Enforceability of Annulled Arbitral Awards

Respect for party autonomy, efficiency and finality of result, and international comity are the most fundamental tenets of international commercial arbitration. In the context of international arbitration awards that have been set aside (“annulled awards”), these tenets are in tension, and this tension has led to significant disagreement between courts and academics as to how to treat annulled awards. Some scholars such as Albert Jan van den Berg argue that an annulled award becomes invalid and cannot be enforced in any jurisdiction since it ceases to exist after it has been set aside. He argues that the parties, by choosing the seat wanted their agreement to be subject to the annulment rules of the seat and that the award owed its life to the procedural law of the seat (or the law applicable to the arbitral procedure if chosen separately). However, the telos and the language of Article 5 of the New York Convention[1] (“Convention”) only suggests that an annulled award ‘may’ not be recognized and enforced. Therefore, a contracting state is allowed not to enforce an annulled award but also perfectly allowed to enforce such awards, after all the Convention is the product of a search for a pro-enforcement regime which eliminated double exequatur. This evaluation of the Convention shows that contracting states are allowed to regulate the grounds for setting aside arbitral awards and the consequences of setting them aside. Therefore, consequences of annulment of arbitral awards vary from jurisdiction to jurisdiction whereby in some jurisdictions annulment in the seat of arbitration has no effect, some jurisdictions defer greater importance to annulment of an arbitral awards. While an award that has been refused recognition and enforcement can be taken to another jurisdiction to seek enforcement without such non-enforcement having any effect on the legal status of the arbitral award (i.e. such award remains as a binding arbitral award), annulment may arguably have the consequence of nullifying the arbitral award. In recent years, national legal systems have exercised their discretion under Article V(1)(e) in dramatically different ways. These differences are especially illustrated by comparing the approaches of the French and the US courts.

This paper seeks to explore these issues by: (i) defining “annulled awards”; (ii) describing the consequences of the annulment of an award in France and the US; and finally (iii), arguing that the US approach to annulled awards is the most compelling.

 

1. Annulled Awards

Pursuant to Article III of the Convention, once an award is rendered by a tribunal, national courts “shall” enforce it. This mandatory obligation, however, has two important qualifications.

First, courts of the country “in which or under which” the award was made (in most cases, the courts of the seat), may annul the award pursuant to applicable national law. This power is justified since in the seat the award is not “foreign”, but domestic, and thus the NY Convention does not apply. The effect of annulment, at least in the seat, is that the award “never existed” and parties may be forced to pursue a new arbitration[2].

Second, the mandatory obligation under Article III is qualified by Article V of the NY Convention, which provides six grounds upon which any other court may refuse to enforce an award. These grounds are exhaustive exceptions to Article III, however they are not mandatory in the sense that contracting states may adopt a more pro-enforcement system by not allowing for the exceptions under Article 5. Most notably, Article V(1)(e) provides that a foreign court “may” decline enforcement where the award has been annulled by the courts of the seat (or the place which provided the procedural law). Although the Convention is of no guidance as to what constitutes a ground for annulment, it does limit the fora where an arbitral award may be annulled.

Most importantly, an award that has been refused recognition and enforcement can be taken to another jurisdiction to seek enforcement without such non-enforcement having any effect on the legal status of the arbitral award under the Convention (i.e. such award remains as a binding arbitral award), while an annulment decision might arguably have the consequence of nullifying the arbitral award.

 

2.1.  French Law

French law regards arbitral awards as not anchored in any national legal system but as international judicial decisions. Therefore, annulment of a foreign arbitral award bears no legal effect in France since an award is the product of an international legal system[3]. This position is perfectly in compliance with the Convention and promotes the object and purpose of the Convention which is to promote recognition and enforcement as much as possible. Although, Article 5 (1) e of the Convention states that awards that have been annulled can be refused enforcement, this does not mean a contracting state is required to refuse enforcement of such an award but only means that it has the right to refuse enforcing such an award.

Article 1520 of the French Civil Code of Procedure (previously Article 1502) sets forth that awards which are international should be recognized or enforced unless any one of the enumerated limited grounds, which correspond to Article 5 (1) a to 5(1) d of the Convention, can be relied upon. Therefore, a French judge is required to grant recognition and enforcement to an award which has been annulled unless there is another ground for refusal such as there being no valid arbitration agreement between the parties, which means that annulment of a foreign arbitral award has no effect under French. This stance under French law is based on the idea that foreign arbitral awards are considered as international judicial decisions not belonging to any national legal system.

