Articles

From innumerable awards rendered in international commercial disputes over the years and the wide publicity given to them, there is emerging a discernible pattern of transnational commercial jurisprudence. It can only be sustained if arbitrators of different nationalities and functioning under varied legal systems, continue rendering decisions which can be supported on some applicable law or principle.

Over 100 years ago, a great English Judge (Lord Esher M R) laid down the test for deciding whether (or not) a person acts as an arbitrator:

"If it appears from the terms of the agreement by which a matter is submitted to a person's decision, that the intention of the parties was that he should hold an inquiry, and hear the respective cases of the parties and decide upon the evidence led before him, then the case is one of arbitration. The intention in such cases is that there shall be a judicial inquiry worked out in a judicial manner."¹

But under the New York Arbitration Convention (1958) and the UNCITRAL Model Law (1985) the exhaustive (but limited) list of grounds for refusal of enforcement do not include failure to work out the arbitration in a judicial manner. There is no recourse against an award containing flagrant or patent errors (of law or of fact): this is a good thing, but only up to a point.

Article 34 of the UNCITRAL Model Law sets forth the standards against which Courts of the Model Law States are to judge the final product of the arbitral proceedings. The Secretariat had urged from the very beginning that the New York Convention grounds be incorporated into the Model Law's setting-aside provision: these grounds having been internationally accepted, "would help prevent … an international award from falling victim to local particularities of law". The Working Group discussed the prospects of adding additional grounds to those already set-out in the New York Convention but ultimately resolved not to depart from them. The Working Group's Report provides a concise statement of the reasons for this fundamental policy choice:

"That solution would facilitate international commercial arbitration by enhancing predictability and expeditiousness and would go a long way towards establishing a harmonized system of limited recourse against awards and their enforcement…"

At the following session of the Working Group suggested ground of recourse against the award was offered viz. setting it aside for "manifest injustice": it was not adopted.² The question of whether to add additional grounds was raised again during the deliberations of the UN Commission on International Trade, which finalized the draft Model Law submitted by the Working Group. After a lengthy discussion, this Commission, like the Working Group before, declined to add any new grounds to the list borrowed from the New York Convention. But at the insistence of the United Kingdom delegation, the Commission decided to incorporate a broader interpretation of the term "public policy" into its Report. The Commission Report states:

"It was understood that the term 'public policy' which was used in the 1958 New York Convention and many other treaties covered fundamental principles of law and justice in substantive as well as procedural respects. Thus, instances such as corruption, bribery or fraud and similar cases would constitute a ground for setting aside. It was noted in that connection that the wording 'the award is in conflict with the public policy of the State' was not to be interpreted as excluding instances or events relating to the manner in which an award was arrived at".³

Cases of "manifest injustice" though not expressed as a separate ground under the UNCITRAL Model Law may still fall under the generic head of "public policy", but only in jurisdiction where reference to the travaux préparatoires is permitted as a legitimate aid to statutory construction.

Under the New York Arbitration Convention 1958, public policy has always been narrowly construed. When an arbitrator does not work out his decision in a judicial manner, his award would have to be enforced under the 1958 Convention, even where he can be shown to have understood and correctly stated the law and yet consciously ignored it (on some vague notions of justice); we have it on high authority that such a Convention Award would be "unimpeachable".⁴

"Manifest injustice", rejected as an additional ground of recourse under the model law, is a coined phrase, so is "manifest disregard" -the latter was introduced in the interstices domestic U.S. legislation by the Judges of its highest Court. In Wilko v. Swan 346 U.S. 427 at 436-437 (1953), Justice Reed delivering the Opinion of the Supreme Court, said that in an unrestricted arbitral submission "the interpretation of the law by the arbitrators, in contrast to manifest disregard, are not subject, in Federal Courts, to judicial review…".⁵

