Court’s Intervention in Enforcement of Arbitral Awards: An Impediment to the Pro-Enforcement Bias of the New York Convention 1958?

1. Introduction

The exhaustive grounds of refusal available under Article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (herein referred to as “the New York Convention”) have been subjected to criticism for providing broad discretion to the courts of a forum state to re-litigate disputes between arbitrating parties. The scope of this paper is Article V(1)(b) of the New York Convention, under which the enforcement of an award can be refused at the request of award debtor, if that party can demonstrate to the court that it was not given proper notice of the appointment of arbitrator or the arbitration proceedings, or that the party was unable to present its case. If any of the aforementioned requirements of due process are not fulfilled, then the enforcing court may refuse to recognize and enforce the arbitral award.

2. Problem Statement

The arbitration process is designed to protect the rights of parties, and therefore following the due process is an essential element of arbitration. However, this paper examines whether the grounds mentioned under Article V(1)(b) of the New York Convention redirect an arbitral dispute to the court, such that the court is able to exercise its power of review and initiate new legal proceedings from scratch. In other words, it has to be analyzed whether the court’s discretion to set aside an award and re-litigate the matter defeats the purpose of parties’ agreement to submit the dispute to arbitration for an expeditious disposal of their case. Arguably, it also goes against the pro-enforcement bias of the New York Convention, whose purpose was for the courts of a forum state to defer to the decision of arbitral tribunals.

Pro-Enforcement Bias

The argument presented in this section can be illustrated through the case of Jess Smith and Sons Cotton LLC v D.S. Industries.[1] In that case, the objections raised by the defendant were that the defendant was never informed of any application being made to the International Cotton Association Limited for commencement of arbitration, and that the defendant did not receive any notice regarding the said arbitration. While the Lahore High Court recognized the inclination of courts to narrowly construe the conditions for refusing enforcement, at the same time, the Lahore High Court held that it was competent to frame formal issues and record evidence where the circumstances of the case may require. Hence, instead of setting aside or recognizing the arbitral award, the parties’ case was remanded, and the Court proceeded to frame the issues. The Court’s decision in this case appears to be against the pro-enforcement bias of the New York Convention. The pro-enforcement bias is at the heart of the New York Convention, and it facilitates the enforcement of foreign arbitral awards by limiting the grounds upon which the enforcement of the same may be resisted.[2] However, as will be discussed later in this paper, the courts have been very cautious in allowing the defense of due process; the courts have adopted a non-interventionist approach by allowing the defense of due process only in a narrow set of circumstances. The remaining part of this paper will scrutinize the approach taken by the U.S. and English Courts, and draw an inference of the approach that courts in these jurisdictions take when refusing enforcement an award on grounds of procedural irregularities.

3. Scope of Due Process as a Procedural Defense

The procedural defense of due process is crucial. Not only does the New York Convention embody this principle, but various institutional rules also include this defense. However, the scope of this challenge is restricted. A party is deemed to have waived its rights to raise any objections at the enforcement stage, if the same was not raised during the arbitration proceedings.[3] In Karaha Bodas v Pertamina,[4] the U.S. Court of Appeal held that the ground that applicant was not given a right to present its case under Article V(1)(b) of the New York Convention may not necessarily justify non-enforcement of the arbitral award. The rationale behind this line of reasoning by the U.S. Court was that the power of the Court to review the decision of an arbitral tribunal can only be exercised in exceptional circumstances: where the violation of due process has caused substantial and gross injustice to the rights of the parties.[5] A two-pronged test was provided by the U.S. District Court in Fitzroy Engineering, Ltd. v. Flame Engineering, Inc. for challenging the award on this basis.[6] In that case, the award debtor raised the objection that a conflict of interest between the same and its attorney debarred it from presenting its case during the arbitration proceedings. The Court rejected this argument and held that the party opposing enforcement on the grounds of its inability to present its case has to prove that: 1) an actual conflict existed; and 2) the outcome of the arbitration was affected as a result of such conflict. However, since the award debtor had adequate notice of the proceedings, there can be no valid reason for failing to appear before the arbitral tribunal.

A similar approach is adopted by the English Courts, evident through the case of Irvani v. Irvani.[7] In that case, the party against whom the award was invoked argued that it was unable to present its case during the arbitration. According to the Court, the arbitrator’s reasoning for rendering the award will itself be a strong indicator about the validity of the award. Upon careful reading of the award, if there is factual and lawful support for the award, then the objection of inability of a party to present its case will unlikely succeed.

On the other hand, courts have hesitantly embraced the defense of due process where there was a causal link between the actions of arbitral tribunal and the prejudice caused to the rights of parties. This is illustrated through the case of Iran Aircraft Industries v. Avco,[8] in which the arbitral tribunal itself led the award debtor to believe that it had employed the appropriate method to present its case. When such a method was later rejected by the tribunal, it resulted in that party not being able to adequately present its case.

4. Analysis and Conclusion

By and large, courts of forum states have tried to uphold the pro-enforcement bias of the New York Convention by narrowly construing the exceptional circumstances where the objections under Article V(1)(b) of the New York Convention, pertaining to the due process, can succeed. The courts have kept the aim and object of the New York Convention, as its title suggests, to expedite the process of enforcement and recognition of foreign arbitral awards. In this background, the first approach of the courts has been to refrain from interfering in the decision of arbitral tribunals and giving effect to the award. Even where irregularity of due process is shown, the courts have rejected it as a basis for nullifying the award. The courts have only pierced this veil where the irregularity of due process had caused grave injustice or misreading of evidence. In other words, the exceptional circumstances, which warrant the intervention of the courts in decisions of arbitral tribunals, are those which cause substantial prejudice to the rights of the party against whom the award is invoked. In every other circumstance, the courts are guided by the pro-enforcement bias of the New York Convention, and it is unlikely that the courts of enforcement state will proceed to set aside the award where the irregularity of due process under Article V(1)(b) of the New York Convention has no causal link to the outcome of the decision of arbitral tribunal.

A similar approach must be taken by the courts in Pakistan, where preference should be given to adhering to the objectives of the New York Convention. The arbitration agreement between parties should be guarded with minimal court intervention and, barring in exceptional circumstances, a strict approach should be adopted not to refuse recognition and enforcement of foreign arbitral award. Pakistani courts should give sanctity to the private agreement of parties by deferring to the decisions rendered by arbitral tribunals. The narrow set of circumstances should be limited to situations where a procedural irregularity has caused blatant and grave injustice to the rights of parties to the dispute, or deprived a party of a right which had a substantial effect on the ultimate decision of the arbitral tribunal. Only in such limited circumstances the courts should step in to set aside, modify or alter the decision of an arbitral tribunal.

Arbitral Awards

References

  1. 2019 CLD LHC 23.
  2. Abdullah v Messrs CNAN Group Spa 2014 PLD KHC 349 [5].
  3. May Lu, ‘The New York Convention On The Recognition And Enforcement Of Foreign Arbitral Awards: Analysis Of The Seven Defenses To Oppose Enforcement In The United States And England’ (2006) 23 Arizona Journal of International & Comparative Law 762-763.
  4. 2004 364 F.3d 274.
  5. Fifi Junita, ‘‘Pro Enforcement Bias’ Under Article V Of The New York Convention In International Commercial Arbitration: Comparative Overview’ (2015) 5 Indonesia Law Review 147.
  6. 1994 U.S. Dist. LEXIS 17781.
  7. (2000) 1 Lloyd’s Rep. 412.
  8. 980 F.2d 141.

Author:

Aimen Akhtar

The author is a law graduate from Lahore University of Management Sciences (LUMS), and currently working as a Research Associate at the same institution.