Saturday, April 19, 2008

The Predicaments of Enforcing Arbitral Awards

The Predicaments of Enforcing Arbitral Awards

I. IntroductionAn 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. Arbitration is particularly popular as a means of dispute resolution in the commercial sphere (for a summary of the various arenas in which arbitration is usually generally, see the specific article on "arbitration"). One of the reasons for doing so is that, in international trade, it is often easier to enforce an arbitration award in a foreign country than it is to enforce a judgment of the court.
Under the New York Convention 1958, an award issued a contracting state can generally be freely enforced in any other contracting state. Virtually every significant commercial country in the world is a party to the Convention, but relatively few countries have a comprehensive network for cross-border enforcement of judgments of the court. Hence in many countries, particularly in emerging markets, a foreign arbitration award is much easier to enforce than an award of the court.The other characteristic of cross-border enforcement of arbitration awards that makes them appealing to commercial parties is that they are not limited to awards of damages. Whereas in most countries only monetary judgments are enforceable in the cross-border context, no such restrictions are imposed on arbitration awards and so it is theoretically possible (although unusual in practice) to obtain an injunction or an order for specific performance in an arbitration proceeding which could then be enforced in another New York Convention contracting state.
The New York Convention is not actually the only treaty dealing with cross-border enforcement of arbitration awards. The earlier Geneva Convention on the Execution of Foreign Arbitral Awards 1927 remains in force, but the success of the New York Convention means that the Geneva Convention is rarely utilised in practice.
The Arbitration and Conciliation Act, 1996 of India recognizes and provides for statutory enforcement mechanisms and shall form the base for our study in the following pages.
II. Problems of recognition and enforcementA. Why even recognise an Arbitration Award?For either judicial proceedings or arbitral proceedings, their crucial points are the same: justice and efficiency. As to efficiency, arbitral proceedings are superior to and more preferable than judicial proceeding because the disputed parties can receive a final resolution after only one instance in the arbitral proceedings. However, if the final award can not be timely recognized and enforced by the competent court, the superiority of arbitration in respect of efficiency will certainly be weakened or even thoroughly frustrated. Therefore, the issue of enforcement of arbitral awards in a foreign country is one of the key issues for discussion in international arbitration circles. Most arbitral awards are voluntarily complied with and do not require judicial enforcement. It is only if an arbitral award can be adequately enforced, however, that a successful claimant can ensure that it will actually recover the damages awarded it.
Indian law favours arbitration (both domestic and international) as an established method of resolving disputes. Under the Indian Contract Act, 1872 (S. 28) every agreement which restricts any party thereto absolutely from enforcing its rights under, or in respect of, any contract “by the usual legal proceedings in the ordinary tribunals” is declared void. The statutory exception is the referral to arbitration of questions and disputes that have already arisen, or may arise in the future. Resolution of international disputes by arbitration is a constitutional imperative—Article 51 of the Constitution of India (1950) provides that “the State shall endeavour to encourage settlement of international disputes by arbitration”.
From 1937 to November 1961 arbitral awards rendered in a foreign State which was a party to the Geneva Protocol of 1923 and the Geneva Convention of 1927, were enforced under the provisions of the Arbitration (Protocol and Convention) Act, 1937. This was enacted when India was still a British dominion and continued after the Constitution of India came into force (26 January 1950). India was a signatory to the Geneva Protocol on Arbitration Clauses (1923) and to the Geneva Convention on the Execution of Foreign Arbitral Awards (1927): the provisions of the Protocol and Convention were given statutory effect in British India by the 1937 Act.
Encouraging settlement of international disputes by arbitration being one of the directive principles of State policy in India's Constitution, the Government of India signed the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention 1958) on 10 June 1958. In the following year, the Foreign Awards (Recognition and Enforcement) Act, 1961 was enacted by Parliament to give statutory effect to India's ratification of the New York Convention. Following the provisions of Article VII, clause (2), of the New York Convention, S.10 of the Act provides that the Arbitration Protocol and Convention Act, 1937 will cease to have effect for foreign awards to which the 1961 Act applies.
