Answer By law4u team
Public policy plays a crucial role in the enforcement of arbitral awards, especially in international arbitration. While arbitral awards are generally considered final and binding, there are instances where the enforcement of an award can be refused if it is found to be in violation of a country's public policy. This concept is often invoked as a safeguard to ensure that the enforcement of foreign or domestic arbitral awards does not conflict with the fundamental legal principles or public interests of a state.
Role of Public Policy in Enforcement of Awards
Protection of National Interests
Courts may refuse enforcement of an arbitral award if it is perceived to conflict with the fundamental interests or sovereignty of the state. For example, if an award goes against the constitutional principles or violates local laws that protect the public interest, it may be denied enforcement.
Upholding Fundamental Legal Principles
Awards that require actions which are fundamentally illegal or contrary to the basic moral and legal standards of the enforcing country may be refused on public policy grounds. For example, an award that forces a party to act in a way that breaches criminal law could be rejected.
Violation of Public Order
Public policy as a ground for refusal of enforcement often centers around public order or ordre public. This refers to the fundamental norms of a legal system that ensure the stability and integrity of society. An award that goes against these norms can be blocked.
Judicial Discretion in International Arbitration
Under frameworks like the New York Convention (1958), courts are granted discretion to refuse enforcement of arbitral awards on public policy grounds. However, this discretion is exercised narrowly, and enforcement is typically upheld unless there is a clear violation of the country's essential laws or principles.
Differences in Public Policy between Jurisdictions
What constitutes public policy can vary significantly between different countries. For example, what is considered contrary to public policy in one jurisdiction may be acceptable in another. This can create complications in the enforcement of awards in international arbitration, as the interpretation of public policy can differ.
Common Grounds for Refusing Enforcement Based on Public Policy
Illegal or Fraudulent Contracts
If the underlying contract or transaction that led to the arbitral award is illegal or involves fraud, the award may be refused enforcement due to violation of public policy.
Violation of Human Rights
Awards that order actions that contravene human rights principles (e.g., forced labor, discrimination) may be denied enforcement on public policy grounds.
Contravention of Local Laws or Regulations
If the arbitral award requires a party to violate domestic laws, such as environmental regulations or antitrust laws, enforcement can be blocked on the grounds that it breaches national public policy.
Breach of Natural Justice or Fairness
If the arbitral process itself violated principles of natural justice (e.g., bias, lack of due process), the resulting award may be challenged as against public policy, particularly if it undermines the fairness of the legal system.
Public Policy in Domestic vs. International Arbitration
Domestic Arbitration
In domestic arbitration, the role of public policy in the enforcement of awards is more straightforward. Local courts are more likely to reject an award if it violates fundamental legal principles or laws considered essential to the country's order and system.
International Arbitration
Internationally, the enforcement of awards is governed by agreements like the New York Convention, which allows for limited grounds to refuse enforcement based on public policy. However, the threshold for refusing enforcement is higher, as international treaties encourage recognition and enforcement of foreign arbitral awards to promote consistency in global trade and investment.
Legal Protections and Consumer Actions
Understanding Public Policy Grounds
Parties involved in arbitration should familiarize themselves with the public policy exceptions in the jurisdiction where enforcement is sought. This will help avoid surprises if enforcement is contested.
Ensuring Award Compliance
Both parties in an arbitration should ensure that the terms of the award comply with the local laws of the jurisdiction where enforcement is anticipated. This can help prevent challenges based on public policy grounds.
Use of Binding Arbitration Clauses
To avoid complications related to public policy, parties should include clear arbitration clauses in their contracts that specify the legal framework and jurisdiction for the arbitration, minimizing the risk of enforcement issues.
Consumer Safety Tips
Seek Legal Counsel
Before agreeing to arbitrate or enforcing an award, it’s important to consult with legal experts familiar with the enforcement process in the relevant jurisdiction.
Ensure Clarity in the Arbitration Agreement
A well-drafted arbitration agreement can help reduce the likelihood of challenges on public policy grounds. Make sure the agreement does not call for actions that could violate local laws or public policy.
Understand Local Public Policy
If enforcing an international award, understand the local country’s public policy to anticipate potential hurdles and ensure smoother enforcement.
Example
Suppose a company, GlobalTech Ltd., based in Country A, wins an arbitration case against a company, MegaBuild Corp., based in Country B. The arbitral award orders MegaBuild to pay a large sum for breach of contract. However, MegaBuild argues that the award should not be enforced in Country B, claiming it violates public policy because the enforcement of the award would force it to pay a penalty for a contract deemed illegal under Country B’s anti-corruption laws.
Steps MegaBuild Corp. should take:
- Seek Legal Advice: MegaBuild should consult with legal counsel in Country B to understand how public policy is defined in the context of enforcement.
- File an Application in Court: MegaBuild files a petition in the relevant court in Country B, arguing that the award is in violation of local anti-corruption laws.
- Court Decision: The court will evaluate whether enforcing the award would be contrary to public policy. If the court agrees with MegaBuild’s argument, enforcement of the award will be denied.
- Possible Outcome: If the court rejects the enforcement based on public policy grounds, MegaBuild could seek to renegotiate or litigate the matter in a different jurisdiction.
