Proposed reforms for European jurisdiction – an outside view from an insider

How are non-Member States of the European Union, such as the United States, affected by Europe’s law on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters – a group of instruments which one can call the ‘Brussels-Lugano regime’? Developments in Brussels may be about to bring about significant changes, as part of a package of measures now being considered to update this regime. The other significant development in those proposals, from a non-European perspective, relates to arbitration.

The external dimension

Since before it was signed in 1968, the Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, and its associated instruments, have prompted adverse comment for their inward-looking nature. The Brussels-Lugano regime, now largely based on Council Regulation (EC) 44/2001 (the ‘Brussels I Regulation’), provides mandatory and uniform jurisdictional rules for 32 jurisdictions spread across 30 European countries (the 27 member states of the European Union plus, under the Lugano Convention, three EFTA states – Switzerland, Norway and Iceland).

But it very largely ignores the rest of the world. With just three exceptions, it governs jurisdiction only against defendants domiciled in the member states, providing a framework of rules governing the jurisdiction of the courts of the member state to entertain civil or commercial proceedings. (For these purposes, ‘domicile’ is a much more liberal concept than the rather narrow common law concept of domicile). What it does in this regard, and what it leaves undone, are both significant.

First, what it leaves undone. Article 4(1) of the Brussels I Regulation says,

If the defendant is not domiciled in a Member State, the jurisdiction of the courts of each Member State shall, subject to Articles 22 and 23, be determined by the law of that Member State.

Article 22 contains rules conferring exclusive jurisdiction on the courts of member states with which, by reason of their particular subject-matter, the proceedings are considered to have a particularly close relationship. Thus, proceedings concerned with rights in rem in immovable property in a member state, or the constitutions of companies incorporated in a member state, or public registers, or patents, or the execution of judgments are all assigned exclusively to the member state in question, irrespective of where the defendant is domiciled.

Article 23 confers jurisdiction –exclusively so unless the contrary is agreed – on the courts of member states which the parties have chosen in a forum selection agreement. There are a number of conditions for the efficacy of such an agreement, one of which is that either party must be domiciled in a member state. So a plaintiff who is domiciled in a member state and who has such an agreement with a defendant who is non-European domiciliary can still rely on Article 23 both to confer jurisdiction on the chosen court, provided it is within a member state, and to derogate from the jurisdiction of an otherwise competent court.

The only other exception is of marginal interest: Article 9(2) deems a non-European insurer to be domiciled where its European branch is domiciled.

With those three exceptions, when it comes to non-European defendants, national law rules the day, including the widely varying and sometimes exorbitant rules which the national laws contain. Some of these are mentioned in Annex I to the Brussels I Regulation. In Germany, for example, Article 23 of the Zivilprozessordnung (ZPO, the Code of Civil Procedure) provides for jurisdiction based on the presence of property, irrespective of whether the dispute has any connection with that property. In France, Articles 14 and 15 of the Civil Code notoriously provide a forum for any dispute brought by or against a person of French nationality. In England, jurisdiction may be founded on the service of the claim on a person during their presence in England, even if it is only transitory (although in this case the exorbitance of the rule is tempered by the doctrine of forum non conveniens).

As against persons domiciled in member states, these and other rules of national law are excluded by Article 3(1), which says that persons domiciled in a member state may be sued in the courts of another member state only by virtue of the rules set out in the Regulation. And it is now clear, following the decision of the European Court of Justice in Owusu (case C-281/02, [2005] ECR I-1383) that not only ‘may’ they be sued in the courts of the member states but, if they are to be sued at all, they must be sued there. In other words, proceedings properly brought under the jurisdictional rules of the Brussels-Lugano regime cannot be stayed under national law powers for jurisdictional reasons, either in favour of the courts of another member state which might also be competent under the regime or in favour of the courts of a non-member state.

Which brings us to what the regime Brussels-Lugano leaves undone. What it does not do is to provide exceptions to take account of the external dimension. The three areas which have long been recognized as giving rise to problems are (1) where there is a close connection with a third state, the paradigm case being one concerning title to land in that third state; (2) where there is a valid forum selection agreement giving exclusive jurisdiction to the courts of a third state; and (3) where there are prior proceedings on foot in the third state between the same parties and involving the same cause of action as later proceedings commenced in a member state. In any of those cases, proceedings commenced in a member state under the Brussels-Lugano regime will  not be stayed or dismissed in favour of the third state (or at least they should not be – there is anecdotal evidence suggesting that, at least in the case of forum selection clauses, the clause is sometimes given effect and the Brussels-Lugano regime ignored).

