September 13, 2019 Dispute Resolution Magazine

Case studies from Canada and the United States

Rekha Rangachari and Kabir A.N. Duggal

The New York Convention, one of the most successful treaties in commercial law, has been ratified by more than 150 countries. The Convention’s framework facilitates the enforcement of foreign arbitration awards in the territory of each contracting party and permits a state to deny recognition or enforcement of foreign awards on certain narrow grounds intended to protect procedural fairness, due process, and public policy.

The 2015 International Bar Association Report has noted that the “public policy” ground perhaps lends itself to greatest elasticity because of its varying conceptions: “Contravention of public policy is thus one of the few grounds for refusing the recognition or enforcement of a foreign award. But the notion of public policy was (intentionally) not defined in the Convention and its concrete manifestations may substantially vary from one jurisdiction to another.”

Implementation of the New York Convention depends on each country’s constitutional and legal framework, where the national legislation enumerates the grounds for recognition and enforcement as provided within the Convention.

This article offers a brief overview of the implementation of the New York Convention in Canada and the United States, specifically looking at each country’s enabling legislation and its application of the public policy exception.

Canada and the New York Convention

Canada is a federal parliamentary democracy comprised of a federal government with 10 provinces and three territories that present a diverse juridical landscape. With the exception of the province of Quebec, which follows civil law, Canada is a common-law jurisdiction. The legal framework for enforcement of arbitration awards includes both the federal government and the provincial governments, since the provinces have power over matters related to property and civil rights.

Canada acceded to the New York Convention in 1986 but added a reservation to its accession, which stated: “The Government of Canada declares that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the laws of Canada, except in the case of the Province of Quebec where the law does not provide for such limitation.”

To implement the New York Convention, the federal government passed legislation entitled the United Nations Foreign Arbitral Awards Convention Act in 1985. Unlike many other jurisdictions, Canada passed the legislation to implement the New York Convention before it actually acceded to it.

The federal statute dealing with arbitration in Canada is the Commercial Arbitral Act. Article 2 of this statute provides for its application and states: “The Code applies only in relation to matters where at least one of the parties to the arbitration is Her Majesty in right of Canada (the Canadian state), a departmental corporation or a Crown corporation or in relation. to maritime or admiralty matters.” Because the federal statute is concerned only with disputes involving the state or state-owned entities, provincial legislation dealing with recognition and enforcement of arbitral awards will have a more significant role. Each of the Canadian provinces has enacted its own legislation, inspired by the New York Convention, to deal with the enforcement of international arbitration awards. 

Recognition and enforcement of an arbitral award may be resisted if it violates Canadian public policy, and the scope of that exception was considered by the Supreme Court of Canada in a landmark decision, Beals v. Saldanha.

The issue before the Supreme Court of Canada was whether a judgment issued in Florida could be enforced in Ontario. In this case, the defendants, residents of Ontario, sold a vacant lot in Florida to the Beals. After discovering that the defendants did not actually own the property they had sold, the Beals filed their claim in Florida and were awarded $260,000 in damages. The Beals sought to enforce the judgment in Canada.

The trial court in Canada concluded that the judgment was unenforceable on grounds of public policy, but the appellate court reversed the judgment permitting enforcement. The Supreme Court affirmed the decision of the appellate court. It noted that the public policy exception should be narrowly tailored – that it cannot be a basis to resist enforcement where a judgment (e.g., the Florida judgment) has “real and substantial connection” to the cause of action:

The use of the defence of public policy to challenge the enforcement of a foreign judgment involves impeachment of that judgment by condemning the foreign law on which the judgment is based. It is not a remedy to be used lightly. The expansion of this defence to include perceived injustices that do not offend our sense of morality is unwarranted. The defence of public policy should continue to have a narrow application. 
The award of damages by the Florida jury does not violate our principles of morality.  . . . [T]he record here does not provide any basis allowing the Canadian court to re-evaluate the amount of the award. The public policy defence is not meant to bar enforcement of a judgment rendered by a foreign court with a real and substantial connection to the cause of action for the sole reason that the claim in that foreign jurisdiction would not yield comparable damages in Canada.

