Setting Aside Arbitral Awards on the Grounds of Public Policy – a Recent Decision of the UK’s Privy Council

Adam Greaves

On 14 June 2021, the Judicial Committee of the UK’s Privy Council handed down judgment in Betamax Ltd v State Trading Corporation (Mauritius) [2021] UKPC 14. The judgment can be found here.

The case has important ramifications for the extent to which a court can set aside or refuse to enforce an international arbitration award on the basis that it conflicts with public policy. This decision is therefore important to all lawyers advising on arbitration and in particular when considering whether awards can be set aside on public policy grounds.

By way of background, in 2008, Mauritius adopted UNCITRAL’s Model Arbitration Law 1985 (as amended in 2006) (the “Model Law”) by enacting the International Arbitration Act 2008 (the “International Arbitration Act”). In the award in an international arbitration with which this appeal was concerned (the “Award”), the Arbitrator decided that a contract of affreightment (the “COA”) did not contravene legislative provisions relating to procurement and was not illegal.

The Supreme Court of Mauritius set aside the Award under section 39(2)(b)(ii) of the International Arbitration Act (article 34 of the Model Law) on the grounds that, in its view, the COA contravened the legislative provisions and the Award conflicted with the public policy of Mauritius. The appeal primarily raises the issue as to the extent of the permissible intervention by a court in an international arbitration under section 39(2)(b)(ii) of the International Arbitration Act / article 34 of the Model Law.

On 27 November 2009, the appellant (“Betamax”) entered into the COA with the respondent (“STC”), a public company which operates as the trading arm of the Government of Mauritius responsible for the import of essential commodities. Under the COA, which was governed by the laws of the Republic of Mauritius, Betamax was to build and operate a tanker and make available for a period of 15 years the freight capacity of the vessel for the transport of STC’s petroleum products from Mangalore in India to Port Louis in Mauritius.

In 2006-8, the Government of Mauritius, as set out in some detail in the Award, evaluated the best means of providing for the shipping of petroleum to Mauritius and thereafter began negotiations with Betamax in 2008-9. With effect from 17 January 2008, a procurement regime entered into force in Mauritius under the Public Procurement Act 2006 (the “PP Act”) and the Public Procurement Regulations 2008 (the “PP Regulations 2008”) made by the Minister under section 61 of the PP Act. The PP Act and the PP Regulations 2008 were amended in 2009.

In the dispute that emerged between the parties, one of the principal issues was whether the PP Act and PP Regulations as they were in force on 27 November 2009 applied to the COA: STC contended that they did; Betamax contended that the COA was exempted from the provisions. If the PP Act applied to the COA, it would have been a contract which required approval by the Central Procurement Board established under the PP Act. No such approval was given by the Central Procurement Board and entering into the COA would have been unlawful under the PP Act.

On 30 January 2015, the Cabinet of a new Government in Mauritius which had come to power in December 2014 announced that it would terminate the COA in light of “the unlawful procedure and processes regarding the allocation of the contract”. On 4 February 2015, STC gave notice that it was unable to use Betamax’s services under the COA any longer. On 7 April 2015, Betamax terminated the COA under its default provisions.

Betamax filed a notice of arbitration in 2015. Betamax claimed damages of over US$150m in the arbitration for breach of the COA.

STC advanced a number of objections to the arbitration and the jurisdiction of the Arbitrator and a number of defences to the claim. Its principal contentions were:

  1. The Arbitrator lacked jurisdiction on the basis that the dispute was not arbitrable as the issues involved matters concerning ordre public under article 2060 of the Mauritian Code Civile (C Civ) and the arbitration agreement was void under article 2061 C Civ.
  2. If the dispute was arbitrable, STC was not liable as the COA was subject to the PP Act and the PP Regulations. As the COA had been entered into without the approval of the Central Procurement Board, it was illegal and unenforceable.
  3. The COA had been entered into as part of a criminal conspiracy to benefit Betamax at the expense of the Government of Mauritius and was illegal and unenforceable.
  4. The decision of the Cabinet of Mauritius was a force majeure event which discharged any obligations under the COA.