The proposal

The European Union has an unusual legislative process. Legislative proposals are made, and can only be made, by the European Commission. But they are adopted, and can only be adopted, by the Council (which represents the governments of the member states and which has a system of qualified majority voting) and, in a fairly recent development, by the European Parliament, which is directly elected. Both the Council and the Parliament have to give their approval.  As it was mandate to do by the Brussels I Regulation, the Commission has carried out a review of the working of the Brussels I Regulation and in December 2010 put forward a proposal for its revision  or ‘recast’  (COM(2010) 748/3).

It is by no means clear that this proposal will pass into law in its present form, not least because the European Parliament is taking a close interest in the matter and has made a number of criticisms, as behind the scenes, no doubt, have the member states. Nevertheless, the Commission is in a powerful position and will be keen to press for some at least of its proposals.

The Regulation in the international legal order

Among the proposals is the repeal of Article 4, removing the power of member states to apply their own laws to defendants domiciled in non-member states, and the removal of the ‘domiciled in a member state’ qualification in most of the Regulation’s jurisdictional rules. This would have the effect that the jurisdiction of the courts of member states over persons domiciled anywhere in the world would then be subject to the Brussels I Regulation. At present, for example, English courts will assume jurisdiction over a contract case where the contract is governed by English law – a common state of affairs in international sale or transport contracts, for example. But if the proposal were adopted, they would no longer be able to do so. Admittedly, if England was the place of performance of the obligation in question, they would then be able to assume jurisdiction on that basis under Article 5(1) of the Regulation, but that is a power which, albeit on slightly different terms, they have already. It seems very likely, especially in the shipping field, that if the proposal is adopted in this form it would result in a significant loss to Europe of dispute-resolution business from around the world. It is probably for this sort of reason that the European Parliament has expressed concern that the repeal of Article 4 should not occur without a lot more detailed analysis and consultation.

An exception to the generalised extension of the Regulation’s jurisdictional rules to defendants domiciled in non-member states is provided by Article 6(1). That provision enables a defendant domiciled in a member state to be sued as a co-defendant in the courts for the place where any of the other defendants is domiciled; but it is not proposed to extend this rule to found jurisdiction against defendants domiciled in non-member states.

One deficiency of the present system is addressed by the proposal, although curiously two more are not.  What the proposal contains is a welcome provision, in Article 34, designed to deal with the problem which may occur when proceedings in relation to the same cause of action and between the same parties are pending before the courts of a third state at a time when a court in a member state is seised.  As we saw, at present the latter court has no power to stay its proceedings, notwithstanding the parallel proceedings in the third state.  Under the proposed revision, the court seised in the member state would have a discretion to stay its proceedings if certain conditions are satisfied, including that,

‘it may be expected that the court in the third State will, within a reasonable time, render a judgment that will be capable of recognition and, where applicable, enforcement in that Member State; and the court is satisfied that it is necessary for the proper administration of justice to do so.’

These conditions are both, to a common lawyer, gratifyingly discretionary and mark something of a shift towards a flexible realism and away from a dogmatic adherence to legal certainty. The court would have power to lift the stay at any time and the stay would not prejudice the plaintiff’s position on limitation. This proposal has been generally welcomed and it seems likely that it will be adopted, whatever the fate of Article 4.

What the Commission’s proposal does not contain, however, is either a provision dealing with cases involving a close connections with a third state of a kind which, within the European Union, would give rise to exclusive jurisdiction under Article 22, or a provision enabling effect to be given to choice of court agreements in favour of third states. The case for the former is less clear cut, but the case for the former is very strong.

As regards the latter, an argument which Commission officials have been advancing in public for this omission is that such agreements will soon be dealt with by the Hague Convention on Choice of Court Agreements of 30 June 2005, and that if the Brussels I Regulation were to contain a more favourable rule, then third states would have a reduced incentive to ratify the Convention.  Ratification by the EU and by other states around the world is doubtless a desirable objective, but it is not a sufficient reason to exclude a provision from the recast Brussels I Regulation on this question. It is far from certain when, if ever, this Convention will come into force at all, let alone as between the EU and enough states around the world to make any other rule of marginal significance. So far only Mexico has ratified the 2005 Convention, and its eventual effectiveness is likely to depend to a great extent on whether the United States SA ratifies it. But this question is bogged down in a constitutional dispute within the USA on whether its implementation falls within the exclusive competence of the Federal government, or also of the individual states. Even if it does come into effect, it will exclude significant numbers of international contracts and, for a significant period at least, many countries.

The case for legislation on forum selection agreements in favour of third states is now generally agreed, and perhaps the simplest way of doing it would be to adopt wholesale the terms of the 2005 Hague Convention, which could if necessary be done by reference, even in circumstances where that convention itself does not apply. It would, however, be sensible to extend the subject-matter scope of the rule to the subject-matter scope of the Brussels I Regulation, so that the difficulties which the current rules present are not perpetuated for cases which fall outside the subject-matter scope of the Hague Convention, but within the Brussels I Regulation.

