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The Supervisory Role of the DIFC Courts in Arbitration Matters Including the Recognition and Enforcement of Awards - DIFC Courts
Nov 1, 2010 | Judges' Addresses
DIFC COURTS’ LECTURE SERIES 2010
PART I: THE IMPORTANT BUT LIMITED ROLE OF THE DIFC COURTS
1.1 In this paper I make frequent reference to English and New Zealand decisions. The first reason for the reference to English cases is obvious enough: English law has shaped DIFC laws and it is to the default law if there is no applicable DIFC Statute or Rule: See RDC Rules 2.9 and 10 referring to the English Civil Procedure Rules. Reference to New Zealand law may be explained by the fact that like the DIFC it is a smaller common law jurisdiction which has adopted the UNCITRAL Model Law on International Commercial Arbitration and because I am familiar with it.
1.2 There is a second reason which has to do with the Law of Arbitration itself. Both the New Zealand and the United Kingdom Arbitration Acts rely heavily on the Model Law. Although the United Kingdom initially decided against the adoption of the Model Law into their 1996 Arbitration Act, the drafters of that Act relied heavily on the Model Law. This reliance was explicitly noted in the DAC Report on the Arbitration Bill in February 1996, where it stated that despite not adopting the Model Law in “wholesale” form, “at every stage in preparing a new draft Bill, very close regard was paid to the Model Law, and it [would] be seen that both the structure and the content of … the final draft, owe much to this model” (para 4).
1.3 Further, as noted by Stewart Shackleton in an article written in 2000, “England is moving beyond earlier rejection of international harmonisation slowly to evolve into a Model Law jurisdiction”: Shackleton, “The Internationalisation of English Arbitration Law” (2000) 11 ICC International Court of Arbitration Bulletin 16 and 18. The trend has continued, most notably in Patel v Patel [199] 3 WLR 322, where the English Court of Appeal held that the UNCITRAL Model Law had acquired the status of travaux preparatoires in the interpretation and application of the Arbitration Act 1996 (UK): “[T]he terms of the UNCITRAL Model Law … should be taken into account because it is clear that those responsible for drafting the Act had the provisions in mind when doing do” (p 325). Thus, there exists a unity between the New Zealand and United Kingdom arbitration statutes.
1.4 The DIFC Courts by adopting the UNCITRAL Model Law on International Commercial arbitration expanded the powers of arbitral tribunals and confined curial involvement to defined stages of the arbitral process. The intention was to create a largely free-standing system of dispute resolution with the DIFC Courts to having two functions: to provide assistance and support and, within specified areas, to supervise and control. The aim was to restrict the role of the Courts to those occasions where it was obvious that either the arbitral process needed support or assistance, or there had been a perverse arbitral decision that had ignored basic procedural fairness or exceeded the authority of the tribunal.
1.5 Great importance attaches as to where lines are to be drawn between those cases where judicial power to intervene is clear, and the occasion to exercise it is appropriate, and those where one or other is absent. The DIFC Arbitration Law No.1 of 2008 Act itself establishes the boundaries of the judicial role in relation to the statutory rules applying to arbitration generally. It does this in Article 10 which states:
“Extent of Court Intervention — In matters governed by this schedule no DIFC Court shall intervene except where so provided in this Law.”
1.6 Article 10 reflects a general desire to minimise judicial intervention in the running of arbitrations in situations where the parties or the arbitrators can resolve issues for themselves, in the interests of speed, finality and reduced costs.
1.7 The Act specifically authorises judicial intervention in relation to the following matters:
• Article 3 — Stay or Proceedings
• Article 5 — Interim Measures
• Article 23 — Decision on Jurisdiction of Arbitral Tribunal
• Article 41 — Applications to Set Aside Award
• Article 42–44 — Recognition and Enforcement of Awards
1.8 In practice the operation of the Article 10 prohibition depends on the definition of “matters governed by this Schedule”, a question which was considered in New Zealand in Carter Holt Harvey v Genesis Power Ltd [2006] NZLR 114, mentioned below.
1.9 Article 10 necessarily leaves a considerable area of inherent and statutory jurisdiction available for deployment in respect of arbitral proceedings. As to that jurisdiction the modern tendency is to acknowledge what may be called a general presumption of non-intervention and to carefully calibrate the proper occasions for intervention. In ABB AG v Hochtief Airport Gin BH et al [2006] EWHC 388 (Comm) a challenge of serious procedural irregularity was advanced in respect of an Award in an LCIA international commercial arbitration where the three person Tribunal comprised very experienced commercial arbitrators and both parties were represented by senior English counsel and the main ground of challenge was an alleged failure to provide a sufficiently reasoned Award. The Judge said:
“The nature of the arbitration alone indicates that the Court is operating in territory where judicial restraint and sensitivity is required.”
1.10 There are many judicial statements, both before and after the 1996 UK and NZ Acts which exemplify the modern principle of judicial defence and restraint. As for statements in English cases prior to 1996 reference may be made to Zermatt Holdings v Nu-Life Upholstery Repairs (1985) 2 EGLR14 where Bingham J said:
“[I]t is perhaps right to emphasise two things. The first is that, as a matter of general approach, the courts strive to uphold arbitration awards. They do not approach them with a meticulous legal eye endeavouring to pick holes, inconsistencies and faults in awards and with the objective of upsetting or frustrating the process of arbitration. Far from it. The approach is to read an arbitration award in a reasonable and commercial way, expecting, as is usually the case, that there will be no substantial fault that can be found with it.”
