Recognition and Enforcement of Arbitral Awards

From Max-EuP 2012

by Jan Kleinheisterkamp

1. Object and purpose

Arbitral awards are decisions made not by state courts vested with sovereign jurisdictional powers, but by private arbitrators who derive their jurisdiction from the parties’ agreement to submit their disputes to arbitration (arbitration law (national); arbitration (international)). As for the enforcement of the resulting award, the parties can rely on contractual or other private mechanisms, such as performance bonds or the black lists of trade associations. The question whether or to what degree a party can rely on the award as resolving the dispute as a matter of res iudicata and/or as an enforceable title before state courts, however, is dependent on the lex fori of the court seized in an enforcement action. In general, a state court should only be allowed to use its constitutional powers to give legal effect to arbitral awards if they are compatible with the fundamental values of the forum. An arbitral award is introduced into a judicial system under a logic very similar to that of the recognition and enforcement of foreign judgments but with the difference that, from a theoretical point of view, there is no compelling reason for distinguishing between foreign awards and domestic awards since both are ‘foreign’ to the domestic judicial system. Indeed, such a holistic approach was accepted under the ius commune and can today still be found in the common law ‘action on the award’ and, again, in French law and the UNCITRAL Model Law which provide for a single regime for enforcing ‘international’ awards ‘irrespective of the country in which they were made’. The historical rise of territorialism, however, meant that most jurisdictions came to discriminate against foreign awards by the end of the 19th century. This imposed significant obstacles to the free circulation of arbitral awards, a shortcoming which was progressively remedied by treaties on judicial cooperation and eventually led to the modern uniform regime of enforcement and recognition of foreign arbitral awards.

2. The evolution of the law on recognition and enforcement

The oldest treaty dealing with arbitral awards was concluded in 1867 between the Grand Duchy of Baden and the Swiss Canton of Aargau, followed by the Franco-Swiss Treaty of 1869 and the Belgo-French Treaty of 1899. These treaties put arbitral awards on an equal footing with court judgments and abolished the previously practised substantive review of both types of decisions (révision au fond). An application for simplified recognition or enforcement required a certified copy of the judgment or arbitral award, proof that the other party had been duly summoned and a certificate by the competent authority in the country of origin affirming the res iudicata effect of the decision.

The simplifications introduced by these treaties were, however, partially lost in subsequent treaties. The Swiss-Spanish Treaty of 1896 excluded the révision au fond, yet required proof that the foreign decision not only be ‘final’ (in the sense of res iudicata) in its country of origin, but also ‘enforceable’ in that country. For court judgments, this proof could easily be sought from courts who could themselves certify not only that their judgments had ripened into res iudicata, but could also confirm their enforceability. For arbitral awards, by contrast, it was no longer sufficient to request a simple certificate of res iudicata from the courts of the country of origin. The award creditor now had to initiate burdensome proceedings in the country of origin for obtaining leave for enforcement (exequatur). The implicit understanding was that an award creditor could not obtain more in the country of enforcement than its title was worth in the country of origin. A clear expression of this principle can be found in the South American Treaty on International Procedural Law of Montevideo (1889), the first multilateral treaty of its kind, which stated that ‘judgments and arbitral awards rendered in civil and commercial matters in one of the signatory states, shall have in the others the same force as in the country where they were pronounced’. Accordingly, exequatur from the country of origin was necessary to obtain exequatur in the country of enforcement.

The unfortunate equation of arbitral awards and court judgments and the resulting requirement of double exequatur found its way into the Pan-American Código Bustamante (1928), the Treaty of Montevideo on International Procedural Law (1940) and the Arab League Cairo Convention on the Enforcement of Court Decisions and Arbitral Awards (1952), as well as most bilateral treaties covering arbitration, such as the Belgo-Dutch Treaty (1925); the Franco-Italian Treaty (1930); the United States Treaties of Friendship, Commerce and Navigation with Greece (1951), Germany (1954), and the Netherlands (1956); and the Belgo-German Treaty (1958). The 1927 Geneva Convention on the Execution of Foreign Arbitral Awards, concluded under the auspices of the League of Nations, only required proof that the arbitral award was ‘final’ and legally binding in its country of origin. Many national courts, however, read ‘final’ as requiring proof of enforceability in the country of origin, thus largely depriving the Convention of its effect.

