Enforcement of annulled arbitral awards: Would an International Arbitration Court (IAC) mitigate the inconsistencies?

Written by

Manu Thadikkaran*

Currently, one of the main reasons for favouring arbitration in international commercial disputes is the enforceability of an award across jurisdictions. The parties from different corners of the world can settle their disputes through a single process, and the result of such process can be enforced in any Member State to the New York Convention (NYC). However, this does not mean that once an award is rendered, there are no hassles attached to its enforcement. NYC itself sets out various grounds in Article V for a State to refuse enforcement of an arbitral award.

More importantly, an award can be set aside by the Courts of the seat of arbitration. The effect of setting aside of an award, as opposed to a mere refusal to enforce, is that the award becomes non-existent in every jurisdiction. Article V(1)(e) of the NYC specifically states that an award may be refused enforcement if it is set aside by a competent authority of a country in which, or under the law of which, the award was made.

Nevertheless, the French approach towards annulment of awards, starting from the Norsolor[i] case, has been to enforce such annulled awards. The French relies on the use of the word may in Article V(1)(e) of the NYC to interpret the provision as not mandatory. The French Civil procedure Code, while importing the grounds under Article V(1)(a)-(d) of the NYC, omits the ground under V(1)(e) to refuse enforcement. To further this reasoning, the French relies on Article VII of the NYC, which allows a party to rely on a more favourable national law for enforcement. When an award is sought enforcement in France, the provisions of the French Civil Code, which are more favourable than the NYC standard, is used by the Court. Thus, the French position relies on Article VII of the NYC to bypass the applicability of the NYC to the enforcement of the award. The French position was reiterated further in the famous Hilmarton[ii] and Putrabali[iii] cases, wherein an international arbitral award was viewed as an independent judicial decision, not rooted in any particular national law. The US, in the Chromalloy case, had followed an approach similar to the French approach. There was a shift in this position when the US Courts refused to enforce annulled awards in the Baker Marine[iv] and Termorio[v] cases. Recently, however, the US Courts enforced an award annulled in Mexico in the case of COMMISA v PEMEX[vi]. In this case, the Mexican Courts had annulled an award by the retroactive application of a law making administrative matters non-arbitrable.

The inconsistencies in the enforcement of annulled arbitral awards indicate the necessity for a balanced approach in this issue. When the parties agree to conduct arbitration in a particular State, they impliedly agree to be subject to the authority of such State with respect to its national laws. This includes the recognition of the power of that State to set aside an award made in its territory. At the same time, many States resort to setting aside an award on unreasonable grounds. For instance, in the COMMISA case, the award was set aside on the ground of a law which was applied retroactively. Similarly, in the Bechtel[vii] case, an award was set aside by the Courts in Dubai because the arbitrators did not hear the witnesses under oath, as required under their law. Even in the Chromalloy[viii] case, the US Courts took into consideration the strong possibility that the Egyptian government influenced the judiciary to set aside the award. Therefore, a balanced approach, in my view, would be to recognize setting aside of an award as a general rule, while applying the French view in exceptional circumstances. The challenge, then, becomes the identification of these exceptional circumstances where the French position is warranted. More importantly, there is a question of sovereignty as well which is involved. The non-recognition of an annulment may be viewed as an encroachment on the sovereignty of the annulling State and a breach of the principle of comity. In fact, when the French Court enforced the award annulled by Switzerland in the Hilmarton case, there was an outrage among the Swiss Judiciary which was later settled through an informal conference between France and Switzerland.

A possible way of mitigating this issue would be the formation of an International Arbitration Court (IAC) to annul awards under the NYC. The IAC can be formed by means of an Additional Protocol to the NYC. The function of the IAC would be to sit as a Court of annulment of international arbitral awards under the NYC. In doing so, the IAC would apply principles of transnational public policy. If an award is set aside by the IAC, it would be non-existent in all the Member States of the NYC. On the other hand, if an award is not set aside, each Member State would still have the option to refuse enforcement of such award in its jurisdiction on public policy grounds. Nevertheless, the international enforceability of the award would not be affected by the actions of a single national Court.