Arbitration

The Brussels-Lugano regime expressly excludes arbitration from its scope: Article 1(2)(d). It is clear that for most purposes the law which governs arbitrations is unaffected by the Brussels-Lugano regime. It does not apply to the recognition and enforcement of arbitration awards as such, nor to court judgments which incorporate such awards. Equally, proceedings which form part of the arbitral process – such as the appointment of an arbitrator, setting aside an award or ruling on points of law in the course of the arbitral proceedings – fall outside the regime. But the scope of the exclusion is unclear at the margins and the effectiveness of arbitration as a parallel system of dispute resolution has been potentially compromised by the famous West Tankers decision of the European Court of Justice (case C-187/07, [2009] ECR I-663). The Commission’s proposal contains a provision designed to overcome this difficulty, although whether it does actually do so is less clear.

The critical questions are (1) the extent to which court proceedings which aim to protect or give effect to arbitration agreements and arbitration proceedings are excluded from the regime; and (2) the effect of a dispute involving an incidental or preliminary question relating to arbitration. Both questions are affected by the decision in West Tankers.

West Tankers

In brief, the case involved a jetty in Italy owned by Erg Petroli SpA which was damaged in a collision with a tanker owned by West Tankers Inc. There was a contract between Erg and West Tankers which included a London arbitration clause. Erg was paid by its insurers for the damage up to the policy limits and then made a claim against West Tankers in a London arbitration for the excess. Meanwhile, the insurers, in exercise of their subrogation rights, brought proceedings against West Tankers in Italy. West Tankers disputed the jurisdiction of the Italian court and also sought and obtained from the English courts an anti-suit injunction to restrain the insurers from pursuing the Italian proceedings, arguing that these were covered by the arbitration clause. The question of whether that was permissible under the Brussels I Regulation was referred by the House of Lords to the European Court.

In deciding that that was not permissible, the European Court affirmed two principles. First, it decided that despite even if the London proceedings were their being outside the scope of the Regulation, it could nevertheless have a collateral effect on them if those proceedings would have the consequence of undermining the effectiveness of the regime, “namely preventing the attainment of the objectives of unification of the rules of conflict of jurisdiction in civil and commercial matters and the free movement of decisions in those matters” (para. 24).  This is an example of the ‘principle of effectiveness’ in European law.

Secondly, therefore, it went on to consider whether the Italian proceedings themselves fell within or outside the subject-matter scope of the Regulation. The critical question for these purposes was whether the fact that the dispute was subject to an arbitration agreement (which was assumed for the purposes of the argument) took what was otherwise a straightforward civil or commercial dispute outside the Regulation’s scope. It concluded that it did not: a dispute that fell within the Regulation was not removed from it by reason of a preliminary or incidental issue relating to the validity of an arbitration agreement. It was for the Italian court to rule on its own jurisdiction, even if that involved ruling on the validity or applicability of the London arbitration clause, without interference by the London anti-suit injunction.

As a footnote, what happened next was that the London arbitration proceeded and was extended to include a counterclaim by West Tankers against Erg and the insurers for a declaration that it was under no liability. Although Erg participated the insurers did not and the arbitrators made an award in West Tankers’ favour against the insurers. West Tankers then applied for and obtained an order that that award be registered as a judgment of the English court. The English court held ([2011] EWHC 829 (Comm)) that although such an order would not normally be made in respect of a declaratory award, where, as in this case, the successful party’s objective was to establish the primacy of its award over any inconsistent judgment, an order would be made because that would make a positive contribution to obtaining the material benefit of the award. That order was appealed, the appeal was heard on 22 November and judgment is awaited. Meanwhile, the Italian proceedings are stayed.

The proposal

The difficulty with the West Tankers decision is that it removed from the London courts the ability to rule on the validity of the London arbitration agreement. It is this difficulty which the Commission’s proposal seeks to address. The way in which it seeks to do so is by providing an exception to the general exclusion of ‘arbitration’ in Article 1(2)(d) of the Regulation. The exception is in a new Article 29(4), which would require a court whose jurisdiction is contested on the basis of an arbitration agreement to stay its proceedings once the arbitral tribunal, or the courts of the member state of the seat of the arbitration, have been seised of proceedings to determine the existence, validity or effects of the arbitration agreement, even if that is merely an incidental question in those proceedings.

It remains to be seen whether this proposal, if adopted, will have its intended effect, the main difficulty being that the original court whose jurisdiction is challenged will have to decide as a threshold matter whether its jurisdiction is actually contested on the basis of an arbitration agreement. It is not hard to imagine that frivolous recourse may be had by recalcitrant defendants to alleged arbitration agreements as a delaying tactic. But abuse of that kind aside, it seems that a proposal along these lines is probably the best that can be achieved in keeping courts away from disputes that really ought to be decided by arbitration. (Other concerns about the proposal, such as its application to insurance disputes, or its potential effect on the competences of member states, are beyond the scope of this paper).

