Duty and Discretion in International Arbitration

DUTY AND DISCRETION IN INTERNATIONAL ARBITRATION*

A. Introduction

After a long arbitration in New York, a Canadian company wins substantial damages against a British multinational, only to see a federal court vacate the award.¹ Two grounds are given for vacatur: the arbitrator was biased and the arbitrator manifestly disregarded the applicable law. Not deterred by the vacatur, the winning claimant seeks to enforce the award against the defendant’s London bank accounts.

What effect (if any) should a court in England give the American award? Should an English court ignore the arbitrator’s decision or the federal judge’s order? Should the English court make its own investigation into the legitimacy of the vacatur?

Unconditional respect for all foreign annulments will hardly promote efficient arbitration, since an award might be annulled in bad faith or in violation of fundamental notions of justice. Without some deference, however, victims of tainted arbitrations must prove de novo the award’s defects in every jurisdiction where they either have assets or seek to rely on subsequent awards.

The treaty framework for international arbitration provides no clear guidance on when annulments should have extraterritorial effect.² In Paris and Washington, however, courts have recently recognized awards vacated at the arbitral situs,³ sparking a debate on two rival policies: extending comity toward foreign judgments and enforcing arbitral awards. The proper balancing of these policies depends in large measure on one’s conclusions about the nature of commitments to resolve cross-border commercial disputes through arbitration.

Like prisms, these French and American cases help to refract the interaction of three overlapping legal orders: national statutes, international law, and privatized dispute resolution. While lending itself to few elegant dogmas, analysis of award annulment offers insights into how these legal systems interact, and suggests two modest conclusions.

First, courts should defer to annulments that are consistent with procedural fairness and international public policy. Such deference follows not from any explicit treaty mandate, but from the parties’ mutual commitments. Merchants who contract for an arbitral situs should be held to the implicit consequences of the bargain, whether this means narrow or broad judicial scrutiny. If the chosen review standards appear problematic on post-dispute reflection, market forces will direct future arbitrations elsewhere. Although this approach occasionally will be inconvenient for some business managers, it provides a better balance of social and economic consequences than other realistic alternatives.

Second, countries that host international arbitration should maintain their traditional role in monitoring the fairness of proceedings conducted within their borders. At the same time, these national legal systems should seek to limit the type of intrusive review procedures that invite disregard of annulments. To this end, the United States should adopt a separate statutory regime for international commercial arbitration, embodying more laissez-faire review than might apply to purely domestic cases.

B. Annulled Awards

Options

Returning to our opening scenario, several approaches are open to British judges considering enforcement of awards vacated at the arbitral situs. They might (i) never defer to annulments, (ii) always defer to annulments, or (iii) defer to annulments only on certain conditions, such as compatibility with public policy or with English grounds for vacatur.

Traditionally, annulment was thought to uproot an award so as to make it unenforceable abroad.⁴ There is no reason, however, that this must be so. An annulled award might well take its legitimacy solely from the enforcement forum, much as a contract void in one nation can be enforced in another.⁵ As discussed later, the French and American court cases mentioned in the introduction took exactly this approach.⁶

Case law

In the many-faceted saga of Hilmarton v. OTV,⁷ an arbitrator in Geneva denied a claim for consulting fees, erroneously believing that a contract subject to Swiss law violated Switzerland’s public policy.⁸ After a cantonal court vacated the award on the basis of this mistake, a second arbitral tribunal gave damages to the claimant.⁹

In France both awards were recognized, each in a separate proceeding: first the annulled decision in favor of the defendant,¹⁰ then the award in the second arbitration in favor of the claimant.¹¹ Ultimately the Cour de cassation held that the first judgment, recognizing the annulled decision, prevented recognition of the second arbitral award.¹²

The position of the Cour de cassation on res judicata is understandable. However, its enforcement of the vacated award is less so. The court’s reasoning that international arbitrations are not integrated into the legal order of the arbitral situs¹³ is hardly consistent with the fact that French judges annul awards in international arbitrations conducted in France.¹⁴ Moreover, in Hilmarton the ultimate result of recognizing the annulled award was that the claimant who prevailed at the bargained-for situs was hindered in obtaining unpaid fees.¹⁵

In the United States a similar scenario arose in Chromalloy Aeroservices v. Egypt,¹⁶ where an arbitral tribunal in Cairo had awarded damages to an American company for Egypt’s breach of a military helicopter maintenance contract.¹⁷ The award was then vacated for the arbitrator’s failure to apply the correct law, a non-waivable ground for annulment in Egypt.¹⁸

Despite the annulment, a U.S. federal court ordered enforcement of the award against the defendant’s American assets.¹⁹ In an opinion with neither precedent nor progeny,²⁰ the court reasoned that since the Federal Arbitration Act does not list error of law as a ground for vacatur, the claimant “maintains all rights [to award enforcement] that it would have in the absence of the Convention.”²¹

Two aspects of the federal court’s controversial reasoning deserve special mention. First, the Egyptian practice of annulling erroneous awards does not differ significantly from the way American courts vacate awards for “manifest disregard of the law” or improper choice-of-law reasoning.²² Second, to invoke the vacatur standards of the Federal Arbitration Act²³ risks giving the impression that American courts can annul foreign awards, a result at odds with existing law²⁴ and efficient arbitration.²⁵

C. The Interaction of Treaty and Statute

Control mechanisms

Judicial review of arbitral awards constitutes a form of risk management designed to safeguard against perverse arbitrators and shameless intermeddlers.²⁶ Such public scrutiny of arbitration is inevitable when the winners ask courts to recognize awards by seizing assets or by denying the losers access to otherwise competent courts.²⁷

Inherent in judicial review is a tension between two rival goals of efficient dispute resolution, which underlie most aspects of arbitration law. Finality, promoted by freeing awards from challenge, competes with community confidence in control mechanisms that protect against enforcement of aberrant decisions.

Award finality enhances political and procedural neutrality, which is compromised if the winner must re-litigate the case. Without a reliable alternative to the uncertainty of third country tribunals²⁸ and the other side’s “home-town justice,”²⁹ many transactions will remain unconsummated, or be concluded at increased prices to cover the risk of biased adjudication.