International Arbitration

No Reservations, Hong Kong: A ‘Choice of Remedies’ If the Tribunal Makes a Preliminary Ruling on Its Jurisdiction?

I. Introduction

The ‘choice of remedies’ in international commercial arbitration refers to an award-contesting party’s freedom to opt, without prejudice, between challenging an award via (1) the passive remedy at the enforcement courts, or (2) the active remedy at the seat of arbitration (hereinafter referred to as the “seat”).[1] The former refers to raising objections to the enforcement of an award,[2] while the latter typically refers to an application to set aside an award, but also includes a challenge to a tribunal’s preliminary ruling affirming its own jurisdiction.[3] This ‘choice of remedies’ has been stated to be consistent with the regime under the New York Convention,[4] and to rest at “the heart of [the Model Law’s] entire design”.[5]

Until early 2015, the courts of Hong Kong, a Model Law jurisdiction, had affirmed the ‘choice of remedies’ available to parties contesting a claim made in arbitration.[6] However, the Hong Kong position is imperilled by the Hong Kong Court of First Instance’s (“HKCFI”) decision in Astro,[7] where it held that a party who did not challenge a tribunal’s preliminary ruling affirming its jurisdiction and only reserved its right to do so is not later entitled to raise jurisdictional objections during enforcement proceedings. Astro runs counter to a decision by a court in another Model Law jurisdiction, PT First Media, where the Singapore Court of Appeal (“SGCA”) addressed the same awards that Astro was concerned with, in the course of parallel enforcement proceedings.

This note examines: (1) Astro’s holding, and (2) the broader question of whether the ‘choice of remedies’ exists if a tribunal has made a preliminary ruling affirming its jurisdiction. Ultimately, this note concludes that there is and should be a ‘choice of remedies’ even when a tribunal has rendered a preliminary ruling on its jurisdiction.

II. Parallel Enforcement Proceedings in Astro and PT First Media

Astro and PT First Media concerned awards (the “Awards”) made against an award debtor (“First Media”) in favour of non-parties to an arbitration agreement. These non-parties had been joined to the arbitration pursuant to Rule 24(b) of the 2007 Singapore International Arbitration Centre Rules (“SIAC Rules”). Although First Media had objected to the joining of the non-parties, it did not invoke Article 16(3) of the Model Law to challenge the tribunal’s preliminary ruling affirming its jurisdiction over the dispute concerning the non-parties (the “Preliminary Ruling”). Instead, First Media continued to participate in the arbitration on the merits, reserving its position on the Preliminary Ruling. First Media also did not subsequently apply to set aside the Awards in Singapore, the seat, within the applicable time limit.

In enforcement proceedings in Singapore, the SGCA held that the Awards had been made in excess of jurisdiction because Rule 24(b) of the SIAC Rules did not grant the tribunal the power to join non-parties to the arbitration.[8] The SGCA thus denied enforcement of the Awards. Importantly, the SGCA held that Singapore’s arbitral framework adopts the Model Law, including the principle of the ‘choice of remedies’.[9] Pursuant to the ‘choice of remedies’, First Media was able to raise its jurisdictional objection at the enforcement proceedings even though First Media had chosen not to challenge the Awards at the seat and instead reserved its position on the tribunal’s jurisdiction. Additionally, the SGCA held that First Media’s conduct did not give rise to a waiver or estoppel, which would otherwise have precluded it from raising jurisdictional objections at the enforcement stage.[10]

The situation in Hong Kong was different. First Media failed to challenge the enforcement of the Awards in a timely manner because it initially thought that it had no assets in Hong Kong.[11] However, First Media subsequently changed its position when the award creditors obtained a garnishee order in respect of a third-party’s debt to First Media. Thereafter, First Media applied for an extension of the applicable time limits and for the enforcement orders to be set aside on the basis of the tribunal’s lack of jurisdiction.[12]

The HKCFI dismissed First Media’s application on two alternative grounds.[13] The first relatively uncontentious ground was that there were no “good reasons” for extending the time limits. This was because First Media’s initial choice to not challenge enforcement was deliberate and had caused a considerable 14-month delay.

The second ground, on the other hand, jeopardises the principle of the ‘choice of remedies’ that the Hong Kong courts themselves had earlier endorsed.[14] Notwithstanding First Media’s reservation on jurisdiction, the HKCFI held that First Media’s conduct breached the principle of good faith under the New York Convention. First Media was thereby precluded from resisting enforcement of the Awards in Hong Kong under Section 44(2) of the Hong Kong Arbitration Ordinance (which gives effect to the New York Convention grounds for non-enforcement).[15]

III. The ‘Choice of Remedies’ and Article 16(3) of the Model Law

The Hong Kong court’s decision effectively abrogates a party’s ‘choice of remedies’ if a tribunal renders a preliminary ruling as to its jurisdiction. The upshot of Astro is that a party’s reservation of its position on the tribunal’s jurisdiction will not preserve its right to raise such objections at the enforcement stage. If Astro is to be followed, a party who objects to the tribunal’s jurisdiction but wishes to continue with the arbitration must challenge the tribunal’s preliminary ruling on jurisdiction at the seat of arbitration under Article 16(3) of the Model Law, or risk being later found lacking in good faith and thereby forfeiting its right to raise its jurisdictional objections during enforcement proceedings. In such a situation, the ‘choice of remedies’ is illusory for a party who wishes to challenge an award both on its merits and on the lack of jurisdiction.

Accordingly, it is difficult to reconcile Astro with the Hong Kong court’s previous position affirming the ‘choice of remedies’.[16] As one commentary notes, “[e]ither [First Media] did have a right to choose its remedies, or it did not”.[17] An application of a ‘good-faith principle’ to restrict the exercise of the right to a ‘choice of remedies’ effectively renders such a right non-existent.

One way to cut the Gordian knot is to argue that the ‘choice of remedies’ becomes unavailable if a tribunal renders a preliminary ruling affirming its jurisdiction.[18] In other words, that a party cannot choose remedies because the failure to invoke Article 16(3) of the Model Law (or its equivalent) to challenge a tribunal’s preliminary ruling on jurisdiction precludes that party from subsequently raising jurisdictional objections, whether at the seat or before an enforcement court. Ghilbrazade, a proponent of this view, argues that the final text of Article 16(3) drew “a clear line between the challenge mechanism under Article 16(3) being the sole recourse” and the availability of the ‘choice of remedies’ where there was no preliminary ruling on jurisdiction.[19] In support of her view, Ghilbrazade cites case law from Canada,[20] Australia,[21] Hong Kong,[22] and particularly, Germany.[23] However, as will be shown in the following paragraphs, there are several flaws in Ghilbrazade’s arguments that undermine her position.

First, the Model Law drafters did not intend a party’s failure to engage Article 16(3) to preclude it from raising jurisdictional challenges before an enforcement court. The discussions on the text of Article 16(3) were only considered in the context of challenges that a dissatisfied party could raise at the seat, and not in the broader context of challenges that could be raised in enforcement courts.[24] This is reflected in the travaux préparatoires on earlier drafts of Article 16(3), where the seat’s intervention under Article 16(3) was regarded as an alternative to setting aside proceedings under Article 34, but was silent as to the position vis-à-vis enforcement proceedings.[25] Thus, it is unsurprising that the Analytical Commentary on an earlier draft of Article 16(3) recognised a party’s right to object to the tribunal’s preliminary ruling on its jurisdiction during enforcement proceedings, even though this was not explicitly mentioned in text of the said earlier drafts.[26] While the Secretariat Note on the final draft of Article 16(3) is silent as to whether this choice remained possible,[27] nothing in the travaux préparatoires indicates that the position expressed in the Analytical Commentary was to be changed. Therefore, it would be disingenuous to suggest that the adopted version of Article 16(3) was intended to be the sole recourse to challenge a tribunal’s preliminary ruling on its jurisdiction.

Second, the cases cited by Ghilbrazade do not corroborate her position:[28] these cases only considered Article 16(3) in the context of (a) setting aside proceedings at the seat;[29] or (b) finding an estoppel at the enforcement stage.[30] These cases are thus consistent with two aspects of PT First Media, namely, the SGCA’s (1) finding that waiver or estoppel could effectively annul the ‘choice of remedies’; and (2) obiter dicta that failure to challenge a tribunal’s preliminary ruling on jurisdiction will likely preclude a party from raising further jurisdictional challenges at the seat but not before enforcement courts.[31]

Lastly, despite Ghilbrazade’s heavy reliance on German case law,[32] German courts appear open to allowing a party to raise jurisdictional challenges at enforcement proceedings even though it failed to challenge the tribunal’s preliminary ruling on jurisdiction. The Oberlandesgericht Hamm (“OLG Hamm”) has previously held that an award debtor could not raise jurisdictional objections at the enforcement stage because it had continued participating in the arbitration on the merits without reserving its position on the tribunal’s preliminary ruling affirming its jurisdiction, and thereby violated the principle of fair conduct of proceedings.[33] Thus, the converse consequence of the OLG Hamm’s holding is that an award debtor who reserves its position on the tribunal’s jurisdiction can raise jurisdictional objections at enforcement proceedings even though it had failed to challenge the preliminary ruling. In fact, the OLG Hamm went further to suggest that if the abovementioned award debtor had made a reservation, the award creditor would have had the burden of applying to the court at the seat to conclusively determine the tribunal’s jurisdiction.[34]

Accordingly, neither the travaux préparatoires of Article 16(3) itself nor case law supports the view that the Model Law’s ‘choice of remedies’ becomes unavailable if a tribunal renders a preliminary ruling affirming its jurisdiction. Therefore, consistent with PT First Media, the notion of a ‘choice of remedies’ remains even if a tribunal renders a preliminary ruling on its jurisdiction, with the consequence that a party in such a situation can raise jurisdictional objections either at the seat or at the enforcement stage.

IV. Policy Reasons for a ‘Choice of Remedies’ Where the Tribunal Makes a Preliminary Ruling on Its Jurisdiction

There are compelling policy reasons for the position taken by the SGCA in PT First Media. If an award-challenging party’s failure to invoke Article 16(3) has a preclusive effect, this would constrain the party to only being able to seek recourse at the seat. Such constraints make little sense if a party objects to the tribunal’s jurisdiction on the ground that there is no valid arbitration agreement; such an objection is tantamount to denying the supervisory jurisdiction of the seat stipulated in the arbitration agreement being challenged.[35]

Moreover, there are legitimate reasons for an award debtor’s reluctance to pursue remedies at a seat he denies agreeing to. For example, the award debtor may have valid concerns as to whether the decisions of the seat would be objective, fair and impartial.[36] If so, the award debtor may want to avoid challenging the tribunal’s jurisdiction at the seat if this could later give rise to an issue estoppel in enforcement proceedings.[37] Alternatively, if the award debtor’s assets are located in a jurisdiction which gives little weight to decisions by the seat, it could consider that setting aside the award at the seat would be costly yet unconstructive.[38] This is because the enforcement courts in such jurisdictions might enforce the award regardless of the decision of the court at the seat of the arbitration.

Thus, the choice between raising jurisdictional challenges before the enforcement courts or at the seat ensures that a party objecting to the existence of a valid arbitration agreement is not prejudiced by limited recourse at a seat that he denies agreeing to. This would also correspond with the Model Law’s intention to be aligned with the New York Convention[39] – which does not regard enforcement courts as unequivocally bound by decisions at the seat.[40]

V. Conclusion

Consistent with the SGCA’s approach in PT First Media, there is and should be a ‘choice of remedies’ even if a tribunal has rendered a preliminary ruling on its jurisdiction, such that a party retains the choice of challenging the tribunal’s jurisdiction at the seat or before the enforcement courts. Although a party’s ‘choice of remedies’ is still subject to the principles of waiver, estoppel or fair conduct, following the position in Singapore and Germany, none will be made out if a party had expressly reserved its position on the tribunal’s jurisdiction. In contrast, until Astro’s appellate ruling, such reservations will have no effect in Hong Kong.[41]

 

David Isidore Tan

David is a candidate for the LL.M. in International Business Regulation, Litigation & Arbitration at the NYU School of Law. He is also a concurrent candidate for the LL.B. (Honours) degree at the National University of Singapore, under the NYU-NUS LLB/LLM Dual Degree Program.

 

[1] PT First Media TBK (formerly known as PT Broadband Multimedia TBK) v Astro Nusantara International BV and others and another appeal [2014] 1 SLR 374 [PT First Media], para. 22; Sir Michael Mustill & Stewart Boyd, The Law and Practice of Commercial Arbitration in England (London: Butterworths, 1982), p. 489.

[2] Based on the grounds in Article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 10 June 1958, 330 UNTS 38 (entered into force 7 June 1959) [New York Convention], replicated in UNCITRAL, UNCITRAL Model Law on International Commercial Arbitration, UNGAOR, 40th Sess, Supp No 17, UN Doc A/40/17, (1985) [Model Law] under Article 36.

[3] The tribunal’s preliminary ruling affirming its jurisdiction can be challenged under Article 16(3) of the Model Law. See also PT First Media, supra note 1, para. 22.

[4] Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46 [Dallah], para. 76.

[5] PT First Media, supra note 1, para. 65.

[6] Paklito Investment Ltd v Klockner (East Asia) Ltd [1993] 2 HKLR 39 [Paklito], p. 48, 49.

[7] Astro Nusantara International BV and others v PT Ayunda Prima Mitra and others and AcrossAsia Limited, HCCT 45/2010 [Astro].

[8] PT First Media, supra note 1, paras. 178-185, 191-193, 197 and 198.

[9] PT First Media, supra note 1, para. 143. See also Section 3(1) of Singapore’s International Arbitration Act (Cap 143A, 2002 Rev Ed Sing) (“the Model Law… shall have the force of law in Singapore.”).

[10] PT First Media, supra note 1, para. 224(d).

[11] Astro, supra note 7, para. 37.

[12] Astro, supra note 7, paras. 1, 95.

[13] Astro, supra note 7, paras. 125, 129.

[14] Paklito, supra note 6, p. 48, 49. See also Astro, supra note 7, para. 83.

[15]Astro, supra note 7, paras. 77, 91.

[16] See Tomas Furlong, “Astro v Lippo in Hong Kong: Award Enforced Despite Singapore Court of Appeal’s Finding that the Tribunal Lacked Jurisdiction”, online: Kluwer Arbitration Blog <http://kluwerarbitrationblog.com/2015/03/07/astro-v-lippo-in-hong-kong-award-enforced-despite-singapore-court-of-appeals-finding-that-the-tribunal-lacked-jurisdiction/> (“the judgment appears to go further than the Hong Kong authorities relied on”).

[17] Nicholas Poon, “Issues and Problems in Enforcing Arbitral Awards Across Multiple Jurisdictions: Astro v Lippo, the Hong Kong Edition”, online: Singapore Law Blog <http://www.singaporelawblog.sg/blog/article/102> [Poon].

[18] This is diametrically opposed to the decision in PT First Media, supra note 1. See Nata Ghilbrazade, “Preclusion of Remedies under Article 16(3) of the UNCITRAL Model Law” (2015) 27 Pace Int’l L. Rev. 345 [Ghilbrazade].

[19] Ghilbrazade, supra note 18, p. 384. See also “UNCITRAL Model Law on International Commercial Arbitration: note by the Secretariat” (UN Doc A/CN.9/309) in UNCITRAL Yearbook 1988, vol XIX (New York: UN, 1988) at 117 (UNDOC.A/CN.9/SER.A/1988) [Secretariat Note], para. 25.

[20] Compagnie Nationale Air France v Libyan Arab Airlines [2000] RJQ 717 [Air France]; ARL Regional Print Ltd. and Rene Laporte v George Ghanotakis and Jean M. Won, 2004 CanLII 23270 [Ghanotakis].

[21] teleMates (previously Better Telecom) Pty Ltd v Standard SoftTel Solutions Pvt Ltd [2011] NSWSC 1365 [teleMates].

[22] China Nanhai Oil Joint Service Corporation Shenzhen Branch v Gee Tai Holdings Co Ltd.[1994] 3 HKC 375 [Nanhai].

[23] Bundesgerichtshof (Germany), 27 March 2003, Neue Juristische Wochenschrift, 133, 2003, English summary available online: Deutsche Institution für Schiedsgerichtsbarkeit e.V. < http://www.dis-arb.de/en/47/datenbanken/rspr/bgh-case-no-iii-zb-83-02-date-2003-03-27-id212> [Bundesgerichtshof, 27 March 2003]; Oberlandesgericht (Germany), 4 September 2003 in 15 Y.B. Comm. Arb. 528 (2005) [Oberlandesgericht, 4 September 2003].

[24] “Analytical compilation of comments by Governments and international organizations on the draft text of a model law on international commercial arbitration” (UN Doc A/CN.9/263) in UNCITRAL Yearbook 1985, vol XVI (New York: UN, 1985) at 53 (UNDOC.A/CN.9/SER.A/1985) [Analytical Compilation], Article 16, paragraph (3), paras. 7, 8. See PT First Media, supra note 1, paras. 113, 115.

[25] Analytical Compilation, supra note 24, Article 16, paragraph (3), paras. 7, 8; “Summary records of the United Nations Commission on International Trade Law for meetings devoted to the preparation of the UNCITRAL Model Law in International Commercial Arbitration (UN Doc A/CN.9/SR.330-333) in UNCITRAL Yearbook 1985, vol XVI (New York: UN, 1985) at 458 (UNDOC.A/CN.9/SER.A/1985), 320th Meeting at paras. 16, 17. See also PT First Media, supra note 1, paras. 113, 115, 117. Contra Ghilbradze, supra note 18, p. 383.

[26] “Analytical commentary on draft text of a model law on international commercial arbitration” (UN Doc A/CN.9/264) in UNCITRAL Yearbook 1985, vol XVI (New York: UN, 1985) at 104 (UNDOC.A/CN.9/SER.A/1985), Article 16, para. 12.

[27] Secretariat Note, supra note 19, para. 25.

[28] One qualification bears mention here: this analysis is based in part on English interpretations or summaries of the cases which were originally published in languages other than English.

[29] Air France, supra note 20; Ghanotakis, supra note 20; teleMates, supra note 21; Bundesgerichtshof, 27 March 2003, supra note 23; Oberlandesgericht, 4 September 2003, supra note 23.

[30] Nanhai, supra note 22, p. 387. See also Poon, supra note 17 (“that case had considered the principle of good faith as an aspect of the doctrine of estoppel.”).

[31] PT First Media, supra note 1, paras. 224(d) and 130 respectively.

[32] Ghilbradze, supra note 18, p. 385-387.

[33] Judgment of Oberlandesgericht, 7 September 2005 in 31 Y.B. Comm. Arb. 685 (2006), paras. 5-7.

[34] Ibid, para. 5.

[35] See Dallah, supra note 4, para. 23 (“A person who denies [consenting to an] arbitration agreement has no obligation to… take any steps in the country of the seat of what he maintains to be an invalid arbitration…”). See generally Gary B. Born, International Commercial Arbitration, 2d ed (Kluwer Law International, 2014) [Born], Chapter 11.

[36] A well-known example is the decision by the Russian Arbitrazh Courts to set aside an arbitration award of 13 billion roubles made in 2005 in the favour of Yukos Capital S.a.r.L that has been criticized by numerous courts. See e.g. Yukos Capital S.a.r.L. v OJSC Oil Company Rosneft [2014] EWHC 2188, para. 20 (“both unsatisfactory and contrary to principle [to recognize the Russian court’s decision] which offended… principles of honesty, natural justice and [domestic]  public policy.”). See also Court of Appeal of Amsterdam (Enterprise Division), April 28, 2009, LJN BI2451 s 3.10; Albert Jan van den Berg, “Enforcement of Awards Annulled in Russia (Case Comment on Court of Appeal of Amsterdam, April 28, 2009) (2010) J.Int’l Arb. 179, p. 180.

[37] See e.g. Diag Human SE v The Czech Republic [2014] EWHC 1639 (Comm).

[38] For example, France, where some French decisions have enforced awards even after the awards had been set aside by the seat of arbitration. See e.g. Pablak Ticaret Ltd. Sirketi v Norsolor SA, Cour de Cassation (1st Civ. Ch.), 9 October 1984 (court enforced arbitration award even though seat of arbitration had set aside the award for lack of jurisdiction).

[39] Howard M Holtzmann & Joseph E Neuhaus, A Guide to the UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary (Kluwer Law and Taxation, 1989), p. 1055, 1056.

[40] Born, supra note 35, p. 3427 (“[The New York Convention does not require] Contracting State[s] to deny recognition to an arbitral award.”).

[41] On 8 December 2015, First Media was granted leave to appeal the HKCFI’s decision in Astro. See Astro Nusantara International BV and others v PT Ayunda Prima Mitra and others and AcrossAsia Limited, HCCT 45/2010 (8 December 2015), available online: http://legalref.judiciary.gov.hk/lrs/common/ju/judgment.jsp.

The next chapter for dispute resolution in Brazil

I. Introduction

The Brazilian National Congress has been quite active in the past few months with respect to dispute resolution. We have a brand new legal framework for litigation (the new Civil Procedure Code), for arbitration (amendments to the Brazilian Arbitration Act), and for mediation (the new Mediation Act). This article written exclusively for Transnational Notes focuses on the recent developments brought by the amended Arbitration Act and the new Mediation Act.

II. What’s new on arbitration?

For almost 20 years, the Brazilian Arbitration Act (Law 9,307/1996) has played an important role in establishing Brazil as an arbitration-friendly jurisdiction and supporting the ever-increasing growth in the use of arbitration throughout the country. On May 26th, Law 13,129/2015[1] introduced the first amendments to the 1996 Arbitration Act, which are in force as of July 27th.

While the structure and achievements of Law 9,307/1996 were preserved, further improvements came into play: (i) the new legislation consolidates case law on several issues, e.g. allowing the issuance of partial awards[2] and establishing that the limitation period is interrupted upon the institution of arbitral proceedings;[3] and (ii) it also introduces new features, such as the “arbitral letter”, an official instrument for communication between state courts and arbitral tribunals, by which arbitrators may request judicial authorities to perform certain acts within their jurisdiction.[4] In a nutshell, the legal framework for arbitration in Brazil is now strengthened and the country takes some important steps forward in protecting investors who seek a secure and credible alternative to litigation.

In that regard, one of the most relevant amendments relates to the provisions dealing with the use of arbitration by state entities. The new law swept away any doubts that could still exist on the arbitrability of those disputes: its provisions expressly allow the public administration to take part in arbitral proceedings provided that the dispute relates to patrimonial negotiable rights.[5] This prevents state entities from evading arbitration if they have contractually agreed to arbitrate. In such proceedings, arbitrators must decide based on the law and observe the publicity inherent to public acts.[6] Although Brazilian courts, including the Superior Court of Justice, had already confirmed that state entities could be bound by arbitration agreements, the enactment of these new provisions put a decisive end on any residual debate of whether Brazilian legislation authorized state entities to resort to arbitration.

Law 13,129/2015 also introduced new provisions in the Brazilian Corporations’ Act (Law 6,404/1976), improving the use of arbitration in corporate disputes. The main purpose was to clarify whether the inclusion of an arbitral clause in the company’s bylaws was also binding on dissenting shareholders. This issue had raised controversial debates among scholars. This discussion is now dismissed by the new amendments: the insertion of an arbitration clause in the company’s bylaws is binding on all shareholders if approved by at least half of the voting shares.[7] Nevertheless, the new Law also introduced a threshold to balance the interests and rights of shareholders, assuring that dissenting shareholders have the right of withdrawal upon reimbursement of the market value of their shares.[8]

The interaction between arbitral tribunals and state courts was also improved by the amendments to the Brazilian Arbitration Act. Some provisions were included to consolidate the case law on provisional and interim measures. They confirmed that, if the arbitral tribunal has not yet been constituted, parties may resort to state courts for pre-arbitral interim measures.[9] Once the arbitral tribunal is constituted, however, the arbitrators decide whether they will maintain, modify or revoke the measures granted by state judges.[10]

III. What’s new on mediation?

On 26 June 2015, Law 13,140/2015[11] (the Mediation Act) was enacted to introduce a legal framework for mediation in Brazil. It establishes that any conflict related to negotiable rights or non-negotiable rights that allows for certain transactions[12] may be subjected to mediation. If an agreement is reached, such agreement may be subject to direct judicial enforcement.[13] The Mediation Act also regulates the general principles guiding the mediation process – such as the impartiality of the mediator, equality between the parties, party autonomy, confidentiality,[14] good faith, among others;[15] determines the functions and duties of the mediators, as their duty to disclose any facts or circumstances that could call into question their impartiality;[16] and provides general rules for the mediation proceedings.[17]

Two types of mediation are regulated by Law 13,140/2015: the judicial and extrajudicial mediation. Judicial mediation occurs in state courts either (i) right after the filing of the statement of claim;[18] or (ii) anytime during judicial proceedings, in which case the parties should request the judge to suspend the proceedings.[19] In judicial mediation, the court indicates the mediators.[20] Additionally, the mediators must have been graduated in a higher educational program and trained by an institution recognized by state courts.[21] The parties, on the other hand, must be represented by lawyers or public defenders.[22] The judicial mediation must be concluded within 60 (sixty) days of its first session and, if successful, the state judge can ratify the parties’ agreement if so requested by them.[23]

With respect to the extrajudicial mediation, parties could initiate proceedings (i) if there is a contractual provision mandating mediation; or (ii) if the parties so agree[24]e.g. during arbitral proceedings.[25] The mediator can be anyone who has the parties’ trust.[26] The party who wishes to initiate the mediation must notify the counterparty of its intention and of the date and venue for their first session.[27] There is also a new provision dealing with escalation clauses: if there is a mediation clause determining that parties could only initiate arbitral or judicial proceedings after a specific period of time or after the implementation of a certain condition, arbitrators and judges must suspend the proceedings until such condition is fulfilled.[28]

The Mediation Act has also provisions allowing state entities to resort to non-judicial dispute resolution mechanisms.[29] These provisions are mostly drawn from the positive experience of the Federal Attorney General’s Office (AGU) with the use of mediation between state entities.

IV. Conclusion

The amended Arbitration Act and the Mediation Act mark the beginning of a new chapter for dispute resolution in Brazil, giving more credibility and security to non-judicial mechanisms. Companies and investors have reasons to celebrate the strengthening of alternatives to litigation and will certainly benefit from a more effective dispute resolution environment.

 

Rafael F. Alves

LL.M. New York University, Arthur T. Vanderbilt Scholar – Class of ’10. Master of Laws, University of São Paulo. Senior Associate at L.O. Baptista Schmidt Valois Miranda Ferreira Agel Advogados. Director of the Brazilian Arbitration Committee.

Laura Gouvêa de França Pereira

Associate at L.O. Baptista Schmidt Valois Miranda Ferreira Agel Advogados. Former President of the Brazilian Association of Arbitration Students (ABEArb). Bachelor of Laws (LL.B.) degree from University of São Paulo.

___________________________

[1] Available here: http://www.planalto.gov.br/ccivil_03/_Ato2015-2018/2015/Lei/L13129.htm

[2] Law 9,307/1996, Article 23, §1, as amended by Law 13,129/2015.

[3] Law 9,307/1996, Article 19, §2, as amended by Law 13,129/2015.

[4] Law 9,307/1996, Article 22-C, as amended by Law 13,129/2015.

[5] Law 9,307/1996, Article 1, §1, as amended by Law 13,129/2015.

[6] Law 9,307/1996, Article 1, §3, as amended by Law 13,129/2015.

[7] Law 6,404/1976, Article 136-A, caput, as amended by Law 13,129/2015.

[8] The right of withdrawal is only subject to two exceptions set forth in Law 6,404/1976, Article 136-A, §2, as amended by Law 13,129/2015.

[9] Law 9,307/1996, Article 22-A, as amended by Law 13,129/2015.

[10] Law 9,307/1996, Article 22-B, caput, as amended by Law 13,129/2015.

[11] Available here: http://www.planalto.gov.br/ccivil_03/_Ato2015-2018/2015/Lei/L13140.htm.

[12] Law 13,140/2015, Article 3.

[13] Law 13,140/2015, Article 20, sole paragraph.

[14] Law 13,140/2015, Articles 30 to 31.

[15] Law 13,140/2015, Article 2.

[16] Law 13,140/2015, Articles 4 to 8.

[17] Law 13,140/2015, Articles 14 to 20.

[18] Law 13,140/2015, Article 27.

[19] Law 13,140/2015, Article 16.

[20] Law 13,140/2015, Article 25.

[21] Law 13,140/2015, Article 11.

[22] Law 13,140/2015, Article 16.

[23] Law 13,140/2015, Article 28.

[24] Law 13,140/2015, Articles 21 and 22.

[25] Law 13,140/2015, Article 16.

[26] Law 13,140/2015, Article 9.

[27] Law 13,140/2015, Article 21.

[28] Law 13,140/2015, Article 23.

[29] See Chapter II of Law 13,140/2015.

Argentina, Vulture Funds and a Sovereign Debt Convention

I. Introduction

Without a doubt, sovereign debt is one of the most controversial but yet relevant issues in the international legal arena, not solely for the States as debtors, but also for many private creditors and several other stakeholders. Sovereign debt has gained further attention and importance in light of the recent Argentina’s sovereign debt default, restructure and litigation in NY Courts. In light of these events, this brief note aims to assess the major advantages of the adoption of a multilateral convention regarding sovereign debt restructuring. Therefore, the following note is divided in three main sections; the first one describes the basic sovereign deb restructuring process currently existent. The second section, explains the Argentinian sovereign debt procedure, restructure and litigation. Finally, the third section advances the most positive and relevant elements that a sovereign debt multilateral convention can provide for the international community, by making reference to the other free market alternatives for sovereign debt restructuring currently available.

II.  The Sovereign Debt Restructuring Process

When it comes to private debts – those owed by individuals or corporations – most, if not all, countries have developed mechanisms to resolve in an orderly manner the issues that arise in the event of insolvency.[1] Yet in the sovereign debt context there is no equivalent mandatory bankruptcy procedure upon default.[2] This is a concern that has been exacerbated and brought starkly into focus by the recent Argentine sovereign debt crisis[3] – the juncture at which international finance collides with international law.

At the outset, it should be noted that sovereign debt restructurings are widespread and common practice throughout the world.[4] Moreover, restructurings are a wholly legitimate and sometimes essential exit mechanism out of debt crises,[5] allowing distressed countries to restore the provision of essential public services and recover their domestic economies.[6]

So what then does the term debt restructuring entail? It refers to the making of voluntary changes to the originally envisaged payment terms, undertaken in order to create a more manageable liability profile or to reduce the debt’s net present value.[7] In reality what this tends to mean is that creditors agree to: either, take a “haircut” on the value of the debt they own, lower the interest rates they receive, or delay the bond’s repayment maturity date; as well as any combination thereof.

In this milieu, one of the greatest difficulties in restructuring claims against sovereign debtors is balancing the interests of the majority of the creditors with those of minority creditors.[8] This difficulty arises given the voluntary nature of the restructuring process: creditors are entitled to refuse to participate in a restructuring and instead “hold out” in the hope of receiving better repayment terms, or even the full value of their claims, through litigation or negotiated settlements based on that threat.

a). The Purpose of Holdout Litigation

Bond agreements actually contain clauses that explicitly contemplate enforcement litigation, such as, typically, the waiver of sovereign immunity, and choice-of-law provisions, through which the sovereign debtor submits to the laws and jurisdiction of a country with a mature and robust legal and financial system – typically the UK or USA.

Litigation, then, may function as a deterrent to the possibility of opportunistic default by a sovereign debtor, which in turn facilitates the functioning of the international capital markets.[9] Litigation may also operate as a check on the terms of a proposed restructuring, giving a creditor recourse against a restructuring with inappropriate or unfair terms.

Holdout litigation, therefore, serves a legitimate purpose and is not entirely the pariah that it has recently been made out to be. On the one hand, holdout creditors serve to limit collusive majority behaviour and act as a check on opportunistic defaults and unreasonable restructuring terms, yet on the other hand, their presence interferes with the restructuring process.[10]

Notwithstanding the foregoing, concerns about holdout litigation have acquired fresh urgency as a result of its use as a strategy by “vulture funds” during, inter alia – but most prominently, Argentina’s current financial crisis. This has led many commentators to question the ethicality of their predatory and speculative behaviour,[11] particularly as vulture funds are not comprised of individuals or funds that actually lent money to Argentina or bought Argentine bonds on good faith.

For those that have not been following these developments, vulture funds are hedge funds that seek to enforce contractual claims against distressed sovereign debtors through litigation.[12] Most often they buy the relevant sovereign bonds on the secondary markets at rock-bottom prices and then sue for repayment at nominal value.[13] Put simply, they seek to exploit the current global legal vacuum in order to make exorbitant profits.[14]

III. Argentine Pari Passu Litigation

In December 2001, Argentina defaulted on its external debt – which amounted to well over eighty (80) billion dollars.[15] In the bond contracts governing that debt, Argentina selected New York law and consented to jurisdiction in the Southern District of New York.[16]

Subsequently, Argentina engaged in 2 restructurings – in 2005 and 2010.[17] This resulted in the restructuring of around ninety-two (91.3%) percent of the foreign debt which had been defaulted on in 2001.[18] The majority of the remaining bonds are in the hands of vulture funds.[19]

After the default, NML Capital brought a claim against Argentina in New York, as the bond contracts contemplated.[20] The vulture fund sued Argentina for specific performance of the pari passu (equal treatment)[21] clause contained in the bonds, arguing that the clause precluded Argentina from making payments on some of its debt contracts (the restructured bonds – which Argentina had been servicing) and not others.[22]

The now infamous Judge Griesa of the District Court found in favour of NML Capital,[23] granting an injunction against Argentina.[24] His judgment has been affirmed by the Court of Appeals[25] and the Supreme Court of the United States.[26]

Essentially the judgment made it illegal for Argentina to pay its restructured creditors (91.3% of its original creditors) without also making concurrent ratable payments to the holdout creditors (the vulture funds); an outcome ensured by the fact that Judge Griesa’s injunction also enjoined financial intermediaries from processing any payments not in compliance with his order. As an initial consequence of the judgment, Argentina entered into technical default on the 30th of July 2014.[27]

However, the judgment has wider reaching implications, including that bondholders might now be less inclined to accept bond swaps, safe in the knowledge that they can hold out for face value; which in turn will make it more difficult and more expensive for countries – often those in development – to restructure their debts. This has knock-on effects for their sustainable long-term development.