The phrase ("manifest disregard") as understood by US Judges means something more than, something different from mere error or a mere failure on the part of the arbitrator to understand or apply the law – it encompasses only a deliberate and wanton refusal to apply the law to the facts of the case. Thus the U.S. District Court for the Northern District of Alabama recently held (April 19, 1991) that a securities industry arbitration panel showed "manifest disregard of the law" where, after finding that a broker and its agent had engaged in fraudulent options trading, it failed to award the investors treble damages and attorney's fees. In vacating the award, Judge J. Foy Guin ruled that the panel improperly disregarded both the Alabama Securities Act and the Federal Racketeer Influenced and Corrupt Organizations Act (RICO) – The judge said:

"The error of not applying these –(statutory) provisions would be readily and instantly perceived by a typical arbitrator; these arbitrators were cognizant of the proper legal standard and disregarded it in fashioning the award; and their disregard of the applicable law is indisputably apparent on the face of the record."⁶

But U.S. Courts have repeatedly held that the judge-made rule, applied in domestic arbitration, does not apply to international arbitration, and that an arbitrator's "manifest disregard" of law (even in its pejorative sense) does not rise to the level of a transgression of "public policy"⁷, the only available ground of recourse (on merits) under the New York Convention.

The consequence of all this is best illustrated by two hypothetical examples – apposite, though somewhat far-fetched, each of them furnished by distinguished judges of the English Court of Appeal.

At the 1989 Freshfields Arbitration Lecture, Lord Justice Bingham recalled a form of arbitration which flourished during the last century in a small county in England:

"The parties agreed on an impartial Chairman, who sat at the head of a long table with the parties on either hand. Down the middle of the table a line was drawn, and grains of oats were placed along it at intervals of a few inches. A foot or so from the head of the table the line stopped, and two grains of corn were place a few inches from the middle, one in front of each party. Then, with the Chairman as umpire, a hen turkey was gently placed on the table at the far end. The turkey would then delicately peck her lady like way all up the table until, when she reached the two grains of corn at the top, she delivered her award in favour of one party or the other by taking first the grain nearer to him!"

It appears that on one occasion the loser, a litigious character, refused to accept the "Award", and a Civil Bill was brought in the County Court against the Winner. It was dismissed. At the hearing of the Appeal from the dismissal, Counsel for the Winner implored Counsel for the loser to tell "the aged and learned equity Judge" (Chief Justice Lefroy) whether the turkey wasn't truly for the defendant! At which point:

Chief Justice: "What on earth has a turkey to do with this case?"

Counsel: "It's a local form of arbitration, My Lord."

Chief Justice: "Do you mean to tell me that the plaintiff has brought this case in disregard of the award of an Arbitrator?"

Counsel: "That is so, My Lord."

Chief Justice: "Disgraceful! Appeal dismissed with costs."

Now, what if (God forbid) parties to an ad hoc international commercial arbitration (exasperated at its never-ending duration and to save themselves from further costs) agree to a "Turkey Award" – an award duly authenticated by the arbitral tribunal but based only on the pecking-order of the bird, or (perhaps) on the less elaborate (but equally chancy) expedient of a toss-of-the-coin? Such an award would not only exhibit a manifest disregard of the law -it would be cocking-a-snook at it! But would it not pass muster as a Convention Award?

The second (more serious) hypothesis is furnished in Mustill and Boyd. Imagine an Award, rendered in a contract expressly governed by English Law and containing an "exclusion agreement" (permitted under the terms of Section 3(1) of the Arbitration Act, 1979: excluding judicial review). Imagine, also that the Award of this Arbitrator contains a passage on the following lines:

"I am well aware that if I apply the firmly established rules of English law to the facts which I have found, I will be compelled to decide in favour of the respondent. I have always thought that the law on this topic is unfair nonsense. This is very clearly demonstrated by the present case. In my view, the only just course is to divide the loss equally between the two parties, and I shall give effect to my opinion by awarding the claimant 50 per cent of his claim."⁸

Under English domestic law such an award (the authors assure us) would be impregnable! But is a national Court really obliged to lend its coercive powers, so as to compel a result which is not what the parties contracted for, through the medium of a document (euphemistically called an "award") which openly defies the law? One possible answer would be that which a great commercial judge, Lord Justice Scrutton, once gave to a plea that the arbitrator had not followed the law –

"…. You have gone to an arbitrator, and if the arbitrator whom you choose makes a mistake in law that is you look-out for choosing the wrong arbitrator, if you choose to go to Caesar you must take Caesar's judgement…."⁹

Is there then no right of inherent control for open and deliberate departure from the law?

