A View from the Top

Public Policy — The Ride of the Unruly Steed on the Highway of International Arbitration

 

The article examines the scope of the doctrine of public policy in the enforcement of foreign arbitral awards.

Commercial lawyers have long been familiar with the doctrine of public policy in the context of commercial transactions, particularly in respect of whether an otherwise valid contract should not be enforced on the ground of illegality or on some other ground which offends public morals. Indeed, every law student soon learns of the legend of the ‘unruly steed’.

As early as the 19th Century, the concept of the unruly horse of public policy rode into the litany of the English law and hence, common law lawyers. Thus in the early 19th Century, Mr Justice Burrough described the doctrine of public policy thus:

‘It is a very unruly horse, and when once you get astride it you never know where it will carry you.’ (Richardson v Mellish [1824] 2 Bing 229, 252)

In this brief discussion, it is intended to explore the machinations, if any, of this unruly horse in the context of the recognition and enforcement of foreign arbitral awards in Singapore and elsewhere. The task is a difficult one, so far as Singapore is concerned, since there is a dearth of cases covering this field. However, some help may be obtained from cases emanating in other jurisdictions.

The Starting Point

The recognition and enforcement of foreign arbitral awards is dealt with by Part III of the International Arbitration Act (Cap 143A) (‘IAA’) where the foreign award is made in a country which is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (‘New York Convention’) and in the case of an award made in a country which is not a party to the New York Convention under Part IX of the Arbitration Act (Cap 10) (‘AA’).

In both the regimes, international and domestic, Singapore’s arbitration law provides for grounds to refuse enforcement of arbitration awards. In both cases, the legislation adopts the grounds for the refusal to enforce laid down in the United Nations Commission on International Trade Law (‘UNCITRAL’) Model Law — see First Schedule to the IAA.

Thus, in the case of the International Arbitration Act, s 31 of the IAA sets out the grounds upon which the Singapore court may refuse enforcement of a foreign award — see s 31(2) of the IAA. Additionally, however, the IAA provides in s 31(4) that:

(4) In any proceedings in which the enforcement of a foreign award is sought by virtue of this Part, the court may refuse to enforce the award if it finds that:

(b) enforcement of the award would be contrary to the public policy of Singapore.

A similar provision is found in s 48(1)(b)(ii) of the AA. The discussion that follows with respect to the refusal to enforce a foreign award under the IAA on the ground that it would be ‘contrary to the public policy of Singapore’ would equally apply to the AA regime pursuant to s 48(1)(b)(ii).

Public Policy of Singapore

It is immediately apparent from a plain reading of s 31(4)(b) of the IAA that the refusal to enforce a foreign award on grounds of public policy refers squarely to the public policy of Singapore, ie it refers to the public policy as perceived by the national courts of Singapore. By definition this would refer in turn to the domestic public policy as opposed to international public policy, if there be such a notion.

It follows that there would be no difficulty for a Singapore court to apply its own doctrine of public policy as it perceives within the domestic arena to determine if and when it will not enforce a foreign award on the ground that it would be contrary to public policy.

It would also mean that ‘the public policy of Singapore’ would import to the exercise of the court’s power not to enforce a foreign award all the common law notions of public policy as understood and by now well-entrenched in the local jurisprudence. Thus, this would necessarily draw on the notions of morality, fairness and other ‘public policy’ concepts understood in the law. It would appear, therefore, that a foreign arbitral award which deals with an activity which is illegal in Singapore would attract a simple but firm response from the court that to enforce such an award would be ‘contrary to the public policy of Singapore’.

Seen from a very parochial perspective, s 31(4)(b) would appear to provide a ‘catch all’ or ‘sweep up’ clause which ostensibly would allow a Singapore court considerable latitude to refuse enforcement of a foreign award. Anything which the Singapore court perceives as even remotely contrary to the notions of public morality in Singapore can be struck down by the court using this provision. Thus, a foreign arbitral award granting relief to a foreign party pursuant to an arbitration in respect of a dispute over a contract to distribute pornographic material in a country other than Singapore and where by the laws of that country is neither illegal nor indeed undesirable, could potentially be refused enforcement by a court in Singapore on the ground that the activity upon which the award was issued was one which would be illegal and in any event contrary to the public morality of Singapore — and therefore contrary to the public policy of Singapore.

Within the domestic sphere and in the narrow context of national public policy, the above argument and approach seems both desirable and consonant with local notions of law and morality.

The problem, however, is that the refusal to enforce a foreign arbitral award necessarily imports into the equation an international dimension. At its simplest level, the decision by a Singapore court whether to enforce a foreign arbitral award or not inevitably involves the Singapore court dealing with foreign elements of both law and parties. This in turn imports issues touching upon Singapore’s position in the international community and more specifically its attitudes towards notions both juridical and social which are either new or alien to its own national experience. In international law, there is also the issue of the comity of nations which Singapore, as a constituent member of the international community, must observe if not give effect to.

