The Role of State and Public Policy in International Commercial Arbitration: From a Perspective of Investment-Host Countries
By: Xaypaseuth Phomsoupha, PhD
Solicitor-at-Law
Researcher & Author
This article may be appropriate for Laotian legal practitioners and academic staff in Lao universities that offer courses in international commercial law.
1. Introduction
1.1. General
An alternative to litigation is arbitration, whereby disputing parties have their differences settled by private third-party determination. International commercial arbitration concerns disputes arising from a contract performance validly entered into by private parties using international rules to govern internationalised contracts.[1] State and societal interests framed by public policy lie at the heart of the concerted effort of reasonable society members working for the public and private sectors, including those working in in-between settings in a jurisdiction. Public policy serves as a normative belief for state organisations in ensuring that people have equitable rights to enjoy such interests without costs except their inherent tax burden.[2] The relevance of public interests to settlement by a private party of another jurisdiction has long drawn attention to legal professionals, public administrators, and laypeople coexistent in different sovereign states of all the world economies.[3] The public policy protects societal interests against harm in international dispute resolution by arbitration, litigation, or both.[4] Preserving the state and societal interests are under social obligations.
1.2. Purposes
This paper seeks to understand how public interests relate adjudication to international commercial arbitration and to what extent they involve an interplay of several rule-based arrangements.[5] The author reflects on the interconnection between public policy and international arbitration rules in redressing disputes found in judgements of selected case laws he believes are relevant to the theme. With public policy, state actors safeguard state and public interests, while arbitrational tribunals maintain the integrity of international commercial arbitration with arbitrability delimitation. The author reflects on his experience in international commercial arbitration and litigation, the proceedings of which were instituted in Asia, the US, and the European continent over the past fifteen years.
2. Understanding of State and Societal Interests Embedded in Public Policy
2.1. What Do the Parties to Arbitration Want to Have Arbitrated?
Indeed, commercial arbitration is self-explanatory in adjudication by a group of non-officer judges or private arbitrators themselves.[6] The arbitration process is substantially framed by privately-made rules rather than state-made legislation; the former is legislated into law and applied to parties in resolving disputes arising from contract performances.[7] When private adjudicators arbitrate issues against state and societal interests, for example, bribery, torts, public disorder, and analogous acts, as the case may be, the public represented by judiciary courts has full power to dismiss such private decisions.[8] However, rules pertaining to the matters, which private arbitrators should arbitrate, have evolved, resulting in variations to state and societal interests from jurisdiction to jurisdiction.[9] The author observes that the international arbitral institutions, for instance, ICC Arbitration Rules and SIAC Arbitration Rules,[10] have little attention to arbitration rules to foster the public interests insisted on by different states’ members.
2.2. International Trade and Investment – Commercial – Arbitration
Trade, finance, and investment have connected people and their commercial activities to different places on this planet. Assets, whether tangible or intangible, have moved from place to place, following humankind’s agreement on a commercial basis.[11] When commercial activities intertwin wills of different actors, irrespective of whether or not such actors are domiciled in the same jurisdiction, a dispute over contract substance often occurs due to various circumstances.[12] Arbitration, if elected by the contract parties, covers matters in dispute according to their substance and procedure. Domestic and commercial arbitration resolves differences between parties in a single state governed by one set of laws.[13] On the contrary, international commercial arbitration concerns matters and several parties that originate in many states and sets of legislation forming the basis for neutral dispute resolution under a third jurisdiction.[14] Under the forgoing circumstances, one shall note that each state has a different public policy to guard its public interests against any detriment due to dissimilar legal systems.
