The Public Policy Ground to Refuse the Enforcement of an Arbitral Award Under the International Arbitration Act (Cap 143A) – Two Recent Decisions

The attempt to avoid the enforcement of an arbitration award on the public policy ground in s 31(4)(b) of the International Arbitration Award (Cap 143A) was first considered by the High Court in the case of Re An Arbitration between Hainan Import & Export Corp v Donald & McCarthy Pte Ltd. In two recent decisions, the High Court revisited this issue. This article examines the two recent decisions and its ramifications.

Introduction

The enforcement of an arbitral award under the International Arbitration Act (Cap 143A) (‘IAA’) is unremarkable in that it adheres to the framework provided for under the UNCITRAL Model Law regime which by s 3 of the IAA, is part of the law of Singapore.

The grounds for the refusal of enforcement of an arbitral award under the IAA are clearly prescribed under s 31. The provision expressly states that enforcement of an arbitral award may only be refused on the grounds set out in ss 31(2) and 31(4) ‘… but not otherwise.’ – see s 31(1) of the IAA.

The grounds set out in s 31(2) are, generally speaking, relatively uncontroversial. The courts have always had to deal with issues of the type raised in the sub-section as largely speaking, the provisions there deal with basic concepts and notions of what is generally and universally accepted as notions of justice.

This brief article explores the more controversial ground for refusal of the enforcement of an arbitral award, namely, on the grounds of public policy – see s 31(4) (b) of the IAA and art 34 of the Model Law – with reference to two recent decisions of the Singapore High Court.

Public Policy

The refusal to enforce an arbitral award – on the ground that it offends the public policy of an enforcing court under the UNCITRAL Model Law regime – arises because of art 34(2)(b)(ii) of the Model Law. In Singapore, this provision is largely mirrored by s 31(4)(b) of the IAA, whose language is practically identical to that of art 34(1)(b) of the Model Law which adopts the phrase ‘… in conflict with the public policy of this state.’

A Narrow or Broad View of the Public Policy Exception

Here we see the tension between a state’s desire to participate in the wider international community of international arbitration and its own issues as guardian of law and justice within its own jurisdiction.

The real issue is how a state would or should view the public policy ground within the meaning of art 34 of the Model Law and in the case of Singapore, in the context of s 31 of the IAA.

As rightly pointed out by the editors of the chapter on Arbitration in the Halsbury’s Laws of Singapore, ‘The scope of what lies within the domain of public policy is not defined. It should be construed narrowly so that enforcement would be refused only if the award violates the most basic notions of morality 
and justice.’¹

The Position in Singapore Under the International Arbitration Act (Cap 143A)

In 2003, this writer examined the issue of public policy and international arbitrations generally.² In so doing, this writer referred to the one case (at that time) decided in Singapore touching on the issue of public policy in the context of an application to the High Court to refuse enforcement of an arbitral award under the IAA.

The case referred to is of course Re An Arbitration between Hainan Import & Export Corp v Donald & McCarthy Pte Ltd.³ In that case, Justice Judith Prakash was invited to refuse to enforce an arbitral award under s 31(4)(b)(ii) of the IAA on the ground that the arbitration did not deal with the real issue of the dispute between the parties. To enforce the award, it was argued, would be an injustice to the defendants and [presumably] contrary to the public policy of Singapore within the meaning of s 31(4)(b) of the IAA. In that case, the public policy ground was not fully discussed simply because on any reading, the argument advanced by the defendants in that case was spurious. Clearly, public policy was not a relevant ground. Nevertheless, it would be useful to recall what Justice Prakash said in that case. In rejecting the argument put forward by the defendants inviting her to refuse to enforce the arbitral award, Her Honour had this to say, ‘In my view, public policy did not require that this court refuse to enforce the award obtained by the plaintiffs. There was no allegation of illegality or fraud and enforcement would therefore not be injurious to the public good. As the plaintiffs submitted, the principle of comity of nations requires that the award of foreign arbitration tribunals be given due deference and be enforced unless exceptional circumstances exist’.⁴

Two recent decisions

At the time of my earlier article on public policy (see above), I lamented that there has been only one case addressing the issue of public policy under the setting aside provisions of the IAA. Happily, since then, there have been two more decisions of the Singapore High Court touching upon the issue of public policy. Interestingly, the two recent cases are also decisions of the Honourable Justice Judith Prakash.

P T Asuransi Jasa Indonesia (Persero) v Dexia Bank SA⁵

The facts of this case are conveniently set out in the headnote to the reported decision:

The applicant, a state-owned entity of the Republic of Indonesia, guaranteed notes issued by, inter alia, Rekasaran BI Ltd (‘the Issuer’). The respondent, a bank, was one of the holders of notes issued by the Issuer (‘BI Notes’).

