The 'unruly horse' is far from being tamed – international arbitration and public policy
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Dr Ademola J Bamgbose
Hogan Lovells, London
ademola.bamgbose@?hoganlovells.com
Maria Sowinska
Hogan Lovells, London
According to Article V(2)(b) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, the recognition and enforcement of an arbitration award may be refused if the competent authority in the country where recognition and enforcement is sought finds that the award would be contrary to the public policy (or ordre public, in the civil law terminology) of that country.
Over the years, the concept of public policy as a ground for setting aside an arbitration award has evolved, with many developed arbitral jurisdictions adopting a somewhat restrictive notion of public policy. Last year, however, the Supreme Court of Mauritius (‘Supreme Court’) set aside an arbitral award in STC v Betamax [2019] SCJ 154 on grounds of public policy – a decision which would seem to extend the more restrictive approach commonly applied in delineating the public policy principle in international arbitration.
This article examines STC v Betamax in light of the general reluctance in many jurisdictions to open the floodgates for public policy challenges in international arbitration.
Key issues in STC v Betamax
The Mauritian State Trading Corporation (‘STC’) and Betamax Ltd (‘Betamax’) entered into a contract for petroleum shipping services (‘Contract’) for an uninterrupted period of 15 years.
At the time of making the Contract, political opponents in Mauritius alleged that the management of Betamax exploited their relationship with the Prime Minister of Mauritius, and that the terms of the Contract were significantly skewed in favour of Betamax, to the detriment of the State.
Following an election and subsequent change of government in December 2014, on 30 January 2015, the new government of Mauritius terminated further operation of the Contract by Cabinet decision, due to breaches of the law in the procurement process.
Betamax subsequently initiated arbitration proceedings against STC for wrongful termination under the rules and procedure of the Singapore International Arbitration Centre.
One of the main issues for determination was whether this Contract fell squarely within the scope of the Mauritian Public Procurement Act 2006 (‘PPA'). This is because, pursuant to section 14(3) of the PPA, the conclusion of major contracts by, and with, public bodies must be approved by the Central Procurement Board (‘CPB’). As such, if the Contract fell within the scope of the PPA, the agreement would be illegal and unenforceable without the approval of the CPB.
On 5 June 2017, the Tribunal gave an award (the ‘Award’) in favour of Betamax, dismissing all of STC's arguments, and in particular, ruling that the PPA would not apply to the Contract, since STC was an ‘exempt organisation’ under section 2 of the PPA. However, the Tribunal failed to sufficiently address the impact of Regulation 2A of the Public Procurement Regulations 2009, which when read in conjunction with Part V of the Schedule to the PPA, provided that contracts by, and with, STC for goods over Rs 100 million (about US$2.8 million), could not be exempted from the public procurement requirements of the PPA. This provision was designed to maintain the integrity and transparency of the procurement process, especially for high value contracts.
