Privy Council confirms the high bar for refusal to enforce arbitral awards under the New York Convention
In Gol Linhas Aereas SA v MatlinPatterson Global Opportunities Partners (Cayman) & Ors (Cayman Islands)  UKPC 21 the Privy Council has emphasised the narrow construction to be afforded to the provisions of the New York Convention on the Enforcement of Foreign Arbitral Awards 1958 (the “New York Convention”) which justify refusal to enforce foreign arbitral awards.
The narrow construction of the defences to enforcement is “in keeping with the Convention’s object and purpose of facilitating the enforcement of foreign arbitral awards”.
The judgment also involves an in-depth analysis of the basic requirements for due process in the context of international arbitration.
The Privy Council’s judgment is necessarily fact specific and detailed. The purpose of this article is not to delve into all of that detail but to draw out the key takeaways.
The Privy Council judgment is not technically binding in England but, per the ordinary course, will be highly persuasive authority.
The procedural history
After exhausting appeals before the national courts of the arbitral seat in Brazil, the unsuccessful private equity Respondents (referred to here as the “fund” for ease) sought to avoid enforcement brought by the successful Claimant (referred to here as the “airline” for ease) in the Cayman Islands under the New York Convention. The Privy Council dismissed the appeal on the basis that none of the grounds relied on by the fund justified refusal to enforce.
New York Convention: grounds to refuse recognition and enforcement
Article V of the New York Convention provides various grounds on which recognition and enforcement of a foreign arbitral award may be refused. It is well established in English law that the grounds set out in article V should be construed narrowly.
The bases on which the fund sought to resist enforcement led to arguments concerning issue estoppel/validity of the arbitration agreement, due process/public policy and the scope of the submission to arbitration. We will address each argument in turn.
1. Issue Estoppel and the validity of the arbitration agreement (article V(1)(a) New York Convention)
The fund sought to argue that the relevant entities were not party to the arbitration agreement. The airline responded by saying that argument had already been raised before and rejected by the Brazilian court and thus the Brazilian court’s decision created an issue estoppel.
“The doctrine of issue estoppel supports the important public policy of finality in litigation and ensures that the same parties should not have to litigate the same issue twice”.
Whilst the airline claimed the fund was estopped from repeating an argument the fund had already run (unsuccessfully) before the Brazilian court, the fund said that the Brazilian court had not conducted an independent or de novo determination of the issue. The fund argued that as the Brazilian court had only carried out a limited review of the tribunal’s decision, no issue estoppel arose and the Cayman court could look at the point again.
The Privy Council looked closely at the decisions reached by the Brazilian courts in the context of the Brazilian arbitration legislation and found that there was no suggestion that those courts had only applied a limited standard of review. The argument had been subject to de novo determination and thus an issue estoppel arose.
Interestingly, in reaching its decision, the Privy Council referenced recent UK Supreme Court guidance that it is not always necessary to adduce expert evidence of foreign law and in this case it was appropriate for the court to reach its own conclusions following a review of the English language version of the relevant arbitration legislation and translations of the relevant decisions from the set aside proceedings in Brazil.
2. Due Process/public policy (articles V(1)(b) and V(2)(b) New York Convention)
The fund argued that the arbitral tribunal had committed a serious breach of natural justice or due process by finding the fund liable on a legal basis not raised by the airline, without giving the fund an opportunity to be heard on the point. The fund said enforcement should be refused because: i) it had been unable to present its case (article V(1)(b)); and ii) by reason of the alleged breach of natural justice, enforcement would be contrary to the public policy of the Cayman Islands (article V(2)(b)).
In the lengthiest part of the judgment, the Privy Council dismissed this element of the fund’s appeal.
As a matter of principle, the Privy Council held that the meaning and effect of article V(1)(b), as implemented by Cayman legislation, was a question to be decided by applying the law of the Cayman Islands. However, that did not mean that the question should be answered by applying Cayman standards of what constitutes fair procedure.