The respondent, together with few other holders of BI Notes, opposed the applicant’s steps to restructure its obligations to all holders of notes issued by, inter alia, the Issuer. The restructuring had been approved by a majority of the holders of notes at a meeting (‘the February 2000 meeting’). To enforce recovery under the BI Notes, the respondent commenced arbitration proceedings (‘the Previous Arbitration’) against the Issuer and the applicant in the Singapore International Arbitration Centre (‘SIAC’). The arbitral tribunal (‘the Previous Tribunal’) issued an award granting the respondent’s claim (‘the Previous Award’).

In the meantime, the resolutions passed at the February 2000 meeting were ratified at another meeting (‘the June 2001 meeting’). In August 2001, the Previous Tribunal was sent a note of the June 2001 meeting.

On 10 January 2002, the applicant issued a notice of arbitration against, inter alia, the respondent. On the respondent’s application, the arbitral tribunal (‘the Tribunal’) ordered that certain preliminary jurisdictional issues be tried. The Tribunal issued an award (‘the Award’) determining the preliminary issues, after considering written submissions, without calling for an oral hearing.

The applicant sought to set aside the Award on the grounds that: (a) the Award was in conflict with the public policy of Singapore; (b) the Award dealt with disputes or issues not contemplated by, or not falling within, the terms of the submission to arbitration; (c) a breach of natural justice had occurred in connection with the making of the Award by which the rights of the applicant had been prejudiced; and (d) the applicant was not given a full opportunity to present its case or was otherwise unable to present its case.

The applicant before the High Court sought, inter alia, to set aside the Award on the ground that the arbitral award was in conflict with the public policy of Singapore within the meaning of art 34(2)(b)(ii) of the UNCITRAL Model Law which is in substance identical to s 31(4)(b) of the IAA.

Justice Judith Prakash who heard the application rejected the application under the public policy ground. She concluded that:

Having considered the arguments, I find myself in agreement with the contention that the attack on the Award as being contrary to the Previous Award is an attack that has its foundation in a dissatisfaction with the way in which the legal principles encapsulated in s 19B of the Act seem to have been ignored, rather than an attack founded on the ground of public policy. Whilst I do not doubt that a matter of public policy may be expressed in a legal provision, ie, the public policy may be given legislative effect by being enacted as a law, this does not mean that every law has to be regarded as public policy so that if it can be shown that any finding in an arbitration award constitutes a breach of such law, that arbitration award would have to be set aside on the ground of public policy. If I were to make such a holding, it would prove such a fertile basis for attacking arbitration awards as to completely negate the general rule, at least in so far as international arbitrations covered by the Act are concerned, that awards cannot be set aside by reason of mistakes of law made by the tribunal. Further, in the context of this case, whilst it is obviously not desirable to have conflicting arbitral decisions existing on the very same dispute between the same parties, I do not see any public policy implication in such a state of affairs existing between private parties, nor has the applicant identified any such implication. The applicant was content to state that because the Award appeared to disregard s 19B of the Act, it was against public policy without substantiating any public policy that the section had been enacted to implement.⁶

Justice Prakash adopted a narrow interpretation of the public policy formulation and dismissed the attempt to use the public policy exception as a cover for a party’s dissatisfaction with the outcome of its arbitration. It is submitted that the judge got it right on this issue.

The Applicant’s attempt in this case to equate what it said was a breach of s 19A of the IAA as being contrary to public policy is flawed in two ways. Firstly, it is not consonant with the manner in which the public policy exception has previously been interpreted by the High Court in Re An Arbitration.⁷ Secondly, the argument is entirely out of step with the notions of public policy widely accepted by the international arbitration community.

It has, for some time now, been accepted by the international arbitration community that the public policy exception in the Model Law is intended to comprehend only, those matters which would offend the most basic notions of morality and justice and that the public policy defence should be construed narrowly. Thus, in the context of the New York Convention 1958, it has been said that, ‘… the convention’s public policy defence should be construed narrowly. Enforcement of foreign arbitral awards may be denied on this basis only where enforcement would violate the forum state’s most basic motions of morality and justice’.⁸

Although Justice Prakash in the PT Asuransi case (supra) did not refer specifically to her earlier decision of Re An Arbitration, she clearly had her own formulation of the public policy exception in mind. Accordingly, Justice Prakash made it clear in the case (see above) that while the public policy of a state may be given effect to in legislation, it does not follow that ‘… every law has to be regarded as public policy so that if it can be shown that any finding in an arbitration award constitutes a breach of such law, that arbitration award would have to be set aside on the ground of public policy’.⁹

It is respectfully submitted, that Justice Prakash’s approach as set out above is logical and accords with the understanding of the international arbitration community that the public policy exception as encapsulated in s 31(4)(b) of the IAA which is in turn mirrored in substance by art 34(2)(b)(ii) of the Model Law, should be interpreted narrowly.

