Jane Lemon QC Memorial Competition – The Discretionary Enforcement of New York Convention Awards
Released: 2020
Practice Areas: International Arbitration Litigation
Written by: Thomas Saunders
The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted by the U.N. Conference on International Arbitration on 10 June 1958 is not only the cornerstone of international dispute resolution; it is an essential ingredient more generally of world trade.
—DAC Report on the Arbitration Bill.[1]
The New York Convention contains just 16 articles, but it is the lynchpin of the international arbitral system. It operates on a principle of no-questions-asked enforcement (and recognition; the distinction is not presently important), subject to certain limited and exhaustive grounds for refusing.[2]
The question addressed in this article is: when one of those grounds is made out, what power or discretion does the English court have to grant enforcement regardless? I suggest that the Convention does not in itself grant any discretion to enforce, and that the assumption that it does has led the English authorities to take a wrong turning.
THE ISSUE.
Article V of the Convention provides:
1/ Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:
[There follows a list of grounds (a) to (e), including lack of capacity, invalidity of the arbitration agreement, an inability to present one’s case, a decision outside the scope of the arbitration agreement, a procedure not in accordance with the agreement of the parties, or the award having been set aside or suspended by the courts of the seat.]
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; or
(b) The recognition or enforcement of the award would be contrary to the public policy of that country.
This is given effect in English law by section 103 of the Arbitration Act 1996, which provides:
(1) Recognition or enforcement of a New York Convention award shall not be refused except in the following cases.
(2) Recognition or enforcement of the award may be refused if the person against whom it is invoked proves—
[Subsections (a) to (f) reproduce, in broadly similar wording, the effect of grounds (a) to (e) under article V(1).]
(3) Recognition or enforcement of the award may also be refused if the award is 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.
(4) An award which contains decisions on matters not submitted to arbitration may be recognised or enforced to the extent that it contains decisions on matters submitted to arbitration which can be separated from those on matters not so submitted.
(5) Where an application for the setting aside or suspension of the award has been made to such a competent authority as is mentioned in subsection (2)(f), the court before which the award is sought to be relied upon may, if it considers it proper, adjourn the decision on the recognition or enforcement of the award.
It may also on the application of the party claiming recognition or enforcement of the award order the other party to give suitable security.
Both the Convention and the Act provide that, where a ground for refusal is made out, recognition “may be refused.” The word “may”, it is said, suggests a discretion to ignore the ground for refusal and enforce anyway.
It is the Act, and not the Convention, which has the force of law in England & Wales. The relevant provisions of the Act, however, were passed to give effect to the Convention, mirror its language closely, and should where possible be interpreted to the same effect.
THE ENGLISH CASES.
The leading English cases are the decisions of the Court of Appeal in Dardana v Yukos Oil[3] and of the Supreme Court in Dallah v Pakistan.[4] The only substantive judgment in Dardana was given by Mance LJ; the main judgments in Dallah were given by Lord Mance (as he had by then become) and Lord Collins of Mapesbury JJSC.
In Dardana, Mance LJ said that section 103(2) of the Act[5]
cannot introduce an open discretion. The use of the word “may” must have been intended to cater for the possibility that, despite the original existence of one or more of the listed circumstances, the right to rely on them had been lost, for example by another agreement or estoppel.
He elaborated:[6]
The word “may” at the state of s. 103(2) does not have the “permissive”, purely discretionary, or I would say arbitrary, force that the submission suggested. Section 103(2) is designed, as I have said in par. 8, to enable the Court to consider other circumstances, which might on some recognizable legal principle affect the prima facie right to have an award set aside.
In Dallah, Lord Mance approved his earlier judgment in Dardana. He noted that article V(1) and section 103(2) “in fact cover a wide spectrum of possible objections,” some of which may be more susceptible to discretionary enforcement than others, and referred to the “obviously fundamental” requirement of a valid arbitration agreement, concluding:[7]
Absent some fresh circumstance such as another agreement or an estoppel, it would be a remarkable state of affairs if the word “may” enabled a court to enforce or recognise an award which it found to have been made without jurisdiction, under whatever law it held ought to be recognised and applied to determine that issue.
Lord Collins began:[8]
The court before which recognition or enforcement is sought has a discretion to recognise or enforce even if the party resisting recognition or enforcement has proved that there was no valid arbitration agreement.