In the middle of the 20th century, the requirement of the double exequatur was also firmly anchored in numerous national laws, such as those of most north and south American states, as well as those in many parts of Europe. Brazil was one of the last and most stalwart strongholds against arbitration until 1996. Following the Roman law logic of consumptio, the foreign arbitral award was completely worthless as Brazilian law only allowed leave for enforcement of a foreign exequatur decision with which the award was deemed to have merged. That exequatur had to result from adversarial proceedings before a state court, so that a court summons had to be served on the award debtor in Brazil via the diplomatic channels, a process which by itself could last over a year. Furthermore, until 1991, arbitral awards could only be recognized if they were rendered, in Brazil or abroad, on the basis of a compromisso, a formal submission agreement concluded after the dispute had arisen. As a result, the enforcement of arbitral awards in Brazil was extremely cumbersome and rarely ever successful, so that parties contracting with Brazilians eventually desisted from using arbitration clauses in the first place.

Against this adverse background, in 1953 the International Chamber of Commerce submitted to the Economic and Social Council of the United Nations a draft for a convention on ‘international arbitral awards’ that would be independent of any national law, so as to eliminate all traditional obstacles to the free circulation of arbitral awards. This fully autonomous or de-localized approach was rejected but the initiative prompted the United Nations to elaborate another text which was eventually signed in New York on 10 June 1958 as the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘NYC’). With 143 ratifications, the NYC is today one of the most successful treaties, and its extremely efficient provisions have permitted international arbitration to thrive ever since. It is thus of little surprise that the 2005 Hague Convention on Choice of Court Agreements was closely drafted, albeit in less fortunate terms, along the lines of the NYC (recognition and enforcement of foreign judgments).

A series of regional conventions have been concluded since 1958. Noteworthy, though of little practical relevance, is the European Convention of 1961 which was concluded under the auspices of the UN Economic Commission for Europe as a complement to the NYC and was meant to bridge the gap between the western arbitration practice and socialist foreign trade tribunals. A European Union instrument on arbitration, called for in Article 293(4) EC Treaty, never materialized due to the sufficiency of the NYC. Also noteworthy is the Inter-American Convention of Panama (1975), which substantially copied the provisions of the NYC and, disguising them as a regional instrument, eventually lured the Latin American states into accepting this new standard despite their traditional hostility to arbitration. Furthermore, the Uniform Act on Arbitration of the Organization for the Harmonization of Business Law in Africa (‘OHADA’), which is directly applicable to arbitral awards rendered in any of the 16 member states, closely follows the arbitral provisions of the French Nouveau Code de la procédure civile of 1981 (Arts 1498–1507), which are consistent with the NYC.

Other regional treaties, by contrast, represent a step backwards vis-à-vis the NYC. The Inter-American Convention of Montevideo (1979) eroded the acquis of the NYC which had been repackaged in the Panama Convention by returning to the recognition criteria under the old Montevideo Conventions (1889/1940). This contradiction is perpetuated in the MERCOSUR Agreements on International Commercial Arbitration of 1998 which refer to the cumulative application of the incompatible Panama and Montevideo Conventions. Like the Montevideo Convention, the equally practically insignificant Arab Convention on Judicial Cooperation of Riyadh (1983) still requires proof of the award being ‘final and binding’. Admittedly, this constitutes some progress as compared to its predecessor, the Cairo Convention of 1952, which still required the award to be ‘enforceable’ in the country of origin.

3. The regulatory structure of uniform law

Different from the Geneva Convention of 1927 and the European Convention of 1961, the NYC applies irrespective of whether the parties or the award come from a contracting state. The NYC thus has a universal scope of application unless the country of enforcement made a reservation of reciprocity (currently still 70 countries). The NYC’s uniform and autonomous rules on recognition and enforcement displace conflicting national provisions and overcome the shortcomings that caused the failure of the Geneva Convention of 1927:

(1) By providing for the direct enforceability of arbitration clauses in Art II, the NYC guarantees the enforceability of awards rendered without the parties having concluded a separate submission agreement (compromis) even if required by domestic legislation;

(2) By requiring awards merely to be ‘binding’ in the country of origin but not ‘final’ (as under the Geneva Convention) or even ‘enforceable’ (as under other treaties), the NYC abolishes the requirement of double exequatur once and for all;

(3) By establishing the presumption of validity of awards and burdening the resisting party with the proof of the limited grounds that would allow refusing recognition and enforcement, the NYC effectively simplifies and expedites proceedings.

