II. Arbitrability in national courts at preliminary phase of investigation

The issue of arbitrability may be raised at the preliminary phase of investigation in a national court which might be a national court of one of the parties or the national court of the seat of the arbitration.

Although different views are raised here (^{Van den Berg, 1981}, p. 126)², the preferable view seems to be that the national court investigating an arbitration agreement must apply lex fori to determine whether the dispute in question can be referred to arbitration or not (Lew, Mistelis & Kröll, 2003; ^{Arfazadeh, 2001}, p. 76; ^{Arfazadeh, 2005}, p. 95) ³.

This view is only partially correct. Lex fori is only appropriate at the extent to which the jurisdiction of national courts (where the dispute has been referred to or the referral national courts) pertains to the specific dispute under investigation.

In other words, lex fori will be applied only when there exists a conflict of jurisdiction between the arbitral tribunal and the national courts to which the case has been referred. As it was mentioned earlier, the main goal of the government by legislations regarding arbitrability is to apply the legislated rules at the time of the occurrence of conflicts of jurisdiction between the courts of that country and the arbitral tribunal and also to assign the exclusive jurisdiction to national courts in relation to particular disputes.

However, these kinds of jurisdictional conflicts will occur only when the national courts which have been referred to have an exclusive jurisdiction in dealing with the dispute in question in an arbitral tribunal. This issue will in turn depend upon the question whether the dispute under investigation has any territorial connection with the country to which the national court belongs or not. The jurisdiction and qualification of the seat of the national courts are limited to the disputes relating to arbitration that take place within the jurisdiction of the seat of the court⁴.

Therefore, the requirement for the application of their version of the law by national courts is that the disputes in question must have a direct territorial link to national courts. The simple fact that arbitration takes place in the same place would not be convincing.

For further explanation, it is suggested to assume that an agreement on the acquisition of permission between the United States of America and Japanese party includes the condition of arbitration in Germany. At this time, a dispute may occur outside of the agreement that had been signed in the US and had been executed in Japan.

In general, this dispute had no other connection with Germany or Europe except the fact that it had been stipulated in the agreement that the arbitration must be done in Germany.

Before establishing the arbitral tribunal, one of the parties resorts to the German courts based on the German Procedure Code (the seat of the national courts) and argues that the dispute is directly related to the registration and validity of the patent and, thus, cannot be referred to arbitration (^{Böckstiegel, Kröll & Nacimiento, 2007}).

In this case, there is no reason for the German courts to exercise their own established law and decide whether the dispute can be referred to arbitration or not. Here, there is no reason for the application of the German law of the seat of the court in the German court for making the decision whether the case is arbitrable or not. This is not placed within the legal realm of the German law of the court seat to generally prohibit arbitration on any claim which does not include the economic interests or disputes over the patents in the German territories. Therefore, the actual meaning of the Lex fori with respect to the likelihood of being referred to arbitration refers to the protection of the exclusive jurisdiction of national courts.

This means that the German courts will ultimately decide on each claim with the following features: 1) The claim should not involve economic profits or validity of patents, and 2) If it has not been mentioned in the agreement, it will be put within the jurisdiction of German courts. Nonetheless, the exclusive jurisdiction of German national courts will not be at risk.

In fact, this is not by any means related to the subject since the German courts will not have any jurisdiction over the existing dispute even if there is no arbitration agreement. Therefore, there will be no jurisdictional disputes between the arbitral tribunal in Germany and German courts.

Consequently, there will be no reason for German courts to exercise their established law for the protection of the jurisdiction of German national courts. In our assumption, there might be a jurisdictional dispute between the arbitral tribunal in Germany and the national courts of another country (probably the national courts of the United States, Japan or a third country that has a territorial connection with the dispute in question or the country wherein the main relation has been formed).

But it is a controversy to determine whether the German courts should intervene to solve this jurisdictional conflict and protect the exclusive jurisdiction of the national courts of another country.

The jurisdictional rules of the third country have no cross-border power over the German courts. Only in exceptional cases, a national law asserts that national courts are bound to protect the exclusive jurisdiction of the national courts of another country.

