g 4 ENFORCING ARBITRATION AWARDS CONTRARY TO. PUBLIC POLICY IN ENGLAND* AG TWEEDDALE Solicitor, Construction and Engineering Group, Norton Rose A number of cases have recently come before the English courts dealing with applications to set aside orders for the enforcement of awards on the basis, that the award is contrary to public policy because of illegality, There has not been a coherent policy adopted by the English courts but rather these issues, have been dealt with on a case by case basis. This article sets out the English public policy rule. Itthen continues with an analysis of how challenges under the public policy rule are made in England on domestic arbitration awards. ‘The severability of the arbitration agreement to the underlying contract is, thereafter discussed and an analysis is given of the approach of the courts of England and Wales to the enforcement of foreign arbitration awards. In this regard the courts differentiate between domestic and foreign awards. They have developed a complicated test in deciding whether enforcement of a foreign award will be refused. The courts have stated that they will not permit an award to be enforced in England that is universally repugnant. However, there is some uncertainty as to the full extent of this principle. Where breach, of public policy is alleged but does not appear on the face of the award then the courts have been inconsistent in deciding whether they should re-open and re-examine the facts of the case. Finally, where the award permits an act contrary to public policy to be undertaken in a foreign, friendly state then again the courts have been inconsistent as to whether such an award is permitted to be enforced in England, For the purposes of this article references to domestic arbitrations are references to arbitrations conducted in England, Wales or Northern Ireland. Foreign arbitrations are references to arbitrations conducted outside this jurisdiction. Similarly, foreign awards and domestic awards should be construed accordingly. WHAT IS PUBLIC POLICY: The term “public policy” is open-textured and encompasses a broad spectrum of different acts. A contract may be contrary to public policy * Thanks are extended 0 Professor Michael Bridge and M omments, criticism and advice in the drafting ofthis article, Bridgewater of Norton Rote for their160 ‘The International Construction Law Review [2000 because it is entered into with the object of committing a criminal act, or to qvade a statute, or commita tort. It may involve bribery and corruption or trading with an enemy in wartime. Alternatively, it may involve a practice which has no criminal element but which is, under common law, Unenforceable. This very open-textured nature of public policy has prompted fears about its unpredictable scope: “Itis a very unruly horse, and When you get astride it you never know where it will carry you.” "As a result of its open-textured nature, breaches of public policy are difficult to categorise. Each agreement in breach of public policy must be examined. An agreement may be “wholly unenforceable because it is contrary to English law, it may ... accurately be said to be void asa contract, that is, not to be a contract atall”.* ‘Akernatively, the agreement may be valid but a clause within the agreement may be unenforceable.” The distinction between the two categories is importantin that itdetermines whether the underlying contract ievedd, In contracts with an arbitration agreementa further distinction has to be made. The arbitration agreement is severable from the underlying contract and therefore an examination of whether the illegality or breach of public policy taints the arbitration clause must also be undertaken. SEVERABILITY OF THE ARBITRATION AGREEMENT Ibis the severability of the arbitration clause from the underlying contract that explains why illegal acts which render the underlying contract void do not always render the arbitration agreement void. In Harbour Assurance (UK) ‘Lid. Kansa General International Insurance’ Steyn J held that, because of. the severability of the main contract from the arbitration agreement, issues of illegality in the underlying contract could be arbitrated where the arbitration agreement contemplated such a reference, This principle has now becn given statutory effect.” "The fact that the arbitration agreement is severable from the underlying contract does not necessarily mean that all disputes containing an arbitration Gause can be arbitrated. The matter in dispute may not be capable of Settlement by arbitration, In England criminal acts cannot be settled by arbitration, Alternatively, an act which renders the underlying contract void may also have the effect of rendering the arbitration agreement void. ‘This point was referred to in Soleimany v. Soleimany? where Waller LJ stated: Rickardson v. Mellidh (1824) 2 Bing 229, 252 Macken Fldia (1961) 2 QB 590, 631 Pevcxaniple restraint of rade cases See O'Sullivan. Management Agency Music Lu {1985} QP 428. [2992] 1 Lioyd’s Rep 81 See s.7 Arbitration Act 1996. (1998) 8 WLR 81. |Pt. 1] Enforcing Arbitration Awards Contrary to Public Policy in England 161 “Bug, the fact thatin a contractalleged to be illegal the arbitration clause may not itself be infected by the illegality, does not mean that its always so, and does not mean that an arbitration agreement that is separate may not be void for illegality. There may be illegal or immoral dealings, which are from an English law perspective incapable of being arbitrated because an agreement to arbitrate them would itself be illegal or contrary to public policy under English law. The English court would not recognise an agreement betncen the highwaymen to arbitrate their differences any more than it would recognise the original agreement to split the proceeds.” In each case an examination must be undertaken as to whether the public policy clement or illegality goes to the root of the contract and renders not only the underlying contract void but also the arbitration agreement. In, O'Callaghan v. Coral Racing Ltd! the Court of Appeal held that a clause in a gaming agreement under which disagreements could be referred to the editor of The Sporting Lifewas part and parcel of a void agreement and could not survive independently. The Court of Appeal held that this was not an arbitration clause since the hallmark of arbitration was a procedure enforceable in law to determine the legal rights and obligations of the parties judicially. A further distinction may be made between initial illegality and supervening illegality. As a general proposition, acts which cause supervening illegality are unlikely to render the arbitration agreement void. Although such acts have a frustrating effect on the contract, the fact that the arbitration clause is treated as a sepatate contract ancillary to the underlying contract will mean that it is not necessarily invalidated.* CHALLENGES IN ENGLAND TO DOMESTIC ARBITRATION AWARDS Under the Arbitration Act 1996 a domestic arbitration award may be challenged on public policy grounds in a number of ways. The award may be challenged under section 67 of the Arbitration Act 1996 where the arbitral wibunal lacked substantive jurisdiction, The award may also be challenged under section 68(2)(g) of the Arbitration Act 1996 on the basis that the award or the way it was procured was contrary to public policy. Finally, under sections 66 and 81(1) (c) enforcement of an award may be refused on the ground that the award was contrary to public policy. Sections 67 and 68 of the Arbitration Act 1996 provide for active challenges to be made against the award whereas section 66 allows for a passive challenge. An active challenge seeks to overturn the substance of the award. A passive challenge does not attempt to overturn the award but seeks to stop its enforcement. 2 sme Fines 26 Novernber 1998, * Seino SACI, Novokets Alen Plt (No 2) (2998) 2 Lloyd's Rep 897; Westar: astmens icv JogoinportSDPR Holding Co Lid {1999} 2 Lloya’s Rep 65; (1099) BLR 279.162 The International Construction Law Review [2000 In Birkett y. Acorn Business Machine Lid’ the court held that it had an. overriding duty in the public interest not to order enforcement of a contract tainted with illegality. The court stated that even if there was not, on the face of the transaction, any manifest illegality, but there was before the court persuasive and comprehensive evidence of illegality, the court might refuse to enforce the transaction even if illegality had not been pleaded or alleged. A contract, which has as one of its objects an illegal act, was contrary to public policy and should not be enforced. THE COURT'S APPROACH TO DOMESTIC VERSUS FOREIGN AWARDS “The English courts will refuse to enforce an arbitration award which is contrary 10 English public policy. In the case of an English award, the common law rule that public policy may operate to prevent enforcement is set out in the Arbitration Act 1996, s.81, although there is little suthority to date on the circumstances in which an English award will not be enforced.” The point that there is little authority on the issue of enforcement of domestic awards is not surprising. Most domestic arbitration agreements will have as the proper law of the contract the law of England and Wales. A contract which is contrary to English public policy, where the proper law is English law, will not produce an enforceable award. What authority there is also makes clear that the English courts will not enforce an award made in England which is contrary to English public policy even if the act was not contrary to the public policy rules of the proper law of the contract. In Holman. Johnson'' the court stated that “no court will lend its aid to a man who founds his cause of action upon an immoral or illegal act”. In Soleimanyy. Soleimany Waller LJ stated that: “Is clear that itis contrary to public policy for an English award (ie. an award following an arbitration