The approach of courts in England & Wales to violations of international public policy

This is the second article in Clyde & Co’s latest international arbitration series covering the scope of court powers on issues or violations of international public policy across various jurisdictions. In this piece, associate Leonor d’Albiousse from our London office provides the legal perspective from England & Wales.

Under the New York Convention, the jurisdictions in which annulment of an international arbitral award may be sought are limited to the place where the award was made or under the law of which the award was made.[1] Consequently, an Award may face annulment in English courts when England was the seat of the arbitration or when the arbitration was conducted abroad but in accordance with English law.

The New York Convention set out limited grounds which can justify annulment of an arbitral award. Among these, Article V(2) provides that the court may refuse enforcement if it finds that the dispute was not arbitrable under the law of the state where the enforcement is sought or if the enforcement is contrary to the public policy of that state.[2]

Section 103(3) of the English Arbitration Act 1996 mirrors Article V(2) of the New York Convention, and sets out the limited grounds to challenge enforcement of an award, including, inter alia, when the award or the way in which it was produced is contrary to public policy.[3]

While other grounds may allow one party to challenge an award before English court, this article focuses on public policy violation as a ground to challenge arbitration awards, and how English courts interpret and apply public policy in this context.

Public Policy under English law

The New York Convention does not define the term "public policy", and it is therefore for each Member State to define freely and individually the scope of this ground for annulment. Public policy may include domestic public policy, i.e., the economic, legal, moral, political, and social values fundamental to one jurisdiction, and international public policy, i.e., fundamental principles pertaining to justice or morality that the State wishes to protect even when it is not directly concerned, and the duty of the State to respect its obligations towards other States or international organisations.[4]

Historically, public policy in English case law is understood quite narrowly and the threshold to annul an award on this ground is high. This reflects the pro-enforcement bias of the New York Convention, followed by England as an attractive and sophisticated seat for arbitration.

As far back as 1902, Lord Halsbury shrank the scope of public policy when he stated that public policy “does not leave at large to each tribunal to find that a particular contract is against public policy … you may say that it is because [certain things] are contrary to public policy they are unlawful, but it is because these things have been either enacted or assumed to be by the common law unlawful, and not because a judge or court have a right to declare that such and such things are in his or their view contrary to public policy”.[5]

English courts are said to be reluctant to define public policy: "[c]onsiderations of public policy can never be exhaustively defined, but they should be approached with extreme caution ... It has to be shown that there is some element of illegality or that the enforcement of the award would be clearly injurious to the public good or, possibly, that enforcement would be wholly offensive to the ordinary reasonable and fully informed member of the public on whose behalf the powers of the state are exercised”[6]

However, given the evolving nature of public policy, English judges seem to enjoy wide discretion to decide a case on the basis of public policy. In the words of Lord Baron Pollock CJ: “I think I am bound to look for the principles of former decisions, and not to shrink from applying them with firmness and caution to any new and extraordinary case that may arise”.[7]

In the context of international arbitration, the parties to an illegal contract “cannot by procuring an arbitration conceal that they, or rather one of them, is seeking to enforce an illegal contract. Public policy will not allow it”.[8] In Soleimany v Soleimany, the Court of Appeal refused, for reasons of public policy, to enforce an award of the Beth Din made in England that referred on its face to an illegal object of the underlying contract, namely to smuggle carpets out of Iran.

However, because a judge in an annulment proceeding does not review the actual merits of the award,[9] and annulment claims are usually heard by way of summary judgment, the threshold to annul an award said to violate public policy is relatively high. In Profilati v Paine Webber, Moore-Bick J stated that “where the successful party is said to have procured the Award in a way which is contrary to public policy, it will normally be necessary to satisfy the Court that some form of reprehensible or unconscionable conduct on his part has contributed in a substantial way to obtaining an Award in his favour. Moreover I do not think that the Court should be quick to interfere under this section”.[10]

Similarly in Honeywell International Middle East Limited v Meydan Group LLC allegations of bribery during a tender process did not allow the defendant to resist the enforcement in England of a Dubai arbitration award relating to payment default under an electrical works contract. In this case, the defendant argued that the award should be set aside because the underlying contract in the arbitration had been procured illegally, after the Claimant had bribed public servants in Dubai. In deciding the case, Ramsay J observed that bribery had not been established and that, even if Meydan's case on bribery succeeded, contracts procured by bribes were not unenforceable in England, but rather were voidable at the innocent party's election, with counter-restitution. The court confirmed that the threshold to set aside an award on the basis of public policy violations is very high when it held that “public policy should only be invoked in clear cases”.[11]

While judges enjoy wide discretion to decide these cases, they are not meant to review the merits and therefore the threshold required to establish a violation of public policy is high. On the other hand, public policy is continuously evolving and judges are not bound by many precedents, which gives counsel the opportunity to be creative when building their arguments on this ground.