For instance, this has been stipulated in the UNCITRAL Model Law about the cross-border insolvency, which is also related to arbitration. This law stipulates in its 20 articles that by the confirmation of the insolvency of disputes before the courts of a foreign country, the initiation and continuation of legal proceedings and the award in the individual’s case by the national courts of the country must be suspended in relation to indebted assets, rights, commitments or responsibilities.

As it is generally accepted, the terms «individual actions or proceedings» includes arbitration disputes in Art. 20⁵. Thus, if the issue of arbitrability is directed to the national courts of a country that has enacted the UNCITRAL Model Law, the national courts are obliged to implement this law (lex fori). They prohibit any kind of arbitration in their territorial jurisdiction on the grounds that the insolvency disputes have been initiated by lodging the case in the national courts of a foreign country; otherwise, the exclusive jurisdiction of the foreign country will be violated, and this is precisely something that the Model Law intends to prevent about cross- border insolvency.

However, until there are not such explicit regulations in the referral national courts of law, these courts will have no responsibility to protect the exclusive jurisdiction of the national courts of foreign countries.

The main question still remains at play: if the national law of a court to which the case has been referred is not applicable to determining the issue of arbitrability (as German courts in our example), which law should be exercised to determine this issue? The answer is that the German courts should not attempt to decide on the arbitrability of the case because their exclusive jurisdiction is not at risk.

They must assign determination of this issue to the arbitral tribunal. They must have no jurisdictional interest whatsoever in the issue of arbitrability. In fact, German courts have the responsibility to assist the arbitration of the cases that occur in their territorial jurisdiction⁶. However, it is doubtful whether they are in a position to help or not.

Arbitrability is here an issue conflict of jurisdictional which exists between the arbitral tribunal and the national courts of a country and, therefore, this matter is basically related to the enforceability of the award. If the arbitral tribunal gets involved in a dispute that is under the exclusive jurisdiction of the national courts of a certain country, it will be more likely that the award that will be issued subsequently will not be enforceable in that country.

III. Appeal to the award in national courts of the seat

When an award is annulled due to non-arbitrability, the national courts of the seat always apply their national law (lex fori). This is mostly due to the fact that the majority of national regulations in lodging an appeal against the award have a provision that reflects Art. V (2) (a) of New York Convention; in fact, it refers explicitly to the national law of the seat. A common example here is Art. 34 (2) (b) (i) of UNCITRAL Model Law, which stipulates that the «subject of the dispute cannot be solved by arbitration in accordance with the law of this country». This means that the lex fori of the national courts where the award has been criticized will be the national courts of the seat.

However, the national law of the seat is not always qualified in determining the arbitrability of disputes when the issue of arbitrability is raised at the stage of proceedings regarding the annulment of an award.

In particular, national courts must examine whether dispute settlement through arbitral tribunal will be a violation of the jurisdictional rules of the court of the seat that grant exclusive jurisdiction to the national courts with regard to the dispute that has been resolved by the arbitral tribunal.

Response to this question depends on whether the national courts of the seat have jurisdiction over specific disputes in the first place. This, in turn, rests upon the fact whether or not the dispute has any territorial link with the seat of the court. If the answer to this question is negative, the national court of the seat should not reject the arbitral award. In such a case, the national law of the seat will not be violated regarding the arbitrability of the case. In fact, the national law of the seat will not have any role at all.

For further explanation on the above assumption, if the arbitral tribunal based in Germany ever decide to investigate the nature of dispute, the award that will be subsequently issued should not be invalidated by the courts in Germany. Based on the above assumption, the German courts do not have any jurisdiction over this particular dispute because it has no connection with Germany. Therefore, decision-making about the dispute would not be a violation of lex fori in Germany.

As it was explained earlier, the scope of lex fori is the maintenance of the exclusive jurisdiction of the national courts rather than to ensure on the assumption that no arbitration should be pursued about the validity of patents in German territory. Hence, there is no reason for the German courts to apply the lex fori and set the award aside.

IV. Control of arbitrability by national courts in position of enforcement of the award

Here, the view that the court responsible for the enforcement of the award is required to apply its lex fori seems to be undeniable (Bernardini, 2008, p. 516). This is mainly due to the explicit words of Art. V (2) (a) of New York Convention which stipulates that «the subject matter of the difference is not capable of settlement by arbitration under the law of that country».

