The Arbitration and conciliation act, 1996 to assure proper conduct of proceedings, allows certain remedies against an award”. Discuss the grounds when arbitral awards can be set aside.
Given the compounding of risk factors often associated with cross-border relationships, appropriate structures for the management of conflict are critical. No written agreement, no matter how detailed or thoughtful, can anticipate or address all of the contingencies and risks arising over the span of a business relationship, especially one involving persons of different cultural and political backgrounds who may use different words, exhibit different behaviors, and harbor very different values and attitudes. . When it comes to submitting disputes to judgment by a third party, arbitration offers the most acceptable means of resolving disputes involving international transactions. Arbitration under the provisions of a recognized arbitral institution keeps the parties out of each other’s courts and allows the parties to select a neutral forum in a mutually accessible location with impartial decision-makers and procedures designed to provide a fundamentally fair hearing. It also provides a binding award which is widely enforceable under the terms of international conventions. In the words of the U.S. Supreme Court, international arbitration clauses are “an almost indispensable precondition to achievement of the orderliness and predictability essential to any business transaction.”
Definition of the key terms:
Arbitration: The process by which the parties to a dispute submit their differences to the judgment of an impartial person or group appointed by mutual consent or statutory provision.
Arbitration award: An arbitration award (or arbitral award) is a determination on the merits by an arbitration tribunal in an arbitration, and is analogous to a judgment in a court of law. It is referred to as an ‘award’ even where all of the claimant’s claims fail (and thus no money needs to be paid by either party), or the award is of a non-monetary nature.
Alternative Dispute Resolution: Alternative Dispute Resolution (“ADR”) processes are alternative methods of helping people resolve legal problems before going to court. ADR involves an independent third person, called a “neutral” who tries to help resolve or narrow the areas of conflict.
Conventions and statutes
Conventions. The primary international convention governing international arbitration is the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (popularly known as the “New York Convention”). The New York Convention, which has been ratified by now ratified by more than 120 countries, including Russia, the United States, China, Japan, and most countries in Europe and Latin America, provides for broad international enforcement of arbitration agreements and ensuing awards with limited judicial intervention.
In the United States, the Convention has been implemented under the rubric of the Federal Arbitration Act (FAA). The U.S. version of the New York Convention incorporates two permissive limitations in the Convention: (1) it applies only to the recognition and enforcement of awards made in another signatory state, and (2) it is limited to “commercial” relationships (including those between U.S. citizens involving property, performance or other connections with foreign states).
National statutes; U.S. state statutes: Even if a nation has acceded to a Convention, domestic arbitration law may still play a part in governing the conduct of international arbitration. It is important that the terms of an international arbitration agreement be consistent with the arbitration law of the place of arbitration. Parties should make certain that their arbitration clause reflects what procedures, if any, are mandated by applicable arbitration law. The FAA. The U.S. version of the New York Convention specifically incorporates provisions of the domestic FAA. Moreover, a given arbitration agreement may be subject to both the domestic and international provisions of the FAA. For U.S. parties and their business partners, therefore, American arbitration law may be of great significance. Under the FAA, as discussed in earlier chapters, arbitrating parties enjoy considerable flexibility in tailoring arbitration agreements; judicial oversight of the process and of arbitral awards is extremely limited.
State statutes. A number of U.S. states have adopted statutes covering international arbitration, some of which are at least partly modeled on the UNCITRAL Model Law on International Commercial Arbitration, discussed below. However, within its purview the FAA applies in both federal and state courts, and preempts conflicting state law unless the parties have specifically agreed to the contrary.
UNCITRAL. The United Nations Committee on International Trade Law (UNCITRAL) developed a model law on arbitration and rules for arbitration. The UNCITRAL Model Law on International Commercial Arbitration, adopted by the United Nations General Assembly in 1985, generally parallels the New York Convention and is consistent with that convention. The UNCITRAL Model Law is more detailed, however, and fills some of the gaps left by the Convention’s limited provisions. A number of countries, primarily those whose arbitration law was not up-to-date, have adopted the UNCITRAL Model Law. In addition, some U.S. states have enacted statutes based at least partly on the UNCITRAL Model Law. In jurisdictions subject to the U.N. Convention but not the UNCITRAL Model Law, the Convention may be supplemented by an agreement incorporating the UNCITRAL International Commercial Arbitration Rules.
