Professional Documents
Culture Documents
Commercial Arbitration
Stephen W. Makau
Abstract
1. Introduction
The concept of party autonomy is a very key and important aspect in International Commercial
Arbitration without which the arbitration process may not be effective. However, this concept is
subject to several limitations and those limitations are the arbitrability and public policy concepts
which to a greater extend puts limitations to the doctrine of party autonomy. The 1958 United
Public policy may either touch on national or international matters. Public policy is of national
character of where the standards and the national laws of a specific country do apply. On the other
flipside of the coin, public policy can be said to be international if the parties involved in the
transaction originate from different States. In other words, an international element gets involved.
In international public policy, the courts here normally will strive to balance the interest of its own
domestic public policy and that of international. Public Policy is normally an important ground
that is used by parties in international arbitration to challenge and set aside an arbitral award. The
nature of public policy been a debate for a while now. . Since the 21st Century, parties have been
warned against relying on public policy: In Richardson v Mellish4 the court stated that, ‘public
Ph.D Cand (Bayreuth), LL.M (Dar), LL.B (Moi), Dip.Law (KSL). Adjunct Lecturer in Law, Mount Kenya
University, School of Law. Contacts: tomsteve734@gmail.com
1
See, The 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards
2
Pierre Lalive, “Transnational (or Truly International) Public policy and International Arbitration,: Comparative
Arbitration Practice and Public Policy Arbitration” ICCA International Arbitration Congress, 261(1987)
3
Mistelis L. & Brekoulakis S., Arbitrability, “International & Comparative Perspectives” 4 (2009)
4
Richardson v Mellish (1824) 2 Bingham 229 at 252
The recognition or enforcement of the award would be contrary to the public policy of that
country.7
It should be noted here that the provision does not go a step further to enumerate what public policy
is all about in the context of International Commercial arbitration. This provision of the New York
Convention does not state the criteria to be adopted or followed by a court of law in determining
public policy issues and hence national courts interpret it according to their own understanding.
This may create chaos since each country’s national court adopts its own understanding of what
amounts to public policy. Loukas Mistelis in his scholarly writings clearly states that, “Public
policy, whatever it means, as provided for in Article V (2)(b) must be interpreted narrowly so as
not to provide room for wealth of interpretations that do not serve any purpose.7
5
Ibid
6
The New York Convention, Article V
7
Ibid, Article V (2)
To begin with, neither of the international commercial arbitration conventions define what public
policy is or what amounts to the same. So, the public policy of one country is not necessarily the
same as that of another country. In determining what amounts to public policy and its effect on
arbitration proceedings both the domestic public policy as well as international public policies are
taken into consideration. It should be noted here that different countries have adopted their own
criteria of determining what amounts to public policy since both the UNCITRAL Model Law and
the New York Convention have not specifically defined what amounts to public policy. In Echo
Swiss China Ltd v. Benetton International NV9 for example, the Paris Court of Appeals, added that
it was for French procedural law to determine the extent of the control of the award and whether
the award was against public policy or not is left for the court to determine. The court here held
that, French court will consider "public policy matter" if a matter offends to the 'fundamental
notion' of French legal systems.
In some instances, public policy is normally determined by looking at the morals in a particular
setting and whether going against such morals justice would be served. In his work, Professor
Schlosser notes that, “The recourse to public policy is only justified where the nonconformity with
8
Mistelis and Brekoulakis, p. 2, paras. 1 to 3
9
Swiss China Ltd v. Benetton International NV 1999
However, in other jurisprudences, courts have broadly defined and determined public policy to
include matters which relate to public good and public interest. Furthermore, in Associate Builders
v Delhi Development Authority,12 the Supreme Court clarified the scope of morality and justice
employed in the determination of what amounts to public policy. “Accordingly, an award could
be set aside on the ground of justice when the "award" would be such that it would shock the
conscience of the Court.” In Oil & Natural Gas Corp v Saw Pipes case,13 the case arose from a
domestic dispute related to the payment of liquidated damages in a supply contract. The matter
was referred to arbitration and an award was rendered by the tribunal holding that Oil & Natural
Gas Corp was not entitled to any liquidated damages since it had failed to establish any loss as a
result of the late supply by Saw Pipes. Oil & Natural Gas Corp applied to set aside the arbitral
award before the Indian court on grounds of public policy. The court set aside the award on public
policy grounds by stating that public policy should not be narrowly construed and hence should be
given a wider meaning to include matters affecting the public good and public interest of the
society.