In principle, this view should not be questioned. The lex fori is the only authority to which the enforcement courts are referred in order to determine whether the arbitral award has violated the laws concerning the impossibility of arbitrability. Nevertheless, the question is whether the lex fori is always suitable in determining non-arbitrability even at the enforcement stage. The enforcement courts should not get involved in an examination of whether the type of the dispute determined by arbitral tribunal was in general arbitrable in accordance with the notion of arbitrability determined by the lex fori.

The central issue for these courts is to examine whether the arbitral award in resolving a dispute has violated the exclusive jurisdiction of the national courts of the place where enforcement of award takes place. Moreover, the enforcement courts must investigate whether the arbitral tribunal has considered a default jurisdiction with regard to a particular dispute despite a binding regulation in the lex fori (i.e. the law of the enforcement courts) which grants these courts a jurisdiction over similar disputes.

From this perspective, the lex fori would be suitable in determining the applicable law only if the enforcement courts have a basic jurisdiction over the dispute that has been already settled by arbitral tribunal. This will depend on whether or not the specific dispute has had any jurisdictional link other than the fact that the award is supposed to be enforced with the enforcement state in the first. Otherwise, the lex fori will be inappropriate in determining the non-arbitrability.

If the dispute had absolutely no territorial link with the enforcement state, the enforcement courts would never have jurisdiction over the dispute. None of the national rules of the enforcement state that seek to protect the exclusive jurisdiction of the enforcement courts would have ever been violated (i.e. lex fori on non-arbitrability).

The jurisdictional regime of the enforcement state which has been established through the lex fori on non-arbitrability, will remain intact and, therefore, there will be no reason for these courts to resist the enforceability of the award.

For example, suppose that a tribunal in Switzerland gives an award on a dispute over the patent which has been registered by the patent office in Italy. If one of the parties wishes to enforce this award in Italy, it is possible that the Italian courts resist with its enforcement on the grounds that the award has violated the lex fori⁷ which gives exclusive jurisdiction over that particular dispute to the Italian courts. Since relevant patent was registered with the Italian patent authority, the Italian national courts would have exclusive jurisdiction over the specific disputes relating to that patent. Under the assumption of jurisdiction over this dispute, the arbitral tribunal has violated “the Italian lex fori” and, thus, the Italian courts would rightfully rely on the lex fori to resist the enforcement of the award in Italy.

However, if the dispute is related to a patent registered, for example, in Japan, there would be no reason for the Italian courts generally to oppose the enforcement of the award in Italy based on the principle that this kind of dispute «cannot be raised by the parties». This is not the purpose of the Italian Code of Civil Procedure Art. 806, but its purpose is that to allocate the jurisdiction to arbitral tribunal and Italian courts and also to maintain the exclusive jurisdiction of the Italian courts with regard to specific disputes. If the Italian courts never had jurisdiction on a particular dispute that has been resolved by arbitral tribunal, there would be no reason to apply their lex fori and oppose the enforcement of the award.

V. Bringing the dispute in an arbitral tribunal

In the strict sense of the word, the arbitral tribunal has no lex fori. Nevertheless, the national law of the seat of the arbitration (that is, lex loci arbitri) conventionally plays an important role in determining the arbitrability by the tribunal.

This is for two reasons: First, the law of the seat has been explicitly referred to in the New York Convention, in Art. V (1) (a)⁸. Second, and also more importantly, the arbiters tend to refer to the law of their own seat in deciding on the arbitrability of a dispute in order to prevent the annulment of their award by the national courts of the seat (Bernardini, 2008, p. 513).

However, according to what has been discussed thus far, the arbiters must consider the lex loci arbitri only when the dispute in question has a territorial connection with the law of the seat. There is a possibility that the lex loci arbitri establishes exclusive jurisdiction for the national courts over a particular kind of dispute (e.g., disputes over insolvency or disputes that the parties cannot solve). However, the arbitral tribunal is obliged to apply this provision so long as the dispute in question is concerned with the law of the seat in terms of territory; otherwise, no issue will be raised in relation to the jurisdiction of the national courts of the seat. Therefore, the lex loci arbitri (as a jurisdictional conflict of law) will not be suitable for that specific dispute⁹.

