Written by Team Farallon
In this comprehensive examination, the focus is primarily on procedural issues concerning the validity of arbitral awards as addressed by the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) and similar instruments.
One of the most common reasons for challenging the validity of an arbitral award is to challenge the tribunal’s lack of jurisdiction, arising from either:
(a) an invalid arbitration agreement; or
(b) the tribunal exceeding the parties’ consent or agreement to arbitration.
Article V of the New York Convention outlines the jurisdictional grounds that can be utilized to challenge an arbitral award, providing circumstances under which the enforcement of a foreign arbitral award “may be refused.”
These circumstances include, but are not limited to, the following:
The validity of an arbitration agreement plays a crucial role in establishing the legitimacy of an arbitral award. Whether it involves commercial arbitration based on a private agreement or investment-based arbitration governed by an international treaty, a valid agreement is essential for rendering a valid award.
Determining the validity of an arbitration agreement can be achieved by referring to either the law governing the agreement, if specified, or the law of the seat of arbitration.
A notable case, First Options of Chicago, decided by the US Supreme Court, sheds light on this matter. Despite the arbitration agreement not being included in the signed agreement between the parties, the tribunal upheld its jurisdiction over a dispute. The Supreme Court concluded that without the explicit consent of the parties to grant arbitrators the authority to decide on the issue of arbitrability, the responsibility falls on the courts to make that determination, thereby disregarding the arbitrators’ decision.
In essence, this ruling emphasizes that the power to decide arbitrability rests on the parties’ agreement. If the parties have agreed to submit the question of arbitrability to arbitration, the arbitrator’s decision prevails. However, in the absence of such an agreement, the court will independently determine whether the dispute should be subjected to arbitration. While this approach yielded the correct outcome in the mentioned case, some commentators view it as unfortunate because it denies arbitrators the inherent authority to determine their own competence.
This consideration becomes critical when selecting the applicable law for an arbitration agreement or initiating proceedings. To address this, parties can explicitly agree in the procedural order for the tribunal to decide on arbitrability, if it is not already covered in the arbitration clause or the applicable institutional rules.
The validity of an arbitration agreement under the applicable law has recently gained significance in the context of investment treaty claims within European nations. The landmark Achmea decision refers to a ruling by the Court of Justice of the European Union (CJEU). In this case, the CJEU declared the arbitration clause in the bilateral investment treaty (BIT) between the Netherlands and Slovakia incompatible with EU law.
The CJEU emphasized the supremacy of EU law over the laws of individual Member States, including their international agreements. Consequently, the arbitral award rendered against Slovakia based on the arbitration clause in the BIT was deemed invalid. The German Federal Court of Justice also affirmed this position and invalidated the award. The reasoning behind this decision was that the utilized arbitration mechanism did not allow for review by a court of an EU Member State, which was considered necessary under the Treaty on the Functioning of the European Union.
Consequently, investment claims based on intra-EU treaties, which currently amount to 196, may lack a valid agreement to arbitrate. This implies that the arbitration clauses included in these treaties may not be enforceable under EU law. In light of this, practitioners seeking to resolve disputes related to foreign investment protection through arbitration may need to explore alternative avenues. One potential option could involve invoking the Energy Charter Treaty, if applicable to the specific situation. This treaty may provide a valid framework for arbitration in cases where the intra-EU treaty lacks enforceability under EU law.
Another notable issue concerning the validity of arbitration agreements is the question of collective claims.
The Abaclat case serves as an example, where a tribunal asserted jurisdiction to hear the claims of over 60,000 Italian investors against Argentina under the ICSID Convention and the Argentina-Italy BIT.
Although neither the ICSID Convention nor the Argentina-Italy BIT explicitly addressed the permissibility of mass claims, the tribunal determined that the issue of the number of claimants pertained to admissibility rather than jurisdiction. In other words, the tribunal believed that the question of whether the claims could proceed collectively was distinct from its authority to hear the case.
This approach raises a significant concern: whether a reviewing court can question the decision to uphold jurisdiction when the issue is shifted from jurisdiction to admissibility, as the latter is typically not subject to review. The applicable law governing the review of the award may provide guidance in such situations.
The scope of a tribunal’s authority is limited by the parties’ consent. The authority of the arbitral tribunal is also constrained by the extent of the parties’ consent.
In general, when a party challenges an arbitral award on the grounds of exceeding the tribunal’s authority, it does so by claiming that the tribunal went beyond its powers or acted ultra petita. This means that the tribunal made decisions or awarded relief that exceeded what the parties had agreed upon or beyond the scope of the arbitration agreement.
Less frequently, a party may argue that the tribunal failed to fulfil its mandate by refusing to exercise jurisdiction over certain or all of that party’s claims. This is referred to as infra petita, which means that the tribunal did not address or consider certain claims brought by a party that were within the scope of the arbitration agreement.
In the case of AKN v ALC [2015] SGCA 18, the Singapore Court of Appeal reviewed three appeals against a High Court decision to set aside an SIAC award. The Court of Appeal reversed three of the five grounds on which the High Court had based its decision.
The dispute involved the liquidation of a company, where the liquidator sold the company’s assets to two purchasers through two agreements. The parties proceeded to arbitration, and the tribunal awarded damages to the purchasers for the liquidator’s failure to transfer clean title and settle certain claims against the assets, to the detriment of secured creditors.
The liquidator, secured creditors, and third-party funds that acquired rights under the agreements applied to the High Court to set aside the award. They presented various grounds for challenging the award, including breaches of natural justice and excess of jurisdiction. The High Court set aside the award based on several grounds.
