Introduction to the Thesis
The 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, more popularly known as the New York Convention (hereinafter referred to as the “Convention”), is the principal international standard for the enforcement of arbitral agreements and awards. It is also the primary tool by which the international community has chosen to regulate the system.
The Conference on International Commercial Arbitration convened at the Headquarters of the United Nations in New York on May 20 until June 10, 1918. In June 1958, after many years of negotiation, research, and drafting, the Convention was signed at the United Nations in New York.
Unfortunately, the Convention was slow in gaining support. Neither the United Kingdom (UK) nor the United States (US) initially signed the Convention, and they did not accede to it until 1975 and 1970, respectively. The early parties to the Convention were France, Russia, India, Israel, Egypt, Czechoslovakia, and the Federal Republic of Germany. Thereafter, most states that had held back (except some Latin American states) acceded to the Convention. As of August 28, 1999, one hundred and twenty-one states have ratified the Convention, making it the cornerstone upon which the value of the international arbitral awards is based.
The Convention’s basic idea was to make arbitral awards rendered in a foreign state enforceable in any state party to the Convention. Without such a convention, it has often been difficult or impossible to enforce an arbitral award outside the state in which the arbitration had taken place, where defendant might well not be established or have assets.
The primary intent was to overcome the difficulties encountered under the then-existing framework for recognition and enforcement set forth in the Geneva Treaties. In particular, the Convention sought to eliminate the need for judicial confirmation of the award where it was rendered (the so-called “double exequatur”), restrict the specific grounds upon which an enforcing court could examine and decline to enforce an arbitral award, and iii) shift the burden of proof concerning the validity of the award from the enforcing to the resisting party.
The first reservation in the Convention is with regard to reciprocity. Subparagraph 1, Article I of the Convention expressly provides that it shall apply to foreign arbitral awards and those not considered as domestic awards. The problem with these two distinct terms is that different states may depict each term in contrasting ways which may not be entirely in accord with how it is meant to be understood under the Convention. Thus, a party to a contract that has adopted the rules of the Convention to govern its disputes may escape from the obligation to arbitrate by alleging that a dispute is domestic.
The second reservation in the Convention is with regard to commercial relationships. Under subparagraph 3 of Article I, it is expressly stated that a reservation may be made by a state that it may apply the Convention only to commercial disputes. This reservation entitles a contracting state to declare that it will only apply the Convention to differences arising out of legal relationships, whether contractual or not, which are considered commercial under the law of the state making such a declaration.
The effect of this reservation, similar to the reservation as to reciprocity, is to narrow the scope of the application of the New York Convention. The problem with these reservations is that any resisting party to the New York Convention can merely allege that the issue involved is either domestic or pertains to commercial relationships, and thereby escape the obligation to arbitrate in the international forum.
Article V, subparagraph 2(b) of the Convention also provides that a party may refuse recognition and enforcement of the award if the Convention is contrary to the public policy of the country upon which it is sought to be enforced. The recurring problem here is that enforcing courts refuse to enforce the awards on the grounds that the arbitral tribunal failed to take account of the law of the enforcing party, and the award as being in conflict to the public policy of the enforcing state and thus cannot be enforced.
The basis for the public policy exception in the Convention is that certain provisions of the law of the enforcing state are matter of fundamental public policy and should not be disregarded even if the contract giving rise to the arbitral award is not the applicable law to the arbitration. On the other hand, Article V (1) of the Convention places significant emphasis on the party autonomy, and the ability to settle their disputes as they choose. Ironically, the public policy restriction in Article V, subparagraph 2 of the Convention places a significant limitation on that autonomy.
Statement of the Problem
This thesis seeks to examine the following three problems in the recognition and enforcement of arbitral awards under the Convention:
- The reciprocity reservation under Article I
- The commercial relationships reservation under Article I
- The public policy exception under Article V (2)(b) in relation to party autonomy under Article V (1)
Significance of the Study
There are several unresolved issues on the applicability of the Convention, three of which will be examined in particular in this dissertation. The reciprocity reservation, the commercial relationships reservation, and the public policy exception in the Convention create problems as to the recognition and enforcement of the arbitral awards. Since the Convention applies only to international arbitration, it is inevitable that the different domestic laws would conflict in the interpretation of its terms, and that resisting states or domestic courts would allege the two reservations and the exception to avoid enforcement of the Convention on what they feel are domestic matters.
The most distinctive feature of arbitration is that it provides an expeditious determination of disputes. To be more precise, “commercial arbitration” in its broadest connotation, is a process for hearing and resolving controversies of economic consequences arising between the parties. It is dependent upon an agreement of the parties to submit their claims to one or more persons chosen by them to act as their arbitrators – in other words, of selecting a judge of their own choice.
It is, thus, a model a vehicle; a method of settling commercial disputes in which the parties create their own forums, pick their own judges, waive all but limited right of review and appeal, dispense with the rules of evidence, and leave the issues to be determined in accordance with the sense of justice and equity they believe their self-chosen judges possess.