Other proposals

In addition to the proposals relating to the Regulation’s external dimension and to arbitration, the Commission’s proposal contains a number of other matters.

Perhaps of greatest interest to non-Europeans is the inclusion of  two proposed new fora of last resort, for cases in which no court of a member states has jurisdiction under the Regulation’s other rules. Under the first of these – a type of forum arresti – a member state’s courts would have jurisdiction if the defendant’s property was located in that state its value was not disproportionate to the value of the claim and the dispute had a sufficient connection with that member state (Article 25 of the draft). Under the second, which is subsidiary to the first, the courts of a member state with which a dispute is sufficiently connected could accept jurisdiction if the right to a fair trial or the right to access to justice so required, particularly if proceedings could not reasonably be brought or conducted in a third state with which the dispute was closely connected, or if a third state judgment would not be afforded recognition and enforcement in that state, thus counteracting the claimant’s rights – a forum necessitates – (Article 26 of the draft).

Other proposals in the draft recast of the Regulation include

  • the abolition of exequatur in respect of judgments from other member states – a proposal which is exciting controversy because of public policy concerns;
  • proposals to ameliorate the rigidity of the lis pendens priority rule, including a proposal to give priority to the putatively chosen courts to determine the effects of a forum selection clause,
  • provisions to increase communications between courts to aid the co-ordination of interim measures with substantive proceedings and other detailed proposals relating to interim measures,
  • a proposal to give priority over cases involving rights in rem in movable property to the courts of the situs, and
  • a strange proposal affirming the priority of workers’ rights to engage in collective action to protect their rights.

Conclusion

It remains to be seen how much of the Commission’s proposal survives the inter-institutional wrangling which is already under way, and what amendments are finally adopted. With some amendment, it seems likely that much of it will find its way into the law, although a big question-mark still hangs over the extension of the Brussels I Regulation to cover claims against persons domiciled outside the European Union.

Alexander Layton

Queen’s Counsel (barrister) in practice at 20 Essex Street, London. Visiting fellow at NYU School of Law’s Center for Transnational Litigation and Commercial Law. Expert adviser to the Legal Affairs Committee of the European Parliament on the proposed reform of the Brussels I Regulation. Immediate past chairman of trustees, British Institute of International and Comparative Law.

Forum of the Center for Transnational Litigation and Commercial Law

This is to announce the November session of the Forum of the Center for Transnational Litigation and Commercial Law, which will take place on November 28th, 2011, from 6.15-8.00 pm., in Lester Pollack Colloquium Room, Furman Hall 900, 245 Sullivan Street, New York, NY 10012.

It is a great pleasure to be able to announce that Prof. Bo Rutledge has accepted the invitation to give a talk on the topic “International Civil Litigation in US courts in the last five years” that Mr. Alexander Layton and Professor Linda Silberman have agreed to act as commentators.

Professor Rutledge is a Professor of Law at the University of Georgia School of Law.  His research interests include international litigation, international arbitration and the United States Supreme Court.  He is the author of several books and book chapters which have been published by Yale University Press, Cambridge University Press, Oxford University Press and others.  His articles have appeared in a diverse array of journals including the University of Chicago Law Review, the Vanderbilt Law Review and the Journal of International Arbitration.  Professor Rutledge has filed more than twenty briefs and petitions in the United States Supreme Court and lower courts on topics such as arbitration, international litigation and criminal law.  Respected by his peers abroad, he also has lectured at a diverse array of institutions including Oxford University, Cambridge University, the London School of Economics, Stockholm University, the University of Mainz and the University of Oslo, among others.  This will be his first public lecture at New York University.

Mr. Alexander Layton is an English Queen’s Counsel (barrister) and a specialist in private international law, practicing from 20 Essex Street chambers in London. He has acted in a number of important cases in this field, including representing the United Kingdom government before the European Court of Justice in the well-known West Tankers case on anti-suit injunctions in support of international arbitration. He is the co-author of European Civil Practice, which has become a standard work on the European regime for  jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, and this year acted as an expert assisting the European Parliament with its legislative work on a revision of the Brussels I Regulation on this topic. He is also the author of various other papers and book chapters on private international law issues. He has recently completed a six-year term as the chair of trustees of the British Institute of International and Comparative law, where he has been instrumental in establishing the Bingham Centre for the Rule of Law. He is also a past-chairman of the British-German Jurists’ Association and of the Bar European Group.