The Arbitrator made the Award on 5 June 2017 which determined, inter alia, that:

  1. On the proper interpretation of the PP Act and the PP Regulations, the COA was exempted from the provisions of the PP Act. Therefore the COA had not been entered into in breach of the provisions of the PP Act and there was no basis for saying that it was illegal.
  2. The COA was not illegal and unenforceable under articles 1131 and 1133 of the C Civ. The Arbitrator concluded that as he had determined the PP Act did not apply to the COA, there was no basis for considering that the COA was otherwise illegal or unenforceable.
  3. Based on an extensive review of the evidence, the COA had not been entered into as a result of any criminal conspiracy.
  4. There was no force majeure event or impossibility of performance arising out of the decision made by the Cabinet of the Government of Mauritius on 30 January 2015.
  5. Betamax was entitled to damages in the sum of US$115.3m plus interest and costs.

In August and September 2017, applications respectively to set aside and enforce the Award were made to the Supreme Court of Mauritius (the “Supreme Court”) as the supervisory court for the arbitration. Under section 42 of the International Arbitration Act, a panel of three designated judges of the Supreme Court is given that jurisdiction.

STC’s application to set aside the Award was made on the grounds that the dispute was not arbitrable, that the arbitration agreement was not valid, and that the Award was in conflict with the public policy of Mauritius.

On 31 May 2019, the Supreme Court held that the Award was in conflict with the public policy of Mauritius and set it aside under section 39(2)(b)(ii) of the International Arbitration Act. It considered that all three grounds advanced by STC for setting aside the Award were underpinned and dependent upon the question of whether the COA had been subject to the PP Act and PP Regulations and had been entered into in breach of the PP Act. The Supreme Court concluded that, on the clear meaning of the PP Act and the PP Regulations, the COA was not exempted from the provisions of the PP Act and the Arbitrator had been wrong so to hold. As the COA had been entered into in breach of the PP Act, it was illegal. That illegality was flagrant. The Award should therefore be set aside as it was in conflict with the public policy of Mauritius.

The Supreme Court’s decision was appealed to the Judicial Committee of the Privy Council. The three issues under appeal were:

  1. Was the Supreme Court entitled to review the Arbitrator’s decision set out in the Award that the COA was not subject to the provisions of the PP Act and PP Regulations and the making of it, without the approval of the Central Procurement Board, was not illegal?
  2. If the Supreme Court was entitled to review that decision of the Arbitrator, was the COA illegal as having been entered into in breach of the PP Act and PP Regulations on their proper interpretation?
  3. If the COA was illegal, was the Award giving effect to the COA in conflict with the public policy of Mauritius?

There was no dispute before the Supreme Court that it was within the jurisdiction of the Arbitrator to determine whether the COA was exempted from the provisions of Page 11 the PP Act and PP Regulations and therefore not illegal. As is evident from the Arbitrator’s Award and the argument on the second issue in this appeal, the interpretation of the legislation on which the legality of the COA turned required detailed consideration of the provisions in the light of the amendments made in the period between the enactment of the PP Act in 2006 and the agreement of the COA on 27 November 2009.

It was therefore necessary first to determine whether section 39(2)(b)(ii) of the International Arbitration Act permits a challenge to the Award of the Arbitrator on the grounds that the Supreme Court was entitled to decide the interpretation of legislative provisions which determine the legality of the COA, even though the issue of interpretation is within the jurisdiction of the Arbitrator and has been decided in the Award. This is a question, as the decision of the Supreme Court made clear, distinct from the question as to the nature and scope of public policy in so far as it affects the consequences of any illegality. It was common ground that where an arbitral tribunal determined that the contract was illegal but that the contract could nonetheless be enforced, a court was entitled to review the question whether an illegal contract should be enforced on an application to set aside or enforce the award as that would ordinarily raise issues of public policy.

