The Scope of the Public Policy Exception to Enforcement
87 Section 8(7)(b) of the IAA provides that an enforcing court may refuse enforcement of a foreign award on the ground that to enforce the award would be contrary to public policy. Section 8(7A) provides that enforcement would be contrary to public policy if the making of the award was induced or affected by fraud or corruption or if a breach of the rules of natural justice occurred in connection with the making of the award.
88 The grounds for refusing enforcement specified in s 8(5) of the IAA reflect commonly accepted notions of fairness. Those grounds must be raised by the party against whom enforcement is sought and the onus of establishing one or more of those grounds is on that party. Section 8(7) specifies two bases for refusing to enforce a foreign award which are not, in terms, required to be raised by the party against whom enforcement is sought. In practice, of course, it will almost always be that party who raises one or other or both of those matters. In order to engage s 8(7), the Court must make a finding either that the subject matter of the foreign award is not capable of settlement by arbitration under the laws of the State or Territory in which the Court is sitting and/or that to enforce the award would be contrary to public policy. Once one or other or both such findings are made, the Court has a discretion to refuse to enforce the award. The proper exercise of that discretion would require the Court to pay due regard to the terms of s 39(2) of the IAA and the objects of the IAA as stated in s 2D.
89 The enforcement court may be tempted to interpret the public policy basis for refusing to enforce a foreign award provided for in s 8(7) of the IAA as conferring a wide discretion upon the enforcing court to deny enforcement. Public policy is not specifically defined in the Convention nor is it defined in the IAA. It is, of course, specifically mentioned in Art V(2)(b) of the Convention and in Art 34(2)(b) of the UNCITRAL Model Law. Article V(2)(b) is obviously the progenitor of s 8(7) of the IAA. Section 8(7) has the potential to provide a broad loophole for refusing enforcement (see the discussion in Moses, The Principles and Practice of International Commercial Arbitration (Cambridge University Press, 2008) at pp 218-219).
90 Clearly the pro-enforcement bias of the Convention, as reflected in the IAA, requires that the public policy ground for refusing enforcement not be allowed to be used as an escape route for a defaulting award debtor. That ground should not be made available too readily, lest it undermine the purpose of encouraging and facilitating the enforcement of foreign arbitral awards embodied in the Convention and in the IAA. As previously observed, arbitration facilitates international trade and commerce by providing an efficient and certain dispute resolution process to commercial parties. If the enforcement of awards is to be subjected to the vagaries of the entire domestic public policy of the enforcement jurisdiction, there is the potential to lose all of the benefits of certainty and efficiency that arbitration provides and which international traders seek.
91 In Uganda Telecom Ltd v Hi-Tech Telecom Pty Ltd (2011) 277 ALR 415 (Uganda No 1) at [126]-[130] (pp 436-437), I said:
126 Section 8(5) of the Act does not permit a party to a foreign award to resist enforcement of that award on such a ground. Nor is it against public policy for a foreign award to be enforced by this court without examining the correctness of the reasoning or the result reflected in the award. The whole rationale of the Act, and thus the public policy of Australia, is to enforce such awards wherever possible in order to uphold contractual arrangements entered into in the course of international trade, in order to support certainty and finality in international dispute resolution and in order to meet the other objects specified in s 2D of the Act.
127 In the United States, the courts have generally regarded the public policy ground for non-enforcement as one to be sparingly applied. It has not been seen as giving a wide discretion to refuse to enforce an award which otherwise meets the definition of foreign arbitral award under the convention.
128 An example of this approach is Parsons & Whittemore Overseas Co Inc v Société Générale De L'Industrie Du Papier 508 F 2d 969 (2d Cir 1974). In that case, at 974, the court said that:
We conclude, therefore, that the Convention's public policy defense should be construed narrowly. Enforcement of foreign arbitral awards may be denied on this basis only where enforcement would violate the forum state's most basic notions of morality and justice.
129 Other courts in the United States have held that there is a pro-enforcement bias informing the convention: for example Karaha Bodas Co, LLC v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara 364 F 3d 274 at 306 (2004) (Karaha Bodas).