The approach of the French courts is to enforce annulled awards in nearly all cases (except where enforcement offends “international public policy”). This approach was set out by the Cour de Cassation in Hilmarton (1994)[4], and has been affirmed and expanded in Putrabali case in 2007.

In Hilmarton, the court reasoned that the annulled (Swiss) award could be enforced since it was not “integrated into the legal order” of Switzerland. Similarly, but more expansively, in Putrabali the court held that an annulled award “is not anchored to any national legal order” and is “an international judicial decision”. Thus, it is well-established in French law that arbitral awards are creatures of international law, and thus capable of (indeed, ought to be) enforced even if annulled by the courts of the seat. This approach has been called the “delocalized” approach[5].

 

2.2. US Law

US courts generally do not enforce annulled awards (i.e., they “recognize” the annulment decision) except in the rarest of cases. This is apparent from the leading Court of Appeals decision in TermoRio (District of Columbia, 2007)[6], where it held that an annulled award “normally” should not be enforced since it “does not exist to be enforced”, and considering that enforcement would create a regime whereby courts of “secondary States…routinely second-guess the judgment of a court” of the seat. TermoRio qualified this general rule only by the exceptional instances where the annulment decision is “tainted” or “repugnant to fundamental notions of what is decent and just in the United States.” Although an earlier US decision, Chromalloy (1996), suggested a more liberal approach to annulled awards, this decision has been questioned by subsequent authority, and is now explained as an instance where the annulment decision was “tainted” or “[un]just”[7]. In Chromalloy, the District court noted that Article 5 (1) e of the Convention is not mandatory but discretionary and that Article 7 allows application of a more enforcement-friendly national rule.  Under the Federal Arbitration Act, a US court should grant an enforcement decision unless there is a manifest disregard of the law by the arbitrators. Since in Chromalloy, the arbitrators applied the law in light of the testimonies of several different experts and as a result there was a controversy as to the law, the arbitrators could not be said to manifestly disregard the law. The District Court asked whether the decision of the Egyptian court annulling the award, which found in favour of Chromalloy, should be given res judicata effect and not whether the Egyptian court properly applied the Egyptian Law. The court noted that it would generally apply a monetary foreign judgement but there was another policy that must be factored in, which was the favouring of enforcement of arbitral awards and disregarding annulment decisions .

 

3. Analysis

Evidently, US and French courts take markedly different approaches to annulled awards, and, for the reasons that follow, I argue that the US approach is superior.

The US model, and not the French model, respects party autonomy. Indeed, it is trite that party autonomy – or, the capability and freedom of the parties to agree to arbitrate – are the most fundamental tenet of ICA. Furthermore, it is trite that party autonomy in any given case has several aspects – in a normal case the parties exercise their autonomy to agree to: which disputes may be arbitrated, the applicable substantive law, the seat of arbitration and so on. For present purposes, the latter is most significant. Specifically, by agreeing to the seat of arbitration the parties agree that those national courts have jurisdiction to annul a future award. Hence, it may be said that the annulment of an award (except where annulment offends “fundamental notions of what is…just”), is a manifestation of the parties’ autonomy. Simply put, courts of other jurisdictions should generally recognize annulment decisions, since doing so reflects the will of the parties and only the US approach achieves this with fine tuned exceptions.

[1] Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958)

[2] Gary Born, International Arbitration: Law and Practice, Wolters Kluwer 2016, p. 346-349.

[3] Philippe Pinsolle, ‘The Status of Vacated Awards in France: The Cour de Cassation Decision in Putrabali’ (2008) 24 Arb Int’l 277

[4] Société Hilmarton v Omnium de Traitement et de Valorisation (Cour de cassation, 23 March 1994), 1994 Revue de l’Arbitrage 327, excerpt translated in (1995) XX YB Comm Arb 663

[5] Philippe Pinsolle, ‘The Status of Vacated Awards in France: The Cour de Cassation Decision in Putrabali’ (2008) 24 Arb Int’l 277

[6]Accessible at – https://www.cadc.uscourts.gov/internet/opinions.nsf/3EA9064DC31B165A852574400045448F/$file/06-7058a.pdf

[7] Corporación Mexicana de Mantenimiento Integral, S de RL de CV (COMMISA) v PEMEX-Exploración y Producción, F Supp 2d, 2013 WL 4517225 (SDNY 27 Aug 2013) and Thai-Lao Lignite (Thailand) Co Ltd & Hongsa Lignite (Lao Pdr) Co, Ltd v Government of the Lao People’s Democratic Republic, 2014 WL 476239 (SDNY 6 February 2014) (Wood J)