litigation seeking specific performance or an injunction would not appear to furnish evidence of a fundamental US legal norm opposed to enforcing an arbitral specific performance award, when that award is the outcome of a legal process (including the enforcement process) to which a foreign State has expressly and voluntarily submitted.

The district court in Hardy Exploration was legitimately concerned about the international unseemliness of a US court policing the compliance of a non-hostile foreign State with a US judgment for specific performance for commercial activity in its offshore waters. But this pragmatic comity concern could be assessed if necessary in regard to enforcement of the judgment, as when the court might be asked to impose a civil contempt sanction for India’s potential non-compliance.

An arguably aberrant decision such as this one may also be seen as a by-product of the common law development of American jurisprudence concerning the New York Convention. We have an elegant catch-phrase handed down through the ages from the Parsons-Whittemore case — “our most basic notions of morality and justice.” We have a series of procedural guidelines for decisions about the Convention’s Article V exceptions: that they are to be construed narrowly, that the Respondent bears a heavy burden, that the pro-arbitration policies of the Convention and the Federal Arbitration Act are entitled to considerable weight. And with regard to the public policy exception specifically courts are instructed that the public policy serving as a basis for refusal of enforcement should be “explicit,” also “well defined and dominant,” and based on “laws and legal precedents.” But synthesis conceptually of the large body of case law dealing with the “public policy exception” appears to be a task US judges have been reluctant to undertake.

Obviously such a synthesis, systematically done, is too ambitious a task for the format of these Commentaries and your patience as readers. But upon a review of the leading appellate decisions and a representative sampling of district court cases, the following observations are offered.  First, the offended public policy must be more dominant, more enduring, more fundamental to the American conception of the rule of law than the public policy favoring international arbitration. Second, the offended public policy should be, or be closely akin to, a foundational principle of the American legal order such as individual liberty, private property, or non-discriminatory application of well-defined rules of law (what might also be considered principles of “natural justice” that are widely adopted in developed nations). Third, perhaps best understood as a corollary of the preceding, federal legislative policies concerned with the regulation of commerce or with diplomatic relations ordinarily, and save in those rare cases where the first two criteria stated above are clearly met, are not matters of “public policy” under Article V(2)(b), even if they are commonly understood as matters of public policy in political discourse.

Under these standards, there is a serious question as to whether the Hardy Exploration case has been correctly decided in the district court on the basis that enforcement (in the Convention sense of converting a foreign arbitral award to a domestic judgment) of an arbitral award of specific performance granting what amounts to a limited commercial easement in the territory of a foreign State is an unacceptable intrusion by the United States upon the sovereignty of that State. The State created the easement in a commercial contract and submitted disputes about the scope and duration of the easement to international arbitration. Specific performance here evidently entails no intrusion on the political and diplomatic autonomy of the foreign State: the Award does not exclude India from the concessionaire’s offshore exploration block for purposes relating to India’s national defense or security, or for any other national purpose that is not in conflict with the concessionaire’s ability to evaluate the commercial viability of the hydrocarbon reserves lying beneath the waters.

A Notice of Appeal has been filed. The case deserves to be watched closely for an important ruling on the New York Convention’s public policy exception from the US Court of Appeals for the District of Columbia Circuit.





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