A word from the Cayman Islands on bridging cultural divides in international arbitration

An airplane of GOL Linhas Aereas prepares to land at Santos Dumont airport in Rio de Janeiro, Brazil March 21, 2019. REUTERS/Sergio Moraes


September 19, 2022 - In a case with significance for common law courts (i.e., mainly those courts in the Commonwealth countries) -- in Gol LinhasAereas SA v MatlinPatterson Global Opportunities Partners (Cayman) II L.P [2002] UKPC 21 (Gol Linhas) -- the Privy Council (on appeal from the Cayman Islands) dealt with the question of how to reconcile due process standards from different jurisdictions when applying Article V(1)(b) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NY Convention), which provides that an award may be refused enforcement if a party was "otherwise unable to present its case."

The Privy Council (PC) held, amongst other things, that the Brazilian arbitrators, in a dispute over the sale of a company, did not breach the Appellants' due process rights under the NY Convention by awarding damages on a legal basis that was different from what the parties had submitted, even if this did not meet expectations of due process in the Cayman Islands.

This is an important decision from one of the most esteemed common law courts on dealing with cultural differences between common law and civil law traditions, which is highly persuasive for any court having to decide a due process challenge.


The Respondent signed a sale and purchase agreement (SPA) with the seller to buy the shares of a Brazilian company. The Appellants (MP Funds) were private equity funds, which controlled the seller.

The SPA was governed by Brazilian law and provided for Brazil as the seat of arbitration. The MP Funds were not named parties to the SPA, but had only signed an addendum with a non-compete obligation.

The Respondent commenced arbitration against the Appellants in Brazil to recover damages because the actual working capital of the company was much lower than what the seller had represented. The Respondent alleged that the seller (though the director of the MP Funds) had fraudulently misrepresented the amount of working capital and should therefore repay the difference (approx. US$18 million).

The Respondent argued that the doctrine of piercing of the corporate veil under Article 50 of the Brazilian Civil Code applied to render the MP Funds liable, even though they were not the named seller under the SPA. However, the Tribunal (consisting of a prominent Spanish arbitrator and two Brazilian lawyers, all of whom were recognized by the Privy Council as "distinguished lawyers and arbitrators") awarded damages based on the concept of "third party malice" under Article 148 of the Brazilian Civil Code, which neither party had the opportunity to make submissions on.

As Brazil was the seat of the arbitration, the MP Funds unsuccessfully applied to set aside the award in Brazil on various grounds under the NY Convention, including its inability to present its case on Article 148 of the Brazilian Civil Code. The Respondent then applied to enforce the award in the Cayman Islands, where one of the MP Funds was incorporated, but was unsuccessful before the Grand Court. However, the Court of Appeal reversed this decision, so the MP Funds appealed to the PC. The PC (based in the United Kingdom) is the court of last resort for the British Overseas Territories, which includes the Cayman Islands, the British Virgin Islands etc.


The PC dismissed the appeal and upheld enforcement of the award against the MP Funds.

In determining whether the Tribunal's unilateral reliance on the concept of "third party malice" caused the MP Funds to be unable to present their case, the PC held the doctrine of issue estoppel arising from the same ruling in the Brazilian courts (where the MP Funds sought to set aside the arbitral award) did not apply because the Brazilian court did not conduct a due process review under the NY Convention, but under its own domestic statute and applied its own standard of due process.

Hence, the PC had to ascertain what standard and system of law to be applied in determining due process claims under Article V(1)(b). In this regard, the PC surveyed the judicial approaches in the United States, France, Germany, Switzerland, United Kingdom and Sweden, and found that these courts would generally refer to their domestic standards while taking into account international norms.

Importantly, the PC observed that a breach of national due process standards does not necessarily mean that Article V(1)(b) had been breached.