Therefore, it is imperative that the issues surrounding the recognition and enforcement of the Convention, due to the reciprocity and commercial relationships reservations, and the public policy exception, be clarified. An examination of these issues will provide for a better understanding on how to strengthen the impact of the Convention on international commercial arbitration, and to ensure its enforcement and recognition by parties.
Scope and Limitations of the Study
This thesis will focus on the examination of three key issues in the enforcement and recognition of the Convention – Article I (1), the reciprocity reservation; Article I (3), the commercial relationships reservation; and Article V(2)(b), the public policy exception. The analysis of the issues will be within the context of UK laws and jurisprudence, as well as foreign statues and jurisprudence. Other international conventions on arbitration will also be used to shed more light on the issues.
The thesis is limited to the examination of the three issues outlined in the Statement of the Problem (Section 2, Chapter 1 of this thesis) and will not discuss the other issues or controversies that may arise from the Convention.
INTRODUCTION
Contracting parties from different countries to an international contract would normally want disputes to be tried in their home territory, where each would feel that they have the “home field advantage.” Selecting a neutral third country would normally not be effective since a third-party country would often decline to try a case over which it does not exercise territorial jurisdiction.
When parties to an international contract come from different countries, the process of dispute litigation often leaves the parties with an expensive and oftentimes frustrating struggle to find an international tribunal to hear the case. Even if a party obtains a favourable judgment, they are often faced with the dilemma of the impossibility of enforcement of such a judgment.
An arbitration clause in an international contract will help the parties avoid the expensive, and frustrating process of settling their disputes. The basic problem that this thesis will examine is enforcement and recognition of an arbitral award between two parties in an international commercial agreement, and how such enforcement and recognition may be hindered by the reciprocity and commercial relationships reservations and the public policy exception in the Convention, pursuant to Article I (1), Article I (3) and Article V (2)(b), respectively.
This chapter will present a background on international arbitration v. domestic law, the nature of arbitration, international arbitration conventions, and the English experience to the Convention.
The settlement of a dispute or question at issue by one to whom the conflicting parties agree to refer their claims in order to obtain an equitable decision.
The definition indicates that arbitration is but one of a number of methods by which disputes may be settled. Many disputes are resolved informally, whether by explicitly or tacit agreement, or by simply letting the point lapse. Dispute resolution may be through the assistance of a third party, but without the power to impose a settlement or decision on the parties in dispute. Other processes lead to a binding decision given by a third party – arbitration before an arbitrator, litigation before a judge, or decision by a statutory tribunal. There are similarities between arbitration and litigation.
In both processes, the decision-maker must be impartial, treat the parties equally, and hear their respective cases, and its decision is binding on the parties. The difference is that arbitration is essentially a private matter based on agreement between the parties. This agreement extends not only to the use of arbitration, but also to the identity of the arbitrator, the procedure to be followed, and the law to be applied. However, arbitration and litigation are not entirely separate since the public powers of the courts are used to enforce both arbitration agreements and the awards which result.[6]
One possible advantage of arbitration over litigation is that it is an opportunity to choose an expert as decision-maker, the degree of informality and flexibility in terms of procedure, the reduction in time and expense (as a consequence of flexibility and expertise), and the choice of the governing principles and law, as well as privacy. Not all of these features will always be present, since some arbitrations may be very formal and may amount to practically a trial.
Others on the other hand may be more informally where a simple onsite inspection would be sufficient for an immediate decision. Ultimately, the difference between arbitration and litigation comes down to the factor of choice and the flexibility this allows for. Lastly, there are public interests arising from this recognition of private ordering, including the reduction of the pressure on the courts and cost savings.
English courts have long debated the nature of arbitration proceedings and how these differ from court actions. According to Justice Kerr in his landmark paper: With the removal of the deterrent of the involvement of the courts under the special case procedure, we will see a vast increase of London arbitration clauses in international contracts coupled with the necessary exclusion agreements.
However, there are two further conditions which must be met. First, we need an arbitral organisation, a focal point, which can provide more than mere reference to ‘London’ in future arbitration clauses. It should avoid all the disadvantages of the ICC. It should offer the appointment of suitable arbitrators and umpires on request, and premises and other ancillary services. Its charges should be minimal, and totally independent of the amount in dispute.
But on no account should it seek to control the arbitrations in any way, and it should prescribe no procedural rules save to make it clear that the procedure will be in the sole discretion of the tribunals and not restricted by the English rules of procedure. This point is further mentioned below. On this basis it should rely on the quality of the tribunals available for appointment and leave the conduct of each arbitration to the tribunal.
The second qualification is one which will then have to be met by the tribunals themselves. This is that they should not allow themselves to be dominated by English procedures. In long and complex cases the Continential inquisitiorial procedure is often more effective than our adversary system. It is often better for the tribunal to limit discovery in the first instance, to appoint its own experts, and then to exercise control over the volume of discovery and the witnesses whom it wants to hear. Our arbitrators will have to learn to be more imaginative than merely to follow the mirror-image of the procedure in our courts.
