The Public Policy Exception to the Enforcement of Arbitral Awards
A Comparative Study of United States and Turkish Law and Practice
Table Of Contents
- About the author
- About the book
- This eBook can be cited
- Abbreviations and Acronyms
- 1 Tracing the Roots of Arbitration in the United States and Turkey Through The Lens of Public Policy
- 1.1 Evolution of Arbitration in the United States and Public Policy
- 1.1.1 Arbitration in Early Stages
- 1.1.2 Old Judicial Hostility Toward Arbitrations
- 1.1.3 The Relationship Between Judicial Hostility and The Use of Arbitration
- 1.1.4 The Undeniable Effect of the FAA and the U.S. Supreme Court Upon International Commercial Arbitration
- 1.1.5 Current Law on Arbitration
- 1.2 The Evolution of Arbitration in Turkey and Public Policy
- 1.2.1 Ottoman Arbitration
- 1.2.2 Turkey at a Crossroad: After the 1980s
- 1.2.3 The Current Law on Arbitration
- 1.3 Comparison and Contrast: Whether Different Foundations of Arbitration Laws May Affect Judicial Application
- 2 Past and Future Coverage Under the Umbrella of Public Policy
- 2.1 Terminology: Public Policy or Public Order (Ordre Public)?
- 2.2 Definition of Public Policy
- 2.3 The Burden of Proof Under the Public Policy Exception
- 2.4 Whose Public Policy? Locating the Applicable Law
- 2.4.1 The Public Policy of That Country
- 2.4.2 Federally Governed States
- 2.5 Public Policy Standards: Domestic, International and Transnational Public Policy
- 2.5.1 The Dichotomy Between Domestic and International Public Policy
- 2.5.2 Transnational Public Policy
- 2.5.3 Public Policy Standard Under the New York Convention
- 2.6 Substantive Public Policy and Procedural Public Policy
- 2.6.1 Substantive Public Policy
- 2.6.2 Procedural Public Policy
- 3 The Public Policy Exception Under the U.S. Law on Arbitration
- 3.1 The Taxonomy of Bodies of Law: Why Does it Matter?
- 3.2 Statutory Law on The Public Policy Exception
- 3.2.1 The Federal Arbitration Act and the Public Policy Exception
- 3.2.2 FAA Section 10 Grounds for Vacatur and the Public Policy Exception Within the Meaning of Article V(2)(b)
- 3.2.3 International Arbitral Awards Made in the United States and the Public Policy Exception
- 3.2.4 The Effect of Federalism on International Awards: State Public Policy and the Federal Arbitration Act
- 3.3 The Common Law on Public Policy
- 3.3.1 Roots of The Public Policy Exception In Common Law
- 3.3.2 The Juxtaposition of the Public Policy Exception Under Labor and Commercial Arbitration
- 3.3.3 Public Policy After Hall Street
- 3.4 Public Policy in The Context of International Arbitration Under The New York Convention
- 3.4.1 The Legal Standard For the Application of Public Policy As An Exception To The Enforcement of Foreign Arbitral Awards
- 3.4.2 Challenges to Arbitral Awards Based on Public Policy Violations
- 3.4.3 Public Policy Gloss: Confirming an Annulled Award Where the Annulment Violates Most Basic Notions of Morality and Justice
- 3.5 Possible Effects of Third-Party Funding and Artificial Intelligence on the Public Policy Exception to Arbitration
- 3.5.1 Implications of The Use of Artificial Intelligence In The Application of The Public Policy Exception
- 3.5.2 The Rise of Third-Party Funding and Public Policy Exception
- 4 The Public Policy Exception in Turkey in the Light of U.S. Law and Practice
- 4.1 Setting the Scene: From Chiquita Bananas to International Arbitration
- 4.2 Statutory Law on the Public Policy Exception
- 4.2.1 International Law on Arbitration and the Public Policy Exception
- 4.2.2 Domestic Law on Arbitration and the Public Policy Exception
- 4.3 The Public Policy Exception in Relation to The New York Convention
- 4.3.1 The Legal Standard for the Application of Public Policy as an Exception to the Enforcement of Foreign Arbitral Awards
- 4.3.2 Challenges to Arbitral Awards Based on Public Policy Violations
- 4.4 Third-Party Funding and Artificial Intelligence on The Public Policy Exception to Arbitration
- 4.4.1 Turkey’s AI Experience as an Emerging Country: Implications for the Public Policy Exception
- 4.4.2 Third-Party Funding in Turkey and the Public Policy Exception
- 5 Concluding Remarks on the Comparison
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←23 | 24→
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←24 | 25→
Concluded in 1958, the New York Convention has as one of its primary goals to encourage international commerce by creating an effective and neutral arbitration process that can function across borders and ensure the reliability of international contracts. With the sheer number of its signatories, the New York Convention has proved to be an immense success in comparison to its predecessors. Over its 60 years of existence, the Convention has provided a setting in which cross-border commercial transactions can thrive, by allowing recognition of arbitral awards in a reliable manner and one that ensures the rule of law.
As we approach the end of the first quarter of the twenty-first century, national courts are becoming more reluctant to refuse enforcement of foreign arbitral awards under the public policy exception. This is especially true in those countries in which the pro-enforcement stance has been faithfully observed. Though it is often raised, the public policy exception is usually unsuccessful not only in actions to refuse to recognize or enforce foreign arbitral awards but also in setting aside actions. This raises the question of why the public policy exception as applied in the United States and Turkey is still a crucial concept to the extent that it has become the subject of this book.
Global lawyering is not about knowing every nation’s laws, but rather knowing how to handle an issue that includes components from different legal systems. Lawyers and scholars in the field of legal research must develop solutions that work best for clients. Hence, the necessities of this era demand lawyers have both substantive knowledge of the law and a broadened horizon in cross-border settings to resolve legal issues.