There would be no potential conflict of jurisdiction between national courts of the seat and the arbitral tribunal and, thus, the lex loci arbitri on arbitrability would have no locus standi to apply.

In contrast, if the dispute had a territorial connection with the seat of the arbitration, this link might provide an exclusive jurisdiction for the national courts of the seat. In this case, the lex loci arbitri would be appropriate and the arbitral tribunal will consider it to determine the arbitrability.

Let us illustrate by reference to the same presumptive case above on a dispute to the validity of a patent: if the seat of the tribunal is in Germany but the pending dispute has no connection with Germany, there will be no basis for the tribunal to take the relevant lex loci arbitri on arbitrability into account¹⁰.

In terms of jurisdiction, the lex loci arbitri about the arbitrability will be irrelevant regarding the settlement of the dispute in question. The German courts would never have jurisdiction over the disputes filed in the arbitral tribunal. Hence, no conflicts of jurisdiction will be created between courts in Germany and the arbitral tribunal and, additionally, there will be no chance to apply the lex fori regarding the arbitrability. In that case, the arbitral tribunal should not be concerned that its award may be annulled by the national courts of the seat.

As it was explained above, there is no justification for the national courts to neglect the arbitration award since none of the national rules concerning the arbitrability have been violated. Then, if the lex loci arbitri is irrelevant to the dispute, the following important question still remains at play for the arbitral tribunal: Which rule should be taken as a guideline in deciding whether the arbitral tribunal has jurisdiction over the raised dispute?

The applicable substantive law would not be appropriate because the issue of arbitrability is a matter of jurisdiction rather than a matter of substance. Therefore, arbitral tribunals must refuse to decide on the arbitrability of the pending case by reference to the applicable substantive law. Additionally, the applicable law will not be appropriate with regard to the validity of the arbitration contract because arbitrability is not a subject that can be related to the validity of the arbitration agreement (Brekoulakis, 2009).

The dispute brought to the arbitral tribunal will be properly connected to a country other than the one where the seat of arbitration is based through a territorial connection. This territorial connection may lead to the exclusive jurisdiction of the national courts of that country. In other words, it is possible that there is a conflict of jurisdiction between the arbitral tribunal and the national courts of a country other than the one where the seat of the arbitration is based. Moreover, there might be a provision about the arbitrability of the case in this country that is the cause of the filed dispute over the arbitral tribunal and the jurisdiction has been assigned to the national courts. Nevertheless, it is doubtful whether the arbitral tribunal is bound to comply with these national regulations. In fact, this issue is relevant to the broad question whether an arbitral tribunal should comply with mandatory rules of a country other than the country where the seat of the arbitral tribunal is located (^{Mistelis, 2007}, pp. 217-229; Brekoulakis & Mistelis, 2009, pp. 51-155). In the above instance, when the arbitral tribunal is held in Germany, the dispute in question might have a territorial connection with the US or Japan whose arbitrability rules confer exclusive jurisdiction upon their national courts in case of specific disputes. Apparently, there is no basis for the arbitral tribunal held in Germany to reject its jurisdiction over the dispute in question because non-arbitrability has been considered for the dispute in Japan or the United States. The mandatory jurisdictional regulations in Japan or the United States have no extra- territorial power over the arbitral tribunal held in a foreign country. Therefore, the arbitral tribunal is not required to apply these rules. Ultimately, the arbitral tribunal must determine the arbitrability of disputes on the basis of fundamental or practical limitations of arbitration as a mechanism for the settlement of disputes (Brekoulakis, 2009).

VI. Applying the legal principles applicable to arbitrability in arbitral proceedings

The arbitration institution should seek for a solution other than the one set out in international arbitration conventions and UNCITRAL Model Law. If the responsible institution pays attention to the theory of arbitration, it will encounter several scattered ideas.