2.3. Case Laws Applied by Civil Code Countries
Recapping the previous section, the author differentiates state public policy from international legislation.[15] One may question how interests framed by the legislation of one particular state are relevant to the rules of other jurisdictions when commercial arbitration takes place outside such a state. In Hansa Mining Co Ltd v The Government of Laos,[16] the Kuala Lumpur Arbitral Tribunal managing the case under UNCITRAL Arbitration Rules (1976)[17] refused to arbitrate the Claimant’s infringement of the national law by refusing to pay natural resources fees on the underlying project to the host state, as the Tribunal deferred to a court decision of available in the Respondent’s state. Later, the Tribunal issued an arbitration award focussing on what was arbitrable.[18] One might argue that the Arbitral Tribunal’s ignorance about the tax invasion did not amount to a waiver of tax invasion from international arbitration, as debated by several scholars.[19] Moreover, one might contend whether or not the public in the host jurisdiction was barred from taking court action against the tax invader in parallel with the international arbitration proceedings.[20] One must thoroughly understand what is to be arbitrable.
3. State and Societal Interests in International Arbitration
3.1. Stakeholders of State and Societal Interests
Morally, a state and all people, whether citizens and aliens, enjoy a wide range of interests, which they are obligated to protect and preserve for their benefit.[21] The definition of public interests varies from jurisdiction to jurisdiction according to the society’s beliefs, which range from shared norms to the surrounding substantive environment.[22] As many states, irrespective of large or small, are open to international trade and investment, the state and social interests of a particular state are exposed to external encroachment.[23] In Charles Stanley & Co Limited v John Adams,[24] Sir Raymond Jack judged public policy pertaining to a stock broking and investment management company to be within the domain of the UK jurisdiction. Sir Raymond Jack made his judgment on the judicial court case, where the UK public policy domain is within the court’s competence.[25] Nonetheless, social interest stakeholders might be outside the UK jurisdiction.
Private arbitral tribunals are limited to exercising their power in respect of judging breaches of public policy and thereby detrimental to the benefit of the parties involved in the case in question.[26] By contrast, judicial courts act for the interests of all stakeholders of state and societal interests belonging to natural persons and social organizations.[27] Some rules, for instance, SIAC Arbitration Rules, as revised and currently in force, tend to oust any state court jurisdiction in reviewing arbitral awards.[28] It is arguable that, so long as the SIAC Arbitration Rules preclude state courts from reviewing the issued arbitral awards, other types of stakeholders may perceive the Rules, as mentioned earlier, to be repugnant to public policy.
3.2. Arbitrability
Matters in a commercial contract fall under the contractual substance depending upon the sense of the agreement reached by the parties. One must note that arbitration may not substitute litigation in all aspects.[29] By common sense, the parties, as the societal members, trust arbitrators registered within and outside their jurisdictions to locate a solution fair for all parties involved directly and indirectly.[30] Arbitrators appointed by arbitral institutions, for example, ICC, SIAC, and UN,[31] practically assure societies that the submitted matters fall under their capacity to arbitrate under applicable law, failing which the appointed arbitrators should be penalized by the communities. The New York Convention acknowledges issues to be arbitrable and those not by codifying:
“Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences with arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.”[32]
As the New York Convention 1958, functioning as the overarching international legislation, provides leeway for member states to have issues determined whether arbitrable or not,[33] other rules inspired by the Convention shall follow suit. In Hansa Mining Co Ltd Co Ltd v The Government of Laos,[34] the courts of the arbitration seat in Kuala Lumpur set aside the Arbitral Award on the dispute’s merits. Nonetheless, the tax invader alleged in the state where the investment took place was not formally accused as parallel proceedings, as explored by Blavi,[35] were silent on the applicable laws at the time. Scholars and law practitioners tend to share the notion of differentiating matters arbitrable by arbitral tribunals from those deemed subjected to state court litigation.[36] Many scholars assert that public policy does not fall into the domain of private arbitration and that parallel court actions against breaches of public policy rules are under debate.[37] It will be fair for a state to obtain an injunction from an arbitral tribunal and, at the same time, take court action against those parties injuring the social interests when a breach of public policy is confirmed in commercial arbitration.
