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By Md. Mamonor Rashid

Abstract

Arbitration as an independent, vastly professional, distinct, and cost effective mechanism of dispute resolution has been adopted as the preferred dispute settlement form of international business over the past decades, inter alia, to the worldwide enforceability of the arbitral awards guaranteed by the New York Convention. Conversely, such widespread enforceability is not infinite: Recognition and enforcement may be snubbed for some constricted grounds. The ground most often invoked is the violation of public policy. Meanwhile, public policy fluctuates from state to state; there is no constant international rehearsal on its solicitation. This expressively impedes the usefulness of arbitration. Such lack of standardization can be moderated by vibrant collective models of the application of public policy.

Public Policy

Party autonomy in international arbitration is the most compelling reason for the contracting parties to enter into the arbitration agreement, rather than opting for litigation.[1] However, arbitration functionalities may be hindered by several factors, one of which is ‘arbitrability and public policy.[2]The Arbitration Act 2001 provides that the tribunal are competent to rule on its own jurisdiction on any questions, unless otherwise contrary to the public policy.[3]The 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards provides arbitrability and public policy as the grounds for refusing the recognition and enforcement of foreign arbitral award for signatory states.Article V2 (b) of the New York Convention states that the 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: the recognition or enforcement of the award would be contrary to the public policy of that country.

Generally, public policy is used to describe the imperative or mandatory rules that parties cannot exploit. Public policy is outside and beyond the scope of arbitration and stays within an exclusive judicial jurisdiction, and it also can be the obstacle to the arbitration of certain disputes. The concept of public policy often is used to describe the imperative rules of each country.[4]

Public policy serves as the rationale on which a domestic court may refuse the enforcement of an arbitral award, which is contrary to the laws or standards of the court’s jurisdiction. If the court feels that enforcement of an award would violate the basic notions of morality and justice, the court may vacate such award.[5] Domestic public policy is expressed by legislative enactments, constitutional constraints, or judicial practice within individual states. These rules and laws are the defense of such a state that dominates the power of the parties to arbitrate the dispute. The concept of public policy is influenced by the old concept that “it is against sovereign dignity to submit to any type of dispute resolution system not controlled by the state itself.[6]

Public policy has three distinct levels: domestic, international, and transnational. A domestic public policy is when only one country is involved in arbitration, the parties come from the same country, and thus the laws and standards of that country’s domestic public policy apply. An international public policy is when an international element gets involved, either from the underlying transaction’s nature or from the nationality of the parties.[7] The concept is comprised of the rules of a country’s domestic public policy applied in an international context.

In other words, we can say that international public policy normally is more liberal than domestic public policy. The international public policy is an application of a country’s domestic public policy in an international context, but the court tends to consider several factors other than public interest internationally. It is not necessary that a country’s international public policy has to be the same as its domestic public policy.

The court will balance the interests of its own domestic public policy with the needs of international commerce.  Each state has its own limitation level and occasionally might feel that the need to control and limit the arbitral process may conflict with the importance of international commerce. The public policy of country can change from time to time due to the need of the and situation of each country. The transnational public policy will occur when the countries step forward and make an effort to make unification or share legal doctrines. This notion “essentially refers to a system of rules and principles, including standard, norms and custom that are accepted and commonly followed by the world community. Violations of these rules and principles, then, are violations of transnational public policy.[8]

The transnational public policy is not a part of a State which can be used by an international arbitrator to avoid enforcement of an arbitration agreement.[9] A difference between international public policy and transnational public policy is that international public policy relies on the laws and standards of specific countries, while the latter represents the international consensus on the accepted norm of conduct.

Public policy, by nature, “is a dynamic concept that develops continually to meet the changing needs of society, including political, social, cultural, moral, and economic dimensions.”[10] When the society or the situation of state changes, public policy adapts.

Local and International Public Policy

Public policy is one of the important mechanisms which balance the need for freedom from the constraints of various states’ domestic law with the legitimate desire of those states and the international community to protect and preserve basic notions of morality and justice.[11]

Courts face a dilemma while deciding between voiding an arbitration agreement or award because it violates public policy, on the one hand, or advancing the contractual intent of the parties, on the other.

In a purely domestic arbitration, a national court needs to consider only for its own domestic policy. Since the arbitration is connected to only one nation, only that nation’s public policy is considered.[12] However, the situation is different for international public policy issues since more than one nation’s public policy is relevant. In this case, the national court must consider the international dimensions of the arbitration when applying its domestic public policy limitations. Therefore, it would be fair to conclude that international public policy are those rules of a nation’s domestic public policy, that will also be applied by that nation in an international context.