The difficulties concerning the adoption of the inquisitorial procedures of the civil law in appropriate cases have been a secondary reason why the ICC has been reluctant to direct arbitrations to this country. A contractual relaxation of our procedure by leaving this expressly to the discretion of the tribunals would meet this criticsm, and any abuses would still be subject to the control of ‘misconduct’ by the Commercial Court.
The word “misconduct” gave rise to the following significant footnote in Justice Kerr’s paper: Under §23 of the Arbitration Act 1950. However, an express contractually binding power for the tribunal to apply its own procedure will no doubt be necessary: without this, any disregard of English procedural rules would probably constitute ‘misconduct.’(Emphasis supplied).
The London Court of Arbitration (LCA) published new, simplified rules on international arbitration, incorporating Justice Kerr’s suggestions. Rule 5 (1) provides: The arbitrator shall have the jurisdiction, and the powers to direct the procedure in the arbitration, necessary to ensure the just, expeditious, economical and final determination of the dispute, as set out in the Schedule of Jurisdiction and Powers of the Arbitrator.[10]
Rule 13 of the LCA’s International Arbitration Rules (adopted to take effect in January 1, 1981) provides that if the parties have agreed that the United Nations Commission on International Trade Law (UNCITRAL) Rules shall apply, then the arbitrator will have the further powers provided therein in addition to those conferred upon him in the Schedule of Jurisdiction and Powers of the Arbitrator.
However, a close comparison of the two instruments reveals that only insignificant extensions of the arbitrator’s specific such jurisdictional powers are envisaged. Some of those apparent additions may, however, be deemed to be implied under the UNCITRAL Rules, and others may not be permissible at law, at least not outside England.
The development of international conventions, and more recently, through the Model, has been the most effective method of creating an international system of law governing international commercial arbitration.
Bilateral Investment Treaties (BITs) are agreements on the part of the states concerned to arbitrate any dispute between the host state and investors of another state; and the definition of “investors” is often sufficiently broad to include nationals and public legal entities of the host state. In the autumn of 1997, the legal advisor of the International Centre for the Settlement of Investment Disputes (ICSID) recorded:
States have in recent years been making BITs at rapid rates. Since 1985, the number of BITs has increased by about 880 to its current level of approximately 1,100.
In a BIT, the state party makes a standing offer to arbitrate any dispute that may arise in the future, but it is only when a dispute actually arises and private investor accepts this offer to arbitrate, that an “agreement to arbitrate” is formed. Other treaties also demonstrate the importance of arbitration as a method of resolving disputes. For instance, in 1993, the North American Free Trade Agreement was finalised, followed in 1994 by the Energy Charter Treaty.
As Paulson notes: By allowing direct recourse by private complainants with respect to [such] a wide range of issues, those treaties create a dramatic extension of arbitral jurisdiction in the international realm.
Other treaties include the Montevideo Convention of 1889, which provided for the recognition and enforcement of arbitration agreements between certain Latin American States. However, the Montevideo Convention was a regional convention, and the first genuinely international convention was the Geneva Protocol of 1923, which was drawn up by the ICC and under the auspices of the League of Nations.
The Geneva Protocol of 1923 had two objectives. The first and primary objective is to ensure that arbitration clauses were internationally enforceable, so that parties to any arbitration agreement would be obliged to resolve their disputes by arbitration rather than going to courts. The second objective was to ensure that arbitration awards made pursuant to such arbitration agreements would be enforced in the territory of the states in which they were made.
These two objectives are also to be found in a more modern version in the New York Convention. Unfortunately, the 1923 Geneva Protocol was limited in its range and effect since it applied only to arbitration agreements made “between parties subject respectively to the jurisdiction of different contracting states” and it could be further limited by states availing themselves of the commercial reservation.Thus, as far as enforcement of arbitral awards was concerned, the execution under its own laws of awards made in its own territory pursuant to an arbitration agreement was covered by the Protocol.
The 1923 Geneva Protocol was followed by the Geneva Convention of 1927, which had the purpose of widening the scope of the former Protocol by providing for the recognition and enforcement of Protocol awards within the territory of contracting states, and not merely the state in which the award was made.
There were a host of problems and issues surrounding the operation of these two Geneva treaties. There were limitations with regard to their field of application, and under the 1927 Geneva Convention, a party seeking enforcement had to prove the conditions necessary for enforcement. This is what is called as the problem of “double-exequatur.” To show that the award had become final in its country of origin, the successful party was often obliged to seek a declaration in the courts of the country where the arbitration took place to the effect that the award was enforceable it that country, before it could go ahead and enforce the award in the courts of the place of enforcement.
