The place of arbitration or the arbitral seat comes with its lex arbitri, i.e.the ‘law which governs the arbitration and by the standards of which the validity of the arbitral proceedings and the ensuing awards are evaluated’. The selection of the seat determines inter alia:
- whether the arbitral award will be considered foreign in the place of enforcement and thus will be subject to enforcement procedures applicable to foreign judgments or the New York Convention in case of enforcement in a member state;
- the mandatory provisions of national legislation out of which the parties cannot contract;
- powers of arbitrators to grant injunctive relief, provisional orders and other interim reliefs;
- relationship between arbitration and national courts in matters such as resolving disputes concerning appointment and removal of arbitrators, jurisdictional objections and judicial assistance in taking or preservation of evidence; and
- the place where action for annulment of the arbitral award can be brought and whether that place has a pro-arbitration regime.
The seat has the power to impose its mandatory law on the arbitration process and to review the sanctity of the arbitration in light of those mandatory laws. All national arbitration laws are only applicable to arbitrations of that national territory. For example, the UNCITRAL Model Law, which governs virtually all aspects of the relationship between arbitration and national courts applies only if the seat of arbitration is in ‘the territory of this state.’
Far too often, the main factor taken into consideration by a party when selecting an arbitral seat is the relevance of the seat in terms of enforcement of the award. For example one of the parties may consider:
- does the seat have a pro-arbitration regime or are its arbitration laws fully matured; and/or
- would the award have to be enforced at the seat (perhaps one of the parties have assets there)
If not, then the next consideration is whether the seat and the place where the enforcement of the award may be sought are both member states of the 1958 New York Convention on Recognition and Enforcement of Arbitral Awards (‘New York Convention’).
However, what is equally important to consider is that it is only the seat of the arbitration which has the right to annul an arbitral award in a direct challenge.
Arbitral awards can only annulled in the seat of arbitration on grounds available under local law. This is the procedural prerogative of the arbitral seat.
The relevant national legislation of many countries, such as the United Kingdom and the United Arab Emirates require that direct actions to annul an arbitral award must only be brought in the place of arbitration whose laws governed the arbitral proceedings. In the words of an English judge, once an agreement as to the seat of arbitration is made “Any claim for a remedy… as to the validity of an existing interim or final award is agreed to made in the courts of the place designated as the seat of arbitration”. Courts of the arbitral seat have wide powers to annul local arbitral awards on grounds available under the local law. This is the procedural prerogative of the arbitral seat.
Under the UAE arbitration laws (Federal Law No. 11 of 1992), experience shows that there is no direct cause of action for seeking nullification of an arbitral award. According to the UAE law, the validity of the award cannot be directly challenged by the award debtor; instead, an award debtor may only contest the recognition and enforcement of the award as a counterclaim to an action for enforcement sought by the judgment creditor.
By comparison, the DIFC Arbitration law contains a clear provision in Article 41 giving parties the option to file a direct application for setting aside the arbitral award made in the DIFC. This application, however, may not be made later than three months from the date on which the party making that application had received the award.
Only a handful of jurisdictions give recourse to a direct right to challenge the award, and the DIFC is one of them.
Similarly, the Arbitration Act 1996 gives a non-waivable right to award debtors to challenge the arbitral award for lack of jurisdiction (Section 67) or serious irregularity affecting the tribunal or the proceedings (Section 68).
If the enforcement of an award is likely to be sought in the United Arab Emirates, then selecting Dubai as the seat of arbitration will prevent the losing party from making a direct challenge to the validity of the unfavourable award, a recourse otherwise available if the seat is London.
Enforcing an award nullified at the seat in another country
The New York Convention permits Member States Courts to refuse recognition of awards annulled in the arbitral seat.
But the seat is not only about having the option to file a direct challenge to nullify an arbitral award made at the seat.
The relevance of the seat is also shown in The New York Convention which specifically provides under Article (1)(e) that an arbitral award can be refused recognition if that award was annulled at the arbitral seat. As Albert Jan van den Berg wrote in 1998: “the rule is that if an award has been annulled in the country of origin, it cannot be enforced in other countries.”
It means, once an award is nullified at the seat of arbitration, it could be very hard if not impossible to enforce that award in other countries.
Even if parties know from the very beginning that enforcement would not be sought in the seat of arbitration, but the award could be enforced in a member state under the New York Convention, parties must know that the New York Convention will not save them from the wide powers of the arbitral seat to annul local awards before enforcement is even sought in another member state.
In most case examples we have seen, once an award is annulled at the seat, it may be refused recognition by other member states where recognition and enforcement are sought.