To answer the questions, Why the Model Law was made and why did we adopt it, and Why the New York Convention was made and why should it be adopted? The U.S. Supreme Court had observed that, "The goal of the New York Convention, and the principal purpose underlying adoption and implementation of it, 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 in the signatory countries".
But there still exist problems with the recognition and enforcement of foreign arbitral awards.B. What is RecognitionGenerally, recognition simplicities is more relevant in 'international commercial arbitrations', where it is important that international awards should be accepted as truly 'international' in their validity and effect. A party seeking 'recognition' alone of an award, can only rely on the award for the purposes of defence or set-off or in some other way in subsequent court proceedings. He has; therefore, to apply to the relevant court to recognise the award as final and binding on the parties between whom it was made. However, the situation is different where the successful party seeks to enforce an award. For obtaining title to the defaulting party's assets or the sale proceeds of such assets, it is usually necessary to initiate court proceedings. Such proceedings are initiated in the state or the states where the properties or other assets of the defaulting party are located.
Recognition is a defensive process. It shields any attempt to raise, in a fresh proceeding, issues that have already been decided in an earlier arbitration resulting in the award sought to be recognized. It usually arises where a court is asked to protect a party with respect to a dispute that has already been the subject matter of an earlier arbitral proceeding. The party who got a favourable award in arbitration is entitled to object to the subsequent arbitration with respect to the dispute which was the subject matter of the earlier arbitration. The subsequent arbitration will be barred by the rule of res judicata. The court is bound to recognise the earlier award as valid and binding upon the parties with respect to the issues which it earlier dealt with. If the earlier award has disposed of all the issues raised in the subsequent proceedings, it will put an end to the subsequent proceedings because the matters in issue between the parties have already been decided and disposed of.
However, if the earlier award did not dispose of all the issues raised, and some issues had remained undecided, it will need to be recognised, for the purposes of issues decided, so as to prevent estoppel of the issues, it had not dealt with, from being raised later. Nevertheless, the issues which were not raised and determined, though could have been raised and determined, will too be barred by the rule of constructive res judicata. The use of 'recognition' on its own has been illustrated by Redfern and Hunter taking a hypothetical case of a company which is a defendant in legal proceedings by a foreign supplier for goods sold and delivered, but allegedly not paid for.
Suppose that the dispute between the company and the foreign supplier has already been submitted to arbitration; and that an award has been made, in which the foreign supplier's claim was dismissed. In these circumstances, the company would ask the court to recognise the award as a valid defence to the foreign supplier's claim. If the court is prepared to do this, the claim is dismissed. The legal force and effect of the foreign award will have been recognised, but the award itself has not been enforced.
C. What is EnforcementIn contradistinction to 'recognition, 'enforcement' is a weapon of attack. It involves aggression and coercion. It is used to ask the court not only to recognise the legal force and effect of an arbitral award, which has become final and binding, but also to enforce it, by using such legal sanctions as are available. In this sense, enforcement is a more comprehensive concept. The concepts 'recognition and 'enforcement' go hand in hand. One is a necessary part of the other because a court that is prepared to grant enforcement of an award will do so because it recognises the award as valid and binding upon the parties to it, suitable for enforcement.The enforcement of a 'foreign award' is a three-phase process. First, the party seeking to enforce the award has to make an application under s 47 to the court along with the evidence, as required in it. Secondly, the party against whom the award is invoked, desiring to resist the enforcement, is required to furnish proof to the court of the existence of one or more of the defences set forth in s 48. Finally, if on the basis of the evidence before it, the court is satisfied that the award is enforceable, it may enforce the award as a decree of the court under s 49.