He continued:[9]
Since section 103(2)(b) gives effect to an international convention, the discretion should be applied in a way which gives effect to the principles behind the Convention.
He gave three examples of cases in which it may be appropriate to enforce a decision notwithstanding the existence of a factor allowing enforcement to be refused:[10]
- Where the resisting party is estopped from raising the ground of challenge.
- Where there has been no prejudice to the resisting party.[11]
- Where the English court would refuse to apply some rule of foreign law, which would otherwise make the agreement invalid, on the basis that it was outrageous to justice or decency.[12]
AN ALTERNATIVE SOLUTION.
Have the English cases approached article V and section 103 correctly? It is submitted that they have not. The approach has been that these provisions are intended to introduce a discretion, but that it is a narrow rather than a “pure” or “open” discretion. On closer scrutiny, that approach lacks both logical and legal coherence.
This section therefore outlines an alternative approach to the Convention and the Act, while the next criticises the present caselaw.
The Convention.
The better view is that the Convention says nothing at all about the enforcement of awards which fall within the exceptions. The French text of the Convention “does not contain the language of discretion: ‘ne seront refusées’ (‘shall not be refused … unless’).”[13] The real purpose of article V is to provide that in certain situations, enforcement must not be refused. It defines those situations negatively, by exclusion, but it says nothing, either expressly or impliedly, about the approach to those exclusions. They are referred back to national law.
A simple example should illustrate this. Suppose a country enacted that enforcement must be refused if there was no valid arbitration agreement. Would that country be in breach of its Convention obligations? Surely not. The Convention does not say to states: “you must make it possible to enforce awards which were made without jurisdiction.”
The Act.
The wording of the Act differs very slightly from the Convention, and it might be said that, even if the Convention does not require it, here Parliament has granted a discretion, because it has said the courts “may”, not “must”, refuse. That is, Parliament has granted the courts a power to enforce an arbitration award notwithstanding the proven absence of an arbitration agreement.[14]
Doubtless Parliament could enact such a provision. The question is whether it has done so. There are three strong reasons for thinking that it has not.
The first is simply that the Convention does not require it to. Section 103 is designed, first and foremost, to give effect to the Convention.
The second is that it is extremely unlikely that Parliament intended to abolish by a side-wind such a fundamental principle as the absolute requirement for a valid arbitration agreement. The starting point is that an award is binding because it represents the agreement of the parties, and statutory provisions for enforcement are simply procedurally advantageous ways of what could otherwise be done by an action on the award.[15] If it had been intended to give the courts a power to ignore this conceptual requirement, clearer language would have been necessary.
The third is that the factual scenarios covered by article V and section 103 vary widely. Not all of them raise the same conceptual difficulties as the lack of an agreement.[16] This suggests that there can be no general rule as to the proper approach – everything must depend on the particular ground cited. If the word “may” introduces a discretion, however, it introduces it to all the grounds indiscriminately. That would be a blunt instrument.
Instead, it is submitted that, by passing section 103 in the form that it did, Parliament did much the same thing as the state parties to the Convention: it said nothing one way or the other about the proper treatment of the exclusions. It left that to be determined by the application of legal principle and the general law of arbitration.
THE AUTHORITIES CRITICISED.
Compared to the alternative solution just outlined, the present caselaw has several flaws. It proceeds from a wrong assumption; it leads to further errors of legal principle and of categorisation; and it makes matters needlessly complicated while obfuscating the real issues.
The authorities assume that “may” introduces a discretion. Everything which follows is an attempt to overcome the conceptual problems to which that gives rise. The attempt to square the circle, however, leads to yet further error. Lord Mance says that the word “may” is “designed to enable the court to consider other circumstances, which might on some recognisable legal principle affect the prima facie right to have enforcement or recognition refused.”[17] He is driven to this conclusion because it is the only explanation he can find, but on closer analysis it depends on sleight of hand and errors of law.
Further agreement or estoppel.
The paradigm example of a situation within the scope of the discretion, given in every case from Dardana to Dallah, is a further agreement or an estoppel. This assumes that it is the discretion which “enables” the court to consider the further agreement or estoppel – and, as a corollary, that if the court had no discretion, it would be obliged to ignore that agreement or estoppel and to refuse enforcement.