Here is the tension that underlines the seemingly simplistic notion of something being ‘contrary to the public policy of Singapore’ within the meaning of s 31(4)(b) of the IAA and similarly s 48(1)(b)(ii) of the AA.

In the application of the principles set out in both the domestic and international arbitration Acts of Singapore, the court in Singapore can either take a narrow or broad view of the scope of public policy. The broad view on the scope of the public policy ground would demand that anything found in a foreign award which remotely offends the notions of morality or nationally accepted principles of justice should result in a refusal to enforce that foreign award. Conversely, the narrow view would require the refusal to enforce a foreign award only in a few cases where the offence to morality or notions of justice is universally accepted.

The Dilemma of an Expansive or Restricted Doctrine of Public Policy in the Refusal to Enforce a Foreign Arbitral Award

At first glance, the tension or dilemma may seem to be no more than a storm in a tea-cup. After all, it is always defensible for a nation state to judge for itself what it desires to do with a foreign arbitral award. Jurisprudentially speaking, the application to enforce a foreign award is nothing more than the usual court process of a national court. The ultimate discretion to do as it sees fit is invested in the local court. Foreign parties who seek enforcement of an arbitral award or indeed any right or judgment must take the consequences as they come — in such exercise, they have after all submitted themselves to a court foreign to them and consequentially must accept that there is at least the possibility that the local Singapore court sees notions of justice, morality and other social norms differently from their own national experience.

Even on the principles of statutory interpretation, ‘contrary to the public policy of Singapore’ (s 31(4)(b)) is as clear as day. The measure is the public policy of Singapore and not any other country or state. In the case of the AA, the provision refers only to public policy with no corresponding reference to Singapore as in the case of s 31(4)(b) of the IAA. However, it seems clear that since the AA is an Act intended to govern domestic arbitrations, a reference to public policy must necessarily refer to the public policy of Singapore.

The matter does not of course end there. Reverting to the fact that Singapore is a constituent member of the international community, it is equally clear that Singapore must play its part in the community of nations. Legally, Singapore is obliged to observe the obligations it has bound itself to and in this case it is not to be forgotten that so far as a New York Convention award is concerned, Singapore, being a party to the New York Convention, must live up to its treaty obligations. The principal purpose of the New York Convention is to facilitate the reciprocal recognition of arbitral awards of the contracting States, of which Singapore is one.

So, the principle of comity of nations and the responsibility of Singapore as a nation state and a party to the New York Convention would require a Singapore court to balance national notions of public policy with Singapore’s obligations as a constituent member of the international community. The balance is even more apt where the court is considering a New York Convention award — by international treaty, Singapore must abide by international notions rather than domestic ones.

The tension between international law principles and a national court’s duty to apply its own notions of public policy can be seen in the now oft-quoted and notorious case involving the Indonesian courts. The case is E D & F Man (Sugar) Ltd v Yani Haryanto, an arbitration that took place in London — for a useful summary of the case, see Karen Mills, Judicial Attitudes to Enforcement of Arbitral Awards and Other Judicial Involvement in Arbitration in Indonesia (2002) 68 Arbitration (No 2) 106, 111.

This 1991 case involved Indonesian buyers of sugar who after an international arbitral award being made against it, started an action in Indonesia to set aside the award for being contrary to law and public policy. At the time, the importation of sugar into Indonesia required authorisation of the Government Logistics Bureau (‘BULOG’). The buyer in that case had not obtained the requisite licence from BULOG.

Although the case went through a series of litigation in Indonesia, the eventual outcome of the matter was that all levels of court in Indonesia set aside the award on the basis that under the Indonesian Civil Code if a contract is defective or involves an illegal cause, the courts must, as a matter of course, declare the contract null and void. The contract of purchase of sugar in this case, being illegal for want of authorisation by BULOG, was therefore null and void and therefore the arbitration clause was also defective. It followed then any arbitral award arising out of a dispute touching on such an ‘illegal contract’ could not be enforced for being contrary to law and public policy.

The case was highly criticised by the international community. From the international perspective the case gained notoriety for the refusal by Indonesian courts to recognise a valid arbitral award issued by an arbitral tribunal in London. From the domestic perspective, however, it is easy to see the court’s logic.

In refusing to recognise and to give effect to the arbitral award made in London in favour of E F Man, the Indonesian courts were merely giving effect to their notions of public policy. In that case, a national court determining its own domestic ‘public policy’ can hardly be faulted for recognising that the contract upon which the arbitral award was based was itself illegal.