If one party, due to the non-arbitrability nature of the dispute, claims the invalidity of the arbitration clause, many arbitration institutions will enforce the law of the country whose tribunal has jurisdiction to review the arbitration. However, in the international arbitration procedure, the lex fori has been chosen by many courts, which has nothing to do with the subject of litigation and is the common practice in the courts (Craig, Park & Paulsson, 1990, p. 82). In addition, the responsible court can be changed during the judicial process. Moreover, in virtual arbitral proceedings, no physical investigation is made. The location of the arbitral tribunal is a very random criterion that arbitrability depends on (Craig, Park & Paulsson, 1990, p. 82). Other arbitration awards determine the law applicable to arbitrability in accordance with the intentions of the parties. Referring to this view is rooted in the fact that it derives from the independence of the parties and the comprehensive principle of international commercial arbitration. However, this issue has been subject to criticism since the rules on arbitrability are of an imperative nature (Lalive, Poudret & Reymond, 1989, p. 309). The view that the parties can avoid compulsive rules of arbitrability only by choosing a different law to be applied to their arbitration agreement has been attributed to Baron Von Munchhausen’s viewpoint (Lalive, Poudret & Reymond, 1989, p. 309). The application of parties’ self-autonomy towards arbitrability does not take into account the public interests lying at the center of the laws or the awards of the courts that exclude disputes from resolution through arbitration. These interests are so important that they cannot be selected by the parties (^{Lehmann, 2004}, p. 755).

In addition, the other view maintains that arbitrators should consider issues of arbitrability in accordance with the law of the country where the probability of the enforcement of an award is much greater (Lehmann, 2004, p. 755). This theory is based on the argument that the arbitration institution is expected to ensure that its award is enforceable as far as possible. However, this view faces practical problems. Firstly, it is required that the arbitration institution determines in which country there are the assets of the losing party in order to be able to determine the country that is more likely to be the place of enforcing the award. This is difficult and often an impossible task (Lehmann, 2004, p. 756). The more important point is that the arbitral tribunal at the beginning of the proceedings should also be aware that the losing party is capable of determining the jurisdiction of the arbitral tribunal. Finally, the party that establishes an arbitration agreement should not be allowed to object to the jurisdiction of the arbitral tribunal later on based on the fact that the arbitral award is not enforceable. Therefore, the current theory is not convincing.

A very different approach is to consider the applicable substantive law. The current approach has been defended by Pierre Mayer in his speech at the Hague International Law Academy.

Mayer argues that arbiters should enforce the regulations that exclude arbitrability like any substantive rule of peremptory law. His view is based on the premise that arbiters should respect any conflicts within the scope of their power; otherwise, they will not validate the legitimate role of the government (^{Mayer, 1989}, p. 438). While this theory holds true in terms of revealing the relationship between the substantive law and arbitrability, it also has some shortcomings and gaps.

First, this theory does not stipulate the applicable law in the case of a dispute over the conflicting rules governing arbitrability Second, this theory permits the abuse of a government in that the claims that the law of that state asserts their non-arbitrability should be applied even in situations where there is no connection or there is only a weak and indirect connection, or in situations where the state itself or one of its affiliated companies is present as a party. As a result, the governments that restrict arbitrability often find their own laws more applicable than other laws that have adopted a more liberal approach to arbitrability (Mayer, 1989, p. 439).

Other pertinent methods for determining the applicable law are the application of the law of one or both of the parties and the application of the law of the state whose courts are usually responsible for determining the jurisdiction over the dispute. In a report released by Goerges Sauser–Hall in early 1952, it was referred to the International Law Institute and stated that the application of the laws of the parties and application of the law of the State whose courts are competent to exercise jurisdiction are inappropriate. These views have never been of importance in the practical procedure of arbitration institutions (Sauser-Hall, 1952, pp. 550-554).

In sum, none of the above theories adequately specify the law applicable to arbitrability. As one of the commentators has pointed out, «there is a consensus on this conclusion that controversy seems to be the only common criterion that can be found between arbiters, courts, and legal writers in relation to what law is applicable to arbitrability» (^{Böckstiegel, 1987}, p. 184). This would be less surprising if it were to be taken into account that the rules governing arbitrability reflect the various public interests that are largely dependent on public policy. Governments are competing with each other to make their own laws applicable to arbitration. The arbitral tribunal should select the most suitable law among those rules and its responsibilities will be much easier if it is able to find and apply the principles of transnational law that govern the arbitrability (Lehmann, 2004, p. 758).

