While the New York Convention and the standardization that it brings in terms of enforcement of international arbitral awards in various countries is a great asset, the hard to define concept of “public policy” still plays a key role in terms of the enforceability of international arbitral awards.
Enforceability of awards under the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (“Convention”) without having to deal with the enforcement rules of each separate jurisdiction is among the most praised advantages of international arbitration.1 In practice, after a tribunal renders an award, the prevailing party applies to the domestic court of the country where it wishes to enforce the award. The state court, if the state is one of the 159 parties to the Convention, then examines the award and will enforce the decision unless grounds for refusal under the Convention exist. One of the grounds that courts considers ex officio is the public policy exception and this is where the things get a little tricky.
Under this exception, the court examines whether enforcement of the award would be against the public policy of the country where the enforcement is to be applied. In addition to the enforcement stage, public policy may also come up during the annulment of the award phase since most of the domestic laws governing the annulment process also include public policy as grounds for setting aside the award.2 Public policy objections can be of procedural or substantive nature. The fundamental procedural rules, such as due process, fraud, mistake and corruption allegations, the right to legal representation, and the right to be heard, may all raise public policy concerns.3 The substantive public policy objections can be related to “pacta sunt servanda, good faith, abuse of right, prohibition of bribery and corrupt practices, and protection of individual rights.”4
While playing a key role in many enforcement proceedings, the concept of public policy is one of the most well-known yet undefined concepts in universal legal theory. Neither the Convention nor the Model Law defines its scope, which creates ambiguity and grants a substantial level of discretion over its meaning to the relevant judicial authority. Although this issue has long been a matter of discussion in the international arbitration arena, recent decisions on highly anticipated cases has exacerbated the importance of these discussions. In this article, we will address different approaches to the public policy concept adopted by domestic courts in light of a notable court decision recently rendered by a US court. Finally, we will touch upon the Turkish Court of Appeals’ perspective.
The Hardy Case: A Landmark Decision on the Enforcement of Specific Performance in a Foreign Territory
One recent example of a domestic court refusing enforcement of an international arbitration award based on the public policy exception is Hardy Exploration & Production (India), Inc. v. the Government of India.5 In the Hardy case, the United States District Court of Columbia rejected Hardy’s request for enforcement of an arbitral award based on a strict approach of the U.S. courts to the public policy concept to respect foreign sovereignty so as to prevent specific performance of an international arbitral award in a sovereign country except for the U.S.6 Although the court found that Hardy was entitled to its claims, it refused to enforce an award that required specific performance within a sovereign territory outside of the U.S., i.e., India. The court tried to balance the true international public policy concerns regarding enforcement of an arbitral award with the U.S. public policy to respect the sovereignty of a foreign state. While interpreting the scope of public policy, the court referred to statutes and national decisions that implicitly prohibit specific performance against a foreign sovereign. With this caveat, the court concluded that enforcing an award that orders specific performance in another state would violate U.S. public policy. The court also stated that the U.S. had not waived its sovereign immunity concerning specific performance in contractual disputes and ruled that it would violate the rules of international soft law if a U.S. court were to order specific performance by a foreign state in that state’s territory.
Types of Public Policy
The term public policy entails transnational, international, and domestic public policy. Domestic public policy has the widest scope of application followed by international and transnational public policy respectively. Some accept that domestic public policy consists of a state’s mandatory rules on domestic public policy. However, domestic public policy may vary from one jurisdiction to another, and a violation of mandatory rules does not always sharply contrast with public policy in some jurisdictions where a mere violation of fundamental rules and values is mostly sought for public policy infringement. International public policy is a state’s application of its own rules on an international matter. Transnational public policy is on the other hand the broadest concept of all and has the narrowest scope of application. It is the internationally accepted perception of how international public policy should be. The Hardy case is one of the recent decisions that has blurred the line between these different understandings of public policy.