Despite these criticisms to the Geneva treaties, they paved the way towards international recognition and enforcement of international arbitration agreements and awards. In 1953, the ICC proposed a new treaty to govern international commercial arbitrations, which was then taken up by the United Nations Economic and social Council (ECOSOC). It later resulted in the New York Convention, adopted in 1958, and discussed more extensively in Subsection 2 (e) of this chapter.
Conventions after 1958 include the European Convention of 1961, under the auspices of the Trade Development Committee of the United Nations Economic Commission for Europe. This Convention applies to international arbitrations to settle trade disputes between parties from different states, whether European or not. The Convention provides for an express recognition of the capacity of the state or other public body to enter into an arbitration agreement, although the Convention also allows a state, on becoming a party to the Convention, to limit this faculty to such conditions as may be stated in its declaration.
Unfortunately, the 1961 European Convention failed to meet its objectives. Its approach was more theoretical than practical. It also did not deal with the recognition and enforcement of awards. This was left to other conventions such as the New York Convention which the European Convention may seem as a mere supplement.
There are also regional conventions on arbitration such as the Panaman Convention and the Amman Convention, which pertain specifically to arbitration agreements or awards in those regions. The most relevant step after the New York Convention towards providing for a uniform system for international commercial arbitration is the UNCITRAL Model Law of 1985, to be discussed more extensively in Subsection 2 (d) of this chapter
The three case studies to be discussed under this subsection will illustrate the desire for an international arbitral process based on universally recognized standards of law. The case studies will be case law from France, Switzerland, and the US, to better illustrate the growing clamour by the international community to have a uniform procedure for international arbitration in place.
This case was a decision rendered by the Court of Appeals of Paris on February 21, 1980. The award in this case obligated GNMTC to take delivery of three oil tankers which the company had ordered from the Swedish shipyard Gotaverken upon payment of the balance of a slightly reduced purchase price (such balance aggregating $ 29,995,050 for the three ships). The price reduction corresponded to certain defects in the vessel determined by the Tribunal to exist.
The Tribunal sat in France. By letter of April 21, 1978, the Secretary of the Court of Arbitration of the ICC advised the claimant that the award conformed to “the procedural law applicable at the place of arbitration”[28] which in this case was Paris. The Paris Court of Appeals, seized with a declaration d’appel by GNMTC in which the award was attacked on manifold grounds, held that the award was not French but “international” and that consequently the court lacked jurisdiction to grant the requested relief of setting the award aside.
In the case, the Paris Court of Appeals ruled: Considering that the award at issue, rendered in accordance with proceedings which are not those of French law and which have no attachment whatsoever to the French legal order since the two parties are foreigners, and since the contract was signed and was to be performed abroad, may not be considered French.
That, in the face of the very clear Article of the ICC Rules recalled above, the place of the arbitral proceedings, chosen only in order to assure their neutrality, is not significant; it may not be considered an implicit expression of the parties’ intent to subject themselves, even subsidiarily, to the loi procédurale française;
That the provisions of the New York Convention, intended to facilitate the recognition and execution of arbitral awards, are inapplicable when the prupose of a court action is not to obtain a declaration of enforceability of an international arbitral award;
That no decisive argument may be deducted from the Convention in order to acknowledge, as a secondary effect, the necessary application of the procedural law of the country where the arbitration takes place;
That moreover, it should be recalled that France expressed the reservation contemplated by Article I (3) of the New York Convention in declaring that it would apply said Convention on the basis of reciprocity, that is to say only to the recognition and enforcement of awards which are rendered on the territory of another contracting State;
Considering that the grounds of challenge against an award which is not French – the hypothesis that there is proof of standing to sue (intérêt à agir) – are those available against foreign awards; That for these reasons the appeal to set aside should be dismissed.(Emphasis supplied).
In the meantime, the award had been held enforceable in Sweden by the Svea Court of Appeal[30] and by the Supreme Court of Sweden. The judgment of the Supreme Court stated that the award, when rendered, must be deemed to have been binding on the parties in France.
Section 5 of the Swedish Act of 1929 concerning Foreign Arbitration Agreements and Awards provides that an “arbitral award shall be considered as ‘foreign’ if it was given abroad” and that “in applying this Act, an arbitral award shall be considered as given in the State where the arbitration proceedings have taken place.” However, the said section does not explicitly provide that a foreign award partakes of the nationally of the State where the proceedings have taken place; yet this was evidently the assumption on which the Supreme Court proceeded, and one deemed a natural presumption to make at that time.
The Federal Tribunal of Switzerland considered an arbitral award of Professor Mahmassani rendered in Geneve on April 12, 1977. In it, Liamco was awarded substantial damages, exceeding $ 80 million, for breach of an oil concession through nationalisation and unilateral abrogation.
At issue before the Swiss court were attachments made on Libyan property with a view to securing enforcement of the award in Switzerland.
The Federal Tribunal held that the award was equivalent to an enforceable Swiss court judgment and therefore enforceable anywhere in Switzerland.