VII. Human rights considerations in arbitral rules from the perspective of international arbitration

It was generally speculated that human rights had little or no connection with international arbitration, which was due to the fact that the international trading community used arbitration to resolve international trade disputes. The parties did not need the support of human rights regimes, and it was assumed that the parties would be backed up by remaining committed to the legal process and fair trial that had been approved by the New York Convention. In addition, since the parties reached a common agreement on referral to arbitration, they effectively abolished the rights supported in the courts. This perspective was strongly confirmed by the fact that no reference has been made to arbitration in human rights documents. On the other hand, fair trial has been considered as one of the most recognized and fundamental rights of human beings and has also been emphasized in international documents and human rights conventions. The realization of such a right in courts’ proceedings and arbitration requires the observance of the principles of the proceedings (^{Khedri, 2015}, p. 520). In the discussion of fair trial in human rights documents, it is possible to refer to Art. 10 of the Universal Declaration of Human Rights and Art. 6¹¹ of the European Convention on Human Rights¹². Many legal authors have carefully analyzed these documents and have inferred these principles as the ones that courts and arbitration institutions are required to deal with: the principles of independence and impartiality of the court and the arbitrator (UNCITRAL Model Law, Art. 12), equality in treating the dispute parties, public proceedings, adversarial proceedings (UNCITRAL Model Law, Art. 8, and Rules of Arbitration of the International Chamber of Commerce, Art. 22), and the right of appeal against the award. The observance of equality in treating the parties and the adversarial proceedings are among the mandatory principles of the proceedings and the standards accepted for the fair trial in arbitration proceedings. In international arbitral rules, some guarantees have been predicted for the realization of these principles. These guarantees are categorized in two groups of guarantees before and after issuing the awards. The obligation to disclose and the right to challenge the arbitrator are among the important guarantees before the issuance of the award.

In this regard, if, after the issuance of the arbitrator’s award, it is revealed that the arbitrator has not observed the equality or the adversarial proceedings, in arbitration law, it will be attempted to prevent the violation of the losing party’s rights through requesting the revocation, or the application for non-recognition and non-enforcement of the foreign arbitration award. However, in Art. 34§2 of the UNCITRAL Model Law, there are indications of the request for the revocation of the arbitral award. Since arbitration is a part of the legal order of the country where the award has been issued, it must be said that if the arbitrator’s decision is against the legal order, it should be possible to override the award in order to safeguard public policy in the area of jurisdiction (^{Born, 2009}, pp. 2620-2921; ^{Gaillard & Savage, 1999}, pp. 947-960)

Moreover, as the aim of the plaintiff’s lawsuit in courts’ proceedings is to obtain an award and enforce it, it is also important to enforce the issued award in arbitral proceedings because the enforcement of the award can lead the winning party to reach his/her right. In most cases in international commercial arbitration, the parties or the arbitration institution usually choose a neutral country as the seat of arbitration with which it has no relation. Therefore, since the losing party usually does not have any properties for the enforcement of the award in the country where the award is issued, the winning party should ask for the enforcement of the award in the country or the countries where the losing party owns properties. Meanwhile, if the winning party requests the enforcement of the award in another country and the losing party believes that the issued award is void in the light of the non-compliance with the principle of equality or the non-observance of the principle of the adversarial proceedings, s/he cannot ask for the annulment of the award in the courts of that country under the excuse that the award has not been issued in that country. This is so because the annulment of the arbitrator’s award is restricted to the jurisdiction of the court of issuing the award or the place where the award has been issued in line with the law governing the country’s arbitral proceedings. However, the losing party can ask for the non-recognition and non-enforcement of foreign arbitration award in accordance with Art. 36, clause 1, of UNCITRAL Model Law and Art. 5 of New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards with respect to the violation of the mandatory principles of the proceedings which have led to the elimination of a fair trial. It is worth noting that one of the representations of the non-recognition and non-enforcement of foreign arbitration awards in international documents is the non-arbitrability of the dispute and the award’s contrast to the public policy of the country in which the foreign arbitral award is enforced.

