Is party autonomy is a fundamental concept in international commercial arbitration where public policy and mandatory rules of a particular country usually have no room to play?

Any citation taking from this article has to be cited accordingly. Failure to comply with regulations may subject to copyright.

Arbitration clauses have become prevalent in most corporate agreements or contracts for employees.

Gretchen Carlson

Introduction

International commercial arbitration has been seen as one of the most effective methods in resolving disputes.[1]The term of party autonomy is well known in the arbitration process as party freedom to choose and determine almost every aspect of the arbitral process including their choice of law to the dispute. Arbitration is contractually based, it needs parties consent, and therefore is underpinned by private law.[2]However, although it is classified as a dispute solve under private law, the practice of arbitration to some extent requires the involvement of a domestic court. This is where the argument of public policy and mandatory rules of a particular state might have involvement in the process of arbitration rely on. The statement itself is still controversial and debatable. Understanding party autonomy as a concept of international commercial arbitration is crucial in deciding whether or not arbitrators shall limit party freedom by applying public policy and mandatory rules for particular states.

Understanding party autonomy as a concept of international commercial arbitration 

The term of party autonomy in international commercial arbitration has been accepted by the international community as international law as well as recognised by almost every national jurisdictions.[3]The principle that creates flexibility in the arbitral process is party autonomy.[4]The basis of party autonomy is the choice of law in a contract.[5]This means that parties to a dispute have an authority to choose the law to govern the dispute. Theoretically, by being able to select appropriate laws to apply to the dispute, parties to the dispute could avoid being subjected to inappropriate laws at a later time.[6]What differs the arbitration process with other dispute settlement mechanism is the fact that it is a legally binding procedure that does not involve the complication element of bringing the dispute to the court. As arbitration is a private matter, party freedom in the proceeding is important to be recognised.

The principle of party autonomy is found in and governed by, several different treaties and domestic or national laws. The main international sources that govern the arbitration process are UNCITRAL[7]Model Law, New York Convention 1958, and the ICC[8]on Arbitration Rules. The UNCITRAL Model Law was created for the purpose of governing international commercial arbitration from the international perspective rather than domestically.[9]This is done so by entering the term ‘autonomy of the will’ in which each party has freedom in choosing the law to govern the dispute.[10]This is specifically stated in Article 35 (1) of the UNCITRAL Arbitration Rules[11]and reinforced in Article 5 (1) of the Model Law.[12]Another provision governing the term of party autonomy could be found in Article 17 (1) of the ICC Arbitration Rules[13]and certain national or domestic law. For instance, the Arbitration Act 1996 governing the arbitration process in the UK. Although compared to any other country jurisdiction, the UK law governing the arbitration is less flexible[14]the act shows some aspect of party autonomy, which found by the words of ‘the parties are free to agree …’[15]in most of the provisions written in the act.

Should arbitrators limit party freedom by applying public policy and mandatory rules of a particular state?

Whether or not arbitrators shall limit party freedom by applying public policy and mandatory rules of particular states remain controversial and debatable. On one hand, arbitration is a private matter and governed by an independent individual, in which resolving the dispute under private law does not require the involvement of states. On the other hand, the practice of arbitration, although it is by independent parties, the practice of arbitration takes place in a particular state jurisdiction and requires a domestic court to enforce the award. Hence, public policy might have room to play. The concept of public policy in private international law is well known in almost all system of laws throughout the world.[16]Due to the increasing popularity on the use of international commercial arbitration, the term of public policy has received a particular significant concept.[17]It is relatively challenging to describe public policy in commercial arbitration because of the role it plays in determining the arbitration clause, the procedures, as well as the award itself.[18]Nonetheless, in deciding party autonomy in the choice of law in arbitration, it has to consider the law governing the substance of the contract and arbitration agreement as well as the law governing the enforcement of arbitral awards.

  • Choice of law in the substance of the contract and arbitration agreement

As it was mentioned before, parties to the arbitration agreement are allowed to govern the dispute resolution and freedom on how to resolve the issue, this includes conducting arbitral proceedings in its own will.[19]To some extent, the characteristic of party autonomy is pictured as detached from domestic laws, in both the New York Convention and UNCITRAL Model Law.[20]When executing the arbitration contract, parties to the arbitration are allowed, and in fact expected to, choose the law applicable to the substance of the transaction.[21]In addition to that, the parties also are able to agree on the law applicable to the arbitration and arbitration agreement.[22]At this stage, there is no state involvement to the dispute, as the process only requires parties to the dispute consent. The process of arbitration is contractual in nature[23], seen from a contractual perspective, public policy and mandatory rules shall not play a part in the arbitration process. This is due to, the whole process of arbitration, from the setting up of the tribunal until the binding effect of the award is seen as a result of party agreement[24]rather than a decision made by states bodies. Hence, according to this theory, state legal system rules, such as public policy and mandatory rules within it, does not apply to the arbitration process.[25]

