Dr. Le Thi Anh Nguyet  Member of VIAC Science Council Senior Associate at Phuoc & Partners Law Firm.

In international commerce and investment, parties to a dispute often select arbitration as an alternative dispute resolution other than litigation in which the court, an authorized state agency, adjudicate disputes. An explanation for this phenomenon is that arbitration may be the optimal means that the parties can exercise their autonomy in writing to select one or several individuals who are not representing state agencies and state power (the so-called private parties) to resolve disputes. However, to prevent the possibility of arbitrators "privatizing"  justice,^[1] the New York Convention and the ICSID Convention set out the rules for annulment of arbitral award when such award violates arbitral proceeding. Here, questions arise. What rules of procedure are violated? And to what extent is the commercial and investment arbitral award annulled? This article seeks to elucidate the theory and practice of annulment for violations of procedure under the New York Convention and the ICSID Convention.

Why must arbitral proceeding be followed?

Arbitration is deemed a flexible dispute resolution method where a variety of advantages can be observed. It respects parties’ choice of law, maintains confidentiality of dispute and its award can be recognized and enforceable internationally under a multilateral mechanism. Therefore, commercial and/ or investment arbitration is becoming increasingly popular although parties cannot appeal to an arbitral tribunal of higher authorities or court, known as the finality of an arbitral award. In fact, domestic and international arbitration law only allows parties to apply for annulment on certain grounds, including violation of arbitration procedure (see article V.1.b of the New York Convention or Article 52.1.d of the ICSID Convention).

This demonstrates a stark difference between resolving commercial and investment dispute through arbitration and in court. In particular, the court’s dispute resolution mechanism allows parties to appeal the decision of the first-instance court (first level) to higher authorities if they find there is a substantive and/or procedural violation that affect the impartiality of court's decision. By making an appeal, parties can request a revision of dispute’s merits and interpretation of the first-instance court. The higher-level court, on this basis, may uphold, modify or revoke the first-instance court's decision depending on the facts of the case and domestic law governing court’s activities.

Functionally, arbitrators and judges abide by law (international treaties, domestic law, custom or precedents) to resolve trade and investment disputes. However, domestic law generally recognizes judge as personnel of state, representing state and receiving payment from state budget. In contrast, an arbitrator acts in his own name, is not reimbursed from state budget and not classified as a civil servant, public employee or government official, as in the case of a judge. Court decision, meanwhile, is not recognized and enforced outside of the host state because it relies heavily on the principle of reciprocity under bilateral international treaties. On the other hand, an arbitral award has broad recognition under multilateral treaties such as the New York Convention (in 164 member states)^[2] and, even automatic recognition under the ICSID Convention (in 163 member states).^[3] Therefore, the arbitral proceeding should be strictly followed and, in contrast, the arbitral award violating such proceeding will be annulled.  

The New York Convention: Loophole in annulment for material breach rule

The New York Convention has no clear distinction between a commercial and an investment dispute. In fact, the Convention recognizes and enforces both commercial arbitration and investment arbitral award. Countries who have yet to become a member state to the ICSID Convention (for example, Vietnam) can only recognize and enforce international commercial and investment arbitral awards in accordance with the New York Convention.

Substantively, unlike the ICSID Convention, the New York Convention does not provide for rules of arbitral proceeding. Instead, as the name implies, the New York Convention only deals with matters relating to the recognition and enforcement of foreign arbitral awards. The procedure to be followed must comply with the laws applicable to the place of arbitration or the law of the country where recognition and enforcement is sought (Article V.1.a). The New York Convention provide parties, either the third-part in interest or the party against whom the award is invoked, with the right to request a domestic court (their national court or a foreign court) for annulment if the arbitral tribunal violates arbitral proceeding:  "Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that: (b) The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case (Article V.1. b). This violation denies the right to presentation, participation in arbitration sessions, and protection against adverse evidence.

Under the New York Convention, the obligation to strictly adhere to the arbitral proceeding is not specified. Instead, the Convention allows domestic courts to "interfere" with the recognition, enforcement or annulment of arbitral awards. Specifically, the New York Convention does not provide for a substantial violation test for annulment by a competent authority. After more than 60 years of implementation, cases in which the party against whom the award is invoked request national court to annul arbitral award so as to extend enforcement and/ or courts refuse to recognize and enforce due to procedural violation are relatively small in number.^[4] In Brasoil v. The Management and Implementation Authority of the Great Man-Made River Project, the Swiss Supreme Court annulled the arbitral award because the arbitral  tribunal violated the principle of contradictory proceeding and due process.^[5]

ICSID Convention: Violation of fundamental legal principles relating to the process results in annulment of international investment arbitral award

Secondly, within the investment arbitration regime, the ICSID Convention provides that the award of an arbitral tribunal established in accordance with the ICSID Convention is recognized and enforced as if it were a final court judgment of the contracting state and is binding on the parties (Articles 52 to 55 of the ICSID Convention). If parties want to make an appeal, they may only apply for full or partial annulment of an award on the basis of one or more of the five grounds prescribed in Article 52: the Tribunal was not properly constituted; the Tribunal has manifestly exceeded its powers; there was corruption on the part of a member of the Tribunal; there has been a serious departure from a fundamental rule of procedure; or the award has failed to state the reasons on which it is based. In other words, parties to investment disputes have no right to appeal the arbitral award, nor request that the merits of the dispute be changed, nor modify the tribunal’s interpretation of the law in arriving at its ultimate conclusion.