The response of Mustill and Boyd is more reassuring than Lord Justice Scrutton's terse admonition. I take the liberty of quoting it since it is or great significance for all those who use and those who help administer International Commercial Arbitration:

"Business people need to be able to settle their disputes by assessing the likely outcome of the arbitration. This they can only do if they are confident that the arbitrator will at least try to apply an objectively ascertainable system of law. The must, of course, recognize the possibility that the arbitrator will make a mistake, but this is not fatal to the settlement. The parties can accommodate error, but not chance. Moreover, when one comes to regard the arbitrator himself, it is seen that he is appointed to ascertain the rights of the parties. These are the rights which, for good consideration, they have chosen to confer on each other. It is not a proper discharge of this trust to give them not the rights for which they bargained, but a reformulated set of rights of his own choosing. It is no answer to say that the arbitrator acts with the best of intentions. If he deliberately transgresses his mandate, he should not do. An award made in such circumstances would not stand, and if the likelihood that such an award will be made is detected whilst the reference is still in progress, the arbitrator would not be allowed to continue in his office.

"Nor in our submission is it an answer to say that the distinction between deliberate transgression and an honest error is unworkable. It has been long established in the English Law, and judges are well capable of giving effect to it. Certainly the utmost caution will need to be used, if allegations of manifest disregard are not to be used as an expedient for delay. Relief is likely to be granted on the most sparing basis, if it is ever granted at all. But the maintenance of a right to intervene, in the rare cases where the arbitrator knowingly steps outside his proper function, is in our submission an essential safeguard, now that the more traditional methods of control heave been so greatly attenuated."¹⁰

It is this "essential safeguard" that is still lacking in international arbitration (especially under the New York Convention): the generic head of "misconduct" available under most national arbitral laws, does not apply to awards rendered in transnational arbitration.

The new (1987) Swiss statute on International Arbitration (effective from January 1, 1989) is national legislative recognition of this modern trend: a pro-enforcement-bias. Recourse against awards under its provisions (on the merits) is limited to "incompatibility with public policy". That expression is used (in Swiss law) in an even narrower sense than in the New York Convention. In discussing the extremely limited scope for setting aside an Award that it is not sufficient (to invalidate the award) that some of the reasons which are given within the framework of the opinion (motivation of the holding) conflict with "public policy". In other words, the Federal Supreme Court may (even) supplant reasons expressed in the award by others that in its view justify the holding, and in such a case the action for setting aside fails. Thus, the Federal Supreme Court might for instance agree that it is incompatible with public policy to maintain the validity of the contract, since its essence was a mandate to bribe a minister, but might conclude that the sum awarded to the claimant is nevertheless due on a quasi-contractual basis, or on culpa in contrahendo, or on the basis of unjust enrichment."! He cites (as an instance) a decision of the Swiss Supreme Court delivered on July 22, 1986, in re R. v. A. (published in BGE 112 at 172)¹¹ A more recent judgement of that Court Valindo v. Ingetex – July 25, 1990 (published in Semaine Judiciaire 1991) endorses Marc Blessing's view. In this case, the Court said that even an obvious violation of a clear rule of law would not necessarily violate Swiss, foreign, or international public policy!