More importantly, arbitration depends on party support for its survival.[26]If there is a conflict in between state interest (such as public policy and mandatory rules), the principle of party autonomy shall apply first, as parties to the arbitration could withdraw their interest in resolving the dispute with arbitration and decide to process it with other dispute settlement mechanism. As it was said before, arbitration is a private dispute settlement mechanism, hence, unlike litigation with the judge acting as a state organ, arbitration is settled by a private individual.[27]It is bound to follow the party wishes and instructions, in other words, national courts or state laws, including public policy and mandatory rules, have no chance to intervene with parties decision in conducting the arbitration agreement.[28]Furthermore, by the nature of arbitration, it has a limited possibility to contribute to the public and to the development of international and domestic commercial law.[29]This is due to the fact that there is little evidence that arbitrators make reference to previous cases or to past awards.[30]Most importantly, because arbitration is a private matter, there is no educational function to it.[31]If there is a little contribution to the arbitration process to the public or state, there shall be no state matters contribution to the arbitration process. As an arbitration agreement obstruct judges to intervene in the conflicts or the case that both parties have agreed to hand over to the arbitrator[32]the court only plays a part in enforcing the agreement and has nothing to do with the substance of the contract. Therefore, at this stage, an arbitrator does not need to consider states matter (such as public policy or mandatory rules).

  • Choice of law in enforcing arbitral awards

Although from the substance of the contract and arbitration agreement perspective, public policy and mandatory rules shall not be taken into consideration, the process of arbitration is still limited by the enforcement of the arbitral awards. This is due to the fact that one of the key aspects of enforcing an arbitral award often needs assistance from the courts of the jurisdiction where the enforcement takes place. Each country has its own public policy and mandatory rules, this mostly is different from one country to another. What makes it similar is that this public policy and mandatory rules provisions are limiting party autonomy to arbitration, as failure to comply to the provisions will affect the result of the award.[33]One could argue that because of the consequences of any activity inside a particular state is subjected to the jurisdiction of the state, all activity, including arbitration, is also subject to the law of that state.[34]As every state wished to regulate any legal activity in its jurisdiction to their own will, the free will of the party to some extent may be subjected to the restrictions imposed by the law of the arbitration place, this term is called lex arbitri.[35]This often results in the national courts deciding the different outcome with what the party wishes.[36]

Another important point is that the development of the law surrounded the arbitration process has also played a part in deciding on why states want to apply a public policy to it. For instance, there has been a consideration on the development of the law surrounded arbitration process by using common law terms, by courts in the UK, mainly through the Commercial Courts in London.[37]This is due to the widespread of arbitration clauses in some sectors of economic activity.[38]If the law is going to be created based on the decision made by the court, the court has to be careful in enforcing arbitral awards to not be in line with states public policy. Moreover, some argued that it is a fallacy to believe that arbitration is not similar to a judicial proceeding in which contain the element of state sovereignty and a part of judicial public service where it takes place.[39]According to jurisdiction theory, all activity taking place in a territory of a state is subject to the jurisdiction of that particular state, including the enforcement of the awarded in which is regulated by domestic laws.[40]Hence, public policy and mandatory rules play a part in the arbitration process. Unlike the substance of the arbitration, the enforcement of the arbitration awards depends on state willingness. It is therefore up to states on to what extent they would allow for neutral arbitration to take place in their jurisdiction.[41]

It has been argued that the most crucial source of law that supports the role of public policy in international commercial arbitration is the New York Convention.[42]This was found in the New York Convention Article V, specifically, Article V (1) (a) stated that ‘recognition and enforcement of the award may be refused … (a) … is not valid under the law to which the parties have subjected it … ’.[43]This shows that the enforcement of the award could only take place if the award is not conflicted with the law of the country in which the award was made. It is also specifically stated in Article V (2) (b) of the convention, stating that ‘recognition and enforcement of an arbitral award may also be refused if … sought finds that … the recognition or enforcement of the award would be contrary to the public policy of that country’.[44]

