Public Policy Exception

Warren Ganesh, Senior Consultant, Smyth & Co in association with RPC

In its decision (High Court Heisei 23 (ra) No. 1334, 2012) the Tokyo High Court upheld a challenge to an arbitral award on the basis of "procedural public policy"; namely, that the arbitrator had wrongly proceeded on the basis that payment under an agreement was a technical service fee, as opposed to a patent licence fee. If the latter, an issue arose whether the payment contravened Japanese anti-trust legislation and was, therefore, void.

The case is a reminder that some disputes may not be capable of arbitration.

While the Arbitration Ordinance in Hong Kong (Cap. 609 - Section 3) underscores the general principle that parties to a dispute should be free to agree how a dispute is resolved, this is subject to such "safeguards that are necessary in the public interest". The position was similar under the previous Ordinance.

For example, in Paquito Lima Buton v Rainbow Joy Shipping Ltd Inc. [2008] 4 HKC 14, the Court of Final Appeal held that Section 18A(1) of the Employees’ Compensation Ordinance (Cap. 282) conferred exclusive jurisdiction on the District Court to deal with all employees’ compensation claims, save for certain statutory exceptions which did not include arbitration. Therefore, in such cases there was no power to stay employees’ compensation proceedings in favour of arbitration.

In so finding, the Court of Final Appeal specifically rejected the Court of Appeal's finding that employees' compensation claims were capable of arbitration ([2007] 1 HKLRD 926). What underpins the Court of Final Appeal's judgment are issues of statutory interpretation and, importantly, public policy. For instance:

  • while a statutory power to stay claims before the Labour Tribunal in favour of arbitration existed, there was no such power with respect to employees' compensation claims falling within the exclusive jurisdiction of the District Court;
  • the judges in the Employees' Compensation List of the District Court had the expertise to determine employees' compensation claims according to the statutory regime in Hong Kong; a no-fault insurance based scheme designed to afford quick redress to employees incapacitated by work related injuries. A stay in favour of arbitration was inconsistent with that policy.

For a good analysis of the common law courts' approach to such matters, see the English Court of Appeal's judgment in Fulham Football Club (1987) Ltd v Richards [2012] Ch 333, concerning the arbitrability of shareholders' claims arising out of the statutory regime for unfair prejudice petitions.

At the end of the day public policy rules and it is the local courts that determine that policy.