Turkey: Public Policy Defence and Arbitration in International Commercial Law

Geneva Convention & New York Convention

Since the public policy criterion is of fundamental significance, it is not a surprise that the Geneva Convention¹ contained a restriction for the recognition and enforcement of foreign arbitral awards on public policy grounds. However, pursuant to Article 7(2) of the New York Convention², Geneva Convention ceases to have effect among contracting states of the New York Convention. Therefore, the focus of this article is on the New York Convention and especially on its article number V (2) (b), where the "public policy" exception on the enforcement of awards finds its place. Such article of the New York Convention is "probably the most misused ground of non-enforcement of all,"³ since it states the following:

Obviously, the Contracting States' freedom to define their own national public policy standard inevitably impedes the predictability and consistency of the enforcement decisions. Therefore, while discussing the article V (2) (b) of the New York Convention, one should explore on the respective public policy standard of the contracting state where the award's recognition and enforcement is sought.

In this article, application of the public policy defences of various national courts will be analysed and the formation of new "international" and "transnational" public policy exceptions to replace the single, "national" public policy approach, will be advocated.⁴

Purpose and Relevance of the Public Policy Defence

Public policy serves the purpose of providing the contracting states with a "safety- valve" allowing them to prevent the enforcement of awards which they consider irreconcilable into their legal system⁵ which finds its legal source in article V(2)(b) of the Convention for the contracting states. By defining public policy broadly, contracting states could effectively deny any undesired award recognition and enforcement. The Convention's enforcement-friendly approach could thus be circumvented through the back door of public policy.⁶

What is the Relationship between Arbitrability and Public Policy?

For an arbitration agreement to be enforceable, the subject matter must be arbitrable. That is, it must be a subject that a state considers it appropriate to be arbitrated. In most jurisdictions, for example, issues such as criminal matters and child custody are not arbitrable. To arbitrate the cases in these areas of law would be against the law or the public policy of the local jurisdiction. So, what is the difference between these two terms? Arbitrability and public policy are bundled in Article V (2) since both serve to a similar purpose. While both instruments are interchangeable as to their functions, their effects are different. Lack of arbitrability invalidates arbitration agreements. However, public policy replaces arbitrability's absolute prohibition with the unpredictability immanent to public policy. Therefore, it reduces the attractiveness of arbitration.⁷

Public policy has different definitions in different jurisdictions, mostly it is concluded that an award could be vacated if it is not consistent with the fundamental principles of justice, honesty, and fairness. Thus, corruption, fraud, or lack of integrity in the process is likely to be considered a violation of public policy, requiring the award to be annulled.⁸ Because of the States' sovereignty over defining public policy, the concept of public policy evades a general precise definition.

In most Model Law jurisdictions, fraud or corruption would probably be considered a proper ground for challenging an award as a violation of public policy. The U.S Federal Arbitration Act ("FAA") is quite explicit in this respect. It provides specifically that grounds for vacating an award containing the following facts: (1) the award was procured via corruption, fraud or undue means, (2) there was evident partiality or corruption in the arbitrators, (3) the arbitrators were guilty of misconduct...or...other misbehaviour by which the rights of any party have been prejudiced.⁹ Similarly, the English Arbitration Act provides that a party may challenge an award based on "serious irregularity affecting the tribunal, the proceedings or the award."¹⁰

There are a few exceptions to the general rule in arbitration that the only grounds for challenging an award are based on jurisdiction, procedural irregularities, arbitrability, or public policy. These exceptions are found generally in common law legal systems. In England, for example, a party may appeal an arbitral award on a point of law, unless the parties agree, or unless the parties have agreed otherwise.¹¹ This right of appeal, however, is subject to substantial limitations. The appeal cannot be brought unless all the parties agree, or unless the court grants leave to appeal. The court should grant leave only if the tribunal was obviously wrong on the point of law, or the question is of general public importance and the decision of the tribunal is open to doubt.¹²

In the United States, courts have created some non-statutory grounds for challenging an award. For example, an award can be vacated if it violates public policy, a non-statutory ground under the FAA. Public policy is a non-statutory ground for setting aside an award in the United States because it is not one of the grounds for non-enforcement provided under the FAA.¹³

Under the Convention, recognition or enforcement of an arbitral award may be rejected if a court deems that the award would be contrary to the policy of that country. However, public policy is not defined in the Convention, and thus presents the possibility of another broad ground for the court to reject the enforcement. On the other hand, however, most of the courts view such a defence narrowly, by sticking to the Convention's pro-enforcement purpose.¹⁴ Even though a number of countries take a narrow approach in interpreting the public policy defence, there is room for it to be used parochially to protect national political interests.¹⁵ For instance, in 1995 the Turkish Supreme Court refused to enforce an ICC award in which the tribunal in Zurich applied Turkish substantive law, but applied the procedural law of the canton of Zurich. According to the Turkish Court the arbitrator had violated Turkish Public Policy by not applying Turkish procedural law.¹⁶

