Non-Enforcement of Arbitral Awards

After securing an arbitral award, and before celebrations begin, enforcement is the final piece to the arbitral puzzle.

Relying on state-by-state consistency for upholding challenges or enforcing awards is, of course, unlikely to be recommended by good legal counsel – us included.

Happily, significant legislation exists to facilitate the enforcement of awards internationally, and it is relatively uncommon for non-enforcement to occur.

This article will look at the most common grounds for non-enforcement, as well as the systems of law in place to ensure international cooperation between commercial parties.

Does non-enforcement or setting aside the award apply? What are the differences?

It might be worth noting, that non-enforcement and setting aside an award are, in fact, entirely different concepts.

Non-enforcement generally happens if the award fails to comply with certain conditions imposed by a system of law, with or without the objections of the parties, and so will not be enforced by the courts.

Setting aside envisages a challenge or appeal by one of the parties which, in effect, extinguishes the award.

What can be confusing is that, in some cases, non-enforcement or setting aside gives rise to the same result. This particular article deals solely with the non-enforcement of awards and the legislation aimed at improving international cooperation, as set out below.

Facilitating international enforcement of awards: New York Convention & UNCITRAL Model Law

As of May 2021, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) has 168 contracting states. It includes the major arbitral centres of London, Stockholm, Hong Kong and Singapore, amongst many others.

The New York Convention rests on two key ideas that, apart from narrow exceptions:

1. An agreement to arbitrate is generally enforceable
2. An arbitral award may be recognised and enforced (as a national court judgment might) in the courts of every contracting state.

UNCITRAL Model Law on International Commercial Arbitration (the “Model Law”), whilst not applicable in England, was designed to assist States in improving their arbitration laws and procedure. England, instead, has the Arbitration Act 1996 (the 1996 Act), which is more detailed (in practice) than the Model Law.

Essentially, the Model Law aims to ensure that more jurisdictions take a more pro-arbitration approach (such as that already in place in England, as well as other leading arbitral seats).

In addition, the Model Law aims to facilitate the real-world application of its provisions for non-enforcement set out below in the New York Convention.

Grounds for non-enforcement: the New York Convention

Article 5 of the New York Convention provides for an exhaustive list of a party’s options for non-enforcement.

Generally, courts can (and will) only refuse to enforce an award where serious questions about its validity exist.

The conditions for non-enforcement according to the New York Convention (echoed almost precisely in section 103 of the 1996 Act in England and Wales) are:

1. The invalidity of the arbitration agreement

The convention provides for non-enforcement of awards if the arbitration agreement was invalid. It might include circumstances where any (or all) signatories to the agreement were under some incapacity, or the agreement was fraudulent in some way.

It can also include invalidity under the law of the country where the award was made (the seat of the arbitration).

2. Improper notice of proceedings, leading to the inability for either side to adequately present their case

This, of course, applies to the party against whom the award is made and any damages are sought.

It might rely on one or all of the following situations, such as the improper notice of an arbitrator being appointed or of the arbitration proceedings themselves.

Other circumstances might also apply depending on the individual case, such as the unfair scheduling of hearings that might have led to key evidence not being presented.

3. The issue on which the award rests falls outside of the submission to the arbitration

If the award deals with a matter that, retrospectively, should not have fallen within the terms of the submission to arbitration, the whole of the award, or just the disputed sections, may become unenforceable.

Importantly, this applies where matters correctly submitted to arbitration can be separated from those outside the scope of the proceedings.

Accordingly, only parts of the award containing sections that are outwith the scope of the arbitration might here become unenforceable, leaving the rest of the award intact, as it were.

4. The arbitral tribunal (or the procedure itself) did not meet the agreement of the parties

If the composition of the arbitral authority, the tribunal or the arbitral procedure was not in accordance with the agreement of the parties (or the law of the seat, where applicable), this could mean non-enforcement.

However, some disagreements on the selection of the tribunal may not mean the non-enforcement of an award. It will usually depend on whether equality of arms and fairness could reasonably be achieved.

Grounds for non-enforcement might include the lack of impartiality of the tribunal, such as where the tribunal lacked significant independence from one or more of the parties.

5. The award is not binding

Where an award is not binding, non-enforcement might be sought. It might apply where the award has been set aside, annulled or suspended by the country in which the award was made, or in the case of non-final awards, such as interim awards.

Caution should be exercised, however, as certain courts (including those predominantly in France, Belgium, Austria and the United States) have previously held that an award may be enforced by foreign courts even if the award has been annulled in the seat of arbitration.

6. The subject matter of the dispute is not capable of settlement by arbitration

This can depend greatly on the nature of the dispute and the law of the seat of the arbitration and any other applicable national laws. .

Non-arbitrable subjects in England, for example, include criminal law, certain cases of family law (depending on the situation and what might be most suitable), or public law disputes (such as election fraud).

Commercial clients may also be wary of referring issues of bankruptcy to arbitration (which, in some jurisdictions might meet the unwelcome surprise of a stay of the arbitration in favour of litigation), as well as competition law or consumer-related claims, amongst others.

Early-stage legal advice should always be sought before entering into any agreement to arbitrate, before or after a dispute arises.

7. The enforcement of the award would be contrary to the public policy of the jurisdiction in which enforcement is sought

Last, but certainly not least important, this public policy exception is perhaps the cause of the most significant irregularities in terms of non-enforcement. It relies, for the most part, on the applicable national laws of the country in which enforcement is sought.

According to the IBA’s report on this public policy exception in 2015, the “grounds for refusing the recognition or enforcement of a foreign award [...] may substantially vary from one jurisdiction to another”.

If your dispute involves a cross-border element, advice from a firm, such as ours, with an international perspective is key to pre-empting (and ultimately avoiding) potential issues with enforcement in the relevant jurisdiction.

Less formal difficulties with enforcement

This article deals with the more formal difficulties of enforcement, resulting in the neutralisation of an award due to procedural or jurisdictional issues stemming from the tribunal or the proceedings.

However, in rarer cases, a party might simply attempt to resist enforcement in the relevant jurisdiction or otherwise refuse to execute the award.

If enforcement issues might be expected, seek early-stage advice as soon as possible from a qualified team. Injunctions or freezing orders before or during the arbitral proceeding may serve parties well in the long run.

Summary

“Other than due to the relatively narrow set of circumstances regarding non-enforcement, as between most states, especially signatories to the New York Convention arbitration awards are generally recognised and not refused. It is considerably easier (in most cases) to enforce an arbitration award than a court judgment in a foreign jurisdiction.

“Whilst international cooperation is high, both during the arbitration and in terms of enforcing awards, caution should still be exercised. For example, in the UAE, awards have in the past been set aside due to procedural irregularities that another jurisdiction may not have interpreted so narrowly.

“Courts in leading jurisdictions for arbitration, such as England and Wales, can be particularly conservative. Ensuring that your counsel provides you with advice based on an international perspective, in the early stages of a dispute, is more important than ever.” – Lawrence Jacobson, In-House Barrister at Carlsons Solicitors

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