Professor Linda J. Silberman is the Martin Lipton Professor of Law at New York University and Co-Director of the Center. She is a leading figure in the United States in private international law and transnational litigation, and her academic and scholarly interests range from numerous areas of commercial law to personal and family matters. At NYU Professor Silberman teaches a range of courses, including Civil Procedure, Comparative Procedure, Conflict of Laws, International Litigation/Arbitration and International Commercial Arbitration.  She is co-author of an important Civil Procedure casebook (now in its 3rd edition) and of a recent book on Comparative Civil Procedure.  She was the co-Reporter for the American Law Institute Project–Recognition and Enforcement of Foreign Judgments: Analysis and Proposed Federal Statute, and an adviser to two other American Law Institute projects: Intellectual Property: Principles Governing Jurisdiction, Choice of Law and Judgments in Transnational Disputes and the Restatement Third on International Commercial Arbitration. Professor Silberman is also a Member of the State Department’s Advisory Committee on Private International Law and has been a member of numerous U.S. State Department delegations to the Hague Conference. Professor Silberman combines her scholarship and academic work with other roles, such as special referee, expert witness and consultant in a number of important cases. Her work was cited by the Supreme Court of the United States in two recent Supreme Court decisions.

Please note that all discussions taking place during the Forum are subject to the Chatham House Rule.

As only limited space will be available, those interested are kindly asked to rsvp by November 20th by writing to transnational@nyu.edu.

Arbitral Awards Under The New York Convention: What Are And What May Be

Introduction

The 1958 New York Convention for the recognition and enforcement of arbitral awards is frequently celebrated for what it has achieved in terms of facilitation of international trade and harmonization of arbitration law and practice.  It is somehow interesting that such a successful international instrument contains no description about the subject matters the recognition and circulation of which it is intended to facilitate.  During the negotiation of the Convention, several attempts were made with a view to providing some kind of definition. However, fears of unnecessary qualification and the wish to secure the broadest possible application resulted in any such attempts being eventually abandoned.

It must be underlined that the New York Convention is not the only major instrument dealing with arbitration lacking any such definition. The UNCITRAL Model Law, for example, refrains from describing what constitutes an arbitral award even though the adoption of a definition was considered and discussed throughout its negotiation and drafting.

What are the decisions falling within the scope of the New York Convention? The analysis that we are highlighting here is not connected to the issue of whether an award is a foreign one or should be considered as such pursuant to Article I of the Convention. The issue here is two-fold and is concerned with (a) the definition of what is arbitration (for the purpose of identifying the means of dispute resolution that may produce a decision enforceable under the Convention) and, having settled that, (b) the orders issued in an arbitration that can be validly enforced under the Convention.

The alternativity test and the finality test

There seems to be general agreement that the Convention is only intended to cover dispute resolution processes which can be regarded as a truly definitive alternative to the jurisdiction of domestic courts and whose awards have the same legal force as a court judgment. This apparently easy path of analysis may be quite complicated to follow in practice. Not least because the terminology employed in practice can be confusing at times. However, it must be remembered in this last respect that, as leading commentators and court decisions have explained, the identification of the actual nature of a means of dispute resolution is not affected by the name or title employed to describe it.

The identification of what is arbitration for the purpose of applying the Convention is only the first part of the two-fold analysis. Indeed, not all orders rendered in arbitration are covered by the Convention. As is well known, arbitral tribunals employ a great variety of orders to direct the development of the arbitral process. It is clear that directions issued by a tribunal to allocate tasks and deadlines in the proceedings are unlikely to qualify as awards covered by the Convention. However, in some cases, tribunals’ orders can give rise to a considerable amount of uncertainty as to their actual nature and therefore as to their enforceability under the Convention. It is advocated that only orders which finally settle one or more of the issues which have validly come within the jurisdiction of the arbitral tribunal should qualify for recognition and enforcement under the Convention. Such awards are not necessarily those that exhaust the tribunal’s mandate. The awards that should qualify for recognition and enforcement under the Convention are all the awards which finally adjudicate one or more of the several differences which have been submitted to the jurisdiction of an arbitral tribunal. The word final implies that once the issue has been adjudicated it would be no longer possible, not even if the tribunal wished, to reopen the issue.

Applying the tests: interpretation

Two clear examples of borderlines situations that may or may not follow within the scope of application of the Convention are described below. Before doing so, however, it may be appropriate clarifying what standard of interpretation should be applied with a view to establishing whether those two instances should follow within the scope of the Convention.