The Beals v. Saldanha decision thus clarifies that the public policy exception must be narrowly construed and does not ordinarily permit an evaluation of whether issues would be identically determined in Canada and thereby facilitates the enforcement of international arbitration awards in Canada.

The United States and the New York Convention

The United States, like Canada, is a federal democracy. The United States Congress, acting on behalf of the federal government and the country’s 50 states, acceded to the New York Convention in 1970, adding the following reservations to its accession: “The United States of America will apply the Convention, on the basis of reciprocity, to the recognition and enforcement of only those awards made in the territory of another Contracting State. The United States of America will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the United States.”

The Federal Arbitration Act, which was signed into law by US President Calvin Coolidge on February 12, 1925, was amended in 1970 to implement the New York Convention into US federal legislation. Section 203 of the FAA provides that the district courts shall have original but not exclusive jurisdiction for any action or proceeding under the Convention. Section 207 requires that the court “shall confirm the award” where subject matter and personal jurisdiction can be satisfied to bring the case within the purview of the court, unless it finds in favor of one of the enumerated grounds for refusal or deferral under the New York Convention.

In the United States, as in Canada, recognition and enforcement of an arbitral award may be resisted if it violates domestic public policy, which is often narrowly construed. The US Court of Appeals for the Second Circuit considered the scope of the public policy exception in the Pemex decision. The dispute arose out of a contract between a construction company, Corporación Mexicana (Commisa), and Petroleos Mexicanos (Pemex), a state-owned petroleum entity of the Mexican government.

While the arbitration was pending, the Mexican government retroactively amended legislation as to public policy contracts, limiting the statute of limitations and prohibiting access to arbitration. The arbitral tribunal subsequently issued an award in favor of Commisa. Parallel proceedings ensued in which Commisa sought to confirm the award in the United States District Court for the Southern District of New York, while Pemex challenged the award in the Eleventh Collegiate Court in Mexico. Commisa initially prevailed in its confirmation effort in the Southern District of New York. Pemex thereafter prevailed in its annulment effort before the Eleventh Collegiate Court of Mexico and then appealed the decision of the Southern District of New York, contending that the annulment precluded confirmation. The United States Court of Appeals for the Second Circuit acknowledged the result in the Mexican court, and therefore remanded the case to the District Court for further consideration.

The issue before the Southern District of New York on remand, therefore, was whether it should enforce a judgment annulled at the seat. After conducting an evidentiary hearing, that court affirmed its previous decision confirming the award. The Second Circuit then affirmed this decision of the Southern District of New York. Using similar reasoning to that applied in the Canadian case of Beals v. Saldanha, the Second Circuit noted the “high hurdle of the public policy exception,” ultimately finding that “[r]etroactive legislation that cancels existing contract rights is repugnant to United States law.”

The Pemex decision shows that US courts could confirm an arbitral award set aside at the seat after rigorous analysis and based on very particular circumstances. In short, the public policy exception can facilitate the enforcement of international arbitration awards in the US.

The New York Convention has helped to promote international arbitration as a means of resolving commercial disputes more than any other instrument. Both the courts of Canada and the United States have clarified the scope of the “public policy” exception, favoring a pro-arbitration and enforcement regime. Both jurisdictions have reaffirmed the high bar for the otherwise elastic public policy exception, maintaining the prominence of these jurisdictions in the international arbitration community. 

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    Rekha Rangachari

    Executive Director of the New York International Arbitration Center

    Rekha Rangachari is the Executive Director of the New York International Arbitration Center and an adjunct Professor at Seton Hall Law School. She can be reached at rrangachari@nyiac.org

    Kabir A.N. Duggal

    Kabir A.N. Duggal is an attorney with Arnold & Porter’s International Arbitration Team in New York office, a Lecturer-in-Law at Columbia Law School, and Managing Editor for the American Review of International Arbitration. He can be reached at kduggal@law.columbia.edu.  

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