3.3. Protection of State and Societal Interests Beyond International Commercial Arbitration
The author states outright that all people and social organizations, irrespective of whether public or private, are obligated to protect and foster their interests. Before doing business in other jurisdictions, reasonable private participants ought to know the law and culture of the host.[38] The investors and host further agree to refer to arbitration by a third party when a dispute arises from an underlying business contract in which a conflict arises; an independent body of arbitrators is to be appointed under pre-agreed rules.[39] Before accepting any appointment, international arbitrators should immerse themselves in the substantive and procedural laws that apply to the parties and arbitration seats.[40] Even though they are very distant from the arbitration in question, the public insists on their interests not suffering from the action of any preceding players, who have been deemed as reasonable actors.
One may postulate that public policy in commercial arbitration functions as a tool for the public to protect public interests. In Betamax Ltd v State Trading Corporation,[41] after the parties went through the arbitration process as framed by procedural law, the Supreme Court of Mauritius set aside the arbitral award on the ground of infringing provisions of the International Arbitration Act.[42] The court judged in favour of advancing the public policy in respect of the arbitration award issued upon the dispute arising in the contract of affreightment between Betamax and State Trading Corporation operating under the law of Mauritius.[43] During the arbitration proceedings, public policy was debated extensively; however, the arbitral tribunal upheld the public policy functions.[44] If a judicial court outside Mauritius’ jurisdiction had enforced the arbitral award according to the relevant substantive law,[45] judges might have determined that a change-in-law event in Mauritius was adversely impacting the contract performance, not as a breach of public policy by either contractual party.
Public policy, as generally believed to guard state and public interests, provides different interpretations depending upon the time and jurisdiction of international commercial arbitration. In Westacre Investment Inc v Jugoimport SDPR Holding Co., Ltd,[46] a contract on services concluded between the Claimant and Respondent to render a third-party arrangement for the supply contract executed between a government agency in Kuwait and the Respondent. The agreement was governed by the law of Switzerland, where the commission arrangement was not illegal at the time.[47] The dispute over payment of the commission resulted in the Claimant’s challenge for setting aside the arbitral award in London on the ground of bribery in procuring the supply contract in Kuwait; the English court based in London refused to take the bribery alleged in Kuwait to merits of the dispute.[48] Nonetheless, in Alexander Brothers Ltd v Alstom Transport SA,[49] like in Wetsacre, the law of Switzerland governing the arbitration under ICC Arbitration Rules,[50] after the Respondent challenged to set aside the arbitral award in Paris on the ground of bribery, the French court considered it positively.[51] Referring to the UNCITRAL Model Law,[52] legal practitioners and scholars in the field of arbitration need to synthesize the vacating and enforcement of the two arbitral awards of the two afore-cited cases to make the public understand them clearly. To this end, the author suggests that public policy plays a crucial role in commercial arbitration only to the extent arbitral awards are submitted to litigation for judicial courts’ review.
4. Conclusion
State and societal interests vary from jurisdiction to jurisdiction. People living and businesses operating in all states are obligated to protect and flourish public interests for their benefit and the generations to come.[53] Public policy, as denoted hereunder, broadly frames public interests, which the societies guard against, for instance, torts, including, without limitation, misconduct, bribery, fraud, illegal acts, misrepresentation, and circumvention.[54] Participants elect to entertain international commercial arbitration because they believe that matters in dispute fall within their executed contract.[55] However, arbitral tribunals lack jurisdiction in deciding on issues pertaining to public policy.
Many international legislations, as revised from time to time, shed light on public policy in respect of the social interests of an individual state as well as of the international community to restore fairness inherent in the rules of law.[56] Many case laws have dealt with issues regarding public policy found in commercial contracts to which state agencies are the parties.[57] With a burden of proof, judicial state courts vindicate a party breaching public policy, the procedure of which is absent in the arbitration.[58] The author concurs that establishing state and societal interests helps international commercial arbitral tribunals to arbitrate matters within their jurisdiction to the extent that participants institute substantive disputes in the arbitrability domain. Thus, international legislation shall facilitate state courts to review arbitral awards to ensure a check-and-balance between international commercial arbitration and litigation.