Procedures most familiar to U.S. practitioners
International arbitration institutions. There are today literally dozens of institutions ready and willing to assist parties to international arbitration agreements. Indeed, there are arbitral institutions in almost every leading trading country in the world. Many parties will initially suggest using their home country institution, if only for the sake of convenience. To avoid the dilemma of protracted negotiation over a particular administering institution, however, many agreements look to an institution that has the aura of neutrality and is not based in the home country of either party. Moreover, some institutions offer significantly more experience and organizational expertise than others.
Arbitral Awards and Their Enforcement:
The authority of arbitrators to fashion relief and the enforceability of awards incorporating particular remedies are a function of the scope of the agreement of the parties and applicable substantive law.
Specific, non-monetary relief.
Awards of specific performance and other non-monetary relief should be enforceable to the extent they are within the scope of the parties’ agreement and not prohibited by applicable law. Parties foreseeing a potential need for such relief are well advised to address the issue by an explicit provision in their agreement. The CPR International Rules explicitly authorize arbitrators to award such relief; a number of other institutional rules do not.
Punitive or exemplary damages.
Under the FAA and the weight of state arbitration law in the U.S., arbitrators have authority to award punitive or exemplary damages. Parties from other legal systems, especially those which regard such measures as contrary to public policy, tend to view such possibilities with alarm. For such reasons, parties to international commercial agreements may consider expressly denying arbitrators the authority to make such awards, or even “waive” such relief entirely. For example, the AAA International Arbitration Rules provide that
“Unless the parties agree otherwise, the parties expressly waive and forego any right to punitive, exemplary or similar damages unless a statute requires that compensatory damages be increased in a specified manner.”
Under U.S. law, the enforceability of an outright pre-dispute waiver of punitive damages remains an open question. In such case, if for any reason the waiver is deemed ineffective, the party seeking punitive damages may be required to submit the issues to arbitration and not a court under a broad form clause.
Most international arbitral rules provide that the costs of the of the arbitration shall be allocated by the arbitral tribunal in the final award that is rendered. The general rule — embodied in the LCIA Rules, is that costs follow the event. This usually means that the losing party pays the costs. If parties are desirous of providing otherwise, it should be in the arbitration clause. A usual provision is that the costs of arbitration shall be borne equally unless the tribunal in its discretion determines otherwise. The CPR International Rules contain a detailed description of what is entailed by “costs,” and recognizes the authority of the tribunal to require a deposit as an advance for anticipated costs.
Pre-award interest on awarded damages may represent a significant sum; therefore, the awardability of interest should normally be addressed in the agreement. Some arbitration procedures, such as the AAA International Rules, contain pertinent provisions. If the parties do not address the point, the governing law may or may not be of help. Where the agreement is silent, arbitrators tend to find that pre-award interest is a matter within their discretion.
Currency of the Award
Due to the nature of international agreements, the currency of the award may be crucial. Currency fluctuations themselves are the cause of many disputes. U.S. practitioners understand that even though an agreement may be with a U.S. party and in the English language, there is no assurance that the award will be rendered in U.S. dollars. If the contract is silent, the arbitrators will decide the currency in which the award will be paid. Parties often specify the currency of the award–especially in cases where your client is likely to be the claimant. It is best to specify a convertible currency, such as U.S. dollars. Some institutional rules address these issues.
Standards for decision making
Under leading international arbitration rules, arbitrators typically are required to apply the law, and not their own concepts of equity or fairness (ex aequo et bono). There are, however, instances in which the parties explicitly have given the arbitrators the power to disregard strict rules of law, e.g., to act as an amiable compositeur. Such provisions are sometimes used in long-term commercial contracts, including reinsurance agreements. In practical experience, even where no such power has been conferred on them,. arbitration panels often consider they have the power to “do justice,” and their decisions may appear based in whole or in part on considerations of fairness. Where the parties to the arbitration agreement prefer the panel to apply the law strictly, they should say so in the agreement.