Betamax subsequently obtained an ex parte provisional order from the Supreme Court for the recognition and enforcement of the Award on 7 September 2017 (the ‘Provisional Order’). Dissatisfied with the Award and the Provisional Order, STC made two applications to the Supreme Court. The first application was for an order setting aside the Award on a number of grounds, including that the Award was in conflict with the public policy of Mauritius. Secondly, STC sought an order of the Supreme Court setting aside the Provisional Order and staying the enforcement of the Award pending the determination of the first application. As the two applications were related, the Supreme Court heard both applications together and handed down a single judgement in favour of STC.[1]
A restrictive approach to public policy in international arbitration
The concept of public policy has evolved over the years with many jurisdictions adopting a restrictive approach to public policy.[2] It however still remains an ‘unruly horse’[3] and one in which ‘…the nebulous nature of the concept may be used by courts in some jurisdictions as a licence to review the merits of a dispute inappropriately.’[4] Accordingly, public policy, as a concept and ground for setting aside a foreign award, remains jurisdiction specific.[5]
In a Kenyan case, Ringera J observed that:
‘Although public policy is a most broad concept incapable of precise definition…an award could be set aside under [section] 35(2)(b)(ii) of the Arbitration Act as being inconsistent with the public policy of Kenya if it was shown that either it was:
- Inconsistent with the constitution or other laws of Kenya whether written or unwritten; or
- Inimical to the national interest of Kenya; or
- Contrary to justice or morality’[6]
Similarly to Kenya, the French Court of Cassation adopted a narrow approach in SNF SAS v Cytec Industries BV (Holland) [7] holding that it would refuse enforcement of an award based on public policy only where the breach would be ‘flagrant, actual and concrete’. The courts in Singapore have also held that an award may only be set aside on the principle of illegality, if the parties' conduct ‘shook the conscience’ or is ‘clearly injurious to public good or […] wholly offensive to the ordinary reasonable and fully informed member of the public, or where it violates the forum's most basic notion of morality and justice.’[8]
In Beogradska Banka DD v Westacre Developments Inc, the Cypriot Supreme Court held that allegations of corruption against an award do not constitute sufficient public policy grounds for non-enforcement. In the court's view the policy underlying the recognition and enforcement of awards outweighs the policy against other illicit conduct, such as bribery.[9]
Professor Bantekas rightly notes that ‘because public policy is in a constant state of flux, it is generally not written in any particular statute, or if it is, this is accomplished in rather general terms and hence it is difficult to always identify and interpret it with any degree of precision or certainty.’[10] Justice Ransley emphasises this point in Mahican Investment Ltd and 3 Others v Giovanni Gaida and 80 Others where he states that there is no ‘…all embracing definition which exhaustively defines what public policy includes. Sufficient to say that what is contrary to public policy will be a matter to be determined by a judge in any case where it is alleged to have been infringed.’[11] In other words, the enforcement of an arbitration award is heavily dependent on each country's approach to the principles and standards which are fundamental to the state. This point is further reflected in the decision of the Supreme Court in STC v Betamax, which we consider in more detail below.
The exceptional circumstances in STC v Betamax
Reluctant to open the floodgates, the Supreme Court in STC v Betamax acknowledged the very restrictive approach to public policy in many jurisdictions. The Supreme Court reiterated that international arbitral awards will only be set aside on grounds of public policy in very limited circumstances and indeed, that the ‘threshold is quite high; it should be the breach of a fundamental legal principle, a breach which disregards the essential and broadly recognised values which form part of the basis of the national legal order, and a departure from which will be incompatible with the State's legal and economic system.’[12]
The Supreme Court determined that a breach of the PPA is precisely an example which would meet this high threshold. Fundamentally, the Supreme Court made a distinction between international public policy and the public policy of Mauritius, and noted that the mandatory provisions of the PPA, which dictate the application of the PPA and the procurement process of the Contract, prescribe the highest standards in relation to corrupt practices in the award of major public contracts and are the ‘fundamental pillars of good governance in Mauritius’.[13] Crucially, the PPA was designed to:
- prescribe and maintain integrity;
- promote free and fair competition; and
- prevent fraudulent and corrupt practices in the award of major public contracts to ensure the efficient use of Mauritian public funds.
Any breach of the PPA would therefore be ‘injurious to public good’.[14] Accordingly this placed the PPA firmly within the scope of section 39(2)(b)(ii) of the IAA, namely that the arbitral award may be set aside where the court finds that it is ‘in conflict with the public policy of Mauritius’.[15]
The Supreme Court also held that the Contract was heavily skewed to benefit Betamax, not least because it contained an obligation to pay Betamax a large sum using public funds for 15 years. This imbalance played a key role in the Supreme Court's decision to set aside the award, as the Contract clearly flouted legislation designed to protect public funds. This encouraged the Supreme Court to conclude that:
‘[t]he enforcement of an illegal contract of such magnitude, in flagrant and concrete breach of public procurement legislation enacted to secure the protection of good governance of public funds, would violate the fundamental legal order of Mauritius. Such a violation breaks through the ceiling of the high threshold which may be imposed by any restrictive notion of public policy.’[16]
Conclusion
Although the Supreme Court looked at the position in other leading jurisdictions with respect to public policy, no single case was identified to the Supreme Court where a court had held a breach of public procurement laws as amounting to a breach of public policy. The Supreme Court nonetheless found in applying the relevant principles that because of their nature and purpose, a breach of the PPA was a breach of the public policy of Mauritius.
