This blog examines STC v Betamax in light of the general reluctance in many jurisdictions to open the flood gates for public policy challenges in international arbitration.
The background to STC v Betamax
The Mauritian State Trading Corporation (STC) and Betamax Ltd entered into a contract for petroleum shipping services for an uninterrupted period of 15 years.
It was agreed that Betamax would provide STC with exclusive use of a ship, Red Eagle. In return, Betamax would receive US $17.6 million from STC for the first year, as well as guaranteed payment from STC at a fixed freight rate, notwithstanding any fluctuating prices, and regardless of whether the vessel carried a full load. Betamax was also granted a right of first refusal for any petroleum products which STC would import in excess of Red Eagle’s capacity.
At the time of making the contract, political opponents in Mauritius alleged that the management of Betamax exploited their relationship with the Prime Minister of Mauritius. They also alleged that the terms of the contract were significantly skewed in favour of Betamax, at the detriment of the state.
Following an election and subsequent change of government in December 2014, the new government of Mauritius (on 30 January 2015), by cabinet decision, terminated further operation of the contract, due to breaches of the law in the procurement process.
Betamax subsequently initiated arbitration proceedings against STC for wrongful termination.
Key issues in the arbitration proceedings
One of the main issues for determination was whether this contract fell squarely within the scope of the Mauritian Public Procurement Act 2006 (PPA). This is because, pursuant to section 14(3) of the PPA, the conclusion of major contracts by and with public bodies must be approved by the Central Procurement Board (CPB). As such, if the contract fell within the scope of the PPA, the agreement would be illegal and unenforceable without the approval of the CPB.
The tribunal gave an award in favour of Betamax, dismissing all of STC’s arguments. In particular, it ruled that the PPA would not apply to the contract, since STC was an “exempt organisation” under section 2 of the PPA. However, the arbitrator failed sufficiently to address the impact of Regulation 2A of the Public Procurement Regulations 2009 (the regulation). The regulation, when read in conjunction with Part V of the Schedule to the PPA, provided that contracts by and with STC for goods over Rs 100 million (about US $2.8 million), could not be exempted from the public procurement requirements of the PPA. This provision was designed to maintain the integrity and transparency of the procurement process, especially for high value contracts.
STC therefore applied to set aside the award under the Mauritian International Arbitration Act 2008 (IAA) and the application was heard before the Supreme Court.
A restrictive approach to public policy in international arbitration
The Supreme Court noted that the laws of many states reflect the pro-enforcement bias of the New York Convention. For example, the French Cour de Cassation in SNF SAS v Cytec Industries BV (Holland) held that it would refuse enforcement of an award based on public policy only where the breach would be “flagrant, actual and concrete.”
In Singapore, the courts have held that an award may only be set aside on the principle of illegality, if the parties’ conduct “shook the conscience” (PT Asuransi Jasa Indonesia (Persero) v Dexia Bank S.A.) or is “clearly injurious to public good or… wholly offensive to the ordinary reasonable and fully informed member of the public, or where it violates the forum’s most basic notion of morality and justice (Rockeby Biomed Ltd v Alpha Advisory Pte Ltd).”
In the United Kingdom, the principle of public policy “is never argued but where other points fail” (Richardson v Mellish). However, the courts have demonstrated their willingness to concede where:
“… [t]he Court is… concerned to preserve the integrity of its process, and to see that it is not abused. The parties… cannot by procuring an arbitration conceal that they, or rather one of them, is seeking to enforce an illegal contract. Public policy will not allow it.” (Soleimany v Soleimany.)
The exceptional circumstances in STC v Betamax
Reluctant to open the floodgates, the Supreme Court in STC v Betamax reiterated that international arbitral awards will only be set aside on grounds of public policy in very limited circumstances. Indeed, the Supreme Court held that the:
“… threshold is quite high; it should be the breach of a fundamental legal principle, 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” (paragraphs 37 and 38).
However, the Supreme Court determined that a breach of the PPA is precisely an example which would meet this high threshold. This is because the mandatory provisions of the PPA, which dictate the application of the PPA and the procurement process of the contract, are the “fundamental pillars of good governance in Mauritius” (paragraph 39). Crucially, the PPA was designed to:
- Prescribe and maintain integrity.
- Promote free and fair competition.
- Prevent fraudulent and corrupt practices in the award of major public contracts to ensure the efficient use of Mauritian public funds.
Any breach of the PPA would therefore be “injurious to public good” (paragraph 39). This places the PPA firmly within the scope of section 39(2)(b)(ii) of the IAA, namely that the arbitral award may be set aside where the court finds that it is “in conflict with the public policy of Mauritius” (paragraph 34).
The court also held that the contract was heavily skewed to benefit Betamax, not least because it contained an obligation to pay Betamax a large sum, using public funds, for 15 years. This imbalance played a key role in the court’s decision to set aside the award, as the contract clearly flouted legislation designed to secure public funds. This encouraged the court to conclude that:
“… [t]he enforcement of an illegal contract of such magnitude, in flagrant and concrete breach of public procurement legislation enacted to secure the protection of good governance of public funds, would violate the fundamental legal order of Mauritius. Such a violation breaks through the ceiling of the high threshold which may be imposed by any restrictive notion of public policy.” (Paragraph 41.)
Although the Supreme Court looked at the position in other leading jurisdictions with respect to public policy, no single case was identified to the Supreme Court where a court had held a breach of public procurement laws as amounting to a breach of public policy. Accordingly, the Supreme Court, in applying the relevant principles, found that because of their nature and purpose, a breach of the PPA was a breach of the public policy of Mauritius.
This decision arguably represents an extension to the known categories of public policy in international arbitration. It remains to be seen whether other jurisdictions will follow the approach of the Supreme Court when it comes to alleged breaches of public procurement laws.
The decision also emphasises that the approach to public policy control in international arbitration remains jurisdiction specific. Accordingly, it is important that parties contracting with government entities ensure that relevant local procurement laws (and indeed local laws in general) are complied with in all respects.