It should be pointed out that the case itself is on appeal to the Court of Appeal. The case, of course, deals with more than just the public policy ground. The other issues that arise in that case are beyond the scope of this article. On the public policy exception, however, it is hoped that the Court of Appeal will endorse the formulation of Justice Prakash thereby providing a clear and authoritative view on the public policy exception.

Aloe Vera of America, Inc v Asianic Food (S) Pte Ltd¹⁰

This is yet another case where the unsuccessful party to an arbitration, in this case one of the defendants, attempted to set aside the leave which the plaintiffs had obtained in the High Court to enforce an arbitration award made in a foreign jurisdiction.

Again, the essential facts of the case are conveniently set out in the headnote as follows:

The plaintiff had entered into an agreement with the first defendant (“the Agreement”). The second defendant had signed the Agreement on the first defendant’s behalf as its manager, but was not expressly stated to be a contracting party to the Agreement. The Agreement provided for disputes between the parties to be mediated, and if mediation was unsuccessful, to be arbitrated. The Agreement was also expressed to be governed by the law of the state of Arizona in the US.

Following the termination of the Agreement, the plaintiff commenced arbitration proceedings and obtained a Final Arbitration Award against both the first and second defendants (‘the Award’). The plaintiff successfully took out an originating summons, on an ex parte basis, to obtain leave to enforce the Award against the defendants in Singapore. The second defendant applied to set aside the order granting leave but this was dismissed by an assistant registrar. The second defendant then appealed against the assistant registrar’s decision.

The second defendant alleged that leave should have been refused as the plaintiff had not crossed the preliminary hurdle of establishing that there was an arbitration agreement between the parties. Alternatively, enforcement should have been refused because the second defendant was able to satisfy one or more of the grounds set out in s 31(2) and/or s 31(4) of the International Arbitration Act (Cap 143A, 2002 Rev Ed) (“the Act”).

One of the grounds relied upon by the appellant (this being an appeal from the assistant registrar who granted leave to enforce the arbitration award) was that the arbitration award was made against Mr Chiew, the second defendant as a party to the arbitration, even though Mr Chiew was never a party to the arbitration agreement. The arbitrator, in his award had apparently relied on an expansive interpretation of the arbitration clause and concluded that Mr Chiew, though not a party to the arbitration agreement, was nevertheless a proper party to the arbitration. The arbitrator appeared also to have treated Mr Chiew as the alter ego of Asianic which was a party to the arbitration agreement and on whose behalf Mr Chiew had executed the contract between the parties in his capacity as manager of Asianic.

Before the learned judge, Justice Prakash, Mr Chiew’s counsel argued that for the arbitrator to treat Mr Chiew as the alter ego of the company was wrong because the arbitrator appeared to have pierced the corporate veil ‘… without any supporting evidence’.¹¹ That, counsel further argued, was contrary to the public policy of Singapore within the meaning of s 31(4)(b) of the IAA and the court ought to refuse the enforcement of the arbitration award. It was also argued that ‘… the enforcement of foreign arbitral awards that seek to bind non-signatory Singapore citizens to such awards would be contrary to Singapore’s public policy’.¹²

Justice Prakash rejected the above arguments. In rejecting the arguments based on the public policy exception, the learned judge returned to her own formulation of ‘public policy’ which was expressed in the Re An Arbitration case. In the Aloe Vera case, she expanded on it by referring to the decision of Litton PJ in the Hebei case:¹³

On the other hand, there is the principle of international comity enshrined in the convention that strongly inclines the courts to give effect to foreign arbitration awards. As Litton PJ observed in the decision of the Hong Kong Court of Final Appeal in the Hebei Import & Export Corp v Polytek Engineering Co Ltd [1999] 2 HKC 205 (“the Hebei case”), woven into the concept of public policy as it applies to the enforcement of foreign arbitration awards “is the principle that courts should recognise the validity of decisions of foreign arbitral tribunals as a matter of comity, and give effect to them, unless to do so would violate the most basic notions of morality and justice”.¹⁴

It is submitted that Justice Prakash is correct in her formulation of the public policy ground expressed in both s 31(4)(b) of the IAA and art 31(2)(b)(ii) of the Model Law. The premises upon which the learned judge based her expression and application of the public policy formulation is founded upon fundamental features of international arbitrations and on the principle of international comity which is the bedrock of international arbitrations.