On appeal, the Court of Appeal overturned the High Court’s decision on four of the grounds. The Court disagreed with the High Court’s interpretation of how the tribunal handled certain arguments but found no breach of natural justice. The Court also ruled that the tribunal’s re-characterization of the purchasers’ claim did not exceed its jurisdiction, although it acknowledged a breach of natural justice due to the lack of opportunity to address the issue. The Court agreed with the High Court that the tribunal failed to consider the secured creditors’ arguments regarding certain claims. The Court also addressed jurisdictional challenges relating to the arbitration agreement’s scope.
The Court of Appeal’s decision clarified the demanding threshold required to successfully challenge an award on infra petita or ultra petita grounds under Singapore law. It emphasized the role of curial courts in upholding principles of natural justice and contractual limitations on arbitrators’ powers, while establishing clear parameters for future set-aside applications, particularly in complex, multi-party arbitrations involving infra petita and ultra petita challenges. The decision underscored the importance of affording parties a reasonable opportunity to address new points or bases for decisions and ensuring that any denial of such opportunity does not cause prejudice.
Enforcement of foreign or international awards is generally presumed wherever the award creditor seeks enforcement. However, challenges to enforcing court jurisdiction can arise when the award has been annulled at the seat of arbitration or when a sovereign asserts immunity from suit.
Article V(e) of the New York Convention allows the party against whom the award is sought to be enforced to challenge the enforcement if certain conditions are met. One of these conditions is when “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.”
The passage highlights the issue of conflicting decisions between different courts in different jurisdictions regarding the enforcement of an arbitral award. Specifically, it raises the question of whether a court approached by the party seeking enforcement has jurisdiction to enforce the award if another court at the seat of arbitration has set it aside.
In the classic approach, the decision of the court at the seat of arbitration, which annuls or sets aside the award, is given deference and considered binding. As a result, the award is deemed unenforceable in any jurisdiction. In other words, the court of primary jurisdiction’s decision deprives any other court, regardless of jurisdiction, of the authority to hear enforcement applications for the same award. This approach is widely adopted in practice, although there may be some variations in its application.
Another school of thought is the internationalist approach. Under this approach, courts where enforcement is sought do not give heightened status to the seat of arbitration as the primary jurisdiction. Instead, each court independently assesses the validity of the arbitral award. This perspective considers international awards to belong to a supranational realm, subject to international instruments such as the New York Convention. As the Convention allows courts to refuse enforcement (“may” refuse enforcement as stated in Article V), proponents of the internationalist approach view it as fair game to conduct their own analysis of the award’s validity.
In the Thai-Lao Lignite case, the claimants, who were seeking enforcement, initiated enforcement proceedings in multiple jurisdictions, including New York, London, Paris, and Singapore, were seeking to enforce a US$56 million arbitral award against Laos.
At the same time, Laos had filed an application to set-aside the award at the seat of arbitration, which was in Malaysia. However, Laos failed to file its request within the designated time frame. Meanwhile, the claimants obtained confirmation of the award in Paris and enforcement orders in New York and London.
In 2014, the award was ultimately vacated at the seat of arbitration in Malaysia. However, the US Court of Appeals for the Second Circuit, which initially confirmed the award, reversed its decision in an unprecedented move. This reversal occurred even though the annulment decision at the seat of arbitration had post-dated the enforcement orders.
In Singapore, the proceedings were stayed pending the decision of the Malaysian court, and ultimately the application for enforcement was dismissed. In the Commercial Court in London, the enforcement orders previously issued were also overturned based on the decision of the Malaysian court.
The final aspect of the case involved the French proceedings. The confirmation of the award in Paris was also overturned. However, in this instance, the Paris Court of Appeal’s decision to overturn the confirmation was not based on deference to the Malaysian court’s set-aside proceedings. Instead, the French court independently assessed the award and determined that the tribunal had exceeded its authority.
Jurisdictions differ in their application of these approaches, leading to varying outcomes in enforcement proceedings.
Over the past 15 years, there has been a significant increase in arbitrations involving states and state entities. While some of these arbitrations are conducted under the International Centre for Settlement of Investment Disputes (ICSID) Convention, which provides a self-contained enforcement mechanism, many others are conducted through ad hoc proceedings under UNCITRAL rules or other institutional proceedings.
Enforcing awards in these cases faces similar constraints as any other international award. However, there is an additional complication when dealing with sovereign parties: they may claim immunity from jurisdiction as a defence to enforcement. Unlike private parties, it can be challenging to enforce a ruling against a state or state entity in its own courts, and seizing state assets can be even more difficult. As a result, when pursuing enforcement, the award creditor often has no practical recourse but to seek enforcement in a third-party state where the state’s assets may be located.
Singapore follows a restrictive approach to state immunity, which means that foreign states are generally immune from jurisdiction. However, there are exceptions to this immunity under the Singapore State Immunity Act (SSIA). These exceptions include cases where the state has submitted to the jurisdiction of Singaporean courts, where the state has agreed to arbitrate, or where the proceedings relate to commercial transactions entered into by the state or involve contractual obligations that are to be performed wholly or partly in Singapore.
Challenges to arbitral jurisdiction, whether related to the tribunal’s authority or the enforcing court’s jurisdiction, play a significant role in the arbitration process. Understanding the grounds for challenging jurisdiction is crucial for businesses involved in arbitration proceedings. By being aware of the potential issues and recent case developments, business professionals can navigate the arbitration landscape more effectively, ensuring the enforceability and validity of arbitration agreements.
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