Enforcement is the process to compel the party to perform an arbitral award, against which it is made, by applying all available legal sanctions. There are a variety of legal sanctions. In a case, where a party who fails or refuses to perform the award, is an individual, his property and other assets, may be seized and attached, his bank accounts may be frozen and forfeited. In extreme cases, even penal proceedings may be invoked against him. In a case, where the party is a corporate body, apart from seizing and attaching moveable and immovable property and other assets such as real estate, bank accounts, trading assets, stock and trade, sanctions may also be directed against their directors personally or on guarantee they may be held personally liable.
D. Distinction between the twoThe compound phrase 'recognition and enforcement' is rather confusing, as it is apt to give the impression that the terms 'recognition' and 'enforcement' are synonymous. The New York Convention 1958 itself uses this phrase with respect to 'foreign awards'. Articles IV and V use the phrase 'recognition and enforcement' while art III uses the expression 'recognition or enforcement of foreign award'. Article 31 of the UNCITRAL Model Law also uses the expression 'recognition and enforcement'. The English Act also uses the phrase 'recognition and enforcement' of awards. The Geneva Convention of 1927 was more precise in using the disjunctive phrase 'recognition or enforcement'. This phrase has been adopted in art 1 to the Second Schedule to the Arbitration (Protocol and Convention) Act 1937. The Foreign Awards (Recognition and Enforcement) Act 1961 used the compound phrase 'recognition and enforcement'. However, in its long title, the Act of 1996 uses the expression 'enforcement' only and omits the word 'recognition. This may be on the presumption that recognition is a necessary step along the way to its enforcement and implicit in it.
In Brace Transport Corpn of Monrovia, Bermuda v Orient Middle East Lines Ltd, Saudia Arabia, the Supreme Court said:An award may be recognised, without being enforced; but if it is enforced, then it is necessarily recognised. Recognition alone may be asked for as a shield against re-agitation of issues with which the award deals. Where a court is asked to enforce an award, it must recognise not only the legal effect of the award but must use legal sanctions to ensure that it is carried out
However, mere 'recognition' does not involve all that. Therefore, it is evident that the two terms are distinct because an award may be 'recognised' without being 'enforced', though when it is 'enforced' it is necessarily 'recognised' by the court that orders its enforcement. Presumably, it may be for this reason that this Part has not used the expression 'recognition'. But advisability of this omission is not clear. Further, even though a theoretical distinction exists between the concepts of recognition and enforcement, as per s 46 of the Act this distinction is not brought into practice under the Indian law. Section 46 provides that any foreign award that would be enforceable can be relied on and shall be treated as binding. There is hence no distinction between enforceability (ie the conditions precedent for enforcement) and the conditions precedent for the recognition of awards.
III. Other problems and suggestionsA. Problems of Local-ProtectionismThe recognition and enforcement of foreign awards in some cases have occasionally been confronted with the obstacles from “local-protectionism”. As mentioned above, the tasks of recognition and enforcement of foreign awards are authorized to the local competent courts. On some occasions, the local competent courts could be impacted by the “pressure” from the officials of the local governments, to partially protect the local parties who are subject to enforcement of the foreign awards. In brief, the recognition and enforcement of foreign award may be delayed and/or frustrated by the impacts of “local-protectionism”. Nevertheless, in a survey of trends in national enactments of other countries, a kind of phenomenon is worthy of note: in order to more strongly prevent the reverse and negative effect of “local protectionism” imposed on the recognition and enforcement of a foreign award, and also in order to more effectively prevent the possible mistakes made by some judges of local courts in judicial examination and supervision over a foreign arbitral award (probably due to their lower professional proficiency), some advanced experience in the practice of international arbitration enactments should be taken for reference. That is, the supervision power to conduct both procedural and substantive examination over domestic and foreign arbitral awards is authorized without exception to some high level courts, which would have judges of a higher caliber, so as to show prudence and to guarantee both justice and efficiency. For example, such supervision power is granted to the High Court in the United Kingdom . Similarly, the supervision and examination power over domestic and foreign arbitral awards is authorized to the Supreme Court in Indonesia and in Australia . Swiss law provides that such supervision power shall be exercised in principle by the Federal Supreme Court, with the exception that both parties may agree that this power shall be exercised by the specific state court where the arbitration tribunal is located, instead of the Federal Supreme Court .In Minmetals Germany GmbH v Ferco Steel Ltd , it was observed that, "in 'international commerce', a party who contracts into an agreement to arbitrate in a foreign jurisdiction is bound not only by the local arbitration procedure but also by the supervisory jurisdiction of the courts at the seat of the arbitration". Commenting on this observation, JE Adams says, "That imposes an obligation to invoke local supervisory jurisdiction— 'a cardinal policy consideration'. If such an application leaves the award undisturbed, that will also weigh heavily with the English courts, so as to sustain the finality of supervisory decisions on procedural matters.
