The Public Policy Exception to the Enforcement of Arbitral Awards

Introduction

Arbitration is the hallmark of international commerce. It is at the core of alternative dispute resolutions (“ADR”). The well-known expression, “I’ll see you in court,” is increasingly fading for any kind of dispute as arbitration becomes the prevalent mode of recourse in international commerce.

The best way to define arbitration is by explaining what it is not. Arbitration is neither mediation, nor negotiation, nor conciliation, nor settlement. What makes arbitration distinctive is that it is a dispute resolution mechanism featuring a final and binding adjudication.¹ Although it is private or quasi-private, and less formal than a court trial, it is nevertheless adjudication. Therefore, arbitration, unlike settlement, does not attempt to resolve the dispute through a voluntary agreement. Once the parties agree to arbitrate, they surrender their right to go to court to resolve their disputes, and the agreement becomes the law between the parties.² This relinquishment gives exclusive jurisdiction and autonomy to the arbitrators to decide upon the dispute.³

Arbitration is not necessarily to be favored over litigation, except in cases of dispute between merchants engaged in cross-border trade.⁴ Whether arbitration ←21 | 22→is the best ADR depends on the specific legal issue at hand. That is to say, the view that arbitration is a better option than litigation depends on a subjective perception. For instance, the strengths and weaknesses of international commercial arbitration would most probably differ from those of adhesive arbitration, e.g., arbitration agreements with employees or consumers.5 Hence, many of the elements in the following discussion could appear both as advantages and disadvantages.

  i. Freedom of contract: The parties can tailor the arbitral proceeding by means of their contracts as to their wishes. This is especially critical in international commercial arbitration because of the shortage in applicable trans-border legislation.⁶ The parties may decide between ad hoc or administered arbitration, on how arbitrators will be selected, where the arbitration will be held, the language of arbitration and more besides. It is worth noting that less is perhaps more when exercising the freedom of contract. That is so since “over-drafting” opens the arbitration to interpretations, which—besides other drawbacks—may cause delay and increase the costs of proceedings.⁷

 ii. Expense: It is often said that arbitration is less costly than litigation.⁸ Yet, the administrative charges and the expenses associated with recruiting arbitrators are typically higher than court filing fees.⁹ Hence, there is no ←22 | 23→one-size-fits-all approach.10 More cost-effective arbitration can be achieved through a well-written arbitration clause and efficient arbitral practices during proceedings.

iii. Privacy and Confidentiality: Parties who do not want to “air their dirty linen in public” value the privacy and confidentiality that arbitration offers. The public is not entitled to attend the hearing and has no access to the documents filed in the proceedings.¹¹ Transcripts are also not part of the public record, and arbitration awards generally remain unpublished.¹² While arbitration offers these benefits to parties seeking them, privacy can make referring to past awards challenging when attempting to persuade the tribunal in the dispute or in conducting effective scholarly research.

iv. Expertise: “Shopping around” to find the most competent judge to hear a case is not possible in litigation. In arbitration, however, parties are free to appoint an arbitrator with extensive experience in a relevant industry or sector or substantive legal knowledge about the subject matter because of freedom of contract.¹³

 v. Neutrality: The arbitrator is considered “neutral” when his or her nationality differs from that of either of the parties.14 Especially in the context of cross-border disputes, arbitration can, therefore, offer a straightforward way to avoid any perception of bias that might arise in the proceedings.

vi. Enforcement: Without enforceability, an award is merely paper. Arbitral awards are much easier to enforce in foreign jurisdictions than judgments from foreign courts due to the Convention on the Recognition and Enforcement of Arbitral Awards (“the New York Convention”),¹⁵ which has been ratified by 169 countries to date.¹⁶ Arbitration ensures that the award will be enforced, provided that the losing parties’ assets are situated in the court’s jurisdiction.¹⁷

vii. Finality: The principle of finality aims to prevent courts from engaging in merit review and parties from appealing on the merits.¹⁸ In a way, arbitration is a compromise, in so far as the parties forsake their rights to have the arbitration award reviewed in the interests of finality and avoiding delays.¹⁹ Considering the concerns of parties who wish to appeal the award, some arbitration administrations offer an optional appellate tribunal.²⁰

The case of the Gulf of Mexico oil spill provides an excellent example of how such a perspective would operate in practice. In 2010, the disaster—recognized as the worst oil spill in U.S. history—saw 11 workers killed and severe environmental damage inflicted on the environment.21 British Petroleum (BP), headquartered in England, had leased an oil-drilling rig, Deepwater Horizon.²² The spill was the result of faulty cement in the well,²³ prompting a flood of litigation against BP, both civil and criminal, when the rig failed, and oil gushed into the environment.²⁴ Tragic as this incident was, the question of greater moment for ←25 | 26→the discussion here is why the aggravated parties sought to have an English company subjected to U.S. jurisdiction and U.S. legal standards.25 The advantages of the adversarial system in the United States, the chance for the award of punitive damages, and jury trial meant, in all likelihood, considerably more damages recovered compared to an ordinary lawsuit in England. In this example, a global lawyer is one who considers the possible jurisdictions—namely, the United States and the United Kingdom—and chooses the best one for his or her plaintiff.

