Skip to content
Welcome / Blog Archive / English / 2022-08-d0c3 About (over)stretching the public policy exception

2022-08-d0c3 About (over)stretching the public policy exception

Article 6 of the UNCITRAL Model Law on Cross-Border Insolvency (MLCBI) contains the ‘public policy’ exception in the application of the law. It is a standard provision in UNCITRAL texts. Article 6 MLCBI (‘Public policy exception’) provides: ‘Nothing in this Law prevents the court from refusing to take an action governed by this Law if the action would be manifestly contrary to the public policy of this State.

No definition. Article 6 does not contain a uniform definition of ‘public policy’ as the notion of public policy is grounded in national law and may differ from State to State. It should also be interpreted in the way Article 8 MLCBI (‘Interpretation’) describes. The Guide to Enactment and Interpretation (2013), nr. 102, is in favour of restricting the so-called ‘public policy exception’ to fundamental principles of law, in particular constitutional guarantees. Public policy could be used by domestic states ‘… to refuse the application of foreign law, or the recognition of a foreign judicial decision or arbitral award, when that would contravene those fundamental principles.’ As it is used in matters of international cooperation and recognition of effects of foreign laws, the Guide to Enactment and Interpretation (2013), nr. 103, wishes public policy to be understood on a more restrictive basis than solely domestic public policy. The word ‘manifestly’ has been added to emphasize that public policy exceptions should be interpreted restrictively and that Article 6 MLCBI should only be invoked ‘under exceptional circumstances concerning matters of fundamental importance for the enacting State’, see Guide to Enactment and Interpretation (2013), nr. 104. There is a contradiction in the language used in the Guide, where these ‘matters of fundamental importance’ seem wider than a court’s refusal of ‘… the application of foreign law, or the recognition of a foreign judicial decision or arbitral award, when that would contravene those fundamental principles’, so’only related to foreign law or foreign decision/award.

Yukos Oil in NL. Unrelated to Article 6, a ‘matter of fundamental importance’ could be at hand in the well-known Yukos Oil case in the Netherlands. The Netherlands Supreme Court 18 January 2019, ECLI:NL:HR:2019:54, was in support of the findings of the Amsterdam Court of Appeal that recognition of the Russian insolvency judgment re Yukos Oil, in the sense that legal effects are attributed to it in the Netherlands, is contrary to public policy, both as regards procedural aspects and material aspects. The Supreme Court determined a violation of principles and values that were regarded as fundamental in the Dutch legal order, not in the Russian judgment itself, but in proceedings that preceded Yukos’ insolvency proceedings in Russia, ie earlier Russian judgments related to tax claims which had obtained the force of res judicata. These latter judgments did not stand in the way of the Court’s judgment. These violations exceeded the boundaries within which the insolvency judgment could be given legal effect, concluded the Dutch Supreme Court.

Manifestly contrary to the public policy. When comparing Article 6 MLCBI and Article 33 EIR 2015 (public policy exception) it is notable that Article 6 closes with the words ‘manifestly contrary to the public policy of this State’, whereas the final words of Article 33 EIR 2015 are ‘… manifestly contrary to that State’s public policy, in particular its fundamental principles or the constitutional rights and liberties of the individual’. When drafting the Model Law, there was no majority approval for a reference to the latter wording, much to the disappointment to German and Dutch commentators. It is clear that Article 6 MLCBI has a wider scope than Article 33 EIR 2015, as the latter only addresses (refusal of) recognition whereas Article 6 provides the possibility of invoking the public policy exception against ‘an action’ deriving from the foreign state, particularly any decision of a foreign court. It should also be noted that Article 6 is one of the general provisions of Chapter I and is not included in Chapter III MLCBI, which concerns recognition of foreign proceedings.

US and UK. Section 1506 US B.C. follows the text and the restrictive approach literally. In court cases a narrow application is followed of section 1517 (and Article 17 MLCBI), which states that recognition of a foreign proceeding is subject to section 1506 (and Article 6 Model Law). As was stated in U.S.’ legislative history: ‘The word “manifestly” in international usage restricts the public policy exception to the most fundamental policies of the United States’, see H.R. Rep. 109-31, Pt. 1, 109th Cong., 1st Sess. 109 (2005). Not sure whether there should be made a distinction to ‘the most fundamental’ policies and those that are not so fundamental. Anyway, these ‘policies’ should be ‘public’. In the UK, in its Model Law version in the Cross Border Insolvency Regulations (CBIR) 2006, Article 6 Schedule 1 literally follows the text of the Model Law but replaces the final word ‘State’ with ‘Great Britain or any part of it’. The last five words seem redundant.

