The Horse and International Commercial Arbitration

In an old English case [Richardson v. Melish, 2Bing. 228(251) Court of Common Pleas, England (1824)] Judge Burrough stated that public policy is “unruly horse and once you get astride to it, you do not know where it will carry you.”  This judge has sufficient reason for saying public policy is unruly horse: case law and scholars have tried to define public policy; but none succeeded in giving a concise, precise, and short definition. Its concept remains controversial.

In English case law from 1853 [Egerton v. Earl of Brown, 4HL 1], House of Lords (the former English supreme court) said that what is denominated is, public policy is the obligations to perform all the duties which men owe to society; and anything having tendency to operate in opposition to that is void.

One scholar articulated that “public policy constitutes general principles of a state that exists in all legal systems, even in the absence of specific rules or judicial precedents to that effect and a principle which may be opposed to the application of any law…” (Pierre Lalive “Transnational (truly international) public policy and International Arbitration” VIII International Congress on Arbitration, New York, May 1986, Congress Series no. 3, Kluwer Law International, 261)

Public policy is held to be superior as it reflects the fundamental interest of the society. When a case is presented before a judge, and if it presumed to violate public policy, then the otherwise applicable law, whether or not foreign, will be disregarded. For example, in case of contracts, contracts that go against morality and law cannot be executed. The standard of morality can be related to public policy that ties the society together.

However, the application of public policy becomes controversial in case of international arbitration. This means that an arbitral tribunal seated in Switzerland may be forced to consider Ethiopia’s public policy. Nevertheless, the criterion for applying public policy of a certain state is ill-defined. The controversy that emanates from public policy gets its shape from the nature of international arbitration.

Cross border trade has gained momentum after the easy flow of capital, labor, and information. Business men invest in another country huge amount of money expecting to generate profits. Cross border commerce brings multifaceted problems to the globe, dispute resolution being one of them.

An international contractant is advised to resort to international arbitration so that he/she can avoid the application of national law. Basically, international arbitration is based on the parties consent, i.e, an arbitral tribunal derives its jurisdiction from the parties’ will.  Secondly, the parties are free to choose a law. Note that parties are not privileged as such in litigations taking place in national courts.

Their choice of law authority is the expression of their autonomy. For example, an Ethiopian, a Chinese, and an Indian can choose the substantive law of Switzerland, and procedural law of England.  Moreover, the parties can agree to make the decision binding upon them.

These and other advantages have helped arbitration to stand out as a primary tool of resolving disputes. Therefore, if everything is based on the parties’ agreement, where can you apply such a mandatory law as public policy?

When it comes to the application of public policy in international arbitration, there are three types: domestic, international, and transnational public policy. Domestic public policy refers to preemptory norms that govern a private action in forming a contract. These types of public policy find its application in domestic litigation. Domestic public policy may impose limit on arbitrability of local disputes.

International public policy, on the other hand, allows a forum to choose not to enforce a foreign law when it would offend the most basic principles of the forum. The concept of international public policy refers to those principles in a legal system that is so fundamental as to be upheld even if the context of the dispute is international or regardless of a link between the dispute and the forum.

Transnational public policy is one that establishes universal principles to serve the higher interests of the world community. The norms under transnational public policy are created either by international convention, UN Resolutions or by other multi-national bodies.

Transnational public policy can render a dispute non arbitrable or force a tribunal to decline jurisdiction. For instance, in the famous case ICC Case 1110, the arbitrator declined jurisdiction because he thought that entertaining a contract secured by bribery is illegitimate. Also, in partial award on jurisdiction ICC Case No. 6474 an arbitral tribunal relied upon transnational public policy to determine its jurisdiction.  In ICC Case No. 6248, the tribunal found that the secret commission agreements between the respondent and the claimant were contrary to transnational public policy.

In ICC Case No. 6329 the arbitral tribunal concluded that fighting against drug trafficking is obviously in the international interest, yet does not imply that all methods employed by a state in this context ought to be automatically applied internationally.  In another leading case between Southern Pacific Properties Ltd v. Arab Republic of Egypt the tribunal stated that protection of cultural heritage concerns transnational public policy.

The single arbitrator in ICC Case No. 1110 held that “…there exists a general principle of law recognized by civilized nations which seriously violate bonos mores or international public policy are invalid… and that they cannot be sanctioned by courts or arbitrators.” A public policy that ties all nations together may be difficult to spot during litigation. This is why its application is rare. Usually, jus cognes are not doubted as to their transnational application.

It is obvious that a tribunal will not be willing to entertain a case about slavery, human trafficking, money laundering. We have to note that it is safer for a party to rely on transnational public policies, than domestic public policy, although its application is rare. These transnational public policies can be applied in different areas of law; however, those that are related to international trade are relevant to international arbitration.

These rules are termed as lex mercatoria and defined as “rules of law which are common to all or most of the states that engaged in international trade or to those states that are connected to a dispute, and if not ascertainable, then the rules of which would appear to be the most appropriate and equitable.” (Gui J. Conde e Silva, “Transnational public policy (PhD diss., Queen Mary College, University of London, 2007)