On 14 June 2021, the Privy Council of the United Kingdom (“Privy Council”) handed down judgment (available here) in Betamax Ltd (“Betamax”) v State Trading Corporation (Mauritius) (“STC”).  The judgment provides important guidance on the setting aside of arbitral awards on grounds of public policy in circumstances where the underlying contract is alleged to be illegal.

In summary:

• Where an arbitrator finds that there is no illegality as a matter of fact or law, a review court must carefully examine whether the grounds advanced by the party seeking to set aside the award actually engage issues of public policy.
• If the grounds advanced by the party challenging the award simply seek to reopen decided issues relating to the meaning and effect of the contract in question or whether it complies with a regulatory or legislative scheme, there will be no basis for a public policy challenge.  The review court will not “go behind” the arbitral tribunal’s decision in this regard.
• To the extent that obiter observations in English and Singaporean authority (such as Soleimany v Soleimany [1999] QB 785 and AJU v AJT [2011] 4 SLR 739) suggest otherwise, those observations are incorrect and inconsistent with the decisions themselves.
• In this case, the issue in question was the interpretation of public procurement legislation and determination of whether the contract between the parties was exempted from that legislative regime.  In the Privy Council’s view, such questions of interpretation did not give rise to any issue of public policy and did not permit the reopening of the arbitral tribunal’s decision. 

This post begins by setting out the relevant background, then examines the Privy Council’s decision and its practical implications. 

Factual background

STC is a public company operating as a trading arm of the Government of Mauritius.  It is responsible for the import of essential commodities.  Betamax is a Mauritian company incorporated for the purpose of performing the parties’ agreement.

The parties entered into a 15-year affreightment contract (“COA”) in 2009.   Under the COA, Betamax was to build and operate a tanker and make available for a period of 15 years the freight capacity of the vessel for the transport of STC’s petroleum products from Mangalore in India to Port Louis in Mauritius.  The COA was governed by Mauritian law and provided for disputes to be resolved by arbitration under the SIAC Rules. 

Betamax carried the first cargo under the COA in May 2011.

With effect from 17 January 2008, a procurement regime had entered into force in Mauritius under the Public Procurement Act 2006 (“PPA”) and the Public Procurement Regulations 2008 (“PPR”).  The PPA and the PPR were amended in 2009.

In January 2015, a new government came to power in Mauritius.  It had announced in December 2014 that it would terminate the COA in light of “the unlawful procedure and processes regarding the allocation of the contract”.  In February 2015, STC gave notice that it was unable to continue to use Betamax’s services under the COA.  On 7 April 2015, Betamax terminated the COA under its default provisions.

Betamax then filed a notice of arbitration under the COA. 

International arbitration in Mauritius is governed by the International Arbitration Act 2008 (“IAA”).  The IAA is based on UNCITRAL’s Model Arbitration Law 1985 (as amended in 2006) (“Model Law”).  In the course of proceedings, it was agreed between the parties that the arbitration was an international arbitration for the purposes of the IAA because the management obligations under the COA were to be performed outside Mauritius.

The proceedings – which were seated in Mauritius – took place between May 2015 and June 2017, with an award rendered on 5 June 2017 (“Award”).  In the Award, the sole arbitrator found that he had jurisdiction over the dispute and that Betamax had been entitled to terminate the COA on 7 April 2015, STC having made clear its intention not to perform.  Importantly, he also found that on the proper interpretation of the PPA and PPR, the COA was exempted from the provisions of the PPA and there was accordingly no basis for saying that it was illegal and unenforceable.

In August 2017, STC applied to set aside the Award.  Section 39(2) of the IAA allows for an award to be set aside in a number of circumstances, including non-arbitrability, invalidity of the arbitration agreement and if enforcement of the award would be “in conflict with the public policy of Mauritius”.

Decision of the Mauritian Supreme Court

On 31 May 2019, the Mauritian Supreme Court held that the Award was in conflict with the public policy of Mauritius and accordingly set it aside under IAA s.39(2). 