1.11 These observations were echoed by Lord Cooke in Money v Ven-lu-Ree Ltd [1988] 2 NZLR 414 at 417 where he said:
“Reasons given by an arbitrator or umpire should be read fairly and as a whole. Awards should not be vitiated by fine points; the modern approach is in favour of sustaining awards where that can fairly be done, rather than destroying them.
He made observations to the same effect in Manukau City Council v Fencible Court Howick Limited [1991] 3 NZLR 410 at 412:
“Where parties have agreed to some form of arbitration rather than Court proceedings, even when as here this element in their contract has been dictated by the statutory regime applying to such leases, the Court should not in my view allow the finality of the award to be destroyed except for truly compelling reasons.”
1.12 In delivering the Privy Council’s 1995 judgment in Pupuke Service Station Ltd v Caltex Oil (NZ) Ltd, reported as an appendix to Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 at p338, para [1]) Lord Mustill said this at p 338 and 339:
“Arbitration is a contractual method of resolving disputes. By their contract the parties agree to entrust the differences between them to the decision of an arbitrator or panel of arbitrators, to the exclusion of the Courts, and they bind themselves to accept that decision, once made, whether or not they think it right. In prospect, this method often seems attractive. In retrospect, this is not always so. Having agreed at the outset to take his disputes away from the Court the losing party may afterwards be tempted to think better of it, and ask the Court to interfere because the arbitrator has misunderstood the issues, believed an unconvincing witness, decided against the weight of the evidence, or otherwise arrived at a wrong conclusion. All developed systems of arbitration law have in principle set their face against accommodating such a change of mind. The parties have made a choice, and must abide by it. This general principle is, however, applied in different ways under different systems, according to the nature of the complaint.
Only if the award, read in complete isolation, clearly discloses an error of law does the court have power to intervene, and the court must be alert not to blunt the point of an agreement to arbitrate by allowing what is really an appeal on the facts to be dressed up as a dispute on the law. The risk that the court will be drawn into re-hearing the arbitration must always be avoided … Having entrusted this task to an arbitrator the parties should abide by the result, unless the arbitrator has employed a method clearly without the contemplation of the contract (7–9).”
1.13 As to Post 1996 UK statements the most notable are those made by Lord Steyn in the Lesotho Highlands case. In explaining the ethos of the 1996 UK Act he stressed the radical nature of the changes brought about by the English Act and endorsed the observations of Lord Wilberforce who had said in the Parliamentary Debates on the UK Arbitration Bill that the Court had been given “only those essential powers which … the Court should have, that is rendering assistance when the arbitrators cannot act in the way of enforcement or procedural steps, or, alternatively in the … correction of very fundamental errors.”
1.14 Turning to statements made in respect of the 1996 New Zealand Act notable instances include the observations of Wild J in Marnell Corrao Associates Inc v Sensation Yachts Ltd [2000] 15 PRNZ 608:
“[61] That result gives effect to the general principle that Courts should uphold arbitration, by striving to give effect to the intention of parties to submit disputes to arbitration, and not allow any inconsistencies or uncertainties in the wording or operation of the arbitration clause to thwart that intention. That is stated in Redfern & Hunters Law and Practice of International Commercial Arbitration (3rd ed), 1999, pp 172-173. To similar effect is Russell on Arbitration (21st ed) 1997, para 2-006, citing the Privy Council’s decision in Queensland Electricity Generating Board v New Hope Colleries Pty Ltd [1989] 1 Lloyds Reports 205. Their Lordships’ opinion was delivered by Sir Robin Cooke, who said (at p210):
“At the present day, in cases where the parties have agreed on an arbitration or valuation clause in wide enough terms, the Courts accord full weight to their manifest intention to create continuing legal relations.”
[62] The judgment of this Court in A-G v Mobil Oil NZ Ltd [1989] 2 NZLR 649, 666-668 and of the Court of Appeal in CBI NZ Ltd v Badger Chiyoda [1989] 2 NZLR 669 (CA), at p 677 also evince a strong New Zealand policy in favour of enforcing contractual arbitration provisions, especially in international commercial disputes, such as this one. The same policy is evident from the decision of 29 March this year of the US Federal Court for the Southern District of Texas in Enviro Petroleum Inc.v Condur Petroleum SA 91 F Supp (2d) 1031 (5D Tex 2000), where, at p1035, the Court said:
“The plaintiff seems to forget that there is a strong public policy in favour of enforcing contractual arbitration provisions, especially where, as here, they involve international commercial disputes between sophisticated business concerns”.
1.15 Returning to Article 5 the meaning of the phrase “matters governed by this law” evoked considerable controversy in the drafting stages (see Binder International Commercial Arbitration and Conciliation in UNCITRAL Model Law Jurisdiction 3rd Ed 2010 65). In the Analytical Commentary on the draft prepared by the UNCITRAL Secretariat expressed the view that Article 5 was “limited to issues which are in fact regulated, whether expressly or impliedly in the Model Law” (emphasis added). (See Binder at 66).
1.16 In the Carter Holt case (supra) the Court issued an anti-arbitration injunction where there were concurrent cases under way in the High Court and before an arbitration tribunal. The Court held that the fact that the arbitral tribunal had implied procedure powers to order a stay of the arbitration under the New Zealand equivalent to DIFC Law Article 26 “Determination of Rules of Procedure” did not mean that such a matter was “governed” by the First Schedule. Therefore, the Court had power to order an anti-arbitration injunction to stay the arbitration proceeding so that the High Court proceedings could proceed first and be determined ahead of the arbitral proceedings. (This decision has been criticised in [2004] New Zealand Law Review.)