Having said that, nothing is ever simple as it seems as the relevance of the seat in the above sense is not always interpreted and understood by courts in the traditional territorial way which entrusts “concentration of judicial control over arbitration at the place of arbitration”.
French Courts, in particular, have recognised and enforced awards annulled at their seats. French jurisprudence seems to have established that arbitration is not subject to anyone national law.
In the case of 23 March 1994 / Cour de cassation / Société Hilmarton Ltd v Société Omnium de traitement et de valorisation (OTV), the Court ruled that the “Swiss award is an international decision that is not incorporated in the legal order of that State. Its existence continues regardless of annulment given that its enforcement in France is not contrary to international public policy”.
In 2005, the French Courts ruled in the case of Direction Générale de l’Aviation Civile de l’Emirat de Dubaï v Sté International Bechtel Co that: “fundamental principles of [French] arbitration law…seek to eliminate obstacles to the international circulation of arbitral awards by refusing to consider the setting-aside of an award at the country of the seat as a ground of denial of recognition [in France].”
French Courts’ “de-localized approach” was further confirmed as recently as 2015 by the Cour de Cassation in Société Ryanair Ltd v Syndicat Mixte des Aéroports de Charente where the Court held “an international award, which is not anchored in any domestic legal order, is an international judicial decision, the validity of which is ascertained in light of the rules applicable in the countries where recognition and enforcement are sought” .
As per the French Courts, arbitral awards are not decisions integrated in any national legal order and Article VII of the New York Convention allows the country where enforcement is sought to ignore the annulment decision. The French approach perhaps reduces the relevance of the seat of arbitration at least in so far as enforcement is concerned which is mainly the ultimate goal for parties in any arbitration.
Another example of a court’s refusal to recognise annulment of an arbitral award at its seat is in the case of Yokus Capital S.A.R.L v Oao Rosneft, where the Third Court of Appeal, civil section, Amsterdam, 28 April 2009 refused to recognize the annulment of the arbitral awards at the seat of arbitration in Russia.
However, the reasoning of the Amsterdam Court of Appeal’s decision did not directly address Article V(1)(e) or Article VII of the New York Convention or the question of the Court’s power to enforce arbitral award already annulled at the seat of arbitration. The annulment in Russia was not recognised because in the view of Dutch Courts the annulment decision by the Court in Russia was issued by a partial and dependent judiciary. Dutch Courts’ decision did not directly undermine the decision of Russian Courts as coming from the seat of arbitration, it circumvented the question of annulment by the seat of arbitration and focused rather on the legitimacy of that decision from a public policy perspective.
On the other end of the spectrum are the courts of Germany, England & Wales and the United States, where the prevailing opinion is to deny enforcement of awards annulled at the arbitral seat.
Under the principle of comity, English Courts have taken the stance that in exercising powers under Article V(1) (e) of the NYC, unless “a decision of a foreign court … offended against basic principles of honesty, natural justice and domestic concepts of public policy.” English Courts would not normally enforce an award that has already been set aside at the seat of arbitration (Yukos Capital SARL v OJSC Rosneft Oil Company  EWHC 2188 (Comm) (03 July 2014).
The discretion exercised by English Courts is also enshrined under Section 103(2)(f) of the English Arbitration Act 1996 which provides that English Courts may refuse enforcement on the basis that the award has not yet become binding on the parties or has been set aside or suspended by the courts of the seat of arbitration. Several other precedents confirm this approach.
Courts in the United States of America have also adopted the same approach that an award nullified at its seat will not be enforced. In one case a Swiss award previously annulled in Jakarta, Indonesia was enforced by the State of Texas on the basis that as the annulment did not hail from Switzerland, the seat of arbitration,
Parties to an international transaction are sometimes compelled by the party with greater bargaining position to choose the latter’s home country as the place of arbitration. If a party agrees upon a seat thinking that enforcement is unlikely to be sought in the place of arbitration, it must take note of whether the national law of that seat allows annulment of an arbitral award through a direct challenge, which if granted could prevent enforcement in possibly every country, except perhaps in France.
The right to nullify an award at the seat is a sword which could stab both ways. If the seat permits a direct challenge to nullify an award, the losing party may get the award annulled at that seat, and then the winning party may not be able to enforce the award anywhere else.
Conversely, if the seat does not allow a direct challenge to the validity of the award, a party with an unfavourable arbitral award will not have the option to file a direct action to nullify an award, but only to wait for the other party to seek enforcement first and then to contest it, in whichever court the enforcement is sought.