The Judges of the IAC must be selected among the nationals of the Member States to the NYC, on the basis of their knowledge and experience in international arbitration. There would be nine Judges and any application before the IAC must be decided by a Panel of three Judges as selected by the President of the Court on the basis of their nationality and expertise. The seat of the IAC may be in The Hague, while allowing the proceedings to take place in any place with the consent of the parties and the Panel for practical convenience. The costs of the proceedings should be allocated in such proportion as between the parties after considering the nature of the claim and the conduct of the parties during the proceedings. The Panel can, thus, prevent frivolous claims and delaying tactics by the parties before the IAC. Moreover, given the numerous actions for setting aside international awards every year, the IAC will be capable of financing itself with minimal financial contributions from the Member States to the NYC.

The main relevance of the IAC would be that the Member States to the NYC would limit their sovereign power in favour of an international body, to the extent of annulling international awards. When an international body formed by the consent of the States annuls an award as opposed to a national Court, the question of encroachment on sovereignty and breach of comity are likely not to arise. At the same time, the States can preserve their public policy through its power to refuse enforcement of an award confirmed by the IAC, on such public policy grounds.

Thus, the formation of the IAC has the potential to mitigate the inconsistencies in enforcement of annulled arbitral awards to a large extent. It would be a step forward in ensuring predictability and uniformity with respect to the enforceability of international awards. The real task, however, would be gathering a consensus among the Member States to the NYC for the formation of the IAC. Nevertheless, the efforts in gathering such consensus would be worth it in view of the benefits that would accrue from the IAC.

* Advocate;  Geneva LL.M. in International Dispute Settlement (MIDS ’14) (Hans Wilsdorf Scholar);  B.A., LL.B. (Hons.) (National Law University, Jodhpur ’13)

[i] Norsolor S.A. v. Pabalk Ticaret Sirketi S.A., Cour de cassation Oct. 9, 1984, 24 I.L.M. 360 (1985)

[ii] Société Hilmarton Ltd v. Société Omnium de traitement et de valorisation (OTV) / 92-15.137

[iii] Putrabali Adyamulia v. Société Rena Holding, 1ere civ 29 juin 2007

[iv] Baker Marine (Nig) Ltd. v. Chevron (Nig) Ltd., 191 F.3d 194 (2d Cir. 1999)

[v] TermoRio SA ESP v. Electranta SP, 487 F 3d 928 (DC Cir 2007)

[vi] COMMISA v. PEMEX; No. 10 Civ. 206 (AKH), 2013 WL 4517225, (S.D.N.Y. Aug. 27, 2013)

[vii] International Bechtel Co. Ltd. v. Department of Civil Aviation of the Government of Dubai, 300 F. Supp. 2d 112

[viii] Chromalloy Aeroservices v. The Arab Republic of Egypt, 939 F.Supp. 907



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4 responses to “Enforcement of annulled arbitral awards: Would an International Arbitration Court (IAC) mitigate the inconsistencies?

  1. Akansha Dubey

    Interesting! But apart from the near-impossible consensus for the IAC I was wondering whether the criteria for the IAC to set aside an award will be the same as under Article V of NYC? If so you will notice that apart from public policy the ground of the ‘subject matter being capable of settlement by arbitration’ under Article V(2)(a) of NYC has a territorial link to its interpretation. Therefore, the IAC will interpret the law of the country in which the award is required to be enforced? Or would you suggest more internationally accepted standards apart from transnational public policy (considerably vague) to be the basis for the IAC decisions. Also the exclusion of ‘national public policy’ grounds from the IAC still allows for unreasonable and inconsistent setting aside of the awards. Additionally, a two-tier annulment system may hamper the expeditiousness of the process as such. Any thoughts?