It should also be noted that, the ICSID Convention prohibits national court of contracting parties to participate during and after dispute settlement process. In particular, with respect to annulment, national courts are not granted the same power as those under New York Convention who can annul an award (Article V.1.a New York Convention). In other words, the national court of a contracting party does not have any role in ICSID proceedings and in the recognition and enforcement of arbitral awards in particular.^[6] Instead, the ICSID Convention has a unique mechanism, the "internal mechanism of the ICSID Convention", which appoints an ad hoc Committee having the authority to annul an award following Article 52.3. In a report by ICSID Secretariat, as of 2016, the total number of annulment applications is 87.^[7] In particular, one of the most frequently invoked grounds was “(d) there has been a serious departure from a fundamental rule of procedure ” (Article 52.1.d ICSID Convention). In particular, this ground covers principles of integrity of the arbitration proceeding, such as the parties’ right to be heard and due opportunity to present proofs and arguments.^[8]

In short, not every discrepancy in the proceedings that the arbitral tribunal has made will result in the annulment of international investment arbitral award. Instead, the Committee only annul awards that violate the following two parallel requirements: (i) the rule of procedure must be fundamental and (ii) the departure from it must be serious.^[9] In fact, the number of international investment arbitral awards under ICSID Convention that were annulled pose limited in number. Up to present, the Committee have annulled one award on this basis^[10] . In Fraport AG v. Philippines, on December 6, 2007, Fraport AG filed with the Secretary-General an application in writing requesting the annulment of the Award on three grounds, one of whom was there had been a serious departure from a fundamental rule of procedure. On April 14, 2008, an ad hoc Committee was constituted and, on December 23, 2010, the Committee unanimously decided to annul the arbitral award because Fraport AG did not have an opportunity to participate in the evidence-verification process provided by the Philippines. Specifically, the Committee annulled the arbitral award on the basis of Article 52.1.d because a different conclusion could have been reached if the arbitral tribunal had had knowledge of the illegality of documents submitted by Philippines at the end of the proceeding. Fraport could not raise the issue of illegality because they did not have access to the documents and, therefore, could not make counterclaim.^[11]

In  conclusion, the violation of procedural rules in international investment arbitration for annulment must be so serious that the arbitral tribunal issues a fundamentally different award from one in which the rules are followed.^[12]As such, the threshold in the ICSID Convention is stricter than that of the New York Convention. This may be a solution to limit national court’s intervention and abuse of domestic law to prevent the recognition and enforcement of international arbitral awards.

*This research paper is made to order by the Science Council under Vietnam International Arbitration Centre (VIAC) and only reflects the author’s opinion. VIAC uploads this paper on its official website with the aim of providing valuable information for the reference of the Arbitrators, the parties, other participants in the arbitral proceedings pursuant to VIAC’s Rules of Arbitration, as well as those who are interested in arbitration. Any reference and citation to this research made by a third party shall not be valid or recognized by VIAC. VIAC shall not explain or answer any requests or inquiries related to this research from a third party.

^[1]The term is translated from "privatization of justice". See also Some benefits and Risks of Privatization of Justice through ADR, The Ohio State Journal on Dispute Resolution, volume 11, No. 2 of 1996, https://core.ac.uk/download/pdf/159609087.pdf, accessed on 7/20/2020.

^[2] http://www.newyorkconvention.org/countries, last accessed 23/7/2020.

^[3] https://icsid.worldbank.org/en/Pages/about/Database-of-Member-States.aspx, last accessed 23/7/2020.

^[4] Susan Choi, Note, Judicial Enforcement of Arbitration Awards Under the ICSID and New York, 1997, page 175.

^[5] https://www.lalive.law/wp-content/uploads/2019/10/tgi_what_are_the_grounds.pdf, accessed on 7/20/2020.

^[6] accessed Background Paper on Annulment for the Administrative Council of ICSID, May 2016,  https://icsid.worldbank.org/en/Documents/resources/Background%20Paper%20on%20Annulment%20April%202016%20ENG.pdf, accessed July 19, 2020.

^[7] https://icsid.worldbank.org/en/Documents/resources/Background%20Paper%20on%20Annulment%20April%202016%20ENG.pdf, accessed on 7/20/2020.

^[8] See Drafting history of the ICSID Convention citing Fraport AG v Philippines, Decision on annulment, paragraph 185.

^[9] Fraport AG v Philippines, Decision on annulment, paragraph 180.

^[10] ICSID Annulment Based on Departure from Rule of Procedure, https://www.lalive.law/wp-content/uploads/2019/10/ICSID_Annulment_Based_on_Departure_from_Rule_of_Procedure.pdf, accessed on 20/7/2020.

^[11] Fraport AG v Philippines, Decision on annulment, sections 218 - 227.

^[12] Wena Hotels sues Egypt, Decision on annulment, paragraph 65.