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.
This book has two primary aims. First, it offers extensive guidance indicating the possible risks of non-enforcement with respect to public policy in the United States and Turkey. Such a need arises because some enforcing courts have continued to deny enforcement under the guise of public policy and thwarted the effectiveness of international commercial arbitration, especially in those countries where arbitration encounters firm resistance. Acting with ulterior motives, some national courts have taken a more interventionist stance in enforcing arbitral awards. For this reason, controversy surrounds the scope that public policy ought to be accorded based on the Convention. Thus, not only legal scholars but also practitioners, international commercial actors, and other stakeholders can benefit from the guidance that this book sets forth.
The second aim of the book is to understand the reasons behind the approach toward international arbitration in each jurisdiction and the role that public policy plays therein. It pursues this objective by identifying the current disposition toward arbitration and its interplay with the public policy (exception). In so doing, it seeks to provide an in-depth analysis of the law and of practice as it pertains to the public policy (exception) in each jurisdiction, thereby casting a critical eye over the entire field.←29 | 30→
1 See e.g. Glaser, Weil, Fink, Jacobs & Shapiro, LLP v. Goff, 194 Cal. App. 4th 423, 438 (2011); Schaefer v. Allstate Ins. Co., 63 Ohio St. 3d 708, 718 (1992) (stating that in order for an ADR method to be deemed as arbitration, it should yield a final and binding award); Minkowitz v. Israeli, 433 N.J. Super. 111, 151 (Super. Ct. App. Div. 2013) (emphasizing that when arbitration is agreed upon, the parties should not return to the court other than to confirm the final arbitration award).
2 E.g. Scherk v. Alberto-Culver Co., 417 U.S. 506, 511–12 (1974); M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 12 (1972).
3 Thomas E. Carbonneau & William E. Butler, International Litigation and Arbitration 572 (2nd ed. 2013).
4 In cross-border commerce, arbitration appears as a vital dispute mechanism because it provides greater ease for parties to enforce the award thanks to the international treaties. Further, it provides a neutral, non-national venue, thereby eliminating the concern of having a dispute adjudicated by a court in another country that may show preference to perceived interests of the forum. See Margaret Wang, Are Alternative Dispute Resolution Methods Superior to Litigation in Resolving Disputes in International Commerce?, 16 Arb. Int’l. 189, 211 (2000); Stephen L. Brodsky, Cross-Border Arbitration: A Beneficial Alternative to Resolving International Commercial Disputes, A.B.A. (July 03, 2019), https://www.americanbar.org/groups/litigation/committees/commercial-business/articles/2019/spring2019-cross-border-arbitration-international-commercial-disputes/.
5 See Ljiljana Biukovic, International Commercial Arbitration in Cyberspace: Recent Developments, 22 NW. J. Int’l L. & Bus. 319, 331 (2002) (“[I]nternational commercial arbitration is expensive and is not a particularly speedy procedure. It is cheaper and quicker than litigation, but for individuals and for disputes involving small amounts, it is not as affordable as ADR.”)
6 Thomas E. Carbonneau, The Exercise of Contract Freedom in the Making of Arbitration Agreements, 36 Vand. J. Transnat’l L. 1189, 1191 (2003). See also S.I. Strong, Limits of Procedural Choice of Law, 39 Brooklyn J. Int’l L. 1027, 1082 (2014) (discussing the problem that international commercial litigation faces).
7 John M. Townsend, Drafting Arbitration Clauses: Avoiding the Seven Deadly Sins, 58 Disp. Resol. J. 28, 30 (2003). See Oliver Dillenz, Drafting International Commercial Arbitration Clauses, 21 Suffolk Transnat’l L. Rev. 221, 223 (1998) (noting that drafting an arbitration clause requires as much attention as drafting a statute).
8 E.g. Harry T. Edwards, Advantages of Arbitration Over Litigation: Reflections of a Judge, in Arbitration1982 Conduct of The Hearing Proceedings of The Thirty-Fifth Annual Meeting National Academy of Arbitrators 16, 23 (James L. Stern et al. eds., 1983); Ljiljana Biukovic, supra note 5, at 331.
9 See e.g. Sebastian Perry, The cost of Yukos, Global Arb. Rev. (Aug. 15, 2014), http://globalarbitrationreview.com/article/1033686/the-cost-of-yukos. (stating that fees and costs added up to USD 124 Million in the final instance); Tony Cole & Pietro Ortolani, Understanding International Arbitration 21–22 (2019); Henry S. Noyes, If You (Re)Build It, They Will Come: Contracts To Remake The Rules Of Litigation In Arbitration’s Image, 30 Harv. J.L. & Pub. Pol’y 579, 586–87 (2007).
10 See e.g. Jennifer Kirby, Efficiency in International Arbitration: Whose Duty Is It?, 32 J. Int’l Arb. 689, 690–91 (2015) (drawing an analogy between some dry cleaners’ signs in the United States which state “Fast. Good. Cheap. Pick two” and arbitration in terms of efficiency); Henry S. Noyes, supra note 9, at 587. (“The high cost of arbitration can be a significant deterrent that precludes consumers, employees, and those with fewer resources from pursuing claims in arbitration.”)
11 See Cole & Ortolani supra note 9 at 21 (distinguishing between privacy and confidentiality, saying that privacy refers to the provision that only parties may attend arbitral proceedings whereas confidentiality refers to disclosure of the information regarding arbitration to third parties).
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- 2022 (May)
- Berlin, Bern, Bruxelles, New York, Oxford, Warszawa, Wien, 2022. 298 pp., 1 fig. b/w, 1 table.