Domestic Public Policy and International Public Policy

Public policy is one of the important mechanisms which balance the need for freedom from the constraints of various states' domestic law with the legitimate desire of those states and the international community to protect and preserve basic notions of morality and justice.¹⁷

Courts face a dilemma while deciding between voiding an arbitration agreement or award because it violates public policy, on the one hand, or advancing the contractual intention of the parties, on the other.¹⁸

In a purely domestic arbitration, a national court needs to consider only of its own domestic policy. Since the arbitration is connected to only one nation, only that nation's public policy is considered. However, the situation is different for international public policy issues since more than one nation's public policy is relevant. In this case, the national court must consider the international dimensions of the arbitration when applying its domestic public policy limitations. Therefore, it would be fair to conclude that international public policy are those rules of a nation's domestic public policy, that will also be applied by that nation in an international context.¹⁹

As Curtin states in his referred article, national courts should consider not only their own domestic public policy, but also the public policy of interested nations and the needs of international commerce. International public policy is a test of balancing of interests. At this point, a reference is made to the U.S Supreme Court decision on Mitsubishi Motors Corporation v. Soler Chrysler- Plymouth Inc.²⁰

As stated above, the court reasoned that the needs of international commerce for predictability in the resolution of disputes required the enforceability of the arbitration agreement, although a contrary result might be reached in a domestic context.²²

Furthermore, France declared that the standard of review in an international context is whether arbitration would violate "international" public policy.²³ Furthermore, typical of courts distinguishing between domestic and international standards for the review of arbitration awards are decisions from Germany, Korea and Luxembourg which are listed below: ²⁴

How Narrowly Can Public Policy be interpreted?

Even though there is a general bias on interpreting Article V (2) narrowly in favour of enforcement of international arbitral awards under the New York Convention, there are still certain limits which arbitrators may not go beyond. An award can be contrary to the public policy both for procedural and substantive reasons. It can violate substantive public policy or procedural public policy. Substantive public policy goes to the subject matter of the award²⁸ while procedural public policy relates to the process by which the matter was adjudicated.²⁹ From this explanation, it can be understood that fundamental principles pertaining to justice and morality would be an issue under substantive public policy. Also, recognising or enforcing awards which do not comply with the rules serving the State's essential political, social or economic interests would infringe on such a State's substantive public policy.

To exemplify these limits, Troy L. Harris lists the cases, shown below, from different jurisdictions.

Two examples for substantive limits:

Two examples for procedural limits:

Conclusion

As arbitration becomes more and more international and transnational, arbitrators have the duty to maintain vigilance so that arbitration does not become a method by which the legitimate interests of states are defrauded.³⁴ Although public policy probably plays a much greater role in the theory of arbitration than in actual practise, there are occasional examples of misuse of the public policy defence. In most countries, courts have been reluctant to refuse enforcement on public policy grounds. In fact, awards are so rarely refused enforcement on grounds of public policy.³⁵ Professor Felix Dasser's article illustrates this with statistics: According to his article, public policy was invoked 142 times and dismissed in 100% of those instances in Switzerland from 1989 to 2009.³⁶

Even though the public policy exception to enforcement has been interpreted narrowly by the certain states as the statistics provided above states, practitioners still must be cautious because of the fact that most countries have not indicated one way or the other how they view article V(2).

There is little doubt that international commercial parties have little patience with such ideas as state sovereignty.³⁷ They demand laws to facilitate their transactions, and if states are loath to do so in a timely fashion, they have not been hesitant in creating international commercial law using "soft law" instruments that in actuality have even more potency than "hard law".³⁸ National states worry because there is a limited role for them in the creation of international commercial law which means a loss of sovereignty for them, as they are being managed by the rules made by someone else, but they also want to facilitate commercial transactions. However, nation states do not appear to understand the demands of modern international commerce and as Gopalan stated at the end of his article, "If they cannot take the heat, they should get out of the kitchen".³⁹ On the other hand, as arbitration becomes more and more international and transnational, arbitrators have the duty to maintain vigilance so that it does not become a method by which the legitimate interests of the states are defrauded.⁴⁰ Otherwise, arbitration will lose its national backing, and old judicial hostility towards arbitration will return to destroy the utility of arbitration as an alternate dispute resolution technique. Even though it is not possible to state that public policy has no place in the arbitration of international commercial law, the notion of public policy is unnecessarily broad and open to misinterpretation. Therefore, international and transnational public policy notions must be adopted by the states in order to keep the development pace of international/transnational commercial law at the same level.