Yet the court held that the attachmwents at issue should be cancelled since there was “no sufficient nexus of the legal relationship at stake with the Swiss state territory.”
The rationale for this decision was that such a nexus would not be created by the mere choice of Switzerland as a forum: by a third party or by the court of arbitration itself… in any event not in cases where the court of arbitration is asked to decide on a dispute resulting from a legal relationship having itself not points of contact with Switzerland.”
The agreement establishing the Iran-United States Claims Tribunal (hereinafter referred to as “Iran-US CTR”) is an intergovernmental international treaty which provides for the establishment of an “International Arbitral Tribunal.” The Iran-US CTR has been called the “most significant arbitral body in history.”
However, the Tribunal appears to yield decisions of unclear precedential value. The doubt about the relevance of the Tribunal’s work reflects a more fundamental uncertainty about the proper place of the Tribunal and its work within traditional categories of international dispute resolution.
Under this legal system, there is little need for the parties to request assistance from powers external to the Tribunal. The UNCITRAL Arbitration Rules provide for an appointing authority to resolve disputes between the parties over the composition of the Tribunal. The Algiers accords established a fund, the Security Account, with a portion of the Iranian assets that the US had frozen. With the Algerian Government acting as escrow agent for the Security Account pursuant to the Tribunal’s instructions, the Security Account assures the availability of funds to satisfy most awards of the Tribunal.
Another factor in analysing the Tribunal’s relationship to the external legal world is the Tribunal’s three primary jurisdictional grants. It must be asked whether the legal system supervising the arbitral process before the Tribunal is a function of the particular basis of jurisdiction. First, the Tribunal may hear “claims of nationals of the United States against Iran and claims of nationals of Iran against the United States” (claims of nationals). Second, the Tribunal has jurisdiction over “official claims of the United States and Iran against each other arising out of [certain] contractual arrangements between them” (official claims). Third, the Tribunal may hear disputes between Iran and the United States concerning the interpretation or performance of any provision of the General Declaration or interpretation or application of the Claims Settlement Declaration (interpretive disputes).
In sum, under the Iran-US CTR, the arbitration agreement is evidently subject to amendment and amplification only by the two State parties to it. It embodies the UNCITRAL Arbitration Rules and enjoins the Tribunal to render awards – as between the US and Iran, and among US and Iranian nationals, and Iran and US respectively – which will be enforceable against either government “in the courts of any nation in accordance with its laws” (pursuant to Article IV, subparagraph 3 of the Iran-US CTR) Hence, the agreement lacks precedent and poses novel problems of apparently vast significance.
Conclusion
The conclusion that can be derived from these three case studies is that potential users of Switzerland as a forum for international arbitration proceedings must now pause and reflect a second time before opting for any Canton as a forum if neither party is Swiss and there does not therefore exist a “nexus,” for otherwise the resulting award may be held unenforceable.
ICC and other tribunals sitting in France must seek to realize under what legal system they operate, and what their awards will eventually be worth, for again, if French procedural law does not apply, the awards cannot be challenged in France, nor may they be enforceable abroad as not partaking of French – or any other – nationality. They may well, however, be enforceable in France. As for the Iran-US CTR, unless the arbitration agreement is substantially clarified and elaborated by the parties to it, the arbitrators seemingly must fulfil a mammoth of task of interpretation and judicial discretion.
The common denominator among the three case studies presented in this section, despite their seemingly disparate legal developments, seems to be a latent desire to achieve recognition of the ideas so ardently advocated by the ICC before the adoption of the New York Convention. It indicates a need for an internationalised arbitral process based on universally recognized standards of law and justice.
This Convention shall apply to the recognition and enforcement of arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought, and arising out of differences between persons, whether physical or legal. It shall also apply to arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought. (Emphasis supplied).
The tern “international” is used to mark the difference between arbitrations, which are purely national or domestic and those, which in some way transcend boundaries and so are international, or, in the terminology adopted by Judge Jessup, “transnational.” The distinction is important in practice. It is but natural that a state should wish to exercise firmer control over domestic arbitrations, involving its own residents or citizens, than it would wish to exercise over international ones.
As a general rule, among states that have a developed law of arbitration, more freedom is allowed in an international arbitration as compared to domestic arbitration. The rationale is that domestic arbitrations usually take place between the citizens or residents of the same state, as an alternative to proceedings before the courts of law of that state. More often than not, such arbitrations involve claims that are small in amount, although often important in practice.
In relation to international arbitrations, these may only take place within the state territory because of geographical convenience. However, there is an important element of consumer protection in this attitude as well. A nation’s concern is that powerful trade associations would otherwise impose their own “law” on traders and citizens less powerful than themselves. Such concern is less strongly felt when the arbitration is international.
Moreover, in some states, only the state itself or entities of the state may validly enter into an arbitration agreement in respect of international transactions, which is a further reason for distinguishing between an arbitration which is international and one which is not.