Examples of Justifiable Instances of Judicial Intervention — The Discretion to Grant Anti-Suit Injunctions to Restrain Foreign Judicial Proceedings in Breach of an Arbitration Agreement
1.17 If one of the parties to an arbitration agreement providing for arbitration in the DIFC commences judicial proceedings in an overseas Court and for whatever reason, whether it be the likely excessive cost or the difficulty of successful invention in the overseas proceedings, the defendant in those proceedings is unable to obtain or unwilling to seek a stay of those proceedings in the foreign Court the defendant may seek relief in the DIFC Courts. One of the available forms of relief is an anti-suit injunction issued by the DIFC Courts against the claimant in the foreign proceedings preventing it from continuing those proceedings so that the dispute is resolved by arbitration alone in accordance with the arbitration agreement. In this area there are also other remedies including claims for damages.
1.18 The applicant for an anti-suit injunction must first prove that the foreign proceedings are in breach of the arbitration agreement. This involves demonstrating that on the true construction of the clause it encompasses the claim made in the foreign proceedings.
1.19 The general effect of the English cases is that an anti-suit injunction will usually be granted on proof of the existence and coverage of the arbitration clause so long as there are no exceptional circumstances which tell against relief. The seminal English case is the Angelic Grace [1995] 1 Lloyds, Rep 87 and the detailed principles governing the discretion to grant anti-suit injunctions to restrain breaches of arbitration agreements or exclusive jurisdiction clauses were summarised by Cresswell J in American Speciality Lines Insurance Co v Abbott Laboratories [2004] Lloyds Rep 1R 815.
Other Justifiable cases of Judicial Intervention — Abuse of Court Processes to Circumvent Arbitral Tribunal’s Rulings or Award
1.20 The Courts will intervene to prevent its processes being used improperly in relation to arbitral proceedings and awards. For example, the Singapore High Court (GAR Thursday 20 October 2010) agreed to revoke a subpoena requiring witnesses to attend an arbitration hearing to confirm that parties had fully complied with discovery orders issued by an arbitrator. The Court held that the subpoena was designed to circumvent those orders.
1.21 The Singapore legislative regimes provide that “any party to an arbitration agreement may take out a subpoena to testify or a subpoena to produce documents”. The application arose out of the defendant’s dissatisfaction with the discovery process in an arbitration conducted according to the rules of the Singapore International Arbitration Centre. Parties had exchanged discovery pursuant to a procedural order issued by the arbitrator. After a contested hearing, the arbitrator issued another order for further discovery. The defendant was dissatisfied with the disclosure made, and wrote a lengthy letter to the arbitrator expressing its displeasure and requesting that he direct the relevant witnesses to swear an affidavit attesting to the completeness of the disclosure made. The arbitrator rejected the request. Instead he held that, if it should subsequently emerge that discovery had been improperly withheld, he would entertain submissions as to the consequence that should follow no doubt envisaging the drawing of adverse inferences against the party if it had made inadequate disclosure. Article 9(5) of the International Bar Association Rules on the Taking of Evidence in International Commercial Arbitration.
1.22 Without further notice to the arbitrator, the defendant issued a subpoena in the Singapore High Court requiring the witnesses to attend the arbitration hearing to give evidence regarding the adequacy of the claimant’s disclosure. The claimant then applied to have the subpoena revoked.
1.23 The High Court ruled in favour of the claimant and revoked the subpoena on the several grounds. First, the parties had agreed to a procedure whereby only the witnesses agreed to by the arbitrator would be permitted to testify at the hearing. Secondly, the parties had agreed to adopt the IBA Rules on the Taking of Evidence in International Commercial Arbitration (1 June 1999 Edition) as a guideline on procedural matters. The IBA Rules make it clear that the arbitrator has the final say as to the witnesses who may give evidence at the hearing. Thirdly, having agreed to these procedures, the court should not intervene since as a general principle, an arbitrator is the master of the procedure governing the arbitration; and the defendant’s attempt to subpoena the plaintiff’s witnesses was an abuse of process insofar as it was designed to circumvent the arbitrator’s ruling. Any other ruling would effectively have given the defendant an appeal against the arbitrator’s decision on the discovery dispute.
1.24 Another example of appropriate Court intervention on abuse of process grounds may be seen in the application of the Henderson v Henderson estoppels/abuse of process principle in arbitration. The principle precludes a party in later proceedings from relying on a point which it could and should have been raised in earlier proceedings. Two cases will illustrate this development which may be traced to Fidelitas Shipping Co Limited v v/o Expatchelb [1966] QB 630 (CA) where after discussing the Henderson v Henderson principles Lord Denning M.R. said that “like principles apply to arbitration”.
1.25 In Noble Assurance Co v Gerling Konzern General Insurance Co (UK) 2008 Lloyds’ Rep 1. There the claimant reinsured obtained an arbitration award against their reinsurers to the effect that the person claiming against the reinsured under the direct policy was a co-assured with a right to be paid, and accordingly that the loss fell within the terms of the reinsurance policy. The arbitrators gave two independent reasons for their award; the co-assured was identified in the policy; and in any event a certificate of insurance issued by the primary assured to the co-assured would have had the effect of extending coverage to the co-assured.
1.26 Following the award, the reinsurers commenced judicial proceedings in Vermont, arguing that the only ground of cover found by the arbitrators was the certificate of insurance, but that the certificate of insurance was a nullity, a point which had not been put to the arbitrators.
1.27 Toulson LJ, having held that there had indeed between two independent reasons given by the arbitrator for coverage, ruled that the conditions for the grant of an anti-suit injunction were satisfied, in that the reinsurers had acted in vexatious, oppressive and unconscionable fashion in attempting to raise in court an issue which had implicitly been rejected by the arbitrators and which in any event had not affected the outcome of the arbitration.