130 A more conservative approach has sometimes been taken in Australia: see for example Resort Condominiums International Inc v Bolwell [1995] 1 Qd R 406 at 428-32; (1993) 118 ALR 655 at 677-82.
92 At [131] (pp 436-439), I referred to the decision of McDougall J in Corvetina Technology Ltd v Clough Engineering Ltd (2004) 183 FLR 317 at [6]-[14] (pp 319-321) and at [18] (p 322). In that case, his Honour described the discretion conferred on the Court by s 8(7)(b) of the IAA as "wide". His Honour also remarked that there may be, in addition, a general discretion to refuse to enforce a foreign award. However, his Honour expressly refrained from expressing a concluded view on this point. At [18] (p 322), McDougall J said:
18 It was suggested in the course of argument that if I did not accede to the plaintiff's notice of motion then, in substance, it would send a warning signal to those who wish to enforce international arbitrations in Australia. Again, I do not agree. The very point of provisions such as s 8(7)(b) is to preserve to the court in which enforcement is sought, the right to apply its own standards of public policy in respect of the award. In some cases the inquiry that it required will be limited and will not involve detailed examination of factual issues. In other cases, the inquiry may involve detailed examination of factual issues. But I do not think that it can be said that the court should forfeit the exercise of the discretion, which is expressly referred to it, simply because of some "signal" that this might send to people who engage in arbitrations under the Act. There is, as the cases have recognised, a balancing consideration. On the one hand, it is necessary to ensure that the mechanism for enforcement of international arbitral awards under the New York Convention is not frustrated. But, on the other hand, it is necessary for the court to be master of its own processes and to apply its own public policy. The resolution of that conflict, in my judgment, should be undertaken at a final hearing and not on an interlocutory application.
93 At [132]-[133] (p 439) in Uganda No 1, I observed:
132 Whether or not, in 2004, there was a general discretion in the court to refuse to enforce a foreign award which was brought to the court for enforcement, the amendments effected by the 2010 Act make clear that no such discretion remains. Section 8(7)(b) preserves the public policy ground. However, it would be curious if that exception were the source of some general discretion to refuse to enforce a foreign award. While the exception in s 8(7)(b) has to be given some room to operate, in my view, it should be narrowly interpreted consistently with the United States cases. The principles articulated in those cases sit more comfortably with the purposes of the convention and the objects of the Act. To the extent that McDougall J might be thought to have taken a different approach, I would respectfully disagree with him.
133 The complaint in the present case is that the assessment of general damages in the award is excessive because the arbitrator failed to consider the costs and expenses that would have to be expended by UTL in generating the gross income which he found was likely to be earned. This is quintessentially the type of complaint which ought not be allowed to be raised as a reason for refusing to enforce a foreign award. The time for Hi-Tech to have addressed this matter was during the arbitration proceedings in accordance with the timetable laid down by the arbitrator. It chose not to do so at that time. It cannot do so now. As the court in Karaha Bodas also said at 306:
Erroneous legal reasoning or misapplication of law is generally not a violation of public policy within the meaning of the New York Convention.
94 Article V(2)(b) of the Convention makes clear that, under the Convention, it is the public policy of the enforcement state which matters. There is no express reference in the Convention to any concept of international or transnational public policy. Having regard to s 2D and s 39(2) of the IAA, s 8(7)(b) should be interpreted in a manner which is consistent with Art V(2)(b) of the Convention. For this reason, s 8(7)(b) should be interpreted as requiring the Court to consider the public policy of Australia when the public policy ground of refusal is invoked by an award debtor.
95 What then is the scope of the public policy which must be considered? Is it the entire domestic public policy of Australia or a more refined concept? The expression is not defined in the Convention, in the UNCITRAL Model Law or in the IAA. Nonetheless, some assistance as to its meaning is provided by the examples of matters which would definitely be contrary to public policy which are specified in s 8(7A) of the IAA. The matters covered by s 8(7A) are matters which most fair-minded thinking persons would regard as obvious reasons for refusing to enforce a foreign award.