In defining the term “international” in the context of an international commercial arbitration, two main criteria may be used, either alone or in conjunction. The first is to analyse the nature of the dispute. In this connection, arbitration is treated as international if it “involves the interests of international trade.” The second involves focusing attention on the parties; their nationality or habitual place of residence, or if the party is a corporate entity, the seat of its central control and management. On this criterion, arbitration between a British national and a French national would be an international arbitration. Some national systems of law have adopted the first approach; others, the second.
The International Chamber of Commerce (ICC), which established its Court of Arbitration in Paris in 1923, was quick to adopt the nature of the dispute as its criterion for deciding whether or not arbitration was an international arbitration under its rules. Although at first it only considered business disputes as international if they involved nationals of different countries, it altered its rules in 1927 to cover disputes, which contained a foreign element, even if the parties are nationals of the same country.
The present rules of the ICC contains no definition of what is meant by “business disputes of an international character” but the explanatory booklet issued by the ICC used to state:
[T]he international nature of the arbitration does not mean that the parties must necessarily be of different nationalities. By virtue of its object the contract is concluded between two nationals of the same State for performance in another country, or when it is concluded between a State and a subsidiary of a foreign company doing business in that State.
The ICC is prepared to give a wide interpretation of the term “international” so as to cover arbitrations involving any foreign element. For instance, if the subsidiary of a foreign company doing business in a state was incorporated in that state, any arbitration between the company and the state concerned would be classified as international under the ICC Rules.
The lack of an internationally agreed definition of “international” in the context of international commercial arbitration may pose problems. It is possible that an arbitration, which would be considered as international in France because it involves the interests of international trade, would be considered as national or domestic in England because both parties are British nationals. However, such differences of approach should not be exaggerated. In practice, most international commercial arbitrations are likely to satisfy both criteria – that is to say, that of different nationality of the parties and that of the international nature of the transaction.
It has been further argued that international arbitration should entirely be delocalised from national systems of law on the basis that those systems are irrelevant to the parties’ concerns, particularly in that place of the arbitration which is often chosen simply chosen for geographical convenience, and where there are no particular legal consequences of any foreign arbitral award. However, a variation of this argument provides that even though the national law of the place of the arbitration is relevant to international arbitration, it need not regulate them to a great degree. Parties resident or doing business in different states might prefer to detach the arbitral process, so far as practicable, from the courts and the law of the State with which the one or the other has a close connection.
The limited relevance of the law of the place of arbitration suggests that the law should not apply strict controls, and also that it would not have a great interest in doing so. In addition, there are relevant practical advantages in adapting a liberal treatment for international arbitration since international parties tend to prefer flexibility in their dealings and may be more able to shop around, selecting the national forum whose law is most congenial to them. And since international parties can usually look after themselves (and are often supported in a practical sense by international arbitration institutions such as the ICC), they may have less need of support from national laws and courts.
By contrast, parties to domestic arbitrations are likely to have a much closer connection with the law of the place of the arbitration. Their transaction is more likely to be subject to the substantive law of that place. They are not as likely to be able to select other places to arbitrate. The parties are also perhaps less likely to be on equal footing. The State of the place of the arbitration may well also have a greater real interest in the subject matter of domestic arbitrations.
These differences just discussed may however not be always present and are matters of degree. When the United Nations Commission on International Trade Law adapted the Model Law on International Commercial Arbitration (UNCITRAL Model Law) it was recognized that its principles could, with adaptation, be extended also to domestic arbitration.
UNCITRAL was established in 1966 by a resolution of the United Nations General Assembly as a specialized body dealing with international trade law. In December 1985, the General Assembly reaffirmed the mandate of UNCITRAL. [A]s the core legal body within the United Nations system in the field of international trade law, to coordinate legal activities in this field in order to avoid duplication of effort and to promote efficiency, consistency and coherence in the unification and harmonization of international trade law.
While the Convention was a way of enhancing the effectiveness of arbitration in international trade, it was realized within UNCITRAL that there was a need for a more unified approach to arbitration proceedings. The need for a more unified approach arose due to ad hoc arbitrations, where it became necessary to regulate the steps to be taken in arbitration, so that the parties may be reasonably sure of obtaining an award which would be enforceable under the Convention. The aim was to establish a procedural framework which, if properly adhered to, would ensure general international acceptance of the result of the arbitration process, particularly under the Convention.
In attempting to shed uniformity as to the definition of an international transaction, the UNCITRAL Model Law defines “international” as follows:
The definition combines the two criteria mentioned earlier.[53] The primary criterion of internationality is related to the parties, arising from their having places of business in different states.[54] But there is also the secondary criterion of the internationality of the dispute itself in that, for instance, the place with which the subject matter of the dispute is most closely connected may be foreign to the parties. Finally, there is the element of internationality, which may arise from the choice of a foreign place of arbitration.