IV. The Need for an International Convention for Sovereign Debt Restructuring

As a result of the proliferation and success of holdout litigation by vulture funds, Argentina, with the support of the G77 group of developing nations, plus China, presented a draft resolution to the United Nations General Assembly to vote on whether to move forward with a new multilateral international Convention to regulate the restructuring of sovereign debt and curtail the power of holdout creditors.[28]

The draft resolution was approved on Tuesday the 9th of September 2014, and the General Assembly has now committed to adopting a new multilateral legal framework for sovereign debt restructuring processes during its sixty-ninth session.[29]

This is undoubtedly a great achievement.[30] But before evaluating the potential benefits of such an international Convention, the free-market alternatives available for limiting the power of holdout creditors must be analyzed. This is important as, currently, all sovereign debt restructuring efforts take place entirely under a free-market approach,[31] making a superficial understanding of these options necessary in order to determine their limitations.

a). Free-market based alternatives

  • The inclusion of collective action clauses (CACs) in new bond issues.

This contractual mechanism permits a supermajority of bondholders to vote to change the payment terms of an issue of bonds.[32] Accordingly, once an agreement is reached with the sovereign debtor, the bonds can be restructured despite the objections of minority bondholders.[33] Crucially, the new terms bind all bondholders, thus negating the holdout problem.[34]

The use of CACs does, however, have certain disadvantages in terms of being a viable option for reforming the restructuring process. (i) CACs only function across specific issues, or series, of bonds. To put this into perspective, Argentina is attempting to restructure 152 different bond issues involving seven different currencies and the governing laws of eight different countries.[35] CACs offer little help in these situations. Moreover, (ii) the insertion of CACs into new issues of bonds does not address concerns regarding existing bonds, including the Argentine bonds, which contain clauses requiring unanimous voting to effect alterations to essential payment terms.[36] As such, and due to the long-term nature of sovereign bonds, the benefit of CACs will not be fully felt by the financial markets until decades further down the line. Countries like Argentina don’t have that long.

  • The restructuring of sovereign debt through an exchange offer coupled with exit consents.

As suggested by its nomenclature, an exchange offer is an offer by the sovereign debtor to exchange new debt for old. Exit consents, in turn, are designed to mitigate the holdout problem by inducing (some would say coercing) all creditors to agree to the exchange.[37] This is achieved by requiring consenting creditors to waive any covenant protections in their bonds that can be waived without unanimous creditor consent.[38] These amendments are intended to reduce the value of the original bonds, thereby making their retention less attractive to would-be-holdouts.[39]

For all intents and purposes this mechanism has the effect of replacing the existing debt claims with securities governed by CACs and, therefore, is susceptible to the same drawbacks as the latter.

Both of these free-market alternatives to an international statutory framework seek, exclusively, to combat the holdout problem – which we could call, without resorting to hyperbole, the residual vulture fund menace – and both achieve this, albeit imperfectly.

b). Advantages of a UN Convention

As the contents of the proposed UN Convention are at present conjecture, we shall proceed by assuming its assimilation, in terms of sine qua non features, with an unsuccessful IMF proposal – known as the Sovereign Debt Restructuring Mechanism (SDRM).[40]

An international statutory bankruptcy procedure would allow sovereign debtors to voluntarily decide whether to apply the provisions to their debt problems by filing a petition. It would create a process by which a supermajority of creditors could negotiate a binding restructuring for all creditors.[41] The most salient advantages of this approach over the universal use of CACs include the capacity to deal with multiple issues and series of bonds (by grouping all creditors into a single class) as well as its applicability to existing debt.[42] These represent two monumental gains at the outset.

Critics and sceptics might, reasonably, point out the concern that holdout litigation offers an apparatus by which minority creditors can challenge restructurings designed principally for the benefit of the majority.[43] But such unfairness concerns are inherently addressed: since all creditors are similarly situated, the outcome of a vote that binds holdouts should benefit all creditors equally.[44] This presupposes that all such creditors were not speculative purchasers of the sovereign bonds, in this way indirectly clamping down on the practices of vulture funds.

The advantages of a multilateral Convention, however, go beyond the scope of the issues that have so far been dealt with. Intrinsic to any restructuring is the concept of default – an inability to meet payments as they become due. It follows, then, that after any restructuring has been carried out, a sovereign debtor will need to borrow money to fund critical expenses borne during the process. Herein lies the problem: who would lend to a nation that has just proven its unreliability as a borrower? Such a lender would insist on priority creditor status as a condition of any loan.

An international Convention can provide for the requisite legally enforceable first priority right of repayment to new loans.[45] Existing creditors could be protected through the right to object to a new loan if its amount is too high or its terms are inappropriate.[46] Moreover, a nation that abuses these borrowing privileges would encounter difficulty in receiving supermajority creditor approval for its debt restructuring plan anyway.[47] Ultimately, sovereign debtors that act in bad faith could be excluded from making recourse to the Convention.[48]

Lastly, a Convention would also eliminate the threat of moral hazard.[49] Such a state of affairs was not present in Argentina, but was apparent in, e.g. the EU bailout of Greece. It arises in cases where there is a high risk of financial contagion – where a sovereign debt default can trigger a systemic collapse.[50] As the trend of global financial integration continues, this scenario of “too big to fail” becomes ever more likely.[51] By imposing strict austerity conditions on bailouts, as has become the norm, a Convention could take precedence and ensure an orderly restructuring of debts in these crises, thereby preventing taxpayers from bearing the brunt of sovereign financial imprudence.

V. Conclusions

As has hopefully been made evident by now, the problem in the sovereign debt restructuring arena is not holdout litigation per se, but rather it is the immoral deployment of it by vulture funds and the potentially sovereignty-violating judicial decisions of foreign states – formalistically adopted to uphold the contractual language of sovereign bonds, which now constitute a substantial impediment to the voluntary method of debt restructuring that had been the long-standing custom.

This is why a binding international Convention could be of much greater value than the current free-market solutions: it resolves the (i) holdout, (ii) funding and (ii) moral hazards problems that arise in such situations, not only concurrently but convincingly. It will not, however, enable sovereigns to renege on their debt by restructuring whenever they please. Argentina take heed! It is a mechanism of last resort and the provisions of any Convention should make that clear.

Nonetheless, the restructuring of debt is a sovereign prerogative, which, as recognized by the UN Resolution in question, “should not be frustrated or impeded by any measure emanating from another State”. A binding UN Convention would restore that essential element of sovereignty back to nations and enable them to determine sustainable levels of debt based on their real payment capacity, thus empowering them to meet the fundamental needs of their societies whilst simultaneously providing much needed predictability to the financial markets.

Of course, as with any international Convention, its real success will be a function of the level of participation it achieves. The onus is on the world’s nations now – they can either expel the vultures forever or allow them to keep circling overhead.

 

Manuel Jordán Bassó

LL.B. from the University of Glasgow, Scotland. LL.M. in Oil and Gas Law candidate at the University of Aberdeen, Scotland. 2015 International Bar Association (IBA) Section on Energy, Environment, Natural Resources and Infrastructure Law (SEERIL) Energy Law Studies Scholar.

Juan Pablo Hugues Arthur

Law Degree (Highest Honors) from the CIDE, Mexico. International Law Attorney-Counsel for the Attorney-General on Fiscal and Financial Issues, Mexico.

_________________________________________

[1] S L Schwarcz, Sovereign Debt Restructuring: A Bankruptcy Reorganization Approach (2004) 85 Cornell Law Review 4 [Hereinafter, S L Schwarcz, Sovereign Debt Restructuring], p. 958.

[2] See: Mechanism Must Be Found to Avoid Moral Hazard in Crises, IMFDepuy Says, 69 Banking Rep. (BNA) 623 (Oct. 20, 1997).

[3] J E Fisch, C M Gentile, Vultures or Vanguards: The Role of Litigation in Sovereign Debt Restructuring Conference on Sovereign Debt Restructuring: The View from the Legal Academy (2004) 53 Emory L.J. 1043 [Hereinafter: J E Fisch, C M Gentile, Vultures or Vanguards: The Role of Litigation in Sovereign Debt Restructuring], p. 1046; S L Schwarcz, Towards a “Rule of Law” Approach to Restructuring Sovereign Debt (2014) Harvard Law School Forum on Corporate Governance and Financial Regulation (Available at http://corpgov.law.harvard.edu/2014/10/14/towards-a-rule-of-law-approach-to-restructuring-sovereign-debt/. Last visited 14 May 2015) [S L Schwarcz, Towards a “Rule of Law” Approach to Restructuring Sovereign Debt].

[4] For general references on the history of sovereign debt default, see: M Waibel, Sovereign Defaults before International Courts and Tribunals (CUP, 2011) [Hereinafter, M Waiblel, Sovereign Defaults], pp. 3-19. See also in this same sense C G Paulus, The Interrelationship of Sovereign Debt and Distressed Banks: A

European Perspective, 49 Tex Int’l LJ 201 (2014);  A Sde Vicuña y Barroso, ‘Identical

Collective Action Clauses for Different Legal Systems: A European Model’, in K Bauer et al., Collective Action Clauses and the Restructuring of Sovereign Debt (2013); U S Das et al., Sovereign Debt Restructurings 1950–2010: Literature Survey, Data, and Stylized Facts, 30–36 (Int’l Monetary Fund, Working Paper WP/12/203, 2012) (Available at http://www.imf.org/external/pubs/ft/wp/2012/wp12203.pdf.  Last visited 22 May 2015).

[5] T Jones, When vulture funds circle, who will make debt repayments fairer? (8 September 2014) (The guardian) (Available at http://www.theguardian.com/global-development/poverty-matters/2014/sep/08/vulture-funds-restructure-debt-repayments. Last visited 22 May 2015).

[6] Ibid.

[7] M Waibel, Opening Pandora’s Box: Sovereign Debt in International Arbitration (2007) 101 AJIL 711, p. 712.

[8] J E Fisch, C M Gentile, Vultures or Vanguards: The Role of Litigation in Sovereign Debt Restructuring.

[9] J E Fisch, C M Gentile, Vultures or Vanguards: The Role of Litigation in Sovereign Debt Restructuring, p. 1047.

[10] Jeffrey D. Sachs, Do We Need an International Lender of Last Resort, Frank D. Graham Lecture at Princeton University 8 (Apr. 20, 1995), p. 6 (Available at http://www.cid.harvard.edu/archive/hiid/papers/intllr.pdf. Last visited 14 May 2015); C Lipson, ‘Bankers’ Dilemmas: Private Cooperation in Rescheduling Sovereign Debts’ in Cooperation Under Anarchy 200 (Kenneth A. Oye ed., 1986).

[11] See: F Salmon, Vulture Funds in Distress, REUTERS (24 February 2011), (Available at http://blogs.reuters.com/felixsalmon/2011/02/23/vulture-funds-in-distress/. Last visited 22 May 2015).

[12] C C Wheeler & A Attaran, Declawing the Vulture Funds: Rehabilitation of a Comity Defense in Sovereign Debt Litigation (2003) 39 Stan J Int’l L 253, p. 254.

[13] K H Fukuda, What is a vulture fund? (2008) University of Iowa College of Law Center for International Finance & Development 2.

[14] Vulture Funds in the Sovereign Debt Context, African Development Bank Group (Available at http://www.afdb.org/en/topics-and-sectors/initiatives-partnerships/african-legal-support-facility/vulture-funds-in-the-sovereign-debt-context/. Last visited 14 May 2015).

[15] J F Hornbeck, Argentina’s Defaulted Sovereign Debt: Dealing with the “Holdouts” (2013) Congressional Research Service [Hereinafter: J F Hornbeck, Argentina’s Defaulted Sovereign Debt], p. 1.

[16] Republic of Argentina v. NML Capital LTD, et. al. On Petition for Writ of Certiorari to the United States Court of Appeals for the Second Circuit PETITION FOR WRIT OF CERTIORARI (February 18, 2014), p. 8.

[17] J F Hornbeck, Argentina’s Defaulted Sovereign Debt, pp. 4-6.

[18] Ibid., p. 7.

[19] J Muse-Fisher, Starving the Vultures: NML Capital v. Republic of Argentina and Solutions to the Problem of Distressed-Debt Funds (2014) 14 CalLRev 1671, p. 1688.

[20] NML Capital, Ltd. v. Republic of Argentina, No. 08 Civ. 6978(TPG), 2011 WL 9522565 [Hereinafter: NML Capital v. Argentina]; Stephen Davidoff Solomon, In Court Battle, a Game of Brinkmanship With Argentina, N.Y. TIMES (Nov. 27, 2012), (Available at http://dealbook.nytimes.com/2012/11/27/in-court-battle-a-game-of-brinkmanship -with-argentina/. Last visited 22 May 2015).

[21] L C Buchheit & J S Pam, The Pari Passu Clause in International Debt Instruments (2004) 53 Emory L J, p. 851.

[22] NML Capital, Ltd. v. The Republic of Argentina.

[23] “It is DECLARED, ADJUDGED, and DECREED that the Republic is required under Paragraph 1(c) of the FAA at all times to rank its payment obligations pursuant to NML’s Bonds at least equally with all the Republic’s other present and future unsecured and unsubordinated External Indebtedness.”). The specific pari passu clause provides that “[t]he Securities will constitute […] direct, unconditional, unsecured and unsubordinated obligations of the Republic and shall at all times rank pari passu and without any preference among themselves. The payment obligations of the Republic under the Securities shall at all times rank at least equally with all its other present and future unsecured and unsubordinated External Indebtedness. It is DECLARED, ADJUDGED, and DECREED that the Republic lowered the rank of NML’s bonds in violation of Paragraph 1(c) of the FAA when it made payments currently due under the Exchange Bonds, while persisting in its refusal to satisfy its payment obligations currently due under NML’s Bonds. 6. […] It is DECLARED, ADJUDGED, and DECREED that the Republic lowered the rank of NML’s bonds in violation of Paragraph 1(c) of the FAA when it enacted [the relevant Laws] […]” NML Capital v. Argentina, pp. 1-2.

[24] Ibid. p. 254.

[25] NML Capital, Ltd. v. Republic of Argentina, No. 12-105 (2d Cir. 2013).

[26] Republic of Argentina v. NML Capital, Ltd, 134 S. Ct. 2250 (2014).

[27] J Hartley, Argentina’s Default: Lessons learned, what happens next? Forbes, 2014 (Available at http://www.forbes.com/sites/jonhartley/2014/08/04/argentinas-default-lessons-learned-and-what-happens-next/. Last visited 22 May 2015).

[28] Y Li, U.N. to negotiate a multilateral legal framework for sovereign debt restructuring (2014) (Opinio Juris Blog) (Available at http://opiniojuris.org/2014/09/16/guest-post-u-n-negotiate-multilateral-legal-framework-sovereign-debt-restructuring/. Last visited 14 May 2015).

[29] GA Resolution 68/304: “Towards the establishment of a multilateral legal framework for sovereign debt restructuring processes”. See Resolution on Sovereign Debt Restructuring Adopted by General Assembly Establishes Multilateral Framework for Countries to Emerge from Financial Commitments (9 September 2014) (Available at http://www.un.org/press/en/2014/ga1  1542.doc.htm. Last visited 15 May 2015).

[30] See: B Muchhala, Historic UN General Assembly vote on a multilateral sovereign debt mechanism (Available at http://www.twn.my/title2/unsd/2014/unsd140903.htm. Last visited 15 May 2015); A Caliari, Historic agreement paves the way for just response to sovereign debt crises (Available at https://www.coc.org/rbw/historic-agreement-paves-way-just-response-sovereign-debt-crises-september-2014. Last visited 15 May 2015).

[31] See footnote 2 supra.

[32] W Mark, C Weidemaier & M Gulati, A People’s History of Collective Action Clauses (2014) 54 VirJInt’lLaw, p. 53.

[33] See: W Mark, C Weidemaier & M Gulati, ‘How Markets Work: The Lawyer’s Version’ in From Economy to Society? Perspectives on Transnational Risk Regulation  (Bettina Lange et al. eds, 2013).

[34] Ibid.

[35] G Nielsen, Secretary of Finance of Argentina, Remarks in Dubai 14 (Septembre 22, 2003), (Available at

http://www.argentinedebtinfo.gov.ar/documentos/discurso_gn_dubai_con_diap_english.pdf. Last visited 15 May 2015).

[36] S L Schwarckz, A Minimalist Approach to State “Bankruptcy” (2011) 59  UCLA L Rev  322, pp. 329-331.

[37] L C Buchheit & G M Gulati, Exit Consents in Sovereign Bond Exchanges (2000) 48 UCLA L Rev 59, pp. 65-66.

[38] Ibid.

[39] Ibid.

[40] Anne Krueger, New Approaches to Sovereign Debt Restructuring: An Update on Our Thinking, Address

to the Institute for International Economics Conference Sovereign Debt Workouts: Hopes and Hazards (1 April 2002) (Available at https://www.imf.org/external/np/speeches/2002/040102.htm. Last visited 22 May 2015).

[41] S L Schwarcz, Sovereign Debt Restructuring Options: An Analytical Comparison (2012) Harv Bus L Rev [Hereinafter, S L Schwarcz, Debt Restructuring Options] p. 107.

[42] Ibid.

[43] J E Fisch & C M Gentile, Vultures Or Vanguards? The Role Of Litigation In Sovereign Debt Restructuring (2004)  53 Emory L.J 1043, p. 1098.

[44] S L Schwarcz, Sovereign Debt Restructuring: A Bankruptcy Reorganization Approach (2000) 89 Cornell L Rev 956, p. 1005; B J Houser et al, ‘Plan Issues: Classification, Impairment, Subordination Agreements’

in Chapter 11 Business Reorganizations 317, 328 (ALI-ABA Course of Study Materials S024, 1998).

[45] S L Schwarcz, Debt Restructuring Options, p. 113.

[46] Ibid. Pp. 113-113.

[47] See: W W Bratton & G M Gulati, Sovereign Debt Reform and the Best Interest of Creditors (2004) 1 VLRev 54, p. 26.

[48] S L Schwarcz, Debt Restructuring Options, p. 110.

[49] Which denotes a situation whereby a party does not bear the full costs for the risks it takes. See: O Gürtler & M Kräkel, Double-Sided Moral Hazard, Efficiency Wages, and Litigation (2010) 1 J Law Ec Bus 54.

[50] S L Schwarcz, Towards a “Rule of Law” Approach to Restructuring Sovereign Debt.

[51] Ibid.

Promoting Party Autonomy by Severing Severability

I. Introduction

Party autonomy is the fuel that drives the machinery of international commercial arbitration. The increasing ability to find the mutual consent of contracting parties to submit their disagreements to binding dispute resolution is the vital driving force behind the growth of international arbitration into new and complex commercial fields. The modern growth of international arbitration has created two misleading assumptions regarding party autonomy. First, the evaluation of whether a contractual dispute is arbitrable is “typically” only concerned with evaluating whether the parties have drafted a separate and distinct “agreement to arbitrate” applicable to the overall contract.[1] Second, international practice maintains an assumption that the severability doctrine can normally “separate” an invalid provision from tainting an otherwise valid “arbitration agreement.”[2]

With Carr v. Gallaway Cook Allan, the Supreme Court of New Zealand challenged both assumptions.[3] In that case, the parties contracted for “final and binding” arbitration with the possibility to appeal the subsequent award on “‘questions of law and fact’ (emphasis added).” This contractual right of appeal provision conflicted with New Zealand law because it only permitted appeals of arbitral awards on questions of law, and not fact.[4] On appeal following the arbitration proceedings, the Supreme Court set aside the arbitral award. Looking outside the specific submission of disputes to arbitration clause, the Court found that the parties’ agreement to arbitrate included an invalid right of appeal provision. In refusing to apply the severability doctrine to the appellate review mechanism, the Court also determined that the invalid right of appeal provision could not be separated from the overall arbitration agreement because it went to the heart of the parties’ mutual agreement to arbitrate. In rendering its decision, the Supreme Court properly promoted party autonomy by expansively defining an arbitration agreement and limiting the application of the severability doctrine.

II. Background to Carr v. Gallaway Cook Allan

Carr v. Gallaway Cook Allan involved a failed business venture that ultimately led to a failed arbitral award. Ewen Robert Carr and Brookside Farm Trust Limited (“Appellants”) secured the services of Gallaway Cook Allan (“Respondent”), a law firm, to help secure the purchase of lucrative “farm and hotel assets” from a third party.[5] The parties’ business agreement included a dispute resolution mechanism providing:

1.1       The dispute is submitted to the award and decision of the Honorable Robert Fisher QC as Arbitrator whose award shall be final and binding on the parties (subject to clause 1.2).

1.2       The parties undertake to carry out any award without delay subject only to such rights as they may possess under Articles 33 and 34 of the First Schedule to the Arbitration Act 1996 (judicial review), and clause 5 of the Second Schedule (appeals subject to leave) but amended so as to apply to “questions of law and fact” (emphasis added).[6]

Unfortunately, Respondent was unable to secure the purchase of the commercial assets from the third party. Appellants then brought an arbitral dispute claiming that Respondent was negligent in handling the planned commercial transaction. The sole arbitrator rendered an award favoring the Respondent after a finding that Respondent’s negligence was not the cause of the commercial transaction’s failure.[7]

On appeal, Appellants sought to set aside the arbitral award by contending the dispute resolution provision was invalid. Appellants claimed that the parties’ arbitration agreement was invalid because it included both the clause submitting the dispute before a sole arbitrator (cl. 1.1) as well as the invalid right of appeal mechanism (cl. 1.2). In response, Respondent argued that the arbitration agreement was valid because it implicated only the clause submitting the dispute to arbitration (cl. 1.1). Further, the invalid right of appeal mechanism (cl. 1.2) could be severed from the submission to arbitration clause (cl. 1.1).

III. Broad Definition of An Arbitration Agreement

The Supreme Court approached the issue of whether the parties had agreed to arbitrate their dispute by reaffirming the wide capacity of party autonomy to shape the arbitral process. The Court noted that New Zealand law grants parties broad authority to “modify the powers of an arbitral tribunal”[8] as well as fashion “terms governing the privacy and confidentiality of the arbitral proceedings”[9] in their “arbitration agreement.”[10]  Since party autonomy has such wide discretion to shape arbitral procedure, the Supreme Court determined that parties may also agree to vary the form of an agreement to arbitrate. Referencing New Zealand law, the Court emphasized that an “arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.”[11] An arbitration agreement has a “broad meaning that [can also] encompass[] procedural matters on which the parties can agree.”[12]

The Supreme Court concluded that Appellants’ and Respondent’s agreement to arbitrate included both the clause submitting the dispute to arbitration (cl. 1.1) as well as the right of appeal clause (cl. 1.2). The Court reasoned that the parties’ “arbitration agreement” was not “confined to the contractual term submitting a dispute to arbitration,” but also included the “any procedural terms” to which “contractual asset to arbitration is made conditional.”[13]  In this way, the clause submitting disputes to arbitration and right of appeal provision were interconnected terms that together formed one single arbitration agreement.

The Supreme Court’s ruling correctly promoted party autonomy by recognizing flexibility in drafting arbitration agreements. Parties should be afforded the freedom to fashion additional procedural terms into an arbitration agreement according to their needs. Parties should not be constrained by a form requirement that an arbitral agreement be restricted to a single clause or procedure. The Supreme Court thus properly decided that arbitral agreements should not be constrained to a single, out-molded “take-it-or-leave-it” contractual term.

IV. Limiting the Severability Doctrine

Having construed the definition of an arbitration agreement broadly, the Supreme Court then addressed the issue of whether an invalid provision could be severed from the arbitration agreement and the remainder enforced. The Court determined that the appellate review mechanism (cl. 1.2) was invalid because New Zealand law only provides “a right of appeal against an arbitral award on a question of fact,” but not a question of law, and “[c]ontracting parties cannot, by agreement, create a right of appeal to a court where no statutory authori[z]ation exists.”[14] Accordingly, the Court was tasked with deciding whether this invalid right of appeal provision could be severed from the otherwise enforceable arbitration agreement. If not, the whole arbitration agreement would have to be rendered unenforceable.

To determine whether the severability doctrine was applicable to the appellate review mechanism, the Supreme Court surveyed case law from New Zealand, Australia, and the United States. According to New Zealand’s Privy Council, the test of whether invalid provisions “are severable [from valid provisions] is whether [the invalid provisions] are in substance so connected with the [valid provisions] as to form an indivisible whole which cannot be taken to pieces without altering its nature.”[15] Along these lines, the High Court of Australia refused to sever an invalid term from the arbitration agreement because the “invalid promise [was] so material and important a provision in the whole bargain that there should be inferred an intention not to make a contract which would operate without it.”[16] On the other hand, the United States Court of Appeals for the Ninth Circuit severed an invalid appellate review mechanism in a contract because there was “no evidence” that the right of appeal provision was “critical to the entire [arbitration] agreement.”[17]

Taking these cases together, the Supreme Court determined that “[s]everance cannot be permitted to alter the nature of a contract.”[18] While the severability doctrine may sever non-essential provisions from an arbitration agreement, “severance may not destroy the main purpose and substance of what has been agreed.”[19] The Court concluded that the right of appeal clause (cl. 1.2) was inseverable from the clause submitting the dispute to arbitration (cl. 1.1). The end of the clause submitting disputes to arbitration (cl. 1.1) explicitly referenced the fact that the arbitral award was subject to the appellate review mechanism (cl. 1.2).[20] Beyond that, the “italici[z]ation of the words ‘questions of law and fact’ followed by the notation ‘(emphasis added)’ made clear, objectively, that the scope of the appeal right did go to heart of [the parties’] agreement to submit their dispute to arbitration.”[21] The right of appeal provision was “central to the agreement of the parties” and could not be severed to save the arbitration agreement.[22]

The Supreme Court’s properly promoted party autonomy by restraining the application of the severability doctrine to a central, albeit invalid, provision of an arbitration agreement. Severability should not be exercised in a way that alters the contractual relationship governing the consent to arbitrate. Consent to arbitrate remains under the singular domain of party autonomy. Deference to party autonomy requires that terms central to the agreement to arbitrate must always be respected, even at the cost of invalidating the whole arbitration clause. When central terms of an arbitration agreement exceed the boundaries of mandatory law, arbitral tribunals and national courts must regulate the bounds by rendering the whole arbitration agreement unenforceable. By limiting the application of the severability doctrine, the Supreme Court ensured that the legal relationship between the parties would be preserved whether or not the arbitration agreement was enforced or rendered unenforceable.

V. Conclusion

After deciding not to enforce the invalid arbitration agreement, the Supreme Court exercised its discretion and set aside the underlying arbitral award because the sole arbitrator lacked jurisdiction and “a valid arbitration agreement to underpin [the] award.”[23] In the end, this decision stands as an instructive lesson for parties and practitioners that pursue arbitration specifically in New Zealand,[24] and generally in UNCITRAL Model Law jurisdictions. Parties should draft terms central to their consent to arbitrate clearly and explicitly so that those critical terms will be given sufficient weight in deciding whether the dispute is arbitrable. Practitioners should ensure that the central terms comprising the consent to arbitrate do not contravene mandatory law in order to prevent the arbitration agreement from being rendered unenforceable. Ultimately, the Supreme Court decision shows that party autonomy prevails in determining consent to arbitration. It is up to parties and practitioners to ensure that the consent is properly manifested in a contract.

 

James Ng

James Ng is a Class of 2015 LL.M. student in International Business Regulation, Litigation, and Arbitration at New York University School of Law. He received his J.D. from the Benjamin N. Cardozo School of Law and received a B.A. from Boston College. The author can be contacted at jcn303@nyu.edu.

__________________________________________

[1] See Peter Ashford, Handbook on International Commercial Arbitration 5 (2009).

[2] See Gary B. Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing 128 (2010).

[3] Carr v. Gallaway Cook Allan [2014] NZSC 75 (SC).

[4] New Zealand Arbitration Act 1996, Second Schedule, cl. 5. In the relevant provisions, the New Zealand Arbitration Act 1996 includes an adoption of the UNCITRAL Model Law as well as an appellate review provision for arbitral awards on questions of law to the High Court of New Zealand.

[5] Carr (SC) para. 84.

[6] Id. at para. 8.

[7] Id. at para. 6.

[8] New Zealand Arbitration Act 1996, § 12.

[9] Id. § 14.

[10] Carr (SC) para. 39.

[11] New Zealand Arbitration Act 1996, First Schedule, cl. 7(1).

[12] Carr (SC) para. 41.

[13] Id. at paras. 44, 46.

[14] Id. at para. 14.

[15] Carney v. Herbert [1985] AC 801 (PC) 311.

[16] Humphries v. The Proprietors “Surfers Palms North” Group Titles Plan 1955 [1994] 179 CLR 597 (HC) 621-622 (citations and internal quotation marks omitted).

[17] Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987, 1002 (9th Cir. 2003).

[18] Carr (SC) para. 62.

[19] Id.

[20] Id. at para. 68.

[21] Id. at para. 70.

[22] Id.

[23] Id. at para. 80.

[24] New Zealand Arbitration Act 1996, § 6.

The Disclosure Requirement Under French Law: Global Law Firms and Social Media Networks

In a decision delivered on 11 March 2014[1], the Lyon Court of Appeal refused to annul the award issued in the commercial arbitration commenced by E.U.R.L. Tesco (Tesco) against S.A.S. Neoelectra Group (Neoelectra). The challenge was based on the arbitrators’ failure to disclose facts allegedly likely to call into question their independence and impartiality in the eyes of the parties. The Court considered that the professional relationship between one arbitrator and Neoelectra’s counsel on one hand, and the Facebook friendship between this same counsel and another arbitrator on the other hand, were not likely to create doubts in the parties’ minds.

This decision plays an important role in the evolution of French arbitration law. Impartiality and independence of arbitrators are the corner stone of arbitration. In this respect, French law[2], like other national legislations[3] and international instruments[4], contains a disclosure requirement. The French Supreme Court indicated that an arbitrator should reveal any circumstance creating reasonable doubts in the parties’ minds as to his or her independence and impartiality[5]. It is the role of the French Courts of Appeal to determine what can or cannot reasonably create such doubts in the parties’ minds. The Lyon Court of Appeal’s reasonable analysis shows its intent to break with the severe case law on the matter and promotes the effectiveness of international arbitration.

This paper first provides an explanation of the facts and procedure of the case (I). It then explains the Court’s decision (II) and examines its input for the French law of arbitration (III).

I. Facts and Procedure

In 2006, Tesco and Neoelectra entered into a commercial agreement. Soon after, in 2007, a dispute arose out of the agreement. In order to resolve their dispute, the parties had recourse to arbitration (1) and later post-arbitration proceedings before the French Courts (2).

1) Arbitration Proceedings

Pursuant to the arbitration clause contained in their agreement, the parties started arbitration proceedings. On 4 June 2009 in Paris, the arbitral tribunal (the Tribunal) composed of Mr. Morin and Mr. Larroumet as co-arbitrators and Mr. Degos as President of the Tribunal, issued an award ordering both parties to pay various amounts.

2) Annulment Proceedings

Unsatisfied with the award, Tesco requested the Paris Court of Appeal to annul it. It argued the Tribunal had been irregularly constituted[6]: two arbitrators had failed to reveal circumstances that created doubts in its mind regarding their impartiality and independence. First, Mr. Larroumet had been “of counsel” of Freshfields Bruckhaus Deringer (Freshfields), the law firm for which Neoelectra’s counsel, Ms. Lallemand, was working. After leaving Freshfields, he kept in touch with the firm by notably providing legal consultations. Second, Ms. Lallemand was also friend on Facebook with another arbitrator, Mr. Degos. She supported his candidacy for the Paris Bar elections by “liking” his Facebook status.

The Paris Court of Appeal accepted Tesco’s arguments and set aside the award[7]. Consequently, Neoelectra appealed to the French Supreme Court, which issued a widely noticed decision on 10 October 2012[8]. It decided that the Paris Court of Appeal had not explained the reasons why these facts could create reasonable doubts in the parties’ minds, and considered it could not exercise its legal control on the decision[9]. The Supreme Court reversed the decision of the Paris Court of Appeal and remanded the case to the Lyon Court of Appeal.

II) Decision

Unlike the Paris Court of Appeal, the Lyon Court of Appeal refused to set aside the award. It considered that both the undisclosed law firm relationship (1) and the Facebook friendship (2) were not likely to create doubts in the parties’ minds as to the arbitrators’ impartiality and independence.

1) Past “of counsel” position at a law firm and occasional consultations do not create doubts

The Lyon Court’s reasoning is based on three elements. First, Mr. Larroumet was not working at Freshfields anymore when Ms. Lallemand joined the firm. He was “of counsel” of Freshfields until 2000, 8 years before the start of the arbitration, and Ms. Lallemand started working at the firm in 2005, 5 years after Mr. Larroumet left it. Second, Mr. Larroumet’s contacts with Freshfields after he left the firm were occasional: he gave “2 or 3 consultations”[10] in 10 years. Finally, Neoelectra’s lawyer was defending her client in her personal name, not in the firm’s name[11].

The Court’s decision appears to be reasonable. Setting aside the award for non-disclosure of these circumstances would be too harsh. As the Court pointed out, the link between Mr. Larroumet and Ms. Lallemand is too tenuous. They did not work at Freshfields simultaneously. Moreover, it seems like the Court is taking into account Mr. Larroumet’s good faith. If Mr. Larroumet had thought this circumstance could create a doubt in the parties’ minds, he would very likely have disclosed it. Indeed, purposefully refraining from disclosing a litigious circumstance does not serve an arbitrator’s interest. It would undoubtedly harm his or her reputation, preventing him or her from being nominated in subsequent arbitrations.