Of course, the authors of the current study believe that although arbitration tribunals should be inspired by human rights laws, the direct application of human rights will not be appropriate because Art. 6 of the European Convention on Human Rights, for example, speaks of public trials, while everyone has accepted that arbitration is private and usually confidential. Although the European Convention on Human Rights is not directly enforced relative to arbitration, it has an indirect effect on arbitrators and arbitration institutions. In addition, the authors of this study believe that the effect of public policy is different in the stage of establishing the right (the stage of issuing a foreign arbitral award) and in the stage of the effectiveness of the right (the stage of the enforcement of the foreign arbitral award); and it may get diminished or increased. In general, it can be argued that public policy produces an attenuated effect, and should be less used in the stage of the effectiveness of the right (the stage of the enforcement of the foreign arbitral award); however, public policy produces a strong effect in the stage of establishing the right (the stage of issuing a foreign arbitral award). This means that the arbitrator cannot recognize a right in contradiction to the material laws and the right creator for the parties or one of the parties in the face of an issue contrary to the public policy.

However, if such an award is issued, it can be revoked because of the violation of public policy (Art. 34, clause 2, of the International Commercial Arbitration Law of Iran (1997) and Art. 34 of UNCITRAL Model Law). But, if a right has been obtained abroad, the arbitrator may also refer to the doctrine of the attenuated effect of the public policy and can recognize the right, even if the lex loci arbitri does not consider that right to be producible. For example, we assume that a commercial contract is concluded between an Iranian businessman and an American one. In this contract, the parties agree that in the event of a dispute in the appearance of any damage resulting from the cancellation of the contract and its determination, the arbitrator should deal with the dispute between them and the seat of arbitration is determined in the United States. In this assumption, the Iranian businessman becomes bankrupt after the cancellation of the contract. In the United States, pure bankruptcy issues, such as establishing a manager and lodging a bankruptcy lawsuit, which are not arbitrable are considered to be different from other issues, such as standardized and common financial lawsuits against the bankrupt party or claims for determining the losses arising from the contract cancellation that do not impose any problem to the main topic of the bankruptcy issue.

On the other hand, since such disputes are clearly arbitrable on their own and do not become non-arbitrable due to one’s bankruptcy, they are considered to be different in terms of judgment. In contrast, clause 1, Art. 496 of the Iranian Civil Procedure Code has made no distinction between pure bankruptcy issues and other issues and does not consider all the claims against a bankrupt businessman to be arbitrable and it has been asserted that any dispute against a bankrupt businessman will be in the jurisdiction of the court and cannot be referred to the arbitration. Now, in this case (the lawsuit for damages arising from contract cancellation), the seat of arbitration is the United States and the arbitral proceedings will begin in that country. Assume that the arbitrator eventually issues the award in favor of the American businessman and condemns the Iranian bankrupt businessman to pay an amount as the compensation for the damage arising from the contract cancellation; and the losing party (Iranian bankrupt businessman) has no properties in the United States. But, if the American businessman wishes to enforce the award through the courts of Iran where the losing party owns properties, the Iranian court judge naturally cannot refer to Clause 496 of the Civil Procedure Law of Iran and refuse to recognize and enforce the foreign arbitral award under the pretext that the claims against the bankrupt businessman are not arbitrable. This is so because here the issue of the creation of the right is not at play; instead, the aim is to enforce the obtained right to the property that has been legally established in the United States in the past. Therefore, now in Iran, the issue of the enforcement of the obtained right is at play public policy creates an attenuated effect in the stage of the right enforcement.

On the other hand, public policy has both positive and negative effects in terms of the enforcement of the foreign law. The effect of public policy will be negative when the arbitration authorities can rule out some aspects of the law governing the arbitration agreement under the pretext of public policy even if these aspects have been chosen by the parties; hence, the negative effect of public policy is clearly observable. Arbitrators can reject the law that is really against the public policy with reference to the two laws, namely the lex fori based on their national law or a law they deem appropriate and can replace the rejected law with the two said laws. Therefore, it will be possible to consider a positive effect for the public policy. Anyway, public policy, which can have a positive or a negative effect as a result of the enforcement of foreign law, will have only a negative effect when it comes to the enforcement of foreign arbitral awards because it is mostly asserted that the award cannot be enforced due to its contrary with public policy and no other awards will be issued. In fact, solely the enforcement of the foreign award is refused.

It seems that the foundation of all these principles in the law of hearing and arbitral proceedings is the decree of reason and wisdom as a divine gift, which is common to all human beings and has been confirmed by natural rights and moral.