The enforcement of arbitral awards is a very important last step that follows the arbitration proceedings. The arbitral awards, which are not complied with through the free will of the parties, would eventually be subject to recognition and enforcement proceedings. Accordingly, the failure to enforce the award may render the arbitration proceedings entirely useless and ineffective. At this point, the grounds for refusal of enforcement should be reviewed carefully, in order to avoid unpleasantries at the end of an enforcement proceeding.
The question as to whether an arbitral award set aside at the seat of arbitration may be enforced or not is quite important, and is analyzed in this article.
The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) ("New York Convention" or "Convention") sets forth the grounds for refusal of enforcement, under Article V. The grounds for refusal under Article V(1) may be reviewed by the enforcement judge only if the party against whom the enforcement is invoked furnishes proof that one or several of these grounds exist. Article V(1)(e) sets forth that one of the grounds for refusal of enforcement is the fact that the award has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.
The wording of Article V(1) regulating that "Recognition and enforcement of the award may be refused..." grants leeway to the court before which the enforcement is sought1. This means that if any of the grounds for refusal are present in the case at hand, the court does not necessarily have to refuse the enforcement, and may exercise its discretion in favor of enforcement.
This discretion granted to the enforcement judge is one of the indications of the enforcement-friendly approach of the New York Convention.
Another provision of the New York Convention that should be taken into consideration on this issue is Article VII(1). Pursuant to this article, the Convention shall not deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon. Accordingly, in case there is a more favorable provision under the national law that can be applied, the enforcement judge applying the New York Convention must apply this provision, so that the party seeking enforcement would be able to benefit therefrom. This provision, unlike Article V(1), does not contain permissive wording, and sets forth that the Convention shall not deprive any party to take advantage of the more favorable national law provisions.
Court Decisions Pertaining to Enforcement of Arbitral Awards Set Aside at the Seat of Arbitration
For many years, the prevailing opinion was that arbitral awards set aside at the country of origin would not be enforced under the New York Convention. However, this view has changed as a result of decisions granted in France, the United States of America and the Netherlands. Pursuant to these decisions, in the event that the arbitral award set aside at the place of arbitration would not have been set aside at the country of enforcement, this arbitral award may be enforced. In other words, if the grounds to set aside would not result in the set aside of the award pursuant to the law to be applied by the enforcement judge, then this arbitral award may be enforced.
An example of the decisions referred to, above, is the Hilmarton case. In this case, the French Court of Cassation (Cour de Cassation) decided to enforce an award set aside in Switzerland. The Court of Cassation held that the award was an international award that was not integrated into the legal order of that state and, therefore, continues to exist even though it has been set aside. Accordingly, the Court decided that the parties could avail themselves of French rules pertaining to recognition and enforcement of foreign arbitral awards, namely, the relevant articles of the Code of Civil Procedure, which do not include the same grounds for refusal of enforcement as Article V(1)(e) of the New York Convention. The Court of Cassation also emphasized that the enforcement of that award in France would not contradict the international public policy2.
Similarly, in the Chromalloy case, an arbitral award was set aside by the courts of Egypt. In this case, the Arab Republic of Egypt contended that the arbitrators incorrectly applied the substantive law by refusing to apply Egyptian administrative law, which should govern the contract. The United States District Court (District of Columbia) decided that this would, at worst, constitute a mistake of law, which would not be subject to review by the enforcement court. The court further opined that the grounds to set aside in Egypt would not result in setting aside in the United States, and recognizing the decision of the Egyptian court would violate the United States public policy in favor of final and binding arbitration of commercial disputes and, therefore, decided on the enforcement of the relevant arbitral award3.
Finally, the issue has been discussed within the scope of four Yukos arbitration awards that have been set aside in Russia. In 2009, the Amsterdam Court of Appeal decided in favor of enforcement of these awards. The Court opined that "it was very likely that the judgments by the Russian civil judge setting aside the arbitral award are the result of a dispensing of justice that must be qualified as partial and dependent;" therefore, they cannot be taken into consideration in the Netherlands during the enforcement action4. On the other hand, it should be emphasized that this decision has been criticized in the doctrine, since the Court of Appeal's decision was not based on concrete evidence of a lack of impartiality on the part of the judges involved in all three instances, but on the purportedly systematic lack of independence of the Russian judiciary5.
General Principles to be considered in the Enforcement of an Award Set Aside at the Seat of Arbitration
In light of the decisions, above, some general principles may be taken into consideration. To begin with, the grounds to set aside of an arbitral award are decisive in the analysis of whether it could be enforced in another state. Especially, if the grounds to set aside are not in line with the general practice of international arbitration, or if it is clear that the court ruling on the setting aside aims to favor its own citizens and, therefore, ruled to set aside, this should not have a negative effect on the enforcement.
Another example to set aside in some states may be based on some procedural irregularities that are considered as substantial at the seat of arbitration, but which would not have an effect on the substance of the arbitral award. Instances such as the lack of signature of arbitrators on each page of the arbitral award, or the fact that the arbitral tribunal held a hearing on a national holiday, even though all of the witnesses attended the hearing, may be given as example.
In practice, there are instances in which some national courts decide on the setting aside of an arbitral award without any reasonable grounds. These set aside decisions should not have a negative impact on the enforcement in other states, as this interpretation would endanger the uniform application of the New York Convention. Accordingly, the reasons upon which the decision to set aside are based should be analyzed by the enforcement judge, in order to decide on the enforcement.
1 Note that the Turkish translation of the relevant article does not properly reflect this wording. The Turkish translation, stating that "the enforcement of awards may not be rejected unless any of the grounds set forth hereunder are present..." does not correctly reflect that there is a discretionary power of the enforcement judge even though the grounds exist in the case at hand. However, the relevant article should be interpreted in accordance with the English version, which is one of the official languages of the New York Convention.
2 Cour de Cassation, Societe Hilmarton Ltd. V. Societe Omnium de Traitement et de Valorisation (OTV), 23 March 1994, Van den Berg (ed), Yearbook Commercial Arbitration 1995, p. 663.
3 United States District Court, District of Columbia, 31.07.1986, Civil no. 94-2339, Chromalloy Aeroservices Inc. v. The Arab Republic of Egypt, (1997), Van den Berg (ed), Yearbook Commercial Arbitration 1997, p. 1001.
4 Court of Appeal of Amsterdam, 28.04.2009, LJN BI2451; Van den Berg, Enforcement of Arbitral Awards Annulled in Russia, Case Comment on Court of Appeal of Amsterdam, April 28, 2009, Journal of International Arbitration, 27(2), 2010.5 Van den Berg, Ibid, p.181.