1.28 However, Toulson LJ decided that an anti-suit injunction was a last resort and that in the present case the reinsured could be adequately protected by a declaration as to the meaning of the arbitration award. The declaration was a decision of the English court which would be recognised by the Vermont court, and on that basis the Vermont court would be entitled to hold that the reinsurers were estopped from going behind the findings in the award.
1.29 A New Zealand instance is Video Ezy International (NZ) Limited v John Jackson & Co Ltd (20 May 2005) John Hansen J, High Court, Christchurch CIV-2005-409-000499 where the Court held that a party who had raised a matter in material put before the arbitrator but who had not pursued it there could not seek to rely upon it in subsequent Court proceedings.
1.30 The Court applied the Henderson v Henderson principle that:
“… the plea of res judicata applies, except in special cases, not only to points upon which the Court was actually required by the parties to form an opinion and pronounce a judgment but to every point which properly belonged to the subject to litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time”.
1.31 The Court held that “the Banks ground should have [put the matter] before him … [the arbitrator] … they are now stopped from advancing it further. Res juridcata applies”
PART 2: RECOGNITION AND ENFORCEMENT OF AWARDS
2.1 It is first necessary to consider Article 41 of the Arbitration Law DIFC Law No.1 of 2008 which deals with Applications to set aside Awards. This is because of the interrelationship between this Article and Articles 42, 43 and 44 which deal with Enforcement and Recognition of Awards. For convenience, these four Articles are reproduced below:
“41 Application for setting aside as exclusive recourse against arbitral award
(b) the DIFC Courts find that:
(iii) the award is in conflict with the public policy of the UAE.
(4) The DIFC Courts, when asked to set aside an award, may, where appropriate and so requested by a party, suspend the setting aside proceedings for a period of time determined by it in order to give the Arbitral Tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the Arbitral Tribunal’s opinion will eliminate the grounds for setting aside.
Part 4 The Recognition and Enforcement of Awards
42 Recognition and enforcement of awards
(1) An arbitral award, irrespective of the State or jurisdiction in which it was made, shall be recognised as binding within the DIFC and, upon application in writing to the DIFC Courts, shall be enforced subject to the provisions of this Article and of Articles 43 and 44. For the avoidance of doubt, where the UAE has entered into an applicable treaty for the mutual enforcement of judgments, orders or awards the DIFC Courts shall comply with the terms of such treaty.
(2) The party relying on an award or applying for its enforcement shall supply the original award or a duly certified copy thereof and the original Arbitration Agreement referred to in Article 12 or a duly certified copy thereof. If the award or the agreement is not made in English, the DIFC Courts may request the party to supply a duly certified translation thereof.
(4) Awards issued by the DIFC Courts may be enforced within the DIFC in the manner prescribed in this Law and any rules of Court made for this purpose. Awards recognised by the DIFC Courts may be enforced outside the DIFC in accordance with the Judicial Authority Law and recognition under this Law includes ratification for the purposes of Article 7 of the Judicial Authority Law.
43 Recognition
(1) Where, upon the application of a party for recognition of an arbitral award, the DIFC Courts decides that the award shall be recognised, it shall issue an order to that effect.
(2) An order recognising an arbitral award shall be issued in English and Arabic unless the DIFC Courts shall determine otherwise. Either language version, in its original or certified copy form, shall constitute sufficient proof of recognition.
44 Grounds for refusing recognition or enforcement
(1) Recognition or enforcement of an arbitral award, irrespective of the State or jurisdiction in which it was made, may be refused by the DIFC Courts only:
(a) at the request of the party against whom it is invoked, if that party furnishes to the DIFC Courts proof that:
(b) if the DIFC Courts find that:
(2) If an application for the setting aside or suspension of an award has been made to a Court referred to in paragraph (1)(a)(v) of this Article, the DIFC Courts may, if it considers it proper, adjourn its decision and may also, on the application of the party seeking recognition or enforcement of the award, order the other party to provide appropriate security.
2.2 Article 41 comprehensively lists the instances according to which an arbitral award may be set aside by the court. Upon closer scrutiny it becomes apparent that the grounds listed in this provision bear great resemblance, on the one hand, to the grounds for refusing recognition and enforcement given in art.41(1)(a) and, on the other hand, to art.V of the New York Convention. The similarity is indeed no coincidence. On the contrary as was noted by the UNCITRAL Secretariat during the drafting stages of UNCITRAL MODEL LAW:
“[Article (44)’s] conformity with article (41) [of the Model Law, which de facto implements Article V of the New York Convention] is regarded as desirable in view of the policy of the Model Law to reduce the impact of the place of arbitration. It recognises the fact that both provisions with their different purposes (in one case reasons for setting aside and in the other case grounds for refusing recognition or enforcement) form part of the alternative defence system which provides a party with the option of attacking the award or invoking the grounds when recognition or enforcement is sought. It also recognises the fact that these provisions do not operate in isolation. The effect of traditional concepts and rules familiar and peculiar to the legal system ruling at the place of arbitration is not limited to the State where the arbitration takes place but extends to many other States by virtue of article (44) (or article V(1)(e) of the 1958 New York Convention) in that an award which has been set aside for whatever reasons recognised by the competent court or applicable procedural law, would not be recognised and enforced abroad.”
The question of when, if ever, it is permissible to use of more than one part of the “defence system” is discussed below.