In its judgment, the Supreme Court began by examining the question of illegality de novo.  It held that the COA was within the scope of the PPA, in breach of the same and therefore illegal.  It then considered whether this illegality was sufficient to justify the setting aside of the award.  In doing so, the Supreme Court expressed the view that, in order to justify setting aside an award, (i) illegality “must be flagrant, actual and concrete”; (ii) the threshold was “quite high” for illegality to necessitate setting aside the award; and (iii) a breach “which disregards the essential and broadly recognised values which form part of the basis of the national legal order, and a departure from which will be incompatible with the State’s legal and economic system” would be sufficient. 

The Supreme Court considered that the breach of the PPA met this test because the PPA reflected “the public policy of Mauritius in prescribing and ensuring high standards of integrity, free and open competition, and protection from fraudulent and corrupt practices in the award of major public contracts”.  The Court held that the PPA prescribed “fundamental legal principles, the breach of which would … be injurious to public good and conflict with principles which are fundamental to the national economic and legal values of Mauritius.”  The illegality found by the Court was therefore sufficient to justify setting aside the Award.

On jurisdiction (which it addressed only briefly), the Supreme Court held that it was “incumbent” upon it under s.39 to “exercise ultimate control over the arbitral process by determining whether the award should be set aside on the basis of a finding by the Court that the award is in conflict with the public policy of Mauritius.”

Privy Council Decision

Under the IAA, appeal from the Mauritian Supreme Court is to the Privy Council.  The case accordingly came before the Privy Council in January 2021.  There were three issues before the court: (i) whether the Supreme Court had been entitled to review the arbitrator’s decision that the COA was not subject to the provisions of the PPA and PPR and accordingly was not illegal; (ii) if the Supreme Court had been so entitled, whether the COA was illegal; and (iii) if the COA was illegal, whether the Award was in conflict with the public policy of Mauritius. 

This post focuses on the first of these three issues.  The second and third are dealt with briefly at the end of this section.

On the first issue, the Privy Council found that the Supreme Court was in error in reviewing the decision of the arbitrator that the COA was exempt from the provisions of the PPA and PPR.  The arbitrator’s decision had been final and binding on the parties so no issue arose under s.39(2) as to whether the Award was in conflict with the public policy of Mauritius.

In reaching this conclusion, Lord Thomas (who gave the Privy Council’s judgment) began by identifying several key principles in the IAA.  These included: very limited court intervention in arbitrations under the IAA; finality of awards issued under the IAA, with very limited recourse against the same; exclusion of appeals on questions of law, and; the ability of arbitral tribunals to rule on their own jurisdiction.  Lord Thomas stated that, as a result of these principles, the only route open to the Supreme Court in its review of the Award was under s.39 of the IAA.

In considering the scope of the public policy exception under s.39 of the IAA, Lord Thomas reviewed English and Singaporean case law.  The relevance of English case law derived from the fact that the English cases concerned the common law and legislative provisions giving effect to the New York Convention (including the predecessor of s.103(3) of the Arbitration Act 1996, which provides in similar terms to s.39 of the IAA that recognition or enforcement may be refused if “it would be contrary to public policy to recognise or enforce the award”).  The Singaporean authority referred to by the Privy Council dealt with the Model Law provision on which s.39 of the IAA was based (article 34 of the Model Law). 

Lord Thomas extracted the following points from the authorities:

