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Cases in Which the Decisions of Foreign Arbitration are not Implemented, according to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards

04/09/2010

 

Dr. Latif Jabr Khomani

Sadr al-Iraq University- A private University

 

A final document was issued by the United Nation’s Conference on International Arbitration, held in New York during the period 20 May 1958 – 10 June 1958, which became known as the “Convention on the Recognition and Enforcement of Foreign Arbitral Awards,” or simply the “New York Convention.”The New York Convention went into force on 07 June 1958, with 142 states joining as members[1].

Iraq has not joined or acceded to the New York Convention due to concerns regarding Iraq’s sovereignty. This is evident by the Follow-up Committee on Oil and the implementation of conventions affairs Decision No. 930 on 09 December 1973, indicating that “international arbitration conditions imply stepping over the boundaries of the principle of sovereignty of Iraq and thus diminish the value of Iraqi courts and laws”.

Furthermore, as stipulated in a memo distributed to the ministries by the Council of Ministers - Commission of Foreign Economic Relations No. 1045 on 21 October 1979 “recourse to arbitration is an exceptional case, and should be considered only when necessary, by presenting the subject to the ministry to decide the matter after having to stand on the rationale”.  Sentiments supporting this direction are reflected by the State Consultative Council/Shura Council, and enumerated in Decision No. 122/1978 of 28 August 1978[2].

In reference to certain paragraphs of the resolution aforementioned, the Director-General of the International Textile Manufacturers Federation, situated in Zurich, Switzerland, requested that Iraq join the New York Convention of 1958.  However, because international commercial arbitration includes foreign legal elements, which may take place abroad and arbitration may be entrusted to foreign arbitrators whom might apply foreign laws—either in terms of substantive law or in terms of rules of procedure—the implementation of foreign arbitral awards in the Republic of Iraq implicates obstacles of legal and sovereign nature.  It is stated in the resolution, reflecting both the importance of arbitration and the reluctance to resort to it, that after the Shura studied various legal and practical aspects of this issue, the following became apparent – due to the rapid transformations taking place in the country and the world, plus the requirements of economic development of the country, in addition to the increased exchange of international trade there are now certain special cases which appear to have an urgent need for arbitration clauses to be included in contracts with foreign bodies; whether public institutions, private companies or individuals.  Therefore, international commercial arbitration is likely to be useful in the settlement of certain commercial disputes, but must be resorted to with utmost caution and above all must require some form of opinion and approval by higher authorities, taking under consideration the fact that it is an exception to the norm.

The issue of whether Iraq should join the New York Convention has been raised again,[3] this time in the context of the country`s need to contract with foreign entities; especially as it pertains to Iraq’s desire to encourage foreign investment from investors of various nationalities. One of the ways to encourage investments is to make arbitration the default method of resolving disputes that may arise. 

For these reasons, the committee is working on the development of arbitration law based on international standards of arbitration.

Clearly, this indicates that there is a decline in hesitation and sensitivity raised by the notion of including arbitration clauses with respect to international contracts; the same is true regarding sovereignty because it is not acceptable to uphold sovereignty for the price of distancing Iraq from the international community, while at the same time recognizing that major countries have given up  this same manifestation of their sovereignty, and the practice continues to occur in the laws and procedures of the European Union.

Thus, accession to the New York Convention has become unavoidable because the existence of arbitration clauses in foreign contracts also requires facilitating the implementation of arbitral awards.  This may not be achieved without accession to the New York Convention or through bilateral agreements alone[4].

In this research summary, I discuss certain reservations permitted by the provisions of the New York Convention, which if put in place will except Iraq from the obligations of some of the Conventions provisions.  These reservations made by the State when ratifying or acceding to the Convention, include issues of party incentives for the requested implementation; some of which are exercised by the party pursuing the implementation procedures in the State where the foreign award is intended to take effect. We will address these topics in three studies, respectively:

 

The First Study

Reservations Formulated by the State[5]

States can specify reservations when ratifying or acceding to the Convention in accordance with what Paragraph 3 of Article I, which reads:

 “When signing, ratifying, or acceding to this Convention, or notifying extension under Article X hereof, any State may on the basis of reciprocity declare that it will apply the Convention to the recognition and enforcement of awards made only in the territory of another Contracting State. It may also declare that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such a declaration.” 

