Geneva Convention & New York Convention

Since the public policy criterion is of fundamental significance, it is not a surprise that the
Geneva Convention1 contained a restriction for the recognition and enforcement of foreign
arbitral awards on public policy grounds. However, pursuant to Article 7(2) of the New York
Convention2, Geneva Convention ceases to have effect among contracting states of the New
York Convention. Therefore, the focus of this article is on the New York Convention and
especially on its article number V (2) (b), where the "public policy" exception on the enforcement
of awards finds its place. Such article of the New York Convention is "probably the most
misused ground of non-enforcement of all,"3 since it states the following:

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:...

(b) The recognition or enforcement of the award would be contrary to the public policy of that
country.

Obviously, the Contracting States' freedom to define their own national public policy standard
inevitably impedes the predictability and consistency of the enforcement decisions. Therefore,
while discussing the article V (2) (b) of the New York Convention, one should explore on the
respective public policy standard of the contracting state where the award's recognition and
enforcement is sought.

In this article, application of the public policy defences of various national courts will be analysed
and the formation of new "international" and "transnational" public policy exceptions to replace
the single, "national" public policy approach, will be advocated.4

Purpose and Relevance of the Public Policy Defence

Public policy serves the purpose of providing the contracting states with a "safety- valve"
allowing them to prevent the enforcement of awards which they consider irreconcilable into their
legal system5 which finds its legal source in article V(2)(b) of the Convention for the contracting
states. By defining public policy broadly, contracting states could effectively deny any undesired
award recognition and enforcement. The Convention's enforcement-friendly approach could
thus be circumvented through the back door of public policy.6

What is the Relationship between Arbitrability and Public Policy?

For an arbitration agreement to be enforceable, the subject matter must be arbitrable. That is, it
must be a subject that a state considers it appropriate to be arbitrated. In most jurisdictions, for
example, issues such as criminal matters and child custody are not arbitrable. To arbitrate the
cases in these areas of law would be against the law or the public policy of the local jurisdiction.
So, what is the difference between these two terms? Arbitrability and public policy are bundled
in Article V (2) since both serve to a similar purpose. While both instruments are
interchangeable as to their functions, their effects are different. Lack of arbitrability invalidates
arbitration agreements. However, public policy replaces arbitrability's absolute prohibition with
the unpredictability immanent to public policy. Therefore, it reduces the attractiveness of
arbitration.7
Public policy has different definitions in different jurisdictions, mostly it is concluded that an
award could be vacated if it is not consistent with the fundamental principles of justice, honesty,
and fairness. Thus, corruption, fraud, or lack of integrity in the process is likely to be considered
a violation of public policy, requiring the award to be annulled. 8 Because of the States'
sovereignty over defining public policy, the concept of public policy evades a general precise
definition.

In most Model Law jurisdictions, fraud or corruption would probably be considered a proper
ground for challenging an award as a violation of public policy. The U.S Federal Arbitration Act
("FAA") is quite explicit in this respect. It provides specifically that grounds for vacating an
award containing the following facts: (1) the award was procured via corruption, fraud or undue
means, (2) there was evident partiality or corruption in the arbitrators, (3) the arbitrators were
guilty of misconduct...or...other misbehaviour by which the rights of any party have been
prejudiced.9 Similarly, the English Arbitration Act provides that a party may challenge an award
based on "serious irregularity affecting the tribunal, the proceedings or the award."10

There are a few exceptions to the general rule in arbitration that the only grounds for
challenging an award are based on jurisdiction, procedural irregularities, arbitrability, or public
policy. These exceptions are found generally in common law legal systems. In England, for
example, a party may appeal an arbitral award on a point of law, unless the parties agree, or
unless the parties have agreed otherwise. 11 This right of appeal, however, is subject to
substantial limitations. The appeal cannot be brought unless all the parties agree, or unless the
court grants leave to appeal. The court should grant leave only if the tribunal was obviously
wrong on the point of law, or the question is of general public importance and the decision of the
tribunal is open to doubt.12

In the United States, courts have created some non-statutory grounds for challenging an award.
For example, an award can be vacated if it violates public policy, a non-statutory ground under
the FAA. Public policy is a non-statutory ground for setting aside an award in the United States
because it is not one of the grounds for non-enforcement provided under the FAA.13

Under the Convention, recognition or enforcement of an arbitral award may be rejected if a court
deems that the award would be contrary to the policy of that country. However, public policy is
not defined in the Convention, and thus presents the possibility of another broad ground for the
court to reject the enforcement. On the other hand, however, most of the courts view such a
defence narrowly, by sticking to the Convention's pro-enforcement purpose.14 Even though a
number of countries take a narrow approach in interpreting the public policy defence, there is
room for it to be used parochially to protect national political interests. 15 For instance, in 1995 the
Turkish Supreme Court refused to enforce an ICC award in which the tribunal in Zurich applied
Turkish substantive law, but applied the procedural law of the canton of Zurich. According to the
Turkish Court the arbitrator had violated Turkish Public Policy by not applying Turkish
procedural law.16

