Breaking in the 'unruly horse': the status of mandatory rules of law as a public policy basis for the non-enforcement of arbitral awards.

• Author: Villiers, Luke

Abstract

International arbitration has increasingly emerged as a preferred method of dispute resolution in recent years as it offers parties to a contract the autonomy to choose the law that will govern any dispute arising from that contract. The law selected to govern a dispute arising from the contract may not, however, be the only law that the arbitrator is bound to consider when adjudicating the dispute. Questions remain as to whether an arbitrator is bound to apply the mandatory law of a party to the arbitration agreement where that party's law is not the governing law. If they are, what then is the effect of a failure by the arbitrator to apply such mandatory law on an arbitral award? This second question is the one that this article seeks to explore. In particular, it asks whether a failure to apply a State's mandatory law constitutes a public policy basis for refusing to enforce an award. Using the decision in Transfield v Pacific Hydro Ltd [2006] VSC 175 as a framework for exploring this question, this article considers the concept of 'public policy' and those circumstances in which various national legal systems have upheld a failure to apply a State's mandatory law as a basis for refusing to enforce an arbitral award. It then seeks to distil some common themes from such decisions to consider how the public policy exception may be applied in Australia by our national courts.

I Introduction

In the past three decades, arbitration has increasingly become a preferred method of dispute resolution for parties to international agreements. Many reasons are cited for this trend, such as flexibility, informality, confidentiality or efficacy. (1) The primary motivation for parties, however, is that arbitration represents the peak in party autonomy. This autonomy almost invariably includes the freedom to select the law that will govern the substance of the dispute. (2) Often, however, a tension arises between the capacity of parties to choose their substantive law and the mandatory national law that binds one or more of the parties to the transaction. (3) The tension stems from the fact that not every arbitral award will be enforceable. Notwithstanding that the purpose of near internationally adopted arbitration instruments, such as the convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, (4) is to ensure the enforceability of arbitral awards, (5) such conventions usually provide a number of grounds for national courts to refuse enforcement. (6) One common basis for refusing enforcement is that the award is contrary to 'public policy'. (7) Although well recognised as an exception to enforcement, public policy remains, at least to some extent, a nebulous concept. (8) In particular, it is still uncertain whether a failure by an arbitrator to apply a State's mandatory law constitutes a public policy basis for non-enforcement. The purpose of this article is to explore this question and examine the status of mandatory law in the context of enforcing arbitral awards. In order to provide framework within which to examine mandatory law and policy, this article next examines the decision of the Victorian Supreme Court in Transfield Pacific Hydro Ltd. (9) Having, analysed the relevance of mandatory law to the conclusion of the Court in Transfield, this article then defines the concepts of public policy and mandatory law. Part IV assesses the relationship between mandatory law and public policy and then considers whether, in light of the international jurisprudence on the scope of the public policy exception, a failure to apply mandatory law constitutes a basis for non-enforcementt. Finally, in Part VI, some comment will be made on the likely approach of Australian courts to public policy.

II Transfield v Pacific Hydro Ltd [2006] VSC 175

A The facts

The dispute in Transfield arose out of We construction of the Bakun Hydro Electricity Power Station in the Philippines. Luzon Hydro Corporation ('Luzon') was a Philippines incorporated company responsible for the construction and operation of the power station. Half of Luzon's shares were owned by Pacific Hydro Ltd, an Australian company. The construction of the plant was carried out by a wholly owned subsidiary of an Australian company, Transfield Holdings Ply Ltd, which acted as guarantor for the subsidiary.

The contract between the Australian subsidiary, Transfield Philippines Inc ('TPI'), and Luzon was executed in 1997. Included in the contract was a choice of law provision that selected Philippines law as the proper law of the contract. The clause further provided that all disputes were to be settled by arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, with the seat to be situated in Singapore. The hearings were, however, conducted in Melbourne.