2) Counsel “liking” an arbitrator’s Facebook status after the award was issued does not create doubts either

The Lyon Court of Appeal decided that Tesco’s Facebook argument was irrelevant because Ms. Lallemand’s support to Mr. Degos on Facebook took place after the award was issued. However, the Court did not say a word about the Facebook friendship between them. Tesco’s argument was both based on the fact (i) that the counsel and the arbitrator were friends on Facebook, and (ii) that the counsel had “liked” the arbitrator’s status relating to the upcoming Paris Bar elections. The facts do not specify whether they became friends on Facebook before or after the arbitration, and the Court did not investigate that issue further.

III) Analysis

The Lyon Court of Appeal’s decision plays an important role in the evolution of French arbitration law by reasonably narrowing the scope of the disclosure requirement, thus promoting the effectiveness of international arbitration (1). However, it does not put an end to the debate over the scope of the disclosure requirement (2).

1) The decision promotes the effectiveness of international arbitration

a) A little bit of background

The French law on the disclosure requirement has been described as extremely severe[12]. French law adopts a strict standard of apparent impartiality and independence. In reality, this approach relies on a confusion between the failure to disclose an element that could give rise to doubts on one hand, and an actual lack of impartiality or independence of the arbitrator on the other hand. It follows that any failure to disclose a litigious circumstance leads to the annulment of the award, regardless of the existence of an actual conflict of interest[13]. The reason for such a strict position might be the intent of the French legislator to ensure France’s legitimacy as a reliable forum. Making sure arbitrators are independent and impartial promotes due process, and enhances people’s trust in the arbitration system.

It follows that a court considering a statement of independence insufficiently detailed is likely to automatically set aside the award[14]. The burden on arbitrators is thus extremely onerous. Notably, arbitrators practicing in large international law firms have to proactively research links of any kind that the firm has or may have with the parties[15].

However, in its 2012 decision[16], the French Supreme Court attempted to mitigate the strictness of this standard by requiring Courts of Appeal to explain why a fact that was not revealed was likely to create a reasonable doubt in the parties’ minds. Absent such proof, the arbitral award cannot be annulled. The standard is still apparent impartiality, but the appearance has to be reasonable and the party challenging the award needs to prove it.

b) Promoting the effectiveness of international arbitration

The problem is that there has not been a clear line yet on what is likely to create doubts in the parties’ minds[17]. The Supreme Court’s decision could have been followed by another severe decision, even though justified. But the Lyon Court of Appeal adopted a reasonable approach on what is likely to create doubts. Its decision has an impact on the effectiveness of arbitration on tow levels: the award and the arbitrators’ designation process.

First, its decision protects the award. It avoids an automatic annulment of the award, thus bringing proportionality to the remedy for non-disclosure. It is more serious for an arbitrator to be partial than to fail to disclose an element that would make the parties doubt of his impartiality, especially when the element is so minor that it would not create doubt in a reasonable person’s mind. However, there is only one remedy available: the annulment of the award. Because annulment can be disproportionate, the Lyon Court of Appeal mitigated the severity of this only remedy. It rightly considered the undisclosed circumstances invoked by Tesco were insufficient to justify the annulment of the award.

Second, the decision has an impact on the designation of arbitrators. As explained before, the Court refused to consider the links between Mr. Larroumet, Ms. Lallemand and Freshfields as a problem. Its decision makes sense. As French authors pointed out, “the international arbitration community is a small world, where it is not uncommon for the arbitrators, often lawyers themselves, to know and meet the parties’ counsel, or for them to be appointed with the agreement or even the support of the latter”[18]. Moreover, arbitrators working in law firms do not always know all their firm’s clients. This is particularly true for global international firms that have offices and clients all over the world. At the same time, it is legitimate for the parties to choose a specialist in arbitration to resolve their dispute, not a random person found in a telephone directory. Therefore, requiring arbitrators to disclose every single detail about their career and network, even details they do no know about, constitute a burden that would both slow down the designation proceedings tremendously and threaten the validity of arbitral awards.

2) The decision does not solve all the problems relating to the scope of the disclosure requirement

a) What about Facebook and other social media networks?

The decision does not address the issue as to whether an arbitrator has to disclose his Facebook friendship with a counsel for one of the parties, leaving the question unanswered under French law. Since the creation of Linkedin in 2003, Facebook in 2004 and Twitter in 2006, lots of authors have written on the subject[19]. On 23 October 2014, the International Bar Assocation adopted revised Guidelines on Conflicts of Interests in International Arbitration (the IBA Guidelines). To promote greater consistency in the arbitrators’ disclosures and avoid unnecessary challenges, the Guidelines have established three non-exhaustive lists of circumstances: the “Red list” of circumstances that should give rise to doubts in the eyes of the parties, the “Orange list” of situations that may give rights to doubts, and the “Green list” of elements that do not show any apparent conflict of interest. The IBA notably decided that relationships between an arbitrator and a counsel through social media networks belong to the “Green list” of elements that do not need to be revealed[20], without distinguishing between the various networks. I believe that practitioners and legislators should further develop their understanding of this issue.

Social media networks can be very different. It would make sense to classify them into two categories: personal networks on one hand, and professional networks on the other hand. It appears to me that doubts on the impartiality of arbitrators are likely to be more serious in the presence of a personal network relationship than a professional one.

Facebook, for instance, is a personal network that I believe is clearly likely to call into question an arbitrator’s impartiality in the eyes of the parties. Although the IBA Guidelines have classified social media networks in the Green list, “close personal friendships” between an arbitrator and a counsel are part of the Orange list of situations which “may, in the eyes of the parties, give rise to doubts as to the arbitrator’s impartiality or independence”[21]. Facebook may be a social network, but I think it rather belongs to the “close personal friendship” category. On Facebook, people post their holidays pictures and comment on their friends’ status. Facebook even describes itself in the following way: “People use Facebook to stay connected with friends and family”[22].  It is thus legitimate for parties to have doubts when they see that the opposing counsel’s Facebook friends list includes the arbitrator. And because “any doubt as to whether an arbitrator should disclose certain facts or circumstances should be resolved in favor of disclosure”[23], a Facebook friendship should be disclosed.

Linkedin may also be a problem. Unlike Facebook, it is a professional network where people stay connected with their former and current colleagues, with people they have studied with or with people they have met in the course of their work. However, Linkedin may, like Facebook, create reasonable doubts in the parties’ minds. Under French law, arbitrators need to disclose their professional links with either a party or a counsel for a party because of a potential intellectual dependence. It seems that few judges have a Linkedin profile, probably because of their obligation to be neutral. One may argue that, an arbitrator being a private judge, arbitrators should adopt a similar attitude. However, contrary to judges, arbitrators are nominated by parties and a Linkedin profile may be useful in this regard. Even if Linkedin may be more useful to arbitrators than to judges, both have to be impartial and independent. Because their online professional connections may still give rise to reasonable doubts in the parties’ minds on their intellectual independence, it would be worth engaging in a debate over the issue.

How will the French Courts decide the issue of Facebook and social media networks in general? Future decisions will tell us sooner or later…

b) Predictability regarding the scope of the disclosure requirement. Really?

One may wonder whether Courts will in the future follow the same reasonable approach and create a coherent and stable case law. Indeed, one author believes that the obligation for the Courts of Appeal to explain why the non-disclosed elements were likely to create doubts will bring more predictability[24]. But will the obligation to explain in itself bring more predictability to the decisions? Determining the existence of doubts in the parties’ minds implies a very subjective analysis. It depends on the parties, but also the judge examining the case[25]. Courts may have different interpretations of the same circumstances. This case is a very good example: although the Paris Court of Appeal did not explain its findings, it considered the elements were sufficient to create doubts in Tesco’s mind, whereas the Lyon Court of Appeal considered it was not enough. Notably, the Paris Court took into account the fact that Mr. Larroumet still had a Freshfields email address at the time of the proceedings. This element was excluded by the Lyon Court’s decision.

To conclude, the Supreme Court’s decision to require Courts of Appeal to justify their decisions is not enough to reach a uniform and liberal case law. French Courts of Appeal need to apply a common principle in each of their decisions: ensuring the effectiveness of international arbitration. It is the principle on which the Lyon Court of Appeal’s decision is based, and we can hope Courts of Appeal will do the same in subsequent disclosure cases. Courts have placed the effectiveness of arbitration as the number one priority in their decisions on recognition and enforcement of awards. They consider that international awards are international decisions of justice that should be enforced in France, regardless of whether the award was annulled at the seat of arbitration[26]. In addition, French Courts or French law will have to regulate the disclosure of media-based relationships. The issue needs to be clarified, as the use of media networks is increasing everyday.

Anne-Lise Ménagé

The author is a Class of 2015 LL.M. student in the International Business Regulation, Litigation and Arbitration program at the New York University School of Law. She obtained her first law degree in 2011 at the University of Paris Ouest Nanterre La Défense, in the bilingual Anglo-American Law / French Law program. She then obtained a graduate degree in Business Law at the University of Paris II – Panthéon Assas in 2013. The author can be contacted at annelise.menage@hotmail.fr.

_____________________________________________

[1] CA Lyon, 11 March 2014, n°13/00447.

[2] Article 1456 of the French Civil Procedure Code applying to both domestic and international arbitration via Article 1506 of the French Civil Procedure Code.

[3] Article 12(1) of the Model Law; §1036 of the German ZPO.

[4] General Standard 3 of the IBA Guidelines on Conflicts of Interest in International Arbitration, 23 October 2014; Art. 9 UNCITRAL Rules, 1976.

[5] Cass. Civ. 1e, 16 March 1999, n°96-12.748, État du Qatar c/ Société Creighton.

[6] Pursuant to Article 1520, 2° of the French Civil Procedure Code.

[7] CA Paris, 10 March 2011, n°09/28537.

[8] Cass. civ. 1e, 10 October 2012, n°11-20299, FS-P+B+I* (*decision published in the Report of the Civil Chamber of the Supreme Court, in the Information Report of the Supreme Court and on its website).

[9] The French Supreme Court can only examine legal issues, not factual issues.

[10] CA Lyon, 11 March 2014, n°13/00447, quoting Mr. Larroumet’s testimony.

[11] French lawyers are not employees of their law firm: they are allowed to have their own personal clients in addition to the firm’s clients.

[12] “Indépendance des Arbitres et Conflits d’intérêts”, D. Cohen, Rev. Arb. 2011, p. 611, paras. 59-62; “Le devoir de révélation dans la jurisprudence récente: de la rigueur à l’excès ”, M. Henry, LPA, 21 February 2011, p. 17 s.

[13] This view has been supported by T. Clay in Note under CA Paris, 12 February 2009, Rev. arb. 2009, p. 186.

[14] “Indépendance des Arbitres et Conflits d’intérêts”, D. Cohen, Rev. Arb. 2011, p. 611, para. 59.

[15] CA Reims, 2 November 2011, SA J&P Avax c/ Tecnimont SpA.

[16] Cass. civ. 1e, 10 October 2012, n°11-20299.

[17] While E. Loquin adopts a subjective approach, recommending the judge to put himself into the parties’ shoes with reasonableness, C. Jarrosson explains the undisclosed circumstance should be an element that could allow the parties to challenge the arbitrator.

[18] Ph. Fouchard, E. Gaillard et B. Goldman, Traité de l’arbitrage commercial international (1999), para. 1031.

[19]“Social Media and Arbitration Conflicts of Interest: A Challenge for the 21st Century”, J. E. Kalicki, Kluwer Arbitration blog, 23 April 2012; “Arbitration Disclosure in the Internet Age: some guidance concerning the obligation to disclose internet activity and online relationships”, R. V. Glick, L. J. Stipanowich, Dispute Resolution Journal, vol. 67, n°1, Feb.-Apr. 2012, American Bar Association; The College of Commercial Arbitrators, “The Guidance Note: Arbitration and Social Media”, 15 August 2014.

[20] Part II, para. 4.3.1 of the IBA Guidelines, 23 October 2014.

[21] Part II, para. 3.3.6 of the IBA Guidelines, 23 October 2014.

[22] https://www.facebook.com/facebook/info?tab=page_info.

[23] Part I, General principle 3(d) of the IBA Guidelines, 23 October 2014.

[24] “A propos de l’obligation de revelation: une leçon de méthode de la Cour de cassation, note sous Cass. Civ. 1e, 10 octobre 2012”, C. Jarrosson, Rev. Arb. 2013.

[25] “La dualité des fonctions de l’obligation de révélation”, E. Loquin, Dalloz, 2013, p.487.

[26] Cass. civ. 1e, 23 March 1994, n° 92-15137, Hilmarton c/ OTV; Cass. civ. 1e, 29 June 2007, n° 05-8053 and n° 06-3293, Putrabali Adyamulia c/ SA Rena Holding.

Reinstating Courts’ Deference to Institutional Arbitration Rules: The Tecnimont case

I. Introduction

In a long-awaited decision and close to the end of a judicial ‘marathon’, the French Court of Cassation restored lost tranquility in the troubled waters of commercial arbitration by confirming that the institutional rules chosen by the parties to govern the arbitration procedure set limitations over a judge’s power to review an award[1]. An earlier decision by the Reims Court of Appeal generated intense criticism by  holding that the scope of the institutional rules governing the time limit for challenging arbitrators does not extent to the question of the admissibility of an action to set aside an award. [2]

II. Factual Background

Société Tecnimont SPA (“Tecnimont”), an Italian company and S.A.J. & P. Avax (“Avax”), a Greek company, entered into an agreement for the construction of a propylene plant in Greece. Pursuant to an arbitration clause contained in the subcontract agreement, all disputes arising from the agreement would be resolved by recourse to International Chamber of Commerce (“ICC”) arbitration. A dispute arose between the parties, and Tecnimont initiated ICC proceedings in Paris.

During the proceedings, it came to Avax’s attention that the Chairman’s law firm assisted a company later acquired by the parent company of Tecnimont. In September 2007, Avax challenged the Chairman’s appointment before the ICC Court alleging a lack of independence, pursuant to Article 11 of the 1998 ICC Rules (now Article 14 of the 2012 ICC Rules). In October 2007, the ICC Court dismissed the challenge for undisclosed reasons. Avax then continued to participate in the arbitration while reserving its rights. In December 2007, Avax filed an application to set aside the partial award. The Paris Court of Appeal held that the Chairman of the tribunal did not observe his duty to disclose relevant facts that allegedly raised reasonable doubts as to his independence.

In February 2009, the Paris Court of Appeal annulled the award. It specifically held that the arbitrator was under a continuing obligation to inform the parties of any matter that called into question his impartiality and independence.[3] The same Court rejected Tecnimont’s argument that Avax’s application was inadmissible because it had already unsuccessfully challenged the Chairman before the ICC on the same grounds. The Paris Court of Appeal found that Avax had been notified of the relevant facts and circumstances only after it had challenged the arbitrator before the ICC Court and after the partial award was issued.

In November 2010, the French Court of Cassation reversed the Paris Court’s decision on the ground that most of the facts complained about in Avax’s application to set aside the award were invoked before the ICC Court.[4] It further determined that the Paris Court modified the subject-matter of the dispute by considering facts that came in light after the partial award was rendered.  Consequently, the Court of Cassation remanded the case to the Reims Court of Appeal for the latter to decide on the substantive question of the validity of the award.

III. The Controversial Ruling of the Reims Court of Appeal

The actual question before the Reims Court of Appeal was whether a party’s failure to adhere to the ICC’s 30-day deadline to challenge an arbitrator precludes a judge form setting aside an award on the same grounds. The Court first held that the judge who is seized of the question of the award’s validity is not bound by the time limit prescribed by the institutional rules. It further added that the absence of any subsequent challenge against the arbitrator regarding facts discovered at a later stage by the challenging party does not preclude the latter from seeking annulment of the award insofar as it has not waived its right.

The Court also explained that for a grievance against an award to constitute a basis for a challenge under the Article 1520-2° of the French Code of Civil Procedure, it has to be raised during the arbitration procedure whenever possible.  Moreover, the Court emphasized that it was not bound by the ICC’s dismissal of the challenge: a challenge before the ICC and an application to set aside an award are separate proceedings, which do not serve the same purpose and are not controlled by the same authority. In this context, the Court further held that the decision of the ICC Court is of an administrative nature and therefore does not have the effect of res judicata.

On the merits, the Reims Court held that a proper disposition of the challenge required consideration not only of the ties between the company and the Chairman’s law firm, but also of the ties between other companies of the group and the law firm. To the extent that Avax obtained its information about the Chairman gradually, the Reims Court determined that Avax’s application was admissible. In this regard, the Court explained that it could not conclude that Avax waived its right as a consequence of the non-exercise of the institutionally provided disqualification procedure. Based on this reasoning, the Reims Court set aside the partial award of 2007 holding that the Chairman failed to meet his duty of disclosure, which itself raised reasonable doubts as to his independence. As expected, Tecnimont challenged the Reims Court decision.

IV. The French Court of Cassation Ruling

The Court of Cassation, apparently not convinced by the Reims Court reasoning, reversed the latter’s ruling with a brief, though clear-cut, decision.[5] The Court of Cassation held that a party who knowingly fails to ask for the disqualification of an arbitrator within the prescribed time period is deemed to have waived their right. Accordingly, the Court of Appeal should have examined whether the 30-day time limit for exercising the right of challenge was observed in respect of each of the facts and circumstances the court held to constitute a breach of the arbitrator’s obligation of independence and impartiality.

V. Analysis of the Court of Cassation Decision in Light of the Reims Court Ruling

To understand the value of the Court of Cassation decision, one should read it in conjunction with the Reims Court ruling. In doing so, it is necessary to identify why the Reims Court decision was met with criticism and the ways in which the Court of Cassation altered the situation created by the former.

The question that tormented both courts was whether a timely challenge of the arbitrator was a precondition for the court to set aside the award on the grounds of lack of independence and impartiality, when the challenging party was already aware of them during the arbitration procedure. For the Reims Court, the question whether Avax rose the challenge within the prescribed time limit was not determinative for the admissibility of its claim at the setting-aside stage. Instead, according to the Reims Court reasoning, the mere fact that the challenging party expresses its doubts on the arbitrator’s impartiality at any time during the arbitral procedure is sufficient for the admissibility of a request to set aside the award on the same grounds.

The implications of the Reims Court ruling are far-reaching. Ιt is true that the short and concise ruling of the Court of Cassation, although corrective in its very essence, is devoid of an explicit argumentation that could shed enough light on the reasoning behind the reversal of the Reims Court decision. However, this is not to suggest that the Court of Cassation judge was not conscious of the wider implications of the Reims Court ruling. The analysis below aims to address the elements that presumably were taken into account by the Court of Cassation in formulating its ruling.

The ultimate issue before the two courts was the legal force of the arbitration rules chosen by the parties on the judge who reviews the award. At the outset, it should be noted that the incorporation of the institutional rules in the arbitration agreement is of a contractual nature and constitutes an extension of the arbitration agreement.[6] Indeed, by concluding the specific arbitration agreement, the parties in this dispute relied on certain rules on which they developed their expectations.  These rules reflect certain balance between the opposing interests of the parties and were selected by them as appropriate to govern the conduct of the arbitration procedure. In this regard, the parties’ expectation was that any concern related to the independence and impartiality of the arbitrators would be raised during the arbitration procedure within reasonable time, as prescribed by the ICC rules. Failure to do so would amount to a waiving of the party’s right to challenge the arbitrator and, therefore, the proceedings would move on without the fear that this issue would come up at a later stage. In determining, therefore, the appropriateness of these rules, each party has accepted any constraints or stakes accruing by the very content of the rules. Having said that, the judge of the Reims Court overturned those expectations when he considered allegations about the Chairman’s impartiality without examining whether Avax timely raised those during the arbitration procedure.

In fact, there are two competing principles that scramble to prevail on each other in this debate. On the one hand, it is the security and predictability that arbitration rules offer to the parties. The ICC rules are built on the idea that disputes need to be resolved within certain timeframe and that the different stages of the arbitration procedure should also be governed by time limits. On the other hand, it is the judge’s duty and concern to ensure that the award issued by the arbitral tribunal is not ultimately the product of any abuse that could result to the unfair treatment of either party. Here, the Reims Court judge in ensuring that the award was issued by a proper tribunal might find himself accepting the abuse of the procedure by the party who did not raise the challenge on time during the arbitration.

What the Reims Court judge did not seem to consider though, was that such an approach encourages dilatory tactics and ultimately results in an unequal treatment of the parties, to longer proceedings and additional costs. These time limits serve an important protective function: without them a party would be able to use information about an arbitrator’s independence as a weapon to obstruct the arbitration or to successfully challenge the validity of the award rendered by the tribunal. A party with knowledge of facts capable of resulting to the disqualification of an arbitrator is therefore obliged by the time limit to make them known immediately. Otherwise, the party will be estopped from invoking them later on.[7]

It has been suggested, that sometimes there might be ‘reasons of opportunity’ not to force a party to challenge an arbitrator during the arbitration proceedings: for instance when a party might not want to antagonize the tribunal or to aggravate an already tense situation.[8] In this author’s view, it would be hardly acceptable that there might be any such reasons justifying a belated challenge. The request of an arbitrator’s disqualification is by its very nature an ‘inconvenient’ moment during the proceedings and this is something that parties need to consider when challenging an arbitrator. In this regard, they should be prepared to accept the possibility that their request may not be upheld.

It has been also suggested that the Reims Court ruling is reasonable insofar as a contrary solution would render a timely request for disqualification before the ICC a precondition of an action to set aside an award. [9] Even though this proposition holds true on its merits, it seems to ignore the very considerations that lie behind the adoption of the requirement to respect the time limit prescribed by the rules. At the end of the day, one should wonder what is more preferable: to reward faith to the contractual obligations or to favor the mischievous party that dishonestly attempted to benefit from the challenge of the arbitrator.

Another interesting point in the Reims Court decision was the proposition that the judge’s power to second-guess the disqualification issue is based on the fact that the relevant decision of the ICC Court is of an administrative nature and therefore it does not have a res judicata effect. This proposition was nevertheless not rejected by the Court of Cassation. In this author’s view, this reasoning is problematic, insofar as it implies that the outcome would be different if the determination for the disqualification was rendered in the form of, for instance, an interim award. As a matter of fact and law, the judge admittedly can get into the merits of the disqualification decision and reconsider the issue, irrespective of the legal nature of the decision.  A judge is therefore entitled to set aside an award on the ground of an arbitrator’s lack of independence despite the institution’s opposite decision. Having said that, it is necessary to make the following distinction, which is also implied in the Court of Cassation ruling: it is one thing that a judge is not bound by the findings of the ICC Court as to the outcome of an application to disqualify an arbitrator, and another to suggest that the judge is not bound by the 30-day limit of the institutional rules.[10]

VI. The “raise it or waive it” principle and the duty of diligent enquiry in acquiring information related to the arbitrators

The position advanced by the French Court of Cassation further represents a reiteration of the principle of good faith to the arbitral procedure. Even in the absence of an explicit time limit in the institutional rules, a party seeking to challenge an arbitrator should be expected to raise the grounds of challenge as soon as it becomes aware of them; otherwise it should be prevented from bringing the question at a later stage as a means to challenge a disfavoring award.

Swiss courts have even gone one step further by developing a standard of diligent enquiry that each party should exercise at the start of the arbitration.[11] In a case before the Federal Court, the claimant sought the annulment of a Court of Arbitration for Sport (CAS) award because of irregular composition of the arbitral tribunal.[12] The party challenging the award asserted that it became aware of the professional relationship between two of the three arbitrators and one of the Respondent’s counsels only after the issuance of the arbitral award. The Court explained that even if the party requesting annulment had not been aware of the alleged ground of challenge, he could have become aware by using the required attention. The Court further observed that staying in ignorance may in certain cases be considered as an inacceptable manoeuvre, comparable to deferring the announcement of a challenge.

According to the Court, elementary prudence would require from each party to investigate and ensure that the appointed arbitrators present sufficient guaranties of independence and impartiality; they could not simply rely on the general statement of independence made by each arbitrator on the ad hoc form. As the relevant information was publicly available and given the small size of the sports community, the Court held that the claimant was able to do such an enquiry within less than thirty days after the receipt of the arbitral award. Accordingly, the Court concluded that the claimant’s right to raise the irregular composition expired, be it because he knew the grounds for challenge at the time, be it because he should have known them by means of a diligent enquiry into the arbitrators’ background.

Concluding remarks

The solution advanced by the Court of Cassation confirms that judges should give deference to the arbitration rules agreed by the parties. This ruling is essential insofar as it reinforces the legal status of the arbitration rules and the underlying principles of predictability and certainty. Moreover, it rewards the party that does not engage in dilatory and lurking tactics.  It further provides a solution that is in accordance with Article 1456 3° of the French Code of Civil Procedure which sets a 30-day limit to challenge an arbitrator. This solution is also in accordance with Article 1466 of the same Code, which provides that the party, who knowingly and without lawful reason fails to invoke timely any irregularity before the arbitral tribunal, is deemed to have waived their right.

This is not to imply, however, that the judge may not limit the binding nature of the procedural rules, if questions of public policy require such deviation.[13] Having said that, one cannot treat the present case as falling within the limited pool of those instances, where the judge will have to bypass the rules agreed by the parties in order to correct any ‘imbalances’ that might be inherent in the rules. The French Court of Cassation therefore sends a strong message on the legal power of the institutional rules selected by the parties: a limitation of the judge’s powers and an acknowledgement of the prominence of party autonomy.

 

Chrysoula Mavromati

The author is a Class of 2015 LL.M. student in the International Business Regulation, Litigation and Arbitration program at the New York University School of Law. After receiving her law degree from Aristotle University of Thessaloniki, Greece, in 2012, she pursued graduate studies at the University of Barcelona and then gained working experience in the European Commission and in the International Trade and Investment group of a renowned international law firm in Brussels. She is admitted to the Thessaloniki Bar.

_________________________________

[1] Société Tecnimont SPA v. S.A.J. & P. Avax, Cass 1er civ, 25 June 2014.

[2] S.A.J. & P. Avax v. Société Tecnimont SPA, CA Reims, 2 November 2011.

[3] S.A.J. & P. Avax v. Société Tecnimont SPA, CA Paris, 12 February 2009.

[4] Société Tecnimont SPA v. S.A.J. & P. Avax, Cass 1er civ, 4 November 2010.

[5] Because it reversed the Reims Court ruling on the issue of admissibility, the Court of Cassation did not enter into the question of the extent of an arbitrator’s duty to disclose facts and circumstances relating to his independence and impartiality.

[6] Jean-François Poudret and Sébastien Besson, Comparative Law of International Arbitration,  Sweet & Maxwell (2007), pp 69-70

[7] Christopher Koch, Standards and Procedures for Disqualifying Arbitrators, Journal of International Arbitration, Vol. 20 No 4 (2003), p. 330

[8] Alexis Mourre, Institutional Arbitration Rules: Do they Deserve More Deference from the Judiciary? Comments on Tecnimont and other cases, in “The Practice of Arbitration: Essays in Honour of Hans van Houtte, edited by Patrick Wautelet, Thalia Kruger and Govert Coppens, Hart Publishing (2012), p.156

[9] Id at p.156

[10] Id. at p. 155

[11] Antonio Crivellaro, “Does the Artibtrators’ Failure to Disclose Conflicts of Interest Fatally Lead to Annulment of the Award?” The Approach of the European State Courts.” The Arbitration Brief 4, no.1 (2014), p. 136

[12] X. v. Y., I. Zivilabteilung, 4A.506/2007, 20 March 2008

[13] See Siemens AG/BKMI Industrieanlagen GmbH v. Dutco Construction Company, Cass, 7 January 1992. The French Court of Cassation annulled an award because it considered that the ICC rules did not protect the equality of parties, insofar as they were requiring from the two Respondents to jointly appoint a single arbitrator in a multiparty arbitration, while those parties’ interests were not entirely aligned in the contract. The Court held that the principle of equality of parties is a question of public policy that can only be waived after arbitral proceedings have been initiated. The Court of Cassation was of the view that in this way the arbitral tribunal placed Dutco in a better position to affect the outcome of the arbitration.

Receipt of goods under the CISG: a threshold question when an American buyer is going bankrupt

I. Introduction 

In 2005, the U.S. Congress adopted the Bankruptcy Abuse Prevention and Consumer Protection Act, which, among other things, incorporated an effective protection for sellers of goods when a bankrupt buyer received them without paying[1]. Less than 10 years after, two recent decisions of the United States Bankruptcy Court for the Eastern District of Pennsylvania made this protection less effective when the sale is governed by the UN Convention on the International Sale of Goods (hereafter the « CISG »)[2].

In the present paper, we will first expose the general context of the litigation (I), then discuss the interpretation of this protection in US case law (II). We will after explain why the CISG applies in the cases at hand (III). Finally, we will expose why the Court went wrong in its interpretation of the CISG (IV).

II. Legal and factual framework

The effective protection incorporated under section 503(b)(9) of the Bankruptcy Code states that the unpaid seller of a bankrupt buyer should be allowed administrative expenses[3] amounting the value of the goods. The Bankruptcy Code provides two conditions for this provision to apply. On the one hand, the transaction must occur within the ordinary course of debtor’s business. On the other hand, there is a strict time limit: the debtor shall have received the goods less than 20 days before going bankrupt.

The facts under which the discussed decisions arose are common and straightforward. Chinese sellers sent goods to an American buyer[4]. The goods were shipped FOB from different Chinese harbors more than 20 days before the bankruptcy proceeding began but arrived in the United States less than 20 days before. The core issue was to determine when the goods where received in the meaning of section 503(b)(9), in order to determine the starting point of the 20 days period.

 III. The interpretation of « received» under article 2 of the U.C.C.

The term « received » is not defined in section 503(b)(9) neither in the US Bankruptcy Code itself[5], and courts agree that the definition must be found in article 2 of the Uniform Code of Commerce (the « UCC »)[6]. This statute defines the « receipt of goods » as « taking physical possession of them »[7]. Despite the express reference to physical possession in the UCC, courts stated that possession could also be constructive[8].

It is worth noting that this definition is a uniform federal interpretation. Indeed, referring to a state interpretation of section 503(b)(9) would be impracticable in the context of large bankruptcies, given that the bankruptcy judge would have to look to the conflict of law rules of each interested state to determine the law applicable to the claim, then would define the word « received » in that law and finally apply this definition to the claim at hand[9].

IV. A different definition when the CISG governs the sale of goods: two decisions of the United States Bankruptcy Court for the Eastern District of Pennsylvania

Despite this uniform interpretation, the US Bankruptcy Court for the Eastern District of Pennsylvania decided that the CISG shall provide the definition of the word « received » when this Convention governs the sale of goods[10]. Even if the Court went fast on this point, we will present the exhaustive analysis of the application criteria of the CISG.

In fact, five conditions have to be met for the CISG to apply. First, the contract shall be a sale of goods. Even if the CISG itself does not define what a sale of goods is, case law has defined this notion by interpreting articles 30 and 53: « a sales contract is a contract by which the seller is obliged to deliver goods, transfer the property in the goods and eventually hand over all the documents relating to the goods, while the buyer is obliged to pay the price and take delivery of the goods[11]. » Secondly, the object of the contract shall be tangible and movable goods[12]. Thirdly, the contract shall be international, which means, under article 1(1) of the CISG, that the parties have their places of business in different states. Fourthly, an additional applicability criteria requires that the states in which the parties have their places of business are signatories of the CISG[13] or that the international private law rules of the forum lead to the application of the law of a contracting state of the CISG[14]. Finally, the parties shall not have agreed to exclude the CISG[15].

In the cases at hand, no doubt exists on the application of the CISG. There are sales of goods between parties having their places of business in different countries. Both China and the US are signatories to the CISG, and the parties did not exclude it.

V. The definition of the « receipt of goods» shall be based on the CISG, but not following the reasoning adopted by the Court

As the CISG applies, the Court was correct when stating that this Convention displaces the traditional definition found in the UCC (a), but erred in its interpretation of the CISG, mixing the interpretation of the Convention itself with the interpretation of parties’ intention (b). And since the parties did not modify the CISG provisions on the receipt of goods, the general principles of the CISG provide the definition of « receipt of goods » (c).

a. Interpretation of receipt of goods under the CISG: a case of first impression

As the CISG is the applicable law, the Court noted that it displaces the UCC[16]. Therefore, it displaces the interpretation of the « receipt of goods » as stated under article 2 of the UCC, only if this concept falls within the scope of the Convention. As article 4 of the CISG does not exclude the « receipt of goods » from the scope of the Convention, the above-mentioned case law based on article 2 of the UCC shall be disregarded. The interpretation of « receipt of goods » under the CISG is a case of first impression[17].

b. The Court baldy interpreted the CISG

This word « receipt » is not defined in the CISG[18], so that the Court shall interpret this Convention to determine the meaning of this concept. The reasoning of the Court on how to interpret the CISG is unfortunately very short and confusing. The Court decided first to rely on the gap-filling analysis under article 7(2), which requires interpreting the text of the CISG in accordance with the general principles on which it is based. Then, without any explanation of the relationship between both articles, the Court referred to article 9(2) of the Convention, which deals with the implicit application of international trade practice. On such basis, the Court held that the parties have impliedly made the Incoterms FOB applicable and that, under the Incoterms provisions on transfer of risks, the receipt was concomitant to the delivery by the seller, which occurred when the risks were transferred[19].

