| This Commentary concerns the scope of judicial review in US courts when an arbitral tribunal in an international case decides whether or not to enforce a contract that is illegal, or is tainted with illegality, whether under the law applicable to the contract or other relevant law such as the law in force at the place of performance. If the losing party in such a case asks a US court to refuse recognition and enforcement of a foreign award, or in a US seated case asks for the award to be vacated, in either situation on the basis that enforcement of the award would violate US public policy, what if any scope exists for the court to revisit arbitral findings of fact and conclusions of law that were made on the issues of illegality? |
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As our collective instinct is that there is no such scope for a judicial revisiting of arbitral determinations on illegality, when made by the arbitral tribunal within the scope of its mandate. But our concern is that this is an underdeveloped position in the US jurisprudence of international arbitration, a situation that seems related to the fact that the award losers who raise public policy objections do not often present positions that are seriously arguable, as raising matters of illegality that are established and explicit matters of public policy in US law and also offend “our most basic notions of morality and justice.” It may be useful to see how this issue has been treated in the courts of some other major common law jurisdictions – judgments that might inform future US law development should an important or difficult case arise – and so that is a major part of the task I undertake in this Commentary. Public Policy Objections to Award Enforcement in Notable UK and Singapore Judgments Two important arbitration jurisdictions whose courts have considered these questions are the United Kingdom and Singapore. We examine here four major cases, before turning to a sampling of US decisions to consider to what extent they are in harmony or in tension with those judgments. The first case comes from the UK but is not a decision applying UK law. It emanates from the Privy Council, whose Judicial Committee functions as the court of last appellate resort for judgments from the courts of Mauritius – – a consensual legacy that dates from the time Mauritius gained independence from the UK in 1968. The case arises in the framework of the UNCITRAL Model Law as adopted by Mauritius. In this case, Betamax Ltd. v. State Trading Corporation, [2021] UKPC 14, the Privy Council held that, under the Model Law’s provision for vacatur of an award whose enforcement would be contrary to the public policy of the Model Law-adopting State, the Mauritius court of first instance was without power to reconsider the arbitral tribunal’s interpretation of the contract at issue as being exempt from obligatory compliance with Mauritius’s public procurement laws. This was received by UK commentators as a vindication of the principles of finality and autonomy in arbitration and of judicial non-intervention. But as shown in a decisive quotation from the Judgment, as quoted below, we know that the possibility of substantive judicial review of arbitral findings on a public policy issue was not entirely foreclosed in principle, albeit such review will only be available in some exceptional circumstances that the Privy Council opted not to specify in ultimate detail: “If [the arbitral tribunal, within its jurisdiction] holds that the contract is not illegal, then that decision will be final, in the absence of fraud, a breach of natural justice or any other vitiating factor. There may be some exceptional cases, where the court under the Model Law provision may be entitled to review the decision on legality, but it is not easy to think of such a case arising in practice. In the light of experience, it would not be helpful to seek in this appeal to go further by delineating possible circumstances or making observations about them.” (at para. 52 in the Judgment). The second case is also a UK case. However it is from the UK Court of Appeal, dates from 1999, has found disfavor in subsequent judgments as we will discuss, and is controversial for its obiter dicta about the potential scope for judicial review on an issue of illegality/public policy when an arbitral tribunal either finds no illegality or fails to state its reasons on this issue. The case is Soleimany v. Soleimany, [1999] Q.B. 785 (19 February 1998). Importantly, the position taken in Soleimany, possibly allowing for a more expansive judicial role, has been rejected in the Betamax case discussed above, and in other judgments in the UK and Singapore discussed below. But we are looking to the potential influence of these foreign judgments in the evolution of US law, so Soleimany deserves our attention. |
