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Dr Joséphine Hage Chahine

International arbitration lawyer (Paris and Beirut Bars), Lecturer - University Paris 1 Panthéon-Sorbonne

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Transnational Public Policy

(This wiki note will not address the implications of transnational public policy in commercial arbitration.)

I. Definition

1.

Several national arbitration statutes1 as well as international instruments2 contain references to “international (or transnational) public policy” without however providing any definition or guidance thereon. Transnational public policy, can be defined as “a reflection of global consensus- deriving from the convergence of national laws, international conventions, arbitral case law and scholarly commentary- on fundamental economic, legal, moral, political, and social values”,3 while domestic public policy can be defined as a set of economic, legal, moral, political, and social values considered fundamental by a national jurisdiction. The content of transnational public policy is not static and adapts to society's changing attitudes and beliefs. 

2.

Many investment arbitral tribunals recognized the existence of transnational public policy and defined it as “an international consensus as to universal standards and accepted norms of conduct that must be applied in all fora4 or as a “a series of fundamental principles that constitute the very essence of the State, with the essential function […] to preserve the values of the international legal system against actions contrary to it.5

3.

One can distinguish between procedural transnational public policy which encompasses the due process components (i.e. a “bundle of rights”, such as the right to an impartial and independent tribunal, the right to fully present its case, and equality of treatment between the parties) and substantive transnational public policy which notably comprises piracy, terrorism, genocide, slavery, smuggling, drug trafficking, trading of stolen property, trafficking of human organs,6 fraud, and more specifically corruption, to which a particular attention should be drawn. 

4.

Actually, it has been ruled that prevention of corruption is one of the “fundamental principles of international public policy, insofar as most national laws and international conventions condemn bribery”.7 In World Duty Free v. Kenya an ICSID tribunal concluded that bribery is contrary to the international public policy of most, if not all, States. Similarly, in Wena Hotels Ltd. v. Arab Republic of Egypt, an ICSID tribunal held that bribery and corruption is contrary to “international bones mores”.

II. Breach of transnational public policy in investment arbitration

5.

The breach of transnational public policy can lead the arbitral tribunal to deny its jurisdiction or to declare the claim inadmissible (A). Such breach can also constitute grounds for setting aside the award (B) or to denying its recognition and enforcement (C).

A. Lack of jurisdiction or inadmissibility of the claim

6.

When examining a claim arising out of an investment tainted by illegality, the arbitral tribunal may either decide that it lacks jurisdiction thereon or declare the claim inadmissible on the basis of a breach of transnational public policy or the “clean hands” doctrine.8 

7.

Several treaties require, under the formula “in accordance with host state law”, that in order to qualify as an investment, the operation must comply with the host State’s regulations. Therefore, an investment that is not in compliance with host State law is not covered by the definition of “investment” and will not benefit from the treaty’s provisions, notably from the arbitration clause. When the investment treaty contains an “in accordance with host state law” clause, arbitral tribunals consider that there is a jurisdiction issue. For instance, in Inceysa v. El Salvador,9 an ICSID tribunal held that fraudulent misrepresentation in a bidding process for a government contract was a violation of a principle of international public policy, and that the existence of an “in accordance with the law” provision demonstrates the clear intent of the signatory States to exclude from protection investments made in violation of their internal laws. 

8.

When an investment treaty does not contain an “in accordance with host state law” clause, arbitral tribunals consider that there is an admissibility issue. On this basis, arbitral tribunals have ruled that an investment claim was inadmissible when the contract was obtained by fraudulent misrepresentation10 or by corruption.11 

B. Challenge of the award

9.

The breach of transnational public policy constitutes ground for setting aside the award under most modern arbitration laws that follow Article 34(2) of the UNCITRAL Model Law, which provides an exhaustive list of grounds, among which, the breach of transnational public policy. This is not the case under the ICSID Convention where annulment is limited to an exhaustive list of grounds in Article 52(1) of the said Convention.

