PRIVY COUNCIL CONSIDERS EXTENT OF SUPERVISORY COURT'S POWER TO SET ASIDE ARBITRAL AWARDS ON GROUNDS OF PUBLIC POLICY

In the recent decision in Betamax Ltd v State Trading Corporation (Mauritius) [2021] UKPC 14 the Judicial Committee of the Privy Council (the "Privy Council") found that the Supreme Court of Mauritius was wrong to set aside an international arbitration award on the basis that the award was contrary to the public policy of Mauritius, in circumstances where the tribunal had found the underlying contract was not illegal and had the jurisdiction to do so.

The award had been set aside under s39(2)(b)(ii) International Arbitration Act of Mauritius (the "Mauritian International Arbitration Act"), which provides for the supervisory court to set aside arbitral awards that conflict with the public policy of Mauritius and is materially identical to Article 34 UNCITRAL Model Law. The decision will, therefore, be of wider interest to parties to arbitration seated in those Model Law jurisdictions where it is possible to challenge and set aside an arbitral award on the grounds that it conflicts with public policy.

Background

In November 2009 Betamax Ltd ("Betamax") entered into a contract of affreightment (the "COA") with State Trading Corporation ("State Trading Corp"). Under the COA Betamax was to build and operate a tanker and make the freight capacity of the tanker available for 15 years for the transport of State Trading Corp's petroleum products from India to Mauritius. Betamax was a Mauritian company, operating as a joint venture vehicle between a Mauritian family and a Singaporean company formed to finance the construction and carry out the COA, Executive Ship Management Pte Ltd ("Executive Ship Management"). State Trading Corp was a public company responsible for the import of essential commodities, "as the trading arm of the Government of Mauritius". Following the construction of the vessel, the first cargo under the COA was carried in May 2011.

In January 2015 the Cabinet of a new Government in Mauritius announced that it would terminate the COA as a result of the "unlawful procedure and processes regarding the allocation of the contract". In early February 2015 State Trading Corp gave notice that it was unable to use Betamax's services under the COA, and in April 2015 Betamax terminated the COA under the default provisions. Betamax then filed a notice of arbitration under the arbitration clause in the COA and claimed over $150 million in damages for State Trading Corp's alleged breach of the COA. Although the seat of the arbitration was Mauritius, it was agreed that the arbitration was an international arbitration for the purpose of the Mauritian International Arbitration Act, because the ship management obligations under the COA were to be performed outside of Mauritius in Singapore and India.

One of the principal issues in the arbitration was the legality of the COA. This in turn centred around the procurement regime in Mauritius that entered into force in January 2008, consisting of the Public Procurement Act 2006 (the "2006 Act") and the Public Procurement Regulations 2008 (the "2008 Regulations"), both of which were amended in 2009. As observed by the Privy Council, the issue was "whether the [2006] Act and [2008] Regulations as they were in force on 27 November 2009 applied to the COA… If the [2006] Act applied to the COA, it would have been a contract which required approval by the Central Procurement Board established under the [2006] Act. No such approval was given by the Central Procurement Board and entering into the COA would have been unlawful under the [2006] Act."

In the arbitrator's award (the "Award"), the arbitrator found, among other things, that on the proper interpretation of the 2006 Act and 2008 Regulations the COA was exempted from the provisions of the 2006 Act, and that as the COA had not been entered into in breach of the provisions of the 2006 Act, the COA was not illegal.

In August 2017 State Trading Corp made an application to the Supreme Court of Mauritius (the "Court") under s39(2) Mauritian International Arbitration Act to set aside the award on a number of grounds, including, among other things, that the award was in conflict with the public policy of Mauritius (the "Set Aside Application"). In September 2017, Betamax applied to enforce the award.

The Court allowed the Set Aside Application, setting aside the Award under s39(2)(b)(iii) Mauritian International Arbitration Act, finding that the award was in conflict with the public policy of Mauritius. The Court considered that the grounds relied on in the Set Aside Application depended on the question of whether the COA was subject to the 2006 Act and 2008 Regulations and had been entered into in breach of the 2006 Act. In contrast with the arbitrator in the Award, the Court found that the COA was not exempted from the 2006 Act and the COA was illegal. The Court went on to find that the illegality was "flagrant" and therefore the Award should be set aside as it was in conflict with the public policy of Mauritius.

Permission was given to Betamax to appeal three issues to the Privy Council, namely (i) whether the Court was entitled to review the arbitrator's decision that the COA was not subject to the 2006 Act and 2008 Regulations and the COA was not illegal ("Issue 1"); (ii) if the Court was entitled to review the decision, was the COA illegal on the proper interpretation of the 2006 Act and 2008 Regulations?; ("Issue 2"); and (iii) If the COA was illegal, was the Award giving effect to the COA in conflict with the public policy of Mauritius? ("Issue 3").

Decision

The Privy Council found that the Court was wrong to review the decision of the arbitrator that the COA was exempt from the provisions of the 2006 Act and 2008 Regulations and that the COA was not illegal, and allowed Betamax to enforce the Award.

When considering whether an award conflicts with public policy in circumstances where the tribunal has made a finding on an issue of law or fact in the award (and has the jurisdiction to do so), the supervisory court is only entitled to apply public policy to the findings made in the award. Here this meant that it was not open to the supervisory court "under the guise of public policy… to reopen issues relating to the meaning and effect of the contract or whether it complies with a regulatory or legislative scheme".

Issue 1

The Privy Council concluded that the extent of the supervisory court's power to interfere with awards on the basis of public policy under s39(2)(b)(iii) of the Mauritian International Arbitration Act was limited in order to respect the finality of arbitral awards. The Privy Council found that where a tribunal has "expressly considered issues which have required the arbitral tribunal to inquire into circumstances suggesting illegality and set out their reasons for holding as a matter of fact and of law that there was no illegality" then "if within its jurisdiction… it holds that the contract is not illegal, then that decision will be final in the absence of fraud, a breach of natural justice or any other vitiating factor".

In the eyes of the Privy Council, this conclusion accorded with decisions in past cases concerning public policy challenges to arbitral awards and their enforcement. National courts had previously refused to enforce awards on the basis of public policy where the underlying contract had been found to be illegal in the arbitral award, but in cases where the tribunal had not found illegality, national courts had not "overturned those determinations". While the Privy Council observed that "there may be some exceptional case where the court under the Model Law provision may be entitled to review the decision on legality", the Privy Council considered that it was "not easy to think of such cases arising in practice".

Issues 2 and 3

As the Privy Council concluded that the Court was not entitled to review the arbitrator's decision, Issue 2 did not arise. In any event, after a detailed examination of the legislative scheme relating to procurement, the Privy Council concluded that the arbitrator was right to find that the COA was exempted from the procurement regime. The Privy Council considered that in light of its findings as to Issues 1 and 2, it was "neither necessary nor helpful" to address Issue 3. In the eyes of the Privy Council, "considerations in relation to the scope and extent of public policy in relation to an illegal contract are best considered in circumstances where the illegality is established and its seriousness can be judged in that context."

Comment

This decision of the Privy Council is likely to impact the approach of courts of other common law and Model Law jurisdictions as to the permissible extent of interference with awards on the grounds of public policy by supervisory courts. In finding that the Supreme Court was not entitled to review the decision of the tribunal on an issue within the tribunal's jurisdiction, the Privy Council has respected the finality of arbitral awards and upheld the parties' agreed choice of arbitration as the dispute resolution mechanism.

For more information, please contact Craig Tevendale, Partner, Rebecca Warder, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

The authors would like to thank Luke Hard for his assistance in preparing this blog post.