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Non-Enforcement Arbitral Awards Under the New York Convention

Introduction

The great Aristotle said that an arbitrator goes by and follows the equity of a case, a judge goes by the law, and the development of the process of arbitration was to obtain full power of equity. Through this saying, Aristotle has clearly shown the importance of arbitration in seeking justice. Arbitration is a process of resolving disputes using mechanisms of choice between the parties in the ever-expanding world economy. International Commercial Arbitration (ICA) has gained ground as one of the main methods of resolving international disputes.

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According to Moses, ‘this is because the International Arbitral Tribunal issues awards recognized worldwide by nations that comprise the United Nations Conventions on the Recognition and Enforcement of Foreign Arbitral Award. It has also gained ground in its attempt to avoid Foreign Judicial systems when it comes to transnational contracts or projects’. 1

The New York Convention (NYC)

This convention is one of the most essential Conventions in the field of arbitration and it forms the basis of international commercial arbitration. The bilateral treaties or multinational conventions guarantee the enforcement of arbitral awards in foreign countries with the exception of refusal due to reasons given by the treaty. The credibility of international arbitration depends on the legality of arbitral awards and their enforceability at the place of rendering them and at the place, the award is seeking enforcement. The NYC is involved in enforcement and recognition of awards not recognized as domestic in the country their enforcement is sought. The NYC does not fully define an International Arbitral Award. However, article-I state the situations under which the Convention is applied to enforce an arbitral award. 2

Enforcement and Recognition of Foreign Arbitral Awards

The purpose of the NYC is to recognize foreign arbitral awards, with article IV, V, and VI providing grounds for refusal of enforcement of the awards. Article IV gives the requirements from the party seeking enforcement of the award. Article V provides the grounds of revoking the enforcement of an award. Article VI gives power to a court to postpone the decision on enforcement of an award if a party makes an application on the same. “The party applying for the enforcement of an award under the Convention has to supply to the competent authority or the Court, a duly authenticated award or a copy thereof and a duly authenticated arbitration agreement or a copy thereof”.3

Grounds for non-enforcement

Article V of the NYC states the grounds of refusal to enforce an arbitral award in the State the enforcement is sought. The article has to serve its purpose; it has provided few defenses to enforcement. A significant characteristic of the defenses given in the article is that they are not on merits. They concentrate on the integrity of the arbitration process like fairness and opportunity of the parties to have a fair hearing.4

Invalidity of an agreement and incapacity of parties

This is the first ground for refusal to enter an arbitration agreement. This involves sovereign immunity. It also touches on whether the person who signed the arbitration agreement had the authority to act on behalf of the corporate party. This is as seen in the case of IMP Group (Cyprus) Ltd. v Aeroimp, [1998]. The solution to the question of invalidity is by the law chosen by the parties or by law of the seat of the arbitration. Enforcement of an award is done if it is in a contract or in arbitration agreement, signed by the parties. There is exception to this rule. For example, where one person sends the other a purchasing order with an arbitration clause, but the party does not sign it and accepts it by sending goods.

Due process

This is the most essential ground for refusal under the Convention. It ensures proper conduct of the arbitration process with adequate notice to the parties involved. Failure to notify the parties to the arbitration amounts to unfairness in the proceedings. The practice of Natural Justice calls for a fair hearing. Disputing parties have a right to a full opportunity of representing their cases, failure to which it amounts to denial of fair hearing. If a party refuses to participate in the proceedings knowingly, then the party cannot seek protection under article V. The court has its own way of determining what constitutes a fair hearing. This is as shown in the case of Libyan American Oil Co. v. Socialist People’s Libyan Arab Jamahirya.

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The International Chamber of Commerce 1998 provided that, “In all cases, the Arbitral Tribunal shall act fairly and impartially and ensure that each party has a reasonable opportunity to present its case.”

This defense has succeeded in very few occasions. In the case of Iran Aircraft Industries v. Avco Corp, the court refused to enforce the arbitral award because the losing party was unable to present their case. According to Blackaby, ‘the award of the Iran-United States Claims Tribunal was denied enforcement because the losing party, relying on discussions with the Tribunal, had failed to present back-up invoices supporting an analysis of the quantum of the claim by an international public accounting firm. Holding that the New York Convention applied to the award in question, the Second Circuit, in a 2-1 decision, refused to enforce the award on the ground that Avco had been unable to present its case on damages’5

Jurisdictional issues

This touches on jurisdictional issues of the arbitration tribunal. The issue of jurisdiction is used as the defense line in arbitration cases. It deals with issues where the arbitrators have acted outside its jurisdiction and where they have exceeded their jurisdiction. These two issues have been unsuccessful as shown in Aloe vera of America Inc (US) v Asianic Foods (S) Pte Ltd (Singapore). One of the defendants claimed not to be part of arbitration clause. He argued that the arbitrator went beyond his jurisdiction by entering an award against him. The court in Singapore held that whether the defendant was a party to the arbitration clause did not fall under this ground. Park states that, “the Court further held that the defendant had brought no evidence to prove that under Arizona law the award contained a decision on a matter beyond the scope of submission to arbitration”.6

In some instances, the ground proved successful. In Moscow Dynamo v Ovechkin, Moscow Dynamo, failed to show the court’s jurisdiction to enforce the award. This is because it failed to show the exchange of communication between the club and Ovechkin showing Ovechkin assent to enter a new agreement to play for Dynamo after expiry of his contract, or an arbitration process for dispute of such an agreement. Dynamo relied on an implied agreement, which was sufficient for domestic arbitration, but it was not for enforcement of the foreign award.