Another restriction of party autonomy by public policy and mandatory rules could be found from Article 19 (1) of the UNCITRAL Model Law stated that ‘subject to the provisions of this law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings’[45]and Article 19 (2) stated that ‘failing such agreement, the arbitral tribunal may … conduct the arbitration in such manner as it considers appropriate’.[46]The implication of this is that party autonomy is limited by the mandatory provisions written in the UNCITRAL Model Law, to the extent that the rules of the procedure shall not be in conflict with the mandatory provisions.[47]There have been few provisions in both New York Convention and UNCITRAL Model Law, directly and indirectly, touch on national laws as well as the public policy of the particular state.[48]This has undermined the detachment of arbitration from national laws.[49]Therefore, eventually, national laws define what is subject to arbitration, both whether or not public policy and mandatory rules apply to the arbitration agreement and whether or not an award is valid.[50]

Furthermore, another limitation to party autonomy restriction could be seen from the decision made by the European Court of Justice. In the case between Ukrainian and Sweden disputes, the European Court of Justice found that ‘an award would be invalid and unenforceable for violation of public policy if it gave effect to a contract that does not comply with competition law’.[51]It clearly stated that the organisation public policy plays an important role in their willingness to enforce the arbitral award. Another concrete example could be seen from a decision made by the Russian court, in which it decides to refuse to enforce an award that was seen as going to affect the shareholder’s agreement among the Russian company.[52]Had the court decides to enforce the arbitration agreement, it would have violated Russian public policy.[53]From both of this examples, it could be seen how the principle of party autonomy in the enforcement of arbitration agreements and of arbitration awards is restricted by domestic law and states matter, in which includes public policy and mandatory rules.

  • Choice of law in international commercial arbitration from the international perspective

The view that argued public policy and mandatory rules play a part in the arbitration process arguably is a traditional view of commercial arbitration. The New York Convention was drafted in 1958 and came into force in 1959[54]which has been more than sixty years ago. It could be argued that the convention is outdated. As international affairs are moving towards a liberal world. Many argued that the arbitration process is not subject to national or domestic law, in fact, it is subject directly to the international standard.[55]If seen from an international perspective, domestic or national public policy should not intervene in the process of international commercial arbitration. This is because the jurisdiction where the court enforces the arbitral awards is only seen as a tool to enforce the awards and not participants of the arbitration.

Although it is understandable how states would apply mandatory rules in the arbitration process, it does not necessarily right because, as it discussed before, the result of the arbitration (the arbitration awards) has little influence to the country where the arbitration takes place neither or to the country of the choice of law. If any, the type of public policy that might have the right place to govern party autonomy freedom is international public policy. It is also known as transnational public policy in which portrays fundamental ethical standards.[56]Examples of this are human rights, bonos moros (this includes corruption, terrorism, and genocide), fair hearing and due process.[57]The reason for this is that international public policy often associated with international customary law, and when it comes to international customary law, any international law activity, either international public law or international private law has to comply with international customary law. This type of policy is also less controversial[58]as it does not lie on particular state policy, but a widely accepted universal moral values.

However, although it appears that international public policy is less controversial, the application of it is still, to some extent affected by national public policy. This blended statement of national and international public policy in commercial arbitration appears in relevant conventions and treaties governing the international commercial arbitration. Another example other than what it was mentioned in the New York Convention and UNCITRAL Model Law is the 1927 Geneva Convention for the Execution of Foreign Arbitral Awards.[59]In this convention, it was stated certain condition to fulfil before an arbitral award could be enforced.[60]According to Article 1 (e) of the convention, one of the requirements was that the enforcement of the awards shall not be in ‘contrary to the public policy … of the country in which it sought to be relied upon’.[61]This clearly implies the importance of public policy in the enforcement of the arbitral award. Nevertheless, the main issue relies on the fact that states merely not ready to accept international public policy to govern the arbitral process.[62]

Conclusion

In deciding on whether or not public policy and mandatory rules play a part in the process of arbitration is a difficult and complex matter. This is due to the process of arbitration, which categorised as a private matter, hence govern under private law, to some extent rely on certain state jurisdiction and domestic court. In term of choice of law in the substance of the contract and arbitration agreement, party autonomy does not require the involvement of either public policy or mandatory rules. This statement is supported by the fact that the process of arbitration is contractual in nature.[63]Party consent is what played a part in the process and not state matters. When it comes to the enforcement of the arbitral awards, party autonomy is limited by the rule of public policy and mandatory rules. Evidence of this could be found on the European Court of Justice decision in the case between Ukrainian and Sweden disputes, as well as the decision made by the Russian court. Additionally, if seen from an international perspective, domestic or national public policy and mandatory rules shall not apply to the arbitral process. The reason is because the international arbitration process is a matter of international private law. However, international arbitration still has to comply with international public policy. Nevertheless, the languages in relevant international convention and treaties are vague[64]the existence of both arguments, in either, public policy and mandatory rules play an in the process of arbitration or not, are equally competent. Eventually, ‘the arbitration agreement is a contract and must be treated as such, the arbitration proceedings remain subject to some national law.’[65]