| The case involved a dispute over the division of profits between the partners in a scheme to smuggle Persian rugs out of Iran in violation of Iranian export control regulations. The partners, both observant Jews, submitted their dispute for resolution before an Orthodox Jewish religious tribunal (Beth Din) under Jewish law. It was common ground that under Iranian law the contract was illegal because it violated export control regulations, and this was stated explicitly in the Beth Din award, where it was held that under Jewish law illegality of the object of the contract under Iranian law was irrelevant to the rights of the contracting parties inter se. The UK Court of Appeal held that enforcement of the Award would violate UK public policy, upon the principle that a UK court would not enforce an award in respect of what the arbitral tribunal had accepted to be an illegal contract. But the key component of Soleimany, for the jurisprudence of the public policy exception to award enforcement, was the counter-factual dictum of Lord Justice Waller concerning what the judge in an enforcement court should consider if the arbitral tribunal has found that the contract was not illegal (and perhaps equally if the Tribunal has not addressed the issue of illegality even though the issue was apparent):
“The difficulty arises when arbitrators have entered upon the topic of illegality, and have held that there was none. … In such a case there is tension between the public interest that the awards of arbitrators should be respected, so that there be an end to lawsuits, and the public interest that illegal contracts should not be enforced. We do not propound a definitive solution to this problem, for it does not arise in the present case. So far from finding that the underlying contract was not illegal, the Dayan in the Beth Din found that it was. … In our view, an enforcement judge, if there is prima facie evidence from one side that the award is based on an illegal contract, should inquire further to some extent. Is there evidence on the other side to the contrary? Has the arbitrator expressly found that the underlying contract was not illegal? Or is it a fair inference that he did reach that conclusion? Is there anything to suggest that the arbitrator was incompetent to conduct such an inquiry? May there have been collusion or bad faith, so as to procure an award despite illegality? Arbitrations are, after all, conducted in a wide variety of situations; not just before high-powered tribunals in international trade but in many other circumstances. We do not for one moment suggest that the judge should conduct a full-scale trial of those matters in the first instance. That would create the mischief which the arbitration was designed to avoid. The judge has to decide whether it is proper to give full faith and credit to the arbitrator’s award. Only if he decides at the preliminary stage that he should not take that course does he need to embark on a more elaborate inquiry into the issue of illegality.” (at page 800 of [1999] QB). What lesson should we take from this view? It is neither decisively in favor of arbitral finality as the prevailing public policy consideration, nor wholly dismissive of the possibility that arbitral finality may in some circumstances prevail over policy concerns over enforcement of an illegal contract. But the dictum does suggest that courts ought to be open to a weighing of competing considerations, and that the weight to be assigned to arbitral finality may vary widely depending on the nature of the arbitral forum and even on the quality of the arbitral tribunal’s analysis. The next UK case, Westacre Investments Inc v Jugoimport-SDRP Holding Co., [1999] App. L.R. 05/12 (May 12, 1999), is to be considered in conjunction with Soleimany, as the author of the Court of Appeal decision in the latter case, Lord Justice Waller, once again took the position that some form of reopening of the arbitral factual record on corruption would potentially be allowable in an appropriate case. But on this occasion Lord Justice Waller was in the minority, with the two other Court of Appeal Justices standing with the High Court first instance judge, Justice Colman, in rejecting a judicial reopening to consider new evidence about whether the Claimant’s consultancy in regard to weapons sales to Kuwait was an engagement to pay bribes to relevant Kuwaiti officials. It is the opinion of Justice Colman at first instance that stands, in UK law and in the Singapore cases as revealed below, as the standard bearer for the UK position. In brief the essentials of Westacre were these: There was a contract for a lobbyist/agent to interact with the Government of Kuwait to secure weapons sales contracts for the Claimant, and the public policy issue was whether in fact the contract was made with intent that the lobbyist/agent should bribe Kuwaiti officials. A Swiss-seated ICC Tribunal heard evidence on the bribery issue, and decided in the Award that bribery was not the purpose of the contract nor was it established in contract performance. Before reaching the UK courts in an enforcement case, that Award was upheld against an annulment petition in the Swiss courts. In the Swiss set-aside case, Kuwait sought to expand the record on bribery with an affidavit from a witness who had testified before the