Different Approaches to Public Policy
The purpose of Article V(2)(b) of the Convention, which allows the courts to refuse enforcement based on public policy concerns, is to provide a “safety valve” for the courts.7 Accordingly, the legislative history of the Convention suggests that public policy should be interpreted as the public policy of the enforcing jurisdiction; however, there could easily be various interpretations of public policy by different jurisdictions. The understanding of public policy may even evolve within the same jurisdiction should courts find room to impose their own interpretation of public policy, benefiting from the lack of a precise definition.8 Domestic public policy, which may differ in each jurisdiction, generally consists of the fundamental rules and values important to that state.9 However, when deciding on enforcement of a foreign arbitral award, courts try to apply international public policy, which is construed narrower than domestic public policy, so that enforcement of the foreign arbitral award is less likely to be refused. Yet, there is no objectively agreed set of rules for public policy on an international level, again leaving much to the discretion of the courts. This is when another concept enters the scene: transnational public policy.10 Its scope of application is considered even narrower, and it is used to describe the moral or legal rules that are recognized in all civilized countries.11 This definition is sure far from being selfexplanatory, but it essentially means the conduct that is observed by every fair and decent society and the basic principles that cannot be waived12 such as slavery, bribery, piracy, murder, terrorism, and corruption.13 For instance, the Supreme Court of the United States found a contract that was formed as a result of the illicit influence of a third party to be against public morality.14 The Swiss Federal Tribunal reached the same conclusion under similar conditions where parties tried to bribe a third person.15 International public policy and transnational public policy are being used interchangeably by some courts, and in their application of either principle, the courts are adopting a narrower scope for the principles that help layout a framework for the public policy.
The Approach of the Turkish Courts towards International Public Policy
Turkish courts have adopted a similar position to the generally-accepted international standards in their interpretation of public policy claims raised during enforcement and annulment proceedings. In one of its decisions in 2015, the General Assembly of Civil Chambers of the Turkish Court of Appeals relied on Article 15 of the Turkish Code on International Arbitration16 that was enacted based on the Model Law.17 The court recognized that the scope of international public policy is narrower. A violation of domestic public policy does not necessarily mean violation of international public policy as their scopes may differ.18 The court failed to state whether international or domestic public policy was applicable in the relevant dispute concerning enforcement of a foreign arbitral award, and instead it defined public policy as institutions and rules that protect the interests of society and identify its fundamental structures in terms of political, social, economic, and moral values within a given period.19
Parallel to international interpretation, the court stated that public policy principles are composed of mandatory laws, moral values, fundamental rights, and freedoms.20 The court, in line with other Turkish court decisions, also noted that violations of customs laws and tax laws may particularly raise public policy concerns.21
The court ruled that while interpreting the public policy arguments in the particular case, the substance of the award must be evaluated as it related to a violation of tax law; otherwise, the court cannot properly decide.22 Although this decision may imply separation from the well-established principle of the prohibition of révision au fond, it does not require review of the merits of the case per se but rather the technical aspects of the merits particularly in relation to tax and customs disputes.23
Interestingly, the court also noted that by choosing the applicable law, the parties agreed to the public policy principles of that particular state.24 This statement contradicts the traditional interpretation of Article V (2)(b) which finds that the public policy of the state where the enforcement is sought should be considered. Indeed, the reason public policy was inserted in the Convention was to ensure the balance between the pro-enforcement procedures and the public interest of the enforcing state.25 With this statement, the court diverged from this internationally-accepted interpretation.
It is noted that the scope of international public policy defined by the Turkish courts is in line with international application; however, while the decisions correctly state that international public policy should be interpreted narrowly, there is not a wellestablished practice yet as the approach of courts may vary.
Turkish courts have not dealt with the question of transnational public policy yet. While in some jurisdictions there are criteria that assist courts in deciding the boundaries of public policy, Turkish courts merely content themselves with stating a long list of possible situations that could raise public policy concerns. Since the courts recognize both procedural and substantive violations of public policy, it is advisable to be cautious during proceedings that might fall under these circumstances. Although it is not an internationally accepted standard, it would be wise to consider the public policy of the state whose law is selected as the applicable law. Therefore, the criteria laid out by Turkish courts should be taken into account for enforcement of awards in Turkey as well as for cases where parties selected Turkish law as the law applicable to their disputes.