Annulment of arbitral awards as an exemption to the principle of the binding nature of arbitral awards

Introduction – Final and binding nature of arbitral:

International commercial arbitration, as an alternative to litigation in state courts to resolve international commercial disputes, brings advantages that are very attractive in the context of international trade. Compared to the “normal way” of litigation, arbitration offers several advantages in accordance with the principle of the party autonomy, such as an increased speed of the proceedings, flexibility with regard to the parties wishes regarding procedural and constitutive details[1] and possible cost advantages, particularly in proceedings involving large amounts in dispute.[2] Furthermore, in contrast to court proceedings, arbitration proceedings are usually not public, thus the confidentiality of the proceedings may be agreed and achieved. The confidential nature of international arbitration has also been stressed by the English and Welsh Courts of Appeal in Emmott v. Michael Wilson & Partners Ltd.[3]

Having said this, there are also disadvantages resulting from the objective of a quick resolution of disputes. The main disadvantage of the international arbitration is the widespread lack of appeal procedures, which increases the risk of uncorrected wrong decisions. Arbitral awards have a final and binding character as provided for in many institutional rules[4], which excludes the possibility of appeal against the award. With the final award of the arbitral tribunal, the case becomes a res judicata, since in the absence of superior instances the trial cannot be appealed both in terms of its substantive essence and also on the basis of the legality of the proceedings.

However, the absence of the possibility to appeal to higher instances does not necessarily mean that there is no possibility to contest the arbitral award in certain cases specified in national and international arbitration laws. The advantage of arbitration over litigation would not exist if the arbitral award would not be recognised and enforced by the State as equivalent to a final court decision. It is therefore logical that States have established certain mechanisms which provide for the review of arbitral awards in certain cases.[5] This mechanism of review of arbitral awards by domestic courts is that of annulment of the arbitral award.

Pro-enforcment bias nature of the annulment – Grounds of annulment:

There is one last hope for the party that has lost the arbitration and has been given a negative verdict. This hope is named “the setting aside of the arbitral award” or “the Annulment of the arbitral award”. Annulment of the award is nothing else than the process of invalidation of the award by a higher court of the place where the seat of the arbitral tribunal was located, a process which must be initiated upon the timely application of the unsuccessful party.[6]

The setting aside of the award is an atypical institution in the law of international commercial arbitration, as it is contrary to the main principles of international commercial arbitration, such as equity and non-interference by the State, principles which, despite the fact that international commercial arbitration has moved toward a stricter legal regulation, have retained their place in the hierarchy of grounds which have made international commercial arbitration more attractive than ordinary litigation before state courts. The annulment mechanism is conceived as an institution with a pro-enforcment bias nature, which means that it can only be used in specific and limited cases. The main ojective of the annulment is to maintain the balance between the non-interference by the State and the judicial review of arbitral awards which openly violate universal principles of law.

The setting aside of the award as an institution of arbitration law has been incorporated into the domestic law of States, who have ratified the New York Convention of 1958 on the basis of the Article V New York Convention and Article 34 (2) the UNCITRAL Model Law.[7] The UNCITRAL Model Law contains an improved and structured list of grounds for annulment of the arbitral award, which is widely used in the domestic laws of States. The reasons for setting aside arbitral awards provided for in Article 34 (2) of the UNCITRAL Model Law are as follows:

• Lack of capacity of the parties or valid agreement between the parties.
• Denial of the opportunity to be heard.
• Transgression of jurisdiction by the Tribunal.
• Non-compliance with the agreed arbitral procedure.
• Breach of public policy.

The grounds for annulment provided for in Article 34 (2) of the UNCITRAL Model Law each have specific qualification criteria, in particular with respect to the law(s) and rule(s) applicable to the annulment of arbitral awards. 

Applicable law(s) and rule(s) concerning the annulment of arbitral awards in the special cases provided for in Article 34 (2) of the UNCITRAL Model Law:

An important issue in relation to the special cases of annulment of arbitral awards by the  courts of the country of the arbitral tribunal seat are the law(s) and the rule(s) applicable during the assessment by the courts of the fact whether the arbitral award in question is to be annuled. The international commercial arbitration law is usually characterised by a combination of different laws, whether strict laws or soft laws, which has as its cornerstone the respect of the principle of the autonomy of the parties. This principle is of exceptional importance for international commercial arbitration in general. This interplay, interaction and the often overlapping or subordinating of laws, resulting both from the principle of the autonomy of the parties and also from the international character of arbitration, extend their consequences as far as the annulment of the arbitral award.

Indeed, in assessing the existence of the grounds for annuling the award, account is taken of rules of law relevant to the assessment of the facts, which may belong to the same jurisdiction as the country where the case is heard or may belong to a foreign jurisdiction. This is observed in the following analysis of the rules of law applicable in special cases of annulment of the arbitral award under Article 34 (2) of the UNCITRAL Model Law.