    • Manu

      The thing to note is that the NYC does not list out the grounds to set aside an award. Art. V of NYC only lists the grounds for refusal to enforce an award in a jurisdiction. The difference is that setting aside makes an award non-existent internationally, while refusal to enforce only makes the the award invalid under that particular jurisdiction. The only hint in NYC towards setting aside is Art. V(1)(e), which says that an award may be refused enforcement if it has been set aside by a competent authority. The grounds for setting aside of an award varies from State to State, and it is laid down in their respective national legislations. The IAC, in this regard, would take away this power from national Courts, and develop its own set of jurisprudence to set aside an award, which is not present in any international instrument as of now. As you can see in many cases such as Chormalloy, etc. there was influence of the government on the judiciary to set aside the award. This would not be in line with transnational public policy. Again in the Bechtel matter, the award was set aside because the arbitrators did not hear the witnesses under oath. While this is in line with the local standards in Dubai, it is not in line with transnational public policy. Essentially, this is what IAC will do. It will give a concrete base to the abstract concept of transnational public policy.

      Again, the ground under Art. V(2)(a), as rightly pointed out, deals with national laws. In my opinion, this is more or less same as the subsequent ground of public policy. Usually, the arbitrability of an issue [Art. V(1)(a)] is dependent on the public policy of a country [Art. V(1)(b)]. But, this is only a ground which an enforcing Court will take into account for refusing to enforce an award. It has nothing to do with setting aside of an award, and the IAC will not be bound to use the same in its jurisprudence. In fact, the purpose of the IAC is to make sure that these local standards of public policy and arbitrability does not affect the international validity of an award. These grounds can only be used by a national Court to refuse enforcement of an award, an action which is valid only within that State’s jurisdiction.

      Also, the very purpose of IAC is to avoid a two-tier annulment system. IAC will be the only body which can annul an award. The national Courts will only have the power to refuse enforcement according to Art. V of NYC. The reason for this is that sovereignty of a country must be respected. If, for instance, parties agree to arbitrate a criminal matter in India, it is against our public policy. So, India should have the power to refuse enforcement of such award, even if the IAC decides otherwise. At the same time, if any other jurisdiction allows criminal matters to be arbitrated (hypothetically), this award can be enforced in that State as the Indian refusal to enforce the award does not affect its international validity. Unlike the current situation, IAC will b the only body that can determine the international validity of such award.

      As a final note, I agree that an international consensus for IAC would be difficult. However, it is not impossible. The IAC will have minimal powers, and each member state still gets to protect its sovereignty. Prior to the existence of NYC, an international instrument of that sort was also thought to be difficult, But, States realised the necessity of the importance of enforcement of awards, and thus, they drew up the NYC with hardly 7 relevant provisions (Art. I-VII). In the same way, enforcement of annulled awards is an issue which currently affects the enforceability of international awards. So, the States should be willing to remedy this situation by giving such minimal powers to an international body, especially when it still gives them the option to protect their sovereignty.

  2. Akansha Dubey

    But as far as the point of ‘inconsistency’ is concerned the sovereign power to enforce awards may still be misused under the ‘national laws’ or ‘public policy’ grounds. Taking into account that the discretionary powers of the State in enforcing the award are present (rightly so to respect the principles of sovereignty) the long procedure of getting a consensus for an amendment in the NYC and establishing an international body with respect to setting aside an award is worth it? Will it actually reduce the inconsistency or will the States begin relying on discretionary powers under public policy grounds more?

  3. Manu

    Inconsistencies may continue regarding refusal to enforce even with an IAC, but not on setting aside of an award. IAC cannot, and is not designed to, put an end to the inconsistencies on refusal to enforce awards, but to mitigate the inconsistencies surrounding setting aside of an award. These inconsistencies would come to an end only in the state of ‘fluid reality’ as propounded by Prof. Jan Paulsson, whereby each party would enforce awards on their own without the need to approach any State mechanism. However, that stage is nowhere near the current reality, and this goes back to the very fact that arbitration, at the end of the day, is a private act.

    So, all the IAC will be able to do is develop a consistent jurisprudence on setting aside of awards (because this power will now rest only with IAC and not any State Court). As for refusal to enforce, it is left to every State in view of their sovereignty. Here, the inconsistency that is mitigated by IAC is with respect to the international validity of an award, which, as of now, is in the hands of the Courts of the seat of arbitration. Given that the international validity of an award can be made more predictable by IAC, the effort to gather such consensus would be worth it, and not impossible.

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