Public policy

The notion of public policy is so vague that it may not appear to be easy to
tell what constitutes a matter of public policy from what does not. Initially a
French distinction, the sphere of internal public policy (ordre public interne)
has been opposed to that of international public policy (ordre public
international). While the former refers to domestic rules that cannot be
contracted out of when the legal relationship is governed by the forum
state’s law (e.g., French courts applying French law), the latter refers to the
system of values that – given its widely agreed international nature – is so
fundamental that it must be complied with whatever law governs the
dispute. In other words, international public policy is a narrower category
that covers only those universal rules that are considered by most nations as
fundamental and mandatory. A domestic court would feel bound to apply
those rules irrespective of the law applicable to the dispute.

But what does international public policy exactly include? In fact, it has
often been referred to the notion of mandatory rules of law (lois de police)
as a subcategory of international public policy. These rules are designed to
protect a public interest or policy. They must be applied regardless of the
law applicable to the relationship. To define mandatory rules, one may refer
to Article 9 of the Rome I Regulation, which states that:

 over riding mandatory provisions are provisions the respect for which

is regarded as crucial by a country for safeguarding its public interests

such as its political, social or economic organisation, to such an extent

that they are applicable to any situation falling within their scope,

irrespective of the law otherwise applicable to the contract under this

Regulation.1

Along the same lines, Professor Phocion Francescakis has explained

that lois de police are ‘laws the observation of which is necessary for the
safeguard of political, social and economic organisation’.

However, these definitions have been criticised for being imprecise and too
broad. It was argued that almost every law or regulation could be viewed as
preserving a social or economic interest, and thus falling within the scope of
said definition. As Professor Pierre Mayer has pointed out, it is practically

1
Article 9, Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law
applicable to contractual obligations (Rome I).
impossible to confine the notion of lois de police to one clear-cut definition,
even if very broad or general.

Hence, one can safely say that international public policy and the notion
of lois de police are, and will probably remain, abstract concepts that would
differ and evolve depending on the subjective view of each nation of what is
part of the sphere of general interest or good morals that must be preserved
and protected, not with standing the will of the parties or any otherwise
applicable law.

Types of Public Policy

The term public policy entails transnational, international, and domestic public policy.
Domestic public policy has the widest scope of application followed by international
and transnational public policy respectively. Some accept that domestic public policy
consists of a state’s mandatory rules on domestic public policy. However, domestic
public policy may vary from one jurisdiction to another, and a violation of mandatory
rules does not always sharply contrast with public policy in some jurisdictions where
a mere violation of fundamental rules and values is mostly sought for public policy
infringement. International public policy is a state’s application of its own rules on an
international matter. Transnational public policy is on the other hand the broadest
concept of all and has the narrowest scope of application. It is the internationally
accepted perception of how international public policy should be. The Hardy case is
one of the recent decisions that has blurred the line between these different
understandings of public policy.  

Purpose and Relevance of the Public Policy Defence

Public policy serves the purpose of providing the contracting states with a "safety-
valve" allowing them to prevent the enforcement of awards which they consider
irreconcilable into their legal system5 which finds its legal source in article V(2)(b) of
the Convention for the contracting states. By defining public policy broadly,
contracting states could effectively deny any undesired award recognition and
enforcement. The Convention's enforcement-friendly approach could thus be
circumvented through the back door of public policy.6
The Hardy Case: A Landmark Decision on the Enforcement
of Specific Performance in a Foreign Territory
One recent example of a domestic court refusing enforcement of an international
arbitration award based on the public policy exception is Hardy Exploration &
Production (India), Inc. v. the Government of India2.5 In the Hardy case, the United
States District Court of Columbia rejected Hardy’s request for enforcement of an
arbitral award based on a strict approach of the U.S. courts to the public policy
concept to respect foreign sovereignty so as to prevent specific performance of an
international arbitral award in a sovereign country except for the U.S.6 Although the
court found that Hardy was entitled to its claims, it refused to enforce an award that
required specific performance within a sovereign territory outside of the U.S., i.e.,
India. The court tried to balance the true international public policy concerns
regarding enforcement of an arbitral award with the U.S. public policy to respect the
sovereignty of a foreign state. While interpreting the scope of public policy, the court
referred to statutes and national decisions that implicitly prohibit specific performance
against a foreign sovereign. With this caveat, the court concluded that enforcing an
award that orders specific performance in another state would violate U.S. public
policy. The court also stated that the U.S. had not waived its sovereign immunity
concerning specific performance in contractual disputes and ruled that it would
violate the rules of international soft law if a U.S. court were to order specific
performance by a foreign state in that state’s territory.