 

The text clearly accommodates two reservations:

First:  A reservation limited to the recognition of awards issued in States having acceded to Convention and in accordance with the principle of reciprocity.  The State will apply the Convention only for the recognition of awards made in the territory of another Contracting State.[6]  This reservation is germane because Article I of the Convention stipulates the recognition of awards issued in any State other than the one where implementation is intended. The word “State” in this sense is absolute, and does not specify whether the State has acceded to the Convention or not.  Therefore, based on this first reservation, recognition and implementation of arbitration awards is limited to decisions issued in a Contracting State. This principle drives nations to join the Convention.  The contrary means that the State remains isolated in that decisions issued within its jurisdiction will be without implementation by States that have had acceded to the Convention.

 

Second: A reservation limited to the recognition of awards pertaining to exclusively commercial legal matters as defined by the law of the State where implementation is intended. Article I, Paragraph 3 states: "It may also declare that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered commercial under the national law of the State making such declaration.[7] "

 

The text stipulates:

1.       The decision to make reservations is optional and is a condition which the State acceding to the Convention must expressly opt for. If the condition is stipulated, the State’s national contractors may stick by it even if it is not set as a condition in their own contracts.  Failure to make reservations at accession is understood to be a waiver of this available option.

2.       The relations between the parties must be a legal one, based on contract or other sources of non-contractual obligations.[8]  Such sources of obligation may be a harmful act, or gain without reason; however, it must be considered as commercial business. Meaning that non-commercial business, such as employment or personal status should be excluded. This is so because the quest is to standardize international commercial issues, and to foster international cooperation and organizations working in this direction. Otherwise, it is difficult to achieve, because the various states opt to implement domestic rules in this regard.

3.       Determine whether the act is commercial or non-commercial business depends on the domestic law of the State where the award is intended to be implemented.  States are forced to implement arbitral awards based not only on the fact that it engages in foreign trade, but also based on the extent of its own laws; a State should not be too surprised with commercial issues if these issues are in compliance with its domestic laws.

It may come to mind, that the issue of making reservations is limited to Commercial topics – which I think is necessary.[9] It would thus appear that issues related to investments are excluded from such consideration because investments—meant to regulate the link between the investor and the host—have nothing to do with determining whether the work is considered commercial or non-commercial.  However, the majority of economic activities available for investments or where investments are required, are considered of a commercial nature according to the provisions of the Iraqi Commercial Law, No. 30 of 1984[10]. Because the main investment sector is in oil and gas, and Article 5 of the law states that “The following acts are considered commercial business if intended for profit, and it is presumed as such unless the contrary is proved.”  Subsequently, sixteen types of activities were stipulated as commercial businesses in this article exclusively.  The fourth on the list is Industry and extraction of raw materials.  Oil and gas satisfy both industry and the extraction of raw materials.  Other areas listed include investments in the field of tourism, listed in paragraph seven, and investments in the field of commercial real estate in accordance with paragraph six, which states “Building, renovation, demolition, and maintenance contracts.

 

 

 

 

The Second Study

Stopping the Implementation of Arbitration Awards Based on the Request of Involved Parties

Article V of the New York Convention demonstrates situations under which the party in the State where implementation is intended can request the State to refuse the implementation of a foreign arbitral award. The text states:

1 – Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:

A.  The parties to the agreement referred to in Article II were, under the law applicable to them, under some incapacity, or the indicated agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or

B.  The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or

C.  The award deals with a difference not contemplated by or not falling within the terms of the submissions to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced; or,

D.  The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or,

E.   The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which or under the law of which, that award was made.

 

It is understood from the text that:

First: 

To refuse to enforce the award is an exception to the mandatory implementation scheme contemplated by the Convention. The text stipulates “It is not permitted to reject the recognition of… and implementing it… unless.”  Thus, allowing abstaining from implementation comes only after the word “Unless.” 

Second: 

The party requesting enforcement must prove to the implementing authority that the parties of the dispute, or one of which, are eligible in accordance to the law to which they are subjected in order to determine their eligibility.  Eligibility is governed by the individual’s state law regarding citizenship; in Iraq this is determined by the Citizenship Law[11] (Article 18, paragraph 1).

Third:

The party seeking to avoid enforcement can do so by proving that the agreement of both parties to refer disputes to arbitration is not valid, based on the law chosen by the parties to as to what would govern their agreement, or to the extent the law of the State which issued the arbitration decision allows.  Accordingly, Paragraph 1(a) shows the legitimization of a protest for non-implementation, which is based on the invalidity of the arbitration agreement, the illegitimacy of a party, or for the rejection of invalid agreements such as arbitration agreements based on issues that cannot be presented for arbitration. 