It is common ground that it was within the jurisdiction of the Arbitrator to determine the issue of the interpretation of the legislative provisions and whether the provisions had the effect of making the COA illegal. The Privy Council therefore approached the scope of the court’s power under section 39(2)(b)(ii) on the basis that decisions on issues of law as well as fact were for determination by the Arbitrator in the Award. As there was no “opt in” to permit an appeal on questions of law, the Supreme Court had no power to review that decision unless it could do so under section 39(2)(b)(ii) of the International Arbitration Act.

In these circumstances, the Privy Council found that the argument advanced by STC, if correct, would enable section 39(2)(b)(ii) to be used as a means of reviewing any decision of an arbitral tribunal in an award on an issue of interpretation of the contract or of legislative provisions where, on one of the alternative interpretations of the contract or the legislative provisions, the result was that the agreement was illegal. That is because the argument had as its premise that, where the law governing the contract and the curial law are the same law, the question of the legality of a contract (either on its terms or its compliance with state regulation or other legislative provisions) gives rise to public policy considerations in relation to the award. The acceptance of this premise would involve a significant expansion of section 39(2)(b)(ii) of the International Arbitration Agreement. It would result in there being in effect an appeal on an issue of law wherever one party had alleged illegality in the arbitration but the arbitral tribunal had rejected the contention, despite the clear provisions of the International Arbitration Act. As the alleged illegality of a contract not infrequently arises in relation to the interpretation of regulations or other legislative provisions said to be applicable to the contract, the ambit of the court’s intervention would be increased significantly by this route to a review of an award under section 39(2)(b)(ii) of the International Arbitration Act.

The Privy Council found that this would be inconsistent with the purpose of the International Arbitration Act and the Model Law. The Model Law is premised on the principle that where a matter has been submitted to an arbitral tribunal and is within the jurisdiction of the arbitral tribunal, the arbitral tribunal’s decision is final whether the issue is one of law or fact. The parties have so agreed in their contract to submit the dispute to arbitration. It is therefore the policy of modern international arbitration law to uphold the finality of the arbitral tribunal’s decision on the contract made within the arbitral tribunal’s jurisdiction, whether right or wrong in fact or in law, absent the specified vitiating factors.

The Privy Council therefore held that the Supreme Court was in error in reviewing the decision of the Arbitrator that the COA was exempt from the provisions of the PP Act and PP Regulations. That decision was final and binding on the parties and therefore no issue arose under section 39(2)(b)(ii) of the International Arbitration Act as to whether the Award was in conflict with the public policy of Mauritius.

Issue 2: If the Supreme Court was entitled to review the decision of the Arbitrator, was the COA illegal as having been entered into in breach of the PP Act and PP Regulations on their proper interpretation?

Given the Privy Council’s conclusion on issue 1, issue 2 did not arise but the Privy Council nonetheless set out the reasons for its view that the Arbitrator was correct in the conclusion he reached that the COA was exempted from the PP Act and PP Regulations and was therefore not illegal under those provisions, which for brevity, we will not set out here, but can be found in paragraphs 55 to 94 of their judgment.

Issue 3: If the COA was illegal, was the Award giving effect to the COA in conflict with the public policy of Mauritius?

As the Privy Council was of the view that the Supreme Court was not entitled to review the finding in the Award on illegality and that the COA was not in any event illegal, it felt that it was neither necessary nor helpful to address the third issue in the appeal.

The Privy Council therefore allowed the appeal, set aside the Order of the Supreme Court and allowed the application of Betamax to enforce the Award.

In conclusion, this decision is likely to have a major influence on the approach to the public policy ground of non-enforcement or setting aside in most leading arbitral jurisdictions: Section 39(2)(b)(ii) of the Mauritian International Arbitration Act , which provides that an award may be set aside if “in conflict with the public policy of Mauritius”, enacts the equivalent provision of the Model Law into Mauritian law, and is thus also reflected in the legislation of many leading arbitration jurisdictions, in Sections 68(2)(g) and 103(3) of the English Arbitration Act, and in Article V(2)(b) of the New York Convention. The Privy Council’s judgment makes it clear that there is no reason of principle to adopt a different approach to public policy in setting aside cases (such as the appeal in Betamax) and in enforcement cases under the New York Convention.

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