Recognition as Contrasted with Enforcement
2.3 In approaching our subject it is also desirable to understand the difference between recognition and enforcement. Recognition is sought by successful arbitral defendants who wish to attain a Court judgment which will enliven the doctrine of res judicata when presented to another Court if the unsuccessful arbitral claimant pursues its arbitral claims at a later stage in another forum. Enforcement, as its name suggests is the process by which the successful claimant accesses the Court’s remedies to enforce the Award.
Onus of Proof — Judicial Policy in favour of upholding Awards wherever possible
2.4 Under Article 41 the applicants have the onus of proving that the award should be set aside. If they fail to satisfy the onus, then Article 42(1) requires the Court to recognise and enforce the award “subject to the provisions of this Article and of Articles 43 and 44”.
2.5 As noted earlier, Courts extend a high degree of deference to the decisions made by arbitral tribunals. The authorities establish that an arbitral award is not invalid because, in the opinion of the court hearing an application to set aside the award, the tribunal conducted its proceedings inappropriately but without serious irregularity or became in the opinion of the Court the Tribunal wrongly decided a point of law. Where a Tribunal’s jurisdiction is called into question, an applicant must overcome a powerful presumption that the arbitral tribunal acted within its powers.
Is there a Discretion?
2.6 Does the word “may” in Articles 41(2) and 44(1) give the Court a discretion and, if so, how should it be exercised? Article 41(1) indicates that the recognition and enforcement of an arbitral award “may be refused only” if one (or more) of the grounds mentioned in arts 41(1)(1) and (b) are either proven by a party or found ex officio by the court. At first glance the wording “may … only” suggests the existence of discretion on the part of the court, in other words: the court, if a party furnishes proof that a ground mentioned in art 44(1)(a) exists, does not necessarily have to refuse recognition and enforcement. The relevant wording originates from arts V(1) and (2) of the New York Convention and this provision of the Convention (especially its sub-para (1)(e), which corresponds with art 41(1)(a)(v) of the DIFC Arbitration Act) has attracted much attention arising from the discussion on whether nullified arbitral awards can be enforced in another state because of the discretion the New York Convention grants the courts.
2.7 In Pacific China Holdings Ltd v Grand Pacific Holdings Ltd the BVI Court of Appeal recently discussed the question of discretion and the related issue of materiality. The respondent company sought the winding up of the appellant company, claiming that the appellant owed the respondent over US$55 million based on a Convention award made by an arbitration tribunal in Hong Kong. The appellant, in disputing the debt, raised Convention defences under Section 36(2) and (3) of the Arbitration Ordinance and argued in respect of the arbitral proceedings that: (1) it was unable to present its case; (2) the arbitral process was not in accordance with the parties’ agreement, and accordingly (3) enforcing the award would contravene public policy, and that for these reasons the court ought to exercise its discretion and refuse to appoint liquidators in respect of the appellant.
2.8 The trial judge having concluded that the grounds raised by the appellant could not be dismissed as being incapable, on full argument in an application to set aside an order for enforcement, of being developed so as to give rise to a substantial dispute as to enforceability, went on further to conclude that the irregularities giving rise to those grounds, had they not occurred would not have in any event impacted the outcome. Accordingly, he granted the order in favour of the respondent and appointed liquidators in respect of the appellant. From this order the appellant appealed in essence on the basis that the trial judge had erred as a matter of law in exercising a broader discretion than that accorded under Section 36(2) and (3) of the Arbitration Ordinance.
2.9 The appeal was allowed and the winding up order set aside. It was held that:
1. The Court’s discretion under Section 36(20 of the Ordinance is a narrow one in which a court is justified in overriding a Convention defence where there has been waiver or circumstances giving rise to an estoppels on some such legally recognised principle, or where the error is minor and prejudicially irrelevant;
Dardana Ltd v Yukos Oil Co [2002] 1 All ER (Comm) 819, Kaniora v Guinness [2006] 2 All ER (Comm) 413, Dallah Real Estate and Holding Co v Ministry of Religious Affairs of the Government of Pakistan [2009] EWCA Civ 755; approved’ dictum of Kaplan J made obiter in Paklito Investment Ltd v Klockner East Asia [ 1993] HKLR 39, doubted;
2. Where a real question of enforceability of an arbitration award is raised and thus a real or bona fide dispute on substantial grounds on the debt has arisen it is not open to the court to proceed to make a winding up order on the debt grounded on the award;
3. The learned trial Judge, having concluded that defences had been raised which on full argument in a application to enforce the award was capable of giving rise to a substantial dispute as to enforceability, erred in exercising a broader discretion than permitted under Section 36(2) by undertaking a merits review of the Convention award and importing therein a consideration as to whether, the matters complained of in respect of the defences raised, were material to or would have impacted the outcome.”
2.10 George-Creque, J.A. delivering the Judgment of the Court said:
“The approach to be adopted
On the exercise of discretion I, for my part, am more comfortable adapting the approach expressed by the law lords in the English decisions of Dardana, Kanoria and Dallah as to the breadth of the Section 36 discretion rather than the Asian decisions which follow the obiter dictum of Kaplan J in Paklito which in turn appears to have been based on the opinion expressed by Professor Van den Berg, unsupported by authority in respect of a Convention award. Further, the Convention and Section 36 of the Ordinance is silent as to requiring a materially element in the establishment of Convention defences. Were it a consideration, no doubt it would have been so stated. The materiality requirement would also, in my view, potentially whittle down the “No Merits review” principle with which all the distinguished authors including Professor Van den Berg and the case law accepts as inviolable as regards and enforcement court for fear of usurping the very function and role of the arbitral tribunal or that of the supervisory court.