Statements of rationale
Awards accompanied by a statement of reasons should be and generally are provided in international arbitral proceedings, although some attorneys believe that such statements may make awards more vulnerable to attack in subsequent proceedings. Under the rules of most international arbitral institutions, some form of accompanying statement of rationale is required unless the parties agree to the contrary.
Finality of international awards
The policy and practice of treating international awards as final and reviewable only on narrow grounds have been enforced by courts in the United States and Europe — although precise standards vary. Most of the international arbitral institutions promoting international arbitration as the preferred method of resolving disputes emphasize the finality of proceedings conducted under their rules, and the extremely limited scope of judicial review applicable to such awards.
Enforceability of foreign awards under the New York Convention
The enforceability of foreign arbitral awards is essentially a matter of international treaty. The 1958 New York Convention is the most significant of these treaties. It applies to awards made within the territory of a state other than the state in which recognition and enforcement is sought, and to “arbitral awards not considered as domestic awards in the state where the recognition and enforcement are sought.”
Under the Convention, prior judicial recognition of an award in the country where the award was rendered is not typically required for enforcement: for the purpose of international conventions. Once the proponent of the award has produced the award and arbitral agreement under which it was granted, the burden of proving the non-enforceability of an award is on the the party “against whom it is invoked.”
Article V of the Convention sets forth a limited list of grounds upon which a country may refuse recognition or enforcement to an award. These include:
(1) invalidity of the arbitration agreement under applicable law (as specified in the agreement or, in the absence of specific provision, under the law of the country where the award was made);
(2) lack of a fair opportunity to be heard;
(3) an award outside the scope of the submission;
(4) an arbitral authority or procedures not in accordance with the parties’ agreement, or, in the absence of such agreement, the law of the country where the award was made ;
(5) lack of a final, binding award, as where an 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.
A number of questions regarding application of the New York Convention to the enforcement and vacatur of awards in the country where rendered have been addressed by judicial decisions.
Enforcement of non-domestic awards rendered in the U.S. Courts have made clear that the Convention may apply to awards rendered in the U.S. in an arbitration in which some or all of the parties are foreign.
Law applicable to set-aside actions. Article V(1)(e) of the Convention impliedly contemplates an action seeking to have the award vacated or set aside by the courts of the country of rendition. It does not, however, specify whether that country’s domestic arbitration law is applicable to such actions. The question is very important since the domestic law of some countries provides grounds for vacatur beyond those set forth in Article V of the Convention, discussed above.
In one recent decision, the U.S. Second Circuit Court of Appeals concluded that while a U.S. court could not refuse to enforce an award rendered in a foreign country on grounds other than those enumerated in Article V, the Convention authorized set-aside actions in the country of rendition, under the domestic law of that country. Under this approach, “non-domestic awards” (such as an award in an arbitration between two foreign parties or an arbitration between a domestic party and a foreign party) are subject to the grounds for the review of domestic awards under the Federal Arbitration Act (FAA) in addition to the grounds described in the Convention. Because it exposes international arbitration awards to the vagaries of local law, arguably undermining the intended goal of the Convention to provide uniform enforcement of such awards, this result has been criticized by a number of commentators. .
There is authority for the proposition that in the U.S. a party may raise defenses to enforcement under Article V of the New York Convention without moving to set aside the award.
Impact of a set-aside on foreign enforcement.
Article VII of the New York Convention states that “the provisions of the Convention shall not act to 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 law . . . of the country where such award is sought to be relied upon.” Relying upon this language, and upon the fact that the Convention apparently gives courts discretion to refuse to enforce an award vacated in the country where rendered under Article V(1)(e), a U.S. federal district court in the Chromalloy decision denied res judicata effect to an Egyptian court decision nullifying an arbitration award on grounds of U.S. policy, and enforced the award under the FAA. More recently, the Second Circuit refused to follow Chromalloy in a similar case, citing principles of comity and the impropriety of enforcing an award nullified in a proper set-aside action in a foreign court. Chromalloy has engendered fierce debate between those who say it appropriately limits the ability of courts in the country of rendition to thwart enforcement abroad through set-aside actions and those who believe it permits inconsistent treatment of set-aside awards.