No doubt, as counsel for Mr Chiew had quite reasonably argued, the learned judge’s interpretation ignored the fact that the arbitrator in Arizona had wrongly ‘pierced the corporate veil’. The arbitrator could arguably be said to be wrong in law, at any rate, under Singapore law. The arbitration, it is to be noted, was conducted under the law of the State of Arizona, USA.

Yet, it is respectfully submitted that in the context of the recognition and enforcement of foreign arbitral awards within the framework of the Model Law regime, the enforcing court is not permitted to go behind the award and to examine the merits; in this case, as to whether or not the arbitrator was right to make Mr Chiew a party to the award and therefore susceptible to its enforcement.

More crucially, the concept of finality under the Model Law regime is clearly emphasised in art 34 and in the case of Singapore, under s 31 of the IAA. The court is only permitted to refuse enforcement of the arbitral award on the grounds set out in art 34 of the Model Law and s 31 of the IAA ‘… but not otherwise’. It is accepted that even where the arbitrator is wrong on the law, a court cannot intervene unless the applicant satisfies one of the grounds in s 31 of the IAA or art 34 of the Model Law.¹⁵ In the case itself, Her Honour observed that effect must be given to ‘… the principle of international comity enshrined in the [New York] Convention that strongly inclines the courts to give effect to foreign arbitration awards’ unless the award ‘… violates the most basic notions of morality and justice’.¹⁶

Indeed the court must of necessity take, as Justice Prakash alluded to, ‘a mechanistic’ approach. The adoption of the mechanistic approach, it is submitted, is the correct one for the simple reason that if an enforcing court goes behind the award itself and descends into the merits, it would negate the finality desired in international arbitrations. To permit a court to take a less mechanistic approach is to open the door to a multitude of challenges to the recognition and enforcement of arbitral awards beyond those intended to be permitted under the Model Law regime. That would turn the clock back on the progress of international arbitration as a reliable means of resolving international disputes.

Conclusion

It is perhaps more important that so far as the public policy exception is concerned, there are now two recent cases of the High Court which have adopted the narrow interpretation of this exception – an interpretation which is favoured by international arbitration practitioners and a view which is also mirrored by the editors of Halsbury’s Laws of Singapore.¹⁷ Here, a cautionary note must be added since in at least one of the cases, namely P T Asuransi, the issue is before the Court of Appeal. (The second defendant in Aloe Vera appealed to the Court of Appeal but did not proceed with the appeal.) There is always a chance that the appellate court would take a different view. However, it is hoped that it will not, for that would signal a retreat from Singapore’s own avowed and continuing intentions to embrace international arbitration. Such a retreat would no doubt be damaging to Singapore’s standing as an international hub for dispute resolution.

There is no doubt, however, that the issue of public policy in the recognition and enforcement of international arbitral awards will be revisited from time to time. As has been observed, ‘… the fact that different states have different concepts of their own public policy means that there is a risk that one state may set aside an award that other states would regard as valid’.¹⁸ For Singapore, it is submitted that it is far more important that our courts incline towards enforcement of international arbitral awards.

Leslie Chew, SC

Gurbani & Co

E-mail: lesliechew@gurbaniandco.com

Notes

1    Halsbury’s Laws of Singapore Vol 2 (2003 Reissue) at para 20.149.

2    Leslie Chew, ‘Public Policy – The Ride of Unruly Steed on the Highway of International Arbitration’, Singapore Law Gazette, December 2003.

3    [1996] 1 SLR 34.

4    Ibid at p 461.

5    [2006] 1 SLR 197.

6    Ibid at [29]

7    See 4 above.

8    Parsons & Whittemore Overseas Co Inc v Societe Generale de L’industrie du Papier (RAKTA) 508F 2d 969 at 974 (1974), see also Deutsche Schachtau-und Tiebohr GMBH v Ras Al Kaimah National Oil Co [1987] 2 All ER 269.

9    See 6 above.

10  [2006] 3 SLR 174.

11  Ibid at [74].

12  See 11 above.

13  Hebei Import & Export Corp v Polytek Engineering Co Ltd [1999] 2 HKC 205 at 211, per Litton PJ.

14  See 10 at [40].

15  See 5 at [29].

16  See 13 above.

17  See 1.

18  Redfern and Hunter et al, The Law and Practice of International Commercial Arbitration (4th edn, Thomson Sweet & Maxwell) at p 420.