This decision arguably represents an extension to the known categories of public policy in international arbitration, and it remains to be seen whether other jurisdictions will follow the approach of the Supreme Court when it comes to alleged breaches of public procurement laws.
STC v Betamax also emphasises that the approach to public policy control in international arbitration remains jurisdiction specific. Indeed, the unruly horse is far from being tamed and the enforcement of an arbitration award remains heavily dependent on each country's approach to the principles and standards which are fundamental to the state.
Finally, the decision is a good reminder to parties contracting with government entities and in foreign jurisdictions, to ensure compliance with all relevant local procurement laws.
[1] We examine the judgement later on in this article.
[2] A number of jurists have gone on to develop the concept of ‘international public policy’ (ordre public international) and the concept is now embodied in statutory frameworks including the French Code of Civil Procedure. As such, French law recognises the existence of two levels of public policy: the national public policy, which may be affected by purely domestic considerations and the international public policy, which is less restrictive in its approach. The Court of Justice of the European Union have also confirmed in Case C-40/80 Asturcom Telecomunicaciones SL v Cristina Rodriguez Nogueira [2009] ECR1 – 9579 that European Union member states must consider not only their own national public policy but also European Union public policy when reviewing arbitral awards. In distinguishing between national and international public policy, Nigel Blackaby and Constantine Partasides QC note that ‘an international award would not be set aside simply if it were to fail to conform to a domestic requirement. For example, the absence of reasons, which might lead to an award being annulled in a domestic arbitration, has been held not to vitiate an international award…there is nothing new, as far as arbitration is concerned, in differentiating between national and international public policy. Indeed it is a consistent theme to be found in the legislation and judicial decisions of many jurisdictions’. See Nigel Blackaby and Constantine Partasides QC, Redfern and Hunter on International Arbitration (6th Edition, Oxford University Press, 2015) 10.84.
[3] Burrough J in Richardson v Mellish (1824) 2 Bing 252.
[4] See Nigel Blackaby and Constantine Partasides QC, Redfern and Hunter on International Arbitration (6th Edition, Oxford University Press, 2015) 10.84.
[5] Tinuade Oyekunle and Bayo Ojo, Handbook of Arbitration and ADR Practice in Nigeria (1st edition, LexisNexis, 2018) 42.
[6] Christ for All Nations v Apollo Insurance Co Ltd [2002] 2 EA 366.
[7] Cour de Cassation, Ch Civ 1ère, 4 June 2008.
[8] PT Asuransi Jasa Indonesia (Persero) v Dexia Bank S A, Court of Appeal, Singapore, 1 December 2006, 37 [2006] SGCA 41 para 59 and Rockeby Biomed Ltd v Alpha Advisory Pte Ltd, [2011] SGHC 1155, 16.
[9] Beogradska Banka DD v Westacre Developments Inc (2008) 1B CLR 1217, at 1222-4 cited in Ilias Bantekas, An Introduction to International Arbitration, (1st edition, Cambridge University Press, 2015) 244.
[10] Ilias Bantekas, An Introduction to International Arbitration, (1st edition, Cambridge University Press, 2015) 243.
[11] [2005] EKLR 7.
[12] STC v Betamax [2019] SCJ 154, pp37-38.
[13] STC v Betamax [2019] SCJ 154, p39.
[14] STC v Betamax [2019] SCJ 154, p39.
[15] STC v Betamax [2019] SCJ 154, p34.
[16] STC v Betamax [2019] SCJ 154, p41.
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