It has been discussed whether the analysis aimed at establishing the nature of both a given dispute resolution process and the decisions taken therewith should be carried out with reference to the relevant domestic law(s) or whether an analysis centered on the international nature as well as the harmonization goals of the Convention should be preferred. More precisely, on one hand, it has been argued that the nature of a dispute resolution process should be identified and assessed with reference to the provisions of the law which creates and regulates such process. This law may clarify, for example, either expressly or implicitly, whether the process undertaken by the parties should be considered as a true alternative to the jurisdiction of national courts and therefore whether such process is capable of producing decisions which may be enforced abroad under the Convention. On the other hand, other authors believe that the analysis should be carried out with predominant focus on the scope and purpose of the Convention rather than the provisions of the relevant domestic law. [1] This latter point of view is certainly appealing and does not seem to be inconsistent with the approach advocated in a considerable number of cases, according to which the Convention should be interpreted and enforced having in mind its ‘international’ character. The solution to this question is perhaps found in between the two mentioned views. It seems possible to agree with the opinion that the Convention, as an international legal instrument, should be interpreted having in mind its peculiar nature and scope in accordance with the rules for the interpretation of international conventions provided by the 1969 Vienna Convention on the Law of Treaties. This view, however, should not automatically rule out any reference to the relevant domestic law(s). It is here suggested that – in assessing the nature of a dispute resolution process and the nature of orders issued therewith – domestic courts should form an independent view on the nature of both the process and the relevant award, irrespective of the definitions or categorizations employed in the jurisdictions where the award was made. The domestic courts may, however, also look at the provisions of the relevant domestic law and use them as ‘facts’. Such facts would obviously provide a strong indication as to the actual nature of the means of dispute resolution under analysis. However, they should bear neither binding force nor a definitive answer to the problem.

Adjudication

The recent development of ADR has brought about sophisticated forms of dispute resolution that both from a linguistic and a substantive point of view seem to be germane to genuine arbitration. As we have seen above, where the ADR process does not make its outcome final and binding upon the parties, similarly to court judgments, then the Convention should not be applied.

However, some forms of dispute resolution – which at first sight should be outside the scope of application of the Convention – depending on the circumstances, may, in principle, fall within its scope. This is the case, for example, of adjudication in the United Kingdom. In 1996 a new means of dispute resolution called adjudication was introduced in the United Kingdom through the Housing Grants, Construction and Regeneration Act (the ‘Act’). Adjudication is aimed at providing a fast mechanism for settling on an interim basis disputes arising out of construction contracts. The Act requires the decisions of adjudicators to be enforced pending the final determination of disputes by arbitration or litigation, depending on the choice made by the parties in the relevant contract. Therefore, the adjudicator’s decisions are immediately binding and domestic courts would assist with their enforcement until the dispute is finally settled before the chosen forum. However, it is not clear whether adjudication decisions should be enforced abroad under the Convention. Many would, on first reaction, say no. However, certain provisions of the Act may tip the balance towards the opposite answer. Section 108(3) of the Act provides that ‘the decision of the adjudicator is binding until the dispute is finally determined by legal proceedings, by arbitration (if the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement’. It follows that the decisions of adjudicators are only temporarily binding and cannot therefore be regarded as final decisions on the dispute between the parties. Indeed, adjudication is not a genuine alternative to litigation as any proceedings commenced after adjudication are not an appeal to the decision taken by the adjudicator but completely autonomous and fresh proceedings in which the decision of the adjudicator would carry no weight.

There are however circumstances in the presence of which the nature of the decision of the adjudicator is not as clear-cut. Indeed, the Act provides the parties with the option to agree that the decision of the adjudicator would finally settle the dispute. It seems at least possible to argue that, in such circumstances, the agreement of the parties might have the effect of transforming adjudication into some form of arbitration, the outcome of which could be enforced abroad under the Convention. The fact that adjudication is a much less procedurally-structured process than arbitration should not be enough, at least on its own, to dismiss the view favoring the enforceability of adjudications abroad. While it is true that adjudication can be regarded as a bare bones process in which the parties are not always able to make their case as fully as they desire, it is also true that the principle of party autonomy allows the parties to structure their dispute resolution mechanism as they please, provided that the relevant mechanism is carried out and puts the parties on an equal footing.

Consent Awards

Not infrequently, parties are fortunate enough to settle their differences at the outset of or during arbitration proceedings. The options available to the parties in such circumstances are to either formalize their agreement in a contract and terminate the arbitral proceedings or, where the lex arbitri and the relevant arbitration rules so permit,  to have their settlement agreement embodied by the arbitral tribunal in an award. The arbitral award which is the result of this option is often referred to as a ‘consent’ award.

The majority of arbitration laws and arbitration rules expressly permit consent awards. Article 30 of the UNCITRAL Model Law, for example, states that: “If, during arbitral proceedings, the parties settle the dispute, the arbitral tribunal shall terminate the proceedings and, if requested by the parties and not objected to by the arbitral tribunal, record the settlement in the form of an arbitral award on agreed terms. An award on agreed terms shall be made in accordance with the provisions of article 31 and shall state that it is an award. Such an award has the same status and effect as any other award on the merits of the case.”

The main reason for agreeing to a consent award is that the parties may, where necessary, benefit from the application of the Convention. It is not clear, however, whether the application of the Convention to consent awards should be taken for granted. Even though – as we have seen above – the wording used in the Model Law (‘Such an award has the same status and effect as any other award on the merits of the case’) provides for a strong indication as to the nature of consent awards and therefore as to their enforceability under the Convention, it has been observed that consent awards lack the fundamental characteristics of arbitral awards and therefore should be outside the scope of the Convention.