Under Article 19 of the new Swiss Law, the Judge or Arbitrator is given a wide discretion to substitute for the chosen applicable law, the provisions of another law if this is – "according to the Swiss considered opinion" – justified as necessary having regard to obviously prevailing interests of a party which deserves protection, and if the subject matter of the case shows a close connection to such other law. An award under the new law can be attacked only on appeal to the Swiss Federal Supreme Court and on very limited grounds (Articles 190-191): leaving aside the question of the constitution of the arbitral tribunal, its jurisdiction and the infra or ultra petita, an award can only be striked at, procedurally, for violations of basic requirements of natural justice, and on merits, if the conclusions of the award are incompatible with public policy. A distinguished jurist (not Swiss) is extremely critical of this new international law: it will (he predicts) enable arbitrators to "remain uncontrollable"! In a short note contributed to Business Law Brief December, 1988 (p. 19), under the somewhat alarming title "Arbitration Switzerland -Dangers Ahead in 1989", Dr F. A. Mann trenchantly expresses this point of view:

"The most serious point (in the new Swiss law) is that the failure to apply the relevant law or even the arbitrary misapplication of the law will not be an effective ground of appeal.

The well-known tendencies of certain arbitrators to disregard the law and to apply what the arbitrators regard as equity, even though they may give it the high-sounding name of lex mercatoria or 'transnational' law, are likely to remain uncontrollable.

It may be that in course of time Swiss judicial practice will develop in a manner which displays more wisdom than the legislature has exercised, and will protect the relative certainty which international arbitration expects and requires. For the time being, however, Swiss law is in many respects so vague and even obscure that English parties will have to exercise very special care."

One of Switzerland's most distinguished lawyers – Prof. Pierre Lalive – an arbitrator in the blue-ribbon class, has put the entire matter of lawless awards in true perspective. At the closing session of the 60th Anniversary Celebrations in 1983 of the ICC Court of Arbitration (at which he presided) he reminded the delegates – "that an (international) arbitration award is not always worthy of being respected and enforced"¹² – a trite but necessary reminder.

Awards, because they are international or institutional, are not for that reason sacred or sacrosanct. Prof. Lalive then added:

"appeals against awards and the refusal of enforcement can, in certain cases, be justified, not only for the needs of the case, but also in the general interest of arbitration and that of a better quality of awards".

In the general interests of international arbitration, and (hopefully) in the expectation of a better quality of awards, I would suggest that an award which patently discloses a willful disregard of the law should not be regarded as an "arbitral award" under the provisions of the New York Convention. Unless the submission to arbitration clearly empowers the arbitrator to ignore the law and render a decision on the justice of the case, enforcement of such an award would be contrary to the plain intent of the arbitral agreement viz. that the arbitrator decides according to what he believes to be the law and the rights of parties, each of which he is free to interpret; but if, in the rare instance where he is shown to have acted knowingly in violation of substantive law and in wanton disregard of legal rights, his decision, though characterized as an "award", ought not to qualify for acceptance as an "arbitral award".

That an Arbitrator cannot consciously and deliberately disregard the law does not mean that he is not free to apply equity.

He often does – on settled principles of equity. For instance in International Standard Electric Corporation (ISEC) v. Bridas (cited above in footnote No. 7) the award contained the following sentence:

"All in all, the combined guidance of the relevant legal principles, applied in the context of the equitable nature of the norms which govern our task, lead us to conclude that BRIDAS is entitled to the "restitution" of its May 1979 investment of $ 7.5 million…".

ISEC argued that the arbitrators exceeded their authority and acted as amiables compositeurs, in that they awarded damages based on equitable norms, rather that on Law. US Federal District Judge Conboy rejected the contention on the ground that the entitlement to restitution was not based on whimsical personal view but on sound principle.

The manner in which "equity" was created and developed in England is instructive for trend-setters in the international commercial world of arbitration.

Originally, by "equity" was meant that body of rights and remedies, which before the year 1873, were not recognized or provided by Courts of Law, but only by the Court of Chancery. The authority by virtue of which the Court of Chancery created those rights and provided those remedies arose out of the delegation to its presiding officer (the Lord Chancellor) of the King's prerogative "to afford to his subjects in individual cases relief outside the law where justice so required". The Lord Chancellor who exercised the King's prerogative was keeper of the Great Seal and also keeper of the King's Conscience; the Court of Chancery was not a Court of law but a Court Conscience, whose junction was to use the King's prerogative to interfere with the administration of law in the interest of justice where conscience rendered such interference necessary: relief given outside the law could only be given in each case as it arose.