The following cases assume the validity of the arbitration agreement. Therefore, protests are based on the processes that followed the agreement, including:

A.   Deficiency in informing the party summoned with implementation; where a party has not been informed on an arbitrator’s choice or arbitration procedures, or is not able to introduce arguments because that party was unable to attend or absent due to illness.  No settlement between the two parties will constitute a dishonor of justice under this exception.

B.    Since the Convention addresses disputes regarding whether there was an agreement to submit disputes to binding arbitration, or the parties did not expect it to be included in the convention; in Paragraph 1, as we explained, the Convention addresses the possibility of invoking non-implementation for the invalidity of the arbitration contract. That is due to the fact that it reaches to matters which may not be referred to arbitration. This paragraph shows that the award involves issues which they two parties did not agree to arbitrate; or situations where they agreed to refer the dispute to arbitration, but the decision reached was beyond the agreement, or where they did not contemplate this type of conflict as a subject of arbitration.

If the original intent that all disputes between the parties are supposed to be subjected to arbitration, then conflicts that do not fall within the agreement of the parties should be excluded. The text also states that when decisions reach beyond the scope of arbitration agreement—meaning the award dealt with a dispute at the heart of the contract, but also involved matters not included in it—the award can be divided so that only parts related to the agreement between the two parties are implemented, and other parts are excluded.

C.   When there is a problem related to the formation of the arbitral tribunal, either the arbitration procedures have not been in accordance with the agreement of the two parties, or according to the law of the State where the arbitration took place, this is not proper and may also qualify for non-implementation.

D.   The fact that the award has not become binding, did not become final, or that the possibility of appeal still exists are also issues for the implementing authority to consider. In this case, the risk of erroneously implementation the decision increases due to the possibility that the decision may be vetoed, with consequent serious implications.

It may also be the case that the award was not rendered by the competent authority in the country that issued the decree, or that the procedures were flawed, and did not meet the required conditions.

None-the-less, some ambiguity remains.  If we compare this text with the text of the Article 36(1)(A)(v) of the UNCITRAL Model Law on International Commercial Arbitration, where if “the award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which, or under the law of which, that award was made;” Does this mean that the text of the Model Law requires that the suspension[12] of the arbitral award is based on a decision of a Court of the State which issued the decision, or as otherwise required by the law of that State?  The issue is still vague, and was therefore avoided by some countries.

Possibly, the text of the Jordanian law on the same topic, is more clear, even though it would complicate matters, because it requires what is known as “Double cover or double cladding,” which means that the award is not enforceable unless its implementation is executable according to both the law of the State where it was rendered as well as the law of the State where implementation is intended.

 

The Third Study

Non-implementation be the party inquired to implement

There may be no reservation by the States during the ratification of the exclusion of certain matters, and party required to implement may not request suspension of the implementation. Nevertheless, the party required to implement does not implement the arbitral award issued in another State.

 

For two reasons which the convention illustrated:

First: it is not permitted to solve the dispute through arbitration in accordance with the law of the other State. 

Second: boycotting the implementation when it contradicts “The public order[13] in the country where implementation is required.”

This is a permit given to the authority of the State where implementation is required. Based on the law of the State itself to determine the above two cases, thus refuse on the basis of the license established in the text of the New York Convention 1985 on the implementation.

In summary: we referenced the permission for states and individuals in using applying the provisions related to refusing the implementation of foreign arbitral awards. Resorting to this permission, whether through a reservation established by the State during the ratification, in the form of refraining from implementation by the State in which implementation is intended, or by agreement of the entities entrusted with the execution of the implementation.

This permission shall be used prudently, and in a manner that increases international cooperation in the execution of the implementation decisions, serves the international community’s interest, and remains in line with the trends of economic development and a policy of promoting investments; all under the aegis of Article 14 of the Convention, which stipulates:

 “A Contracting State shall not be entitled to avail itself of the present Convention against other Contracting States except to the extent that it is itself bound to apply the Convention.”



[1] Arab countries that joined the convention are: Jordan, United Arab Emirates, Bahrain, Tunisia, Algeria, Syrian Arab Republic, Kuwait, Lebanon, Egypt, Saudi Arabia, Morocco, and Mauritania. Also, joined from the neighboring countries: Turkey and Iran.

[2] It was published in the Journal of justice, issued by the Ministry of Justice, the first issue of the fifth year 1979.

[3] The previous attempts, as referenced above, include the request of the Director-General of ITMF in Zurich Switzerland, in addition to the reply by the Office of codification referenced above.

[4] Without accession to the New York Convention, the implementation of foreign arbitration awards is not ensured by public international law.