The main three arguments against the enforcement of consent awards under the Convention are the following:

(a) the activity carried out by the arbitral tribunal with consent award is totally deprived of any

jurisdictional character and content. As there is no actual judicial activity there cannot be a genuine arbitral award;

(b) in order for an arbitral tribunal to exist and carry out its duties there must be an actual dispute between the parties.  According to this argument, as soon as the parties enter into a settlement agreement the tribunal should be considered as functus officio;

c) the consent award may serve a purpose the in inconsistent with mandatory provisions of law or be altogether illegal.

The arguments are certainly fascinating but, perhaps, not entirely convincing. With regard to argument (a) it is possible to observe that judicial activity can be carried out in many different ways and in accordance with many different rules. The role of arbitrators, as well as that of court judges, is to preside over a process aimed at resolving a dispute. Whether the dispute is settled through a decision of the tribunal or an agreement of the parties should not make much difference. Furthermore, it should also be considered that, while the role of arbitral tribunals may be limited by the agreement of the parties to settle their dispute, arbitral tribunals retain powers of a fundamental importance. Indeed, tribunals are under no obligation to sanction the agreement if the agreement is illegal or aimed at circumventing the application of public policy provisions.

Argument (b) is somewhat formalistic and in any event unconvincing. As we have seen above, the fact that parties enter into settlement agreements during arbitral proceedings does not automatically deprive arbitral tribunals of their judicial authority. Arbitral tribunals are indeed required to perform further judicial activity before they can be considered functus officio.

If one were to espouse such formalistic method of analysis, then, it would be possible to observe, by the same token, that arbitral tribunals become functus officio only after a final award has been issued or where the proceedings are formally declared closed. Until that moment tribunals are still in function.

Finally, and with the same formalistic approach, it would be possible to argue that the settlement agreement may be implicitly entered into on condition that it is going to be validly incorporated into an award. As the settlement agreement implies the participation of the tribunal in the settlement process, the signing of the settlement agreement by the parties cannot by itself have the effect of making the arbitral tribunal functus officio.

Argument (c) does not seem to pose any insuperable problem. Legality and general compliance with public policy of the award would be in any event scrutinised ex officio by the court of the territory where enforcement is sought under Article V(2) of the Convention. This would be the case irrespective of whether the arbitral tribunal had an opportunity to ascertain the legality of the subject matter of the dispute or it has ignored the issue altogether.

Conclusion

The combined application of the two above-mentioned tests should help identify the decisions which fall within the scope of the Convention. Admittedly the two tests are not infallible. The ever developing practice of alternative dispute resolution may indeed create hybrid means of dispute resolution which could be difficult to classify.

Any analysis as to the applicability of the Convention should be carried out bearing in mind the Convention’s scope and purpose as well as the rules of interpretation provided under international law. It is advocated that no predominant role should be given in such task to the relevant provisions of domestic law. Such provisions should certainly be taken into account but should rather be used as facts which, as such, may provide for a non-binding indication as to the nature of the means of dispute resolution and the decisions under analysis.

Domenico Di Pietro

Lecturer, International Arbitration, University or Rome, “Roma Tre” and Fellow, Center for Transnational Litigation and Commercial Law, New York University School of Law. The present paper is a reviewed, edited and abridged version, for student discussion purposes, of the author’s article “What Constitutes an Arbitral Award Under the New York Convention?” in Enforcement of Arbitration Agreements and International Arbitral Awards – The New York Convention in Practice, (E. Gaillard and D. Di Pietro eds., 2008).


[1] See Emmanuel Gaillard and John Savage (eds.), Fouchard Gaillard Goldman on International Commercial Arbitration 735–80, Kluwer (1999) 7 Albert Jan van den Berg, The New York Arbitration Convention of 1958: Towards a Uniform Judicial Interpretation 49, Kluwer (1981); Gino Lörcher, ‘Enforceability of Agreed Awards in Foreign Jurisdictions’, 17(3) Arb. Int’l 275, 280 (2001).

Moral Damages In International Flight Cancellation: Who And Where To Go To Recover After The Decision In Case C-83/2010

As mentioned in a recent post, the existence of Regulation 261/2004 opens space for multiple forum shopping strategies, especially in flights connecting an EU airport and a non-EU airport belonging to a signatory State to the Montreal Convention. A paradigmatic case would be the regular flights between the US and the EU, considering the number of daily flights connecting both regions.

In accordance to its Article 1, EU Regulation 261/2004 will apply to all flights departing from an EU airport as well as all flights departing from a third country to an EU airport, provided that the air carrier is an EU Community carrier.

Moral and emotional distress damages are some of the most relevant aspects to consider when filing a claim based on the delay or cancellation of a flight.