Domestic Public Policy 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.17
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 intention of the
parties, on the other.18

In a purely domestic arbitration, a national court needs to consider only of its own domestic
policy. Since the arbitration is connected to only one nation, only that nation's public policy is
considered. 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.19

As Curtin states in his referred article, national courts should consider not only their own
domestic public policy, but also the public policy of interested nations and the needs of
international commerce. International public policy is a test of balancing of interests. At this
point, a reference is made to the U.S Supreme Court decision on Mitsubishi Motors Corporation
v. Soler Chrysler- Plymouth Inc.20

"we conclude that concerns of international comity, respect for the capacities of foreign and
transnational tribunals, and sensitivity to the need of the international commercial system for
predictability in the resolution of disputes require that we enforce the parties' agreement, even
assuming that contrary result would be forthcoming in domestic context."21

As stated above, the court reasoned that the needs of international commerce for predictability
in the resolution of disputes required the enforceability of the arbitration agreement, although a
contrary result might be reached in a domestic context.22

Furthermore, France declared that the standard of review in an international context is whether
arbitration would violate "international" public policy.23 Furthermore, typical of courts
distinguishing between domestic and international standards for the review of arbitration awards
are decisions from Germany, Korea and Luxembourg which are listed below: 24

Germany: "The recognition of foreign arbitral awards thus is governed normally by a less

stringent regime than domestic awards"25

Korea: "As due regard should be paid to the stability of international commercial order, as well
as domestic concerns, should be interpreted narrowly. When foreign legal rules applied in an
arbitral award are in violation of mandatory provisions of Korean law, such a violation does not
necessarily constitute a reason for refusal."26

Luxembourg: "The case here concerns the effect in Luxembourg of rights acquired abroad;
hence, public policy intervenes only in its attenuated form and is less stringent than if the case
concerned the acquisition of the same rights in Luxembourg" 27

How Narrowly Can Public Policy be interpreted?

Even though there is a general bias on interpreting Article V (2) narrowly in favour of
enforcement of international arbitral awards under the New York Convention, 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. Substantive public policy goes to the subject matter of the award28 while
procedural public policy relates to the process by which the matter was adjudicated. 29 From this
explanation, it can be understood that fundamental principles pertaining to justice and morality
would be an issue under substantive public policy. Also, recognising 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.

To exemplify these limits, Troy L. Harris lists the cases, shown below, from different
jurisdictions.

Two examples for substantive limits:

Austria: A sale/purchase on margin was void as a gambling contract.30

Germany: Enforcing a contract which violated German exchange laws would violate public
policy.31

Two examples for procedural limits:

Germany: Enforcement of award rendered after parties settled dispute would violate public
policy because it is contrary to duty of good faith.32

Netherlands: Failure of arbitral tribunal to follow own rules and inability of party to challenge
partiality of arbitrator amounted to due process violations of public policy.33

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.34 Although public policy probably plays a much greater role in
the theory of arbitration than in actual practise, there are occasional examples of misuse of the
public policy defence. 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.35 Professor Felix Dasser's article illustrates this with statistics: According to his article,
public policy was invoked 142 times and dismissed in 100% of those instances in Switzerland
from 1989 to 2009.36

Even though the public policy exception to enforcement has been interpreted narrowly by the
certain states as the statistics provided above states, practitioners still must be cautious
because of the fact that most countries have not indicated one way or the other how they view
article V(2).

There is little doubt that international commercial parties have little patience with such ideas as
state sovereignty.37 They demand laws to facilitate their transactions, and if states are loath to do
so in a timely fashion, they have not been hesitant in creating international commercial law
using "soft law" instruments that in actuality have even more potency than "hard law". 38 National
states worry because there is a limited role for them in the creation of international commercial
law which means a loss of sovereignty for them, as they are being managed by the rules made
by someone else, but they also want to facilitate commercial transactions. However, nation
states do not appear to understand the demands of modern international commerce and as
Gopalan stated at the end of his article, "If they cannot take the heat, they should get out of the
kitchen".39 On the other hand, as arbitration becomes more and more international and
transnational, arbitrators have the duty to maintain vigilance so that it does not become a
method by which the legitimate interests of the states are defrauded. 40 Otherwise, arbitration will
lose its national backing, and old judicial hostility towards arbitration will return to destroy the
utility of arbitration as an alternate dispute resolution technique. Even though it is not possible to
state that public policy has no place in the arbitration of international commercial law, the notion
of public policy is unnecessarily broad and open to misinterpretation. Therefore, international
and transnational public policy notions must be adopted by the states in order to keep the
development pace of international/transnational commercial law at the same level.

It should always be kept in mind that arbitration is opted for its neutrality, speed, economy and
privacy, and not as a method to avoid mandatory laws. Increased use of international and
transnational public policy will further the parties' intentions to arbitrate disputes, but it also
could spell the ultimate downfall of international arbitration. Therefore it cannot and must not
become a vehicle through which parties attempt to avoid mandatory national laws, otherwise,
international arbitration will lose its national backing, and awards will not be enforced.41