BIBLIOGRAPHY AND SOURCES
Primary Sources
Case
Alexander Brothers Limited (Hong Kong S.A.R.) v Alstom Transport SA Alstom Network UK Limited, [2020] EWHC 1584 (Comm), 2020 WL 03271314
Betamax Ltd (Appellant) v State Trading Corporation (Respondent) (Mauritius), 2021] UKPC 14
Charles Stanley & Co Limited v John Adams, [2013] EWHC 2137 (QB), 2013 WL 3550487
Hansa Mining Co Ltd v The Government of Laos [2017] 6 AMR 219
Westacre Investments Inc v Jugoimport SDR Holding Co., Ltd [2008] EWHC 801 (Comm), 2008 WL 1771450
EU Legislation
Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958
IBA Rules on Taking Evidence in International Arbitration 2010
ICC Arbitration Rules 1988, 2021
New York Convention on Recognition and Reinforcement of Arbitral Award 1958
SIAC Arbitration Rules 1991, 1997, 2016
UNCITRAL Arbitration Rules 1976, 2013, 2021
UNCITRAL Model Law on International Commercial Arbitration 1985 with amendments as adopted in 2006
Secondary Sources
Books
Blackaby N and Partasides QC C, Redfern A and Hunter M, Redfern and Hunter on International Arbitration (6th edition, Oxford University Press 2015)
Chuah C T J, Law of International Trade: Cross-Border Commercial Transactions (6th edition Sweet & Maxwell 2019)
Cole T and Ortolani C, Understanding International Arbitration (1st published 2020, Routledge)
Ferrari F, Rosenfeld F, and Fellas J, International Commercial Arbitration: A Comparative Introduction (Edward Elgar Publishing Limited 2021)
Gaillard E, Legal Theory of International Arbitration (Martinus Nijhoff Publishers 2010)
Lim C L, Ho J, and Paparinskis M, International Investment Law and Arbitration (3rd printing 2019)
Articles
Andrew Rogers and Mathew Kaley, “The impact of public policy in international arbitration” (Arbitration 1999) 65(4)
Florentine Sneij, “International investment law as an international standard-setting in an increasingly multipolar world: public policy reformulated” (Arbitration 2016) 82(4)
Winnie Ma, “Recommendations on public policy in the enforcement of arbitral awards” (Arbitration 2009) 75(1)
[1] Nigel Blackaby and Constantine Partasides QC Alan Redfern and Martin Hunter, Redfern and Hunter on International Arbitration (6th edition, Oxford University Press 2015) 2-3
[2] Ibid, 110-115
[3] Tony Cole and Pietro Ortolani, Understanding International Arbitration (1st published 2020, Routledge) 2-8
[4] Francisco Blavi, “The role of public policy in international commercial arbitration” Arbitration 2016, 82(1) 3<https://uk.westlaw.com/Search/Results.html?>accessed on 9 October 2022
[5] Selected international laws: ICC Arbitration Rules 1988, 2021 | Mediation Rules 2021; IBA Rules on Taking Evidence in International Arbitration 2010; UNCITRAL Arbitration Rules 1976; SIAC Arbitration Rules 2010
[6] Ibid (n 3), 2-8
[7] Emmanuel Gaillard, Legal Theory of International Arbitration (Martinus Nijhoff Publishers 2010) 13-14
[8] Franco Ferrari, Friedrich Rosenfeld, and John Fellas, International Commercial Arbitration: A Comparative Introduction (Edward Elgar Publishing Limited 2021) 190-196
[9] UNCITRAL Model Law on International Commercial Arbitration 1985 with amendments as adopted in 2006
[10] ICC Arbitration Rules | Mediation Rules 2021; SIAC Arbitration Rules 2016