Tribunal, giving additional facts. The Swiss court declined to accept the new evidence, and in the UK enforcement case Kuwait tried again and failed for the reasons given by Justice Colman. The rejection of the new affidavit evidence for its failure to meet well-understood judicial procedural standards for reopening (not materially different in the UK from US federal Rule 60 (b)) was thoroughly addressed by Justice Colman, but the legacy of Westacre is not on this matter, but on the significance of the fact that the questions of bribery had been thoroughly ventilated and resolved by Award before an ICC arbitral tribunal of unquestioned high competence, and this, in combination with a view that the policing of commercial corruption in transactions that were not performed in the UK was not at the apex of the UK courts’ public policy concerns, was determinative of the proper balance on the facts of the case. To quote in material part from Justice Colman’s decision: “Outside the field of such universally-condemned international activities as terrorism, drug-trafficking, prostitution and paedophilia [and, we may add, human trafficking], it is difficult to see why anything short of corruption or fraud in international commerce should invite the attention of English public policy in relation to contracts which are not performed within the jurisdiction of the English courts. That it should be the policy of the English courts to deter the exercise of personal influence short of corruption and fraud to obtain valuable contracts in foreign countries in which such activity is not contrary to public policy by refusing to enforce contracts would involve an unjustifiable in-road into the principle of pacta sunt servanda. *** It is necessary to take into account the importance of sustaining the finality of international arbitration awards in a jurisdiction which is the venue of more international arbitrations than anywhere else in the world. …[A]lthough commercial corruption is deserving of strong judicial and governmental disapproval, few would consider that it stood in the scale of opprobrium quite at the level of drug-trafficking. On balance, I have come to the conclusion that the public policy of sustaining international arbitration awards on the facts of this case outweighs the public policy in discouraging international commercial corruption… That conclusion is not to be read as in any sense indicating that the Commercial Court is prepared to turn a blind eye to corruption in international trade, but rather as an expression of its confidence that if the issue of illegality by reason of corruption is referred to high calibre I.C.C. arbitrators and duly determined by them, it is entirely inappropriate in the context of the New York Convention that the enforcement court should be should be invited to retry that very issue in the context of a public policy submission.” But when a two-justice majority in the Court of Appeal, on the appeal in Westacre, embraced Justice Colman’s rationale, its rejection of a reopening of the record was not based on an unqualified embrace of arbitral finality. Instead, with only a rhetorical nod in that direction (“some difficulty with the concept” of a reopening in the form of a “preliminary inquiry short of a full-scale trial”), the Court of Appeal majority rejected reopening “by reference to the criteria given by way of example in Soleimany itself.” Thus the majority appears to have conducted at least implicitly the “preliminary inquiry” into the merits but reached the conclusion that the arbitral process had been untainted by any material irregularity: “First, there was evidence before the tribunal that this was a straightforward commercial contract. Secondly, the arbitrators specifically found that the underlying contract was not illegal. Thirdly, there is nothing to suggest incompetence on the part of the arbitrators. Finally, there is no reason to suspect collusion or bad faith in the obtaining of the award.” When we come to the US case law, I suggest we may conclude that many American judges would be as reluctant, in a proper case, to reject any form of or any possibility of arbitral record reopening, as were Lord Justice Waller’s Court of Appeal colleagues in Westacre. The question may well be: what is a proper case? Lord Justice Waller’s answer seems to be some combination of (i) the gravity of the alleged illegality implicated, with a focus on matters that genuinely and directly engage international public policy, such as corruption, drug trafficking, human trafficking, trafficking in stolen government data, etc. (and not, on the other hand, technical illegality under regulatory laws of the place of contract performance), and (ii) possible shortcomings in the arbitral process, ranging in severity from an entirely collusive arbitration (which is what Lord Justice Waller suggested was involved in Soleimany) at one extreme to more technical deficiencies such as the arbitral tribunal failing to elaborate in the award the reasons for a finding that there was no illegality involved. Before we come to the US case