96 For reasons which I will now explain, I think that the expression "public policy" when used in s 8(7)(b) means those elements of the public policy of Australia which are so fundamental to our notions of justice that the courts of this country feel obliged to give effect to them even in respect of claims which are based fundamentally on foreign elements such as foreign awards under the IAA.
97 As Justice Bokhary PJ observed in Hebei Import and Export Corporation v Polytek Engineering Co. Ltd [1999] HKCFA 16 at [29]:
In regard to the refusal of enforcement of Convention awards on public policy grounds, there are references in the cases and texts to what has been called "international public policy". Does this mean some standard common to all civilized nations? Or does it mean those elements of a State's own public policy which are so fundamental to its notions of justice that its courts feel obliged to apply the same not only to purely internal matters but even to matters with a foreign element by which other States are affected? I think that it should be taken to mean the latter. If it were the former, it would become so difficult of ascertainment that a court may well feel obliged (as the Supreme Court of India did in Renusagar Power Co. Ltd v. General Electric Co. Yearbook Comm. Arb'n XX (1995) 681 at p.700) to abandon the search for it.
98 The text of Art V(2)(b) of the Convention makes clear that the public policy to be applied is that of the jurisdiction in which the award is sought to be enforced. However, too rigid an application of the public policy of the domestic jurisdiction runs the risk of undermining the very purpose of the Act, being the facilitation of enforcement and the maintenance of certainty of foreign arbitral awards.
99 As Bokhary PJ also said in Hebei at [27] and [28]:
27 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 the reasons must go beyond the minimum which 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 (1985). There the question was whether an antitrust claim was to be referred to arbitration outside the United States. In holding that it was, the majority said this (at p.629):
"… concerns of international comity, respect for the capacities of foreign and 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 a contrary result would be forthcoming in a domestic context."
The considerable strength of this demand for comity is apparent from what it was able to overcome, namely the advantages of dealing with antitrust claims by way of litigation in the United States rather than by way of arbitration elsewhere. These advantages are detailed in the dissenting judgment of the minority.
28 When a number of States enter into a treaty to enforce each other's arbitral awards, it stands to reason that they would do so in the realization that they, or some of them, will very likely have very different outlooks in regard to internal matters. And they would hardly intend, when entering into the treaty or later when incorporating it into their domestic law, that these differences should be allowed to operate so as to undermine the broad uniformity which must be the obvious aim of such a treaty and the domestic laws incorporating it.
100 The leading decision in the US on the public policy defence in Art V of the Convention is Parsons & Whittemore Overseas Co, Inc v Société Générale De L'Industrie Du Papier (RAKTA) 508 F 2d 969 (2d Cir 1974). In that case, the US Second Circuit Court of Appeals addressed the scope of the defence in relation to an application to enforce an arbitration award between a US company contracted to perform work in Egypt and an Egyptian corporation, at a time when US/Egyptian political relations had broken down as a result of the Arab-Israeli 6-day war. The US Court held that public policy must be narrowly construed, in keeping with the pro-enforcement purpose of the Convention. In an oft-cited passage, the Court held (at 974) that the enforcement of foreign arbitral awards should only be refused where enforcement would "violate the forum state's most basic notions of morality and justice". The Court went on to say (at 974):
In equating "national" policy with United States "public" policy, the appellant quite plainly misses the mark. To read the public policy defense as a parochial device protective of national political interests would seriously undermine the Convention's utility. This provision was not meant to enshrine the vagaries of international politics under the rubric of "public policy." Rather, a circumscribed public policy doctrine was contemplated by the Convention's framers and every indication is that the United States, in acceding to the Convention, meant to subscribe to this supranational emphasis. Cf. Scherk v Alberto-Culver Co., 417 U.S. 506, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974). (Moreover, the facts here fail to demonstrate that considered government policy forbids completion of the contract itself by a private party.)