• Lack of capacity of the parties or valid agreement between the parties according to the Article 34(2)(a)(i) of the Model Law:

The first ground for annulling an arbitral award under Article 34(2)(a)(i) of the Model Law provides that; (i) a party to the arbitration agreement … was under some incapacity.[8] It is clear from the paraphrase of this provision that in such a case at least one of the parties to the arbitral proceedings is unable to conclude an arbitration agreement. As a general rule, any natural person or legal entity that has the capacity to become a party to the contract and enter into a contract may also participate in arbitration agreements. For this reason, in such a case the competent court must examine whether or not the natural or legal person is unfit due to incapacity to conclude a contract under the law of the country of residence or domicile in the case of natural persons and under the law of the country of incorporation in the case of companies and corporations. In this way, the court is obliged to apply foreign laws when assessing the fact in cases where the natural or legal person has a domicile or an incorporation in a place other than the country where the case is heard. The lack of evidence of the parties ability to participate in arbitral proceedings leads to the annullment of the arbitral award, as stated in the 2005 decision of the Swiss Federal Tribunal.[9] According to the Federal Tribunal’s reasoning, an arbitral tribunal must determine whether the parties are fully bound by the arbitration clause, even if it is necessary to affirm the prima facie capacity of the parties to become part of the arbitral proceedings.[10]

• Annulment due to the denial of the opportunity to be heard according to the Article 34 (2) (a) (ii) of the Model Law:

Another ground for annulling an arbitral award under Article 34(2)(a)(ii) of the Model Law provides that; (ii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case.[11] A trial, whether before state courts or arbitration tribunals, must not blatantly violate certain universal principles of justice. The arbitration must be conducted in accordance with the principle of a fair and just trial for the parties, including the right of the parties to be heard and to present their case. Respect for this right requires not only that the defendant be duly informed of the conduct of the proceedings, but also that he be given sufficient time to prepare an effective defence in the case. The failure to guarantee this rights results in annulment of the arbitral award.[12]  The courts in assessing this fact, ie if the parties are guaranteed the right to be heard on the case, refer as a rule to international standards and procedural law agreed by the parties in the arbitration agreement. The procedural law accepted by the parties may be of a foreign jurisdiction[13], which in this case must be taken into account by the court during the trial of the case. In case of lack of agreement between the parties regarding the law in force for the arbitration procedure, then as a rule the fact is assessed based on the law of the country where the tribunal was seated,  the so called Lex Arbitri, which in this case is the law of the country where the annulment of the arbitration award is tried.

• Transgression of jurisdiction by the Tribunal according to Article 34(2)(a) (iii) of the Model Law:

A further ground for challenge under the Model Law is that the arbitral tribunal has exceeded its powers in the decision that it has rendered. In the words of Article 34(2)(a) (iii): the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside.[14]

According to the wording of this article the jurisdiction is exceeded in two cases:

• When the tribunal considers during the trial questions that are not part of the arbitration submission agreed by the parties.
• When arbitral awards have been rendered on matters which have exceeded the scope of submission to arbitration.

The first case concerns a transgression of the tribunal jurisdiction during the hearing of the case which may have had a negative effect on the final decision for one of the parties, while the second case concerns arbitral awards made by the court for matters which are not subject to submission to arbitration. In both cases, the main role in the determination of the facts by the court is played by the law agreed by the parties in the arbitration submission, since that law defines the scope of the arbitration and the issues to be dealt with by it.[15]

• Annulment due to non-compliance with the agreed arbitral procedure according to article 34 (2) (a) (iv) of the Model Law:

According to Article 34 (2) (a) (iv) of the Model Law, an arbitral award may be set aside in cases where the proceedings have been adversely affected by procedural problems relating to the composition of the tribunal which are not in accordance with the agreement between the parties. In this case, the law to be considered by the court deciding to set aside the award is the law agreed by the parties in the arbitration agreement, which may be the Lex Arbitri or any other law agreed by the parties, and which is not in conflict with the so-called mandatory rules of the law of the place of arbitration. In the event of a conflict between what the parties have agreed to and the mandatory provision of the Lex Arbitri agreement, the courts shall be obliged to rule on the basis of the Lex Arbitri regarding those provisions that are in conflict with the mandatory rules and reject them.[16]

• Annulment through inarbitrability according to Article 34 (2) (b) (i) of the Model Law:

According to the article 34 (2) (b) (i) of the Model Law the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State. It is for states to decide, in their domestic legislation, which cases may or may not be heard by arbitration. In cases of inarbitrability , the substance of the case shall not be considered by States as arbitrable and therefore shall not be subject to review by an arbitral tribunal.[17] In such cases, it is understandable that the decision to set aside the arbitral award by the court should be based on the law of the state where the setting aside is sought, which is in any event the state where the arbitration took place.[18] For example, cases of a criminal nature and matters relating to the status of a person or an company (insolvency or bankruptcy) are matters which are normally subject only to national courts.

