Enforcement of Annulled Arbitral Awards
Rebecca Huang, LL.B., FCIArb
An arbitral award is considered to be annulled when it has been set aside by the courts of the arbitral seat. The enforcement of annulled arbitral awards may or may not be problematic. It depends on how and why the award was annulled, and on why a national court decides to enforce a foreign arbitral award that has been annulled.
New York Convention
In the face of an application for recognising a foreign award, the national court shall consider the New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards (“New York Convention”). The rationales for the potential enforcement of annulled arbitral awards are implicit in New York Convention.
Article V(1)(e) of the New York Convention provides that an arbitral award “may” be refused if the award is set aside by the seat of arbitration. As such, if a foreign award has been annulled under Article V(1)(e), a national court has the discretion to decide whether to enforce the annulled award.
Further, according to Article VII, no party shall be deprived of the right to benefit from an arbitral award as permitted by the law of the enforcing State. Therefore, national courts retain discretion to recognise annulled award. If the national law of the enforcing court is more favourable to a claimant of an annulled award, it is possible for the claimant to successfully avoid Article V(1)(e) and enforce it under Article VII. Enforcing an annulled award would be reasonable if the annulment was obtained by means such as bribery.
There is a clear tension between Article V(1)(e) and Article VII of New York Convention. Article V(1)(e) codifies comity, expecting the enforcing court to respect the annulment decision made by the court at the seat of arbitration. On the contrary, Article VII recognizes the enforcing court’s discretion to apply its own law.
Annulment Procedures in Different Jurisdictions
The annulment process is a court proceeding. It must be conducted according to the basic principles of natural justice. Enforcement of an annulled award where the annulment process violated national justice is consistent with Article V(1) of New York Convention that permits non-enforcement of an arbitral award obtained in violation of national justice.
Under Article V(2) of New York Convention, enforcement of an award may be refused if it would contravene the public policy of that country. This suggests that a national court is expected to make enforcement decisions based on public policy as defined in the home jurisdiction.
It is clear that New York Convention allows its signatory countries’ public policy to determine its courts’ enforcement decisions. Therefore, an enforcing court’s decision to reject an annulment based on its country’s public policy is consistent with New York Convention.
In the United States, in a 2016 decision, the Second Circuit confirmed an arbitral award annulled by the Mexican court.1 In that case, the respondent, controlled by the Government of Mexico, was found by an arbitral tribunal to be liable in damages for breaching a private contract. The Mexican government changed the law effective retroactively, on which the Mexican court relied to annul the arbitral award. The US Court held that the retroactive legislation that canceled existing contractual rights was repugnant to US law. The US Court enforced the annulled award on the basis that the nullification in Mexico contravened the fundamental notions of what is decent and just in the US.
In the UK, in a 2017 decision, the High Court of Justice of England and Wales refused to enforce an award that had been annulled by the Russian court.2 In that case, the claimant obtained a substantial award from a tribunal of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation. The award was set aside by the Moscow Court, affirmed on appeal. The claimant sought to enforce the annulled award in the UK under New York Convention. The UK High Court applied a test of bad faith or bias, which was described in various ways as follows:
“[2] … whether the Russian courts’ decision were so extreme and incorrect as not to be open to a Russan court acting in good faith…
[15] …The fact that a foreign court decision is manifestly wrong or is perverse is not sufficient…The decision must be so wrong as to be evidence of bias, or be such that no court acting in good faith could have arrived at it…the evidence or grounds must be ‘cogent’…the decision of the foreign court must be deliberately wrong, not simply wrong by incompetence…
[53] …The Claimant bears a heavy burden to establish not only that a foreign court’s decisions were wrong or manifestly wrong but that they are so perverse as for it to be concluded that they could not have been arrived at in good faith or otherwise than by bias.”
The UK High Court declined to enforce the annulled award because the claimant failed to prove bad faith or actual bias of the Russian judge who annulled the award.
Conclusion
In conclusion, the enforcement of annulled arbitral awards is a complex issue influenced by various factors, including the procedures followed in the annulment process and the discretion of national courts. The New York Convention provides a framework for addressing these issues. How different jurisdictions approach the enforcement of annulled awards depends on whether the award was obtained in violation of natural justice. Overall, the enforcement of annulled arbitral awards requires a careful balancing of legal principles and policy considerations within the context of international arbitration.
1. Corporación Mexicana De Mantenimiento Integral, S. De R.L. De C.V. v. Pemex‐Exploración Y Producción, No. 13-4022 (2d Cir, 2016).
2. Nikolay Viktorovich Maximovv. Open Joint Stock Company "Novolipetsky Metallurgichesky Kombinat", [2017] EWHC 1911.