Supreme Court of Justice
Case Nr. 103/13.1YRLSB-2
A foreign award enforcing a penal clause of such high magnitude that it impairs the personal and economic freedoms of a party is incompatible with the international public order of Portugal, and is therefore unenforceable.
- The fact that the New York Convention seeks to facilitate the recognition and enforcement of foreign arbitral awards does not imply the unconditional recognition of such judgments. Rather, the Convention provides, in art. V, No. 2, al. (b) that recognition may be refused if the award is contrary to the public policy of the concerned country, it being agreed that the public policy referred to here is only ‘international’. This concept of ‘international public order’ is also expressly enshrined in art. 56 (1), al. (b) (ii) of the LAV.
- The concept of international public order has the following characteristics: (i) imprecision; (ii) the national nature of its requirements; (iii) exceptionality (because it is a limit to the recognition of an award putatively based on private autonomy); (iv) fluctuation (based on the conditions prevailing time of the trial); and (v) relativity (depending on the circumstances of the case).
- An inquiry into whether the foreign award is consistent with the international public order of Portugal does not entail any judgment of the appropriateness of the tribunal’s application of the applicable law, or a review of the merits of the dispute.
- Although it is not possible to determine, a priori, the content of the international public order of Portugal, it can be stated that the concept is shaped by the structuring principles of the legal order of Portugal. Thus, its contents would be based on constitutional norms and principles, especially those that protect fundamental rights, as well as the fundamental principles of the law of the European Union. Thus, the contents would include good faith, good manners, prohibition of abuse of rights, proportionality, prohibition of discriminatory measures, prohibition of punitive damages in civil matters, and rules of competition law.
- In light of the indeterminacy of the above principles, their invocation as a ground for refusing recognition of an arbitral award would have to be limited to circumstances where such recognition would lead to a result manifestly incompatible with the international public order of the Portuguese State, and not merely a result divergent from that arising from the application of Portuguese law.
- The foreign award in this case ordered the Defendant (a Portuguese lawyer) to pay the Plaintiffs (a Portuguese law firm) an amount of over EUR 4,5 million under an agreed penal clause attached to a non-compete agreement, Significantly, this amount was equivalent to over 25 years of the Defendant’s professional income. An award pursuant to this penal clause is manifestly inconsistent with the principles of good faith, proportionality, and prohibition of excess. Further, such an award restricts the personal and economic freedoms of the defendant and, consequently, his most fundamental rights enshrined in the Constitution— freedom to choose a profession and free economic initiative (Articles 18, 47 and 61 of the Constitution of the Portuguese Republic). Thus, such an award is manifestly inconsistent with the international public order of Portugal, and is consequently unenforceable.
This case summary was kindly prepared by Rishabh Raheja, (email@example.com, NALSAR University of Law), Sameer Thakur (firstname.lastname@example.org, NALSAR University of Law), and Abhishek Babbar (email@example.com).