The UNCITRAL Model Law has not been without criticsm. Among those are some experienced in arbitrations in London which continues to be the location for arbitration of many international trade disputes. The suitability of the UNCITRAL Model Law for adoption by legislation in England, Wales, and Northern Ireland was considered by a Departmental Advisory Committee chaired by Lord Justice Mustill. The Committee reached a negative conclusion in its 1989 report:
Judged on its intrinsic merits the Model Law has some features which could be of some benefit, principally as statutory statements of existing common law principles. But it does not offer a regime which is superior to that which presently exists in these law districts. A number of the provisions of the Model Law would be detrimental, and others of doubtful benefit, to the law and practice of arbitration there.
The arguments in favour of enacting the Model Law in the interests of harmonization, or of thereby keeping in step with other nations, are of little weight. The majority of trading nations, and more notably those to which international arbitration have tended to gravitate, have not chosen thus to keep in step. There would in our judgment be undoubted disadvantages in intrdocuing a new and untried regime for international commercial arbitration, with all the transitional difficulties that this would entail, and at the same time retaining the present regime for domestic arbitration.
However, a Scottish Advisory Committee on arbitration law, chaired by Lord Dervaird, reached a contrary conclusion in relation to Scotland adopting the UNCITRAL Model Law in its report. The Dervaird Committee, after noting that the adoption or otherwise of the Model Law in England, Wales and Northern Ireland, was not decisive of the position in Soctland, observed that:
[T]he Model Law has been adopted, or proposal for its adoption have been made, in Australia, Cyprus, Hong Kong and New Zealand, also substantial common law jurisdiction. It appears to the Committee therefore that having already established that there would be no significant detriments to the existing law of arbitration arising from the adoption of the Model Law, the decisions taken in those countries and the likelihood of the widespread availability of the Model Law in important commercial countries represent another reason for its adoption in Scotland.
Criticisms aside, the Model Law began with a proposal to reform the New York Convention and has been largely considered successful. The text goes through the arbitral process from beginning to end, in a simple and readily understandable form. It has been adopted by many states, either as it stands or with minor changes, and it is a text that any state proposing to adopt a modern law of arbitration is bound to take into consideration.
The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, (referred to as the “Convention” as previously provided for in Chapter 1 of this thesis), was adopted in June 10, 1958. This Convention is considered as the most important international treaty relating to international commercial arbitration, and is deemed as a major factor in the development of arbitration as a means of resolving international trade disputes.
The Convention is a considerable improvement on the 1927 Geneva Convention since it provides for a much more simple and effective way of obtaining recognition and enforcement of foreign arbitral awards, and replaces both the 1927 Geneva Convention and the 1923 Geneva Protocol.
To enforce arbitration agreements, the Convention adopts the technique found in the 1923 Geneva Protocol, in Article II (3) which requires the courts of contracting states to refuse to allow a dispute that is subject to an arbitration agreement to be litigated before its courts, if an obujection to such litigation is raised by any party to the arbitration agreement. And unlike the 1923 Protocol, the Convention does not provide that the parties to an arbitration agreement to which the Convention shall apply be “subject respectively to the jurisdiction of different contracting states.”
Evidently, the Convention is intended to apply to international arbitration agreements rather than purely domestic arbitration agreements, and also deals with the recognition and enforcement of foreign arbitral awards. The applicability of the Convention to international arbitration agreements has been interpreted in that light by national laws implemeniting the Convention, such as those of the UK, and the US, and by the reported decisions of national courts, when called upon to apply the Convention.
This Convention shall apply to the recognition and enforcemenmt of arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought, and airising out of arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought.
If this opening article was to be taken as without qualification, then it would mean that an award made in any state, even if that state was not a party to the Convention, would be recognized and enforced by any another state that was a party, so long as the award satisfied the basic conditions provided for in the Convention. Article I (3) of the Convention however provides for two exceptions or reservations as to this general rule. The first reservation as to reciprocity will be discussed in the succeeding subsections.
The basic distinction must be made between the substantive law governing a contract and the procedural law applicable to the proceedings. The difference between the substantive law governing a contract and the procedural law applicable to the proceedings lies at the heart of the issues surrounding the enforcement and recognition of international arbitral awards.
In the landmark cases of James Miller & Partners, Ltd. v. Whitworth Street Estates (Manchester), Ltd. and Compagnie d’ Armement Maritime S.A. v. Compagnie Tunisienne de Navigation S.A., Lord Diplock provided:
English law accords to the parties to a contract a wide liberty to choose both the proper law and the curial law which is to be applicable to it. If the parties exercise that choice as respects either the proper law or the curial law or both, the English courts will give effect to their choice unless it would be contrary to public policy to do so. But it is a liberty to choose – not a compulsion, and if the parties do not exercise it as respects the proper law applicable to their contract the court itself will determine what is the proper law.
The first stage, therefore, when any question arises bweteen parties to a contract as to the proper law applicabnle to it, is to determine whether the parties intended by their contract to exercise any choice at all and, if they did, to determine what was the system of law which they selected. In determining this the English court applies the ordinary rules of English law relating to the construction of contracts.