conducted in accordance with English law) to be enforeed ifitis based on ‘an English contract which was illegal when made. That follows from the decision of this couit in David Tayloré?Sons Lid v. Barnet Trading Company {1953} 1 WLR 562 ....” In the case of foreign awards the strict rule that the courts will not enforce an award which would be contrary to English public policy is not so rigidly observed.” The primary difference between enforcement of domestic and foreign awards is that some acts, which would be considered to be contrary to English domestic public policy, will be enforceable if they are the subject ofa foreign award. Further, the courts of England will generally not go behind the awards of foreign arbitrators where the issue relating to the breach of public policy rules has been dealt with by the arbitral tribunal. * The Tines, 25 August 1900. % Merkin, Arbiration Lau, Lloyt's Commercial Lawe Library, para 17.582 1 (2775) 1 Cowp 341,843, * Wescaere vesinens fn ugoinnport SDPR Holding Co Ltd {1999} BLR 279 a 289Pt 1) Enforcing Arbitration Awards Contrary to Public Policy in England 163 ENFORC! MENT OF FOREIGN AWARDS Where the enforcement of a foreign award is sought then such enforcement will usually be made under the statutory rules enacting the provisions relating to the New York Convention or the Geneva Convention.’ Both Conventions provide that the enforcement of an award may be refused where itis contrary to public policy. A party may also seek to enforce a foreign award under section 66 of the Arbitration Act 1996 although this is likely to be more difficult than if an application were made to enforce under the statutory provisions relating to one of the Conventions. The provisions of the NewYork Convention relating to the refusal to enforce an award on the grounds of public policy are to be found at section 103(3) of the Arbitration Act 1996 which substantially re-enacts, section 5(3) of the Arbitration Act 1975. Section 103(3) of the Arbitration Act 1996 states: “Recognition or enforcement of the award may also be refused if the awards in respect of ‘a matter which is not capable of settlement by arbitration, or if it would be contrary to public policy to recognise or enforce the award.” Itis the public policy rules of the enforcing country that must be examined in deciding whether the award should be enforced. It is therefore the case that fora foreign award to be enforced in England it may only be challenged passively. By reason of section 2 of the Arbitration Act 1996 the grounds for actively challenging an award are only available where the seat of the arbitration is in England, Wales or Northern Ireland. ‘The courts, when dealing with arbitration awards that have a foreign element, approach enforcement differently to that of a domestic award. A domestic award that is based on an illegal act will not be enforced as this would be contrary to public policy.'* Where there is a foreign arbitration award then the court will consider the nature of the illegality or breach of public policy and in some cases how that illegality or breach affects the proper law of the contract, the curial law or the law of the place of performance. The courts have addressed this issue on a case by case basis and have not always been consistent in their approach. The inconsistencies may be illustrated by three recent cases. Soleimany v. Soleimany The facts of Soleimany. Soleimany were that a father and son entered into an illegal scheme to export Persian rugs out of Iran. A dispute arose between the father and son in relation to the proceeds of sale, The dispute was referred to the Beth Din. Under the Din Torah: Information for litigants and legal advisers (Beth Din Leaflet No 4) the system of law to be applied to the dispute was stated to be Jewish law. In relation to illegal contracts the " Bare Il, Arbitration Act 1996; Pact Hl, Arbitration Act 1950, David Taylor & Sans Led. Barnet Trading Co (1953) 1 WLR164 The International Construction Law Review {2000 approach taken under Jewish lav differs from that under English law. Armold Cohen, in An Introduction to Jewish Civil Lau," states: “Jewish law) will ot allow an offender to use his collusion in an offence to ake unfair wanttge of his fellow, for that would only be adding to his original offence ... Jewish Aer cescerned) notonly with the just, Jewish law obliges the court co cireumsctibe the were ediigairsof the unjust, and therefore does nor inhibit he court from hearing case ‘whieh in itself arises out of an illegal activity.” Dayan Berger, the judge hearing the dispute for the Beth Din, awarded in favour of the son aiid held that the father should pay to the son £576,000 as a share of the proceeds. The award accepted that the contract was an illegal Contract, The son sought enforcement of the award and the father challenged the right to enforce. “The Court of Appeal held that an English court would not enforce an award on the ground of public policy which sought