However, the possibility of exceptional cases is still accepted \ He therefore, suggested the following criteria relevant for the court to consider:• the nature of the procedural injustice; • whether the enforcee has invoked the supervisory jurisdiction of the seat of the arbitration; • whether a remedy was available under that jurisdiction; • whether the courts of that jurisdiction have conclusively detetmined the• enforcee's complainr in favour of upholding the award; and if the enforcee has failed to invoke that remedied jurisdiction, tor what reason, and in particular whether he was acting unreasonably in so failing."
B. Public PolicyThe violation of rules of public policy is a ground for refusal of enforcement or a ground for setting aside. Indian law does not restrict (or extend) this ground to violation of International Public Policy even where the arbitration is an international commercial arbitration. Where enforcement of a foreign award is sought in any Court in India, the rules of public policy applicable will only be the “Public Policy of India”.
In Renusagar's case (October 1993), whilst construing the provisions of Sect. 7(1)(b)(ii) of the Foreign Awards Act (which reproduced Art. V (2)(b) of the New York Convention), the Supreme Court of India held that in order to attract the bar of public policy the enforcement of the award must involve something more than violation of Indian law; the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement was contrary “to the fundamental policy of Indian law or justice or morality”. It was held that any violation of the Foreign Exchange Regulation Act, which was enacted for the national economic interest, would be contrary to the public policy of India. The enforceability of a foreign award could not be resisted as violating the public policy of India where an award, however, directed payment of compound interest, or directed payment of compensatory damages or where the arbitral tribunal had awarded an amount higher than should have been awarded or where costs awarded by the arbitral tribunal were excessive.
In respect of a party requesting that the award is contrary to public policy, the benchmark for this purpose is the law of India. An explanation, similar to the one appended to S. 34, that seeks to amplify the meaning of public policy in this context is also attached to this Section. The enforcement of a foreign award takes place in India when the court before which it is filed is satisfied that it is enforceable under Chapter I. The consequence of this satisfaction, according to S. 49, is that the award shall be deemed to be a decree of that court. This necessarily implies that there is no need for the court to render a judgment in terms of the award, and the court's satisfaction is sufficient for enforcement. How this satisfaction is to be expressed appears unclear and the procedure that it must adopt to signal it having been satisfied in this regard appears as yet unavailable.
C. Double and Multiple ExequaturWhile going for enforcement of a foreign arbitral award, the possibility of different courts arriving at different findings on questions of fact and different conclusions on questions of law cannot also be ruled out. The result will be that an award annulled in a convention country will have to travel around the world, begging for enforcement in other convention countries. The courts of various countries may also have divergent and inconsistent opinions on the application and interpretation of the Model Law as applied in India. This divergence and inconsistency will defeat the basic object of the New York Convention and the uniformity of the arbitration law among all Convention Countries.
In India, so far there is no direct judicial authority on the question whether the enforcing court should reinvestigate 'procedural defects' contained in clauses similar to (a) to (d) of s 48(1) which have already been investigated by the courts of the seat of arbitration while affirming the award. Particularly, the Indian Supreme Court so far has not pronounced any decision on this question. In any event, it will be a difficult situation for the court. If it rules that, with a view to avoid double or multiple exequatur of the award, there is no need for reinvestigation, the statute will not permit so. Contrarily, if it rules that, in view of the mandatory provisions of the Act, reinvestigation is inevitable, it will open up a lot of scope for double and multiple exequaturs, resulting in diverse decisions on the same questions of fact and law. This will rob the trading community in the convention countries of uniform and harmonious international commercial arbitration.