To deny enforcement of this award largely because of the United States' falling out with Egypt in recent years would mean converting a defense intended to be of narrow scope into a major loophole in the Convention's mechanism for enforcement. We have little hesitation, therefore, in disallowing Overseas' proposed public policy defense.
101 The Court in Parsons applied the principle that the relevant public policy to be applied is that of the enforcement state. However, the Court in Parsons went on to explain that the public policy to be applied is not the entirety of the public policy of the domestic jurisdiction. Enforcement is only to be refused on the basis that the "most basic notions of morality and justice" have been violated.
102 In a later case, MGM Productions Group Inc v Aeroflot Russian Airlines (2004 WL 234871), the US Second Circuit Court of Appeals took the same approach as it had done in Parsons. In MGM Productions Group Inc, the Court remarked that enforcing the foreign award in that case would not contravene US public policy. The issue in that case was whether the relevant award should not be enforced because it compensated the claimant for Aeroflot's non-performance of a contract some terms of which constituted violations of the US Iranian Transactions Regulations adopted pursuant to Executive Orders issued by the President of the United States.
103 In Hebei, when refusing to grant relief to a defendant on public policy grounds, Bokhary PJ said (at [31]) that:
Before a Convention jurisdiction can, in keeping with its being a party to the Convention, refuse enforcement of a Convention award on public policy grounds, the award must be so fundamentally offensive to that jurisdiction's notions of justice that, despite its being a party to the Convention, it cannot reasonably be expected to overlook the objection.
104 Where the public policy to be applied is defined by such narrow parameters, it may well be the case, as Sir Anthony Mason NPJ observed in Hebei that the relevant public policy of the enforcement state is so widely accepted across civilised nations that it can, in a sense, be described as "international public policy". At [98]-[99], Sir Anthony Mason said:
98. In some decisions, notably of courts in civil law jurisdictions, public policy has been equated to international public policy. As already mentioned, Article V.2(b) specifically refers to the public policy of the forum. No doubt, in many instances, the relevant public policy of the forum coincides with the public policy of so many other countries that the relevant public policy is accurately described as international public policy. Even in such a case, if the ground is made out, it is because the enforcement of the award is contrary to the public policy of the forum (A.J. van den Berg, The New York Convention of 1958, page 298).
99. However, the object of the Convention was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced (Scherk v. Alberto-Culver Co. (1974) 417 U.S. 506; Imperial Ethiopian Government v. Barich-Foster Corp. (1976) 535 F. 2d 334 at 335). In order to ensure the attainment of that object without excessive intervention on the part of courts of enforcement, the provisions of Article V, notably Article V.2(b) relating to public policy, have been given a narrow construction. It has been generally accepted that the expression "contrary to the public policy of that country" in Article V.2(b) means "contrary to the fundamental conceptions of morality and justice" of the forum. (Parsons and Whittemore Overseas Co. Inc v Societe General de Industrie du Papier (Rakta) (1974) 508 F. 2d 969 at 974 (where the Convention expression was equated to "the forum's most basic notions of morality and justice"); see A.J. van den Berg, The New York Convention of 1958, page 376; see also Renusagar Power Co. Ltd. v General Electric Co. (Yearbook Comm. Arb'n. XX (1995) page 681 at pages 697-702)).
105 Thus, in my view, the scope of the public policy ground of refusal is that the public policy to be applied is that of the jurisdiction in which enforcement is sought, but it is only those aspects of public policy that go to the fundamental, core questions of morality and justice in that jurisdiction which enliven this particular statutory exception to enforcement. The public policy ground does not reserve to the enforcement court a broad discretion and should not be seen as a catch-all defence of last resort. It should not be used to give effect to parochial and idiosyncratic tendencies of the courts of the enforcement state. This view is consistent with the language of s 8(7), the terms of s 8(7A), the text of Art V(2) of the Convention, the fundamental objects of the Convention and the objects of the IAA. This approach also ensures that due respect is given to Convention-based awards as an aspect of international comity in our interconnected and globalised world which, after all, are the product of freely negotiated arbitration agreements entered into between relatively sophisticated parties.