It should always be kept in mind that arbitration is opted for its neutrality, speed, economy and privacy, and not as a method to avoid mandatory laws. Increased use of international and transnational public policy will further the parties' intentions to arbitrate disputes, but it also could spell the ultimate downfall of international arbitration. Therefore it cannot and must not become a vehicle through which parties attempt to avoid mandatory national laws, otherwise, international arbitration will lose its national backing, and awards will not be enforced.⁴¹

Footnotes

[1] 1927 Geneva Convention on the Execution of Foreign Arbitral Awards ("Geneva Convention")

[2] Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 ("New York Convention")

[3] Harris, T. L. (2007). The "Public Policy" Exception to Enforcement of International Arbitration Awards under the New York Convention. Journal of International Arbitration, 24(1), PP 9-24. P-10

[4] Related definitions about International and Transnational Public Policy can be found in Curtin, K. M. (1997). Redefining Public Policy in International Arbitration of Mandatory National Laws. Def. Counsel J., 64, pp271-284

[5] Supra. Wolff, R. P-406

[6] Ibid.

[7] Ibid.

[8] Moses, M. L. (2012). The Principles and Practice of International Commercial Arbitration. Cambridge University Press. P-206

[9] Moses, M. L. (2012). The Principles and Practice of International Commercial Arbitration. Cambridge University Press p-206 & U.S. Federal Arbitration Act, 9 U.S.C 10(a)

[10] Ibid. Moses, M. L. P-207 &English Arbitration Act of 1996 68(1). The Swedish Arbitration Act also permits a challenge based on "an irregularity....which probably influenced the outcome of the case." 34(6)

[11] Ibid. Moses, M. L. P-207 & English Arbitration Act of 1996 69(1)

[12] Ibid. Moses, M. L. P-207 & English Arbitration Act of 1996 69(2),(3)

[13] Ibid. Moses, M. L. P-208

[14] To see that how narrowly the term public policy is understood by courts also check "United States . 23 December 1974. U.S. Court of Appeals, Second Circuit / Parsons & Whittemore Overseas Co. v. Societe Generale de L'Industrie du Papier (RAKTA) / 74-1642, 74-1676" accessible on http://www.newyorkconvention1958.org/index.php?lvl=author_see&id=115

[15] Ibid. Moses, M. L. P-208

[16] Ibid. P-208

[17] Buchanan, M. A. (1988). Public policy and international commercial arbitration. American Business Law Journal, 26(3) p-531

[18] Curtin, K. M. (1997). Redefining Public Policy in International Arbitration of Mandatory National Laws. Def. Counsel J., 64, pp271-284 p-281

[19] Ibid. Curtin, K. M.

[20] Mitsubishi Motors Corp. v. Soler Chrysler- Plymouth, Inc., 474 U.S 614 (1985)

[21] Mitsubishi Motors Corporation v. Soler Chrysler- Plymouth Inc

[22] Supra. Curtin, K. M. (1997) p-273

[23] The Paris Court of Appeal .Societe Almira Films v. Pierrel es Quai . 4 Rev. Arb. 1989, 711 (1989)

[24] Harris, T. L. (2007). The "Public Policy" Exception to Enforcement of International Arbitration Awards Under the New York Convention. Journal of International Arbitration, 24(1), PP 9-24. P-9

[25] Federal Supreme Court of Germany, January 18, 1990, 27 Year Book Commercial Arbitration p-503 (1992)

[26] Adviso N.V. v. Korea Overseas Constr. Corp., Supreme Court of Korea, February 14, 1995, 21 Year Book Commercial Arbitration p- 612(1996)

[27] Sovereign Participations Int'l SA v. Chadmore Devs. Ltd., Court of Appeal. Luxembourg, January 28, 1999, 24 Year Book Commercial Arbitration p-714 (1999)

[28] Sheppard. A., (2003). 19 Arbitration International.pp-217-248. P-230

[29] Ibid. Sheppard. A.

[30] [Dutch party] v [Austrian party], Supreme Court of Austria, May 11, 1983, 10 Year Book Commercial Arbitration.P-421 (1985)

[31] [German individual] v [New York Corporation], Federal Supreme Court of Germany, June 15, 1987, 19 Year Book Commercial Arbitration. P-653 (1954)

[32] [Seller] v [Buyer], Higher Court of Appeal Bavaria, November 22, 2001. 29 Year Book Commercial Arbitration. P-771 (2004)

[33] Goldtron Ltd. v. Media Most B.V., District Court of Amsterdam, August 27, 2002, 28 Year Book Commercial Arbitration. P-814 (2003)

[34] Ibid. Curtin, K. M. p-284

[35] Supra. Moses. P-229

[36] Dasser, F. (2007). 25(3) ASA Bulletin. Pp-444-472 p-453/ also check updated statistics on Dasser, F. (2010) 28(1) ASA Bulletin. P-87

[37] Gopalan, S. (2004). "Creation of International Commercial Law: Sovereignty Felled", 5 .The San Diego Int'l LJ, pp. 267-322. p-321

[38] Ibid. Gopalan, S. p-321

[39] Ibid. Gopalan, S. p-322

[40] Supra. Curtin, K. M. p.285

[41] Supra. Curtin, K. M. p-283

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