[5] If the reservation was established by the State, it is applicable to awards made against persons of the State (State persons) and against private persons (Individuals and companies). As these entities must adhere to the non-implementation if the decision was issued in a State which has not acceded the Convention, unless there is a bilateral agreement with that State. It references the implementation that is forced upon persons, but if the Contracting State wants to voluntarily implement the resolution even if State Persons are among them, he may.  This is exemplified by the person waiving the right of which provided by the reservation.

[6] From the States that have filed: a number of Arab countries, Morocco, Syria, Egypt, Jordan; and countries that used to be called socialist Yugoslavia, the Soviet Union, Bulgaria, Romania; and the developed countries, Italy, Japan, England, United States, France. Quoting Dr. Fawzi Mohammad Sami, International Commercial Arbitration of Dar al-Thaqafah library, Amman-Jordan 1997, page 40.

[7] From the States that have applied this reservation: France, Hungary and the United States; also, Denmark, Tunisia, India, Malaysia, Chile, Greece, Indonesia, Yugoslavia, Poland, Cuba, Nigeria and Ghana. Quoting from Dr. Fawzi Mohammad Sami, same referenced previously mentioned, page 40.

[8] Dr. Ibrahim Ahmed Ibrahim, in his book “Special International Arbitration, 4th addition,” Dar Al-Nahda Cairo, 2005, sees that (…States may at its accession to the Convention to the exclusive custody of applying the provisions of the Convention on the provisions of Arbitration of disputes arising from an entity without the other, such as disputes arising from contractual relationships or those arising from non-contractual relationships).  This is stipulated in page 297 of his publication. It is this author’s opinion that although this option is applicable to both contractual and non-contractual obligations, l, I do not think it means the possibility is limited to only one source of commitment to the exclusion of the other; or acts to eliminate the issue of choosing one source and not another.  Especially, since the description of commercial applies to both of them.

[9] The exclusion of non-commercial is essential due to the different legal systems relationships other than business, such as issues of marriage, for example.  It is governed by legal and religious provisions (religious laws) in some countries, and by civil laws in other countries.  While rules governing trade relations are similar, in fact consolidation of these rules is actively pursued.  International conventions in this regard has been issued, and for this purpose it was approved by the majority of the international community, including the Convention being addressed as we are going to clarify some of its provisions.

[10] As well according to the provisions of the Egyptian Trade Law No. 17 of 1999, Article (5 / J)

[11] As stipulated in the text of the Convention, as the opinion of Dr. Ibrahim Ahmed Ibrahim - rightly - are suggesting that the ineligibility is required in the contract by both parties; the status that in the case of disqualification of one of the parties will invalidate contractual agreement.  Therefore, the parties granted an arbitration award maintains the right to abstain from implementation, previously referenced source - page 311.

The drafters of the Model Law on International Commercial Arbitration found the confusion in the text of the New York Convention 1985. Thus the new text states “One of the parties to the arbitration agreement… lacks the capacity...” notes the explanatory memorandum, p. 37

 

[12] Suspension, as illustrated by Dr. Fawzi Mohammad Sami in his book referenced above, p. 394, is that the party which award issued against to request from the authority that issued the decision to revoke it; and, before deciding on the request of revocation, the referenced authority then suspend implementation which award issued against to request from the authority that issued the decision to revoke it; and, before deciding on the request of revocation, the referenced authority then suspend implementation.  See also Dr. Ahmed al-Warfali, Tunisian judge and scholar, has researched under the title ”Arbitration in the Arab world” which he presented in an arbitration symposium held in Paris for Iraqi specialists for the period from (17-23 October); also indicated in a footnote, p. 319 of the author Ibrahim Ahmed Ibrahim, previously referenced ”The final ruling may require issuing implementation order by the judicial authority in the country in which it issued, "which refers to dr. Izz al-Din Abdullah, private international law, 1977, p. 973, 974."

 

[13] Dr. Fawzi Mohammad Sami, previously referenced, p. 398 sees that the term public order was referenced as “Absolute” in the Convention, as is the case in the majority of laws, so it includes internal order - in the States where Implementation is required and the international public order.  It is known in many countries, even though the when a judge examines the matter he “does not examine it from an international prospective, will rather… examines it as guarding the public order ... for his country.” 

As for Dr. Ibrahim Ahmed Ibrahim, previously referenced, in page 323; sees the meaning of public order is the internal order in the country under consideration by the judge examining the implementation, where he says (or if the arbitration award contradicts the public order of the State of the Judge).  However, he refers to American justice, which considers the concept with flexibility “As it is referenced in the New York Convention, should be interpreted narrowly, by mere refusal to implement the provisions of the arbitration, which contains explicit contradiction to the fundamental principles of justice and morality.”

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