If, applying these rules, the court reaches the conclusion that the parties did not intend to exercise any choice of proper law, or is unable to identify what their choice was, it becomes necessary for the court to proceed to the second stage, of determining itself what is the proper law applicable. In doing so, the court applies the English rule of the conflict of laws relating to the proper law of the contract. This is that the proper law is that system of law with which the transaction has its closest and most real connection (Bonython v. Commonwealth of Australia).
My Lords, this is applied as a positive rule of English law. It is applied not because it is the choice of the parties themselves but because they never intended to exercise their liberty to make a choice or, if they did, they have failed to make their choice clear.
Similarly, with choice of curial law. This generally takes the form of a provision in the contract for submission to arbitration of disputes arising out of it; although parties may, and sometimes do, agree by their contract to submit disputes to the determination of the courts of law of a particular country to the exclusion of all other courts.
An express choice of forum by the parties to a contract necessarily implies an intention that their disputes shall be settled in accordance with the procedural law of the selected forum and operates as if it were also an express choice of the curial law of the contract. If the parties have made no choice of forum, an English court can only apply English procedural law in any disputes under the contract in which it is invited to adjudicate.
My Lords, it is possible for parties to a contract to choose one system of law as the proper law of their contract and a different syustem of law as the curial law. Although they may want their mutual rights and obligations under the contract to be ascertained by reference to the system of law of a country with which the transaction has some close and real connection, they may nonetheless consider that the arbitral procedure adopted in some other country, or the high reputation and commercial expertise of arbitrators available there, make the curial law of that country preferable to the curial law of the country whose system of law they have chosen as the proper law.
The reason why the distinction between substantive and procedural law becomes relevant thus is that the principle of party autonomy (discussed below) permits parties to select one governing law clause and a different arbitration forum. The governing law clause will operate according to its terms, and the procedural law, the lex arbitri, will be that of the forum. The problems consist in marrying the two systems to the extent that they are disparate.
The principal starting point of this proposition is that the basis of which all arbitrations rest is the theory of party autonomy. Many writers, especially in France, have regarded this underlying idea as having a generative force of its own and have sought to deduce further propositions and rules from it. They have formulated theories to the effect that the international arbitral process is autonomous and independent of the laws of national jurisdictions, and have launched the concept of a modern lex mercatoria.[67]
The Convention defines a foreign award as an award made in another country, eliminating the requirement concerning the nationality of the parties. It also allows party autonomy to override non-mandatory provisions of the arbitration law of the place of arbitration.[68]
The Convention mentions the terms “foreign arbitral award” and “non-domestic awards.” A lay person would construe the terms as synonymous. Thus, one might understand the terms to mean as simply an award rendered in another national jurisdiction and which is sought to be enforced here. The second reservation contained in Article I (3) of the Convention pertains to commercial relationships.
Reference
- W. Laurence Craig, ‘Some Trends and Development in the Laws and Practice of International Arbitration’ (Winter 1995), Texas International Law Journal, Vol. 30, No. 1, at 10 [hereinafter Craig, ‘Some Trends and Development’]
- Georgios C. Petrochilos, ‘Enforcing Awards Annulled In Their State of Origin Under the New York Convention’ (October 1999), International and Comparative Law Quarterly, Vol. 48, at 856, footnote no. 2 [hereinafter Petrochilos, ‘Enforcing Annulled Awards].
- Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration, 3rd Ed. (Sweet & Maxwell, London 1999) at 457 [hereinafter Redfern and Hunter 1999].
- Re Spectrum Fabrics Corp., 139 N.Y..S 2d 612, aff’d 309 N.Y. 709, 128 N.E. 23 35 (Statute).
- Faegre & Benson, LLP, ‘The Role of International Arbitration in World Trade’ (10 November 2005) <http://www.faegre.com/global/article.aspx?id=1734 > accessed 24 February 2007
- Arbitration, Law Commission Report No. 20, NZLC (1991), at 58-59 [hereinafter NZLC, ‘Arbitration.’]
- Justice Kerr, ‘International Arbitration v. Litigation’ (1980), The Journal of Business Law, 164-180.
- London Court of Arbitration International Arbitration Rules (1981).
- To be discussed more extensively in Chapter 1, Section 2, Subsection 2 (d) of this thesis.
- Paul Sieghart, Commentary on the International Arbitration Rules (LCA, International Arbitration Centre, London 1981).
- Hans Smit, Nina M. Galston, and Serge L. Levitsky, Eds., International Contracts (Matthew Bender, New York, NY 1981), at 282 [hereinafter Smit, et al.].
- Antonio Parra (1997), ‘Provisions on the Settlement of Investment Disputes in Modern Investment Laws, Bilateral Investment Treaties and Multilateral Instruments on Investment,’ 12 Foreign Investment Law Journal 287.