This reasoning mixes the interpretation of the CISG itself, governed by article 7, with the interpretation of parties’ agreement, provided in articles 8 and 9. The interpretation of the CISG itself, as opposed to the interpretation of the contractual framework, is convincing when the parties did not agree to derogate from CISG’s default provisions. On the contrary, when, under article 6 of the CISG, the parties derogated from the Convention, their intention shall be interpreted. Seeing the inconsistent provisions invoked by the Court, the question is whether the Incoterms provide a definition of « receipt of the goods », so that the court wrongly referred to article 7(2), or whether the Incoterms are not dealing with the receipt of the goods, so that the court correctly referred to article 7(2) but should have analyzed the general principles surrounding the CISG. In our opinion, the answer is the latter.

c. The parties did not modify the CISG provisions on the receipt of the goods

In the present case, the Court considered that the FOB term provided a contractual definition of the « receipt of goods ». The Court, in the decisions at hand, did not explain why its reasoning is limited to the transfer of risks. In the decision of 10 September 2014, plaintiffs were challenging the use, in the first decision, of the Incoterms as an interpretation tool to define the « receipt of the goods ». The Court refused to revise its position, stating first that there is « no reason to look outside the Incoterms for a definition of « receipt[20] » », given that the seller delivers the goods when they are placed on board of the vessel, and that this event is concomitant to the receipt of the goods by the buyer. Secondly, it refused to consider that the Incoterms make a distinction between delivery and receipt of goods[21].

This focus on transfer of risk is absolutely not convincing. Indeed, the definition of « receipt of goods » is not univocal, but can revert to different moments: when the risk of loss passes, when the title passes or when a party takes possession of the goods[22]. Therefore, the Court shall first determine the definition of « receipt of goods » under the CISG. Then, if this definition reverts to a provision superseded by the Incoterms, such as article 67(1) of the CISG on the transfer of risks[23], the Court shall apply trade terms.

d. General principles of the CISG concerning the receipt of goods

Article 7(2) helps to fulfill internal gaps, by referring to general principles and, in absence of such principles, by referring to the rules of private international law of the applicable law[24]. Concerning the « receipt of goods », a general principle can be deducted from different provisions of the CISG, which distinguishes this concept from the transfer of risks and reverts to possession by the buyer.

First, article 38 deals with the examination of the goods by the buyer. The receipt of goods is very important in this context, as it fixes the point in time from which the « short period » to examine the goods runs[25]. For contracts involving the carriage of goods, article 38 states that the examination can only occur when the goods arrive at destination. When trade terms such as FOB are used, delivery occurs when the goods are transferred to the first carrier. At this time, it is impossible, or at least unreasonable, that the buyer examines the goods. Therefore, article 38(2) provides that such examination can only be performed when the goods are at destination[26]. Thus, the CISG makes a distinction between the delivery by the seller, which occurs when the goods are handled over to the first carrier, and the reception by the buyer, which occurs when the goods are at destination. In the present cases, the former reverts to transfer of risks, governed by the Incoterms. The latter concerns receipt of goods, which occurs when the buyer takes possession of them.

In the same way, article 58 states that, unless otherwise agreed, the buyer must pay the price when the seller places the goods, or documents controlling their disposition, « at the disposal » of the buyer[27]. The threshold question to determine disposal of the goods is « the right to possession of the goods[28] ». When a sale of goods involves a carriage, the disposal takes place when the goods are at the place of destination, i.e. when the carrier passes the goods to the buyer[29]. This reverts to the possession of the goods by the buyer. This focus on possession has been confirmed by the CISG Advisory Council in its opinion no. 11, which stated, in analyzing which documents constitute a constructive possession, that the buyer may not be left in the position of having to pay for goods when the right to possession can still be transferred[30].

Hence, it arises out of these articles that the CISG distinguishes the transfer of risk from the receipt of goods by the buyer. And definition of « receipt of goods » reverts to the possession of the goods by the buyer. As the Incoterms deal with transfer of risks, the agreement of the parties does not change this definition in the present case. Concretely, this means that the American buyer received the goods when they arrived in the US harbor, and the Chinese sellers are entitled to an administrative expense.

VI. Conclusion

Two principles govern the interpretation of article 503(b)(9) of the US Bankruptcy Code in the context of an international sale of goods under the CISG. First, the CISG provides the definition of the word « received », dismissing the uniform federal interpretation found in article 2 of the UCC.  Secondly, the general principles surrounding the CISG distinguish the receipt from the transfer of risks, and state that the receipt occurs when the buyer takes possession of the goods.

Concerning the first principle, one may regret that this conclusion sounds the death knell of uniform federal interpretation of section 503(b)(9). However, from a practical perspective, the unmanageable burden of various states’ definitions, which was the rationale for uniformity, is not relevant, as every case governed by the CISG will use the same interpretation, unless the parties otherwise agree.

On the second one, the proposed solution reconciliates the CISG with US law. Indeed, shortly after the issue of the commented decisions, some law firms advised, among other tools, to exclude the CISG when contracting with a US buyer, in order to enjoy the broader protection of article 503(b)(b) interpreted under article 2 of the UCC[31]. If US courts adopt the interpretation proposed in this paper, the CISG will continue to be an interesting legal framework for international sales of goods when the buyer is American.

 

Alexandre Hublet

The author is a Class of 2015 LL.M student in the International Business Regulation, Litigation and Arbitration program at the New York University School of Law. He obtained his law degree at the Université libre de Bruxelles (ULB) in 2012, after which he took the oath at the Brussels’ bar and worked for two years in a major Belgian law firm. In the mean time, he collaborated with the Perelman Center for Legal Philosophy at the ULB, focusing his research on global justice.

____________________________

[1] See section 503(b)(9) of the US Bankruptcy Code; In re Momenta, Inc., 455 B.R. 353 (2011)

[2] In re World Imps., Ltd., 511 B.R. 738 (18 June 2014) and In re World Imps., 2014 Bankr. LEXIS 3858 (10 September 2014)

[3] An administrative claim is « a first priority claim that is much more likely than a general unsecured claim to be paid in full or substantially in full upon any distribution to creditors. » See Michael A. Tessitore, The U.N. Convention on International Sales and the Seller’s Ineffective Right of Reclamation Under the U.S. Bankruptcy Code, 35 Willamette L. Rev. 367 (1999), p. 383

[4] In fact each case concerns two Chinese exporters. In the June 18’s case, one exporter sent all the goods to the buyer, the second one sent a part directly to the buyer’s consumers, the other to the buyer. As the Court dismissed the case because of the 20 days limitation, it made no distinction between the goods sent to the buyer and the goods sent to the consumers. In the September 10’s case, one of the exporter sent all the goods directly to the buyer’s consumers. The other exporter sent a part of the goods directly to the buyer’s consumers, the other to the buyer. The Court dismissed the claim of the first corporation because the buyer never received the goods. The goods sent directly to the buyer were shipped less than 20 days before the bankruptcy, so that there was no time issue. However, the Chinese exporters contested the reasoning of the June 18’s case, but the court affirmed its position. See In re World Imps., Ltd., op. cit. (18 June 2014) and In re World Imps., op. cit. (10 September 2014)

[5] In re Wezbra, 455 B.R. 493 (2013), p. 770; In re Momenta, Inc., 455 B.R. 353 (2011), at 358

[6] In re Circuit City Stores, Inc., 432 B.R. 225, 228 (Bankr.E.D.Va.2010), at 228 ; In re Momenta, Inc., op. cit.. ; In re Wezbra, op. cit., p. 770-771

[7] Even if both statutes do not use the same wording, Courts consider both expressions as functional equivalent (see In re Circuit City Stores Inc., op. cit., at 229)

[8] The detailed reasoning can be found in In Re Momenta, op. cit., at 361; see also In re Wezbra, op. cit., p. 771

[9] In re Circuit City Stores Inc., op. cit., at 228

[10] In re World Imps., Ltd., op. cit. (18 June 2014), p.6

[11] Tribunale di Forli, 11 December 2008 at 2.2, available at http://cisgw3.law.pace.edu/cases/081211i3.html

[12] Tribunale di Forli, op. cit., at 2.3. The present cases do not mention the type of goods involved. As the issue is not raised, we will assume these are tangible and movable goods.

[13] Art. 1(1)(a) of the CISG

[14] Art. 1(1)(b) of the CISG; please note that both United States and China made a reservation under article 95 of the CISG not to be bound by article 1(1)(b)

[15] Art. 6 of the CISG

[16] In re World Imps., op. cit. (18 June 2014), p. 6

[17] In re World Imps., op. cit. (18 June 2014), p. 6

[18] In re World Imps., op. cit. (18 June 2014), p. 6

[19] In re World Imps., op. cit. (18 June 2014), pp. 6-8

[20] In re World Imps., op. cit. (10 September 2014), pp. 6

[21] In re World Imps., op. cit. (10 September 2014), pp. 5-7

[22] In re momenta, op. cit., at. 358

[23] J. CUOTZEE, The interplay between Incoterms © and the CISG, Journal of Law & Commerce, Vol 23, No. 1 (2013), p. 12

[24] H. MATHER,Choice of Law for International Sales Issues not Resolved by the CISG, 20 Journal of Law and Commerce 155 (2001), pp 156-158

[25] P. SCHLECHTRIEM & I. SCHWENZER, Commentary on the UN Convention on the International Sale of Goods (CISG), third edition, Oxford, 2010, pp. 607 et s.

[26] Id., p. 618

[27] See art. 58 of the CISG

[28] CISG Advisory Council Opinion, no. 11, at 5.3, available at http://www.cisg.law.pace.edu/cisg/CISG-AC-op11.html

[29] P. SCHLECHTRIEM & I. SCHWENZER, op. cit., pp. 847-848

[30] CISG Advisory Council Opinion, no. 11, op. cit., at 5.3

[31] See Gibson Dunn, International Shipments Deemed “Received” by Debtor When Delivered to Common Carrier “FOB Port of Origin” – Rather Than Physically Received – for Purposes of Granting an Administrative Expense Claim Under Section 503(B)(9) of the Bankruptcy Code, Aug. 18 2014 available at http://www.gibsondunn.com/publications/pages/International-Shipments-Deemed-Received-by-Debtor-When-Delivered-to-Common%20Carrier-FOB-Port-of-Origin.aspx; Montgomery McCracken, Bankruptcy and Commercial Transactions with Foreign Entities: What Law Governs?, July 8, 2014, available at http://www.mmwr.com/home/news-and-publications/alerts-and-resources/default.aspx?d=5826

When will the English Court agree to be a “forum of necessity” for foreign litigants?

I. Introduction

This paper considers the English Courts’ approach to the following hypothetical: All traditional connecting factors point to a foreign jurisdiction being the most natural place to hear a dispute but, that notwithstanding, the forum court ultimately decides the foreign jurisdiction is an unacceptable place to litigate and accepts jurisdiction in the interests of justice, i.e., it is a “forum of necessity” in its purest form.

International practitioners and academics have widely debated the “forum of necessity” concept and reached little consensus beyond recognizing the need for a doctrine simultaneously consistent with “comity” and “justice”; two fundamental (and generally uncontroversial) international dispute resolution doctrines.[1]  It has also provoked a range of judicial approaches.  While the Canadian Court of Appeal, for example, recently revisited the doctrine and continued its recognition of the theoretical possibility that a court may assume jurisdiction over a claim with no “real and substantial” connection with the forum,[2] other countries have reached different conclusions, requiring at least some connecting factor to the forum.[3]

Unlike many civil law jurisdictions, English courts do not directly employ the term “forum of necessity.”[4]  Instead, they consider issues such as the availability and suitability of alternative fora within the wider common law forum non conveniens doctrine.  Given the rapidly increasing number of international disputes being litigated in London, a more globalized approach to business resulting in substantive disputes arising in countries with less developed judicial traditions, and a (sadly) deteriorating worldwide security situation, jurisdiction challenges of this variety are likely to become increasingly frequent in English courts.

Given London’s status as a major international dispute resolution hub, this paper will hopefully be of interest to international practitioners generally, while offering some comparative value in respect of the English approach compared with other jurisdictions around the world.

II. The Jurisdictional Framework

The Brussels Regulation regulates jurisdiction amongst EU member states and gives primary importance to the domicile of the defendant.[5]  This restricts the application of the forum non conveniens doctrine (and thus the debate regarding “forum of necessity”) to jurisdictional disputes falling outside of the Brussels Regulation.[6]  In such cases (i.e., where the defendant is non-EU domiciled and the alternative forum is outside of the EU), the English courts retain a discretion to apply the forum non conveniens doctrine.  In Spiliada, the seminal English case on forum non conveniens, Lord Goff stated that the court has to identify the forum in which the case can be most suitably tried in the interests of the parties and for the “ends of justice”.[7]

III. Categories of “Forum of Necessity” Arguments

Parties before the English courts seeking to raise “forum of necessity” arguments have seized upon the second limb of Lord Goff’s test arguing that forcing claimants to litigate in unacceptable foreign jurisdictions deprives them of justice, so they should be allowed to proceed in England (notwithstanding the lack of connecting factors).  Such arguments fall broadly into two categories: (i) where the forum is “unavailable”, i.e., unacceptable risks to personal safety or ineffective state infrastructure; and (ii) where the forum is technically “available” (under category (i)) but the court directly attacks that forum’s integrity, i.e., arguing the relevant foreign court is untrustworthy.

(i) “Unavailable” Forum:  The forum non conveniens doctrine presupposes a functioning court system exists in the alternative forum, otherwise the English court is the only available court and, de facto, the most convenient forum.  English courts have (albeit in rare cases) rejected an alternative forum, where civil administration has so broken down that no effective judicial process exists, and permitted proceedings in England, regardless of any connecting factors.  In Katanga, for example, the court ruled the Democratic Republic of Congo (the “DRC”) unavailable as civil justice had entirely broken down.[8]  In his judgment, Tomlinson J. suggested a forum is unavailable if there is an “absence of a developed infrastructure within which the rule of law can be confidently and consistently upheld” and “[t]he normal infrastructure of a State does not exist in the DRC.”[9]  The judgment demonstrates the willingness of English courts to act as “forum of necessity” in such rare cases as war, lack of infrastructure or even barbarism in the alternative forum.[10]  Such cases are arguably uncontroversial as comity and justice can be reconciled (justice is served as the action only proceeds if the English court accepts jurisdiction and comity is essentially irrelevant given such states are unlikely to have functioning judicial infrastructure, thus negating any damage such a decision might inflict on legal reciprocity). Indeed, a limited transnational consensus on how to deal with this scenario has arguably begun to develop.[11]

(ii) Attacks on the Foreign Court’s Integrity:  A far more contraversial contention is that a foreign court, whilst functioning, is little better than no court at all, due to corruption or partiality.  Such holdings unavoidably strike at the heart of judicial comity and English courts have wrestled timidly with how to justify such holdings.

Historically, English courts were reluctant to even entertain disparaging comparisons between English and foreign legal systems, upholding only extreme examples.[12]  As Lord Diplock noted in the Abidin Daver, “judicial chauvinism has been replaced by judicial comity.”[13]  However, in a section of his judgment that would be seized upon by later courts, Lord Diplock also said that a plaintiff seeking to resist a stay on these grounds must at least support his allegations with “positive and cogent evidence.”[14]  Since 2008 a raft of decisions have either upheld direct attacks on a foreign court’s integrity (and accepted jurisdiction) or at least seriously considered such challenges, signifying a dramatic changing tide in the English court’s approach. [15]  These decisions provide guidance on the current English courts’ approach to this issue.

First, English Courts (adopting Lord Diplock’s wording) will require “positive and cogent” evidence to support such allegations.  This is clear from the infamous, Deripaska v. Cherney case in 2008, in which Mr. Cherney alleged he would not receive a fair trial in Russia of his claim against Mr. Deripaska (purported to be part of Putin’s close circle of advisors and one of the richest and most influential men in Russia).[16]

Second, courts will more reluctantly accept allegations of general endemic corruption than targeted criticism specific to the case at issue.  In Deripaska, the court carefully grounded its concerns in the specific facts of the case avoiding, to some extent, overly broad dispersions about Russian courts.[17]  In Kyrgyz Mobil, the Privy Council held that in endemic corruption cases (i.e., where the system itself is criticized) comity requires extreme caution before finding that justice might not be done by a foreign court although “there is no rule that the English court . . . will not examine the question whether the foreign court or the foreign court system is corrupt or lacking in independence.  The rule is that considerations of international comity will militate against any such finding in the absence of cogent evidence.”[18]

Third, although far from clear, the “cogent evidence” test requires more than general academic studies about a jurisdiction.  While the “cogent evidence” test is easily stated, commentators criticized it as difficult to apply in all but the most extreme cases.[19]  Potentially in response to such criticisms, the court in Ferrexpo, sought to clarify the “cogent evidence” concept.[20]  It rejected Transparency International studies and press articles, noting that while they indicated general concerns about Ukraine’s judicial system “[l]ooking at the material as a whole, it is too fragmentary, too vague and often too unreliable in its nature to justify such a conclusion.”[21]  Ferrexpo, thus made clear that general disparaging studies are not sufficient and evidence must be “sufficiently detailed and focused” to justify such allegations. [22]

IV. Conclusion and Observations

English law has not expressly endorsed a “forum of necessity” doctrine but its courts have plainly demonstrated a willingness to function as such when no alternative forum exists.  Notably, in accepting jurisdiction in such cases, English courts do not require a connection to England whereas many civil law systems do.[23]  The reason for this, particularly in commercial matters, can perhaps be traced to remnants of a historical entrenched idea of the English court, as the great commercial court of the trading world, able to accept jurisdiction provided parties are willing to submit.[24]  Whatever its roots, the removal of the requirement to show a connection to the jurisdiction negates a significant barrier to true recognition of the “forum of necessity” doctrine in England which persists in those civil law countries.

Recently, English courts have been more willing to accept or at least consider accepting jurisdiction based on criticisms of a foreign forum’s integrity (provided there is “cogent evidence”).[25]  The reason for this change of approach is unclear.  Briggs and Rees suggest the enactment of the 1998 Human Rights Act, requiring English courts to address claims that a party’s human rights will not be respected by a foreign judicial system, is significant.[26]  I would submit that another factor is the recent efforts by the English legal community and judiciary to promote London as a dispute resolution hub for international commercial parties.[27]  This willingness to welcome international cases has potentially, whether directly or indirectly, resulted in a greater openness to hearing the type of challenges to the integrity of a foreign forum that were previously taboo.

It is also worth highlighting two differences in the application of the forum non conveniens doctrine in England versus the United States (the other major common law dispute resolution forum), that theoretically renders England more amenable to the “necessity” doctrine.  First, U.S. jurisprudence contains a longstanding recognition that forum non conveniens should consider the public interest and weigh it against the parties’ private interests.  For example, a judge is required to consider the long queue of cases before him when deciding to stay proceedings, essentially respecting a U.S. claimant’s wish to sue in U.S. courts above a non-U.S. claimant’s desire to invoke U.S. jurisdiction.[28]  In stark contrast, this idea was expressly rejected in England where only the parties’ private interests are relevant in the forum non conveniens test.[29]  Second, the U.S. forum non conveniens doctrine operates within a wider jurisdictional regime fundamentally concerned with the affiliations between defendant and forum and is thus geared towards protecting defendants from litigation in inconvenient forums.[30]  Incorporating a (pro-plaintiff) “forum of necessity” concept into such a defendant-oriented system is understandably contentious.[31].  However, in the arguably more neutral English law interpretation (as espoused by Lord Goff in Spiliada) “forum of necessity” receives a more hospitable welcome.

This area will undoubtedly be subject to further development. Whatever the result, unless the English Parliament adopts statutory guidance or even a “black list” of inappropriate fora, uncertainty is an inevitable consequence of an overlap between the powers of the legislature and judiciary as this area impacts not only comity but also international policy and relations.  Indeed, a more comprehensive test than “cogent evidence”, without statutory intervention, could be deemed to further blur the lines between the separate powers.

 

Shaun Palmer

The author is a Class of 2015 LL.M. student in the International Business Regulation, Litigation and Arbitration program at the New York University School of Law. He obtained his undergraduate degree at Balliol College, Oxford University, in 2008, after which he completed his legal training in London, qualifying as a Solicitor in 2012.

 

[1] See e.g., C. Kessedjian, Synthesis of the work of the special commission of March 1998 on international jurisdiction and the effects of foreign judgments in civil and commercial matters, Hague Conference on Private International Law, Prel. Doc. No. 9, July 1998, p. 37 (To propose an agreed position in the Hague Preliminary Draft Convention on International Jurisdiction, various approaches were weighed up with no consensus reached).

[2] See, West Van Inc. v. Daisley, 2014 ONCA 232, ¶ 20 (“[a]ll jurisdictions in Canada that have recognized the forum of necessity [doctrine] have incorporated a ‘reasonableness’ test” and in Ontario, a plaintiff must establish “there is no other forum in which the plaintiff can reasonably seek relief”).  This built on the Court of Appeal’s decision in Van Breda v. Village Resorts Ltd., 2010 ONCA 84.  The Canadian Supreme Court affirmed this decision without directly addressing the “forum of necessity” doctrine but left room for its “possible application” in the future (2012 SCC 17, ¶ 100).

[3] See e.g., Art. 3 of the Swiss Federal Act on Private International Law: “When this Act does not provide for jurisdiction in Switzerland and proceedings in a foreign country are impossible, or cannot reasonably be required, the Swiss judicial or administrative authorities at the place with which the case has a sufficient connection have jurisdiction” (emphasis added); thus recognizing a codified limited application in cases where there is “sufficient connection” to the Swiss forum. In the French Courts, the forum of necessity doctrine is accepted but infrequently used (See A. Huet, Jurisclasseur Droit Civil, Art. 14 and 15, Fasc. 21 (Dec. 2001), n. 85 et seq.;presenting a detailed review of French case law on the subject).

[4] See B. Ubertazzi, “Intellectual Property Rights and Exclusive (Subject Matter) Jurisdiction: Between Private and Public International Law” (2011) 15:2 Marq Intell Prop L Rev 357 at 387-88 (Noting that Costa Rica, Estonia, Finland, Germany, Iceland, Japan, Lithuania, Luxembourg, Poland, Portugal, Romania, Russia, Spain, and Turkey expressly adopt the doctrine of “forum of necessity” either statutorily or via case law).

[5] European Council Regulation No 2201/2003 concerning jurisdiction and the recognition and enforcement of judgments (the “Brussels Regulation”). The revised Brussels Regulation (European Council Regulation No 1215/2012, “Brussels Recast”) takes effect from January 10, 2015 but the changes are not relevant to this paper.  Interestingly, the European Commission considered adding a forum necessitatis provision in the Brussels Recast (see Proposal for a Regulation of the European Parliament and of the Council on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Recast), at 3 COM (2010) 748 final (Dec. 14, 2010)) but no consensus was reached and the proposal was removed from the final version.

[6] Owusu v. Jackson and Others (Case C-281/02) [2005] QB 801 (where a member state has jurisdiction via the Brussels Regulation, English courts do not retain forum non conveniens discretion even with respect to non-member state courts).

[7] Spiliada v. Maritime Corp v. Cansulex, [1986] 1 AC 460 at 478.

[8] Alberta Inc v Katanga Mining Ltd, [2008] EWHC 2679. Tomlinson, J. in fact upheld the English court’s jurisdiction as he deemed the primary defendant domiciled in London (and hence open to suit in England under the Brussels Regulation); his comments on the suitability of the DRC as a forum were responsive to the plaintiffs’ arguments in the alternative.

[9] Id., ¶ 33.

[10] See e.g., Oppenheimer v Rosenthal [1937] 1 All ER 23 and Ellinger v Guinness Mahon & Co [1939] 4 All E.R. 16 (English courts permitted Jewish litigants to bring cases where the alternative forum was Nazi Germany).

[11] See e.g., Article 6 of the 2005 Hague Choice of Court Convention which provides an exception to recognition of choice of court agreements where proceedings before the chosen court are impossible.  T. Hartley and M. Dogauchi’s accompanying report explained the exclusion covered “exceptional” scenarios, i.e., war or non-functioning courts.  This evidences a limited consensus on the “forum of necessity” doctrine amongst the signatory states.

[12] See e.g., A/S D/S Svendborg v. Wansa [1997] 2 Lloyd’s Rep 183, 189 in which the English Court upheld its jurisdiction on the basis that the defendant openly boasted that he could manipulate the courts in Sierra Leone.

[13] The Abidin Daver, [1984] AC 398, ¶411 (the English court declined jurisdiction and rejected insinuations that the courts of Turkey were so corrupted by military pressure that they would not do justice in the case).

[14] Id. at 411.

[15] See Deripaska v Cherney [2009] EWCA Civ 849; Pacific International Sports Club Ltd v Igor Surkis and others, [2010] EWCA Civ 753; AK Investment CJSC v Kyrgyz Mobil Tel Ltd and others [2011] UKPC 7 (privy council case); Ferrexpo AG v Gilson Investments Ltd & Ors  [2012] EWHC 721 (Comm).

[16] Deripaska, ¶ 27 (“…so far as establishing that there are factors that make England an appropriate forum despite another forum being natural, one factor, that justice cannot be achieved in that natural forum, requires “cogent evidence” and the reason for that was spelt out by Lord Diplock in The Abidin Daver”).  Applying the “cogent evidence” test, the Court of Appeal concluded that, because of the unusual circumstances of this specific case, in particular, risks of: assassination in Russia, prosecution on trumped-up charges, and state interference by Russia in the judicial process, England was the most suitable jurisdiction for the interests of all the parties and the ends of justice (Id. ¶¶ 64-67).

[17] Id. ¶ 67; See also, Pacific Sports Club (it was not enough to show that there were inherent problems with the Ukrainian judicial system (it was accepted that there was general evidence of corruption and impropriety), the Court of Appeal held that the claimant had to show that he personally was unlikely to obtain justice in relation to the specific claims brought).

[18] AK Investment v. Kyrgyz Mobil, ¶101.  The Privy Council upheld the jurisdiction of the Isle of Man court noting: “There can be no doubt that Kyrgyzstan is the natural forum for claims under Kyrgyz law that the KFG Companies have been deprived of their shares in a Kyrgyz company through a conspiracy wholly or mainly carried out in Kyrgyzstan. But the fundamental point in this case is that, if there is no trial in the Isle of Man, there will be no trial anywhere.”

[19] See e.g., Briggs and Rees, Civil Jurisdiction and Judgments (5th Edition, 2009) at 4.83 (“[T]he standards by which an English Court may make such an assessment in cases, in less extreme cases, in advance of any hearing of the foreign court are elusive . . . In truth, some such cases may be examples of a case in which the claimant, fearing that he will lose before the foreign court, seeks to cloak that irrelevant fact in allegations of unjudicial behavior by foreign judges.”)

[20] Ferrexpo, ¶ 35.

[21] Id., ¶ 96.

[22] Id., ¶ 44.

[23]  The only requirement is that the relevant defendant is served in accordance with English law; cf. fn. 3 supra.

[24]  See e.g., Unterweser Reederei G.m.b.H. v. Zapata Off-Shore Company [1968] 2 Lloyd’s L. Rep. 158. (English Court of Appeal upheld  jurisdiction on the basis of a forum selection clause over two non-English parties in a dispute concerning a breach of contract off the coast of Florida; there was no other connecting factor to England).

[25]  See e.g., Deripaska.

[26] Briggs and Rees, Civil Jurisdiction and Judgments at 4.29.

[27]  See e.g., http://www.ibanet.org/Article/Detail.aspx?ArticleUid=5dbd1c44-27d2-4568-8dfb-5a61287ac7db (“We have good Commercial and Chancery judges coupled with a sound and robust system of law. Further, there is a substantial amount of case law relating to litigation cases in England which makes it very appealing for litigants to bring cases here, even more so if the rule of law in their own countries is unpredictable or if judges are inexperienced in handling these types of cases.” (comments attributed to Katie Papworth, commercial disputes solicitor)).

[28] See Piper Aircraft v. Reyno (1981) 454 US 235 at 256.

[29] See Lubbe v. Cape Plc [2000] 1 WLR 1545, ¶ 33, holding that considerations of public interest were irrelevant to the Spiliada, forum non conveniens analysis.

[30] L. Silberman, “A Comparative Look at Judicial Jurisdiction in Transnational Cases.” 63 S.C. Law Review (2011).

[31] See e.g., Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408 (1984) at 416 (U.S. Supreme Court held Texas had no jurisdiction because the defendant did not have “continuous and systematic contacts” with the forum.)

Center to co-host two-day arbitration conference in the Dominican Republic

The Center is co-hosting a two-day conference entitled “Convergence and Divergence of Investment and International Commercial Arbitration” to take place on Nov. 19th and 20th in Santo Domingo. During this conference, some of the foremost arbitration practitioners and scholars will look into whether there is cross-fertilization between international commercial arbitration and investment arbitration. What the speakers want to do, with the help of the audience, which will be allowed to ask questions after the various sessions, is to determine whether international commercial arbitration and investment arbitration are necessarily to be considered so different that they cannot influence each other.

 

For the conference program please click here

Professor Ferrari gives talks in Berlin and Rome

Professor Franco Ferrari, the Director of the Center, will give talks both in Berlin and Rome. In Berlin,  Professor Ferrari will join two former scholars-in-residence of the Center, Ms. Inka Hanefeld and Professor Luca Radicati di Brozolo, who will also give talks on the occasion of this year’s annual meeting of the German Arbitration Institution (DIS). On that occasion, Professor Ferrari will examine how international international arbitration should be (for the program, click here). In Rome, at a conference hosted by Universita’ Roma Tre and the International Institute for the Unification of  Private Law (UNIDROIT), Professor Ferrari will discuss the process of how arbitrators get to the arbitral award, focusing specifically on the deliberation process (for the program, click here). 

Has Florida Become an Attractive Seat for International Arbitration? The Adoption of the ICAA

1. Introduction:

In today’s ever-globalizing world, it has become increasingly important for jurisdictions to promote commerce with foreign parties.  One manner in which jurisdictions can encourage international business is to modernize their international commercial arbitration statutes.  The UNCITRAL Model Law on International Commercial Arbitration (the Model Law) is designed “to assist States in reforming and modernizing their laws on arbitral procedure.”[1]  The United States has not adopted the Model Law on the federal level, and its main source of arbitration law is the Federal Arbitration Act (the FAA).[2]  While federal law is one source of U.S. arbitration law, there are several situations in which state law can complement or supplement the FAA,[3] and can fill in procedural gaps that are not directly addressed under the FAA.[4]  As such, in 2010, Florida adopted the International Commercial Arbitration Act; by adopting this act, Florida has become one of eight U.S. states to enact the Model Law in order to promote international arbitration and international business within its state boundaries.[5]  More recently, in June of 2013, Florida further attempted to attract international business by clarifying ambiguities in its International Commercial Arbitration Act.[6]

2. The Federal Arbitration Act:

Prior to 1925, there was no federal statutory law on arbitration.[7]  The FAA was enacted by Congress in 1925, and then codified in 1947.  When the FAA was adopted in 1925, U.S. courts held a negative attitude towards arbitration.[8]  Congress’ main goal in enacting the FAA was to “…overrule this hostility towards arbitration and to ensure judicial enforcement of arbitration agreements.”[9]  The FAA explicitly states that an agreement to arbitrate “an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable….”[10]  Courts have generally held that the FAA only pre-empts state law that conflicts with the intent of promoting arbitration.[11]

Some critics argue that the FAA is not a comprehensive international arbitration statute when compared to the Model Law.  Attorney Daniel Kolkey is one such critic of the FAA.  Kolkey states that “[t]he FAA addresses too few subjects of international concern, leaves too many issues unresolved, and shares far too much jurisdiction with an increasingly diverse set of state arbitration laws for foreign parties to enthusiastically choose it for arbitrating international commercial disputes.”[12]  For example, there are several subjects not addressed by the FAA, such as “…challenging the arbitrators, provisional relief, selecting an arbitral situs, the conduct of arbitral proceedings, and choice of law.”[13]  Accordingly, “…gaps in the FAA leave room for the enactment of state laws governing interstate and international arbitrations.”[14]  Kolkey further states that “[p]roblems concerning the relationship between federal and state law are compounded by the enactment of different state statutes governing, or at least applying to, international arbitrations.”[15]  Thus, this divergence among state statutes means that there is no uniform law governing international commercial arbitration in the United States.[16]  There is now a clear trend among states to adopt the more internationally uniform UNCITRAL Model Law, in order to complement or supplement the FAA, and fill in procedural gaps that are not directly addressed under the FAA.

3. State Law Regarding International Commercial Arbitration:  

According to commentator Daniel A. Zeft, there are several situations in which state international arbitration law may complement or supplement the FAA in an arbitral proceeding.  The first situation is when a state court action is brought pursuant to a state international arbitration statute, regarding an arbitration agreement or award that is within the scope of Chapter 1 or 2 of the FAA; in this scenario, the provisions of the state international arbitration statute may apply only if they do not conflict with the corresponding provisions in the FAA.[17]  In Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., the United States Supreme Court held that “…state law may nonetheless be pre-empted to the extent that it actually conflicts with federal law-that is, to the extent that it ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’”[18]  Zeft claims that federal pre-emption of state international commercial arbitration law is not significant because “…few provisions contained in the state international arbitration statutes examined conflict directly with provisions in [C]hapter 1 or 2 of the FAA, or frustrate the purposes and policies of the FAA or the New York Convention.”[19]  Furthermore, according to the Supreme Court in Volt, “[t]he FAA contains no express pre-emptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration.”[20]  Adoption of the UNCITRAL Model Law by states has been said to improve state laws and create a climate favorable towards arbitration.[21]  Thus, the UNCITRAL Model Law’s goal is in line with the FAA’s goal of promoting international commercial arbitration, and the FAA will likely not pre-empt the Florida International Commercial Arbitration Act in this first situation.[22]

The second situation in which a state international arbitration statute may apply is when an arbitration agreement falls within the scope of a state international arbitration statute, but is outside the scope of Chapter 1 of the FAA.  According to Zeft, in this scenario, “the FAA’s [C]hapter 1 cannot pre-empt the pertinent state statutory provisions.”[23]

Thirdly, state law that is inconsistent with the FAA may even apply to international arbitrations when the parties have expressly agreed upon the application of state law to the arbitration.[24]  In Volt, the parties chose to arbitrate in accordance with California law.[25]  The court held that while the FAA is fully applicable in state court proceedings, it does not prevent the application of California law “where, as here, the parties have agreed to arbitrate in accordance with California law.[26]  Accordingly, “[w]hen Volt is cited as precedent on the issue of pre-emption, it is much more likely that state arbitration law will play some role in the arbitration process.”[27]  More recently, the court clarified the Volt holding in Mastrobuono v. Shearson Lehman Hutton, Inc., suggesting “…that state arbitration law inconsistent with the FAA may only apply to an arbitration if the parties include in their contract a choice of law clause that expressly selects such state law over federal law.”[28]  Some commentators stated that the FAA is simply a set of default rules that apply when the parties have not selected an alternative mechanism.[29]  The coexistence of the FAA and different state international arbitration statutes offers maximum party autonomy, with “choices among varied legal frameworks supportive of the international arbitral process.”[30]  

Various U.S. states have adopted international arbitration statutes in order make their jurisdictions more attractive forums for conducting international commercial arbitrations.[31]  This means that both the seat of arbitration and state law are relevant in United States’ arbitration proceedings.  The seat of arbitration remains an important choice for parties in international commercial arbitration due to variation among state and national arbitration law.[32]  As such, it is beneficial to a U.S. state (such as Florida) to adopt the UNCITRAL Model Law in order to promote international commercial arbitration within its jurisdiction.