In most cases, determining public policy, courts will normally consider the international public
policy as divorced from the national public policy because different countries tend to have different
national public policies. In the case of Tampico Beverages Inc. v. Productos Naturales14 the
10
Peter F. Schlosser, ‘Arbitration and European Public Policy’ in L'Arbitrage et le Droit Européen (1997) 81 at 86
11
Renusagar v General Electric (1994) AIR SC 860
12
Associate Builders v Delhi Development Authority 2014 (4) ARBLR 307
13
Oil & Natural Gas Corp v Saw Pipes (2003) 5 SCC 705
14
Tampico Beverages Inc. v. Productos Naturales de la Sabans S.Z. Alqueria, SC 2014
Furthermore, jurisprudence has proved to be useful when determining what amounts to public
policy. In Renusagar Power Co. Ltd. v General Electric Co,16 held that an award against public
policy would be an award that was passed in contravention of fundamental policy as well as justice
or morality. Furthermore, in the case of ONGC Ltd v Saw Pipes Ltd, an Indian case, the court in
this particular case widened the scope of what constitutes public policy. The court stated: -
"Therefore, in our view, the phrase 'Public Policy of India' used in Section 34 in context is required
to be given a wider meaning. It can be stated that the concept of public policy connotes some
matter which concerns public good and the public interest. What is for public good or in public
interest or what would be injurious or harmful to the public good or public interest has varied
from time to time. However, the award which is, on the face of it, patently in violation of statutory
provisions cannot be said to be in public interest. Such award/judgment/decision is likely to
adversely affect the administration of justice."
However, following this case, the courts have in recent times narrowed down definition of public
policy in international commercial arbitration. Specifically, the courts in LLC and Ors v Tech
Mahindra Ltd. and Ors17 as well as in the case of Sutlej Construction v The Union Territory of
Chandigarh.18 The courts avoided adopting the wider determination of what public policy is. The
15
Ibid
16
Renusagar Power Co. Ltd. v General Electric Co (1994) AIR 860 (SC)
17
LLC and Ors v Tech Mahindra Ltd. and Ors (2017) 13 SCALE 91 (SC)
18
Sutlej Construction v. The Union Territory of Chandigarh (2017) 14 SCALE 240 (SC)
Arbitrability refers to the question of whether a particular dispute may or may not be settled
through arbitration. It separates the types of dispute that may be resolved by arbitration and the
one which belongs exclusively to the court domain.19 Professor Loukas A Mistelis defines the term
Arbitrability as involving the simple question of what types of issues can and cannot be submitted
to arbitration and whether specific classes of disputes are exempt from arbitration proceedings’20
Therefore, the concept of arbitrability seeks to address matters that can or cannot be resolved
through arbitration and are a reserve of the court.21
The notion of arbitrablity may either be objective or subjective. Objective arbitrability deals with
the subject matter of the dispute between the parties while on the other flipside of the coin,
subjective arbitrability deals with the capacity of the person party to the arbitration proceedings.
In international Arbitration law, the concept of arbitrability should be construed objectively i.e to
determine whether specific classes of disputes are capable of been resolved through arbitration or
in a court of law.
19
Pierre Mayer & Audley Sheppard, “Final Report on Public Policy as a Bar to Enforcement of International Arbitral
Awards”, 19 Arb. Int'1249, 255 (2003)
20
Loukas A Mistelis and Stavros L Brekoulakis, “Arbitrability: International and Comparative Perspectives”,
International Arbitration Law Library, Volume 19 [Mistelis and Brekoulakis], pp. 3 and 4, paras. 1 to 6.