[11] Jason C T Chuah, Law of International Trade: Cross-Border Commercial Transactions (6th edition Sweet & Maxwell 2019) 21-22
[12] Winnie Ma, “Recommendations on public policy in the enforcement of arbitral awards” Arbitration 2009, 75(1) 2<https://uk.westlaw.com/Search/Results.html?>accessed on 9 October 2022
[13] Ibid 3-5
[14] Chin Leng Lim, Jean Ho, and Martins Paparinskis, International Investment Law and Arbitration (3rd printing 2019) 88, 212
[15] Ibid (n 3) 171-176
[16] Hansa Mining Co Ltd v The Government of Lao People’s Democratic Republic [2017] 6 AMR 219
[17] UNCITRAL Arbitration Rules 1976
[18] Ibid,[13]
[19] ibid (n 1) 110-115
[20] Ibid (n 16)
[21] Andrew Rogers and Mathew Kaley, “The impact of public policy in international arbitration” (Arbitration 1999) 65(4) 5-7
[22] ibid (n 3) 8-9
[23] Jason Chuah, Law of International Trade: Cross-Border Commercial Transactions (6th edition Sweet & Maxwell 2019) 21-22, 149-154
[24] Charles Stanley & Co Limited v John Adams, [2013] EWHC 2137 (QB), 2013 WL 3550487 [18] –[20]
[25] Ibid, [18] – [20]
[26] ibid (n 1) 2-15
[27] Ibid, 5-7
[28] SIAC Arbitration Rules 2016
[29] ibid (n 4)
[30] Ibid, 7
[31] ICC Arbitration Rules | Mediation Rules 2021; SIAC Arbitration Rules; UNCITRAL Arbitration Rules 2013
[32] Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, art II (1)
[33] Ibid, art II (1)
[34] ibid (n 16)
[35] ibid (n 4)
[36] Emmanuel Gaillard, Legal Theory of International Arbitration (Martinus Nijhoff Publishers 2010) 70-78; Winnie Ma, “Recommendations on public policy in the enforcement of arbitral awards” Arbitration 2009, 75(1) 2-3<https://uk.westlaw.com/Search/Results.html?>accessed on 9 October 2022
[37] ibid (n 7) 70-78;
[38] Florentine Sneij, “International investment law as an international standard-setting in an increasingly multipolar world: public policy reformulated” Arbitration 2016, 82(4) 2-4<https://uk.westlaw. com/Search/ Results.html?> accessed on 10 October 2022
[39] ibid (n 1) 194-196, 218-223
[40] IBA Rules on the Taking of Evidence in International Arbitration 2010, arts 2, 3
[41] Betamax Ltd (Appellant) v State Trading Corporation (Respondent) (Mauritius), 2021] UKPC 14 [1], [2]
[42] Ibid, [77], [78]
[43] Ibid, [95], [96]
[44] Ibid, [77], [78]
[45] ICC Arbitration Rules 2016
[46] Westacre Investments Inc v Jugoimport SDR Holding Co., Ltd [2008] EWHC 801 (Comm), 2008 WL 1771450 [1]
[47] Ibid, [1], [2]
[48] Ibid, [12], [13], [14], [15]
[49] Alexander Brothers Limited (Hong Kong S.A.R.) v Alstom Transport SA Alstom Network UK Limited, [2020] EWHC 1584 (Comm), 2020 WL 03271314
[50] ICC Arbitration Rules | Mediation Rules 1988
[51] ibid (n 49)
[52] ibid (n 9) art 34
[53] Andrew Rogers and Mathew Kaley, “The impact of public policy in international arbitration”, (Arbitration 1999) 65(4) 5-7<https://uk.westlaw. com/Search/ Results.html?> accessed on 10 October 2022
[54] ibid (n 3), 231-233
[55] Ibid (n 41) [1], [2]; ibid (n 46) [1]
[56] New York Convention on Recognition and Reinforcement of Arbitral Award 1958; ICC Arbitration Rules 1988, 2021; SIAC Arbitration Rules 2013
[57] ibid (n 24), Ibid (n 41) [1], [2]; ibid (n 46) [1]
[58] ibid (n 46) [1]