4. The Florida International Commercial Arbitration Act:

Florida has become a center for international business and a popular arbitral seat for international arbitrations involving Latin American parties.  According to Miami international arbitration attorney Pedro Julio Martinez-Fraga, “it does appear that Miami is considered and selected more frequently as a seat of arbitration.”[33]  Historically, Floridian courts were antagonistic towards international arbitration.  However, since 1986, Florida has been actively modernizing its arbitration law.  First, in 1986, Florida adopted the International Arbitration Act.  Second, effective on July 1, 2010, Florida enacted the UNCITRAL Model Law through the Florida International Commercial Arbitration Act (ICAA); the ICAA “…is a detailed statute granting wide-ranging powers to arbitral tribunals.”[34]  Finally, in June of 2013, the Florida Legislature adopted the “Glitch Fix Bill,” in order to clarify ambiguities in the 2010 International Commercial Arbitration Act.[35]

According to Florida Senator Dan Gelber, the passage of the ICAA “…will send a strong message to international businesses that Florida is the right place to settle their business disputes. By providing a reliable framework, more businesses will come here to use our professional services, stay in our hotels and make Florida their destination.”[36]  Commentators have stated that this act will have a huge impact on the Florida economy, because international arbitrations involve large dispute amounts and generate a need for ancillary services such as lawyers, translators, court reporters, accountants, and investigative services.[37]  If an agreement falls under the scope of the ICAA,[38] then the ICAA may be chosen as the applicable law in lieu of the FAA, which ordinarily applies to a transaction involving interstate commerce.[39]  According to Martinez-Fraga, “the Florida act is most relevant not as a comprehensive legislative scheme, but rather when it fills in procedural gaps that are not directly addressed under the FAA.”[40]

Florida has further attempted to attract international business by passing the “Glitch Fix Bill” in June of 2013.  This bill made minor changes to the Florida International Commercial Arbitration Act, with the goal of “enhance[ing] the business climate in Florida by streamlining legislation related to international law matters in order to increase Florida’s attractiveness as a business friendly state.”[41]  This bill broadened §684.0002 regarding the scope of application by adding an “or” to the definition of an international arbitration.  The bill also made minor changes to the wording of §684.0019 and §684.0026.  Finally, the bill added §684.0049 regarding consent to jurisdiction in Florida.[42]

5. Conclusion:

Jurisdictions around the world are increasingly adopting laws favoring and unifying international arbitration law; this trend has led some commentators to conclude that the seat of arbitration is diminishing in significance.[43]  However, other commentators have stated that as long as there is no supranational international arbitration law, then “[t]he choice of a particular arbitral seat over another one can still have implications for parties and the conduct of the arbitration and should therefore be given due consideration.”[44]  There is no uniform law governing international commercial arbitration in the United States, and there are several situations in which state law can complement or supplement the FAA, and fill in procedural gaps that are not directly addressed under the FAA.[45]  Thus, Florida and several other internationally conscious state legislatures have taken it upon themselves to encourage international commercial arbitration within their jurisdictions, by adopting the UNCITRAL Model Law on International Commercial Arbitration.

 

Cameron Weil

Cameron Weil is a Class of 2014 LL.M. student at New York University School of Law in the International Business Regulation, Litigation and Arbitration program, and received his J.D. cum laude from Brooklyn Law School.  In addition, he is a Graduate Editor on the NYU Journal of Law & Business.  Cameron is admitted to the New York State Bar, and his admission to the Florida Bar is currently pending.

 


[2] White & Case LLP, Understanding US Arbitration Law, Practical Law Company.

[3] Daniel A. Zeft, The Applicability of State International Arbitration Statutes and the Absence of Significant Preemption Concerns, 22 N.C. J. Int’l L. & Com. Reg. 705, 793 (1997).

[4] Email from Pedro Julio Martinez Fraga, Adjunct Professor of Law at NYU School of Law (Dec. 10, 2013).

[5] Sébastien Besson, The Utility of State Laws Regulating International Commercial Arbitration and Their Compatibility with the FAA, 11 Am. Rev. Int’l Arb. 211 (2000).

[6] International Commercial Arbitration “Glitch Fix Bill” Signed By Governor Scott Last Week, The Florida Bar International Law Section (June 24, 2013), http://internationallawsection.org/glitch-fix-passes-florida-legislature/.

[7] Edward Brunet et al., Arbitration Law in America: A Critical Assessment 36 (2006).

[8] Id.

[9] Besson, supra note 5, at 212.

[10] Federal Arbitration Act, 9 U.S.C.A. § 2 (West).

[11] Id.

[12] Daniel M. Kolkey, It’s Time to Adopt the Uncitral Model Law on International Commercial Arbitration, 8 Transnat’l L. & Contemp. Probs. 3, 4 (1998).

[13] Besson, supra note 5, at 219.

[14] Kolkey, supra note 12, at 6.

[15] Id. at 13.

[16] Id.

[17] Zeft, supra note 3, at 721 (1997).

[18] Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 477 (1989) (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941)) (hereinafter Volt).

[19] One of the state statutes that Zeft examined was California; at the time of this article, the California statute was largely based on the UNCITRAL Model Law, Zeft, supra note 3, at 737.

[20] Volt, 489 U.S. 468, 477 (1989).

[21] Besson, supra note 5, at 244.

[22] Id.

[23] Zeft, supra note 3, at 727.

[24] White & Case LLP, supra note 2.

[25] Volt, 489 U.S. 468, 477 (1989).

[26] Id.

[27] Patrick O’Conner & Philip Bruner, Brunner & O’Conner on Construction Law, § 21:29.

[28] Zeft, supra note 3, at 785.

[29] Brunet et al., supra note 7, at 64; Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995).

[30] Zeft, supra note 3, at 794.

[31] Kolkey, supra note 12, at 1.

[32] Herbert Smith Freehills LLP, How significant is the seat in international arbitration?, Practice Law Company.

[33] Pedro Julio Martinez-Fraga, supra note 4.

[34] White & Case LLP, Choosing an Arbitral Seat in the US, Practical Law Company.

[35] International Commercial Arbitration “Glitch Fix Bill” Signed By Governor Scott Last Week, supra note 6.

[36] Ella Phillips, Thurston and Gleber pass the Florida International Commercial Arbitration Act, Westside Gazette, May 5, 2010.

[37] Id.

[38] The scope of the ICAA applies to international agreements in three situations: “(a) The parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different countries; or (b) One of the following places is situated outside the country in which the parties have their places of business: 1. The place of arbitration if determined in, or pursuant to, the arbitration agreement; or 2. Any place where a substantial part of the obligations of the commercial relationship are to be performed or the place with which the subject matter of the dispute is most closely connected; or (c) The parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country.” Fla. Stat. Ann. § 684.0002 (West).

[39] Larry R. Leiby, Florida Construction Law Manual, available at 8 Fla. Prac., Constr. Law Manual § 19:9 (2013-2014 ed.).

[40] Pedro Julio Martinez-Fraga, supra note 4.

[41] International Commercial Arbitration “Glitch Fix Bill” Signed By Governor Scott Last Week, supra note 6.

[42] ACTIONS AND PROCEEDINGS—ARBITRATION AND AWARD—JURISDICTION, 2013 Fla. Sess. Law Serv. Ch. 2013-164 (C.S.S.B. 186) (WEST).

[43] Herbert Smith Freehills LLP, supra note 32.

[44] Id.

[45] Pedro Julio Martinez-Fraga, supra note 4.

 

‘Browsing’ the jurisdiction of a foreign court

 A recent Irish High Court decision involving the Terms of Use of the Ryanair website (an international airline) has held that a party may enter into a binding jurisdiction clause by simply browsing a website, possibly without realizing that they have entered into such an agreement. Such ‘click wrap’ or ‘browse wrap’ agreements are increasingly common in the era of e-commerce, and most large scale commercial websites contain similar fine print underlying their websites’ use. In determining that a party can enter into a jurisdiction clause agreement by browsing and using another’s website in certain circumstances, the Irish High Court relied exclusively on the provisions of the Brussels I Regulation (Article 23) which provides for party autonomy in choosing the forum that is to resolve the dispute. This short post attempts to highlight the significance of this Irish High Court decision, and how the decision has provided further guidance as to the interpretation of Article 23 of the Brussels I Regulation in its application to more modern methods of contracting.

Council Regulation (EC) No 44/2001[1] (more commonly known as “Brussels I Regulation”) was introduced to provide certainty and predictability on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. It came into force in 2002, replacing the Brussels Convention which had preceded it. The Brussels I Regulation provides a set of rules that apply to most European Union member states and which aim to ensure that no matter where court proceedings are first instituted, the application of these rules will always point to the state that is to have exclusive jurisdiction over the dispute.

Article 23 of the Brussels I Regulation sets out rules relating to prorogation of jurisdiction. These rules provide that parties to a contract may agree that a particular court of a Member State is to have jurisdiction in settling any disputes that have arisen or may arise in connection with the parties’ contract. This means that parties to an international contract, concluded over the Internet, may choose a particular Member State to have jurisdiction over their legal relationship should either party later wish to resort to litigation.

Such a dispute arose in the Irish High Court case of Ryanair Limited v. On the Beach Limited.[2] Ryanair was arguing that the defendant, On the Beach Limited, an online travel agency based in England, had contravened the “Terms of Use of Ryanair’s Website” by allegedly “screen scraping” data from Ryanair’s website. Screen scraping is a computer software technique for extracting information from websites through the creation of an automated tool which interrogates the operator’s website. Such improper data extraction was a breach of Clause 3 of the Terms of Use which prohibits the “use of any automated system or software to extract data from [the] website…for commercial purposes”. Ryanair’s claims against the defendant included breach of contract, misrepresentation, passing off, infringement of registered trademarks and infringement of Ryanair’s database rights.

Before the High Court was able to begin determining the merits of the substantive issue in the case, the defendant argued that the Irish courts did not have jurisdiction in this matter, and that in accordance with Article 2 of the Brussels I Regulation which states that “persons domiciled in a Member State shall, whatever their nationality, be sued in the courts of that Member State”, the defendant should be sued in the English courts. However, the Terms of Use of Ryanair’s website contained a clause providing that “it is a condition precedent to the use of the plaintiff’s website…that any such party submits to the sole and exclusive jurisdiction of the Courts of the Republic of Ireland and to the application of the law in that jurisdiction”. It further provided that this applies to any party accessing such information or facilities on their own behalf or on behalf of others. These Terms of Use could be accepted by a party in two possible ways: clicking a box agreeing to the Terms of Use (click wrap agreement), or by actually using the Ryanair website where these Terms of Use were available by hyperlink on each page of the website (browse wrap agreement).

The defendant attempted to argue that there was no contract between itself and Ryanair as the defendant was only acting as agent for the ultimate consumer who was purchasing the flights. It was on this basis that the defendant attempted to argue that in the absence of a contract in accordance with the Terms of Use of Ryanair’s Website, there could be no choice of jurisdiction agreement as contained in that challenged contract. The Court was quick to dismiss this argument, relying exclusively on the test laid down by the European Court of Justice in Benincasa v. Dentalkit Srl.[3] Here, the European Court of Justice held that the Brussels I Regulation serves a procedural purpose, and that the legal certainty that the Brussels I Regulation seeks to secure could easily be jeopardized if one party to the contract could frustrate that rule of forum selection by arguing that the whole of the contract is void on grounds derived from the applicable substantive law. It is therefore the case that a jurisdiction clause may still be valid, even if one of the parties is challenging the very existence of the contract in which the jurisdiction clause is contained. This point also illustrates how any person could become bound by the jurisdiction clause simply by using the Ryanair website, without having to purchase flights or enter into any other contract.

 In determining whether the jurisdiction clause, viewed separately from the contract as a whole, is valid and enforceable, the High Court looks to the provisions of Article 23 of Brussels I Regulation providing for prorogation of jurisdiction. Of most relevance is Article 23(1)(c) which provides that an agreement conferring jurisdiction shall be valid if it is “in international trade or commerce, in a form which accords with a usage of which the parties are or ought to have been aware and which in such trade or commerce is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade or commerce concerned”. The Court relies on the European Court of Justice case of Mainschiffahrts-Genossenschaft eG (MSG) v. Les Gravieres Rhénanes SARL[4] which provided that Article 23(1)(c) encompasses three hurdles that must be overcome in order for the choice of forum clause to be valid and binding.

The first requirement is that the contract in question comes under the head of international trade or commerce. The High Court found this to have been easily met as both plaintiff and defendant are in the business of selling internationally and it was in this context that the defendant utilized and interacted with the Ryanair website. The second requirement provides that there is a practice in the branch of international trade or commerce in which the parties are operating.  This is where the Irish High Court interpreted the reach of the law as extending into the digital age of international online commerce. The Court found that the practice of binding parties to a website’s terms of use through either click wrap or browse wrap agreements was increasingly common in the airline and online travel agency sectors. The Court even noted that it is difficult to see how online trade could be conducted without these devices. It is the online travel agency’s business to scour the Internet and search for the best deals for its customers. The defendant’s own website, like those of most airlines, contains legal notices, waivers and disclaimers which are available through hyperlinks and other click the box icons. Furthermore, many airline companies (British Airways, United Airlines, Air France) contain jurisdiction selection clauses in their terms of use which they bind users of their websites to through either a click wrap or browse wrap agreement. The Court had no hesitation in finding that this evidence proved the existence of such a widely used practice in the online travel industry.

The third requirement provides that if there is found to be a practice of using these click wrap or browse wrap agreements in the branch of trade that the parties are operating in, the parties must have been aware or may be presumed to have been aware of that practice. The European Court of Justice in MSG noted that this requirement includes practices of which the parties ought to have been aware.[5] This presumptive or implicit awareness can be shown by the parties previously having had business relations between themselves, or with other parties in the sector in question, or such practice is generally and regularly followed when a certain type of contract is concluded, with the result that it may be considered as being a consolidated practice. The High Court determined that the defendant was aware of the practice, as it was generally and regularly followed when making bookings with online travel agents and with airlines, and that it may be considered a consolidated practice. This final point illustrates how the defendant was not actually required to have clicked on Ryanair’s Terms of Use to become bound by them, but that constructive knowledge would suffice. This application of Article 23(1)(c) certainly accords with modern business practice, where it is rare that a party will closely examine a website’s terms of use or legal notices, particularly where they do not believe that they may be contractually bound by such terms in the absence of entering into a contract. A party should not be able to argue that the website’s terms of use do not apply, simply because that party neglected to read them or willfully ignored them.

By enforcing the terms and conditions contained in a click wrap or browse wrap agreement, the Irish High Court has allowed the Brussels I Regulation to be construed and understood in a modern light, where a large amount of our daily commerce is conducted through novel methods of communication. Forum selection clauses contained in click wrap and browse wrap agreements deserve exactly the same protection and level of enforcement as any other clauses that would be included in a written contract. Justice Punnett in the Canadian Supreme Court of British Columbia noted that “The evolution of the Internet as an ‘open’ medium with its ability to hyperlink, being key to its success, does not mean that it must function free of traditional contract law. It is simply the manner of contracting that has changed, not the law of contract.”[6] The form that a jurisdiction selection clause takes is unimportant, as long as the same core components stipulated in Article 23(1) are met. Companies conducting much of their business online, with parties all over the world, and possibly entering hundreds of contracts a day, require certainty. That is why such clauses are entered into contracts, and that is why the Brussels I Regulation gives these clauses protection, regardless of the country in which proceedings are first instituted.

Ryanair’s intellectual property, including the mass amounts of data they create and store, can be accessed from anywhere in the world. However, the difficulty that Ryanair would have in protecting that information in jurisdictions with differing and often conflicting laws could be potentially harmful to the growth and encouragement of international trade and commerce. A jurisdiction selection clause that meets the requirements set down in Article 23(1) should be legally valid regardless of the mode of its acceptance or the form in which it was presented. What this High Court decision tells us is that courts are going to be increasingly innovative in their application of the Brussels I Regulation, regardless of whether or not the method used to create such an agreement was in existence at the time the Regulation or the Convention was implemented. A party that engages in international online commerce cannot always expect the protection of their own law, just because they do not physically leave their own jurisdiction. This Irish High Court case illustrates how the Brussels I Regulation is just as effective in ensuring party autonomy and uniformity of result in 2013, as it was when the Convention first came into force.

Daragh Brehony

The author is a Class of 2014 LL.M. student in the International Business Regulation, Litigation and Arbitration program at the New York University School of Law. He obtained his Bachelor in Civil Law degree at University College Dublin, Ireland in 2012, after which he completed the Barrister-at-Law Degree at the Honorable Society of King’s Inns and was called to the Irish Bar in 2013.

 



[1] Council Regulation 44/2001 O.J. (L 12).

[2] Ryanair Limited v. On the Beach Limited, [2013] I.E.H.C. 124.

[3] Case C-269/95, Benincasa v. Dentalkit Slr, [1997] E.C.R. I-3790.

[4] Case C-105/95, Mainschiffahrts-Genossenschaft eG v. Les Gravieres Rhenanes SARL, [1997] E.C.R. I-932.

[5] Id. at para. 19.

[6] Century 21 Canada v. Rogers Communications, [2011] B.C.S.C. 1196 at para. 114.

“Reasonable doubts” as to the “manifest lack” of independence? The successful challenge in Blue Bank v. Venezuela

A.      The decision and its context

On 12 November 2013 the Chairman of the ICSID Administrative Council, Dr Jim Yong Kim, decided to disqualify the arbitrator appointed by the claimant, Mr. José Maria Alonso in the ICSID Case No. Arb/12/20 between Blue Bank International & Trust (Barbados) Ltd.  and the Bolivarian Republic of Venezuela (in the following “Blue Bank International v. Venezuela”) upon request by the respondent.[1] Only one month later, on 13 December 2013, he disqualified Professor Francesco Orego Vincuna in the proceedings between Burlington Resources Inc. and the Republic of Ecuador (in the following “Burlington Resources v. Ecuador).

If one takes into account that until that time challenges of arbitrators in ICSID proceedings have generally been unsuccessful[2] the sequence of two successful challenges within one month is without doubt remarkable. It immediately raises the question as to the legal value and future relevance of these decisions. Are we witnessing a profound change of attitude towards challenges within the ICSID system? Or can the success of the challenges be explained by the particular facts of the two cases which by mere chance were decided within a short time period?

The challenge of an arbitrator was originally a mechanism of last resort. It was used to prevent the participation of obviously unsuitable arbitrators, and parties thought twice before initiating such proceedings. That is also the concept underlying the ICSID Convention at its time of drafting. Pursuant to its Article 57 arbitrators can only be disqualified if there is a “manifest lack of the qualities required by paragraph 1 of Art. 14”, which include inter alia the independence and impartiality of the arbitrator.

Over the years the number of challenges has increased considerably. They have developed into a standard procedural tool employed for a number of different purposes. That applies to commercial arbitration as well as to investment arbitration. In particular in investment arbitration one may even get the impression that challenges are slowly moving from being the exception to becoming the rule. With the increasing case law, the small pool of arbitrators and comparable legal questions in particular, questions of issue conflicts are bound to arise much more frequently than in commercial arbitration.[3]

Irrespective of this it may still be noteworthy that in Blue Bank International v. Venezuela, which is the main focus of this blog, there had been objections against all members of the tribunal. The arbitrator appointed by Venezuela, Dr. Torres Bernárdez, was challenged by the claimant. Claimant considered that the repeat appointments of Dr. Bernárdez by one of the lawyers representing Venezuela as well as his previous decisions which allegedly were always in favor of the party which appointed him, made him unsuitable to act as arbitrator. There was, however, no need for a formal decision on the issue, since Mr. Bernárdez subsequently resigned. Furthermore, concerning the chairman, none of the originally proposed five persons was acceptable to both parties. Venezuela also objected to the appointment of Mr. Söderlund who had been finally selected by ICSID.

To properly evaluate the importance of the successful challenge against Mr. Alonso the decision has to be seen against the background of the particular ICSID challenge system, the previous practice as well as the considerable criticism against the investment arbitration System in general. The potential threat posed by such criticism to investment arbitration is well evidenced by the recent discussion concerning the investment protect provisions in the presently negotiated Transatlantic Trade and Investment Partnership between the US and Europe. The criticism raised has resulted in a temporary stay of the further negotiation of that chapter. A closer look at the discussion in Germany’s general press reveals that one of the biggest objections to investment arbitration is that the decisions are made by a small group of arbitrators who are closely connected to the law firms involved and have an economic interest in maintaining the system as it stands.[4] Even if that may be grossly exaggerated and interest-driven, it is hardly questionable that the legitimacy of investment arbitration depends to a considerable extent on the perception of those involved that the decisions are taken by independent and impartial arbitrators. As Mr. Bottini, who has been handling a number of the ICSID arbitrations against Argentina for the Treasury Attorney’s General office on the Argentinian side, has stated succinctly in an article, “[t]hat is why effective and transparent challenge mechanisms are fundamental for the integrity of international investment arbitration.”[5]

 B.      The particularities of the ICSID challenge regime

The ICSID challenge mechanism can primarily be found in Articles 57, 58 ICSID Convention. While Art. 58 regulates the procedure the relevant standard for challenges can be derived from Art. 57 ICSID Convention. It provides in its relevant part:

“A party may propose to a Commission or Tribunal the disqualification of any of its members on account of any fact indicating a manifest lack of the qualities required by paragraph (1) of Article 14. […]”

The qualities required by Art. 14(1) ICSID Convention are:

  • High moral character
  • Recognized competence in the fields of law, commerce, industry or finance and
  • Reliability to exercise independent judgment.

 

In practice only the last requirement, i.e.  to “exercise independent judgment” has so far played a role. It entails a prospective standard as to whether the arbitrator will have the necessary independence and impartiality to render a decision which is not influenced by any extraneous factors.

On the basis of a primarily textual analysis the ICSID challenge mechanism differs in several respects from the mechanism found in the UNCITRAL Model Law (“ML”) or other national arbitration laws.

First, there is a potential broadening of the grounds for challenge. The ML allows challenges if the arbitrator either lacks the required independence and impartiality or the qualification agreed by the parties. Art. 12(2) provides in its pertinent part:

“An arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence, or if he does not possess qualifications agreed to by the parties. […]”

By contrast Art. 14 ICSID-Convention imposes, irrespective of any agreement by the parties, two additional statutory quality requirements for arbitrators, i.e. being of high moral character and having a recognized competence in the fields of law, commerce, industry or finance.  Their absence may – via the reference in Art. 57 ICSID Convention – become the basis for a challenge. The practical relevance of that difference is, however, limited. In practice challenges are usually based on the third requirement, the reliability to exercise independent judgment.

The second difference concerns the focus of the independence standard. While under the ML the arbitrator has to be independent and impartial, the ICSID Convention requires a person “who may be relied upon to exercise independent judgment”. The latter refers to a prospective act in the future. As has been stated by Professor Crawford in a presentation at a seminar at the PCA in October 2013: “It consists in evaluating the probability of a certain event – the event of the arbitrator acting independently – rather than simply whether the event will occur.”[6] By contrast the ML standard focuses more on present and past elements. Again the practical relevance is limited, if one takes into account that also the decision as to the prospective act in the future is largely based on past and present connecting factors and experiences.

The most important difference to the Model Law standard is the requirement in Art. 57 ICSID Convention that there must be a “manifest lack” of the qualities required. There is a widespread belief that due to the requirement of a “manifest lack” the ICSID Convention imposes a higher threshold for successful challenges than the ML or other national arbitration regimes.[7] The ML, for example, only requires “reasonable doubts” as to the arbitrator’s independence or impartiality and not a “manifest lack”.

In light of this difference the leading commentary on the ICSID Convention for example states that the “requirement that the lack of quality must be ‘manifest’ imposes a relatively heavy burden of proof on the party making the proposal.”[8]

There are, however, different views as to what is exactly meant by the reference of “manifest lack”. Following the decision in the first Vivendi Case, the prevailing view appears to be that the notion of “manifest lack” has an evidentiary meaning. It should exclude “reliance on speculative assumptions or arguments” and the “circumstances actually established (and not merely supposed or inferred) must negate or place in clear doubt the appearance of impartiality.”[9]

In other decisions the reference to “manifest lack” seems to have been considered to be more a question of degree. Thus not every minor lack of independence is sufficient but only those which have reached a certain threshold, i.e. are manifest.

C.      Definition of the relevant standard in Blue Bank International / Burlington Resources

In so far as the abstract definition of the applicable legal standard is concerned both decisions do not provide any new input for the discussion. The relatively short treatment of the issue in the Blue Bank decision in paras 55 – 62 has been taken over largely verbatim in the Burlington Resources decision. It largely limits itself to quote the statutory requirements and their application in previous cases without touching on any of the controversial issues surrounding the standard.

Concerning the second point mentioned above it is noteworthy that in defining the relevant standards to be derived from Art. 14(1) ICSID Convention, a ML terminology is used that “arbitrators must be both impartial and independent” (para. 58). There is no emphasis on the prospective element.

Equally it is confirmed that the reference to an “independent judgment” encompasses both elements, i.e. independence and impartiality. By reference to previous decisions the applicable legal standard is defined as an “objective standard based on a reasonable evaluation of the evidence by a third party” (para. 60).

The only part of some interest in the definition section is the very cautious treatment of the controversial question of the meaning of the word “manifest” and how the standard differs from the “reasonable doubts” standard underlying the UNCITRAL Model Law and the IBA Guidelines on Conflict of Interest. Here the Chairman limits himself to state that “a number of decisions have concluded that it means ‘evident’ or ‘obvious’ and that it relates to the ease with which the alleged lack of the qualities can be perceived” (para. 61). While the quote shows certain sympathy for that view taken in these decisions a clear endorsement would present it more obviously as the Chairman’s own understanding of the standard.

An equally cautious position is adopted concerning the question of how the standard under Art. 57 ICSID Convention differs from that under the IBA Guidelines. The decision remains vague acknowledging somehow that there might be a difference but not clarifying in any way the nature of such a difference. Concerning the IBA Guidelines which have apparently been invoked by the parties the decision merely states that “[w]hile these rules and guidelines may serve as useful references, the Chairman is bound by the standard set forth in the ICSID Convention” (para. 62).

 D.      Application of the standard

Of considerable interest is, however, the application of this abstract legal standard to the particular facts of the cases.

In Blue Bank the challenge was based on facts disclosed by Mr. Alonso in his statement of acceptance and declaration of independence. In his view the disclosed activities of other Baker & McKenzie firms did not affect his impartiality or could reasonably do so. The controversial issue concerned the partner status of Mr. Alonso in Baker & McKenzie, Madrid and the involvement of two other firms belonging to Baker & McKenzie International, in another case brought against Venezuela by Longreef, a Dutch investor, which allegedly involved comparable legal questions. The focal point of the dispute was the different value given to the exact legal relationships in the case. Unlike a number of other law firms which are fully integrated, the various national offices of Baker & McKenzie are legally and financially (largely) independent. They are bound to the other national Baker & McKenzie entities only via their joint membership in Baker & McKenzie International, a Swiss Verein and certain joint practice groups set up within the Baker & McKenzie International Framework.

Venezuela argued in its challenge that “Baker & McKenzie is structured and publicized as a global legal practice”. Therefore the various offices could not be treated a separate legal entities for the purposes of this challenge. That is even more so since they maintain joint committees to which Mr. Alonso is a member and a part of his remuneration depends on the global returns of the firm. Consequently he had an interest in the outcome of the action brought by Longreef which involved issues similar or identical to the ones Mr. Alonso had to decide, leading to doubts as to whether the decision would be free of extraneous influence.

Mr. Alonso, by contrast, considered such doubts not to be justified. In his view, due to the wide legal independence of the various member firms of the Baker & McKenzie International Framework the remaining connections did not even meet the standard for disqualification under the IBA Guidelines, let alone under the ICSID Convention. He emphasized that his remuneration depended primarily on the results achieved by Baker & McKenzie Madrid and that all offices operate with absolute autonomy. The existing joint committees such as the International Arbitration Steering Committee do give no instructions as to the management of individual cases. Personally he had had no previous contact with the parties of this arbitration and had no economic or other interest in the outcome of the arbitration by Longreef against Venezuela.

The Chairman dismissed the arguments by Mr. Alonso. For him the sharing of a corporate name, the existence of an international steering committee and the sharing of some revenues “imply a degree of connection and overall coordination between the different firms comprising Baker & McKenzie International” that it would be justified to treat them as one entity. In light of the similarity of the issues likely to be discussed in the Longreef v. Venezuela case a “third party would find an evident or obvious appearance of lack of impartiality on a reasonable evaluation of the facts of this case” (para. 69).

E.       Evaluation of the decision

In the author’s view, assuming that the Longreef case truly involved comparable questions,   the challenge in Blue Bank was correctly decided, at least as far as the result is concerned.

The decision avoids giving the critics of the existing system of investment arbitration additional ammunition for their attack on the legitimacy of the regime. In light of the very rudimentary legal reasoning it can only be assumed that such political considerations also influenced the decision. Any other decision could perhaps have been justified on the basis of a formal application of existing standards and could have been explained to well-informed lawyers but not to the general public. That is not to advocate that legal decisions should primarily be guided by considerations of the momentary public opinion. Irrespective of that the perception of the general public cannot be ignored completely in the context of investment arbitration. In so far investment arbitration differs from commercial arbitration as is also recognized in other areas. Over the years the role of the general public has changed. It has increasingly and rightly been recognized to be a major stakeholder in investment arbitration to a much greater extent than in commercial arbitration. That is most apparent in the increased role of transparency in investment arbitration endorsed by the recent changes of the relevant arbitration rules. Consequently, the views of the general public cannot be completely disregarded in defining relevant standards for challenges which affect the legitimacy of the system. While the legal standard as such, i.e. “manifest lack of the qualities” remains unchanged the perception of what it required for an “independent judgment” have changed with the above development. Connections which may have been acceptable in the early days of ICSID when Amco v. Indonesia was decided are no longer acceptable now. In so far the standard of what is required may also differ in investment arbitration from commercial arbitration.

On the basis of a formal legal analysis Mr. Alonso was right in emphasizing that his firm, Baker & McKenzie Madrid, S.L.P. and the firms representing Longreef in the other arbitration against Venezuela, i.e. Baker & McKenzie New York and Baker & McKenzie Caracas, are separate legal entities. They are only bound to each other through their membership in Baker & McKenzie, International.

These legal niceties, however, do not influence the perception of the firm in the market. Therefore the legally separate entities are perceived to be part of the one global law firm Baker & McKenzie International. And in principle that is the way the law firm wants to be perceived and markets itself. That becomes obvious for example by having a look at the regularly published Baker & McKenzie International Arbitration Yearbook. In the copyright information for the 2012 – 2013 Yearbook it is stated that the “[l]eading lawyers of the Firm’s International Arbitration Practice Group, a division of the Firm’s Global Dispute Resolution Practice Group, report on recent developments … in the jurisdiction in which they practice”.  The impression created by this publication addressed to the market and intended to shape the market perception is that there is one “Firm” Baker & McKenzie which operates globally and has the required know-how.  The main purpose of setting up the Swiss Verein Baker & McKenzie, International, organizing Committees and Practice Groups across the boundaries of the separate legal entities is to give the market the impression that there is a Global firm with a well-known brand name and not merely a loose cooperation between befriended law firms.

In particular in investment arbitration with its increased need for transparency, it is that market perception which is relevant for the challenge standard. To put it bluntly: it is not the reasonable and well-informed lawyer who must have manifest doubts but those doubts must exist in the eyes of the reasonable layman potentially affected by the decision.

In so far it is unfortunate that the abstract legal standard for successful challenges appears to be higher in ICSID arbitration than incommercial arbitration – at least when it comes to the evidentiary side. The decision cannot be interpreted as a general legal abolishment of that standard, since the Chairman appears to have endorsed the difference between the ICSIC standard and that under the IBA Guidelines. At least it has not questioned that distinction which would have been difficult without a change of the Convention. De facto, the decision will have lowered the standard a little bit, at least through the back door. One can interpret the decision in a way that while the abstract legal standard is still “manifest lack of qualities” the relevant third person, in the eyes of which such a lack must exist is a different one: It is no longer the third person of 1965 but the third person of 2013 with a critical view of investment arbitration.

Will the underlying recalibration of the approach by ICSID pose a threat to the parties’ right to effected legal protection, which always has to be balanced against the right to challenge? It is submitted that this is not the case, as long as the decisions are based on hard and easy determinable factors, such as the partnership in a law firm.

It appears, however, likely that the decision will further reinforce the exodus of leading arbitrators from full service firms setting up their own boutiques.  That excludes at least the law firm related conflicts.