Occasionally, awards are challenged in the country where renderedfor strategic reasons. In certain circumstances, an award that is under attack in the courts of the country where it was rendered will not be enforced anywhere until the judicial challenge has been finally resolved, although there are notable exceptions to this principle. In the jurisdiction where the challenge has been filed, a final resolution could take years. The prospect of delay may motivate a settlement of the dispute on terms different from those prescribed in the award.
Strategic challenges to arbitration awards are generally disfavored by established members of the international arbitration bar. Unless extraordinary error has obviously infected the arbitral proceedings, the presumption of and preference for finality in such awards is strong among lawyers who specialize in international arbitration. If a party believes that the arbitral panel has committed serious error, but finds that its counsel in the proceedings is unduly reluctant to consider any effort to challenge the award in judicial proceedings in the country where rendered, a second opinion from independent, qualified counsel may be desirable.
Waiver of the right to judicial recourse.
Where applicable law permits resort to courts on points of law, concerns regarding the potential delays and costs associated with judicial intervention may motivate parties to seek to avoid such recourse. In England, for example, the courts traditionally had the power to decide all questions of law in arbitration, and parties often raised issues of law during arbitration and delayed the proceedings by asking a court to decide the issues. A party unhappy with an award could also challenge the award on the basis the arbitrators had made a mistake of law. Over the years, various arbitration acts have given parties power to agree to limit the courts’ monopoly on deciding questions of law. The Arbitration Act of 1996 permits parties to waive their rights to bring questions of law to the courts during an arbitration and to challenge an award for a mistake of law. Especially if the place of arbitration is England or a British Commonwealth country, parties may wish to include a provision in their arbitration clause waiving any right the parties may have to seek judicial rulings on issues of law during the arbitration and waiving any right to appeal the arbitral award based on errors of law. Some sets of arbitration rules, including the LCIA Rules and the Singapore International Arbitration Centre (SIAC) Rules, contain such waivers. English courts have also held that a clause incorporating the ICC Arbitration Rules operate as a waiver of the right to seek judicial rulings on errors of law.
The courts do not have jurisdiction to set aside a foreign arbitral award under the UNCITRAL Model Law.. That ruling has attracted critical commentaries. Instead of simply echoing them, this article has ventured to suggest that any concern that the setting aside of a foreign award may undermine the finality of arbitration is largely unfounded and that its only negative effect would be a possible confusion that might be brought about by the unfamiliarity of such a measure.
This report has further endeavoured to show what useful purpose, if any, could be served by accepting jurisdiction over a challenge to a foreign arbitral award. It has come to an affirmative conclusion, albeit in a limited situation. Thus, accepting such jurisdiction may, if the challenge is made in a country closely connected with the underlying contract, serve the useful purpose of providing the court with an opportunity to make findings under its own legal system as to whether the underlying contract is illegal, how significant is such illegality, and whether the illegality has the effect of rendering the contract unenforceable, so that the court in another country seized of proceedings to set aside, recognize or enforce the same award would be able to take notice of such findings and thereby form an accurate view concerning such illegality if that court, in scrutinizing the compatibility of an arbitral award with its own public policy, needed to take into account the illegality of the underlying contract under the law of countries which were more closely connected with the contract. This process may serve the further useful purpose of promoting, albeit indirectly, the legal policy of countries closely connected with the underlying contract that may otherwise be by-passed.
Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 UST 2517 [hereinafter New York Convention
UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE LAWS, UNCITRAL MODEL LAW ON INTERNATIONAL COMMERCIAL ARBITRATION, 40 U.N. GAOR Supp.(No. 17), Annex 1 at 81-93, U.N. Doc. A/40/17 (1985) [hereinafter UNCITRAL MODEL LAW].
See Allied-Bruce Terminix Co. v. Dobson, 513 U.S. 265 (1995).