• Breach of public policy according to article 34 (2) (b) (ii) of the Model Law:

In cases where the matter which is the subject of the arbitral proceedings is contrary to public policy in the country where the award is given, the award may be set aside.[19] Public policy (ordre public) is decided independently by each state. If, for example, a question which is the subject of the arbitral proceedings concerns the division of winnings from gambling and the place where the arbitral proceedings take place categorically prohibits games of chance, there is an infringement of public policy which renders the arbitral proceedings null and void. In such a case, the courts, in deciding the question of setting aside the arbitral award, apply the law of the state in which the setting aside is sought, where the award constitutes an infringement of public policy (ordre public).

Conclusions:

The right to arbitration has as its main feature the interaction and intertwining of different laws and jurisdictions. This is also evident in the setting aside of arbitral awards, where the laws of different jurisdictions are applied to different cases of annulment.

It is noticeable that when the annulment is sought for cases involving non-compliance with the submission agreement between the parties, it is mainly the courts that take into account the laws agreed by the parties in the submission agreement, if such an agreement exists, when determining the fact.

However, in cases where the assessment of invalidity relates to cases which are contrary to the public policy of the state or where the case is considered to be insoluble under the laws of the state, the courts will decide strictly in accordance with the national law of the state, disregarding any agreement between the parties.

This ensures a double balance. On the one hand, a legal certainty is guaranteed for the parties, regarding the arbitration submission submitted by them, and on the other hand, the lack of possibility of illegality of arbitration agreements under the laws of the states where the arbitration takes place is guaranteed.

Literature:

• Redfern and Hunter on International Arbitration, 6th edition, in Kluwer Law International, Oxford University Press (2015).
• Knahr C. et al., Investment and Commercial Arbitration – Similarities and Divergences, 11. Edition (2010).
• Born G., International arbitration: Law and practice (2015).
• Liebscher, The Healthy Award: Challenge in International Commercial Arbitration, in Kluwer Law International (2003).
• John Forster Emmott v. Michael Wilson & Partners Limited (2008).
• Swiss Federal Tribunal, First Civil Law Court, 9 March 2005, A. v. B., n°4P.226/2004.
• Decision of the German Federal Supreme Court, 26.09.1985, File Number III ZR 16/84.
• Decision of the Mexican Supreme Court in Amparo Directo en Revisión No. 8/2011.
• LCIA Rules.
• ICC Arbitration Rules.
• ICDR Arbitration Rules.
• New York Convention 1958.
• UNCITRAL Model Law on International Commercial Arbitration.
• Belgian Arbitration Law 2013

[1] Redfern and Hunter on International Arbitration, Chapter 1,  pp 76 – 77, 6th edition (Kluwer Law International; Oxford University Press 2015).

[2] Ibid.

[3] John Forster Emmott v. Michael Wilson & Partners Limited [2008] EWCA Civ 184.

[4] See, e.g, LCIA Rules, Art. 26(8); ICC Arbitration Rules, Art. 34(6); ICDR Arbitration Rules, Art. 30(1).

[5] Knahr C. et al., Investment and Commercial Arbitration – Similarities and Divergences, p. 132, 11. Edition, 2010.

[6] Born G., International arbitration: Law and practice, p. 311,  (2015).

[7] See New York Convention 1958, Article V(1)(2); UNCITRAL Model Law on International Commercial Arbitration, Art. 34(2).

[8] Article 34(2)(a)(i) of the UNCITRAL Model Law.

[9] Swiss Federal Tribunal, First Civil Law Court, 9 March 2005, A. v. B., n°4P.226/2004.

[10] Swiss Federal Tribunal, First Civil Law Court, 9 March 2005, A. v. B., n°4P.226/2004, para. 4 and 5

[11] Article 34(2)(a)(ii) of the UNCITRAL Model Law.

[12] See Decision of the German Federal Supreme Court, 26.09.1985, File Number III ZR 16/84.

[13] In those cases when the request of the parties does not conflict with the mandatory requirements of the tribunal.

[14] Article 34(2)(a) (iii) of the UNCITRAL Model Law.

[15] See Liebscher, The Healthy Award: Challenge in International Commercial Arbitration

(Kluwer Law International, 2003), ch. V(6).

[16] As indicated in the article 34 (2) (a) (iv) of the UNCITRAL Model Law.

[17] See, e.g., Belgian Arbitration Law 2013, s. 1676(5), providing that certain categories of labour dispute are not arbitrable, and that any arbitration agreement relating to such disputes shall be null and void.

[18] See the decision of the Mexican Supreme Court in Amparo Directo en Revisión No. 8/2011.

[19] Article 34 (2) (b) (ii) of the Model Law.

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Kristi Vako

Kristi completed his Bachelor of Laws in Tirana and then continued his Master’s degree (LL.M.) at the Humboldt University in Berlin. After completing his studies, he worked as an in-house lawyer at various law firms in Germany. He is currently employed as a legal specialist for an international law firm in Frankfurt am Main and is also completing a second Master of Laws (distance learning) at King’s College London with a focus on commercial and corporate law.

His main area of expertise is commercial law in general and, in particular, arbitration law and compliance.