The Supreme Court recently refused to hear an appeal of a district court decision to enforce an International Chamber of Commerce (ICC) award in Israel challenged on the grounds of public policy.(1) In so doing, the Supreme Court supported the district court's determination that a party's agreement to resolve a dispute in accordance with a contractual arbitral provision does not estop it from claiming that the dispute is not governed by the same contract, and that raising such a claim does not constitute bad faith.
Israeli company Watairpoll Engineering Ltd serves as an exclusive agent for several major international companies in the security and scientific inspections field. In 1992 it entered into an agency agreement with a foreign company, pursuant to which Watairpoll was appointed as an agent for the foreign company's products in Israel. In 2009, when a successor of the foreign company sold the Israeli Airport Authority screening machines that used a technology known as XRD, Watairpoll claimed that it was due a commission on the sale under the terms of the agency agreement.
Morpho Technologies, which had succeeded to the XRD technology by the time a claim was brought in the Israeli courts, denied that it was obliged to make such payment to Watairpoll and requested that the claim in Israel be stayed so as to allow for ICC arbitration in accordance with the agency agreement's arbitration clause. The Supreme Court granted the stay, noting in its decision that Morpho had declared before the court that:
- it did not object to arbitral proceedings; and
- it would raise any defences that it deemed to be appropriate in the proceedings.
Watairpoll removed its objection to a stay on the basis of this declaration.
Thereafter, ICC arbitration was conducted in Switzerland. The tribunal denied the Israeli company's claims, determining that the sale of the machines with XRD technology was beyond the agency agreement's scope, which had in any case not been assigned to Morpho in the complicated chain of corporate succession that had occurred since the agreement had been signed. Regarding the latter issue, the tribunal rejected Watairpoll's claim that Morpho's declaration to the Supreme Court that arbitral proceedings were the proper forum in which to settle the dispute constituted an admission that estopped it from later arguing that the assignment had not occurred.
Morpho applied to the Israeli courts for the recognition and enforcement of the award in order to collect the costs awarded to it in the arbitration, based on the New York Convention and the municipal law implementing it.
In response, Watairpoll argued that enforcing the award would constitute a breach of public policy under Article V(2)(b) of the New York Convention. Watairpoll claimed before the district court that Morpho had acted in bad faith by raising defences before the ICC tribunal that were contrary to its position before the Israeli courts in its application for a stay. Given Morpho's declaration to the local courts that it would respect the agency agreement's arbitral clause and participate in the ICC proceedings, its subsequent claim in those proceedings that it was not a party to the agency agreement, and thus not bound by it, constituted bad faith contrary to public policy.
Morpho denied that it had raised contradictory claims in different forums or that it was estopped from raising claims with respect to the agency agreement's scope. While admitting that it had petitioned the Israeli courts for a stay of proceedings in order to engage in ICC arbitral proceedings on the basis of the agency agreement's arbitration provision, Morpho had also made clear to the Israeli courts that it reserved all of its rights with respect to any defences available to it, including the right to argue that no basis for demanding a commission existed. In the stay proceedings, the Supreme Court had even noted Morpho's express reservation of rights.
Morpho further added that enforcement of the award could not be contrary to public policy, as the procedural agreement between the parties in the ICC proceedings stipulated that the preliminary question for the tribunal to determine was whether the agency agreement encompassed the XRD technology.
The district court ruled in favour of Morpho, thus maintaining the Israeli courts' longstanding tradition of interpreting the New York Convention's public policy exception narrowly and refusing to enforce or recognise awards only in exceptional circumstances.
In its decision, the court stated that public policy considerations justify refusing the recognition or enforcement only of arbitral awards that meet the conditions found in Article 24(9) to the Arbitration Law 1968. Courts have long ruled that these conditions must be strictly interpreted so as to apply only in exceptional cases in which an arbitral award contravenes the public norms or basic principles of Israeli society or its legal system.
The district court also reiterated long-established jurisprudence that, in Israel, the enforcement of foreign awards is rarely denied on public policy grounds. The public policy in question is internal public policy, as opposed to external public policy with which Article III(3) of the New York Convention is concerned, and its scope is limited to the state's founding principles. Thus, enforcement is denied only if doing so would contravene the state's most basic principles of morality, justice and fairness.
Accepting Morpho's position, the court agreed that Morpho had declared to the Israeli courts its intention to use any available defences in the course of the arbitral proceedings. Therefore, Morpho was not estopped from arguing that the XRD technology was not within the agency agreement's scope or that it was not bound by the agreement. The court therefore found no grounds for the claim that Morpho had engaged in any procedural misconduct regarding estoppel or the use of rights in bad faith. As a result, it determined that nothing in Morpho's conduct in the ICC arbitration proceedings justified denying its request for enforcement of the award under Article V(2)(b) of the New York Convention's public policy exception.
Watairpoll filed leave to appeal the district court's decision with the Supreme Court. This request was recently refused on the grounds that Watairpoll did not raise any new questions of law or principle justifying review by the Supreme Court.
However, the Supreme Court agreed with the district court's determination that nothing in Morpho's declarations to the Israeli courts had prevented it from arguing in ICC proceedings that the agency agreement did not extend to the XRD technology. Like the district court, the Supreme Court accepted and adopted the ICC tribunal's position that the consequence of Morpho's statements before the Israeli courts was that, if Watairpoll were to make a claim on the basis of the agency agreement, it was deemed to have accepted that such claim must be heard by an arbitral tribunal as mandated in the agreement's arbitral clause. However, none of the arbitral panel, the district court nor the Supreme Court understood such statement to constitute Morpho's acquiescence to any claim that it was bound by the agency agreement or that Watairpoll's claim against it thereunder was valid.
The Supreme Court stated that Watairpoll had asked for a contractual remedy provided for in the agency agreement and its claim was heard as provided therein. This claim was denied by the arbitral panel solely because Watairpoll was unable to establish its right to the remedies claimed under the agency agreement. Having participated in the proceedings in which Watairpoll had been allowed to present its claims freely, the Supreme Court found no basis for Watairpoll's claim that Morpho had not acted in good faith or in a manner constituting a breach of public policy.
Both the district court and the Supreme Court confirmed the Israeli courts' reluctance to grant any relief from the enforcement or recognition of foreign arbitral awards on public policy grounds in the absence of gross misconduct by a party or panel. In these decisions, the Israeli courts also rejected Watairpoll's rather far-fetched contention that a party agreeing to arbitration in accordance with a contractual arbitral clause is thereafter estopped from raising arguments regarding the applicability of the underlying contract to the conflict being arbitrated.
For further information on this topic please contact Zvi Nixon or Lauren Sobel at E Landau Law Office by telephone (+972 2 561 8845) or email (firstname.lastname@example.org or email@example.com). The E Landau website can be accessed at www.elandau.co.il.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.