21
Alan Redfern, Martin Hunter, “Law and Practice of International Commercial Arbitration”5 (2004)
2. Recognition and enforcement of an arbitral award may also be refused if the competent
authority in the country where recognition and enforcement is sought finds that:
(a) The subject matter of the difference is not capable of settlement by arbitration under the law
of that country
From the above, it is crystal clear that Articles II and V of the New York Convention provide for
the law of arbitrability as a ground for a court to refuse recognizing and enforcing an award, but
are silent as to which law should govern the question of arbitrability.
The Model Law on the other hand provides for arbitrability but does not go ahead to mention
specifically which matters are arbitrable or not. Article 1, paragraph 5, stipulates that the Model
Law shall not affect any other law of the state by virtue of which certain disputes may not be
submitted to arbitration or may be submitted to arbitration only according to other provisions.22
Article 34, paragraph 2(b), stipulates that the arbitral award may be set aside only if, among others,
the court finds that the subject matter of the dispute is not capable of settlement by arbitration
under the law of the State.23 Although the UNICITRAL Model Law provides arbitrability in the
above provisions, it does not go any further to list down or provide for matters that are or are not
arbitrable.
A dispute will be said not to be arbitrable if for example it relates to disputes such as intellectual
property or even securities regulations which in turn invites the courts to determine the dispute.
However, for dispute to be subjected to arbitration and be said to be arbitrable, this depends on
22
Article 1 paragraph 5 of the UNICITRAL Model Law
23
Ibid Article 34(2)(b)
Criminal cases such as corruption are likely to occur in trade related activities. In most cases,
criminal cases in Trade are majorly concerned with corruption which involves for example looting
of public funds. So, in most countries, corruption disputes are solved and settled amicably by a
court of law and are therefore not arbitrable or subject to be settled through arbitration since most
of these corruption disputes are of public nature.24 In BJ Exports & Chemical Processing Co. v.
Kaduna Refining and Petrochemical CO the Nigerian court decided that fraud is not arbitrable in
Nigeria because the case was considered a criminal matter and the enforcement of the award would
be contrary to public policy.25
In Lagergren's 1963 Award in ICC Case,26 the plaintiff was an Argentinian businessman while the
defendant was a British company operating on the Argentinian market. The defendant was
interested in supplying electrical equipment to the Buenos Aires region. It asked the plaintiff, who
was an influential person in the politics and business, to support its offer. The parties entered into
an agreement, under which the plaintiff was to obtain a certain percentage from contracts
concluded by the defendant with Argentinian authorities as a commission. In the end, the defendant
only concluded one contract, and refused to pay the commission to the plaintiff. Subsequently, the
parties entered into an arbitration agreement and referred the dispute to a sole arbitrator in
accordance with then valid ICC Rules. The venue of arbitration was France. The arbitrator, on his
own motion, decided to review his jurisdiction and looked into the issue of arbitrability from the
viewpoint of the French as well as Argentinean law. He concluded that he had no jurisdiction in
the matter, because the case involved gross violation of good morals and international public policy
and could not be tolerated by any court or arbitral tribunal in a civilized country. Therefore it can
24
Valdhans, Málek, Pavel, “Consequences of Corrupt Practices in Business Transactions in Terms of Czech Law”,
BONELL, Michael J., MEYER, Olaf (eds), “The Impact of Corruption on International Commercial Contracts” Basel:
Springer International Publishing, 2015, p. 99.
25
BJ Exports & Chemical Processing Co. v. Kaduna Refining and Petrochemical CO (1948) 2 AIl ER 576 (1948).
26
Lagergren's 1963 Award in ICC Case
The disputes here may involve the violation of intellectual property rights or even the validity or
even ownership of these rights. Disputes concerning the registered intellectual property rights are
normally granted by the States and hence not subject to arbitration. In other words disputes that
arise on matters to do with the recognition of registered intellectual property rights by the parties
are not arbitrable and can only be resolved by a court of law. 27 Also, an arbitral tribunal will lack
jurisdiction to arbitrate rights affecting third parties. However, whether registered intellectual
property rights are subject to arbitration will most likely depend on the national laws of different
States.
