Finality of arbitral awards - public policy

Burrough J's comment in the 1824 case Richardson v Mellish, that "public policy is a very unruly horse, and once you get astride it you never know where it will carry you" is oft quoted, and is a timely reminder for many seeking a backdoor escape from the laws that would otherwise apply.

Since the adoption of the UNCITRAL Model Law in 1996, New Zealand has accepted as one of the purposes of the Arbitration Act in section 5 to redefine and clarify the limits of judicial review of arbitration agreements and arbitration awards.  Article 5 of Schedule 1 to the Act goes further, providing that no court shall intervene in matters covered by Schedule 1 (which encapsulates the Model Law) except where specifically provided in the schedule; and article 8 provides for court proceedings to be stayed where there is an agreement to arbitrate in place.  For those in any doubt, article 16 further provides that the arbitral tribunal may rule on its own jurisdiction, including issues as to the validity of the arbitral agreement.

Court intervention is, therefore, reasonably limited.

The provisions of the Act, excluding the Schedules, are relatively brief, covering issues such as the applicability of Schedule 2 to international arbitrations (opt-out for domestic arbitrations and opt-in for those with parties deem different States); the arbitrability of disputes; consumer arbitrations; the powers of tribunals to grant relief; exclusion of liability for the tribunal; and privacy.

Schedule 1, the Model Law provisions, cover the detail and mechanics of the arbitration process.  Court intervention in Schedule 1 is limited to the following:

  • Where there is "not in fact any dispute between the parties" in relation to the matters referred to arbitration, the court is not required to stay any conflicting court proceedings (article 8) - this saving provision has been constrained by the decision of Arnold J in the Zurich v Cognition case.
  • Interim measures (article 9).
  • Appointment of an arbitrator, where AMINZ as the appointing body has failed to make an appointment within 30 days (article 11(7)).
  • Challenge to the appointment of an arbitrator (article 13).
  • Recognition and enforcement of interim measures (articles 17L & 17M).
  • Assistance in taking evidence (article 27).
  • Setting aside awards (article 34), on the grounds of invalidity of the arbitration agreement; failure to give notice of the arbitrator's appointment; dispute outside the scope of submission to arbitration; and composition of the tribunal not in accordance with the agreement.
  • Recognition and enforcement of awards (article 35).
  • Refusing recognition or enforcement (article 36), mirroring the reasons for setting aside in article 34.

Schedule 2 (containing optional provisions) provides for limited court involvement, in each case, expressed to be notwithstanding the limitation in article 5:

  • Consolidation of arbitral proceedings (clause 2).
  • Assistance in exercising powers (clause 3).
  • Determination of a preliminary question of law (clause 4).
  • Appeals on questions of law (clause 5).
  • Costs (article 6).
  • Extension of time for commencing arbitration (clause 7).

In practice, notwithstanding the efforts of some unsuccessful parties, court intervention is reasonably rare.  Notable exceptions are the Supreme Court decisions in General Distributors v Casata (holding that a failure to award costs under section 12 was an error of law); Carr v Gallaway Cook Allan (holding that an agreement to arbitrate was invalid, as it provided for appeals on questions of fact); and Zurich v Cognition (limiting the application of the saving in article 8(1)).

Two issues which go to the heart of party autonomy and have had limited judicial consideration are questions of arbitrability of disputes under section 10 and where an award is in conflict with the public policy of New Zealand under article 34(2)(b)(ii).

The first was considered in the case of Ngati Rehua discussed in an earlier Musings page.  In that case, the High Court decided that, notwithstanding the limitations in section 5 and article 5, the court retained inherent jurisdiction to supervise arbitral proceedings and held that, under tikanga Māori, issues of whakapapa were not arbitrable.  

This decision leaves Māori in the unfortunate position that, while they may have agreed to arbitration (in some modified form, consistent with te ao Māori), the court may step in and overturn that agreement leaving the parties with no recourse.  The court itself in that case, holding that it could not determine issues of whakapapa either.  The concept that some disputes, while real and having significant consequences cannot be determined by anyone other than the parties themselves, is novel and difficult.  The difficulty with this decision is compounded by the fact that the parties have decided not to appeal.