It is submitted that this cannot be correct. The effect of a further agreement or estoppel is that the right to rely on the “truth” is lost.[18] Once established, its application is not a matter of discretion but of law. If a party agrees not to challenge the validity of the arbitration agreement, or is estopped from doing so, section 103(2)(b) simply does not apply: the court must act on the basis that the agreement was valid. Three key considerations support this view:
- Suppose an award were made without jurisdiction, but the resisting party became estopped from raising that point. If the English court has a discretion to enforce, then it follows that the English court can refuse to exercise that discretion and refuse to enforce the award, relying on the absence of a valid arbitration agreement. That conclusion is absurd: if the resisting party is estopped from asserting the lack of jurisdiction, then the enforcing party is entitled to his Convention right to enforcement.
- If the Act said that enforcement “must” be refused in given circumstances, but a party were estopped (or contractually prevented) from asserting those circumstances, the court would not look behind that estoppel or agreement in search of the “truth”. The word “may” is therefore not necessary.
- Article V(1) and section 103(2) are not concerned with what actually happened, but with what the resisting party can prove.[19] An estoppel, paradigmatically, prevents proof, as does an agreement not to take a point: if the estoppel or agreement is made out, then, however much evidence might be produced, the court can simply take no notice of it.
Where there is a further agreement or an estoppel, therefore, approaching the question as if the court requires a discretion to give it effect is neither necessary nor desirable. The issue arises at an earlier stage, when the court is considering whether any of the grounds under section 103 is made out at all.
Lack of prejudice.
Lord Collins in Dallah suggests two further principles: a lack of any prejudice to the resisting party[20] and a case where “the English court would refuse to apply a foreign law which makes the arbitration agreement invalid where the foreign law outrages its sense of justice or decency.”[21]
As to lack of prejudice, he added that it was “not easy” to see how it could be applied to a party who was not in fact a party to the arbitration agreement. This reflects an instinctive conceptual aversion to enforcing in such a situation. With respect, however, it is easy to visualise a “no prejudice” situation. Two parties may intend to enter into an arbitration agreement but fail to do so for some minor formal reason. In such a situation, is there really any prejudice in holding them to that agreement? The real objection is conceptual. That conceptual objection is, however, so fundamental that it could never be overlooked on such grounds. It is best to be straightforward about this, rather than inviting sophisticated arguments on prejudice.
Outrageous foreign law.
As to the arbitration agreement which is invalid because of an outrageous foreign law, the argument here is as follows:[22]
- There may be a provision of foreign law which would invalidate the arbitration agreement but which is entirely repugnant – “so grave an infringement of human rights that the courts of this country ought to refuse to recognise it as a law at all.”[23]
- In such a case, the arbitration agreement is “not valid under the law to which the parties subjected it.”[24]
- The court, by “the combination of (a) the use of public policy to refuse to recognise the application of the foreign law and (b) the discretion to recognise or enforce an award even if the arbitration agreement is invalid under the applicable law,” may nevertheless enforce the award.[25]
The flaw in this argument comes at step (2). The provision of foreign law in question is so repugnant that the court will “refuse to recognise it as a law at all.”[26] That means that the court will “refuse to allow the contractual rights of the parties to be affected by such legislation.”[27] As far as the English court is concerned, therefore, the arbitration agreement is valid. This means that section 103(2)(b) of the Act is just not applicable. There is no need for (further) discretion, and step (3) overcomplicates matters.
If, on the other hand, the foreign law is not outrageous enough to justify disapplying it, then the court must, as a matter of principle, treat the arbitration agreement as invalid and thus incapable of giving rise to an enforceable award. There is no second bite at the cherry.
CONCLUSIONS.
A careful appraisal of the language and purposes of the Convention and the Act indicates that they were not intended to create or grant any discretion, but simply to exclude certain situations from the scope of mandatory enforcement. Furthermore, it is not necessary to have recourse to a general discretion in order to do justice in situations of estoppel or outrageous foreign laws, or any other recognised legal principle. Doing so has led the courts into legal error. The alternative solution is therefore to be preferred, as a matter of law and principle, to the approach taken in the authorities.