Several disputes arose from the construction of the power station. In 2000, as a result of Luzon threatening to cash A$18 million in project securities, TPI initiated arbitration. Included in TPI's Request of Arbitration, were claims for breaches of the Trade Practices Ad 1974 (Cth) ('TPA') (10) 'for negligent misrepresentation and for equivalent breaches of Philippines law.' (11) The Tribunal, however, declined to entertain TPT's claims under the TPA. They concluded that the claims were governed by Philippines law either as the direct law of the contract or, by applying choice of law rules, as the law most closely connected with the claim. (12)

TPI subsequently commenced proceedings in the Victorian Supreme Court seeking damages under the TPA. (13) Luzon applied to have a stay issued under article 7(2) of the International Arbitration Act 1974 (Cth) ('IAA').

B The decision

The decision of Hollingworth J was delivered on 4 December 2006. Having found against TPI for defects in service out of the jurisdiction, her Honour went on to consider whether to stay the proceedings. It was accepted by the parties that the TPA claim could be arbitrated. (14) As to whether the TPA claim should have been considered, her Honour concluded that:

it would not be appropriate for an Australian court to adjudicate claims for misrepresentation under Australian statutes once the arbitral tribunal had determined them ... To do so would ... usurp the jurisdiction of the tribunal and deny the intention of the parties. (15) C The significance of Transfield

The reasoning in Trasfield may have significant consequences for the future of the public policy exception in Australia. Although the exception was not raised before, or considered by, the Court, implicit in Hollingworth J's reasoning was a preparedness to respect the sanctity of the arbitral process. Notwithstanding that the Tribunal failed to apply arguably mandatory Australian law, the Court was reluctant to review the content of the award. Accordingly, while Luzon was not seeking to enforce the award in Australia, it is a logical extension of her Honour's reasoning that she would have enforced the award. In light of these concerns, it is relevant to ask, was Transfield correctly decided? This raises further questions of whether the application of Philippines law ousted the TPA; (16) whether this ousting was permissible; (17) and if this contracting out was impermissible, does the failure to apply the TPA constitute a public policy basis for non-enforcement? It is these questions which this article seeks to answer.

III Definitions

The extent to which an arbitrator must have regard to the mandatory rules of law governing the parties relationship, the mandatory law of the forum, supranational mandatory rules, and the mandatory rules at the potential place of enforcement are some of the most difficult issues in international arbitration. (18) Some of the difficulties associated with these questions arise from the competing theoretical approaches to arbitration. Among those theories most commonly referred to in arbitration literature are the contractualist, (19) jurisdictional (20) and hybrid theories. (21) To resolve these complexities, three broad approaches could be taken by arbitrators when determining whether to apply mandatory law: apply all mandatory rules, apply no mandatory rules or apply mandatory rules at the arbitrator's discretion or under an objective formula. (22)

The question of whether an arbitrator must apply mandatory rules of law, and which mandatory rules they should apply, will impact upon whether any failure to apply mandatory law renders an award unenforceable on public policy grounds. It is accepted that a mandatory rule will apply where it forms part of the lex contractus, is not expressly excluded and one party has invoked it before the arbitrators. (23) Absent these conditions, however, the task of the identifying the proper approach to applying mandatory law is beyond the scope of this article. This article proceeds on the assumption that an obligation to apply mandatory law exists and the arbitrator has failed to comply with this obligation. It is then asked whether a court could refuse to enforce the award on public policy grounds.

A What is mandatory law?

For Mayer, a mandatory rule is an imperative provision of law that must be applied to an international relationship irrespective of the law that governs the relationship. (24) Mandatory rules of law tend to share most of the characteristics of 'public law'; they are typically expressed in statutory form, they are regulatory, rather than elective, they frequently vary from nation to nation and they are often enforced directly by an agency of government. (25) Mandatory rules may also he procedural. However, the obligation to apply the mandatory procedural laws at place of enforcement is uncontentious.

There are numerous examples of substantive mandatory provisions both domestically and internationally. Among those mandatory rules most frequently encountered are competition laws, currency controls, environmental protection laws...