Different Approaches to Public Policy

The purpose of Article V(2)(b) of the Convention3, which allows the courts to refuse
enforcement based on public policy concerns, is to provide a “safety valve” for the
courts.7 Accordingly, the legislative history of the Convention suggests that public
policy should be interpreted as the public policy of the enforcing jurisdiction;
however, there could easily be various interpretations of public policy by different
jurisdictions. The understanding of public policy may even evolve within the
same jurisdiction should courts find room to impose their own interpretation of public
policy, benefiting from the lack of a precise definition.8 Domestic public policy,
which may differ in each jurisdiction, generally consists of the fundamental rules and
values important to that state. However, when deciding on enforcement of a foreign
arbitral award, courts try to apply international public policy, which is construed
narrower than domestic public policy, so that enforcement of the foreign arbitral
award is less likely to be refused. Yet, there is no objectively agreed set of rules for
public policy on an international level, again leaving much to the discretion of the
courts. This is when another concept enters the scene: transnational public policy. Its
scope of application is considered even narrower, and it is used to describe the moral
or legal rules that are recognized in all civilized countries. This definition is sure far
from being self explanatory, but it essentially means the conduct that is observed by
every fair and decent society and the basic principles that cannot be waived such as
slavery, bribery, piracy, murder, terrorism, and corruption. For instance, the Supreme
2
Hardy Exploration & Production (India), Inc. v. Government of India, Ministry of Petroleum & Nat. Gas, 314 F. Supp. 3d 95 (D.D.C. 2018)
3
Dr. Reinmar Wolff (ed.), New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Commentary, 495
Court of the United States found a contract that was formed as a result of the illicit
influence of a third party to be against public morality. The Swiss Federal Tribunal
reached the same conclusion under similar conditions where parties tried to bribe a
third person. International public policy and transnational public policy are being used
interchangeably by some courts, and in their application of either principle, the courts
are adopting a narrower scope for the principles that help layout a framework for the
public policy. 

What is the Relationship between Arbitrability and Public

Policy?
For an arbitration agreement to be enforceable, the subject matter must be arbitrable.
That is, it must be a subject that a state considers it appropriate to be arbitrated. In
most jurisdictions, for example, issues such as criminal matters and child custody are
not arbitrable. To arbitrate the cases in these areas of law would be against the law or
the public policy of the local jurisdiction. So, what is the difference between these two
terms? Arbitrability and public policy are bundled in Article V (2) since both serve to
a similar purpose. While both instruments are interchangeable as to their functions,
their effects are different. Lack of arbitrability invalidates arbitration agreements.
However, public policy replaces arbitrability's absolute prohibition with the
unpredictability immanent to public policy. Therefore, it reduces the attractiveness of
arbitration.

Public policy has different definitions in different jurisdictions, mostly it is concluded

that an award could be vacated if it is not consistent with the fundamental principles
of justice, honesty, and fairness. Thus, corruption, fraud, or lack of integrity in the
process is likely to be considered a violation of public policy, requiring the award to
be annulled.Because of the States' sovereignty over defining public policy, the
concept of public policy evades a general precise definition.

In most Model Law jurisdictions, fraud or corruption would probably be considered a

proper ground for challenging an award as a violation of public policy. The U.S
Federal Arbitration Act ("FAA") is quite explicit in this respect. It provides
specifically that grounds for vacating an award containing the following facts:

(1) the award was procured via corruption, fraud or undue means,

(2) there was evident partiality or corruption in the arbitrators,

(3) the arbitrators were guilty of misconduct...or...other misbehaviour by which the

rights of any party have been prejudiced. Similarly, the English Arbitration Act
provides that a party may challenge an award based on "serious irregularity affecting
the tribunal, the proceedings or the award."4

There are a few exceptions to the general rule in arbitration that the only grounds for
challenging an award are based on jurisdiction, procedural irregularities, arbitrability,
or public policy. These exceptions are found generally in common law legal systems.
In England, for example, a party may appeal an arbitral award on a point of law,
unless the parties agree, or unless the parties have agreed otherwise. This right of
appeal, however, is subject to substantial limitations. The appeal cannot be brought
unless all the parties agree, or unless the court grants leave to appeal. The court
should grant leave only if the tribunal was obviously wrong on the point of law, or the
question is of general public importance and the decision of the tribunal is open to
doubt.

In the United States, courts have created some non-statutory grounds for challenging
an award. For example, an award can be vacated if it violates public policy, a non-
statutory ground under the FAA. Public policy is a non-statutory ground for setting
aside an award in the United States because it is not one of the grounds for non-
enforcement provided under the FAA.