Article III NYC lays down the foundation for the free circulation of arbitral awards. All contracting states accept that an arbitral award is binding on the parties as soon as it is rendered. Its enforcement is subject to the national rules of procedure, which may be different for domestic and foreign awards, but only so long as the latter are not subjected to ‘substantially more onerous conditions’. Article IV NYC complements the presumption of binding force with the presumption of validity. Upon the mere presentation of the arbitral award together with the arbitration agreement, the requesting party is entitled to obtain recognition and enforcement, which may only be refused if the opposing party can rebut these presumptions with sufficient evidence.

Article V(1) NYC strictly limits the grounds that the opposing party can raise in enforcement proceedings. In essence, the opposing party can only argue that the arbitrators had no jurisdiction or exercised it contrary to the parties’ terms. The party objecting to enforcement must prove either that the arbitration agreement was not validly concluded or that its scope was not respected (Art V(1)(a) and (c)); or it must show that the tribunal had not respected due process (the essential pre-condition for waiving access to state courts) (fair trial) or that the composition of the arbitral tribunal or the applicable procedures violated the parties’ stipulations or national default rules (Art V(1)(b) and (d)). Additionally, the opposing party can argue—but must also prove —that the arbitral award has not yet become binding in its country of origin (eg because a second arbitral instance has been agreed upon or because domestic law still allows ordinary appeal against the award or because a grace period for performance has been granted) or has been annulled or suspended (Art V(1)(e)).

Other than this review of arbitral jurisdiction, the NYC also provides for safeguards of public interests of the country of enforcement where the arbitral award is to take effect. Courts can refuse recognition and enforcement of an arbitral award by their own motion under Art V(2)(a) NYC if their lex fori reserves certain ‘sensitive’ disputes to domestic courts and thus declares the subject matter of the dispute not to be capable of settlement by arbitration. This, in turn, justifies great judicial deference to the arbitrators. As a matter of principle, courts are not allowed to review arbitral awards on the merits (révision au fond). Even a clearly wrong application of the law in an arbitral award is, in itself, not a ground for denying its enforcement, but rather a risk that the parties assume by accepting arbitration.

The only exception to the prohibition of the révision au fond is the public policy exception (public policy) in Art V(2)(b) NYC. Reflecting the traditional assumption that domestic laws applicable under Art V(2)(a) NYC will already disallow arbitration of disputes which touch upon interests other than those exclusive to the parties, it has generally been accepted that the public policy exception must be interpreted very narrowly. Accordingly, recognition and enforcement of awards should be refused only if enforcement would be manifestly contrary to those public policies which protect the core moral, social and economic values of the forum and are thus so strong as to preclude any deviating solutions despite the international dimension of the dispute (ordre public international, ordre public atténué).

4. Trends in legal development

The rules of the NYC provide a very efficient and largely uncontested global uniform regime for the recognition and enforcement of foreign arbitral awards. This uniformity is, however, not absolute. Article VII (1) NYC contains a ‘most favourable treatment’ clause which allows the contracting states to adopt more enforcement-friendly solutions in their national arbitration laws. A number of countries, but most of all France, make use of this. One of the controversial issues in this context is the recognition and enforcement of awards that have been annulled abroad despite the contrary solution stated in Art V(1)(e) NYC. This provision has been perceived by many as making awards too dependent on the law of the seat of arbitration and its potentially spurious grounds for setting aside an award. Article IX of the European Convention (1961) restricts this ground of refusal to those cases where annulment abroad was based on the grounds equivalent to those contained in Art V(1)(a)–(d) NYC, a solution that is now also forwarded in the 2008 ICCA proposal to review the NYC. French courts, however, go well beyond this solution of defining internationally acceptable standard annulments. An annulment abroad is simply irrelevant to French courts, purportedly ‘since an international arbitral award, not attached to any national legal system, is a decision of international justice, whose irregularities are reviewed on the basis of the applicable national rules of the country where recognition and enforcement are requested’ (Cass. civ. 1re, 29 June 2007, Revue de l’arbitrage 2007, 507). German and Dutch courts have refused to take such an extreme pro-arbitration position. If Art IX of the European Convention is not applicable, an arbitral award annulled abroad can only be enforced in these countries if recognition of the foreign annulment decision itself is to be refused as incompatible with the public policy of the enforcement state (OLG Dresden, 31 January 2007, IHR 2008, 152 ff; Gerechtshof Amsterdam, 28 April 2009, AZ 200.005.269/01, LJN BI2451 <www. rechtspraak.nl>). US courts, which previously seemed to favour an approach comparable to the French, have also accepted this more cautious and, it is submitted, doctrinally sound approach (Court of Appeals for the District of Columbia, TermoRio v Electranta 487 F.3d 928 (2007)). At least in the European context, the proposed elimination of the arbitration exception in a revised Brussels I Regulation (jurisdiction (PIL)) would sensibly end the significant problems resulting from the French practice as French courts would then be forced to recognize routine setting-aside decisions from other Member States.