Tribunal/procedure that is not in line with the agreement

The inconsistency in the membership of the arbitration tribunal or with the law of the place of arbitration forms the other basis of refusal to enforce the award. This provision provides that parties seeking shelter under this clause have to look into the arbitration agreement. The law of the place of arbitration comes into use where there is no such provision. This is as seen in the case of Encyclopaedia Universalis SA (Luxemberg) v Encyclopaedia Britannica Inc (US).

A case shows a successful reliance on this ground. It was a case in the US court of appeal. The parties had agreed that,

  • Two party-appointed arbitrators had to disagree before the appointing a 3rd arbitrator,
  • The 2 party-appointed arbitrators must choose a 3rd arbitrator,
  • If the 2 party-appointed arbitrators failed to agree on the 3rd, the English Commercial Court would appoint.

Encyclopedia SA (Luxembourg) overlooked the 2nd provision and asked the court to appoint a 3rd arbitrator. Gary points out that, “In a request by Encyclopedia Britannica Inc (US) to refuse enforcement of the award rendered against it, the Court of Appeal held that theCommercial Court’s premature appointment of the third arbitrator irremediably spoiled the arbitration process. Article V (1) (a) of the New York Convention itself suggests the importance of Arbitral composition”.7

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Award not binding

This happens where the award is set aside, suspended by a competent authority, is not binding on the parties or law of which the award was made. Two conditions on the refusal of the award are enshrined in the article.

  • Award not binding on parties,
  • Award suspended or set aside,

Binding award

The term binding has no specific definition under the NYC. A court will consider an award to be binding if there will be no way of bringing an appeal on the merits or on court application. A binding award will be enforced without confirmation from the rendering jurisdiction. In Maritime International Nominees Establishment v Republic of Guinea, the award passed by the American Arbitration Association (AAA) was denied enforcement because MINE filed ICSID arbitration against the same party on the same subject matter, at the conclusion of AAA arbitration, thus acknowledging that the award passed by AAA had no binding effect.

Vacated award

To vacate an award is to render it null. Under the NYC, a court can only enforce an award but cannot vacate it. An award is vacated under the domestic law of arbitral forum. In National Thermal Power Corporation v The Singer & others, the parties entered into an agreement to carry out work and supply equipments in India. They agreed that the Indian law would govern their contract incase of a dispute. They also agreed to settle their disputes amicably, failure to which they would refer their dispute to an arbitral tribunal with three arbitrators, one selected by each party and the 3rd selected by the International Chamber of Commerce (ICC).

A dispute arose and the ICC chose the 3rd arbitrator from London. The tribunal sat in London. The tribunal passed an award and the appellant set the award under the NYC. The court in India held that the appellant could not seek shelter against enforcement under the convention. This is because the Convention recognizes foreign award but not Domestic arbitral awards. An award is foreign if only decided in a foreign law. In this case, the parties had subjected themselves to Indian law; therefore, the dispute does not qualify the award to be a foreign award by virtue of it being in a foreign state. 8

In Chromalloy Aero Services case, an Egyptian award enforced by a US court, had been set aside in Egypt. A US company obtained an award against the State of Egypt but the Egyptian Court vacated the award. The court in US stated that Article V of the NYC gave local courts power to decide whether to enforce an award or not. By applying Article VII, the court discovered that the Federal Arbitration Act was favorable legislation that allowed the enforcement of the awards.9

References

Blackaby, N, Redfern and Hunter on International Arbitration, OUP Publishers, New York, 2009.

Francois, PS, and BG Sebastein, Comparative Law of International Arbitration’, Sweet & Maxwell Publishers, London, 2007.

Gary, B, international Commercial Arbitration, 2nd edition, Kluwer Law International, The Netherlands, 2001

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Mark, HJ and GM Nicholas, International Commercial Arbitration, 2nd ed, London LLP, London, 1999.

Moses, ML, The Principles & Practice of International Commercial Arbitration, 2 edn, Cambridge Publishers, New York, 2012.

Park, W, The Procedural Soft Law of International Arbitration, in Mistelis, L. & Lew, J., Longhorn Publishers, Boston, 2006.

Reymond, C, The Channel Tunnel Case and the Law of International Arbitration, McGraw Hill, New York, 1993.

Footnotes

  1. ML Moses, The Principles & Practice of International Commercial Arbitration, 2 edn, Cambridge Publishers, New York, 2012, P, 17.
  2. Moses, P 25.
  3. Gary, 2001.
  4. C Reymond, The Channel Tunnel Case and the Law of International Arbitration, McGraw Hill, New York, 1993, P 64.
  5. N Blackaby, Redfern and Hunter on International Arbitration, OUP Publishers, New York, 2009.
  6. W Park, The Procedural Soft Law of International Arbitration, in Mistelis, L. & Lew, J., Longhorn Publishers, Boston, 2006, P. 12.
  7. B Gary, international Commercial Arbitration, 2nd edition, Kluwer Law International, The Netherlands, 2001.
  8. PS Francois & BG Sebastein, Comparative Law of International Arbitration, Sweet & Maxwell Publishers, London, 2007.
  9. HJ Mark & GM Nicholas, International Commercial Arbitration, 2nd ed, London LLP, London, 1999.

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