Stefan Kröll

Prof. Dr. Stefan Kröll, LL.M. (London) is an independent arbitrator in Cologne and Honorary Professor at the Bucerius Law School in Hamburg where he teaches international arbitration and litigation and international contract law. He is a director of the Willem C. Vis Arbitration Moot and a former scholar in residence of the Center for Transnational Litigation, Arbitration and Commercial Law.



[1] The decision was reported and commented on in this blog on 31 January 2014 by Ikemefuna Stephen Nwoye

[2] For the challenges until 2012 see the list published by K. Daele, Challenge and Disqualification of Arbitrators in International Arbitration, 2012, Annex I, p. 455 et seq.

[3] See L. Markert, Challenging Arbitrators in Investment Arbitration: The Challenging Search for Relevant Standards and Ethical Guidelines, 3 (2) Contemp. Asia Arb. J. [2010] 238, 240.

[5] G. Bottini, Should Arbitrators live on Mars? Challenge of Arbitrators in Investment Arbitration, 32 Suffolk Transnat’l L. Rev. 341.

[6] J. Crawford, Challenges to Arbitrators in ICSID Arbitrations, at Confronting Global Challenges: From Gunboat Diplomacy to Investor-State Arbitration, PCA Peace Palace Centenary Seminar, 11 October 2013.

[7] See Reed/Paulsson/Blackaby, Guide to ICSID Arbitration (Kluwer, 2011), p. 81; see also S. Luttrell, Bias Challenges in Investor-State Arbitration: Lessons from International Commercial Arbitration, in: Brown/Miles (eds), Evolution in Investment Treaty Law and Arbitration (CUP 2011), p. 458.

[8] Schreuer et al., The ICSID Convention: A commentary, 2nd ed. (OUP, 2009), Art. 57, para 19. ,

[9] Compania de Aguas de Aconquija SA and Vivendi Universal v. Argentina, ICSID Case No. ARB/97/3, Decision on the Challenge to the President of the Committee (3 October 2001), para. 25.

TICKETS, MONEY, PASSPORT – AND AN ARBITRATION AGREEMENT?

Today’s international businessperson should never travel far without an arbitration agreement.  One would expect to hear that from arbitration lawyers, hungry for business (or business class flights).  Yet Australia’s courts have now joined many others in viewing arbitration as essential to international commerce, seen recently with the decision in Dampskibsselskabet Norden A/S v Gladstone Civil Pty Ltd (“Norden”).[1]  After exploring the role of this “international commercial policy” in Norden, I evaluate the ways in which the New York Convention (“NY Convention”)[2] and the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”)[3] legitimate the use of such a policy in resolving arbitration issues.  Applying this policy, I suggest an alternative approach to Norden for upholding arbitration of carriage of goods by sea disputes.

I           Norden

Norden concerned a dispute arising under a voyage charterparty for the carriage of coal from Australia to China between a Danish ship-owner and an Australian charterer, with a choice of English governing law.[4]  The dispute was referred to London arbitration in accordance with the parties’ agreement.[5]  In resisting enforcement of unfavorable awards, the Australian relied on the Carriage of Goods by Sea Act 1991 (Cth) (“COGSA”), s 11(2)(b) of which provides, inter alia, that an agreement “has no effect” insofar as it purports to “preclude or limit the jurisdiction of [an Australian] court in respect of” a sea carriage document relating to the carriage of goods from Australia.  This section does not apply to arbitration agreements with a seat in Australia.[6]  Section 11’s purpose is to protect Australian shippers from the inconvenience of litigating abroad.[7]  Similar protections are found in Argentina, Canada and South Africa.[8]

Australia has implemented its obligations under the NY Convention in the International Arbitration Act 1974 (Cth) (“IAA”), but s 2C provides that “[n]othing in this Act affects…the operation of section 11…of [COGSA]”.  A majority in Norden found that COGSA s 11 did not apply to voyage charterparties and overturned the lower court’s decision refusing enforcement of the awards.[9]  The international commercial policy played a significant role in reaching this result.  Justice Mansfield acknowledged that, although it was clearly open to construe s 11 as applying to voyage charterparties, the “better approach” was to exclude such contracts from its operation due, in part, to the longstanding acceptance that “international commercial disputes…may be settled by arbitration”.[10]  Justice Rares similarly relied upon the “policy of reocognising and encouraging private arbitration as a valuable method of settling disputes arising in international commercial relations” to narrowly construe s 11.[11]  The case highlights how the international commercial policy encourages reaching an outcome which favors arbitration when alternative constructions or resolutions of issues arise in international commercial disputes.[12]

II         The Validity of the International Commercial Policy

The international commercial policy, as applied in Norden, has both international and national aspects.  The international aspect recognizes that an “ordered efficient dispute resolution mechanism leading to an enforceable award…is an essential underpinning of commerce”,[13] the unenforceability of which would “damage the fabric of international commerce and trade”.[14]  This international aspect has been applied by courts throughout the world in, for example, broadening arbitrability,[15] or narrowing grounds for refusing enforcement of awards.[16]

The international aspect of the policy is also supported by the NY Convention.  While the text of the Convention evidences a pro-enforcement policy,[17] the travaux préparatoires indicate this arises from arbitration being essential for international commerce.  The ICC, whose Report drove the impetus for the NY Convention,[18] sought greater recognition and enforcement of arbitration awards in order to develop international trade.[19]  The philosophy of arbitration as a tool to promote trade and development was wholeheartedly adopted by the drafting committee and Conference.[20]  In interpreting the NY Convention, courts must have regard to its object and purpose.[21]  This includes the international aspect of the international commercial policy.[22]

The national aspect, on the other hand, stems from a belief that a court’s disfavor of arbitration could discourage the expansion of their nationals’ businesses or deter others from doing business with their nationals.[23]  This belief has some justification.  First, the World Bank emphasizes the enforceability of contractual promises as part of the ease of doing business in a given country, which suggests failing to enforce agreed dispute resolution mechanisms may deter business in the country.[24]  Second, the few studies undertaken on business attitudes towards arbitration indicate businesses see arbitration as the only effective dispute resolution mechanism for cross-border transactions.[25]  Finally, in this author’s experience, a party often insists on pre-dispute protections in contracts, such as bank or third party guarantees, when the other is from a country notorious for its enforcement difficulties.  These measures increase transaction costs or may deter transactions with that country entirely.  While these concerns do not form part of the NY Convention’s objects or purposes, broader policy considerations are often taken into account by courts when exercising their functions or construing legislation.[26]  It is legitimate to include this national aspect in the international commercial policy to which courts should have regard.

III        Applying the International Commercial Policy to Norden

Norden applied the international commercial policy in finding COGSA s 11 did not apply to voyage charterparties, but the award should have been enforced even if voyage charterparties were “sea carriage documents” and, therefore, covered by s 11.  While nothing in the IAA affects COGSA s 11, one must still ask whether s 11, even if applicable, requires an award made outside of Australia to be denied enforcement.[27]  The below analysis, informed by the international commercial policy, suggests not.

First, failing to enforce the awards at issue in Norden would have been contrary to Australia’s obligations under the NY Convention.  There were three arguable grounds for non-recognition of the awards in Norden, but each was unlikely to apply.  Article V(1)(a) of the NY Convention allows non-enforcement when the arbitration agreement is invalid under the law chosen by the parties to govern its validity or, failing a choice, the law of the place where the award was made.  The Norden parties chose English law to govern the main contract, from which an implication can usually be drawn that they intended English law to govern their arbitration agreement as well.[28]  Even if COGSA s 11(1) (which invalidates the choice of foreign law in a “sea carriage document”) is taken into account,[29] the arbitration agreement remains a separate contract and the chosen seat of arbitration may still imply English law as that chosen by the parties.[30]  Failing any implied choice, the validity of the arbitration agreement is still determined under English law, as the Convention defaults to the place of the award.  As English law would uphold the validity of the arbitration agreement, art. V(1)(a) of the NY Convention is not an available ground for setting aside the award.

Second, art. V(2)(a) (subject-matter inarbitrability) is also unlikely to apply because COGSA s 11(3) expressly recognizes that the subject-matter of such disputes are arbitrable; it allows disputes under “sea carriage documents” to be arbitrated in Australia.  Finally, the “public policy” exception in art. V(2)(b) is generally reserved for when enforcing the award would violate the State’s “most basic notions of morality and justice”.[31]  It is difficult to argue that the concern of protecting Australian shippers from the inconvenience of litigating overseas meets this high threshold.  Accordingly, the NY Convention requires enforcement.

Australia is a dualist system such that the NY Convention does not necessarily prevail over COGSA s 11 (and the IAA expressly provides otherwise).  However, the conflict with the NY Convention and the international commercial policy strongly suggest s 11 should, to the maximum extent possible, be construed favorably for enforcing arbitration awards.  A plausible construction of s 11 is that it simply provides parties cannot oust the jurisdiction of Australian courts over “sea carriage documents”; the position for all contracts at common law prior to statutory intervention.[32]  Thus, if a party desires to bring a dispute under a “sea carriage document” to an Australian court, the court need not stay its proceedings due to a foreign arbitration agreement.  That does not mean the arbitration agreement is itself invalid, nor that a resulting award is unenforceable in Australia.  Further, under Australian law, an award extinguishes the underlying dispute.  In enforcing an award, the court is not concerned with rights or liabilities under a “sea carriage document”, but a party’s obligation to comply with the award.[33]  As at common law, the court’s jurisdiction is not ousted contrary to COGSA s 11, because the rights and liabilities under the “sea carriage document” are subsumed with the award which the court is now asked to enforce.[34]

IV        Conclusion

This suggested alternative approach to Norden is particular to the text of Australia’s COGSA, but the analytical approach adopted may have broader application to enable the enforcement of awards in jurisdictions which seek to override choice of forum clauses in carriage of goods by sea contracts.  While there might be good policy reasons for protecting certain persons from litigating overseas, if no party seeks to avail themselves of the local courts and disputes are in fact referred to arbitration, it makes little sense to construe the legislation as invalidating the arbitration agreement or the resulting awards when the text does not expressly provide for such a result.  The international commercial policy suggests the non-enforcement of awards would have adverse effects for international and national commerce, which provides a compelling reason for courts to construe statutes which restrict recourse to arbitration narrowly.

 

Jesse Kennedy

The author is a Class of 2014 LL.M. student in the International Litigation, Arbitration and Business Regulation program at New York University.  He obtained his Bachelor of Laws with Honors from the Australian National University in Canberra.  The author was previously a judicial clerk to the Hon. Justice Gummow AC on the High Court of Australia, and an Associate working in international arbitration and transport litigation with Norton Rose Fulbright in Sydney.



[1] [2013] FCAFC 107.

[2] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38 (“NY Convention”).

[3] G.A. Res. 40/72, U.N. GAOR, 40th Sess., Supp. No. 17, U.N. Doc. A/40/17, at annex I (June 21, 1985), as amended by G.A. Res. 61/33, U.N. GAOR, 61st Sess., Supp. No. 17, U.N. Doc. A/61/17, at annex I (July 7, 2006).

[4] Norden [2013] FCAFC 107, [23]-[24].

[5] Id. at [25].

[6] COGSA s 11(3).

[7] Norden [2013] FCAFC 107, [71].

[8] Felix Sparka, Jurisdiction and Arbitration Clauses in Maritime Transport Documents: A Comparative Analysis 211 n.1334 (2009).  Until 1995, this was also the case in the United States:   State Establishment for Agricultural Product Trading v. M/V Wesermunde, 838 F.2d 1576, 1579 (11th Cir. 1988), overruled in Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528 (1995).

[9] Norden [2013] FCAFC 107, [14], [28], [126] and [133].

[10] Id. at [15].

[11] Id. at [63]-[66] and [71].

[12] See also Apache Bohaj Corp. LDC v. Texaco China BV, 480 F.3d 397, 401 and 404 (5th Circ. 2007); Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25 (1983).

[13] Comandate Marine Corp v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45, 94-95; TCL Air Conditioner (Zhongshan) Co Ltd v Judges of the Federal Court (2013) 87 ALJR 410, [10] (“TCL”).

[14] Scherk v. Alberto-Culver Co., 417 U.S. 506, 516-517 (1974) (“Scherk”).

[15] See, e.g., Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 629-631 (1985); ESAB Group, Inc. v. Zurich Insurance Plc, 685 F.3d 376, 390 (4th Cir. 2012); Harbour Assurance Co (UK) Ltd v Kansa General International Insurance Co Ltd [1993] Q.B. 701, 719; Attorney-General v Mobil Oil NZ Ltd [1989] 2 NZLR 649; 1987 NZLR LEXIS 716, 63-64; Canada Moon Shipping Co. Ltd. v. Companhia Siderurgica Paulista-Cosipa, (2012) 223 A.C.W.S. (3d) 12; 2012 F.C.A. 284, [68]-[70]; Karl-Heinz Böckstiegal et al., Germany as a Place for International and Domestic Arbitrations – General Overview, in Arbitration in Germany: The Model Law in Practice 3, 15-16 (Karl-Heinz Böckstiegal et al. eds., 2007); Emmanuel Gaillard, La Jurisprudence de la Cour de Cassation en Matière d’Arbitrage International, 2007 Rev. Arb. 697, 702-705 (2007); Karim Youssef, The Death of Inarbitrability, in Arbitrability 47, 57-64 (Loukas A. Mistelis et al. eds., 2009).

[16] See Soh Beng Tee & Co. Pte. Ltd. v. Fairmount Development Pte. Ltd., [2007] 3 S.L.R.(R) 86, 116-117; Hebei Import & Export Corp. v. Polytek Engineering Co. Ltd., [1999] 1 H.K.L.R.D. 665, 691; Anton G. Maurer, The Public Policy Exception Under the New York Convention 66-67 (2012).

[17] NY Convention, arts. II, V and VII; Nigel Blackaby et al., Redfern and Hunter on International Arbitration 638-640 (2009); Gary B. Born, International Arbitration: Law and Practice 377-378 (2012).

[18] See infra note 20.

[19] U.N. ESCOR, Enforcement of international arbitral awards: statement submitted by the International Chamber of Commerce, U.N. Doc. E/C.2/373 (Sept. 10, 1953).

[20] See, U.N. ESCOR, Report of the Committee on the Enforcement of International Arbitral Awards, 3, U/N/ Doc. E/2704: E/AC.42/4/Rev.1 (Mar. 28, 1955); United Nations Conference on International Commercial Arbitration, 1st mtg. at 3-4, U.N. Doc E/CONF.26/SR.1 (May 20, 1958).

[21] Vienna Convention on the Law of Treaties art. 31(1), May 23, 1969, 1155 U.N.T.S. 331 (1969).  Strictly speaking, the Vienna Convention has no retroactive application such that it does not apply to the NY Convention.  However, arts. 31 and 32 are widely recognized as being a codification of the rules of customary international law, meaning such rules apply to the interpretation of all treaties unless a specific treaty provides otherwise: see, e.g., Dispute regarding Navigational and Related Rights (Costa Rica v. Nicaragua), 2009 I.C.J 213, 237 (July 13).

[22] The Resolution adopting the Model Law also recognized arbitration’s value to international commerce: G.A. Res. 40/72, U.N. GAOR, 40th Sess., Supp. No. 17, U.N. Doc. A/40/17, at 308 (June 21, 1985).

[23] See Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 8 (1972); Scherk, 417 U.S. 506, 517 (1974).

[24] World Bank and IFC, Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises 21-22 (2013).  See also OECD, Policy Framework for Investment: User’s Toolkit 17-21 (2011).

[25] See Christian Bühring-Uhle et al., Arbitration and Mediation in International Business 106-108 (2006); Queen Mary School of International Arbitration, Corporate Choices in International Arbitration: Industry Perspectives 6-9 (2013).

[26] See, e.g., Attorney-General (Cth) v Alinta Ltd (2008) 233 CLR 542, 553-554.  The IAA also requires such concerns to be taken into account: IAA ss 2D and 39B.

[27] But see Norden [2013] FCAFC 107, [133] (Buchanan, J.), finding the award should not be enforced because either COGSA s 11 rendered the agreement “ineffective” or on grounds of public policy.

[28] See, e.g., Gary B. Born, International Commercial Arbitration: Commentary and Materials 753 (2001); Martin Davies et al., Nygh’s Conflict of Laws in Australia 796 (8th ed. 2010).  An arbitration agreement is recognized as a separate agreement to that in which it is contained: Ferris v Plaister (1994) 34 NSWLR 474; Comandate Marine Corp v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45, 101-105.

[29] An arbitral tribunal seated in London need not necessarily have regard to Australian law on the validity of the choice of governing law, rather this should be determined by the law putatively chosen by the parties: Linda Silberman & Franco Ferrari, Getting to the Law Applicable to the Merits in International Arbitration and the Consequences of Getting it Wrong, in Conflict of Laws in International Arbitration 257, 275-276 (Franco Ferrari & Stefan Kröll eds., 2011).

[30] See, e.g., Sulamerica Cia Nacional De Seguros v Enese Engenharia [2012] 1 W.L.R. 102 (U.K.).

[31] Parsons & Whittemore Overseas Co., Inc. v. Societe Generale de L’Industrie du Papier (Rakta), 508 F.2d 969, 974 (2nd Cir. 1974); Traxys Europe SA v Balaji Coke Industry Pvt Ltd (No 2) [2012] FCA 276, [96]; IMC Aviation Solutions Pty Ltd v Altain Khuder LLC (2011) 282 ALR 717, [129].

[32] TCL (2013) 87 ALJR 410, [76].

[33] See TCL (2013) 87 ALJR 410, [77]-[80].

[34] Cf. Scott v Avery (1856) 5 H.L.C. 811; 10 E.R. 414; Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643, 653.

The Relevant Point in Time for Assessing Arbitrability — Clarification in a Decision by the Swedish Supreme Court

I. Introduction

In judgment T 4982-11 of November 23, 2012, the Swedish Supreme Court (the Supreme Court) upheld an arbitral award challenged primarily on the ground that the matter was non-arbitrable since it was regulated by mandatory law at the time of the conclusion of the arbitral agreement.[1] The Supreme Court discussed the limits of arbitrability and addressed the question of when arbitrability should be assessed. This paper evaluates the Supreme Courts conclusions, with regard to this latter issue, which has been little explored by Swedish courts. First, the factual and procedural background is outlined, followed by a description of the Supreme Courts decision. The decision is then evaluated before final conclusions mark the end of the paper.

II. The factual and procedural background

On January 24, 1990, the Soviet entity, Moscow City Golf Club OOO (City Golf), entered into a loan agreement (the Loan Agreement) with a Swedish bank, Nordea Bank AB (publ.) (the Bank), to finance the construction of a golf course in the former Soviet Union. Under the Loan Agreement, which was governed by Swedish law and contained an arbitration clause providing for arbitration in Stockholm, the Bank was to lend to City Golf SEK 22,000,000 (USD 3,584,155.48). The loan was made through drawdowns by City Golfs Swedish general contractor. However, when the Loan Agreement was entered into, mandatory law that prohibited, invalidated, and imposed penal sanctions on import and export of currency without due authority approval was in force in both Sweden and the former Soviet Union.[2]

The Swedish general contractor made its drawdowns and performed the construction but City Golf later failed to repay the loan. The Bank initiated arbitration to recover the outstanding amount and on May 11, 2010, the sole arbitrator gave a final award under which the Bank was allowed to recover from City Golf. At this point, the Swedish and Soviet mandatory currency laws were no longer in force. City Golf challenged the award before the Svea Court of Appeal (the Court of Appeal), which upheld it.[3]City Golf therefore appealed to the Supreme Court.

III. The decision by the Supreme Court

City Golf argued that the award was invalid since it concerned a matter that, at the time of the conclusion of the arbitration agreement, was regulated by mandatory Swedish and Soviet laws requiring authority approval for transfer of currency and therefore was non-arbitrable. City Golf alleged that approval never was granted and that Russian laws to similar effect still were in force. However, the Supreme Court deemed the dispute arbitrable and upheld the award.

The Supreme Court determined that Swedish law was applicable, not only to the Loan Agreement, but also to the arbitration agreement[4] and made reference to Section 33 of the Swedish Arbitration Act (1999:166) (the SAA), under which an arbitral award is invalid if it includes determination of an issue which, in accordance with Swedish law, may not be decided by arbitrators.The Supreme Court stated that generally under Swedish law, an issue may be decided by arbitrators, and is arbitrable, if it is amenable to out-of-court settlement. This follows from Section 1 of the SAA. The Supreme Court also stated that foreign mandatory provisions of economic or political nature generally do not affect arbitrability under Swedish law.

The Supreme Court conceded that the issue of when arbitrability is assessed depends to some extent on the circumstances of the case. However, it deemed the amenability to out-of-court settlement when the dispute was resolved to be determinative in this regard, irrespective of the amenability to out-of-court settlement when the arbitration agreement was concluded.  

The Supreme Court noted that there were no longer any Swedish mandatory currency regulations in force when dispute was resolved, which was the relevant time to assess arbitrability. The only mandatory currency regulations allegedly still in force at that point in time were Russian provisions and the Supreme Court held that those foreign provisions were not of such nature that they could affect arbitrability under Swedish law. The dispute was deemed amenable to out-of-court settlement and arbitrable.

IV. Evaluation and comments

Admittedly, the outcome of this case may not have been entirely contingent on when arbitrability was assessed. The Supreme Court did point out that the mandatory provisions did not target the creditor-debtor relationship under the Loan Agreement; only the actual transfer of currency. Even if the repayment contemplated by the Loan Agreement was proven invalid and punishable under current Swedish law, the Supreme Court may still have deemed the issue of payment liability amenable to out-of-court settlement. However, it is easy to see that had the circumstances been just slightly different, the issue might certainly have prejudiced the outcome of the entire dispute.[5] The Supreme Court correctly found the issue relevant enough to address specifically.

The question of when a dispute needs to be amenable to out-of-court settlement in order to be arbitrable has been subject to debate.[6]Some argue that the relevant time is when the arbitration agreement was entered into,[7]whereas others think it is when the dispute was resolved and that arbitrability should be assessed only at that point.[8] 

The wording of Section 1 of the SAA, which draws up the limits of arbitrability, appears inconclusive in respect of the point at which arbitrability is to be assessed. On the one hand, it stipulates that [d]isputes concerning matters in respect of which the parties may reach a settlement may, by agreement, be referred to one or several arbitrators for resolution.The use of present tense, may reach a settlement,here suggests that the relevant time is when the matter is referred to the arbitrators. However, on the other hand, the same section stipulates that [s]uch an agreement may relate to future disputes,which makes the words may reach a settlementrather seem to relate to whether the parties could settle when the arbitration agreement was concluded.

However, the Supreme Court takes a strong position that a dispute, in order to be arbitrable, only needs to be amenable to out-of-court settlement when the dispute is resolved. Although the Supreme Court expresses the caveat that the issue to some extent depends on the specific arbitration agreement and the circumstances in general, it does state that the determining factor must be whether the parties could have reached an out-of-court settlement at the time when the dispute was resolved, irrespective of whether the arbitration clause could be deemed in breach of peremptory legislation when it was entered into.[9]Several arguments may be made in support of the Supreme Courts conclusion.

Importantly, the restriction that only disputes amenable to out-of-court settlement may be referred to arbitration originates from a principle of party autonomy.[10] Logically, if parties are free to reach a settlement they should be equally free to refer the matter to arbitration. Therefore, if a dispute currently is amenable to out-of-court settlement, it may be argued that the underlying principle of party autonomy permits either of them to refer it to arbitration even if they previously were not allowed to settle. Mandatory substantive laws change with time and it would seem reasonable that arbitrability change with them.

Also, it may be inappropriate if historical political whims were to affect present day arbitrability of disputes over old agreements. Sweden is a popular forum for east-west arbitrationsinvolving parties from the former Soviet Union. The issue of when to asses arbitrability is particularly important for such arbitrations since the highly politicized law of the Soviet Union may differ much from the present law of the remaining republics. If arbitrability were to be assessed at the conclusion of the arbitration agreement, such old politicized legislation may be perpetuated within the partiesrelationship. 

Admittedly, the Court of Appeal came to the opposite conclusion on the issue of when arbitrability was to be assessed. It stated that [t]he relevant time for ruling on whether the dispute is arbitrable is the time of entry into the [L]oan [A]greement.Already at that point, reasoned the Court of Appeal, should the parties have been able to foresee its consequences; at least with respect to invalidity.[11] Given that the entry into of the Loan Agreement coincided with that of the arbitration agreement, the conclusion is not unreasonable since arbitrability is a requirement for a valid arbitration agreement.[12] If the arbitration agreement was flawed at its conclusion due to lacking arbitrability it would therefore seem incoherent if that flaw was allowed to healwith time.

In support of the Court of Appeals view, it may also be argued that assessing arbitrability based on the conditions after the conclusion of the disputed agreement might weaken the effect of certain mandatory legislation. Some mandatory law, such as currency regulations, may be of temporary nature yet serve a valid purpose. If a party knew that once such law is repealed the party would be able to arbitrate and later obtain enforcement of an agreement forbidden by the mandatory provisions, the impetus of such legislation may be weakened.

However, the Court of Appeal did attach significance to the entry into of the Loan Agreement rather than that of the arbitration agreement, which renders these arguments in support of its conclusion weaker. In contrast, the Supreme Courts view appears more persuasive since it gives maximum effect to party autonomy and takes into account an international trend of increasing arbitrability.[13] The Supreme Courts view is also more pragmatic. It would seem unnecessarily formalistic to prevent arbitration of an issue that the parties have already agreed to arbitrate and that under the current political values is amenable to out-of-court settlement. The Supreme Courts view may be positive for Swedens attractiveness as a forum for international arbitrations since it favors a broad notion of arbitrability and slightly less room for finding an award invalid due to lacking arbitrability. It should also increase foreseeability as to whether a dispute is arbitrable since arbitrability will depend on current conditions rather than the conditions at the conclusion of the arbitration agreement, which may be less lucid.[14] 

V. Conclusions

In the court proceedings between City Golf and the Bank, the Supreme Court answered the question of when arbitrability should be assessed under Swedish law. It held that a dispute is arbitrable if the matter it concerns is amenable to out-of-court settlement when the dispute is resolved. This holding by the Supreme Court is persuasive since it is pragmatic, well in line with the principle of party autonomy and with the international trend of increasing arbitrability. It is positive for Sweden since it contributes to a broader and more foreseeable notion of arbitrability, which should work to maintain Swedens attractiveness as a forum for international arbitrations.

 

Eric Schultz

The author is a Class of 2014 LL.M. student in the International Business Regulation, Litigation and Arbitration program at New York University School of Law, having obtained a Master of Laws degree (J.D. equivalent) from Uppsala University, Sweden, in 2011. He is presently on leave from his position as associate in the Insurance practice group at Mannheimer Swartling Advokatbyrå AB in Stockholm, Sweden


[1]Judgment T 4982-11 of November 23, 2012, by the Supreme Court, available at http://www.arbitration.sccinstitute.com/dokument/Court-Decisions/1450921/Judgment-of-the-Supreme-Court-of-Sweden-23-November-2012-Case-No-T-4982-11?id=95788.

[2]The Soviet provisions were primarily Article 712, Clauses 3 and 4 of the December 8, 1976, Decree of the Presidium of the Supreme Soviet Legislature of the USSR and Article 88 of the Criminal Code of the Russian Soviet Federative Republic. The corresponding Swedish regulations were the Swedish Currency Ordinance (1959:264) and the Swedish Currency Act (1939:350).

[3] Judgment T 6798-10 of October 7, 2011, by the Court of Appeal, available at http://www.arbitration.sccinstitute.com/files/102/1023105/Svea%20HovR%20T%206798-10%20Swedish.pdf#search=Moscow%20City%20Golf.

[4]The Supreme Court appears to have assumed that Swedish law was applicable also to the specific issue of arbitrability. Although this potentially vital question has been subject to some debate, domestically and internationally, the most popular view seems to be that arbitrability is assessed under the law that governs the arbitration agreement, which is in line with the Supreme Courts conclusion. See for example judgment T 10141-01 of November 15, 2005, by the Court of Appeal.

[5] If, for example,the Swedish mandatory provisions had targeted the creditor-debtor relationship per se. Or, alternatively, if City Golfs contractor had been a Soviet entity, in which case the drawdowns by that contractor may have violated therules as import and export of currency. City Golfs payment liability would be subject to the loan having been paid out so if the drawdowns violated mandatorylaw, itmay have been argued that the dispute concerning City Golfs liabilityto repay the loan was non-arbitrable.

[6]See for example Per Sundin and Erik Wernberg, The scope of arbitrability under Swedish law, The European Arbitration Review 2007, 63-65 at 64.

[7] Anders Reldén and Ola Nilsson, The arbitration agreement, in Ulf Franke, Annette Magnusson, et al. (eds), Internationalarbitrationin Sweden: A practitioners guide(Kluwer Law International 2013) at69.

[8]Lars Heuman, Skiljemannarätt (Norstedts Juridik 1999) at 157.

[9] Judgment T 4982-11 of November 23, 2012, by the Supreme Court at 7.

[10]See Sundin and Wernberg, supra note 6 at 63 and Heuman, supra note 8 at 156.

[11] Judgment T 6798-10 of October 7, 2011, by the Court of Appeal at 8-9.

[12]See for example Reldén and Nilsson, supra note 7 at 69.

[13]For this trend, see Stavros L. Brekoulakis, On Arbitrability: Persisting Misconceptions and New Areas of Concern, in Loukas A. Mistelis and Stavros L. Brekoulakis (eds), Arbitrability: Internationalandcomparativeperspectives(Kluwer Law International 2009) at 20.

[14]See Sundin and Wernberg, supra note 6 at 65.

Recognition of foreign arbitral awards in Brazil: recent developments

I.      Introduction

The purpose of this article written exclusively for the “Transnational Notes” of NYU’s Center for Transnational Litigation, Arbitration and Commercial Law, directed by Professor Franco Ferrari, is to provide a brief overview of recent case law regarding the recognition of foreign arbitral awards in Brazil.

According to the Brazilian Arbitration Act (“Lei 9.307/96” or “BAA”), an arbitral award rendered outside Brazil shall be recognized by the competent authority to produce its effects within the Brazilian territory.

Since the 2004 Amendment to the Brazilian Federal Constitution[i], the Superior Court of Justice (“Superior Tribunal de Justiça” or “STJ”) is the competent authority to decide on the recognition of foreign awards in Brazil, including arbitral awards.

Such recognition is governed by three sets of rules: (i) first, international treaties adopted by Brazil, such as the Inter-American Convention on International Commercial Arbitration (1975)[ii], adopted in 1996, the Inter-American Convention on the Extraterritorial Effectiveness of Foreign Arbitral Award (1979)[iii], adopted in 1997, and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (“the New York Convention”), adopted in 2002[iv]; (ii) the BAA, already referred to; and (iii) the STJ Resolution 9, of 4 May 2005 (“Resolution 9/2005”).

II.      Case law from 1996 to 2009

In 2010, the Brazilian Arbitration Committee (“CBAr”), an academic nonprofit organization, concluded a comprehensive empirical research on judicial decisions related to arbitration matters and the application of the BAA[v].

One of the reports dealt specifically with the recognition of foreign arbitral awards, analyzing judicial decisions rendered between November 1996 and July 2009. It concluded that the STJ and the Federal Supreme Court (which was the competent authority to recognize foreign awards until 2004) were highly favorable to the recognition of foreign arbitral awards. Recognition was denied only in a small percentage of cases.

III.      Recent developments (2011-2013)

STJ’s “pro arbitration” approach is confirmed by recent case law.

We analyzed twelve arbitral awards submitted for recognition to the STJ between 2011 and 2013. Out of those awards, only one was not recognized (Kanematsu v. Advanced Telecommunications Systems), due to the lack of proof of a valid arbitration agreement. Such cases are presented in more detail below. All the cases and facts discussed below are public and may be found in the STJ’s website[vi], searching by the reference included in the footnotes.

A.     Comverse v. American Telecommunications do Brasil[vii]

Claimant Comverse Inc.sought the recognition of the arbitral award rendered in New York City. The arbitral tribunal decided that the American Telecommunications Inc. Chile and the American Telecommunications do Brasil Ltda. – a Brazilian subsidiary of the Chilean company – should pay damages to Claimant. The Brazilian subsidiary, Respondent in the recognition proceedings, alleged that it was not a party to the original contract and was not bound by the arbitration clause. Claimant responded that, during the arbitral proceedings, counsel for the Chilean company sent a letter to the arbitral tribunal declaring that the affiliated companies (including Brazilian affiliate) (i) agreed to be bound by the arbitration clause, (ii) accepted the Arbitral Tribunal’s jurisdiction and (iii) that the counsel was going to represent them. The question was whether or not such letter could be considered a valid arbitration agreement and a valid counsel nomination.

The STJ answered those questions in the affirmative. It found that, according to Art. 38 II of BAA[viii] and article V (1) (a) of the New York Convention, the award shall be recognized if the arbitration agreement is valid “under the law to which the parties have subjected it”. The STJ clarified that the applicable law to party representation is not necessarily Brazilian law, but the rules chosen by the parties. According to the institutional arbitration rules applicable to the case, the parties were allowed to nominate their counsel by sending a letter to the arbitral tribunal. Furthermore, the representative of the Brazilian company had been present in the hearings, including when the Arbitral Tribunal and the parties decided to include the Brazilian company, as well as the other subsidiaries, in the proceedings, and never objected to the arbitral tribunal’s jurisdiction. The STJ concluded that, according to the principle of good faith, a Respondent in an arbitration proceeding cannot accept to abide by the arbitration clause and then oppose to the jurisdiction of the arbitral tribunal. The STJ also decided that the party opposing the recognition of an arbitral award bears the burden of proving the existence of grounds for such recognition to be denied, burden which was not fulfilled in the present case.

B.     Western Bulk Carriers v. A.P. Oxidos[ix]

Western Bulk Carriers sought the recognition of the award rendered by an arbitral tribunal in London ordering A.P. Oxidos Industria e Comercia Ltda. (“Respondent”) to pay damages for breach of contract. Respondent alleged that the requirements of articles 37 of the BAA[x], 5 III and IV of the Resolution 9/2005 were not fulfilled, because only the signature of the English notary was legalized, not the signature of the arbitrator, and the arbitral award annexed to the recognition proceeding was neither complete nor translated.

