A tribunal has held that the refusal by Czech courts to recognise and enforce New York Convention awards on grounds of public policy did not constitute a breach of the Canada-Czech Republic bilateral investment treaty (BIT).

The claimant (Frontier), a Canadian company, had obtained interim and final awards in Swedish arbitration proceedings against a Czech company (MA). Before the awards were made, MA had been declared bankrupt. Frontier sought to enforce the awards in the Czech Republic. However, the Czech courts refused to recognise or enforce the awards, relying on the public policy exception in Article V(2)(b) of the New York Convention. Frontier claimed that the Czech courts' wrongful failure to recognise and enforce the awards meant that the Czech Republic was in breach of its obligations under the BIT to provide fair and equitable treatment and full protection and security to Frontier's investment. It commenced arbitration under the UNCITRAL Arbitration Rules 1976.

The tribunal dismissed Frontier's claims. It found that the alleged inaction of the Czech courts in relation to the interim award did not constitute a failure to properly give effect to that award. In relation to the final award, the tribunal's role was to determine whether the Czech courts' refusal to recognise and enforce the final award in full violated the BIT. Specifically, was the Czech courts' refusal made in an arbitrary or discriminatory manner or did it otherwise amount to a breach of the fair and equitable treatment standard?

The tribunal endorsed the widely accepted view that reference to "public policy" in Article V(2)(b) of the New York Convention was to the particular national conception of international public policy. The question here was whether the Czech courts' decision was "reasonably tenable" and made in good faith. The tribunal noted that other national courts (such as in France and Germany) had found that the equality of creditors in bankruptcy proceedings and the equitable distribution of assets were public policy principles sufficient to refuse enforcement of awards under the New York Convention. This supported the conclusion that the Czech courts' interpretation of international public policy of the Czech Republic was reasonably tenable. Further, there was no indication that the Czech courts had acted arbitrarily, discriminatorily or in bad faith.

Another reason for finding that the Czech courts' interpretation of "public policy" under the New York Convention was not unreasonable was that enforcement of the final award would have given Frontier preference over other creditors of MA, whose position would have been seriously affected given the size of Frontier's claim and the limited assets available.

The decision contains an interesting discussion of the scope of the public policy exception in the New York Convention and the interaction between the New York Convention and the host state's obligations under a BIT.

Case: Frontier Petroleum Services Ltd v Czech Republic (Final award, PCA, UNCITRAL Arbitration Rules, 12 November 2010) (available at www.investmentclaims.com).