The recognition and enforcement of annulled awards under the New York Convention of 1958

Written on 19 Jul 2018

One of the current main concerns of the arbitration community is the enforcement phase of the award once the proceedings have been completed, especially when its enforcement is sought in a territory other than the place where the decision was rendered. In this regard, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, signed in New York on 6 July 1958, has made it possible, to a greater or lesser extent, for this objective to be achieved in territories other than the territory where the award was issued, making them binding on the parties and allowing their enforcement.

Article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (hereinafter, the “Convention“) establishes the grounds on which recognition and enforcement of an arbitral award may be refused: “Recognition and enforcement of the award may only be refused at the request of the party against whom it is invoked, only if that party furnishes poof to the competent authority where the recognition and enforcement is sought”. The following is included among those grounds, in paragraph 1(e): “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, the award was made”.

The first thing that draws attention in the wording given to article V is that a refusal of recognition is a right – not an obligation – as it says “may”; that the state where the recognition and enforcement is sought has the authority to decide whether or not to reject the request. That is to say, the existence of a ground for refusal is necessary but not sufficient grounds for refusing to recognize and enforce the suspended or annulled award. Therefore, although, a priori, we might think that awards that are suspended or annulled under the lex arbitri of the place of arbitration should not be recognized or enforced in another state, the fact is that the use of the optional form shows us that even in such cases the judge is not obliged to refuse recognition and enforcement.

In this regard, the most restrictive doctrine such as that upheld by Professor Albert Jan van den Berg, argues that the annulled award is legally dead and ex-nihilo nil fit (nothing comes from nothing). In his view, the best placed bodies to decide on the regularity of the arbitration are the courts of the place of arbitration. For this reason, courts in other countries should give preference to the decision to annul the award of the domestic courts and refrain from recognizing and enforcing it.

Article V is closely related to article VII of the Convention, pursuant to which the provisions of the text shall not deprive “any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon”. This provision invokes the so-called “favourability principle”, which grants the states that are parties to the Convention with the possibility of restricting or eliminating some of the grounds for refusing recognition provided in article V.

From the joint interpretation of both articles, two doctrinal positions have emerged that defend the possibility of enforcing an award that has been annulled. On one hand, the position based on art. V.1 (e) entitled the “International Standard Annulment”, and the so-called position of “Local Standard Annulment”, which is based on article VII.

After nearly 60 years of the Convention being in force, the debate is still open today. The refusal to recognise and enforce annulled awards should not, a priori, raise any doubts. Common sense leads us to try to eliminate any legal uncertainty in the enforcement of awards. If an award has been suspended or annulled, the parties should be able to rely on the fact that it cannot be enforced in a third state. In addition, another risk would be avoided: that the affected party would exercise forum shopping in several jurisdictions until he or she obtains recognition and enforcement from one of them.

However, this restrictive interpretation may give rise to truly unfair situations, such as given in the jurisdiction of the United States, in which recognition is directly refused if totally formal requirements are met: that it is annulled by the competent judge through the due process, even if the ground for annulment blatantly infringes public order.

The unification of criteria would help to reach a consensus on global standards in which international arbitration would provide a greater legal certainty than the position adopted in the current situation. However, it is difficult to contemplate that states will renounce internal control and disregard their fundamental legal principles and respect for public order.

In my opinion, consistent with some legal doctrine, in that the one-way dual control between the declaration of annulment and the application for enforcement should be disposed of. The true control over the award must be exercised by the judge of the country where it will be enforced as the authority that must defend the respect for its laws and public order in its territory, if an eventual enforcement goes against them. The issue, therefore, passes from changing the territorial mentality of the jurisdiction of the place where the award is made, to giving way to an international vision in which the review of the annulment of the award is carried out in the place where it is actually going to take effect, i.e. where it is going to be enforced. Undoubtedly, in the short term it becomes rather utopian for states to even consider such a waiver and relinquish control over the nullity action to foreign judicial authorities. In the meantime, I am afraid that we will witness many varying situations of recognition and enforcement but perhaps this is the tendency pursued by the Convention itself.