law, first let’s examine one more non-US case: the 2022 decision of the Singapore International Commercial Court in CHY et ano. v. CIA, [2022] SGHC (I) 3, where the Court after examining prior case law in the Singapore Court of Appeal as well as the UK precedents up to and including Betamax, adopted a hybrid approach to review, in the framework of a Model Law annulment petition, of the fact and law issues pertaining to illegality that had been considered in the Award: (i) issues of fact properly determined by the tribunal within the scope of the submission to arbitration including determinations of issues of foreign law may not be reopened (absent proof of fraud or other manifest injustice in the arbitral process) – a position grounded in settled principles of award finality expressed in the Model Law – but (ii) issues of Singapore law pertinent to whether the public policy of Singapore has been violated may possibly be reopened – under the principle that the Model Law’s public policy exception to award enforcement makes the courts of the Model Law-adopting State the ultimate arbiters of whether a contract or a course of conduct offends the State’s public policy. In the case before it, the Singapore International Commercial Court (Ramsey, J.) considered that all the questions resolved by the arbitral tribunal pertaining to Singapore public policy – including issues of interpretation of India’s laws governing certain Foreign Exchange transactions – were issues of fact that could not be reopened, and so the Court did not go further to address in what circumstances a reopening of a question of law decided by the arbitral tribunal might be allowed. But Justice Ramsey did have some helpful observations about circumstances that often underlie “public policy” based objections to award enforcement but, in her view, categorically would not invite re-examination of questions of law decided by the Tribunal. These are recurrent situations where the losing party’s “public policy” submission is made in two steps: first, to assert that “international comity” is a public policy rule or principle of the State where enforcement is sought, and second, to say that entering judgment enforcing an arbitral award that reaches an incorrect position on an issue of foreign law violates the enforcing State’s comity-based obligation to give effect only to the correct applications of foreign law. But Justice Ramsey rejected the proposition that “comity” is per se such a powerful public policy principle that it reaches all manner of foreign law illegality that might be involved in enforcement of an award. As she wrote in the Judgment: “[M]aintaining international comity [does not] mean that, absent the type of criminal activity such as corruption, bribery or fraud, which would violate the most basic notions of morality and justice or would ‘shock the conscience’, public policy should be engaged”
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Looking at US Case Law on the Public Policy Exception With the Foreign Case Law in Mind
From a sampling of the recent US case law, two general observations seem possible. One is that the arguments raised against award enforcement generally do not remotely implicate a truly international public policy or even explicit US domestic public policy norms of high importance that find expression in specific US laws. The consequence is that the public policy exception is often raised as the last item in a laundry list of the award-loser’s objections to enforcement, and thus receives perfunctory judicial examination. The second observation relates to the first: that there is reason to think that in a case that did seriously implicate international (or high-level domestic) public policy embedded in US law, US courts could find reasons to adopt the kind of carefully calibrated approach that we see in the foreign case law. Accordingly we should be careful not to quickly leap to the conclusion that the US is a more “pro-arbitration” jurisdiction where judicial re-consideration of the arbitral record in a public policy exception case is simply off the table.
1.In a Los Angeles-seated international arbitration, a Hong Kong-domiciled owner of downtown LA real estate, as payment guarantor for its US affiliate, had refused to make payments to a construction contractor, and defended on the ground that the construction contract was illegal because the contractor did not maintain licenses required by California law. The arbitrator decided that the guarantee contract was not a construction contract, and that licensure issues were therefore outside the arbitrator’s jurisdiction under the terms of the guarantee. In the US District Court, the motion to vacate on grounds of a violation of public policy was denied, and the Court stated: “Respondent’s public policy argument would require a finding that the Guarantee was a construction contract under which licensure was necessary, which would be an inappropriate reinterpretation by the Court.” (Lendlease (US) Construction Inc. v. China Oceanwide Holdings Ltd., 2021 WL 8443761 at *7 (C.D. Cal. June 15, 2021)).