How Narrowly Can Public Policy be interpreted?

Even though there is a general bias on interpreting Section 17 (c) of the Arbitration Act 2001 and Article V (2) the New York Convention narrowly in favor of enforcement of international arbitral awards, there are still certain limits which arbitrators may not go beyond. An award can be contrary to the public policy both for procedural and substantive reasons. It can violate substantive public policy or procedural public policy. The substantive public policy goes to the subject matter of the award while procedural public policy relates to the process by which the matter was adjudicated. From this explanation, it can be understood that fundamental principles pertaining to justice and morality would be an issue under the substantive public policy.[13] Also, recognizing or enforcing awards which do not comply with the rules serving the State’s essential political, social or economic interests would infringe on such a State’s substantive public policy.

Conclusion

As arbitration becomes more and more international and transnational, arbitrators have the duty to maintain vigilance so that arbitration does not become a method by which the legitimate interests of states are defrauded.[14] Although public policy probably plays a much greater role in the theory of arbitration than in actual practice, there are occasional examples of misuse of the public policy defense.[15] In most countries, courts have been reluctant to refuse enforcement on public policy grounds. In fact, awards are so rarely refused enforcement on grounds of public policy.


About the Author

Md. Mamonor Rashid has attained his Master of Laws by thesis (Equivalent to M.Phil) on International Commercial Arbitration from University Utara Malaysia with Post Graduate Scholarship. He is practicing as an Associate of B&M Legal, focusing on International Commercial Arbitration, Corporate Law and Drafting. He is the Young Professional member of Singapore International Arbitration Centre (YSIAC), Singapore and Young International Arbitration Group (YIAG), London. Can be reached at mamon_rashid@live.com


Reference

[1] Buchanan, Mark A. “Public policy and international commercial arbitration.” American Business Law Journal 26, no. 3 (1988): 511-531.

[2]Hanotiau, Bernard, and Olivier Caprasse.”Public policy in international commercial arbitration.” In Enforcement of Arbitration Agreements and International Arbitral Awards: The New York Convention in Practice, UK: Cameron May Ltd. 2008.

[3] Section 17 (c) of the arbitration Act 2001  provides competence of arbitration tribunal to rule on its own jurisdiction.-Unless otherwise agreed by the parties, the arbitral tribunal may rule on its own jurisdiction on any questions including the following issues, namely, whether the arbitration agreement is against the public policy.

[4]Arfazadeh, Homayoon. “In the shadow of the unruly horse: international arbitration and the public policy exception.” Am. Rev. Int’l Arb. 13 (2002): 43-197.

[5]Curtin, Kenneth-Michael.”Redefining Public Policy in International Arbitration of Mandatory National Laws.” Def. Counsel J. 64 (1997): 271.

[6]Strong, Stacie I. “Enforcing Class Arbitration in the International Sphere: Due Process and Public Policy Concerns.” U. Pa. J. Int’l L. 30 (2008): 1.

[7]Stempel, Jeffrey W. “Pitfalls of Public Policy: The Case of Arbitration Agreements.” . Mary’s LJ 22 (1990): 259.

[8] Buchanan, Mark A. “Public policy and international commercial arbitration.” American Business Law Journal 26, no. 3 (1988): 511-531.

[9]Lalive, Pierre. Transnational (or truly international) public policy and international arbitration. 1987.

[10]Hunter, Martin, and GuiConde E. Silva. “Transnational public policy and its application in investment arbitrations.” J. World Investment 4 (2003): 367.

[11]Ehrenberg, Ronald G., and Robert S. Smith. Modern labor economics: Theory and public policy. Routledge, 2016.

[12]Edwards, Harry T. “Judicial Review of Labor Arbitration Awards: The Clash Between the Public Policy Exception and the Duty to Bargain.” Chi.-Kent L. Rev. 64 (1988): 3.

[13]Strong, Stacie I. “Enforcing Class Arbitration in the International Sphere: Due Process and Public Policy Concerns.” U. Pa. J. Int’l L. 30 (2008): 1.

[14]Roy, Kristin T. “New York Convention and Saudi Arabia: Can a Country Use the Public Policy Defense to Refuse Enforcement of Non-Domestic Arbitral Awards, The.” Fordham Int’l LJ 18 (1994): 920.

[15]Estreicher, Samuel. “Predispute Agreements to Arbitrate Statutory Employment Claims.” NYUL Rev. 72 (1997): 1344.

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