Accordingly, I would hold that the Section 36(2) discretion is a narrow one in which a court is justified in overriding a Convention defence where there has been waiver or circumstances giving rise toan estoppels on some such legally recognised principle or where, as Lord Rix LJ said in Dallah, the error is minor and prejudicially irrelevant. It does not permit the enforcing court and a fortiori a winding up court on a Convention award yet to be enforced, to undertake a merits review of the award and to import into the exercise of the discretion the consideration as to whether, had the irregularity not occurred or the material taken into account, the outcome would have been unaffected.”
Enforcement of nullified arbitral awards
2.11 For many years a possible weakness of art V(1)(e) of the Convention has been pointed out: it was feared that an award that was set aside in the country of origin — while not being enforceable in the state of origin — could still be enforced in another country due to the discretion awarded by the Convention (“recognition and enforcement may be refused”). While remaining as a purely academic scenario for many years, the Hilmarton and Chromalloy cases gave the discussion immediate practical relevance. In these cases, arbitral awards which had been set aside in the country of origin were consequently enforced by a foreign court under the discretion awarded by the New York Convention. These cases have resulted in extensive and vigorous debate. As Redfern and Hunter 4th Ed 2004 states at P455 10-49:
“Nothwithstanding decisions such as Hilmarton and Chromalloy enforcing awards that have been set aside by the courts of the place of arbitration remains controversial. With some notable exceptions, courts around the world are still more than likely to decline to enforce annulled awards.”
Multiple Attempts to Resist Enforcement
2.12 May a party resisting an Award seek to set aside the Award and if unsuccessful argue the same matters in opposing Recognition and Enforcement of the Award? So far as the DIFC is concerned, Article 44(3) provides that:
“(3) Any party seeking recourse against an arbitral award made in the seat of the DIFC shall not be permitted to make an application under paragraph (1)(a) of this Article if it has made or could have made an application under Article 41 of this law.
The matter is discussed in more detail below in relation to the question of public policy.
The “Public Policy” ground — a New Zealand view1
Setting Aside Awards under Article 34, First Schedule
New Zealand adopted Article 34 of the UNCITRAL Model Law, acknowledging the courts’ ultimate discretion to exercise control over the arbitral process by setting aside arbitral awards in restricted circumstances. Article 34(2)(b)(ii) of the New Zealand Act mirrors the UNCITRAL Model Law by allowing for the setting aside of an award on the grounds that it is in conflict with the public policy of New Zealand, New Zealand joins Australia, Singapore, Zimbabwe and India by elaborating the meaning of “public policy”. Article 34(6) states:
For the avoidance of doubt, and without limiting the generality of paragraph (2)(b){ii), it is declared that an award is in conflict with the public policy of New Zealand if —
(b) A breach of the rules of natural justice occurred —
Nearly identical language appears in Article 36, which deals with the grounds upon which recognition and enforcement of awards may be refused. However, it is important not to overlook the different purposes of Articles 34 and 36. There is already extensive case law in New Zealand addressing what amounts to a breach of public policy under the breach of natural justice exception provided in Article 34(6)(b). The following sketch shows that while the power is sometimes viewed as a restricted one, given that it must be read with the guiding purposes in s 5 (Amaltal Corporation Ltd v Maruha (NZ) Corporation Ltd [2003] 2 NZLR 92 emphasises the reduced curial involvement in the arbitral process), subsequent cases (Kimberley Construction Ltd v Mermaid Holdings Ltd [2004] 1 NZLR 386) and Attorney-General v Tozer (HC Auckland, CIV 2003-404-5945, 10 October 2003)) suggest that Article 34’s application is quite broad.
A Amaltal — a restrictive approach
Amaltal applied under Article 34 to set aside an award finding it to be in breach of a joint venture agreement with Maruha, and directing it to transfer its shares in the joint venture company to Maruha, which conversely applied to enforce the award. Amaltal’s argument was that the relief provisions under the joint venture agreement operated as penalties, which are generally considered to be contrary to equitable notions of public policy and therefore contrary to the public policy of New Zealand under Article 34. In rejecting this proposition Harrison J noted that Amaltal was equating broad equitable notions of public policy with “the weightier notion” of the public policy of New Zealand found in Article 34(2)(b)(ii), which (para 32):
… implies something more in the notion of sovereign importance — that the award threatens a state’s welfare or is truly injurious to the public good or its enforcement would be “wholly offensive to the ordinary reasonable and fully informed member of the public on whose behalf the powers of the state are exercised” (Deutsche Schachthau-und Tiefbokrgesellschaft mbH v R’As al-khaimah National Oil Co [1987] 2 All ER 769 (CA) per Lord Donaldson MR at p 779).
This reference to the leading international enforcement cases of Deutsche Schachtbau and Parsons & Whittemore Overseas Co Inc v Société Générale De L’Industrié Du Papier (Ratka) 508 F 2d 969 (1974) when dealing with an Article 34 application was misconceived. As noted below, there is a world of difference between the wider supervisory power of the court at the seat of the arbitration under Article 34 and the much narrower focus of a court asked to enforce a foreign award.
Harrison J also considered that Article 34 was directed towards rectifying procedural errors that may have occurred in the making of the award, whereas a substantive error of law in the award could be remedied through the appellate process under cl 5; “routes of challenge [that are] mutually exclusive” (para 28). His Honour was fortified in his position by Amaltal having already unsuccessfully applied for leave to appeal under cl 5 on the same penalty issue; it could not have been the legislative intent to allow parties to dress up failed cl 5 applications as Article 34 applications “especially where the Act through the articles prescribes two distinct routes to the same remedy” (para 31). This distinction is untenable, as Sir Anthony Mason has recently pointed out in a similar context: see below.