to enforce a contract Which was illegal under English Jaw as well as the law of the country of performance, even if the foreign arbitrator considered the illegality to be of jo relevance since under the law governing the arbitration. It would have no Cifect on the rights of the parties. The Court of Appeal made no distinctions between varying types of illegality for the purposes of enforcement and this was left for the Court of Appeal to review in the case of Westaore Investments Ine v. JugoimportSDPR Holding Co Ltd." Westacre Investments Inc v. JugoimportSDPR Holding Co Lid “The facts of Westacre Investments Incv. Jugoimpor-SDPR Holding Co Ltdinvolved an allegation that a consultancy agreement envisaged that the claimants Would bribe Kuwaiti officials in order to obtain contracts to purchase military equipment, An ICC arbitration award held that the consultancy agreement tas not invalid and found as a matter of fact that there had not been any bribery. The defendants appealed to the Swiss Federal Court, which upheld the award. ‘The claimants subsequently obtained leave under section 26 Arbitration Act 1950 to enforce that award and in April 1996 commenced proceedings by writ bringing an action on the award itself. The defendants Challenged the enforcement on the ground that it would be contrary to public policy for recovery to be permitted in the English courts. The utial of the preliminary issue was whether, if both the parties intended that in order to obtain the armaments contract the claimants should exercise personal influence over the officials of the government of Kuwait and contemplated for that purpose that such officials would be bribed, the enforcement of the award would be contrary to public policy. The defendants argued that at ‘common law public policy would bea good defence toan action on the award and that, in any event, the order for enforcement should be set aside by reason of section 5(3) of the Arbitration Act 1975. ° (1991) Feldheim Publishers, pp 185-187 % [1999] 2 Lloye’s Rep 6 [1999] BLR 279,Pt. 1] Enforcing Arbitration Awards Contrary to Public Policy in England 165 Colman J held that it was necessary to determine in each case whether the nature of the illegality was such as to invalidate the agreement to arbitrate as wellas the underlying contract. Ifthe underlying contract was illegal and void at common law, the question whether an arbitration agreement was also impeached by the illegality should be answered by reference to the policy of the court in relation to the particular nature of illegality involved. The public policy of sustaining international arbitration awards from reputable international bodies, on the facts of the case, outweighed the public policy in discouraging international commercial corruption. Accordingly, the defendants’ primary point did not bring them within the public policy exception to the enforcement of the award under section 5(3) of the Arbitration Act 1975. Furthermore, where the issue of illegality by reason of corruption had been referred to ICC arbitrators and duly determined by them and reviewed by the supervising Swiss court, it was not appropriate that the enforcement courtshould be invited to retry the same issue in the context ofa public policy submission. The defendants appealed. ‘The Court of Appeal by a majority dismissed the appeal because itwas clear from the award that bribery was a central issue before the arbitrators and had been rejected, The Swiss Federal court had upheld the award. In those circumstances and without fresh evidence there could be no justification for refusing to enforce the award. The Court of Appeal continued that although Seleimany v. Soleimany permitted the court to consider the question of the illegality of the underlying contract at the enforcement stage, the conclusion was the same: namely that the attempt to re-open the facts decided by the arbitrators should be rejected. Omnium de Traitement et de Valorisation SAv. Hilmarton Ltd’ In Omnium de Traitement et de Valorisation (OTV) SA v. Hilmarton Ltd, OTV appointed Hilmarton as its consultants in relation to a drainage project for the town of Algiers under an agreement providing for OTV to pay Hilmarton’s fees when OTV obtained a public works contract. The agreement contained an arbitration clause under which the parties chose Swiss law as the proper law of the contract and an ICC arbitration, OTV ‘obtained the contract but refused to pay Hilmarton the balance of its fee and ICC arbitration proceedings were commenced. The arbitral tribunal held that, even if Hilmarton had breached an Algerian statute which prohibits the intervention of a middleman in ‘connection with any public contract, the activity of Hilmarton did notinvolve any bribery or any similar corrupt activity. As a matter of Swiss law the agreement, even though it breached Algerian law, was not unlawful under Swiss lav. This was upheld by the Swiss courts. Hilmarton obtained leave to * (2999) 2 All ER (Comm) 140,