First, STJ rejected the argument concerning the arbitral award since two copies had been annexed to the proceedings and one of them was complete. The STJ then analyzed the meaning of the word “authenticated” in Art. 37 I of the BAA. It reasoned that, according to case law, the recognition of the notary’s signature is valid under this article of the BAA. Secondly, the STJ acknowledged that the award had become binding on the parties. Thus, the requirements were fulfilled. Thirdly, it added that there was no violation of public policy. The arbitral award was granted recognition.

C.     LDCB v. LVL de C[xi]

Louis Dreyfus Commodities Brasil S.A sought the recognition of the arbitral award rendered by the arbitral tribunal of the International Cotton Association. The Arbitral Tribunal decided that LVL de C (“Respondent”) should pay damages for breach of the purchase agreement of cotton. Respondent opposed to the recognition of the arbitral award alleging that the arbitration agreement was invalid due to formal requirements for standard form contracts under Art. 4 §2 of the BAA[xii]. It also alleged that it had not been duly notified (Art. 5 II of the Resolution 9/2005).

STJ stated that the parties had signed every page of the contract (even the page containing the arbitration clause), and that the clause seemed to be valid according to the law chosen by the parties (Art. 38 II of the BAA). Furthermore, the STJ reminded that it is not allowed to re-examine the merits of the dispute in a proceeding for recognition of foreign award. Hence, the STJ clarified that it could not, in the case at hand, define the nature of the contract, and determine whether the contract was a standard form contract or not, an issue which had not been dealt with by the arbitral tribunal. The arbitral award was granted recognition.

D.    YPFB Andina v. Univen Petroquímica[xiii]

YPFB Andina S.A. and Univen Petroquímica Ltda. entered into a contract for the supply of natural gas during three years. According to the allegations, YPFB Andina suspended the supply of gas before the end of the three years. The arbitral tribunal decided that the contract was validly suspended in light of “force majeure” events. Univen Petroquímica Ltda. (“Respondent”) argued that the arbitral award could not be recognized in Brazil because: (i) the arbitral tribunal had been partial, (ii) public policy had been violated, and (iii) a setting aside procedure was pending in the place of arbitration.

The STJ rejected the first argument because there was nothing in the facts indicating that Respondent opposed to the arbitral tribunal when it had the opportunity to do so. As regards the suspension of the contract and the alleged public policy violation, the STJ reminded that it is not allowed to re-examine the merits of the case, since its power was limited by articles 38 and 39[xiv] of the BAA. Finally, as regards the setting aside procedure, the STJ decided that Respondent did not prove it, and therefore the argument could not be considered. The arbitral award was granted recognition.

E.     Nuovo Pignone v. Petromec[xv]

In this case, the STJ clarified that, according to Art. 34 of the BAA[xvi], an arbitral award is considered foreign when it is rendered outside Brazil. The BAA does not take into consideration the location of the arbitration chamber which administered the arbitral proceedings. For a comprehensive analysis of this case, we refer to Daniel Aun’s article also published in the NYU “Transnational Notes[xvii].

F.      Kanematsu v. Advanced Telecommunications Systems[xviii]

Kanematsu USA Inc. sought the recognition of the award rendered by the AAA, which decided that the Advanced Telecommunications Systems do Brasil Ltda. (“Respondent”) should pay damages. Respondent opposed to the recognition arguing the inexistence of a contract signed by the parties and the absence of legal reasoning in the award.

The STJ denied recognition, finding that the contract between the parties had not been signed and Respondent objected to the jurisdiction of the arbitral tribunal during the arbitral proceedings. The STJ cited Plexus[xix], in which it was decided that, since the choice of arbitration is an exception, the express and clear will of the parties is mandatory. Hence, the STJ concluded that there was no proof of the existence of the arbitration agreement and that recognizing this award would be a violation of articles 37 II  and 39 II  of the BAA.

G.    GE Medical Systems v. Tecnimed Paramedics[xx]

The recognition of this arbitral award rendered in Miami, FL, United States (SEC 853/EX) is related to two US state judgments validating the arbitration agreement, which had been also submitted for recognition to the STJ (SEC 854/EX).

Both recognition proceedings were suspended because one of the parties had previously sought the declaration of invalidity of the arbitration agreement before a Brazilian court, in the State of Rio Grande do Sul. The State Court of Appeals decided that the arbitration agreement was invalid and an appeal related to such procedure was pending in the STJ at the time both recognition proceedings were initiated. This is why, at the request of one of the parties, the STJ decided to suspend both recognition proceedings.

Later on, GE Medical Systems Information Technologies Inc. and General Electric do Brasil S.A. requested the continuation of the recognition proceedings before the STJ. In granting such request in the Regimental Appeal of SEC 854/EX, in 2011, the STJ decided that setting aside proceedings and recognition proceedings may exist and develop in parallel (no lis pendens)

The appeals against the State Court of Appeals decision to the STJ were found invalid for violation of formal procedural requirements under Brazilian law[xxi]. Therefore, the State Court of Appeals decision rendering the arbitration agreement invalid turned into res judicata.

However, in deciding SEC 854, the STJ found that such res judicata did not affect the recognition of the two US state judgments validating the arbitration agreement because the grounds (“causa de pedir”) for such lawsuits were different. Therefore, the STJ decided to grant partial recognition to the US state judgments, excluding some civil and criminal sanctions. The recognition of the arbitral award is still pending in the STJ (SEC 853/EX).

H.    Weil Brothers Cotton Inc. v. Espólio Pedro Ivo de Freitas[xxii]

Weil Brothers Cotton Inc. sought the recognition of the arbitral award rendered by the arbitral tribunal of the International Cotton Association in 2008. The arbitral award decided that the assets (“espólio”) of Pedro Ivo de Freitas  – Pedro Ivo de Freitas being deceased – should pay damages for breach of the cotton purchase agreement. Respondent’s arguments against recognition were, among others, that (i) the arbitral tribunal was not competent since there were two different contracts, (ii) the arbitration agreement contained in a standard form contract did not observe the form requirements of the BAA and, therefore, was invalid and ineffective (Art. 4 §2 of the BAA), (iii) the contract was tainted with fraud, and (iv) it was not duly notified according to Art. 39 of the BAA.

In dismissing all of Respondent’s arguments and granting the enforcement of the award, the STJ decided that (i) the arbitral tribunal was competent because the International Cotton Association was mentioned in both contracts; (ii) the STJ cannot determine the validity and effectiveness of the contract in a proceeding for recognition of a foreign award, because such analysis would entail an examination of the merits of the dispute, which is prohibited by Brazilian law, and also in light of the fact that there was a lawsuit pending in Brazil to deal with the fraud allegations; and, finally, (iii) Claimant proved the existence of Respondent’s notification and Respondent’s awareness of the arbitral proceeding.

I.       Keytrade AG v. Ferticitrus Indústria e Comércio de fertilizantes[xxiii]

Keytrade AG sought the recognition of an arbitral award rendered against Ferticitrus Indústria e Comércio de fertilizantes Ltda. (“Respondent”) by an arbitral tribunal in London. The dispute concerned “demurrage” expenses related to Respondent’s debarkment’s delay. Respondent opposed to the recognition of the award alleging that it had not been duly notified (Art. 38 III of the BAA) and that the compound interests in the sentence were a violation of public policy (Art. 39 II of the BAA).

The STJ rejected both arguments, deciding that (i) the notifications were made according to the law chosen by the parties, that is, the law of the place of arbitration (London), which allows for notification by email, fax or letter, in accordance with Art. 39 of the BAA, and the receipt of those notifications was proven; (ii) as regards the public policy argument, the STJ reminded that it is not any divergence with Brazilian law that shall suffice to fulfill the conditions of violation of public policy. The fundamental values of the Brazilian law system must be threatened to allow the STJ to re-examine the merits of the dispute, which is not the case at hand, because compound interests are also accepted in Brazil in certain types of contracts provided for in the Brazilian Civil Code (“contrato de mútuo”) and according to the requirements of Brazilian law.

J.        Mandate Holdings LLC. v. Consórcio Europa[xxiv]

Mandate Holdings LLC. sought the recognition of an arbitral award rendered against Consórcio Europa  by an arbitral tribunal seated in Los Angeles. The dispute related to the breach of the licensing agreement, containing an arbitration agreement.

Consórcio Europa (“Respondent”) argued that the arbitral award should not be recognized in Brazil because (i) there was no proof of power of attorney attributed to the vice-president of Mandate Holdings Llc., (ii) the Supreme Court of California had not recognized the award, as should be done according to the Californian civil procedure code, (iii) there was no proof that the award is the final judgment (res judicata), (iv) the contract is a standard form contract rendering the arbitration agreement invalid, and (v) Respondent had not been duly notified.

The STJ rejected all the arguments deciding that (i) the powers of the vice-president was recognized by the notary of Los Angeles; (ii) the recognition of a foreign award in Brazil is made only in accordance with Brazilian laws (the BAA and the Resolution 9/2005); (iii) according to the arbitration agreement, the award would be binding on both parties and had to be executed; (iv) the STJ cannot determine the nature of a contract in a proceeding for recognition of foreign award, since this would conduct to a re-examination of the merits of the dispute; and finally (v) a “letter rogatory” is not necessary to notify a party, since email, fax or a simple letter is enough, as long as the receipt can be proven.

K.    Queensland Cotton Corporation Ltd. v. Agropastoril Jotabasso[xxv]

Claimant, Queensland Cotton Corporation Ltd., sought the recognition of the arbitral award rendered by the arbitral tribunal of the International Cotton Association in Liverpool against Respondent, Agropastoril Jotabasso Ltda. (former Agropecuária Basso Ltda.).

Respondent alleged that the award could not be recognized because (i) it had not been duly notified, (ii) the contracts signed by the parties were not included in the records, (iii) the award was unfair, (iv) the amount claimed in the recognition proceedings was higher than the amount included in the award, and (v) Olam International Ltd. is not a legitimate successor of Claimant since there was no proof of its power of representation in the records.

In dismissing all of Respondent’s arguments and granting the enforcement of the award, the STJ made it clear that it cannot determine the nature of a contract and the fairness of an award in a proceeding for recognition of a foreign award, because such analysis would entail a re-examination of the merits of the dispute, which is prohibited by Brazilian law.

L.      Queensland Cotton Corporation Ltd. v. Espólio Pedro Ivo Freitas[xxvi]

Queensland Cotton Corporation Ltd sought the recognition of the arbitral award rendered by an arbitral tribunal under the International Cotton Association in Liverpool against the assets (“espólio”) of Pedro Ivo de Freitas (“de cujus”) (“Respondent”) – Pedro Ivo de Freitas being deceased.

Respondent opposed to the recognition alleging that it did not sign the contract containing the arbitration agreement and was never aware of the choice of arbitration.

The STJ decided that the successor of the de cujus is responsible for all debts, and there was proof of a duly notification made according the law chosen by the parties. The arbitral award was granted recognition.

 

Rafael F. Alves

LL.M. New York University, Arthur T. Vanderbilt Scholar – Class of ’10. Master of Laws, University of São Paulo. Senior Associate of the Arbitration Practice at L. O. Baptista Schmidt Valois Miranda Ferreira Agel Advogados. Director of the Brazilian Arbitration Committee.

 

Joséphine Marmy

Master of Law at the University of Fribourg, Switzerland. Currently working as a law clerk at Baker & McKenzie Zurich. Former intern at L.O. Baptista Schmidt Valois Miranda Ferreira Agel Advogados in São Paulo, and former assistant of Professor Pierre Tercier in Switzerland.



[i] Emenda Constitucional n. 45, December 30th, 2004.
[ii] Decreto 1.902, May 9th, 1996.
[iii] Decreto 2.411, December 2nd, 1997.
[iv] Decreto 4311, July 23rd, 2002.
[v] Available at www.cbar.org.
[vi] Available at www.stj.jus.br.
[vii] Superior Tribunal de Justiça, Sentença Estrangeira Contestada n. 3709/EX (2008/0266915-8), Rel. Min. Teori Albino Zavascki.
[viii] Art 38 II of the BAA: “The request for recognition or enforcement of an arbitral award may be denied only if the defendant furnishes proof that […] II – the arbitration agreement was not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made […].”
[ix] Superior Tribunal de Justiça, Sentença Estrangeira Contestada No 4439/EX (2009/0188275-1), Rel. Min. Teori Albino Zavascki.
[x] Art. 37 of the BAA: “The request for homologation of a foreign award shall be submitted by the interested party; this written motion shall meet the requirements of Article 282 of the Code of Civil Procedure, and must be accompanied I – by the original of the arbitral award or duly certified copy authenticated by the Brazilian consulate, accompanied by a sworn translation; II – the original arbitration agreement or a duly certified copy, accompanied by a sworn translation.”
[xi] Superior Tribunal de Justiça, Sentença Estrangeira Contestada No 6335/EX (2011/0072243-3), Rel. Min. Felix Fischer.
[xii] Art. 4 §2 of the BAA: “In adhesion contracts, the arbitration clause will only be valid if the adhering party takes the initiative to initiate arbitration proceedings or if it expressly agrees to arbitration by means of an attached written document, or if it signs or initials the corresponding contractual clause, inserted in boldface type.”
[xiii] Superior Tribunal de Justiça, Sentença Estrangeira Contestada No 4837/EX (2010/0089053-1), Rel. Min. Fransisco Falcão.
[xiv] Art. 39 of the BAA: “The request for recognition or enforcement of a foreign award shall also be denied if the Federal Supreme Court finds that: I – according to Brazilian law, the subject-matter of the dispute is not capable of settlement by arbitration; II – the recognition or enforcement of the award is contrary to Brazilian public policy. Sole paragraph – The services of summons on a party resident or domiciled in Brazil, pursuant to the arbitration agreement or to the procedural law of the country in which the arbitration took place, including mail with confirmation of receipt, shall not be considered as offensive to Brazilian public policy, provided the Brazilian party is granted sufficient time to exercise its right of defence.”
[xv] Superior Tribunal de Justiça, Recurso Especial No 1231554/RJ (2011/0006426-8), Rel. Min. Nancy Andrighi.
[xvi] Art. 34 of teh BAA: “A foreign award shall be recognised and enforced in Brazil in accordance with international treaties effective in the internal legal system, or, in the absence of that, strictly according to the terms of this law. Sole paragraph – A foreign award is an award rendered outside the national territory.”
[xvii] http://blogs.law.nyu.edu/transnational/2012/03/the-definition-of-domestic-and-foreign-arbitral-awards-in-brazil-a-critical-analysis-of-the-decision-in-nuovo-pignone-v-petromec/
[xviii] Superior Tribunal de Justiça, Sentença Estrangeira Contestada No 885/EX (2055/0034898-7), Rel. Min. Francisco Falcão.
[xix] Superior Tribunal Federal, Sentença Estrangeira Contestada No 6753/GB, Rel. Min. Maurício Corrêa.
[xx] Superior Tribunal de Justiça, Agravo Regimental na Sentença Estrangeira Contestada n. 853/US (2005/0080062-0), Rel. Min. Castro Meira and Superior Tribunal de Justiça, Agravo Regimental na Sentença Estrangeira Contestada n. 854/US (2005/0123803-1), Rel. Min. Luiz Fux.
[xxi] Superior Tribunal de Justiça, Recurso Especial nº 1.015.194-RS (2005/0173966-2), Rel. Min. Humberto Gomes de Barros and Agravo Regimental nos Embargos de Divergência em Recurso Especial nº 1.015.194-RS (2009/0117392-4), Rel. Min. Maria Isabel Gallotti.
[xxii] Superior Tribunal de Justiça, Sentença Estrangeira Contestada No 5213/EX (2009/0107931-0), Rel. Min. João Otávio de Noronha.
[xxiii] Superior Tribunal de Justiça, Sentença Estrangeira Contestada No 4024/EX (2010/0073632-7), Rel. Min. Nancy Andrighi.
[xxiv] Superior Tribunal de Justiça, Sentença Estrangeira Contestada No 6365/EX (2011/0100599-0), Rel. Min. Eliana Calmon.
[xxv] Superior Tribunal de Justiça, Sentença Estrangeira Contestada No 6753/EX (2012/0064310-5), Rel. Min. Maria Thereza de Assis Moura.
[xxvi] Superior Tribunal de Justiça, Sentença Estrangeira Contestada No 6760/EX (2011/0197514-1), Rel. Min. Sidnei Beneti.

The effect of a party’s bankruptcy on international arbitration proceedings in Switzerland – the revised position of the Swiss Federal Supreme Court after Vivendi

On October 16, 2012, the Swiss Federal Supreme Court (hereinafter “Supreme Court”) issued a decision wherein it clarified its position regarding the effect of a party’s bankruptcy on international arbitration proceedings in Switzerland.[1] The Supreme Court therewith reacted to numerous criticisms regarding its so-called Vivendi decision of March 31, 2009[2].

I.              The Vivendi decision

A.           The decision of the Supreme Court

In 2009, the Supreme Court was faced with the question of the effect of the bankruptcy of a Polish company, Elektrim SA (hereinafter “Elektrim”), on an international arbitration proceeding in Switzerland.[3] Elektrim, a defendant in the arbitration proceeding in Geneva, informed the arbitral tribunal that it had been declared bankrupt in Poland and that therefore all arbitration agreements concluded by the company ceased to exist and all arbitration proceedings ended for the company. It relied on article 142 Polish Bankruptcy Act (hereinafter “BA”), which states: “Any arbitration clause concluded by the bankrupt shall lose its legal effect as at the date bankruptcy is declared and any pending arbitration proceedings shall be discontinued.“[4] The arbitral tribunal decided to discontinue the proceeding with respect to Elektrim as the entity had lost its capacity to be a party in the arbitration proceeding pursuant to article 142 BA.[5]

The Supreme Court upheld the award over a challenge. It held that the capacity to be a party in arbitration proceedings depends on legal capacity. As the legal capacity is to be determined, based on the Swiss conflict of laws provisions, by the law governing the registration of legal entities, Elektrim’s legal capacity and the capacity to be a party in an arbitration proceeding were governed by Polish law.[6] The Supreme Court saw no reason to question the arbitral tribunal’s view that article 142 BA deprived a bankrupt party of the capacity to be a party in an arbitration proceeding and held that Elektrim had thus lost this capacity.[7]

B.            Critique

Numerous authors criticized the decision of the Supreme Court.[8] The principal criticism was that the Supreme Court had misconstrued the scope of article 142 BA by interpreting it as a norm regulating the capacity to be a party in a proceeding instead of the substantive validity of the arbitration agreement. In the latter case, the bankruptcy of Elektrim would have had no effect on the proceeding because of the principle of favor validitatis regarding arbitration agreements in article 178(2) Swiss Private International Law Act (hereinafter “PILA”).[9]

II.           Revision of Vivendi in 2012

In 2012, the Supreme Court had the chance to review the question of the effect of a party’s bankruptcy on the capacity to be a party in an international arbitration proceeding in Switzerland. In doing so, the Supreme Court approached the topic more carefully and rendered an elaborate decision clarifying its position.[10]

A.           Facts and decision of arbitral tribunal

In 2009, a controversy over an agreement, that contained an arbitration clause for arbitration in Geneva, arose between a Portuguese and a Chinese company. In August 2009, a Portuguese court declared the Portuguese company insolvent. Nearly a year later, the Chinese company initiated an ICC arbitration proceeding against the Portuguese entity.[11]

In light of its insolvency, the Portuguese entity disputed the arbitral tribunal’s jurisdiction.[12] It relied in particular on article 87(1) Portuguese Insolvency Law (hereinafter “IL”) which states: “Without prejudice to provisions contained in applicable international treaties, the efficacy of arbitral agreements relating to disputes that may potentially affect the value of the insolvency estate and to which the insolvent is party shall be suspended.”[13]

In an interim award, the arbitral tribunal concluded it had jurisdiction as the arbitration clause was valid and the parties were capable of being parties in an international arbitration proceeding in Switzerland.[14] It considered the arbitration clause to be valid based on article 178(2) PILA and case law stating that an arbitration clause survives the bankruptcy of a party under Swiss law.[15] Regarding the capacity to be a party in arbitration proceedings, the arbitral tribunal determined that Portuguese law was applicable and concluded that article 87 IL does not have any effect on the capacity of a party as it only addresses the validity of an arbitration agreement.[16]

B.            Law governing the capacity of a party in international arbitration proceedings

First, the Supreme Court determined the law governing the capacity to be a party in an international arbitration proceeding in Switzerland. In this respect, the Supreme Court noted that Chapter 12 PILA does not contain a provision regarding subjective arbitrability of non-state parties, and accordingly the capacity to be party in arbitration proceedings is to be determined based on the preliminary substantive law question of the legal capacity.[17]

Based on article 154(1) PILA, it held that the legal capacity of a legal entity is to be determined by the law of the state under which the entity is registered.[18] Thus, the Supreme Court came to the conclusion that Portuguese law governs the legal capacity of the Portuguese entity.[19]

C.           Definition of legal capacity and its consequences

Then, the Supreme Court referred to Swiss law to define legal capacity as the capacity to be the subject of rights and duties. It further concluded that if the legal capacity of an entity is to be determined based on foreign law, it must be analyzed if the entity is capable of having rights and duties under this foreign law. If so, the entity has legal capacity and capacity to be a party in an international arbitration proceeding that is governed by Chapter 12 PILA. The Supreme Court then held that specific restrictions regarding arbitration proceedings of the law governing the entity’s registration, which do not affect the legal capacity of the entity in general, have no effect on the capacity to be a party in arbitration proceedings in Switzerland.[20]

The Supreme Court then analyzed Portuguese law and concluded that insolvent entities are subject to rights and duties until the completion of liquidation in Portugal. Thus, the entity has legal capacity and capacity to be a party in an arbitration proceeding governed by Chapter 12 PILA. Even if article 87 IL hinders a Portuguese insolvent entity to be a party in a Portuguese arbitration proceeding, this would have no effect on the capacity to be a party in an international arbitration proceeding in Switzerland, as the only decisive factor for the proceedings in Switzerland is whether the Portuguese law assigns the entity rights and duties.[21]

D.           Comments to its Vivendi decision

The Supreme Court then addressed its Vivendi decision and pointed out that this decision needs to be seen in the specific context of Polish law and can neither be generalized nor the statements therein applied to the law of other jurisdictions. In particular, that decision does not confirm in a general way that foreign insolvency laws which declare arbitration agreements ineffective in the case of a party’s insolvency result in the loss of the capacity to be a party to arbitration proceedings.[22]

E.            Conclusion regarding subjective arbitrability

The Supreme Court upheld the award by concluding that article 87(1) IL has no effect on the legal capacity and the capacity to be a party in international arbitration proceedings in Switzerland. Pursuant to the Swiss lex arbitri, article 87(1) IL only addresses the validity of the arbitration agreement. But this question is governed by article 178(2) PILA, pursuant to which an arbitration agreement is valid if it conforms to Swiss law. Since under Swiss law an arbitration agreement survives the bankruptcy of a party, article 87(1) IL has no effect on this question either.[23]

III.        Comments

This new decision raises various issues. Among them are the characterization of the insolvency problem and its consequences, the effect of the lex concursus on arbitration proceedings and limits thereto of the lex fori, the difference between capacity to be a party in a proceeding and the procedural right to bring an action, the determination of the capacity to be a party in an arbitration proceeding, the applicable law on the definition of legal capacity of a foreign entity, the reliance on provisions outside of the lex arbitri and the application of foreign insolvency law as loi d’application immédiate.

Hereinafter, the characterization of the insolvency problem and the determination of the capacity to be a party in an arbitration proceeding will be addressed. The characterization deserves particular attention as it is the starting point in an analysis of the effect of a foreign insolvency and can have a significant effect on the outcome. The determination of the capacity is of practical importance as it provides the parties with a test to predict the consequences of insolvency with respect to international arbitration proceedings in Switzerland.

A.           The characterization of the insolvency problem

The effect of foreign insolvency or bankruptcy proceedings on arbitration proceedings in Switzerland mainly depends on the characterization of the problem. “[W]hether the insolvency of a party is an issue of capacity, of the binding force and scope of the arbitration agreement or a procedural question”[24] is a decisive factor, as it determines the applicable provisions of Chapter 12 PILA and therewith the law governing the issue of the foreign insolvency.[25]

As shown in the decision, the characterization can predetermine the effect of party’s insolvency on proceedings in Switzerland: If it is an issue of the validity of the arbitration agreement, a foreign insolvency law has no effect on an arbitration proceeding in Switzerland based on article 178(2) PILA, according to which an arbitration agreement is valid if it conforms at least to Swiss law, and case law pursuant to which the bankruptcy of a party does not affect the validity of an arbitration agreement under Swiss law.[26] However, if the capacity to be a party in an arbitration proceeding in Switzerland is the issue, the answer depends on the entity’s capacity to be the subject of rights and duties pursuant to the law of the place of the registration.[27]

In Vivendi, the Supreme Court characterized the problem of insolvency as one of capacity without explicitly addressing the question of characterization.[28] The absence of any reasoning in this regard was surprising as the minority of judges took the position during the public deliberation that it was rather an issue of the validity of the arbitration agreement than one of the party’s capacity.[29]

Likewise in its new decision, the Supreme Court characterized the insolvency problem as an issue of capacity:[30] It analyzed, without addressing the process of characterization, the question of insolvency as one of the capacity to be a party in an arbitration proceeding. Only after concluding that Portuguese law does not affect the entity’s capacity, did it hold that article 87 IL solely addresses an aspect of the substantive validity of the arbitration agreement.[31]

Hence, the Supreme Court has twice characterized the insolvency issue as one of capacity. As the characterization process was not explicitly addressed in either decision, it is not clear how the Supreme Court came to this conclusion. Under the presumption that the Supreme Court conducted a characterization of the insolvency under the lex fori, as earlier case law suggests,[32] and with a focus on the legal problem at issue and not the particular provision invoked,[33] it could be concluded that the Supreme Court will also in future characterize insolvency as a capacity issue. It might, however, be the case that the Supreme Court did not want to commit itself to such a characterization at this time. Be it one way or the other, it would be helpful to have an express ruling on this question to provide potential parties with predictability.

B.            Determination of capacity to be party in international arbitration proceedings

The Supreme Court held in its new decision that the capacity of a foreign entity to be a party in international arbitration proceedings in Switzerland depends on the entity’s capacity to be the subject of rights and duties under the law governing the entity’s registration. Restrictions regarding arbitration proceedings of the foreign law that do not affect the entity’s legal capacity in general will not be considered.[34]

At least here the Supreme Court provides the parties with predictability. This straightforward test to determine the consequences of insolvency on their capacity to be a party in international arbitration proceedings in Switzerland strengthens Switzerland as a place of arbitration by providing the mentioned predictability and by limiting the reach of foreign insolvency laws[35]. Thus, if insolvency is characterized as an issue of capacity, such foreign insolvency laws cannot prevent arbitration proceedings in Switzerland as long as the entity has legal capacity in the country of registration.

 

Simon Marc Hohler

The author is an LL.M. student in the International Business Regulation, Litigation and Arbitration program at New York University School of Law, Class of 2014. After graduating from the Universities of Lucerne and Neuchatel in Switzerland in 2008 (Bilingual Master of Law; J.D. equivalent), he gained working experience in Swiss and U.S. law firms as well as at the Cantonal Court of Zug, Switzerland. After being admitted to the bar in 2011, he worked in the Litigation & Arbitration Team at Blum & Grob Attorneys at Law Ltd. in Zurich, Switzerland.

 



[1]    Bundesgericht [BGer] [Federal Supreme Court] Oct. 16, 2012, 138, Entscheidungen des Schweizerischen Bundesgerichts [BGE] III 714 (Switz.).

[2]    BGer Mar. 31, 2009, 4A_428/2008 (Switz.).

[3]    Id.

[4]    Id. at B.b.

[5]    Id. at B.c.

[6]    Id. at 3.2.

[7]    Id. at 3.3.

[8]    For a list of the scholarship criticizing the decision see: BGer Oct. 16, 2012, 138 BGE III 714 (Switz.), 724-725 (3.5.2).

[9]    BGer Oct. 16, 2012, 138 BGE III 714 (Switz.), 724-725 (3.5.2); Article 178(2) PILA states: “Furthermore, an arbitration agreement is valid if it conforms either to the law chosen by the parties, or to the law governing the subject-matter of the dispute, in particular the main contract, or to Swiss Law”.

[10] BGer Oct. 16, 2012, 138 BGE III 714 (Switz.); See also Georg Naegeli, The Capacity of a Bankrupt Party to Be or Remain a Party to International Arbitral Proceedings, A Landmark Decision of the Swiss Federal Supreme Court, 31 ASA Bulletin, 372, 372 and 375 (2013).

[11] BGer Oct. 16, 2012, 4A_50/2012 (Switz.), at A.a, A.b and B.a.

[12] Id. at B.a.

[13] BGer Oct. 16, 2012, 138 BGE III 714 (Switz.), 716 (3.1.2.2).

[14] Id., 715 (3.1).

[15] Id., 715 (3.1.1).

[16] Id., 715-719 (3.1.2, in particular 3.1.2.4 and 3.1.2.5).

[17] Id., 720 (3.3.1).

[18] Id., 720-721 (3.3.2); In the absence of such a registration requirement in that law, the legal entities are governed by the law of the state under which they organized themselves (article 154(1) PILA in fine).

[19] Id., 721-722 (3.3.3 and 3.3.5).

[20] Id., 721-722 (3.3.4).

[21] Id., 722-723 (3.4, in particular 3.4.2).

[22] Id., 724-726 (3.5, in particular 3.5.3).

[23] Id., 726 (3.6); Thereafter, the Supreme Court analyzed if 87(1) IL applies as loi d’application immédiate but denied this (see id., 726-727 (4.)).

[24] Stefan Kröll, Arbitration and Insolvency – Selected conflict of law problems, in Conflict of Laws in International Arbitration 211, 241 (Franco Ferrari & Stefan Kröll eds., 2011).

[25] Id., 233, 241-242, 244 and 246.

[26] BGer Oct. 16, 2012, 138 BGE III 714 (Switz.), 726 (3.6); BGer Dec. 8, 2009, 136 BGE III 107 (Switz.), 108 (2.5).

[27] BGer Oct. 16, 2012, 138 BGE III 714 (Switz.), 719-722 (3.2 and 3.2);

[28] BGer Mar. 31, 2009, 4A_428/2008 (Switz.), at 3.

[29] Naegeli, supra, 373.

[30] Lara Pair, Entscheidbesprechungen, BGer 4A_50/2012, Aktuelle Juristische Praxis 615, 616 (2013).

[31] See above, II.B., II.C. and II.E.

[32] BGer Dec. 4, 2009, 136 BGE III 142 (Switz.), 144 (3.2).

[33] Kröll, supra, 244-245; Michael Günter, Internationale Schiedsgerichtsbarkeit und Insolvenz – Zur Berücksichtigung von Insolvenzverfahren und ihren Auswirkungen vor internationalen Schiedsge­richten mit Sitz in der Schweiz, 202 (§ 427-428) (2011).

[34] See above, II.B. and II.C.

[35] See also Naegeli, supra, 380-381.

TCL v. Castel: The Constitutionality of the Adoption of the Model Law in Australia

On March 13, 2013, by its decision in TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5 (the TCL Case), Australia’s highest court, the High Court of Australia, unanimously rejected efforts by the losing participant in an international arbitration to challenge, as unconstitutional, Australia’s adoption of the enforcement provisions of the UNCITRAL Model Law on International Commercial Arbitration (the Model Law) in Australian’s International Arbitration Act 1974 (Cth) (the IA Act).

This note summarizes the Australian Court’s decision, and considers it in the context of debates within American legal scholarship regarding the consistency of arbitration proceedings with judicial power provisions of the United States’ own Constitution, which are relevantly the same as those of the Australian Constitution.