Another highly contentious point is the standard of review when arbitrators decided on disputes which potentially concern public interests. The justification for the strong limitation of the public policy exception in Art V(2)(b) NYC, which reflects the prohibition of révision du fond, is the traditional assumption that such subject matters are a priori not capable of, and are thus excluded from, settlement by arbitration under national laws according to subpara (a). This assumption, however, no longer holds true since the US Supreme Court’s decision in Mitsubishi v Soler (473 U.S. 614 (1985)), the logic of which has also found its way to Europe (ECJ Case C-126/97 – Eco Swiss v Benetton [1999] ECR I-3055). The public interest in most commercial disputes, such as those relating to competition law in particular (competition law (international)), is no longer a bar to entrusting their decisions to arbitrators. This means an important change to the original balance struck in the two points of Art V(2) NYC. The far-reaching liberalization of arbitrability, ie the relaxation—and virtual elimination—of the safeguarding of public interests under Art V(2)(a) NYC, necessarily comes at the price of increased substantive review (‘second look’) by courts under the public policy exception in Art V(1)(b) NYC so as to guarantee the efficiency of the forum’s mandatory law irrespective of the parties’ jurisdictional choice (OLG Dresden, 20 April 2005, SchiedsVZ 2005, 210). If an arbitral tribunal sitting abroad fails to observe applicable mandatory rules, European courts must refuse enforcement not only of the resulting award, but also of the original arbitration agreement that made this violation of ordre public possible, so that a new claim for statutory rights can be brought (High Court of England and Wales, Accentuate v Asigra [2009] EWHC 2655). The constitutional command to give effect to the fundamental public policies embodied in internationally mandatory rules, and especially the European principles of effectiveness, do not allow courts to accept the dilution of these rules to ‘semi-mandatory’ rules and should require state courts to review awards for the materially wrong application of these exceptional rules by arbitral tribunals. French courts, in contrast, have held—based on an unrevised understanding of the ordre public exception—that recognition and enforcement can be refused on such grounds only if the violations of mandatory rules are ‘blatant, actual and specific’ (Cour d’appel Paris, 18 November 2004, Revue de l’arbitrage 2005, 751). This is particularly problematic regarding potential violations of competition laws, which can typically only be averred after a complex legal and economic analysis so that the French standard seems to clash squarely with the European policy of enhancing, not weakening, the enforcement of competition law by way of stimulating ‘private enforcement’ actions (competition law (private enforcement)). It is submitted that the French radical pro-arbitration stance does not promote, but actually undermines, the legitimacy of the arbitrator’s role as the juge naturel du commerce international and thus of international arbitration altogether.

Literature

J Westheimer, ‘Der ausländische Schiedsspruch—Seine Wirksamkeit und Vollstreckbarkeit im Inlande’ (1909) 39 Zeitschrift für Zivilprozess 241; Antoine Pillet, Traité pratique de droit international privé, vol 2 (1924); Ernst Lorenzen, ‘Commercial Arbitration—Enforcement of Foreign Awards’ (1935) 45 Yale Law Journal 39; Paolo Contini, ‘International Commercial Arbitration: The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards’ (1959) 8 Am J Comp L 283; Albert Jan van den Berg, The New York Arbitration Convention of 1958 (1981); Emmanuel Gaillard and John Savage, Fouchard Gaillard Goldman on International Commercial Arbitration (1999); Sylvain Bollée, Les méthodes du droit international privé à l’épreuve des sentences arbitrales (2004); Jan Kleinheisterkamp, International Commercial Arbitration in Latin America: Regulation and Practice in the MERCOSUR and the Associated Countries (2005); Jean-François Poudret and Sébastien Besson, Comparative Law of International Arbitration (2nd edn, 2007); Pierre Mayer, ‘L’étendue du contrôle, par le juge étatique, de la conformité des sentences arbitrales aux lois de police’ in Tristan Azzi and others (eds), Vers de nouveaux équilibres entre ordres juridiques—Liber Amicorum Hélène Gaudemet-Tallon (2008) 459.

Retrieved from Recognition and Enforcement of Arbitral Awards – Max-EuP 2012 on 19 May 2022.

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