By Jonathan Hew

A recent High Court judgment has highlighted the importance of carefully drafting arbitration agreements and the difficulties of challenging arbitral awards on public policy grounds. In National Iranian Oil Company v Crescent Petroleum Company International Ltd & Anor [2016] EWHC 510 (Comm), Mr Justice Burton commented on the following aspects of arbitration law and public policy:

  1. Separability – Part 1 of the Arbitration Act 1996 applies to arbitrations seated in England and Wales. Section 7 of Part 1 provides for separability of the arbitration agreement from the main agreement. This means an arbitration agreement is separate from the underlying contract so that its validity is unaffected by the invalidity of the underlying contract. Notably, Section 7 is non-mandatory and can be disapplied by agreement between the parties. However, the parties must specifically agree to do so. The provision will not be disapplied merely by virtue of the parties’ choice of a foreign governing law.
  2. Public policy and illegality – English public policy requires that courts refuse to enforce a contract that is illegal under English law, for example, a contract to pay a bribe. However, there is no English public policy requiring courts to refuse enforcement of a contract procured by bribery or a contract tainted by previous misconduct, for example, a failed attempt to bribe.
  3. Challenges under the Arbitration Act 1996 – When considering a challenge of an arbitral award under Section 68 or the recognition / enforcement of an award under Section 103, an English court should not interfere with the arbitral tribunal’s conclusions in the absence of fresh evidence or very exceptional circumstances.

What does this mean for you?

Parties should make careful provision as to what law(s) apply to both the main agreement and the arbitration agreement. The failure to do so could lead to a time-consuming and costly challenge of an award.

The case is also a reminder that, although public policy is not a closed category, it only covers certain species of wrongdoing. Therefore, parties should exercise caution when relying on public policy to challenge an arbitral award or to invalidate a contract generally.

Lastly, the case is a further example of the courts’ generally pro-arbitration stance. However, this is certainly worth monitoring in light of recent extra-curial comments by Lord Thomas, Lord Saville and Sir Bernard Eder who have debated whether the relationship between the courts and arbitration needs to be rebalanced to ensure the continuing development of English commercial law. Whilst Lord Thomas has advocated revisions to arbitration law, Lord Saville and Sir Bernard Eder have made compelling arguments that it remains fit for purpose. For more information please keep monitoring the Latham.London blog for an upcoming article on this debate.

Read the full judgment here.

This post was prepared with the assistance of Eleanor Scogings in the London office of Latham & Watkins.