UK top judges rule on UNCITRAL model arbitration law - Betamax v State Trading Corporation

R Craig Connal QC
Independent arbitrator

An important topic

The UNCITRAL Model Law on Arbitration is widely used throughout the world, either directly or by reference or incorporation in local legislation. The Model Law contains highly restrictive provisions for circumstances under which an arbitral award can be set aside. These are set out in Article 34. This provision is largely mirrored in Article 36 (on recognition and enforcement). In turn Article 36 was itself derived from Article V of the New York Convention. Given the importance of the Model Law and the New York Convention in the world of arbitration, any guidance from a top level court on how Article 34 should function may be of interest to a world-wide audience.

The particular part of Article 34 in play in Betamax was 34(2)(b)(ii) which permits a court to set aside an award if – ‘the court finds that: the award is in conflict with the public policy of (the) State.’

A top-level court

The judges of the UK Supreme Court are regularly called upon to issue authoritative decisions on arbitration, given the importance of the UK in the international arbitration world. Essentially the same judges also sit under the banner of the Judicial Committee of the Privy Council to hear appeals from a variety of countries with prior connections to the United Kingdom. In Betamax the country in question was Mauritius. That country had an International Arbitration Act which closely mirrored the Model Law. The Court accordingly recognised that the primary issue before it was the extent of permissible intervention by a Court under Article 34.

Background to the case

The contract which gave rise to the dispute was a major long-term contract to provide oil supplies to Mauritius. A new government was elected in Mauritius. That government decided to review the contract and ultimately to bring it to an end. The basis for ending the contract was said to be that it had been entered into unlawfully. In turn that assertion was based on an analysis the of the prevailing public procurement rules at the time the contract was entered into. It was said that the contract was in breach of those rules. Accordingly, the contract was unlawful and thus in turn in breach of the public policy of Mauritius. It appears from the decision the that the question of whether the contract had been in breach of the procurement rules was of considerable complexity due to the way in which the rules had been written.

The contract provided for disputes to be referred to arbitration. The question of whether the contract had been in breach of the procurement rules was duly put to the arbitrator, there being no dispute the elect the issue was within the arbitrator's jurisdiction. The arbitrator concluded that the contract had not been entered into in breach of procurement rules. It was accordingly not unlawful. The arbitrator thus found in the claimant favour. The respondent asked the Supreme Court of Mauritius to exercise its power to set aside the award on the grounds of public policy. The Mauritius court took a different view to the arbitrator. They concluded that the contract was in breach of procurement rules, unlawful and thus contrary to public policy. They set aside the award. The claimant appealed to the judicial committee of the Privy Council.

The ruling of the UK judges

As became clear, the point at issue could be fairly narrowly defined. The arbitrator had had jurisdiction to decide a question of law concerning whether the contract was in breach of procurement rules. The arbitrator had decided that question. Was the Mauritius court entitled to revisit that question of law and then, depending on their view, potentially go on to set aside the arbitrators award if the contract was in their view unlawful?

In an approach in tune with an arbitration-friendly jurisdiction, the UK judges felt the correct starting place was by setting out the key principles. These were, essentially, that awards should be treated as final and that there was only very limited scope for intervention by the courts. That limited scope applied to decisions on questions of law which were within the arbitrator's jurisdiction in the same way as it did to any other decision. There was no appeal on a question of law, in the absence of an opt-in which was not present.

The UK court of course accepted that the Model Law made provision for setting aside an award due to conflict with public policy. However, they concluded that a ruling, as a matter of law, on whether a contract was or was not in breach of procurement rules, gave rise in itself to no issue of public policy. They went on to point out the possible consequences of allowing a public policy ground for set aside to be deployed in the way in which it had been done by the Mauritius court. It is worth quoting list passage of their judgement in full. They said (in para 47) that such an approach, if correct,

• ‘…would enable (Article 34) to be used as a means of reviewing any decision of an arbitral tribunal in an award on an issue of interpretation of the contract or of legislative provisions where, on one of the alternative interpretations of the contract or the legislative provisions, the result was that the agreement was illegal. That is because the argument has as its premise that, where the law governing the contract and the curial law are the same law, the question of the legality of a contract (either on its terms or its compliance with state regulation or other legislative provisions) gives rise to public policy considerations in relation to the award. The acceptance of this premise would involve a significant expansion….. It would result in there being in effect an appeal on an issue of law wherever one party had alleged illegality in the arbitration but the arbitral tribunal had rejected the contention, despite the clear provisions of the (Model Law). As the alleged illegality of a contract not infrequently arises in relation to the interpretation of regulations or other legislative provisions said to be applicable to the contract, the ambit of the court’s intervention would be increased significantly by this route.’

In a discussion which will be welcomed by the arbitration community the UK court went on to make the point that the Model Law was based on the principle that where an issue was before an arbitrator or arbitration tribunal and was within the jurisdiction of that decision making body, then the decision was final, whether that was a decision on facts or on law or both. It was important to maintain that principle which was in turn based on party autonomy as are represented by the agreement which parties had reached. Any widening of court intervention was contrary to this important principle. What the court described as the policy of modern international arbitration law was to uphold the tribunal's decision, whether it be right or wrong, in the absence of one of the limited list of grounds for setting aside the decision. The particular ground of challenge, ie public policy conflict, had to be viewed by applying public policy of the jurisdiction to the findings, whether of fact or law, made by the tribunal. To do anything else would run contrary to the principle of finality of awards.

What the Mauritius court had done, in effect, was to reopen the question of whether the contract complied with procurement rules ‘under the guise of public policy’. That was not permissible. Accordingly, the Mauritius court was in error in reviewing that matter. The arbitrator’s decision on the point was final and a public policy issue under article 34 of the Model Law simply did not arise.

Conclusion

This is a ruling entirely in accord with the arbitration-friendly approach necessary to make the Model Law function correctly. In reaching its conclusion the UK court reviewed and reconciled previous authority both in the UK and Singapore and clearly set its face against any approach which would extend court intervention. On that ground alone this decision is worth noting.

Lawyers of a cynical mindset will be heard to say from time to time, at least privately, that courts often tend to decide which approach they think is correct and then set out reasons later to justify that result. In Betamax, the UK court went on to themselves consider what the correct decision was on whether the contract complied with procurement rules. Their own view was that the arbitrator was right and the Mauritius court was wrong. The same group of cynical lawyers might be tempted to think that the UK judges looked at this point first and, having concluded that the arbitrator had been right, went on to work through the other issues to leave the award in place. The logic of the court’s approach and its overt support for an arbitration-friendly line on court intervention in arbitration, suggests that such cynicism would be unworthy.