The dilemma is this. A national court has to give effect to its own notions of law and morality. However, the same national court, such as the Indonesian court, has to consider within the wider context whether its refusal to recognise the foreign arbitral award meant it was not giving effect to the principle of comity of nations in that it was preferring national law over international arbitral law.

The Singapore Position

In Singapore the issue of public policy as a ground to refuse enforcement of a foreign arbitral award is governed by the respective arbitration legislation — AA and IAA — see above.

It is not surprising that there are not many cases which have come before the courts in Singapore. Happily there has been one. In the case of Re An Arbitration between Hainan Import & Export Corp and Donald & McCarthy Pte Ltd [1996] 1 SLR 34, the court was asked to refuse enforcement of an arbitral award under s 31(4)(b) of the IAA on the ground that the arbitration did not decide the real issue of the dispute between the parties and to enforce the arbitral award would be an injustice to the defendants. The award was an arbitral award made in China. In rejecting the argument, Justice Judith Prakash noted that:

In my view, public policy did not require that this court refuse to enforce the award obtained by the plaintiffs. There was no allegation of illegality or fraud and enforcement would therefore not be injurious to the public good. As the plaintiffs submitted, the principle of comity of nations requires that the award of foreign arbitration tribunals be given due deference and be enforced unless exceptional circumstances exist. ([1996] 1 SLR 34 at p 467)

The case, unfortunately, did not call for the court to explore the scope of the public policy ground since in the case the defendants’ reliance on the public policy ground was clearly misconceived if not spurious. To assert that they had raised issues which showed that the arbitration tribunal had failed to address the correct issue and that to enforce the arbitral award would then be an injustice and therefore contrary to public policy within the meaning of s 31(4)(b) was far-fetched and a non-starter. As the court rightly pointed out, had there been an issue of illegality — a real issue of public policy recognised universally — then the court would have had to consider whether to refuse enforcement of the foreign arbitral award (supra at p 46) within the scope of the public policy ground.

What if the E F Man case was before a Singapore court? Having regard to the clear wording of s 31(4)(b) of the IAA and s 48(1)(b)(ii) of the AA, it is possible that a Singapore court in a similar situation as the Indonesian court in the E F Man case would also refuse to enforce the arbitral award. Such an approach would appear to be consistent with the principles expressed in the Hainan case. Implicit in the remarks of Justice Prakash when she declined to refuse enforcement were the following principles:

Does that mean both the Indonesian court and in the hypothetical case, the Singapore court are to be criticised for not giving effect to an international arbitral award? From the point of view of international arbitral law and practice, it is always highly undesirable to have a national court give effect to its domestic notions over international arbitral law or practice. Such acts by national courts cut into the very fabric of the now accepted method of dispute resolution in international commerce. It makes international arbitration that much less effective and transnational commerce that much more uncertain.

On the other hand, in cases where the issue of public policy is raised then in Singapore at least, the statutory language seems clear enough to warrant that the Singapore court determines for itself what the public policy of Singapore ought to be in respect of the matter before it. Thus, in the case of illegality it seems clear that the court must give effect to domestic law notions.

The Middle Ground Between Purely International Considerations and Purely Domestic Ones

Is there another way a court in Singapore could approach the problem of balancing its adherence to international norms without compromising its own domestic law? The answer to this question will determine how Singapore is perceived by the international arbitration community. Already in the past year and a half or so Singapore has had to embark on legislative intervention to overcome international perceptions of the Singapore courts’ lack of appreciation of international arbitration and practice. See, for example, Singapore Court Confuses Over Arbitration IFLR September 2001, p 87, a criticism of the case of John Holland Construction Engineering Pty Ltd v Toyo Engineering Corp (Japan) [2001] 2 SLR 262.

Returning to the E F Man case, closer analysis of the case will in fact show that the foreign arbitral award that the Indonesian courts had to deal with was, in fact, an award based on a subsequent settlement between the parties and not on the original purchase contract for sugar which was not licensed — see the discussion in (2002) 68 Arbitration 2, at p 112.

Seen in that light one could make a reasonably sound case for the court in Indonesia to enforce the arbitral award because:

The author of the section on Arbitration in the Halsbury’s Laws of Singapore has suggested that the scope of what lies within the domain of public policy ‘... should be construed narrowly so that enforcement would only be refused if the award violates the most basic notions of morality and justice’ — see Halsbury’s Laws of Singapore (Vol 2) (Re-Issue) at p 136.