“The court should regard the domestic statutory provision as imposing a standard of due process capable of application to any international arbitration whatever the procedural law applicable and the nationality of the participants. This does not mean that the court should be seeking to identify the lowest common denominator of standards required by different national systems. But it does mean the court should be seeking to identify and apply basic minimum requirements which would generally, even if not universally, be regarded throughout the international legal order as essential to a fair hearing”.
Article V(1)(b) and the right to due process will, therefore, only be infringed if there has been a serious violation of fundamental and generally accepted requirements of due process. It is a demanding test and will be narrowly construed. As an aside, the Privy Council held that where a serious violation has been shown there is no need to show a causal link between the violation and the arbitral tribunal’s decision.
The Privy Council did not provide a full exegesis of the essential minimum requirements of a fundamentally fair hearing but did provide some examples from (relatively) recent case law.
In looking at the case in hand, the Privy Council acknowledged that whilst it was, broadly speaking, internationally accepted that “to decide a case on the basis of a significant factual allegation or evidence of which a party has not been informed and given an opportunity to answer is fundamentally unfair” (emphasis added), issues arising in relation to legal reasoning are more complex.
In looking at the question of whether a serious violation had occurred because the tribunal had reached its decision by reference to legal reasoning that one party had not been informed about and given an opportunity to answer, the court undertook a comparative exercise to address the different common law and civil law approaches. In doing so, the court, it appears, was seeking to test what could be considered the basic, general requirements of a fair hearing in this context.
Whereas a common law system will most likely give the parties an opportunity to consider a new point of law that they themselves have not raised, a civil law judge will often bring his or her own knowledge of the law to bear in deciding a case, independently and in addition to the legal arguments and materials adduced by the parties. The Privy Council held that it was significant that the Brazilian court had found that there was no violation of due process, which confirmed that the actions of the tribunal were on balance proper from a Brazilian perspective, despite the situation appearing surprising from an English or Cayman perspective
The Privy Council acknowledged that it found the issue difficult to decide. Its conclusion was that it would have been prudent (“at the very least”) for the tribunal to have given the fund the opportunity to comment or make submissions on all aspects of legal reasoning underlying its decision. That said, the Privy Council did not find the violation to be “so serious a denial of procedural fairness as to justify refusal to enforce the award”.
As the fund’s argument on due process did not succeed, its argument on public policy could not succeed either. The Privy Council commented, obiter, that the decision of the Brazilian court on procedural unfairness was of huge relevance to the question of public policy as it would have been “very strong” for the English or Cayman court to refuse enforcement on the basis of public policy in circumstances where the Brazilian courts, those with primary responsibility for ensuring the integrity of the arbitral process, had upheld the award.
3. Scope of the arbitration (article V(1)(c))
Finally, the fund argued that: i) the subject matter of the arbitral award was beyond the scope of the submission to arbitration; and ii) distinctly, the basis for the finding of liability was outside the scope of the terms of reference for the arbitration.
As to i), the Privy Council held that the argument that the dispute was not within the scope of the arbitration agreement had been made (unsuccessfully) in the annulment action and thus an issue estoppel arose.
As to ii), the Privy Council dismissed the argument holding that “terms of reference should be given a liberal construction in keeping with the purpose of arbitration to provide a flexible and effective means of resolving disputes and providing redress.” In this case, any technical discrepancy between the terms of reference and the final award came “nowhere close to the kind of excess of authority which would justify refusal to enforce the award”. The court will “be slow to find that the arbitrators have exceeded their powers”.
It is not “new news” to arbitration practitioners that the English or Cayman courts will impose a high bar before refusing enforcement under the New York Convention.
What is perhaps most interesting for practitioners is the Privy Council’s discussion of due process. The judgment demonstrates how far the court will go to endorse the internationality of international arbitration, including the lengths it will go to to respect practices and procedures of foreign jurisdictions rather than blindly imposing its own approach.
The exercise conducted by the Privy Council in the interests of finality of litigation and due process involved a detailed reconciliation of different legal systems, and is consistent with the general arbitration-friendly approach of the English courts.