B Attorney-General v Tozer
In Attorney-General v Tozer Heath J respectfully expressed his disapproval of the distinction drawn in Amaltal between the court’s “procedural” jurisdiction to set aside an award under Articles 34 and 36, and its appellate “substantive” jurisdiction under cl 5 of the Second Schedule, He considered that the distinction was drawn “too starkly”; the same issue of law might arise on appeal or on an application to set aside. The criticisms of Heath J are well founded. For example, alleged illegality in the performance of a contractual obligation might form the basis of an appeal under cl 5, while also founding an argument to set aside the award as in conflict with the public policy of New Zealand under Article 34(2)(b)(ii).
Heath J rightly expressed doubt whether the public policy ground for setting aside an award was as confined as Harrison J had suggested. Indeed it is clear that, while the notion of public policy is somewhat amorphous, it is designed to cover both procedural and substantive defects. As UNCITRAL said in its report on the Model Law (UN DOC. 1/40/17, para 297):
It was understood that the term “public policy”, which was used in the 1958 New York Convention and many other treaties, covered fundamental principles of law and justice in substantive as well as procedural respects … [was] not to be interpreted as excluding instances or events relating to the manner in which [an arbitral award] was arrived at.
C Kimberley Construction Ltd v Mermaid Holdings Ltd
In this case Rodney Hansen J determined concurrent applications by the plaintiff (Kimberley) to enter an arbitral award as a judgment under Article 35, and by the defendant (Mermaid) for an order refusing recognition or enforcement of the award under Article 36 on the grounds that as the award was satisfied by a settlement agreement, it would be contrary to public policy to recognise or enforce it.
The Court held that there was no basis in law, principle, or common sense for the entry of the award as a judgment when the award had been satisfied, accepting the defendant’s argument that recognition or enforcement of the award when there had already been satisfaction would be contrary to the public policy of New Zealand within the meaning of Article 36(1)(b)(ii). The Court dismissed the plaintiff’s argument that, applying the higher threshold of Amaltal, the public policy ground could “only be relied on where there had been a defect in the arbitral process or where enforcement would be injurious to the public good or offensive to the members of the public on whose behalf the powers of the state are exercised” (para 11). As Amaltal predominantly concerned Article 34, Rodney Hansen J was able to distinguish Article 36 as based on a “broader enquiry” than Article 34. However, his obiter comments suggest that the approach taken in Amaltal was overly restrictive (paras 23-24):
There has been reluctance to confine public policy even in cases involving the more limited inquiry required by an application to set aside an award. In Cuflet Chartering v Carousel Shipping Co Ltd (The Marie H) [2001] 1 All ER (Comm) 398, Moore-Brick J considered the power in the Arbitration Act 1996 (UK) to set aside an award as procured contrary to public policy.
[2004] New Zealand Law Review
After quoting the passage from the Deutsche Schachtbau case referred to in Amaltal v Maruha he went on to say at p 403:
Public policy is capable of covering a wide variety of matters and it is neither necessary nor desirable in this case to attempt to define the circumstances in which [the relevant provision] is capable of being invoked.
In my view, the circumstances in which art 36(1)(b) may be invoked similarly should not be confined.
It is unclear exactly which test was ultimately applied — the test put forward by the plaintiff, or a lower threshold undefined notion of public policy. The concluding remarks encapsulate both (para 25):
Anything else [than a refusal to recognise the award] would be wholly offensive to the ordinary, reasonable and fully informed member of the public and inimical to the interests of justice. Recognition or enforcement of the award would be contrary to public policy.
D A suggested approach to public policy issues under Articles 34 and 36
Article 36(1)(b)(ii) provides that the recognition or enforcement of an award may be refused if the court finds that to do so “would be contrary to the public policy of New Zealand”. The problem with the public policy ground is that, in the arresting phrase of Professor William Park, it is a “chameleon like concept” that poses challenges for the judiciary and requires careful, if not subtle, analysis and application (Park, “The Specificity of International Arbitration: The Case for FAA Reform” (2003) 34 Vanderbilt Journal of Transnational Law 1271). It is tempting to conclude that, as the definitions of public policy are broadly the same under an application to set aside under Article 34 and an application to refuse recognition or enforcement under Article 36, the scope of public policy and the approach of the court on that issue should be the same for each. In Amaltal, overseas authorities dealing with the enforcement of foreign awards under the New York Convention, such as Parsons & Whittemore, were used to justify a narrow interpretation of public policy under an application to set aside, effectively conflating the scope of public policy under Articles 34 and 36. Other authorities suggest that the supervisory jurisdiction under Article 34 is broader, with the court having more scope for intervening to set aside than it has in refusing to grant enforcement. In Oil & Natural Gas Corporation Ltd v SAW Pipes Ltd (Civil Appeal 7419/2001, 17 April 2003) the Supreme Court of India recently held that public policy is wider under Article 34. It emphasised that jurisdiction to review an award should be wider before the award becomes final and executable. After an award has become final, jurisdiction is more limited.
It is submitted that an important distinction to make in this area is whether the award is domestic or international. The issues that arise in respect of enforcement of foreign awards are quite different to those that apply to domestic applications to set aside. In the international setting, recognition of state sovereignty and a need to dissuade unsuccessful parties from forum shopping support a more consistent conservative approach, with a strong presumption in favour of enforcement. In a domestic arbitration the State through its courts may be expected to play a closer judicial watchdog role, and to set aside awards that fail to reach minimum standards of procedural fairness and legal correctness. Harrison J failed to make this distinction in Amaltal.