2.In a Malaysia-seated international arbitration between a US hydrocarbons exploration firm and the Government of India, the Tribunal in its award found that India had wrongfully evicted the firm from the coastal waters exploration area and, as a specific performance remedy, ordered India to permit the firm to return and resume exploration. In the US District Court in Washington DC where the award was brought for enforcement, India successfully invoked the New York Convention’s public policy exception, persuading the Court that respect for the territorial sovereignty of a foreign nation was for the US “a most basic notion of morality and justice” and that the intrusion upon such sovereignty from recognition and enforcement of the specific performance award was a US public policy violation that outweighed the policy in favor of the finality of foreign arbitral awards. (Hardy Exploration & Prod. (India), Inc. v. Government of India, 314 F. Supp.2d 95 (D.D.C. 2018)). That decision furrowed more than a few brows in the arbitration community; the disgruntled award-holder took an appeal to the DC Circuit; and the Parties evidently reached a settlement before the appeal was decided (as indicated by the voluntary dismissal of the appeal on the docket of the DC Circuit). Why was there much brow-furrowing? Mainly because India could be seen as having submitted the question of remedy for breach to private commercial arbitration without excluding specific performance as a potential remedy, and thus arguably had made a sovereign decision to forgo defenses to award enforcement based on sovereign ownership and control of the coastal waters of the Claimant’s exploration concession.
3.In a Paris-seated investment treaty arbitration between Russian investors and the Government of Ukraine, a final award was entered in favor of the Russian investors even though the award gave effect to corporate share purchases that were allegedly unlawful under Ukraine law. Here however Ukraine only first raised the illegality issue as an objection to recognition and enforcement of the final award, and its efforts were rejected by the US courts. (Tatneft v. Ukraine, 21 F.4th 829 (D.C. Cir. 2021), affirming judgment in the District Court, 301 F.Supp.3d 175 (D.D.C. 2018)). And while the DC Circuit cited US domestic arbitration case law for the proposition that there is no general public policy principle against enforcement of a contract that involves illegality, the decision provides no particular guidance on what types of illegality – or what degree of infection of the contract arising from the illegality— might indeed rise to the level of a US public policy objection to foreign award enforcement.
Tatneft is a prime example of a case that is not even close to “our most basic notions of morality and justice,” with the result that the US courts can make easy work of rejecting the public policy objection with little depth of analysis. In Tatneft, Ukraine, having lost an investment arbitration to Russian State-related parties conducted at a Paris seat under UNCITRAL Rules based on the Ukraine-Russia BIT, and having been found liable for $173 million in damages, first failed to obtain annulment in a Paris court, then sought to fend off enforcement in Washington. Ukraine sought to avoid enforcement based on the alleged illegality under Ukrainian law of the procedure by which the Russian entities had acquired their shares in a jointly-owned oil refinery. Ukraine’s main “illegality” argument against Award enforcement, which it had failed to raise before the Tribunal and had also failed to timely raise in the US District Court, was that the alleged illegal share acquisition vitiated Ukraine’s consent to arbitrate. The District Court declined to address this contention because it was not timely raised, and the DC Circuit followed suit. So Ukraine’s alternative argument that the alleged share-acquisition illegality under Ukraine law violated US “public policy against illegality” was more or less a throwaway – an insubstantial argument offered up with no serious prospect that it would succeed. Said the DC Circuit: “[T]he U.S. does not have a policy against enforcing arbitral awards predicated on underlying violations of foreign law.” So the more interesting question of what kinds of illegalities under foreign law would or could genuinely raise US “morality and justice” hackles was never even close to being in play.
4.In a New York-seated international arbitration in which the Tribunal afforded extensive opportunity for the losing party to prove its claim that the contract was procured by corruption, and the Tribunal specifically examined and rejected that claim, the Second Circuit affirmed the District Court’s rejection of the public policy defense to enforcement. (Commodities & Minerals Enterprise Ltd. v CVG Ferrominera Orinoco CA, 49 F.4th 802, 818-19 (2d Cir. 2022)). The Court declared that “[i]n reviewing an arbitral award for violations of public policy, a court may not ‘revisit or question the fact-finding or the reasoning which produced the award.’”