There is in fact precedent from international cases which suggest that the national courts in those cases have chosen to take a more circumspect approach in their treatment of public policy considerations, thus supporting the international arbitral process. Consider the case of Transport de Cargaison v Industrial Bulk Carriers [1990] Revue de droit judicaire, CA (Quebec). In that case, the court ‘... distinguished a bribe from a ransom as a bribe is intrinsically immoral for both offeror and receiver whereas a ransom involved immorality only on the part of the blackmailer. The court held that the arbitral award which imposed a reimbursement of a sum paid as ransom would not violate public policy of Canada.’ — see Halsbury’s Laws of Singapore Vol 2 (Re-Issue) at p 136, note 10. The approach of the Quebec court will no doubt earn kudos from the international arbitration community and indeed rightly so. The court showed the flexibility and creativity required to deal with the balance between preserving the integrity of international arbitration and the safe-guarding of national notions of public morality.

A more interesting and perhaps more instructive case because the court deciding the matter is closer to home, is the case of Harris Adacom Corp v Perkom Sdn Bhd [1994] 3 MLJ 504. The case concerned the defendants’ resistance to the plaintiffs’ application to have an arbitration award issued under the rules of the American Arbitration Association in Washington DC on the ground that it would be contrary to public policy to do so since the plaintiffs were an Israeli company. It was common ground that if in fact the plaintiffs were an Israeli company the award would not be enforced by the court because in Malaysia trade with an Israeli company was prohibited. The court there found as a fact or, more to the point, accepted evidence that in fact the plaintiffs were an American rather than an Israeli company. The plaintiffs did, however, have majority shareholding in a subsidiary engaged in development and manufacturing operations in Israel. On those facts the court allowed the plaintiffs’ application to register its arbitral award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards Act 1985.

Here again, as in the Hainan case, the issue of illegality turned out to be a red herring. However, the Malaysian court was quite clear that if it had found that the plaintiffs were indeed an Israeli company it would not have enforced the arbitral award as ‘... it is against public policy to enforce it as trade with Israel is prohibited’ — see Harris Adacom Corporation v Perkon Sdn Bhd [1994] 3 MLJ 504 at p 508.

A Suggested Approach for the Courts in Singapore

Bearing in mind Singapore’s avowed intention to be a hub for the international arbitration community and its desire to be favoured by international disputants, it seems clear to the writer at any rate, that the courts in Singapore must finely balance its duty as guardian of Singapore’s public policy and Singapore’s attitude towards the question of when it should refuse a foreign arbitral award on the grounds of public policy.

However, what is equally clear is that Singapore must out of necessity come out in support of international arbitration. For as Justice Prakash observed in the Hainan case, ‘As a nation which itself aspires to be an international arbitration centre, Singapore must recognise foreign awards if it expects its own awards to be recognised abroad.’ — see Re An Arbitration [1996] 1 SLR 34 at p 46. To do this, the court in Singapore in deciding whether or not to enforce a foreign arbitral award (under s 31(4) IAA or s 48 AA) on the ground of public policy, must in this writer’s view, take a narrow view of the scope of ‘the public policy of Singapore’.

It would seem sensible for the court in Singapore to adopt the kind of analysis that was entered into by the Quebec court in Transport de Cargaison rather than the broad and seemingly sweeping approach of the E F Man case. Even the Harris case suggests that the Malaysian court in dealing with the public policy ground for refusing to enforce a foreign arbitral award, chose a restrictive rather than a broad-brushed approach. No doubt, the Malaysian court could have taken a broad and sweeping approach to public policy and simply concluded that since the business operations of the plaintiffs were in Israel, then allowing registering of the arbitral award would be indirectly sanctioning the underlying activity between the parties namely trade involving an Israeli component. The court could then have declined to enforce the arbitral award on the ground that it would be contrary to public policy.

In balancing national policy and international norms, the Singapore court must be flexible and creative, tending towards a position that is supportive of international arbitration. Such an approach is clearly consistent with the general approach of the IAA. The IAA obliges the court to defer to arbitration rather than an action in court in cases where the parties have subscribed to arbitration as a means of resolving their disputes — see s 6 IAA.

The Hainan case did not, unfortunately, require the court to consider real issues of public policy such as those found in Transport de Cargaison for example. Accordingly, in Singapore we must await a proper case where the court will have to grapple with the balance between national policy and international obligations.

It is this writer’s view, however, that the courts in Singapore are sufficiently astute to be able to achieve the type of balance necessary to reach a rational and workable solution when grappling with the question of applying ‘the public policy of Singapore’ to refuse enforcement of a foreign arbitral award. The importance of how the issue is dealt with having regard to its effect on the international arbitration community is not to be overrated. It is hoped that the courts in Singapore will appreciate, as the writer believes the courts would, the nuance necessary to achieve a balanced outcome.

Leslie Chew, SC
Khattar Wong & Partners
E-mail: [email protected]