Bokhary PJ of the Hong Kong Court of Appeal succinctly put the reasons for applying a higher threshold test in the enforcement of international awards than in setting aside domestic awards in Hebei Import & Export Corp v Polytek Engineering Co Ltd [1999] 2 HKC 205, which involved an application to set aside a foreign award (at 215):
In my view, there must be compelling reasons before enforcement of a Convention award can be refused on public policy grounds. This is not to say that the reasons must be so extreme that the award falls to be cursed by bell, book and candle. But it must go beyond the minimum that would justify setting aside a domestic judgment or award. A point to similar effect was made in a comparable context by the United States Supreme Court in Mitsubishi Motors Corp v Soler Chrysler-Plymouth Inc 473 US 614 (L985) [where the majority said]
concerns of international comity, respect for the capacities of foreign transnational tribunals, and sensitivity to the need of the international commercial system for predictability in the resolution of disputes require that we enforce the parties’ agreement, even assuming that the contrary result would be forthcoming in a domestic context.
As a member of the unanimous Court, Litton PJ expressed similar views (at 211):
The expression of public policy as it appears in s 44(3) [the equivalent to Article 36] is a multi faceted concept. Woven into this concept is the principle that courts should recognise the validity of decisions of foreign arbitral awards as a matter of comity, and give effect to them, unless to do so would violate the most basic notions of morality and justice. It would lake a very strong case before such a conclusion can be properly reached.
In deciding whether the alleged breaches of natural justice were sufficient in Hebei to invoke the public policy ground and justify refusal of enforcement of the foreign award, the Court had to determine what was meant by “international public policy” — a “standard common to all civilized nations” or “those elements of a state’s own public policy which were so fundamental to its notions of justice that its courts felt obliged to apply the same not only to purely internal matters, but also matters with a foreign element by which other states were affected” (at 216 per Bokhary PJ). Given the difficulty in determining norms of a jus cogens nature, the latter was adopted.
The same distinction applies in the context of setting aside an award. The standard of international public policy (“ordre public international”) has been developed by French jurists to overcome the issue that different States may have differing notions of public policy, creating a risk that one State may set aside an award that other States may regard as valid. Redfern & Hunter, Law and Practice of International Commercial Arbitration (1999) 431, state that this concept, embodied in the new French Code of Civil Procedure:
… allows an international award to be set aside “if the recognition or execution is contrary to international public policy”. In this way, French law recognises the existence of two levels of public policy, the national level, which is concerned with purely domestic considerations, and the international level, which is less restrictive in its approach. There is nothing new, so far as arbitration is concerned, in differentiating between national and international policy. Indeed, it is a consistent theme to be found in the legislation and jurisdiction of many countries.
In the context of international awards, a justification for a narrower approach to Article 34 and a presumption in favour of enforcement is the serious consequence of an award being set aside at the seat (see Peachey, “The Public Policy Ground for Setting Aside and Refusing to Enforce Arbitral Awards”, Dissertation, University of Auckland 2003). If a court refuses to enforce an award, the party seeking enforcement is free to seek enforcement in any other New York Convention jurisdiction. However, the fact of an award being set aside at the seat gives rise to an independent ground for refusal to enforce an award in any other jurisdiction.
E Can an unsuccessful applicant to set aside argue the same issues again at the enforcement stage?
If an application for setting aside an award under Article 34 is refused at the seat of arbitration, may a party then proceed under Article 36 to apply for refusal of recognition or enforcement? This issue may be of little relevance in a domestic context, where, if an application to set aside an award survives a strike-out application, it is often met with an application to enforce and the two applications are heard simultaneously. The general approach of the domestic cases, such as Attorney-General v Tozer and Kimberley Construction, to Article 34 and 36 applications is a broad one, demonstrating that the courts will remain open to Article 36 applications when an Article 34 application has already failed. This issue is critical in an international context. While some international cases consider the options to be mutually exclusive (for example, Paklito Investment Ltd v Klockner East Asia Ltd [1993] 2 HKLR 39, followed by the High Court of Singapore in Newspeed International Ltd v Citus Trading Pty Ltd (4 June 2001)), the Hong Kong Final Court of Appeal in Hebei held that a party that has unsuccessfully sought to have an award set aside at the seat may still resist enforcement of the award. Sir Anthony Mason NPJ stated (at 689):
[A] failure to raise the public policy ground in proceedings to set aside an award cannot operate to preclude a party from resisting on that ground the enforcement of the award in the enforcing court in another jurisdiction. That is because each jurisdiction has its own public policy.
It is submitted that this is the correct approach, but courts should exercise this discretion taking all factors into account. For example, in Hebei Litton PJ pointed out that where a party did not rely on the public policy ground in the first-instance proceedings, a court, especially an appellate court, should view the case with “utmost suspicion”.
Law Commission Recommendations on the Clause 5 Appellate Jurisdiction on Questions of Law
The Commission was concerned with two main issues in the area of rights of appeal from an arbitral award: first, whether it was necessary for the Act to set out the express grounds on which the High Court could grant leave to appeal, and secondly, if so, what those grounds should be. In particular, should a finding of fact based on no or insufficient evidence amount to an error of law for the purposes of cl 5 of the Second Schedule? The Commission was of the view that it was unnecessary to legislate criteria, as the grounds set out in Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 (CA) appear to be working well, but recommended that the Act be amended to state that perverse findings of fact, or findings based on no evidence, do not constitute “errors of law” for the purposes of cl 5(1)(c).
D.A.R Williams