The Orinoco case calls to mind another reason we don’t get much “morality and justice” nourishment from the jurisprudence: that raising a public policy defense to enforcement is not – at least not systematically — a side-door entry to judicial review of an arbitral determination that there was in fact no corruption or other illegality or public policy obstacle to enforcement of the Claimant’s claim. When the party resisting enforcement argues that “the law governing the contract, interpreted correctly as the Tribunal failed to do, makes enforcement of the claim unlawful” that party can be expected to lose. Call it a finality exception to the public policy exception. The public policy infraction must arise from the award as is, not the award as the loser argues that it ought to have been. Orinoco is an example. In this case, the arbitration Respondent, a Venezuelan State-owned exporter of iron ore, defended before the Tribunal on the ground that the Claimant’s contract to haul ore down river from the mine to an ocean transfer station had been procured by corruption. The Tribunal heard the evidence on that issue, and found no such corrupt procurement. Venezuela then failed on a public policy defense to enforcement in the US District Court and the Second Circuit, and the latter court cited Supreme Court precedent in a domestic context for the proposition that: “[A] court’s task in reviewing … possible violations of public policy is limited to determining whether the award itself, as contrasted with the reasoning that underlies the award, creates an explicit conflict with other laws and legal precedents and thus clearly violates an identifiable public policy…. [Venezuela’s] public policy argument attacks the [contract] itself, not the Award or its enforcement. The Panel carefully considered [Venezuela’s] corruption allegations and gave [Venezuela] ample opportunity to substantiate its claim.”
5.We may however question whether this categorical statement of non-reviewability is uniformly the position in US law. In the passage quoted above, the Court drew upon a precedent in the domestic context of labor arbitration under a collective bargaining agreement. We should compare this to the phrasing from a recent US District Court decision from Texas: “Erroneous legal reasoning or misapplication of law is generally not a violation of public policy within the meaning of the [New York Convention].” (Kora Pack Private Ltd. v. Motivating Graphics LLC, 2023 WL 4826222 at *9 (N.D. Tex. July 27, 2023) (emphasis supplied)). That statement was taken from a rather prominent decision in the US international arbitration jurisprudence, Karaha Bodas Co. v. Perusahaan Pertambangan, 364 F.3d 274 (5th Cir. 2004), and in Karaha Bodas this statement about what should “generally” be deference to the Tribunal on all decided issues of fact and law was qualified a few sentences later by this: “An arbitration tribunal’s contract interpretation does not violate public policy unless it ‘violates the most basic notions of morality and justice’”. 364 F.3d at 306. As that appears to define the exception to the “general” rule of deference – in the Fifth Circuit at least, but also potentially elsewhere because it is an influential decision in the US canon — the door is in fact rather more open to judicial review of the substance of a Tribunal’s analysis in cases that the reviewing court perceives as (i) implicating a compelling issue of US public policy that is explicitly reflected in US law, and (ii) an instance where the depth of the Tribunal’s examination of the issues was not on par with their public policy significance.
There is important guidance for arbitral tribunals, especially those seated in the US, in this potentially unstable US legal terrain cohabited by tribunals and courts. Some judges, while in most respects considering themselves to be “pro-arbitration” may be more covetous of their own power when the question entails violation of public policy that is reflected in specific statutes, treaties and rules that, but for the agreement to arbitrate, the courts would enforce even if enforcement meant invalidating a contract as an unlawful bargain. If arbitrators apply their energies to issues of illegality as they believe judges would, and produce awards on those issues that are models of precision and clarity, judges will be less disposed to craft new exceptions for substantive judicial review on illegality and other public policy issues under the malleable rubric of “basic notions of morality and justice.”
Really well written thought piece about an exquisitely difficult area of law, impinging on foreign relations.
I think the Nigeria and Ecuador cases are very salient here.