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Overturning an Arbitration Award on Public Policy Grounds: Gad -v- Siman Tov

Prepared by Keith Shaw, Adv., Zell & Co.

January 2004

Some legal principles are so common and so central that they find constant practical expression.  Others crop up with rather less frequency.  Such a principle is the ability of the courts to cancel contracts, or other matters, on public policy grounds, an area of law which does not often escape from the pages of the textbook.

However, in a decision handed down by Judge Boaz Okon in the Jerusalem District Court on 8 January 2004, it did just that, when in the case of Gad -v- Siman Tov[1], the judge overturned an arbitration award which permitted the payment of bribes to foreign officials, on the ground that such an award was contrary to local and international public policy.

The petitioners in the matter, who were requesting that the arbitral award be overturned, were residents of New York, while the respondent was a resident of Mexico.  In his decision, the arbitrator, who was not required by the parties to rule according to the substantive law, had ruled that the petitioners should pay $250,000 to the respondent, and should refrain from direct correspondence with a certain individual, who served as the respondent’s contact in the Mexican administration.

Upon investigation (prompted in part by the second part of the award, which appeared to the judge to be somewhat out of the ordinary), the judge determined that the claim for payment by the respondent was in return for certain services which he had provided for the petitioners through use of his contacts within the Mexican administration.  Through such contacts, he had brought about the closure of two police investigations in Mexico against the petitioners, and his services had included the making of payments to Mexican officials.

The judge noted that although the arbitrator was fully aware, and indeed had investigated in depth, the nature of the services provided by the respondent, he had decided to treat the relationship between the parties as any other service relationship, on the basis that such activities were considered a normal part of life in Mexico.  This even though it was clear that the respondent had effectively paid bribes to Mexican officials.  The judge concluded that the question before him was not whether the parties had acted unlawfully, or whether unlawful payments had been made to a foreign authority, but rather whether it was possible to confirm an arbitral award based on the finding that services such as described above had been provided.

The judge held that while the parties were entitled to release the arbitrator from an obligation to rule according to the substantive law, and while it was in general the court’s role to uphold the award made by him, it would not do so when the effect of the award was to require or endorse an activity which would be contrary to law or public policy.

The judge quoted Smadar Ottolenghi, in “Arbitration – Law and Practice”:

“Needless to say, freedom from [ruling according to] the substantive law does not justify a ruling contrary to public policy.  If the content of a ruling is contrary to public policy, its cancellation should be expected.”

The judge commented that acting for the general good and acting for profit were not always compatible, and that for this reason it was necessary to subject the conduct of business to certain basic ethical considerations.  The role of the court was to style a framework for such conduct, which could not include illegal activities, wherever they might be committed.  To this end, it made no difference whether the bribes in question were paid in Israel or abroad, and that even if the arbitrator considered that the “tainted payments” were acceptable in the foreign territory, it was not for the Israeli court to derive its values from behaviour which might be considered acceptable elsewhere.  Even if the payment of a bribe outside Israel does not constitute a criminal offence under Israeli law, it would be contrary to Israeli public policy.  It was not possible to conceive that the Israeli court should act as a shelter whereby it would “launder” activities carried out abroad such that under-the-table payments made there would be turned into legitimate payments in Israel.

The judge further noted that the situation was not one where the illegal act was a subsidiary element of the matter, whereby one could adopt a blue pencil approach and distinguish between what was and what was not permissible.  Here, the illegal act was the very basis of the services provided, and for this reason the arbitral award could not be upheld.

The judge noted finally that it was not generally the court’s practice to raise claims not raised by the parties themselves, but that this was not a rule set in stone, and that it was appropriate for the court to do so when it believed that the transaction in question was illegal or otherwise tainted.

In defining what constituted public policy, the judge referred not only to an Israeli standard, such as has found expression most recently in the Prohibition Against Money Laundering Law, but also to an international or global standard, based upon similar principles of fairness, good faith, and customary behaviour between individuals of integrity.  Although the judge did not refer to it specifically, his position in this matter would also seem to be closely in keeping with the anti-bribery provision of the US Foreign Corrupt Practices Act.  Although the black-letter provisions of such Act are more directed at bribes paid for the furtherance of business objectives (obtaining, retaining or directing business), the underlying rationale would appear to be the same as the considerations enunciated by Judge Okon.

Judge Okon’s decision is an encouraging one.  He notes that the activities which led to the award did not constitute a crime in Israel, and that the arbitrator had found that such activities were standard practice in Mexico.  However, the judge ruled that nevertheless, the Israeli legal system would not allow itself to uphold an award (or, presumably, a judgment) which would undermine the basic concepts of fairness and integrity which are the fundamental basis of a properly operating legal system.  In doing so, he placed the Israeli system squarely in line with the principles expressed by the courts of other leading Western legal systems.

Copyright © 2004 Zell, Goldberg & Co

DISCLAIMER: The above memorandum is made available to visitors to our website as a courtesy.  It is not intended as legal advice and should not be relied on as such.  Persons seeking legal advice concerning Israel law should consult with a qualified advocate admitted to practice in Israel under the Chamber of Advocates Law 5721 - 1961.

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