The effect of this conclusion is that, in deciding whether or not to enforce an award, the first stage for the court is to determine whether or not the ground relied upon is made out at all. If there is an estoppel, a further agreement, or something sufficiently repugnant about the law which the court is being asked to apply, then the ground will not be made out and enforcement cannot be refused.
If the ground is made out, the court will have to address the question of whether to refuse enforcement on the basis of the ground in question, the facts, and the fundamental nature and principles of arbitration. If there is not a valid arbitration agreement, then it is conceptually impossible to recognise any award. If a party lacked capacity, on the other hand, enforcement may depend on which party it was – a resisting party may not be able to rely on an enforcing party’s lack of capacity.
Space does not permit a full exploration of these issues. Every ground is different. The first step towards a better understanding, however, and to a properly developed jurisprudence on the subject, is to move away from the notion that the Act grants any sort of discretion to enforce. It blurs important differences, leads to yet further error, and is holding back the proper development of the law. The sooner it is jettisoned, the better.
This essay was first submitted as an entry in the inaugural Jane Lemon QC Essay Competition in 2020.
[1] Report of the Departmental Advisory Committee on Arbitration Law on the Arbitration Bill (February 1996), para. 347.
[2] Rosseel NV v Oriental Commercial Shipping Co (UK) Ltd [1991] 2 Lloyd’s Rep 625.
[3] Dardana Ltd v Yukos Oil Co [2002] EWCA Civ 543, [2002] 2 Lloyd’s Rep 326.
[4] Dallah Real Estate and Tourism Holding Co v Ministry of Religious Affairs of the Government of Pakistan [2010] UKSC 46, [2011] 1 AC 763.
[5] [2002] EWCA Civ 543, [2002] 2 Lloyd’s Rep 326, 330, para. 8.
[6] [2002] EWCA Civ 543, [2002] 2 Lloyd’s Rep 326, 333, para. 18.
[7] [2010] UKSC 46, [2011] 1 AC 763, 827, para. 68.
[8] [2010] UKSC 46, [2011] 1 AC 763, 843, para. 126.
[9] [2010] UKSC 46, [2011] 1 AC 763, 843, para. 127.
[10] [2010] UKSC 46, [2011] 1 AC 763, 843–844, paras. 127 & 128.
[11] China Agribusiness Development Corpn v Balli Trading [1998] 2 Lloyd’s Rep 76.
[12] In the Estate of Fuld, decd (No 3) [1968] P 675, 698; The Playa Larga [1983] 2 Lloyd’s Rep 171, 190 (CA).
[13] Dallah [2009] EWCA Civ 755, [2011] 1 AC 763, 788, para. 69, per Rix LJ.
[14] Dallah [2010] UKSC 46, [2011] 1 AC 763, 843, para. 126, per Lord Collins.
[15] Purslow v Baily (1704) 2 Ld Raym 1039, 92 ER 190; Coastal States Trading (UK) Ltd v Mebro Mineraloel-Handelsgesellschaft [1986] 1 Lloyd’s Rep 465, 467.
[16] Dallah [2010] UKSC 46, [2011] 1 AC 763, 827, para. 68.
[17] Dallah [2010] UKSC 46, [2011] 1 AC 763, 826, para. 67.
[18] Dardana [2002] EWCA Civ 543, [2002] 2 Lloyd’s Rep 326, 330, para. 8.
[19] Section 103(2).
[20] [2010] UKSC 46, [2011] 1 AC 763, 843, para. 127, citing China Agribusiness Development Corpn v Balli Trading [1998] 2 Lloyd’s Rep 76.
[21] [2010] UKSC 46, [2011] 1 AC 763, 844, para. 128, citing In the Estate of Fuld, decd (No 3) [1968] P 675, 698.
[22] [2010] UKSC 46, [2011] 1 AC 763, 844, para. 128.
[23] Oppenheimer v Cattermole (Inspector of Taxes) [1976] AC 249, 278, per Lord Cross of Chelsea.
[24] Section 103(2)(b).
[25] [2010] UKSC 46, [2011] 1 AC 763, 844, para. 128.
[26] Oppenheimer v Cattermole (Inspector of Taxes) [1976] AC 249, 278, per Lord Cross of Chelsea.
[27] The Playa Larga [1983] 2 Lloyd’s Rep 171, 190 (CA).