Insolvency proceedings are initiated with the aim of settling the dispute between the debtor and
the creditor. In most cases, these disputes are settled in a court of law to determine the rights of
the parties to the dispute. These disputes normally involve aspects of public interest because, a
court of law will not only determine and protect the interest of the creditors or the debtors, but will
also be doing so to protect the general public hence such dispute cannot be subject to arbitration
as they are not arbitrable and are a reserve of the court. However, a distinction should be made
between “core” or “pure” insolvency issues which are non-arbitrable.
Disputes based on antitrust and competition laws are not normally arbitrable and in most cases
referred to the court to be resolved. Adam Smith in his writings in the 18th Century noted that;-
‘people of the same trade seldom meet together, even for merriment and diversion, but the
conversation ends in a conspiracy against the public, or in some contrivance to raise prices’28
27
D. Klára, “Arbitrability and Public Interest in International Commercial Arbitration,” International and Comparative
Law Review, 2017, vol. 17, no. 2, pp. 55–71.
28
Adam Smith, “Wealth of Nations” (1776)
Natural resources belong to the government and States enjoy sovereign power over these
resources. Therefore, many disputes concerning the exploitation of natural resources are normally
resolved through the courts and not through arbitration. However, the financial consequences of
the contracts concluded in as far as natural resources are concerned are normally arbitrable but
disputes concerning the sovereignty or the boundaries of the States involved are normally left to
the court to decide.
3 Key differences between Arbitrability on one hand and Public Policy on the other
To begin with, disputes which are not arbitrable usually involve public policy matters but this does
not necessarily mean that every dispute that involves public policy issues would not arbitrable.
The difference may include the fact that, issues to do with arbitrability of a dispute is usually
invoked at the beginning of the arbitration process while issues to do with public policy normally
29
American Safety Case 2 nd CIR 1968
30
Mitsubishi Motors v Soler Chrysler Plymouth Inc., 473 U.S. 614 (1985)
Another difference between public policy and arbitrability is that public policy issues are normally
dependent on the national laws of different States. The courts will domestic courts will normally
determine what amounts to public policy issues. On the other hand, arbitrability majorly depends
on the subject matter of the arbitration and whether its capable of being resolved through
arbitration. Also, the legal rules governing arbitrability are not normally part of public policy, each
is governed by its own legal provisions altogether and thus cannot be taken to form be part of
public policy. Furthermore, when conducting a review of arbitrability to determine whether the
subject matter of arbitration is arbitrable, this should not also involve a review of public policy.
The two should be reviewed differently as they do not form part of each other.
Also, another difference is that both arbitrability and public policy are governed under different
provisions of the law. The New York Convention regulates these two issues under different
provisions. Article V (2) of the New York Convention distinguishes between the issue of
arbitrability and public policy. Subsection (a) of the relevant article sets forth that recognition and
enforcement of an arbitral award may be refused if the subject matter of the difference is not
capable of settlement by arbitration under the law of that country.
On the other hand, the subsection (b) sets forth that the enforcement may be refused if it would be
contrary to the public policy of that country. Another difference is that, while issues to do with
arbitrability can easily be resolved by the parties in arbitration, this is not normally the case with
regard to matters of public policy which normally would require the assistance of a court of law to
determine the matter finally. Also, in as far as arbitrability is concerned, both procedural and
substantive law are used to determine the arbitrability of a dispute while in public policy this is not
required. Furthermore, public policy exists as a matter of practice in its entirety while on the other
hand arbitrability exists as a matter of law.
31
Karl-Heinz Bockstiegel, “Public Policy and Arbitrability’, “Comparative Arbitration Practice and Public Policy in
Arbitration”, ICCA Congress Series, Volume 3 (Bockstiegel), p. 178.
Bibliography
Books
Blackaby, Nigel et.al. Redfern and Hunter on “International Arbitration”, Oxford University
Press, London, 2009 2.