Comparative law is dissimilar to contracts or torts that are established upon cases, acts, treaties and other primary sources of law. Comparative law is, instead, an approach to correlate different legal systems.²⁶ It concerns itself not with substantive law per se but in how legal principles differ comparatively across systems. It is a two-pronged notion. On the micro-level, a global lawyer practices comparative law to find solutions to material client problems. On the macro-level, comparative law aims to enrich the understanding of the law and to find optimum ways for different laws in the same field—in our case, international commercial arbitration—to be integrated and to coexist. ²⁷ The purpose of this book is to address both objectives of comparative law.

Here the legal context in which a comparison is sought is the public policy exception in international arbitration. The relevant countries are the United States and Turkey. The United States has a preeminent position in international commerce, and this affects the position of U.S. courts in worldwide arbitration.²⁸ As a result, any policy followed by U.S. courts—good or bad—will most probably flow through to other countries’ jurisprudence. Turkey, on the other hand, is a developing country, and international arbitration is a relatively fledgling practice. As the book discusses later, the public policy concept is central to the research at hand because it has long been employed as a tool to achieve particular goals in Turkey.²⁹

Each profession has its tools—for mathematicians, it is numbers; for architects, it could be a drafting table, compass, scale, and the like. The primary ←26 | 27→tool that legal professionals have at their disposal is words and their absolute meaning in a particular legal context. The precise definition of terms is therefore of paramount importance as this will have a determinative bearing on the specific meaning, notion, and legal consequences of these words.

There are several concepts in law, the application of which may differ from time to time and from one jurisdiction to another. Estoppel doctrine is a case in point. Estoppel is prominent and of long standing in common law countries. In civil law countries, this doctrine exists under a different name; namely, the doctrine of good faith or culpa in contrahendo.30 Both principles, however, function similarly³¹ and have emerged as bedrock approaches to establishing significant protections over time. Nonetheless, the reflexive reach for this solution may discourage legal professionals from considering other rationales when an issue occurs. To that extent, the doctrine of good faith has become something of a skeleton key that opens every door, at least in civil law jurisdictions.³² And it is why this doctrine has been criticized for being vague and arduous to define in legal terminology.³³

As good faith is to contract law, so public policy is to arbitration. This may not be so obvious on first reading, however. Arbitration is mostly related to commercial activities between private parties, so much so that public interests in arbitration are supposed to be a matter of minor discussion. Contrary to expectations, however, the concept of public policy is crucial. So much so, that it has become a subject of much recent research, including this book.

Joining the dots between public policy and arbitration asks us to assume a historical perspective. In the eighteenth century, with the appearance of modern sovereign states, a uniform judicial system was considered to be a fundamental ←27 | 28→dimension of autonomous statehood. Hence, ADRs, as opposed to litigation, were seen as a violation of sovereignty.34 Back then, public policy was employed as an argument against arbitration, not merely as an exception in certain cases, but in principle. Such a public policy stance was referred to readily by judges, primarily as a justification to vacate arbitral awards. In this context, public policy represents a mindset rather than an exception, and this is the first facet of our “public policy” analysis.

The progression that arbitration has made since this time can be seen as the outcome of an evolving historical negotiation. In this negotiation, arbitration and sovereign states have been the parties, and “public policy” has been the matter subject to the negotiation. The requirements of global trade have given arbitration leverage. The twentieth century saw the need for arbitration to reach its climax. Today, with the leverage arbitration has, sovereign states have accepted arbitration as an ADR, all the while overseeing and supporting it within their sovereignty. In this context, the emphasis has flipped, and public policy has evolved to become an exception to arbitration, rather than a being a rule/mindset against arbitration as a whole. For example, Art. V(2)(b) of the New York Convention recognizes a public policy exception as a ground for refusing the recognition or enforcement of a foreign arbitral award. This represents the second and subsequent facet of “public policy” analysis in this book.

Most people tend to assume a linear progression of human evolution, one species following another in historical time. However, this is not the case. As Yuval Noah Harari notes in his book, several human species have coexisted at various times in history.³⁵ Yet, only Homo sapiens remain today.³⁶ Like human species, the concept of public policy has not evolved in a linear fashion—it has borrowed some parameters and tests and dropped others at various times, depending on the period or the jurisdiction in which it has been applied. Unlike Homo sapiens, however, many distinct ideas of public policy coexist today across the various legal systems. Public policy is, in a word, fuzzy—although it is a long-established concept and is discussed broadly, it still lacks a uniform definition.

The definition of public policy, to the extent that a definition can be offered at all, depends on the legal context in which a definition is sought. Moreover, within the same legal context, definitions can vary among countries because of differing backgrounds and legal traditions. At this point in the book, the attempt ←28 | 29→is not to define public policy and make it distinct from other concepts, but simply to emphasize the gap in the field that demands legal scholars come at the topic from a resolutely comparative perspective. Although some previous scholarships that have addressed the application of public policy exception in international arbitration, no study has provided a systematic and more in-depth analysis of the application of public policy exception as applied in the United States and Turkey. This book uses a comparative study approach to attempt to fill this lacuna.