Under the Convention, recognition or enforcement of an arbitral award may be

rejected if a court deems that the award would be contrary to the policy of that
country. However, public policy is not defined in the Convention, and thus presents
the possibility of another broad ground for the court to reject the enforcement. On the
other hand, however, most of the courts view such a defence narrowly, by sticking to
the Convention's pro-enforcement purpose. Even though a number of countries take a
narrow approach in interpreting the public policy defence, there is room for it to be
used parochially to protect national political interests. For instance, in 1995 the
Turkish Supreme Court refused to enforce an ICC award in which the tribunal in
Zurich applied Turkish substantive law, but applied the procedural law of the canton
of Zurich. According to the Turkish Court the arbitrator had violated Turkish Public
Policy by not applying Turkish procedural law.

4
www.mondaq.com/turkey/x/452312/Contract+Law/Public+Policy+Defence+And+Arbitration+In+International+Commercial+La
w
Challenges of awards based on public policy
Tribunals’ duty to apply mandatory rules
When thinking about arbitral tribunals’ duty to apply mandatory rules, the
first question that naturally arises is: mandatory rules of which legal order?
Is it the law of the country of the seat of arbitration? The law governing the
contract between the parties? Or even for enforceability considerations, the
law of the country where the parties may eventually wish to enforce their
award (which obviously may not be predicted with any certainty by the
tribunal in advance)?

It is commonly accepted that arbitrators have an obligation – at least in

practice – to apply the mandatory rules of the country of the seat. Otherwise,
their award would be at significant risk of being set aside. 5

A similar level of deference should be accorded to the mandatory rules of

the law governing the contract. An award in clear violation of any such law
may face enforcement challenges. As a learned author concluded ‘failure to
apply a mandatory rule of [the law governing the contract] by an
international commercial arbitrator is not often fatal to the award or to the
arbitrator’s future employment, albeit it can endanger the enforcement of the
award in certain jurisdictions as well as render the arbitral process less
credible to many users of international arbitration’.

Turning to the question of the mandatory rules of the country where the
enforcement is expected to be sought, this is a much more complex – and
controversial – task for the arbitrators. Although it is submitted that
arbitrators should be keen to render an enforceable award, it is a
discomforting situation for an arbitrator to be asked to speculate and predict
in which states the parties may wish to enforce the award. This task
becomes even harder when the answer would involve more than one state
with conflicting mandatory laws.

That said, it is submitted that the main – if not the only - reason why an
arbitrator would apply mandatory rules of law is having the aim of rendering
an enforceable award.6There is no doubt that this question naturally occupies
a place in any commercial arbitrator’s mind. No arbitrator would like to see
his or her award to be inefficient; the same applies to the parties, or at least
to the prevailing party.

Examples of awards annulled on the ground of a breach of

public policy
5
Laurence Shore, ‘Chapter 4: Applying Mandatory Rules of Law in International commercial Arbitration’, in Bermann and
Mistelis
6
Christophe Seraglini, Lois de police et justice arbitrale international, éditions Dalloz 2001.
As discussed earlier, French courts adopted a restrictive interpretation of
public policy by limiting its rejection to only those awards for which
enforcement would be in clear violation of its international public policy.

This arbitration-friendly approach has been evolving. At an early stage, one

should refer to the Dutco decision in which the French Supreme Court
overturned a Court of Appeal’s decision that had rejected an annulment
application, as the Supreme Court found that the principle of equality of the
parties was violated.7A similar decision was reached in another case when
the Paris Court of Appeal found that the award was obtained by fraud.

Later decisions have reflected the evolution of a liberal approach in France.

French courts have held in several decisions that an award shall be annulled
(or its enforcement rejected) only when the violation of public policy is
‘flagrant, effective and concrete’. 8The rationale behind this position
stemmed from the courts’ conviction that their role in the review of foreign
awards should be limited and should not extend to the merits of the case. In
other words, the courts’ review should not amount to a re-adjudication of the
dispute, even when requested to review the award’s compliance with
international public policy. In this sense, courts tended to review the awards
in law, without re-examining the facts already decided by arbitral tribunals.

This restricted control became the legal test applied by French courts for
many years. However, in more recent years, and following the criticism of
what has been viewed as too liberal an approach, French courts have seemed
to take a step back and have started to move towards a tighter control of
awards. The Paris Court of Appeal has considered on more than one
occasion that it is vested with the power of examining all the elements of the
awards, including the facts of the dispute. For instance, the Court has
recently admitted the setting aside of an ICC award on the ground that the
investment was procured by fraud and that, by entertaining that fraud, the
award had breached a foreign country’s sovereignty over its natural
resources, which is part of French international public policy. To reach this
decision, the Court reinvestigated the facts of the case, including forgery and
fraud allegations. The Court held that, in reviewing whether the award
complied with French international public policy, it has the power to
examine ‘in law and in fact all the elements relating to the defects in
question’.9