That was why long after the English Law Courts were staffed exclusively by Judges trained in the Law, no professional training was thought necessary for the great office of Chancellor, since there were no principles to be learned upon which relief was to be given: in the reign of King Charles I, Selden could say (without exaggeration) that equity depended on "the length of the Chancellor's foot"! It was only in the year 1673 when Lord Nottingham became Lord Chancellor that he examined the grounds on which his predecessors had granted relief outside the law, and by basing his grounds of relief on these grounds, turned equity from a matter of chance into a matter of principle; henceforth, in the Court of Chancery, on points hitherto dealt with, it was precedents which decided; the applicant had to evolve from these precedents a principle which covered his own case, and if he failed, he got no relief. It was only on points never previously dealt with in Chancery that a new precedent was made and a new principle created. When the Lord Chancellor refused to make new precedents after 1848, equity ceased to create new principles; and equitable rights and remedies outside the law became as fixed as those within the law: ultimately, with the establishment of one High Court with different divisions (including the Chancery Division), a fusion of law and equity, in the same judicial body, was achieved.

"Equity" (as the term is now understood – in English Law) has long since ceased to represent the personal view of the individual judge administering it. Thus, when provision is made in an arbitral agreement that the arbitrator is free to administer equity, it is not the same thing as his own personal view of abstract justice: he cannot under this enabling clause dispense "palm-tree justice"; such a clause only ousts legal technicalities and strict constructions".¹³ Arbitrators can be (and often are) authorized by the terms of the submission to depart from the strictness of the law, but this does not empower them to consciously dispense with the law.

The same is the position in international law, where the expression 'Rules of Equity' does not mean that the arbitrator is free to deviate from the path of law proper. Although some arbitrators refuse to accept this term in its technical meaning as understood in the English-American jurisprudence, they never confuse it with a settlement ex aequo et bono. Rules of equity are thus rules of law both in municipal law and in international arbitration. Prof. Lauterpacht says that the term 'Justice' when used in Arbitration Conventions means "legal justice":

"….it is in this manner that it is interpreted by arbitral tribunals. In the Delagoa Railway arbitration, for instance, the arbitrator had to decide according to what he would deem 'most just'.

"Cette clause, says the judgment, n'exclut pas, elle implique au contraire, pour lui l'obligation de déterminer au préalable quelle est la législation qui devra le guider dans la recherche de la solution 'Juste'".

The arbitrator called upon to decide in accordance with justice has here recourse to rules of law, more especially to such rules of private law as seem to him most comprehensive and of universal application."¹⁴

Upholding the arbitrability of a claim for damages resulting from a conspiracy to violate the Sherman Act, the Supreme Court of the United States (in Mitsubishi Motors 473 U.S. at p. 631) emphasised its concerns for "international comity, respect for the capacities of foreign and transnational tribunals" and expressed its "sensitivity to the need of the international commercial system for predictability in the resolution of disputes."

If the international arbitrator is to deserve these encomiums and be worthy of these concerns he must, under all circumstances, ensure that his arbitral decision is rooted in law and based on principle. It may be noted that some arbitration institutions are very much aware of this basic concern. For example, Article 21 of the ICC Arbitration Rules specifically empowers the ICC International Court of Arbitration to scrutinize the arbitrator's draft award and, when it is necessary, to draw his attention to points of substance, without however affecting his liberty of decision.

Attitudes of countries and of parties towards arbitration, particularly towards arbitral institutions, are greatly influenced by one bad decision. It is the legitimacy and correctness of decisions (along with the speed with which they are reached) that make for greater predictability in the resolution of disputes. In the end it is only such decisions that inspire confidence in the international commercial world and ensure that the rule of law prevails in transnational commercial jurisprudence.

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