When The Seat Speaks: Why Foreign Courts Should Respect Annulment Decisions In Arbitration
By Srihari S. Somayaji and Suneha Bhandary
Though the idea of enforcing an Arbitral Award which has been set aside by the Seat of the Arbitration sounds alien or bizarre, different jurisdictions around the world have adopted different approaches to this. At the heart of this issue is the multitude of interpretations that various national courts have adopted regarding Article V(1)(e) of the New York Convention, 1958 (“Convention”). Among the grounds for refusing enforcement, Article V(1)(e) remains particularly controversial. It states that recognition and enforcement may be denied if the award is not yet binding or has been annulled or suspended by the competent authority at the seat. Much of the interpretive inconsistency stems from the discretionary nature implied by the word “may.”
Article VII of the Convention permits an award creditor to rely on the more favourable provisions of the enforcing State’s domestic law, rather than those contained in the Convention itself. By contrast, Article V delineates the grounds upon which recognition and enforcement may be refused, and Article V(1)(e) expressly includes the annulment of the award by the courts of the State in which, or under the law of which, the award was rendered. This juxtaposition gives rise to an inherent tension between the two provisions. Consequently, identical factual circumstances may produce divergent legal outcomes across jurisdictions, depending on the interplay between the Convention and local legislation. Such divergence engenders a level of systemic unpredictability that ultimately undermines the Convention’s objective of fostering uniformity and certainty in the international enforcement of arbitral awards.
This approach adopted by many pro-arbitration jurisdictions around the world has created a plethora of ambiguities.
The French Approach
French Courts have taken the stance that annulled/ set aside awards may still be enforced in accordance with their domestic laws, on the basis that an Arbitral Award forms part of a broader international order.
The new French Code of Civil Procedure (nouveau Code de procedure civile), enacted in 1981, adopted an excessive liberal approach towards enforcement of foreign arbitral awards. The new French Code read along with Article VII (1) of the Convention, the Courts are empowered to legally refuse to apply Article V(1)(e) of the Convention and enforce an award set aside or suspended in the country in which, or under the law of which, it was made. Article VII(1) of the Convention was construed to an exception to the strict supremacy of international treaties over national laws.1
Further, the Court of Cassation in Société Pabalk Ticaret Ltd. Sirketi v. Société Anonyme Norsolor2 held that French Courts are duty bound to apply the more-favourable-right right under Article VII(1) at the time of enforcing an Arbitral Award, even where enforcement would be otherwise refused under Article V(1)(e) of the Convention.
Further, the Hilmarton3 case, saw the coexistence of two differing awards concerning the same issues and between the same parties, creating a dangerous situation that violates the intended uniformity of the Convention and damages the image of international commercial arbitration. The goal of the Convention was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which these agreements are observed and arbitral awards are enforced in the contracting states.
In reaching the conclusion that an award does not form part of any national legal order, France has adopted an extremely liberal approach, demonstrating the nonterritorial view that French law has of international arbitration. Such view is based on the idea that an international arbitral award is a decision binding on the parties, through an agreed jurisdiction, which is not made with the authority of the courts at the place of arbitration. As such, its international enforceability is independent of such courts.
The German Approach
Contrary to the French approach, Section 1061 of the Zivilprozessordnung (ZPO) [German Code of Civil Procedure], a foreign award will be recognised and enforced in terms of provisions mandated under the New York Convention, meaning to say that, at the time of recognising and enforcing an Arbitral Award in Germany, the Courts will look at the status of the Award where the same was issued. Further, under Section 1061 of ZPO, an award which was earlier declared as enforceable can be set aside pursuant to a successful challenge at the Seat.
The German approach has been viewed as the “correct” approach to recognition and enforcement of a foreign award4. Thus, German Courts view awards as an integral part of the judicial regime of the seat5, without subjecting the same to full review in the enforcing country6 and adopts a method that is sensitive to all parties and the seat. While some other jurisdictions, such as the United States have adopted this approach to varying degrees, others have rejected it entirely. This divergence has left the international position unsettled, creating the potential for inconsistent and contradictory outcomes.
Acknowledging the successful challenge at the Seat upholds the spirit of international arbitration and protects the Party against unfair award. This is even what the Convention contemplated, i.e., minimal level of procedural fairness, which is usually overseen by the Courts at the Seat.