Public policy has had some judicial consideration in New Zealand, with the leading case of Amaltal Corporation v Maruha holding a high threshold for judicial intervention on public policy grounds.  As noted by the High Court in Todd Petroleum Mining v Shell, the court's supervisory jurisdiction is "confined", the party's autonomy to elect to go to arbitration is to be "respected" and that "there are only narrowly confined circumstances in which a Court can intervene".   

The basis for a finding of conflict with public policy are further elaborated in article 34(6) by reference to fraud or corruption and a breach of the rules of natural justice during the arbitral proceedings or in the making of the award.

Both issues of arbitrability and public policy were considered by the Privy Council, sitting in its Mauritian jurisdiction, in the case of Betamax Ltd v State Trading Corporation [2021] UKPC 14The dispute concerned a contract for the construction and operation of a tanker, for the transport of petroleum products from Bangalore to Port Louis.  The term of the contract was 15 years.  The first cargo was delivered to Mauritius in May 2011.

A new government came to power in Mauritius in December 2014, and in January 2015 the Cabinet announced that it would terminate the contract with Betamax in light of "the unlawful procedure and processes regarding the allocation of the contract".  In February, the State Trading Corporation advised that it was unable to continue to use Betamax's services under the contract, and Betamax formally terminated the contract for breach in April.  

In May 2015, Betamax commenced arbitral proceedings under the contract, claiming damages of over $150 million.  The arbitration was held under the Singapore International Arbitration Centre rules and in June 2017, the arbitrator found for Betamax, awarding damages of $115 million, with interest and costs.  The State Trading Corporation applied to have the award set aside under the equivalent of article 34 on the basis that the dispute was not arbitrable, the agreement to arbitrate was not valid and the award was in conflict with the public policy of Mauritius.

The Supreme Court of Mauritius set the award aside on the basis that the contract was flagrantly illegal in terms of governing Mauritian legislation.  Leave was granted to appeal to the Privy Council.

 The Judicial Committee considered three issues:

(1)  Was the Supreme Court entitled to review the arbitrator's decision that the contract was not illegal? 

(2)  If so, was the contract illegal? and

(3)  If so, was the award in conflict with public policy?

On the first issue, the Board held that determining the legality of the contract was within the jurisdiction of the arbitrator, and in the absence of a right of appeal on question of law, the Supreme Court had no jurisdiction to re-open the arbitrator's finding.  The only basis for reviewing the arbitrator's decision was therefore on the basis of public policy under article 34(2)(b)(ii) of the Model Law.  

The Board held that a court cannot, under the guise of public policy, reopen issues relating to the meaning and effect of the contract, or whether it complied with the regulatory or legislative regime.  That was a finding of the arbitrator, which was not open to the court to reconsider.  Had the arbitrator found that the contract was illegal, but upheld the claim for damages in any event, that would have been contrary to public policy.  However, having entrusted the arbitrator to make a determination on the interpretation of the legislation, a court could not then bypass the lack of any right of appeal by invoking the public policy exception to set the award aside.

On the second issue, notwithstanding its finding on the first issue, the Board found that the contract was not illegal.  It declined to consider the third issue as being unhelpful and unnecessary.

The decision of the Privy Council is helpful in its considered approach to the issue of public policy, and its review of the relevant caselaw.  It is also telling that the Board gave no consideration to the issue of whether or not the interpretation and application of Mauritian legislation was "arbitrable".  

On the issue of an expanded application of article 34, the Board had this to say:

"The Model Law is premised on the principle that where a matter has been submitted to an arbitral tribunal and is within the jurisdiction of the arbitral tribunal, the arbitral tribunal's decision is final whether the issue is one of law or fact.  The parties have so agreed in their contract to submit the dispute to arbitration,  It is therefore the policy of modern international arbitration law to uphold the finality of the arbitral tribunal's decision on the contract made within the arbitral tribunal's jurisdiction, whether right or wrong in fact or in law, absent the specified vitiating factors."

While issues of fact and law remain the subject to discussion, where rights of appeal on questions of law have been retained, the extent of court intervention and the primacy of party autonomy are well re-stated.

It should also be noted that, rights of appeal and other issues covered in Schedule 2 aside, New Zealand makes no distinction between international and domestic arbitration, having a single Act based on the Model Law.