Often times, the importance of moral damages, in both financial and emotional terms, will be at least as important as recovering the price of the flight ticket. Therefore, it will be strategically important to know in advance whether in a particular jurisdiction (either in the EU or not) claims for moral damages are allowed at all, or if only the material losses (price of the ticket, lodging, damaged luggage) can be claimed.

U.S. courts usually interpret the Montreal Convention¾since EU Regulation 261/2004 is not likely to be applicable¾to exclude non-physical injuries, since such injuries were not covered under the Warsaw Convention, which preceded the Montreal Convention[1]. Consequently, what is not allowed by the Montreal Convention is not available at all[2]. Therefore, as one court has held, only economic loss or physical injury damages are recoverable[3].

Also in Bassam v. American Airlines, 287 Fed. App’x 309 (5th Cir. 2008), the Fifth Circuit concluded that “purely emotional injuries are not available under the Montreal Convention”[4], allowing little room for doubt.

Conversely, the ECJ explicitly admitted moral damages in the EU in its decision C-63/09, Click Air Case. However, the decision did not clarify either the burden of proof requested from the party alleging the damage or the applicable law deciding the existence of moral damages. As a consequence, the ECJ failed to set a reliable uniform interpretation in the EU.

In a recent decision handed down on 13 October 2011, the ECJ clarified that “further compensation” in Article 12 of Regulation 261/2004 is to be read to allow passengers compensation for the entirety of the material and non-material damages they suffered due to the failure of the air carrier to fulfill its contractual obligations.

However, this decision links compensation for moral damages to the conditions and within the limitations provided for by the Montreal Convention or by national law. Since the Montreal Convention does not specify any of these conditions, resort will have to be made to the domestic laws of the EU countries.

This is where the confusion remains, because depending on which EU countries have concurrent jurisdiction, moral damages will be appreciated or not, and if so, under a variable burden for the passenger.

In Spain, for instance, compensation for moral harassment can generally be claimed because the case law of the Supreme Court has established that partial breaches of contract can give rise to moral damages in accordance to Articles 1089, 1091 and 1101 of the Civil Code (judgments dated 22 May 1995 and 19 October 1996). In the particular subject matter of flights, the Supreme Court has declared in a famous decision of 31 May 2000 that, although moral damages may arise from delayed flights, this must not be confused with the usual stress and tension caused by the delay. However, some lower courts have established that moral damages are warranted even in cases where the only issue was that no special assistance was provided at the airport. Other decisions compare the situations of stress created by flight delays and cancellations to set up an iuris et de iure presumption: If delay is the cause of stress leading to moral damages, cancellation, which is more severe than delay, should always be enough for moral damages.

The Italian Supreme Court, by contrast, allows (in judgment no. 26972 dated 11November 2008)for moral damages but, unlike Spanish courts that require a very low burden of proof, requires substantial proof.

If Italian lower courts are consistent with their Supreme Court, parties seeking to obtain moral damages with a possibility to choose between both fora should logically opt for Spanish courts, where the onus probandi is less strict.

A number of similar situations may appear within other countries in the EU, and lawyers should carefully analyze where to sue. It is clear, however, that after the ECJ decision in case C-83/2010, litigants would assume less risks if, having the possibility to sue before U.S. and EU courts, they opt for the latter.

Manuel Gimenez Rasero is an attorney at Areilza abogados and was Rafael del Pino Scholar at the New York University School of Law (LL.M.’11).


[1] Nature of cause of action under Warsaw and Montreal Conventions; convention remedy as exclusive”, in 8A Am. Jur. 2d Aviation § 149

[2] In 8A Am. Jur. 2d Aviation § 149: El Al Israel Airlines, Ltd. v. Tsui Yuan Tseng, 525 U.S. 155, 119 S. Ct. 662, 142 L. Ed. 2d 576 (1999); Mbaba v. Societe Air France, 457 F.3d 496 (5th Cir. 2006), cert. denied, 127 S. Ct. 959, 166 L. Ed. 2d 706 (U.S. 2007); Carey v. United Airlines, 255 F.3d 1044 (9th Cir. 2001); Marotte v. American Airlines, Inc., 296 F.3d 1255 (11th Cir. 2002); Auster v. Ghana Airways Ltd., 514 F.3d 44 (D.C. Cir. 2008); In re Air Crash at Lexington, KY, August 27, 2006, 501 F. Supp. 2d 902 (E.D. Ky. 2007); Bernardi v. Apple Vacations, 236 F. Supp. 2d 465 (E.D. Pa. 2002).

[3] Daniel, 59 F. Supp.2d at 992-94 (citing Eastern Airlines, Inc. v. Floyd, 499 U.S. 530 (1991)).

[4] Bassam v. American Airlines, 287 Fed. App’x 309 (5th Cir. 2008) at 14