[1]William Graham, ‘International Commercial Arbitration and International Public Policy’ (1987) 81 Proceedings of the Annual Meeting (American Society of International Law 372

[2]Robert French, ‘Arbitration and Public Policy’ (2016) 24 Asia Pacific Law Review 1

[3]Sunday Fagbemi, ‘The Doctrine of Party Autonomy in International Commercial Arbitration: Myth or Reality?’ (2015) 6 Journal of Sustainable Development Law and Policy 222

[4]ibid

[5]Fagbemi (n 3)

[6]ibid

[7]United Nations Commission on International Trade Law

[8]International Chamber of Commerce

[9]Fagbemi (n 3)

[10]ibid

[11]UNGA Res 65/22 ‘UNCITRAL Arbitration Rules as revised in 2010’ (April 2011) UN Doc A/65/465, art 35 (1) 

[12]UNGA Res 40/72 ‘UNCITRAL Model Law on International Commercial Arbitration’ (adopted 1985, amended 2006) UN Doc A/40/17 annex I, UN Doc A/61/17 annex II, art 5 (1)

[13]International Chamber of Commerce ‘Rules of Arbitration’ (entered into force 1998, amended 2010), art 17 (1)

[14]Fagbemi (n 3)

[15]Arbitration Act 1996

[16]Javier Garcia de Enterria, ‘The Role of Public Policy in International Commercial Arbitration’ (1990) 21 Law & Pol’y Int’l Bus 389

[17]ibid

[18]Enterria (n 16)

[19]Fagbemi (n 3)

[20]Giuditta Cordero-Moss, ‘Limits on Party Autonomy in International Commercial Arbitration’ (2015) 4 Penn State Journal of Law & International Affairs 186

[21]Fagbemi (n 3)

[22]ibid

[23]Andrew Barralough and Jeff Waincymer, ‘Mandatory Rules of Law in International Commercial Arbitration’ (2005) 6 Melbourne Journal of International Law 205

[24]ibid

[25]Barralough and Waincymer (n 23)

[26]ibid

[27]Okuma Kazutake, ‘Party Autonomy in International Commercial Arbitration: Consolidation of Multiparty and Classwide Arbitration’ (2003) 9 Annual Survey of International & Comparative Law 189

[28]Cordero-Moss (n 20)

[29]French (n 2)

[30]ibid

[31]French (n 2)

[32]Fagbemi (n 3)

[33]ibid

[34]Jan Paulsson, ‘Arbitration Unbound: Award Detached from the Law of Its Country of Origin’ (1981) 30 The International and Comparative Law Quarterly 358

[35]Fagbemi (n 3)

[36]ibid

[37]French (n 2)

[38]ibid

[39]Paulsson (n 34)

[40]Barralough and Waincymer (n 23)

[41]Graham (n 1)

[42]Enterria (n 16)

[43]Convention on the Recognition and Enforcement of Foreign Arbitral Awards (adopted 10 June 1958, entered into force 7 June 1959) 330 UNTS 38 (1959) art V

[44]ibid

[45]UNGA A/40/17 annex I, UNGA A/61/17 annex II, art 19 (1)

[46]UNGA A/40/17 annex I, UNGA A/61/17 annex II, art 19 (2)

[47]Fagbemi, 2015 (n 3)

[48]Cordero-Moss (n 20)

[49]ibid

[50]ibid

[51]Cordero-Moss (n 20) 191

[52]ibid

[53]ibid

[54]Convention on the Recognition and Enforcement of Foreign Arbitral Awards (adopted 10 June 1958, entered into force 7 June 1959) 330 UNTS 38 (1959)

[55]Paulsson (n 34)

[56]Barralough and Waincymer (n 23)

[57]ibid

[58]Barralough and Waincymer (n 23)

[59]Convention on the Execution of Foreign Arbitral Awards (adopted 26 September 1927, entered into force 25 July 1929) 92 League of Nations Treaty Series 301

[60]Alan Redfern, ‘International Commercial Arbitration and International Public Policy’ (1987) 81 Proceedings of the Annual Meeting (American Society of International Law 373

[61]Convention on the Execution of Foreign Arbitral Awards, art 1 (e)

[62]Gerald Aksen, ‘International Commercial Arbitration and International Public Policy’ (1987) 81 Proceedings of the Annual Meeting (American Society of International Law 375

[63]Barralough and Waincymer (n 23)

[64]Redfern (n 60)

[65]Barralough and Waincymer (n 23) 211

Featured Image and any pictures from this article is taken from Google Search.

I can imagine no society which does not embody some method of arbitration.

Herbert Read

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s