Legislative reform by the Parliament only of one country, too, will not solve the problem. This provision has been adopted by all the convention countries implementing the Model Law. The possibility of uniform legislative reform is not free from doubt, because views of various countries are bound to vary. This may not be helpful in solving the problem. Perhaps discussion of the topic by an international arbitration conference with participation of representatives, particularly from the convention countries with experience on the subject, may be helpful. This may provide necessary information and material to the legislators for eventual legislative follow-up for candidly obviating the possibility of double or multiple exequaturs in enforcement proceedings, while enforcing the foreign awards.
D. Biased Enforcement Decisions (esp. with regard to annulled awards)There have already been a few cases and there is also further scope for biasness in enforcing foreign arbitral awards, an award, for example, rendered in State A ordering State B to pay a certain amount to State C can be legitimately annulled in State A, but nevertheless enforced in State C. Such biased enforcement decisions lead to greater injustice than biased annullment decisions. This is because no preventive measures exist against biased enforcement decisions, whereas biased annullment decisions may often be prevented through diligence in the designation of the arbitral seat.
E. Distrust towards ArbitrationWhat these problems or actually, loopholes will ultimately lead to is mistrust towards International Commercial Arbitration by International Business Operators and States, and will thus defeat the very purpose of Arbitration in the arena of international trade and commerce. They will, if not countered by adequate measures before they mature, deal a serious blow to the reputation and development of this international dispute settlement mechanism. Only the right legislative therapy with regard these issues can help maintain the trust and reputation of this mechanism.
F. Extent of Judicial Intervention in ArbitrationThe New Law makes it clear that notwithstanding anything contained in any other law for the time being in force, in matters relating to all kinds of arbitration in India, no judicial authority shall intervene except as provided in the Law itself (S. 5). This principle of limiting the judicial intervention in the arbitral process is not a mere replication of Article 5 of the Model Law that deals with the extent of court intervention. The New Law goes even further. When Article 5 of the Model Law was drafted there was a controversy as to the import of the proposal that the Law would oust the authority of a court in matters governed by it. Apprehension was expressed in some quarters that such a phrase could lead to a situation in which no court could intervene in any aspect of arbitration, unless there was specific provision for intervention in the legislation adopted by the state in question. Subsequently the discussions on the Law as evidenced through the travaux prĂ©paratoires have made it clear that Article 5 is a limitation on court intervention relating only to specific topics covered in the Model Law and not to the general powers of the courts. However, the New Law, in India, by employing the expression “notwithstanding any law for the time being in force”, intends to revert to a situation that was contemplated when the Model Law was being drafted, in which no court could intervene but for a provision made in the Law itself. The effect of S. 5 therefore, is to ensure that the New Law is a complete code as far as matters relating to arbitration are concerned and, accordingly, all Indian courts can act on a matter pertaining to arbitration conducted in India only on the lines prescribed in the New Law. The intervention of the Indian courts in the arbitral process is no longer permissible unless there is a specific provision for this purpose in the Law.
The position of judicial intervention in India with regard to enforcement of foreign awards has been through a lot of debate and change. The current position that does not allow judicial intervention unless a specific provision is present in that regard brings back all the arguments in favour of more judicial intervention. The concept of public policy that was discussed earlier also comes into focus for it is only Indian courts that can decide upon the public policy prevalent and whether the foreign award is in compatibility with it. The requirement of an agreement reduces greatly, the say that Indian courts will have in enforcing foreign arbitral awards. A decent balance needs to be struck between intervention of domestic courts and finality of the award made in outside India. Proper legislative provisions, instead of only Supreme Court decisions in this regard will provide more authority and give a final position with regard to judicial intervention with regard to enforcement of foreign awards.

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