Enforcement of an Arbitral Award which Has Been Set

Aside at the Seat of Arbitration

Koji Takahashi

(Doshisha University Law School, Japan)(Authored in the spring of 2007

Updated in the autumn of 2008)

Can an award set aside at the seat be enforced in other countries?

• The host country may have influence over its judiciary.

• The investor may negotiate to avoid litigation and choose arbitration.

• The host country may negotiate to nominate itself as the seat.

• If the award is unfavourable to the host, the court of the seat may set it aside.

• The investor may still wish to enforce it elsewhere.

Policy Arguments: against enforcement

• An award is a creature of the seat.• The choice of the seat may have been

made in exchange for reciprocal concessions. The attendant risk has been assumed by the investor.

• Endless attempts to enforce a vacated award in a number of countries should not be allowed.

Policy Arguments: in favour of enforcement

• An award is stateless.

• The courts of the seat may set aside an award on capricious grounds.

• The country of enforcement, where the assets are seized, has a greater interest in reviewing the award.

Setting aside awards at the seat

• New York Convention sets forth no grounds.

• Model Law, Article 34(2), allows setting aside on such grounds as nullity of arbitration agreement, procedural deficiencies, and public policy.

• Model Law does not allow the review of the merits but the laws of some countries do.

Enforcement of a vacated award?

• Article V(1) of the New York Convention Recognition and enforcement of the award

may be refused ... only if …: … e. 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.

• Article 36(1)(a)(v) of the Model Law

Interpretation of those provisions

• Explanatory Note on the UNCITRAL Model Law“[t]he setting aside of an award at the place of origin prevents enforcement of that award in all other countries by virtue of Article V(1)(e) of the 1958 New York Convention and Article 36(1)(a)(v) of the Model Law,”

• The words “may be refused” confer discretion.• Restrictive reading: limiting to the setting aside

on internationally recognised grounds, e.g. those listed in Article 34 of the Model Law

1961 European Convention on International Commercial ArbitrationArticle IX

• (1) “The setting aside in a Contracting State of an arbitral award covered by this Convention shall only constitute a ground for the refusal of recognition or enforcement in another Contracting State where such setting aside took place in a State in which, or under the law of which, the award has been made and for one of the following reasons:

[a list replicating Article 34(2) of the Model Law save grounds of non-arbitrability and public policy]

• (2) In relations between Contracting States that are also parties to the New York Convention …, paragraph 1 of this Article limits the application of Article V(1)(e) of the New York Convention solely to the cases of setting aside set out under paragraph 1 above.

“more-favorable-right” provision

• Article VII(1) of the New York Convention: The provisions of the present 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.

• e.g. Article 1502 of le Code de procédure civile of France does not contain an equivalent of Article V(1)(e) of the New York Convention.

Res judicata effect of the foreign annulment decision

• Always give res judicata effect.• Give res judicata effect only if the foreign decision was

based on an internationally recognised ground. • Give res judicata effect only if to do so would not

contravene the public policy of promoting circulation of awards.

“The test of public policy cannot be simply whether the courts of a secondary State would set aside an arbitration award if the award had been made and enforcement had been sought within its jurisdiction. … the Convention contemplates that different Contracting States may have different grounds for setting aside arbitration awards.” TermoRio v. Electranta (D.C.Cir.,2007)

• Never give res judicata effect.

French case law

• Article VII of the New York Convention and Article 1502 of le Code de procédure civile.

• The enforcement of vacated awards is not refused, irrespective of the grounds of setting aside.

• Possible exception: awards on matters purely internal to the seat.

Société Hilmarton v. OTV(23 March 1994, Cass. 1re civ.)

• Arbitration in Geneva between an English company and a French company concerning the procurement of a government contract in Algeria. The Swiss courts set aside the award by reviewing the merits.

• The French Cour de cassation: the award in question was “an international award which was not integrated into the legal order of [Switzerland], so that its existence continued despite its being set aside ….”

• See also Putrabali (29 June 2007, Cass. 1re civile ).

U.S. case law Chromalloy AeroServices v. Egypt

(939 F. Supp. 907 (D.D.C. 1996))

• Arbitration between a U.S. company and Egypt in Cairo. The award unfavourable to Egypt was set aside by the Egyptian court on the ground of a mistake of the application of Egyptian law.

• The U.S. District Court allowed enforcement.– Article V(1)(e) granted discretion.– Via Article VII, Chapter 1 of the Federal Arbitration Act

(9 U.S.C.10), which set forth grounds for setting aside domestic awards, does not permit review of merits.

– Public policy grounds to deny res judicata effect to the Egyptian court’s decision.

U.S. case lawBaker Marine (Nig.) Ltd. v. Chevron (Nig.) Ltd.

(191 F.3d 194 (2d Cir. 1999)) Spier v. Calzaturificio Tecnica S.p.A.

(71 F. Supp. 2d 279 (S.D.N.Y. 1999))

The U.S. Court of Appeals and the District Court refused to enforce vacated foreign awards. – Enforcement under Chapter 1 of the FAA was

not allowed.– Article V(1)(e). The discretion was exercised

against enforcing the awards. – There was “no adequate reason for refusing

to recognize the judgment of the [foreign] court.”

When will the U.S. courts enforce vacated foreign awards? 1

When there is a breach of “no recourse” clause, i.e. an explicit promise not to appeal the award?

• Chromalloy: the party who moved in Egypt for the setting aside of the award had “repudiate[d] its solemn promise.” cf. Baker Marine and Spier.

• No-recourse clauses are prevalent, e.g. in rules of arbitral institutions.

• Its effect is, according to the law of the seat, usually restricted to barring an appeal on the merits.

When will the U.S. courts enforce vacated foreign awards? 2

When the U.S. law is chosen as the law governing the procedure?

• cf. Baker Marine “[n]othing suggests that the parties intended United States domestic arbitration law to govern their disputes” (cited in Spier).

• Then, Chapter 1 of the FAA applicable to set aside the award?

• In practice, it is unusual for an arbitration agreement to choose the U.S. law as the governing law of the procedure while specifying another country as the seat.

Further reading

• Dana H. FREYER “United States Recognition and Enforcement of Annulled Foreign Arbitral Awards - The Aftermath of the Chromalloy Case” Journal of International Arbitration 2000

• David W. Rivkin “The Enforcement of Awards Nullified in the Country of Origin: The American Experience” ICCA Congress Series1999 Paris (no. 9)

• Emmanuel Gaillard “Enforcement of Awards Set Aside in the Country of Origin: The French Experience” ICCA Congress Series, 1999 Paris (no. 9)

• Felix Weinacht ”Enforcement of Annulled Foreign Arbitral Awards in Germany” Journal of International Arbitration 2002