In a similar vein, the PC held that in the Cayman Islands where Article V(1)(b) is transposed into Cayman legislation (i.e. the Foreign Arbitral Awards Enforcement Act 1975), it means that Article V(1)(b) must be interpreted as a domestic statute. However, its interpretation should take into account the fact that the NY Convention is an international instrument intended to have international currency. Hence, the PC needed to identify and apply basic minimum requirements which would generally, even if not universally, be regarded throughout the international legal order as essential to a fair hearing.

As such, the PC drew a distinction between a tribunal's unilateral reliance on findings of fact and legal grounds.

•For novel factual allegations, the PC recognized that it would generally be a breach of due process for a tribunal to rely on factual allegations where both parties have not had an opportunity to submit on.

•But for legal grounds, there is no uniform approach. For common law jurisdictions, unilateral reliance on legal grounds is generally considered to be contrary to parties' expectations of due process. Arbitrators would generally invite further submissions if they wanted to rely on a legal point not submitted by the parties.

•By contrast, in civil law jurisdictions, the concept of iura novit curia meant that arbitrators and judges were deemed to know the law and could bring their own legal knowledge to bear in determining a case.

While it is prudent for arbitrators to generally put novel legal points to the parties before relying on them, this was not such a serious denial of due process that justified refusing enforcement of the award. First, the governing law of the contract and the seat of arbitration were Brazilian and the arbitration run by Brazilian lawyers, so it is unrealistic to ignore Brazilian law and practice on iura novit curia.

Moreover, the Tribunal did not rely on any novel facts in determining its award. Also, it ought not surprise the MP Funds that, if they were found liable for fraud, they would have to repay the difference in the amount of working capital.


This decision is binding in the Cayman Islands and highly persuasive in all common law jurisdictions, including major commercial jurisdictions like the United Kingdom (since the PC judges are drawn from the U.K. Supreme Court), Singapore, Hong Kong, Australia, New Zealand etc., particularly since their arbitration frameworks are broadly similar to that of the Cayman Islands.

Several important points emerge from Gol Linhas that are worth considering.

(1) The PC acknowledged the range of views on an arbitrator's flexibility to consider novel legal points and shied away from adopting a nationalistic approach. This is laudable as it encourages respect for different legal cultures and hints at a transnational set of norms of due process that may be forged through judicial decision-making in various jurisdictions.

(2) In this regard, the PC did not prescribe any particular source of authority for what constitutes a transnational set of due process norms, but had instead surveyed the judicial approaches of many different jurisdictions in arriving at a bespoke ruling for this case.

(3) Given that civil law and common law notions of due process differ in many respects, such as on the scope of document disclosure, the relative importance of witness evidence versus documentary evidence and the level of the tribunal's inquisitorial intervention, it is hoped that the PC's approach can be widely adopted where cultural differences are involved.

(4) In this case, the PC could provide a simple answer to the due process conundrum because the parties had submitted themselves to a civil law style arbitration in every way (i.e., the law of the SPA was Brazilian law, the arbitration was seated in Brazil, lawyers were Brazilian), so the parties should be bound by civil law standards of due process.

(5) But the due process conundrum may become more difficult where the different legal cultures are intertwined in an arbitration, for example, in Sino-foreign disputes where the parties, governing law, procedural law and law of the seat of arbitration may be from different legal cultures. It will therefore be interesting to see how the courts will grapple with the due process conundrum in these circumstances. It will certainly not be a one-size-fits-all approach.

(6) Similar to the IBA Rules on Taking of Evidence in International Commercial Arbitration and the IBA Rules on Conflict of Interest which seek to merge civil law and common law notions of justice together, the area of due process may be ripe for transnational bodies to set out what both common lawyers and civil lawyers regard as universally accepted norms.

The system of international arbitration can only flourish if judges worldwide can strike the right balance between respecting cultural differences and upholding the integrity of the forum state's values and norms. Gol Linhas shows that the PC is leading the way in showing how this balance can be achieved.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.

Andrew Chin is a counsel in Harneys' Litigation and Insolvency team in Hong Kong. He can be reached at andrew.chin@harneys.com.