7
Cass. civ. 1ère, B.K.M.I. v. Dutco, 7 January 1992, 1992 Bull. Civ. I, No. 2.

8
Paris Court of Appeal, SA Thalès Air Défense v. GIE Euromissile, 18 November 2004. See also, Paris Court of Appeal, Cytec,
23 March 2006, Rev. arb. 2007.100, note S Bollée.
9
Paris Court of Appeal, 16 January 2018, No. 15/21703.
Along the lines of the French perspective, most state courts have given a
narrow interpretation to the public policy exception. Hence, the challenge of
the enforcement of awards on that ground has been rarely successful. 10 As
noted by the UNCITRAL Guide, those rare instances have included cases
where the award was considered as contrary to the national interest of the
enforcement state, to its core constitutional values or to a previous judgment
of its courts.11

Awards annulled for failure to apply overriding mandatory

provision

10
The UNCITRAL Guide
11
citing Hemofarm DD, MAG International Trade Holding DD, Suram Media Ltd v. Jinan Yongning Pharmaceutical Co. Ltd,
Supreme People’s Court, China, 2 June 2008 [2008] Min Si Ta Zi No. 11.
Overriding mandatory rules constitute a typical public policy defence
against the recognition and enforcement of awards. However, just like any
other public policy defence, mandatory rules of the forum state are viewed
by most jurisdictions as an exceptional basis for annulment or refusal of
enforcement. Hence, this defence has been successful only in rare cases.
Typically, those cases related to issues of fraud, corruption, antitrust or
insolvency.12

In the United States, only awards that violate mandatory rules in highly
regulated fields have been subject to annulment. For instance, an award was
vacated on the ground that it was contrary to ‘the well-defined public policy
against intentional dishonesty by police officers in connection with their
employment’.13

German courts have ruled that insolvency matters are part of German
mandatory rules, and thus have annulled arbitral awards in violation of those
rules.14The same was decided in relation to serious violations of German
foreign exchange regulations, competition law and human rights.

In Asia, Chinese courts have rejected the recognition of an award that was
considered contrary to the mandatory prohibition of future contracts and
Indian courts refused to enforce an award conflicting with a previous export
ban.

Annulment of awards on the ground of corruption

12
 Born, ‘Chapter 25: Annulment of International Arbitral Awards’
13
citing Town of Stratford v. AFSCME, Council 15, Local 407, 60 A.3d 288, 293 (Conn. App. 2013).
14
citing Oberlandesgericht [OLG] Karlsruhe, Germany, 9 Sch 02/09, 4 January 2012.
The prohibition of corruption is an integral part of international public
policy in almost all countries. In this sense, an award giving effect to
corruption may be set aside under Article V2(b) of the New York
Convention.

In France, corruption is considered to be one of the serious violations that

cannot be tolerated by the French legal order, even in an international
context. For this reason, the Paris Court of Appeal has been very strict when
dealing with allegations that awards had given effect to investments or
contracts that were procured by corruption. The Court has consistently held
that it has the power to conduct a full review of all the factual and legal
elements of the award while investigating corruption allegations. 15 This
extensive approach has been upheld by the French Court of Cassation.

Unlike the French approach, English courts generally tended to abide by

arbitrators’ findings on bribery or corruption allegations, even though a
different result could have been reached by applying English law. In this
respect, if an allegation of bribery had been dismissed by the arbitral
tribunal, an English court would not re-examine the arbitrators’ decision
during enforcement proceedings. In rejecting an application against the
enforcement of an arbitral award, the English High Court clearly held that
‘an arbitration award made under a foreign proper and curial law [Swiss
law], which had specifically found that there was no corruption practice,
should be enforced in England even if English Law would have arrived at a
different result on the ground that the underlying contract breached public
policy because its performance involved a breach of statutory regulation in
the place of performance [Algerian law]’. 16

Similarly, the Swiss Federal Tribunal considered that the payment of bribes
is contrary to Swiss public policy, while ultimately concurring with the
arbitrators’ finding that the bribery allegation was not proven conclusively.
The Tribunal held that, in any case, the investigation of such allegations are
‘beyond the review of the Federal Tribunal’.

Although, in almost all jurisdictions, bribery and corruption are contrary to

international public policy, and thus are valid grounds for annulment, such
an argument has been rarely successful in practice, mainly as a result of
difficulties relating to evidence.

15
Paris Court of Appeal Paris, 21 February 2017, No. 15/01650; Paris Court of Appeal (setting aside an arbitration
award on the ground of corruption and money laundering); Paris Court of Appeal, European Gas Turbines SA
v. Westman Int’l Ltd, Yearbook Commercial Arbitration, Volume XX (1995)
16
English High Court, Omnium de Traitement et de Valorisation SA v. Hilmarton Ltd [1999] 2 Lloyd’s Rep.
222, 224 (QB).