• If an arbitral tribunal decides that a contract is illegal, but makes an award which enforces the contract, a review court is entitled to set aside the award as conflicting with public policy.  That was the position in the English Court of Appeal in Soleimany v Soleimany [1999] QB 785.  In the words of Lord Thomas, “a court would not enforce an award in respect of what the arbitral tribunal had accepted was an illegal contract, just as it would not, for reasons of public policy, enforce a contract between highwaymen or bank robbers for the distribution of the profits of their crimes”. 
• While Waller LJ had in Soleimany made obiter comments (which were relied upon by the Mauritian Supreme Court) suggesting that, where a tribunal does not find illegality, an enforcement judge should nonetheless “inquire further to some extent” “if there is prima facie evidence from one side that the award is based on an illegal contract”, this approach was rejected in Westacre Investments Inc v Jugoimport SDPR Holding Co. Ltd [1999] QB 740 and [2000] QB 288.  Where an arbitral tribunal has the jurisdiction to determine the issue of illegality and has determined it on the evidence, the courts should enforce the award.
• AJU v AJT [2011] 4 SLR 739, a Singaporean Court of Appeal case which considered these decisions, should be read as affirming the position that: (a) in the absence of fraud or other vitiating factors, a decision of fact or law within the jurisdiction of the arbitral tribunal is final and binding, and; (b) the determination of the nature and extent of public policy is a question of Singapore law for determination by the courts of Singapore. 
• While there was a suggestion in AJU that the courts had the power to review an arbitral tribunal’s determinations as to the legality of the contract, Lord Thomas found that the suggestion “went further than was necessary for the decision in the case and [was] inconsistent with the judgment read as a whole.”  To read article 34 of the Model Law as permitting such a broad review “would be inconsistent with the principle of finality in respect of matters determined by the arbitral tribunal within its jurisdiction.”
• RBRG Trading (UK) Ltd v Sinocore International Co Ltd [2018] EWCA Civ 838 is authority for the proposition that in considering whether, and if so, to what extent public policy is engaged, a court will consider the degree of connection between the claim sought to be enforced and the relevant illegality.  That decision accepted, however, that a court could not go behind the findings of the arbitral tribunal.

Having set out the above principles and considered these decisions, Lord Thomas affirmed that the public policy exception under s.39 did not permit the reopening of decisions of fact and law made by the arbitrator. 

Lord Thomas noted that if the public policy exception allowed for the broad review contended for by STC, it would permit the review of any decision of an arbitral tribunal in an award on an issue of interpretation of the contract or legislative provisions where, on one alternative interpretation, the result is that the agreement was illegal.  This would be inconsistent with the purpose of the IAA and the Model Law, the latter being “premised on the principle that where a matter has been submitted to an arbitral tribunal and is within the jurisdiction of the arbitral tribunal, the arbitral tribunal’s decision is final whether the issue is one of law or fact.” 

The question for the court under the public policy exception is, Lord Thomas held, “whether, on the findings of law and fact made in the award, there is any conflict between the award and public policy.”  If a tribunal finds that a contract is not illegal (and that matter is within its jurisdiction), then that decision will be final in the absence of fraud, a breach of natural justice or any other vitiating factor.

The Privy Council’s conclusion on the first issue meant that the second issue did not arise.  The Privy Council nonetheless dealt with it, finding that the arbitrator was correct in his conclusion that the COA was exempt from the PPA and the PPR and was therefore not illegal under those provisions.  The Board’s reasoning – which turns on the interpretation of the relevant provisions of the Mauritian legislation – is beyond the scope of this post.  In light of its conclusions on the first two issues, the Privy Council did not consider it necessary or helpful to address the third issue.

Implications

The Privy Council’s decision is significant for two key reasons.

First, it promotes the finality of international arbitration by laying down a clear marker that the public policy ground for challenges to arbitral awards or attempts to resist enforcement should be understood narrowly and does not offer carte blanche for reopening an arbitrator’s findings on the facts or law.  A tribunal’s findings on questions of interpretation of domestic legislation are unlikely to give rise to issues of public policy.

This provides welcome clarity in a number of jurisdictions and contexts.  While the IAA is Mauritian legislation, s.68(2)(g) of the English Arbitration Act 1996 allows for an award to be set aside if the award is procured in a way that is “contrary to public policy”, and s.103(3) (discussed above) is in similar terms.  Lord Thomas made clear in the course of his decision that there was “no reason for difference as to the extent of a court’s right of intervention in respect of public policy” in a set aside context as compared to an enforcement context.  The decision is also likely to be significant in Singapore, given the extensive discussion of Singaporean authority in the judgment, as well as in other Model Law jurisdictions. 

Second and relatedly, the Privy Council’s decision reconciles several English and Singaporean authorities on the exercise to be conducted by courts considering the public policy exception.  Lord Thomas made clear the Privy Council’s view that – despite obiter comments which might suggest otherwise – cases such as Soleimany, Westacre, AJU and Sinocore are all consistent with the conclusion that, if a tribunal finds that a contract is not illegal and that decision is within the tribunal’s jurisdiction, it will be binding (absent fraud, breach of natural justice or other vitiating factors).