10.

As regards non ICSID awards (made under UNCITRAL, ICC or other rules of procedure), it has been ruled that a wrong evaluation of evidence, a wrong factual determination, or even a manifestly erroneous determination of the applicable law does not amount to a violation of public policy.12 In the same vein, it has been ruled that when the tribunal’s findings with respect to jurisdictional questions are not “patently unreasonable”, “clearly irrational”, “totally lacking in reality”, or “a flagrant denial of justice13 there is no violation of public policy. However, the Paris Court of Appeal annulled a UNCITRAL arbitral award14 on the ground that its enforcement in France would result in allowing the investor to benefit from money laundering activities.15 The Paris Court of appeal also considered,16 that the domestic overriding mandatory rules (lois de police) regarding foreign investments in the State’s natural resources are of international public policy, and annulled the award that has validated a transaction concluded in breach of such rules.17 

11.

If the arbitration’ seat is in a jurisdiction with a broad interpretation of public policy, the odds of setting aside the award would be significantly high. However, in an ICSID arbitration, the seat is of secondary importance insofar as the ICSID Convention provides for an “internal” setting aside procedure before an ad hoc Committee (and not before the jurisdiction of the seat). According to article 52 of the said Convention,18 the award can notably be annulled in case of corruption on the part of a member of the Tribunal (but not in case of corruption related to the subject matter of the dispute) or in case of a serious departure from a fundamental rule of procedure, which amounts to a breach of the procedural transnational public policy. For example, the motion to set aside an ICSID award has been rejected “when the award does not fundamentally offends the most basic and explicit principles of justice and fairness, or evidences intolerable ignorance or corruption on the part of the arbitral Tribunal19 and when “the Tribunal’s conduct was not marked by corruption, bribery or fraud or contrary to the essential morality”.20 

C. Recognition and enforcement

12.

On one hand, Article V.2 (b) of the New York Convention, which applies to non ICSID awards, provides that recognition and enforcement of an arbitral award may be refused if the competent authority in the country where recognition and enforcement is sought finds that the recognition or enforcement of the award would be contrary to the public policy of that country. The exact scope of the public policy exception of Article V(2)(b) of the New York Convention is not clearly established. It is however widely admitted that the exception is restrained to transnational (and not domestic) public policy of the jurisdiction where recognition and enforcement are sought (it is therefore not possible to invoke the public policy of the host State of the investor) and each legal system decides on its own the meaning it wishes to give to this notion transnational public policy.21 The examples listed above as regards the challenge of the award on the grounds of breach of transnational public policy apply mutatis mutandis to denying its enforcement and recognition on the same grounds.

13.

On the other hand, Article 54 (1) of the ICSID Convention22 states that “each contracting state shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State”. It results from this article that an ICSID award will be recognized23 without any condition precedent, while the enforcement24 of the pecuniary obligations (such as the obligation to pay damages or to reimburse a certain amount with interest thereon) resulting from the award will be subject to the conditions applicable to the enforcement of a final judgment of a court in the State where enforcement is sought. The compliance to domestic public policy (which is more strictly construed than transnational public policy) is usually part of such conditions. As to the enforcement of the non-pecuniary obligations (such as a non-compete obligation, or a non-disclosure obligation), scholars25 are of the opinion that it is subject to the conditions set forth in the New York Convention, among which the compliance with the transnational public policy of the State where enforcement is sought. 

III. Conclusion

14.

To sum up, a breach of transnational public policy could preclude investors from presenting their case on the merits before an arbitral tribunal and could lead to the setting aside of the award as well as denying its recognition and enforcement Therefore, in order not to hinder access to arbitral justice as well as the efficiency of the award, the notion of transnational public policy should be narrowly construed by “adopting a ‘manifest’ or ‘obvious’ criterion, as have done, for example, the courts in France and Germany, even in the absence of an express statutory basis for such qualitative thresholds”.26

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