Judicial Perspective. In 2011 UNCITRAL has adopted a text entitled “The UNCITRAL Model Law on Cross-Border Insolvency: the judicial perspective”. It is referred to as Judicial Perspective. Its text has been developed in consultation with judges, insolvency professionals, UNCITRAL’s Working Group V (Insolvency Law) and member states, during international workshops and colloquia. The Judicial Perspective intends to offer general guidance, from a judge’s perspective, on the issues relevant to deciding an application of a foreign (main or non-main) insolvency proceeding, based on the intentions of those who crafted the MLCBI and the experiences of its use in practice.

Earlier this year changes have been proposed to the Judicial Perspective. It was thought appropriate to prepare an updated publication of the Judicial Perspective. The reason is that since 2013 (the second version of the Guide) a significant amount of jurisprudence applying and interpreting the MLCBI had been accumulated. With the finalization of the Digest of Case Law on the MLCBI in 2020, it was considered necessary to align the Judicial Perspective with these cases. Some twenty substantive changes have been suggested on the basis of nine court cases, predominantly origination from the US and the UK. See at A/CN.9/WG.V/WP.180.

Changes to ‘public policy’. UNCITRAL proposes as one of this group of ‘substantial’ changes, to apply the public policy exception to cases which also involve ‘… bad faith or failure on the part of the foreign representative to make full and frank disclosure of material facts to the receiving court’. It makes reference to a US case and a UK case: ‘… In Creative Finance, it was argued that the proceedings for which recognition was sought in the United States were commenced in the British Virgin Islands (BVI) in bad faith. On this question, the court observed that although it was offended by the conduct of the debtors, there was no precedent for applying the article 6 public policy exception on the sole ground of misbehaviour. In Ivan Cherkasov, the applicant for recognition did not disclose to the receiving English court facts relating to the decision by the Government of the United Kingdom not to assist in criminal proceedings in the originating State on the basis that to do so would be likely to prejudice the sovereignty, security, ordre public or other interests of the United Kingdom. The English court found that, when seeking recognition, full and frank disclosure must be made to the court in relation to the consequences of recognition on third parties who were not before the court, including from intended future applications enabled by recognition. The recognition order was therefore dismissed ab initio.’

Full and frank disclosure. Full and frank disclosure also has been the prime message in a UK case of 2016 (In re OGX Petróleo e Gás SA [2016] EWHC 25 Ch), in which Snowden J has given guidance in relating to so called without notice applications for recognition orders under the UK’s CBIR. The judge observed: ‘… Further, and notwithstanding the clear intention that the public policy exception in article 6 should be interpreted restrictively, I consider that it is strongly arguable that the court must have a residual discretion to refuse recognition if satisfied that the applicant is abusing that process for an illegitimate purpose. …’. The judge has a wish for the future, under par. 64: ‘For the future, … I think that it must be made clear that foreign representatives and their advisers must ensure that the valuable process for recognition under the Model Law and the CBIR is not misused. When seeking recognition, full and frank disclosure must be made to the court in relation to the consequences that recognition of the foreign proceeding may have on third parties who are not before the court. In particular, the court should be told of any points that could be raised in relation to the modification or termination of the automatic stay and suspension which will come into effect on recognition.’

And now? Well, it could be discussed whether a foreign representative’s misbehaviour or non-disclosure of relevant information can be the object of the public policy exception. Snowdon J seems to be in favour (‘strongly arguable’). Especially in civil law jurisdictions that have enacted the Model Law, its provisions will be a part of national (procedural) law, as will be any provisions related to ‘misuse of law’, ‘abus de droit’ or ‘abuse of procedural power’. I would favour a court looking for such a basis in stead of using the public policy exception. If you enter the door for an exception, to be interpreted very narrowly, the wind may blow the door wide open. It should be considered, however, what the effect of the court’s decision would be: fully denying recognition or would partial recognition be an alternative? Fully denying results in sanctioning a party’s wish for recognition due to the behaviour of the foreign representative. Is that a sensible solution? Maybe it’s time to regulate this behaviour where it belongs, i e not in substantive matters (doubtfully) concerning public policy, but in stead in (national binding) rules on professional and ethical rules for IPs in cross-border insolvency cases. Why not think about a Model Law regarding those persons who play such a prime role in cross-border matters. Blowing away some dust, see from 10 years ago (as a start for a discussion) ALI-III Global Principle 9 (‘Cooperation and sharing of information between courts and administrators’). The text of the Report on Global Principles can be viewed at the website of III at: html.