Upholding Party Autonomy
The Parties to a contract choose arbitration as their dispute resolution mechanism for the control over the manner in which proceedings are conducted and disputes are resolved. Parties have the control over the Arbitrators, applicable laws, the mandate of the Tribunal, which benefit the Party from one country while contracting with another Party from a different country with a different legal system. Further, Arbitration is chosen to do away with the national bias in one of the party’s home legal jurisdiction.
By giving proper effect to the parties’ autonomy and their freedom to define the contractual framework governing their arbitration, the role of the enforcing court should be confined to the limited grounds for review expressly enumerated in the New York Convention. Aligning the scope of review in the enforcement forum with that undertaken by the courts of the seat ensures that supervisory authority is concentrated in a single jurisdiction. This, in turn, mitigates the inconsistency that arises when foreign courts diverge in their treatment of annulled awards. Under such an approach, the location of the losing party’s assets becomes less significant in determining recognition and enforcement outcomes than the designated seat of arbitration, a preferable result, given that the seat is the only factor subject to the parties’ mutual agreement and deliberate choice.
As in Germany, courts should confine themselves to a limited and internationally acceptable degree of intervention when reviewing an arbitral award, leaving any assessment of the merits to the courts of the seat. Such an approach respects the supervisory competence of the seat’s judiciary and acknowledges the legitimacy of its review of the arbitral process under its own national law. Through this initial scrutiny, the courts of the jurisdiction in which the award was rendered ensure that any award circulating beyond their borders for purposes of recognition or enforcement carries an appropriate level of national validation.
Effects Of Enforcing An Annulled Award
Diluting Legitimacy and Reliability
Courts exercise the power to set aside an Arbitral Award only in extraordinary circumstances such as violation of due process, excess of mandate, improper jurisdiction. Enforcing an award, which is defective, takes away the reliability of international arbitration.
Forum Shopping
Allowing enforcement of annulled awards encourages award creditors to strategically select enforcement-friendly jurisdictions and circumvent legitimate annulment decisions. This practice bypasses the supervisory role of the courts of the seat, which the parties themselves selected as the primary judicial authority. This distorts the balance of fairness in the arbitral process and encourages opportunistic litigation behavior.
When courts permit enforcement notwithstanding annulment at the seat, award creditors are encouraged to pursue recognition in jurisdictions perceived as more receptive, thereby distorting the jurisdictional balance envisaged by the New York Convention and the principle of territoriality.
Lack of Uniformity and Legal Certainty
The goal of the Convention, being harmonization of different legal jurisdictions, is disrupted by inconsistent interpretation of Article V.
Increased Cost
Award creditors may pursue enforcement in multiple jurisdictions despite annulment.
Award debtors are forced into defensive litigation across several countries, escalating costs and creating procedural chaos.
Incentivizing Strategic Behaviour and Opportunism
Enforcement-friendly jurisdictions become magnets for opportunistic litigation. Award creditors may deliberately avoid jurisdictions with a balanced or rigorous approach to annulment decisions and opt instead for courts known for their liberal enforcement stance (e.g., the French approach).
Such strategic behaviour converts the enforcement phase into a tactical game rather than a principled legal process grounded in the Convention and party autonomy.
Disregard to the Seat
Parties themselves choose the seat, which is the anchor of every arbitration proceedings. Enforcing an annulled award makes the seat irrelevant and disregards the parties own choice of governing law.Parties themselves choose the seat, which is the anchor of every arbitration proceedings. Enforcing an annulled award makes the seat irrelevant and disregards the parties own choice of governing law.
Distortion of Commercial Expectations
Businesses select arbitration believing that the award will be subject to a single, coherent supervisory structure. Forum shopping disrupts these expectations, as parties cannot reliably predict where and how an annulled award might be enforced.
This uncertainty affects risk assessments, contract drafting, and ultimately commercial behaviour.
Conclusion
The enforcement of arbitral awards that have been set aside at the seat poses significant challenges to the coherence, predictability, and legitimacy of the international arbitral system. Respect for the supervisory authority of the seat, adherence to party autonomy, and the need for uniform application of the New York Convention all argue strongly against giving effect to annulled awards. Allowing enforcement notwithstanding annulment, not only invites forum shopping and inconsistent judicial outcomes but also undermines the finality and integrity of the arbitral process itself. A principled refusal to enforce such awards therefore promotes legal certainty, reinforces the central role of the chosen seat, and preserves the stability of the international framework within which arbitration operates.
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