Awards set aside or annulled at the seat —
Zombies, ghosts and buried treasure

A disgruntled party on the losing end of an award will sometimes seek to have the award annulled or set aside at the seat of arbitration. But even if such a challenge at the seat is successful, that is not necessarily the end of the matter. Awards that are seemingly “dead and buried” can sometimes be resurrected or haunt the losing party in other jurisdictions where enforcement of the award is sought. This article compares the different approaches taken in various jurisdictions to awards that have been set aside or annulled at the seat.

The provisions of the New York Convention

The New York Convention on the Recognition and Enforcement of  Foreign Arbitration Awards (New York Convention) does not oblige Contracting States to refuse enforcement of awards that have been set aside at the seat. Article V(1)(e) only goes so far as to provide that an award “may” be denied recognition and enforcement if it has been annulled by the courts of the arbitral seat — it does not prohibit enforcement. Additionally, Article VII provides that the Convention shall not deprive any party of any right to benefit from an arbitral award as permitted by the law of the enforcing State. These provisions therefore leave room for national courts to exercise a discretion to recognize annulled awards.

Unfortunately however, there is no further guidance in this regard contained in the New York Convention. In the absence of an international standard, domestic courts in different jurisdictions have taken diverging approaches to this question. Most recently, the issue has returned to the international spotlight as a result of a Dutch court’s annulment of an arbitral award worth over US$50 billion in a dispute between shareholders of the Yukos Oil Company and Russia, with inevitable consequences for Yukos shareholders’ ongoing enforcement proceedings against Russian assets in numerous jurisdictions worldwide.

Treatment of awards set aside at the seat

England

English courts will ordinarily respect a foreign decision annulling an arbitral award, unless that decision is found  to be contrary to basic principles of honesty, natural justice or domestic public policy. In a case involving a different Yukos entity (Yukos Capital SARL v OJSC Rosneft Oil Company) several arbitral awards were recognized and enforced by the English courts notwithstanding that they had been set aside in Russia. The English court rejected an argument that the awards no longer existed legally because they had been annulled. The court found that the annulment was a result of a “partial and dependent judicial system” and should therefore be disregarded in the enforcement proceedings. There were however rather extreme factual circumstances.

A different outcome was reached in Maximov v OJSC Novolipetsky Metallurgichesky Kombinat, where the English court refused to recognize and enforce an arbitral award that had been set aside in Russia. The test the English court applied was whether the Russian courts’ decisions were so extreme and incorrect that the courts could not have been regarded as acting in good faith. Absent cogent evidence of actual (rather than apparent) bias, the English court refused enforcement of the annulled award.

Netherlands

The Dutch courts take a similar approach as the English courts. In the Amsterdam Court of Appeal judgment in Yukos Capital SARL v Rosneft (involving the same award as in the English case between the same parties described above), the Dutch court gave effect to the awards notwithstanding that they had been set aside by Russian courts. This decision was also based  on a determination that the annulment resulted from a partial and dependent judicial process in Russia.

However, again consistent with the approach of the English courts, in the Supreme Court judgment in Maximov v OJSC Novolipetsky Metallurgichesky Kombinat (again, involving the same annulled award as in the English  case above) enforcement was refused. Although the Dutch Supreme Court confirmed that it has a discretion to enforce an annulled award under Article V(1) of the New York Convention, it held that this power can be exercised in exceptional cases only — i.e. situations where the annulment at the seat was based on grounds that do not reflect Articles V(1)(a)‑(d) of the New York Convention or other internationally acceptable standards. Such exceptional circumstances were not found in the case before the court and so the court refused to enforce the annulled award.

France

French law provides for limited grounds for refusing enforcement of awards. Accordingly, French courts have long held that an award which has been annulled at the seat can still be enforced in France. In the seminal decision of Hilmarton v Omnium, the Cour de Cassation permitted enforcement of an arbitral award which had been set aside in Switzerland. The core of the French court’s reasoning relied on Article VII of the New York Convention, which enables Contracting States to apply a more liberal domestic regime for enforcement of arbitral awards. Since annulment of an award is not one of the grounds for refusing enforcement under French law, the court held that the permissive language of Article V(1)(e) in conjunction with Article VII constituted a sufficient basis to enforce awards annulled at the seat. Subsequent cases represent a continuation of this approach.

United States

In a leading US decision in Chromalloy Aeroservices v Arab Republic of Egypt, the court set out the grounds for enforcing an arbitral award annulled at the seat. The award had been set aside in Egypt following a detailed substantive judicial review, in circumstances where the parties had waived any such review. The US court reasoned that the US public policy in favour of final and binding arbitration of commercial disputes compelled it to enforce the award despite its annulment at the seat.
 
In other judgments, although approving the reasoning in Chromalloy, US courts have not found adequate reasons on the facts for disregarding foreign annulments (for example, Martin I. Spier v Calzaturficio Recnica). In a controversial decision in TermoRio SA v Electranta, a US court held that an award that has been set aside “does not exist to be enforced” in other Contracting States to the New York Convention.

More recently however, a US court enforced an annulled award in Corporación Mexicana de Matenimiento Integral, S De RL De CV v Pemex-Exploración y Producción. The arbitral award in question had been set aside in Mexico on the ground that Pemex, as  an entity deemed part of the Mexican government, could not be forced to arbitrate. It was held that the US court’s deference to the Mexican court’s annulment would run against US public policy in favor of enforcement.

Conclusion

Having been drafted in a permissive manner, the New York Convention leaves domestic courts with a discretion to enforce annulled awards. As this area of law is not settled, different jurisdictions have adopted diverging standards with regards to the circumstances in which the enforcement of annulled awards may be permitted. Taken very generally, these circumstances can include

• The annulment procedure being tainted by serious procedural irregularity or otherwise contrary to basic principles of honesty or natural justice.

• The annulment being based on local public policy standards or other local standards of review.

• The annulment being a result of extensive substantive review of merits (when it was contractually excluded by the parties).

Parties should, however, be aware that in most jurisdictions, there is an increasingly high burden to satisfy when seeking to enforce an annulled award. Particularly, where a claim is made that the annulment was contrary to basic principles of justice.
 
Where obtaining judicial recognition  of an annulled award will likely be most problematic is if the grounds for annulment at the seat properly applied the grounds given in Article V(1)(a)‑(d) of the New York Convention.

However, the key takeaway is that just because an award seems dead and buried, that does not mean that it is necessarily the end of the matter. Where an award has been set aside, it is essential that parties seek advice from arbitration counsel knowledgeable in the jurisdiction of the enforcement to identify if recovery may still be possible.

The authors would like to thank Ewelina Kajkowska, trainee, for her contribution to this article.