Background to the TCL Case

The TCL Case arose out of a dispute between the Australian and Chinese parties to a distribution agreement that provided for the submission of disputes to arbitration.[1]  The distributor and claimant, Castel Electronics Pty Ltd (Castel) prevailed in the arbitration, with two awards made which obliged the Chinese manufacturer, TCL Air Conditioner (Zhongshan) Co Ltd (TCL) to pay Castel A$3,369,351 in damages, and A$732,500 in respect of legal costs.[2]

Castel applied to the Federal Court of Australia for enforcement of the arbitral awards, which TCL resisted, asserting that the Federal Court lacked jurisdiction to enforce the awards, or alternatively, that the awards should not be enforced on public policy grounds relating to alleged breaches of natural justice.[3]  TCL also, by a separate proceeding, applied to have the awards set aside, again on the basis of public policy.[4]  The Federal Court held that it had jurisdiction to enforce the awards, and that there was no justification for refusing to enforce the awards, or for setting them aside.[5]

Application to the High Court

TCL then applied to the High Court, which has original jurisdiction in matters concerning the Australian Constitution.  TCL contended that the IA Act’s adoption of Articles 35 and 36 of the Model Law,[6] in not permitting courts to refuse to enforce an award for error of law:

(a) undermined the institutional integrity of the Federal Court by requiring the Federal Court, as a repository of judicial power by Australia’s Constitution, knowingly to perpetrate a legal error by endorsing legally incorrect awards for execution as if they were judgments of the Federal Court;[7] and/or

(b)  impermissibly conferred judicial power upon the arbitral tribunal (where Australia’s Constitution requires judicial power to be exercised only by courts[8]), by allowing the tribunal “the last word” on the application of the law to the dispute the subject of the arbitration.[9]

TCL also argued that the impairment of the Federal Court’s institutional integrity was aggravated by the fact that Article 28 of Model Law, or alternatively an implied term of the relevant arbitration agreement, required an arbitral award to be correct in law.[10]

In two separate judgments, the High Court rejected all of TCL’s contentions. Chief Justice French and Justice Gageler noted the origins of Articles 35 and 36 of the Model Law in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), and that it was essential therefore to construe the Model Law in the context of the objects of the New York Convention.[11]  They emphasised that the scheme designed by the New York Convention, and thus the Model Law, was directed at facilitating the contractually bargained agreement of the parties to refer their respective rights to arbitration in lieu of national courts, and that this agreement effectively superseded the original rights and obligations of the parties.[12]

In that context, the grounds for refusal to enforce in Article 36 essentially delineate the scope of the authority consensually given to the arbitral tribunal by the parties, and the role of national courts is to uphold the scope of that choice, as distinct from deciding the dispute: “Enforcement of the arbitral award is enforcement of the binding result of the agreement of the parties to submit their dispute to arbitration, not enforcement of any disputed right submitted to arbitration”.[13]  Chief Justice French and Justice Gageler posited that Article 28 reinforced the parties’ autonomous choice of dispute settlement mechanism by granting to the parties the freedom to choose whichever substantive law or rules of law they wish to have applied to their dispute.[14]  It was not the case, therefore, that Article 28 required an award to be legally correct, nor could, therefore, that requirement be implied into an arbitration agreement made in the context of the absence of legal error as a ground to refuse to enforce an award in the Model Law. Such an argument by TCL ran “counter to the autonomy of the parties to an arbitration agreement which infuses the Model Law, and of which Art 28 is a particular guarantee”.[15]

In these circumstances, there could be no difficulty with the Federal Court enforcing an award that could potentially contain a legal error.  In enforcing the award, the Federal Court was not endorsing its reasoning; rather the Court was testing the award’s adherence to the Model Law.[16] The obligations requiring the enlistment of judicial power at the Federal Court level were those created by the award, which in turn was created as a result of the parties’ agreement to refer their dispute to private arbitration.  The existing grounds for refusal to enforce – for example, where the arbitration agreement was not valid, or on the basis of public policy – provided appropriate protection to the integrity of courts in performing their recognition and enforcement roles.[17]

The existence of the autonomous agreement of the parties also disposed of TCL’s contentions that an arbitral tribunal could be impermissibly exercising judicial power. The High Court has long defined “judicial power” as having as a key characteristic the capacity to be exercised coercively, or independently of the consent of the relevant parties, and as resulting in an outcome (an order, or a judgment) which is binding without more.[18]  In both judgments, the Court contrasted this with the nature of private power exercised by arbitrators, which has as its fundamental premise the consent and agreement of the parties,[19] and which is dependent upon the assistance of the courts for its force and binding effect.[20]

Relevance to the United States

The decision should be of interest to lawyers in the United States.  The judicial power provisions of the Australian Constitution were modelled upon those contained in the United States’ Constitution.[21] While all of the relevant provisions are not identical in terms, they both enshrine, in very similar language, the key concept that judicial power is vested in courts established by the Constitution and/or the legislature.[22] Yet despite constitutional challenges to the Model Law in Australia, and also in Canada,[23] as well as to domestic arbitration legislation at state level in Australia,[24] and in some lower courts in the United States,[25] the United States Supreme Court has never had reason to consider in detail whether the Federal Arbitration Act[26] (FAA) is consistent with Article III of the United States Constitution.[27]

However, that has not prevented the issue being the subject of scholarly debate, which has proffered, generally speaking, two theories to justify the FAA’s constitutionality, at least with respect to international commercial arbitration.[28]  The first, chiefly espoused by Peter Rutledge, is that the FAA’s limited grounds for enforcement do not present a judicial integrity problem because courts have developed the ‘manifest disregard’ regime to permit themselves a quick check of the merits of the arbitrators’ decision at a very fundamental level, which, in Rutledge’s view, “rescues the FAA from constitutional infirmity”.[29] Leaving aside the questionable current status of the ‘manifest disregard’ doctrine, including whether it applies at all to international as distinct from domestic arbitration, Rutledge would find little comfort in the TCL case, which not only finds the Model Law constitutional in the absence of a limited merits review, but dismisses the historical existence of (the admittedly broader) review for error of law within English and Australian common law as “obscure in origin[30] and “a matter for regret.”[31]

The second theory, which has been considered in detail most recently by Roger Perlstadt,[32] is also partly in conflict with the TCL Case.  This is because Perlstadt argues that the FAA potentially infringes Article III of the United States Constitution, because the disputes submitted to arbitration do require the exercise of judicial power (deciding the law and applying it to the facts as determined) in order to be resolved.[33] However, as the unconstitutionality in Perlstadt’s view lies in the non-availability to parties of the elevated levels of impartiality and independence of Article III judges (underpinned by the tenure and salary protections of the Constitution), the fact that parties of their own volition choose to waive these elevated decision-makers in favour of a less constitutionally safeguarded arbitral tribunal, is sufficient to cure the FAA’s potential inconsistency with Article III.[34]

For Perlstadt, the real debate is about the standard of the consent required to waive Article III protections: whether it should be assessed by an objective manifestation of intent consistently with contract law, or whether consent needs instead to be subjectively tested – the disputants knew and understood what they were waiving.[35]  Perlstadt’s concerns about consent lie in part with consumer arbitrations, but he also queries whether sufficient consent is given by non-signatories to arbitration agreements who may be required to arbitrate,[36] or by potentially defrauded parties who, pursuant to the separability doctrine endorsed in the United States in Prima Paint Corp v Flood & Conklin Manufacturing Co,[37] may be required to arbitrate the question of the validity of their arbitration agreement.[38]

Emphasising the fundamentally coercive nature of judicial power, the Australian High Court found, by contrast to Perlstadt, that arbitrators do not exercise judicial power. However, the court was similarly reassured that the consensual removal of the issues in dispute by the parties from the purview of courts meant that the Australian Constitution was not infringed. It is not obvious how readily the High Court’s reasoning could be applied to the domestic arbitration,[39] non-signatory and fraud scenarios identified by Perlstadt as perhaps involving ‘compromised’ consent or agreement. Assuming that at some stage an unsuccessful but enterprising arbitrating party has the opportunity and fortitude to assert FAA unconstitutionality arguments at the United States Supreme Court level, it remains to be seen how these competing explanations of judicial power and consent will be analysed.

Beverley Newbold

The author is a Class of 2014 LL.M. student in the International Litigation, Arbitration and Business Regulation program at New York University, having obtained her Bachelor of Laws degree from the University of Adelaide, Australia. She is presently on leave from her position as Partner, Dispute Resolution in the Sydney office of the Australian-based international law firm, Minter Ellison, and she has also previously worked as an associate and senior associate in the London litigation and arbitration department of Freshfields Bruckhaus Deringer.



[1] TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5, ¶ 61.

[2] Id. at ¶ 42.

[3] Id. ¶ 62.

[4] Id.

[5] Castel Electronics Pty Limited v TCL Air Conditioner (Zhongshan) Co Ltd [2012] FCA 21 (the enforcement proceeding); Castel Electronics Pty Limited v TCL Air Conditioner (Zhongshan) Co Ltd [2012] FCA 1214 (the application to set aside the awards).

[6] Section 16(1) of the IA Act provides that: “…the Model Law has the force of law in Australia”.

[7] TCL Case, ¶ 4.

[8] Section 71 of Australia’s Constitution states, relevantly: “The judicial power of the Commonwealth shall be vested in a Federal Supreme Court, to be called the High Court of Australia, and in such other federal courts as Parliament creates, and in such other courts as it invests with federal jurisdiction.” Section 72 addresses judges’ appointment, tenure and remuneration, and sections 73, and 75 to 77 prescribe the original and appellate jurisdiction of the High Court.

[9] TCL Case, ¶ 4.

[10] Id.

[11] Id. at ¶ 8.

[12] Id. at ¶ 12.

[13] Id. at ¶ 34. See also ¶ 75-78 per Justices Hayne, Crennan, Kiefel and Bell.

[14] Id. at ¶ 13, citing paragraph 39 of an explanatory note by the UNCITRAL Secretariat relating to the 2006 amendments to the Model Law.

[15] Id. at ¶15. Or, as Justices Hayne, Crennan, Kiefel and Bell put it, in their judgment, that argument should be rejected as it depended “on treating the language of part of Art 28(1) as forming part of the agreement between the parties; whilst simultaneously treating the provisions of the Model Law regulating the recognition and enforcement of awards as not forming part of that agreement”, at ¶ 73.  They rejected the alternative argument advanced by TCL, that an implied term should be found in the arbitration agreement that arbitrators only have authority to render legally correct awards, on the basis that it failed to meet the Australian test for implication of terms; namely that such a term must be necessary to give business efficacy to an agreement, and be so obvious that it went without saying, at ¶ 74.

[16] Id. at ¶ 105.

[17] Id. at ¶103.

[18] Id. at ¶ 27-28 per Chief Justice French and Justice Gageler; and ¶ 108 per Justices Hayne, Crennan, Kiefel and Bell.

[19] Id. at ¶ 29-31 per Chief Justice French and Justice Gageler; and ¶ 107-108 per Justices Hayne, Crennan, Kiefel and Bell. For a similar analysis, see also the decision of the Supreme Court of New South Wales in Ashjal Pty Ltd v Alfred Toepfer International (Australia) Pty Limited [2012] NSWSC 1306, in which the plaintiff challenged the enactment of the enforcement provisions the Commercial Arbitration Act 2010 (NSW) in light of the separation of powers provisions of the New South Wales’ state constitution.

[20] Id. at ¶ 105.

[21] For a detailed discussion of the influence of Article III of the United States Constitution on the framers of the judicial power provisions of the Australian Constitution, see William G Buss, Andrew Inglis Clark’s Draft Constitution, Chapter III of the Australian Constitution and the Assist from Article III of the Constitution of the United States, 33 Melb. Uni. L. Rev 178 (2009).

[22] Article III(1) of the United States Constitution begins: “The judicial power of the United States shall be vested in one supreme Court, and in such inferior courts as the Congress may from time to time ordain and establish.” Compare the very similar text of section 71 of Chapter III of the Australian Constitution, in footnote 8 above. Both Constitutions thereafter contain safeguards for the tenure and remuneration of judges of federal courts.

[23] Quintette Coal Ltd v Nippon Steel Corp 1988 CanLII 2923 (BC SC).

[24] See footnote 19.

[25] Although principally in a domestic arbitration context, see Belom v National Futures Association 284 F.3d 795 (7th Cir. 2002); and McCarthy v. Azure 22 F.3d 351, 1994  (1st Cir. N.H. 1994).

[26] 9 U.S.C. §§ 1-14 (2006).

[27] Roger Perlstadt notes the 1932 decision of the Supreme Court in Marine Transit Corp v Dreyfus 284 U.S. 263 (1932) which upheld enforcement of an arbitration agreement in the face of an Article III challenge, but with little reasoned explanation. See Roger Perlstadt, Article III and the Federal Arbitration Act, 62 Am. Uni. L. Rev. 200 at 207.

[28] Domestic consumer arbitration is apparently less likely to be consistent with Article III; see Jean Sternlight, Rethinking the Constitutionality of the Supreme Court’s Preference for Binding Arbitration: A Fresh Assessment of Jury Trial, Separation of Powers and Due Process Concerns, 72 Tul. L. Rev. 1 (contending that the element of ‘choice’ arguably lacking in many standard form consumer arbitration agreements renders the enforcement of those agreements a violation of Art III); while investment arbitration allegedly presents its own difficulties: see Peter Rutledge, Arbitration and the Constitution, 51-53 (Cambridge University Press, 2013).

[29] Id. at 46.

[30] TCL Case, at ¶ 38.

[31] Id. at ¶ 90.

[32] Perlstadt, supra note 27.

[33] Id. at 223-227.

[34] Id. generally but see in particular 241–253.

[35] Id. at 247-252.

[36] Id. at 251-252.

[37] 388 U.S. 395 (1967).

[38] Perlstadt, supra note 27, at 218-219 and 252.

[39] Domestic arbitration in Australia is governed by state legislation, which, for nearly all states and territories, is based upon the Model Law.

Arbitrator’s Impartiality and Independence in ICSID: Blue Bank International & Trust (Barbados) Ltd v. Bolivarian Republic of Venezuela Revisited

A. Introduction

In a recent decision delivered on November 12, 2013, the Chairman of the Administrative Council of International Centre for Settlement of Investment Disputes (ICSID), disqualified the Claimant’s appointed arbitrator, Mr Jose Maria Alonso, a Spanish national from serving as arbitrator in the bilateral investment treaty arbitration commenced by Blue Bank International & Trust (Barbados) Ltd (“Blue Bank”) against the Bolivarian Republic of Venezuela (‘Venezuela’)[1] on the grounds that his law firm elsewhere is acting against Venezuela in a different arbitration.

This paper first gives an overview of the facts and the decision of the Chairman of the Administrative Council of ICSID. In the second part, an evaluation of the standards for the disqualification of an arbitrator particularly in relation to the independence and impartiality of the arbitrator is carried out through the comparison of the standard under ICSID jurisprudence with those found in the UNCITRAL Model Law and Arbitration Rules[2] and in the International Bar Association (“IBA”) Guidelines on Conflict of Interest in International Arbitration (“IBA Guidelines”). The paper concludes with an analysis of the Chairman’s decision and the recommendation of a possible solution to the lingering problem of bias challenge in ICSID proceedings.

B. Summary of Facts and Decision of the Chairman

Blue Bank had on June 25, 2012 commenced ICSID arbitration against Venezuela for alleged breach of the 1994 Agreement between the Government of Barbados and the Government of the Republic of Venezuela for the Promotion and Protection of Investments, in force since 1995. By a letter dated October 8, 2012, Blue Bank appointed Mr Jose Maria Alonso a national of Spain as arbitrator. The appointment was accepted by Mr. Alonso who submitted and circulated his declaration, statement and curriculum vitae pursuant to the Rule 6 (2) of the ICSID Arbitration Rules.

In his statement, Mr. Alonso indicated that “[H]e is a Partner at Baker & Mckenzie Madrid, SLP in charge of the Dispute Resolution department in Madrid (Spain). That Baker & Mckenzie SLP is a firm belonging to Baker & Mckenzie International (Swiss Verein) and that all the firms that form part of Baker & Mckenzie International are independent and that remuneration of Partners depends mainly on the turnover of each particular firm. He further asserted that neither himself nor Baker & Mckenzie Madrid SLP has or had any relationship with the parties in the proceedings.” However, he acknowledged being aware of ICSID arbitration against Republic of Venezuela in an unrelated matter initiated by Baker & Mckenzie New York and Baker & Mckenzie Caracas in 2011, in which both offices were representing a company called Longreef Investment. He further maintained that given the independent structure of  Baker & Mckenzie International, he would not be provided with any information, intervene or take part in said proceedings and that he considered himself completely independent and impartial as an arbitrator in the Blue Bank proceedings.

On its part, Venezuela appointed Dr. Santiago Torres Bernardez as arbitrator. He also submitted his declaration, statement and curriculum vitae and these were circulated to the parties on November 16, 2012.[3] Meanwhile, Venezuela had on November 5, 2012 submitted a proposal for the disqualification of Mr. Alonso based on his position at Baker & Mckenzie. It contended that there were justifiable doubts as to whether Mr. Alonso, who coordinates the global arbitration practice of a firm, could sign an award rejecting argument that are being defended by other partners of the same firm against the same respondent in another case.

The chairman in his decision stated that he was bound by the standard set forth in the ICSID Convention and that his decision was made in accordance with Articles 57 and 58 of the ICSID Convention.[4] He also pointed out that the applicable standard is an “objective standard based on a reasonable evaluation of the evidence by a third party” and that consequentially the subjective belief of the party requesting the disqualification is not enough to satisfy the requirement of the Convention.[5] He also acknowledged that, in regards to the meaning of the word “manifest” in Article 57 of the Convention, a number of decisions had concluded it means “evident” or “obvious” and it relates to the ease with which the alleged lack of the qualities can be perceived.[6]

Further, the Chairman noted certain undisputed facts: (i) Mr. Alonso is a Partner in Baker & Mackenzie Madrid; (ii) his firm’s New York and Caracas offices represented the claimant in a parallel arbitration proceeding against Venezuela (Longreef v. Venezuela); (iii) Mr. Alonso has no direct involvement in the parallel Longreef v. Venezuela case; and (iv) That Mr. Alonso is a member of Baker & Mckenzie’s International Arbitration Steering Committee.  The Chairman further noted that the sharing of a corporate name and the existence of an international steering committee at the global level implied a degree of connection or overall coordination between the different firms comprising Baker & Mckenzie International[7].

Without detailed explanation, the chairman held that given similarity of issues likely to be discussed in Longreef v. Venezuela and the Blue Bank case and the fact that both cases were ongoing, it was “highly probable” that Mr. Alonso would be in a position to decide issues that were relevant in Longreef v. Venezuela if he remained an arbitrator in the case.  He concluded that in view of the facts of the case, it had been demonstrated that a third party would find an evident or obvious appearance of lack of impartiality upon a reasonable evaluation of the facts in this case.[8]

C. Comparison of ICSID Standard with UNCITRAL and IBA Guidelines Standards     

The ICSID Convention and Rules Standard

An evaluation of the standard for disqualification of an arbitrator under ICSID will first require the consideration of the criteria for appointment given that a challenge proceeding will only be commenced when a party feels that the arbitrator has not met the criteria or has fallen short of the criteria required of him. In the light of the above assertion, certain provisions of the ICSID Convention and Rules will be examined.

Article 14 (1) of the ICSID Convention provides that “Persons designated to serve on the Panels shall be persons of high moral character and recognized competence in the fields of law, commerce, industry or finance, who may be  relied upon to exercise independent judgment.” (Emphasis added).

ICSID Rule 6 (2) requires the arbitrator to sign a declaration of independence and also provide a written statement of (a) his past and present professional, business and other relationships (if any) with parties and (b) any other circumstance which might cause the arbitrator’s reliability for independent judgment to be questioned by a party.  It should be noted, that the obligation to disclose to the Secretary-General of ICSID is a continuing one which lasts throughout the arbitration proceedings.[9]

On the issue of disqualification, Article 57 of the ICSID Convention provides that “a party may propose to a commission or tribunal the disqualification of any of its members on account of any fact indicating a manifest lack of the qualities required by paragraph (1) of Article 14. A party to arbitration proceedings may, in addition, propose the disqualification of an arbitrator on the ground that he was ineligible for appointment to the Tribunal.’ (Emphasis added).

Article 58 of ICSID Convention further provides that the decision to disqualify an arbitrator shall be taken by the other members of the tribunal, however where the disqualification proposal involves a sole arbitrator or a majority of them, or where the co-arbitrator cannot agree, the Chairman of  ICSID Administrative Council should decide.[10]

The UNCITRAL Model Law and Rules Standard

Article 12 of the Model Law provides that “An arbitrator may be challenged only if circumstance exist that give rise to justifiable doubts as to his impartiality or independence.”

Under the UNCITRAL Rules,[11] Articles 11-13 deal with the disclosure obligation and challenge of an arbitrator. Article 11 requires the arbitrator when approached for a possible appointment to disclose any circumstance likely to give rise to justifiable doubts as to his or her impartiality or independence. The obligation to disclose to the parties and the other arbitrators is a continuing one which is to last throughout the arbitration proceeding. (Emphasis added).

Article 12, inter alia, provides that “an arbitrator may be challenged, if circumstance exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence.” Further, Article 12(3) provides that an arbitrator that fails to act, or in the event of the de jure or de facto impossibility of performing his or her function, the procedure in respect to the challenge of an arbitrator contained in Article 13 shall apply.

Article 13 provides for the time line within which a notice of challenge to the appointment of an arbitrator is to be made. It further provides that when this notice is made, all the parties may agree to the challenge and consequentially the arbitrator may withdraw from his or her office. It is however provided that this is not to imply acceptance of the validity of the grounds of challenge.

The IBA Guidelines Standard

Under the general standard regarding impartiality, independence and disclosure, the IBA General Principle stipulates that “every arbitrator shall be impartial and independent of the parties at the time of accepting an appointment to serve and shall remain so during the entire arbitration proceeding until a final award has been rendered or the proceeding has otherwise finally terminated.”

The General Standard 2(a) provides that, “an arbitrator shall decline to accept an appointment or, if the arbitration ha[s] already commenced, refuse to continue to act as an arbitrator if he or she has any doubts as to his or her ability to be impartial or independent.”

General Standard 2(b) stipulates that “the same principle applies if facts or circumstance exist, or have arisen since the appointment, that from a reasonable third person[’s] point of view having knowledge of the relevant facts, give rise to justifiable doubts as to the arbitrator’s impartiality or independence, unless the parties have accepted the arbitrator in accordance with the requirement set out in General Standard (4). (Emphasis added).

General Standard 2(c) explains that doubts are justifiable if a reasonable and informed third party would reach the conclusion that there was a likelihood that the arbitrator may be influenced by factors other than the merit of the case as presented by the parties in reaching his or her decision.

Further General Standard 2(d) clarifies that justifiable doubts necessarily exist as to the arbitrator’s impartiality or independence if there is an identity between a party and the arbitrator; if the arbitrator is a legal representative of a legal entity that is a party in the arbitration, or if the arbitrator has a significant financial or personal interest in the matter at stake.

In addition to the above standards, the IBA guidelines provide for practical application of the general standards under four categories. The Red List which consist of “a non-waivable Red List” that contains situations in which justifiable doubts are in fact present and which should serve as a basis for the disqualification of the arbitrator. It also consist of “a waivable Red List” which contains situations in which justifiable doubts are present and which would lead to the disqualification of the arbitrator,  nevertheless the parties can waive the conflict and still allow the arbitrator to continue. The Orange list contains situation that may or may not justify a disqualification of the arbitrator. The test is usually based on a reasonable person’s point of view who when presented with the fact determines whether there are justifiable doubts as to the arbitrator’s impartiality or independence. The Green List contains those situations that will ordinarily not raise justifiable doubts and in such situations, the arbitrator should not be disqualified.

One cannot help but agree with Sam Luttrell when he posited that the inter-operation of Article 14(1) and 57 produces a rule that an ICSID arbitrator may only be challenged for bias where he or she manifestly lacks the capacity to exercise independent judgment.[12] In Amco v. Indonesia the co-arbitrators in interpreting the ICSID Convention and Rules set the following standard: “[A]rticle 57 requires that fact be alleged-necessarily, that they be proven by the party who files the proposal to disqualify – which indicate the lack of said quality: that means that as apparently conceded by the Respondent, the mere feeling of ‘non-reliability’ does not suffice, since it has to be based on facts; that those facts should indicate a manifest lack of the required quality. Now considering the high interesting semantic remarks presented by the Claimant, the undersigned note that in Random House Dictionary, there are four several synonymous words of ‘manifest’, three of them being ‘evident’, ‘obvious’, ‘plain’. That means that the facts referred to in Article 57 have to indicate not a possible lack of the quality, but a quasi-certain, or as to go far as possible, a highly probable one”[13].

The preponderance of the decisions in ICSID cases and opinions of learned authors clearly suggest that the requirement of a “manifest” lack of the prescribed qualities is arguably a higher threshold than “justifiable doubts” for the successful challenge of an arbitrator.[14] However the higher threshold standard has not been accepted as a settled position.  It was criticized and rejected by the non-challenged members of the ad hoc Committee in the subsequent case of Vivendi v. Argentina I.[15] The non-challenged members acknowledged that the “manifest lack” language could be interpreted as to set a more stringent standard for disqualification than an “appearance of bias” standard, but they explicitly rejected such an interpretation. Interestingly, they held that in a case where the facts were undisputed, the term “manifest” accorded to a reasonable doubt test: “[B]ut in cases where (as here) the facts are established and no further inference of impropriety is sought to be derived from them the question seems to us to be whether a real risk of impartiality based upon those facts (and not any mere speculation or inference) could reasonably be apprehended by either party. If (and only if) the answer is yes, can it be said that the arbitrator may not be relied on to exercise independent judgment? That is to say, the circumstance actually established (and not merely supposed or inferred) must negate or place in clear doubt the appearance of impartiality. If the facts would lead to the raising of some reasonable doubt as to the impartiality of the arbitrator or member, the appearance of security for the parties would disappear and a challenge by either party would have to be upheld.”

One would observe that the decision in the Vivendi case is a radical departure from the challenge decisions in other ICSID cases interpreting the standard for disqualification in ICSID. Not only did it reject the high threshold rule, it imported into ICSID proceedings the “appearance of bias or reasonable third party test.”  Same can also be said of the Urbaser case that applied the “reasonable third party test too. However, one would say that the decisions in the Vivendi and Urbaser cases are not shocking or surprising, given that the non-challenged members of the ad hoc committees resorted to the use of the IBA Guidelines as the benchmark for the determination of the meaning of “manifest lack” as contained in Article 14(1) of the ICSID Convention. Karel Daele justifies this approach by arguing that the “reasonable doubts or reasonable third party” standard lowers the threshold for making a successful challenge and correspondingly, heightens the protection of the parties against an unqualified arbitrator.[16]  

In the realm of international commercial arbitration, both the UNCITRAL Model Law and Rules and the IBA Guidelines recognise justifiable doubts as a basis for challenging an arbitrator.[17]. In fact in the Explanation to General Standard 2 of the IBA Guidelines, the Working Group admitted deriving the wording impartiality or independence from the broadly adopted Article 12 of the Model law, and the use of an appearance test based on “justifiable doubts” as to the impartiality or independence of the arbitrator as provided in Article 12(2) of the UNCITRAL Model Law to be applied objectively (a reasonable third person test). It is therefore apparently clear that the Model Law has had profound effect in this area. In the words of Sam Lutrell, the consistency of the Model Law, Article 12 with General Standard 2 of the IBA Guidelines has also contributed to the export of the Model Law standard into ICSID arbitration.[18]

The author is of the opinion that while the application of the UNCITRAL and IBA Standards in ICSID cases where parties have chosen the UNCITRAL Rules or the IBA Guidelines is justifiable; there is no justification for the application of these standards to cases that are conducted strictly under the ICSID Convention and Rules. A literal reading of the relevant provisions of the various Rules under consideration in this paper shows that while the reasonable person test can be applied in commercial arbitrations or in UNCITRAL arbitrations, on the basis of the standard contained in the Model law or IBA Guidelines. Same cannot be said of  ICSID, where as pointed out earlier the preponderance of the cases have made it clear that under the ‘manifest lack of independence’ standard there need to be both a clear and actual demonstration of bias, not simply a doubt or legitimate concerns or a likelihood of bias or even appearance of bias. This approach has been recognised and followed by ICSID tribunals in previous cases. For instance, in the Perenco v. Ecuador case, the parties agreed that any challenge to the arbitrators would be resolved by the Secretary-General of the Permanent Court of Arbitration (PCA) in accordance with the IBA Guidelines. The Secretary-General in upholding the challenge to Judge Brower filed by Ecuador applied the General Standard 1 and General Standard 2 of the IBA Guidelines. But in the Suez v. Argentina, a case conducted under the ICSID Convention and Rules, the Tribunal in complying with the ICSID standard held that an objective standard was required by the Convention. In its words it posited that: “Implicit in Article 57 and its requirement for a challenger to allege a fact indicating a manifest lack of the qualities required of an arbitrator by Article 14, is the requirement that such lack be proven by objective evidence and that mere belief by the challenger of the contested arbitrator’s lack of independence or impartiality is not sufficient to disqualify the contested arbitrator.”

D. Analysis of the Decision

The ruling in Blue Bank v. Venezuela adds to the increasing number of cases that illustrate the current trend that is observed internationally towards the increase of challenges against arbitrators. This decision of the Chairman in this case is significant for a number of reasons. First, it is the second successful disqualification of an arbitrator in the history of ICSID. Also it is the first in which the decision was taken by ICSID itself.[19] Further, the decision has once again brought to the fore the questions as to what are the exact standards for the disqualification of an arbitrator in ICSID arbitration conducted under the ICSID Convention and Rules.

In the case at hand, the main contention by Venezuela is hinged on alleged direct and indirect economic interests that Mr. Alonso had in the outcome of the two cases against it, given that a favourable result in the other case in addition to a vote favorable to the Blue Bank in this case would contribute to the expansion of the practice of Baker & Mckenzie in the investment arbitration community. It was further noted that Mr. Alonso would be deciding issues similar or identical to those which Baker & Mckenzie would be arguing against Venezuela in other case.

The Chairman in his ruling stated what he considered to be the applicable standard under the ICSID jurisprudence. However in his application of the rule to the facts of the case, he concluded that given the similarity of issues likely to be discussed in the Blue Bank and Longreef cases and the fact that both cases are ongoing, it is highly probable that Mr. Alonso would be in a position to decide issues that are relevant in Longreef v. Venezuela if he remained an arbitrator in the Blue Bank case and that it has been demonstrated that a third party would find an evident or obvious appearance of lack of impartiality. One interesting element of the decision that raises concern is the fact the Chairman did not disclose the similar issues that have given rise to the high probability of Mr. Alonso being biased. It is submitted that by his conclusion, the Chairman missed the point and reached the wrong conclusion by his application of the “obvious appearance or reasonable third party test as first enunciated in the Vivendi case. He clearly lowered the standard to reach a conclusion which will be satisfactory to the challenging party-Venezuela.[20]  Further, one speculates that the decision of the Chairman was borne out of a desperate attempt to dispel the growing apathetic feeling of parties to ICSID to the outcome of challenge proceedings under ICSID.[21]

E. Conclusion

At a point where stakeholders in ICSID arbitration are in desperate need for a solution to the ever increasing bias challenge, which has been described as becoming more dynamic and abstract, as the ‘scorched earth game’ of  international arbitration and litigation against states becomes more ‘vulgar’ and profitable.[22] The decision of the Chairman of the Administrative Council of the ICSID in the Blue Bank v. Venezuela has neither resolved the controversy nor ameliorated it. Rather, it contributed to the already complicated picture of bias challenge in ICSID.

In the author’s opinion, the time is ripe for the controversy to be put to rest. This can be achieved by amending of the ICSID Convention and Rules to bring them in consonance with the standards contained in the IBA Guidelines and the UNCITRAL Rules. This can be achieved by adopting the recommendation of the ICSID Secretariat that the disclosure requirements in Rule 6(2) be changed to reflect the “justifiable or reasonable doubts” test.[23] The author also agrees with Audley Sheppard’s[24] suggestion that a challenge proposal should be decided by an independent ad hoc committee[25] given the concern by challenging parties as to whether the remaining arbitrators will have a conflict of interest themselves when determining a challenge, in that they may have been or might expect to be challenged themselves one day and may have a subliminal desire to set the standard at a high threshold.

However, until the above proposals are implemented, it is important that calm is restored to the already troubled waters of bias challenge in ICSID arbitration by a strict adherence to high threshold of ‘manifest lack of independence’ as contained in the black letters of the ICSID Convention and rules. On the basis of the foregoing, the conclusion reached by the Chairman in the Blue Bank case is wrong and should be rejected.

Ikemefuna Stephen Nwoye

The author is an LL.M. student in the International Business Regulation, Litigation and Arbitration program at New York University School of Law, Class of 2014. He is studying as a Dean Graduate Scholar. He is also a Graduate Editor at the NYU Journal of Law and Business. Prior to the commencement of the LL.M program, he worked as an Associate in the Arbitration and Litigation Department of Nigeria’s foremost Commercial law firm Aluko & Oyebode.



[1] See The Decision on the Parties Proposal to Disqualify a Majority of the Tribunal – Blue Bank International & Trust (Barbados) Ltd v. Bolivarian Republic of Venezuela. http://www.iareporter.com/downloads/20131118_1 .

[2] The choice of the UNCITRAL Model Law for this paper is based on the pivotal role it plays not just in international commercial arbitrations, but also in international investment arbitrations and its wide acceptance in ad hoc arbitrations. Over fifty countries have modelled their national arbitration laws after the UNCITRAL Model Law.

[3] It should be noted that in this case, challenge proposals were filed by both the Claimant and Respondent. It was this development that triggered Article 59 of the ICSID Convention and Rule 9 of the Arbitration Rules which required the Chairman to decide the challenge proposal.  However due to the resignation of the Respondent appointed arbitrator Dr. Santiago Torres, the Chairman did not deliver a decision on his challenge proposal which was premised on repeat appointments by the Argentine Republic and Venezuela and on his alleged systematic findings in favour of States. Therefore the paper focuses on the decision as it related to Mr. Jose Maria Alonso.

[4] Id. at para. 62.

[5] Id. at para. 60.

[6] Id. at para. 61.

[7] Id. at paras. 66 and 67.

[8] Id. at paras. 68 and 69.

[9] The continuing obligation to disclose circumstance which might cause the arbitrators reliability to be questioned by a party was incorporated by the 2006 amendment to the ICSID Arbitration rules which came into effect on April 1, 2006.

[10] In a case where the neutrality of ICSID may be questioned, the ICSID has a practice of referring such challenge proposal to the Secretary-General of the Permanent Court of Arbitration (PCA) at The Hague. For instance see the 2003 challenge proposal of the arbitrator in Generation Ukraine v. Ukraine.

[11] As revised in 2010

[12] See Sam Luttrell,  Bias Challenges in Investor-State Arbitration: Lessons from International Commercial Arbitration p. 458 in Evolution in Investment Treaty Law and Arbitration Edited by Chester Brown, Kate Miles http://dx.doi.org/10.1017/CBO9781139043809.027 .

[13] See also Suez v. Argentina; CDC v. Seychelles Decision of June 29, 2005

[14] See Lucy Reed, Jan Paulsson and Nigel Blackaby, Guide to ICSID Arbitration.81 (The Hague: Kluwer, 2011); also see Sam Luttrell, supra note 13, at p. 458.

[15] See also Urbaser v. Argentina, where it was held that an appearance of such bias from a reasonable and informed third person’s point of view is sufficient to justify doubts about an arbitrator’s independence or impartiality. See also Karel Daele, Challenge and Disqualification of Arbitrators in International Arbitration 221 (Wolters Kluwer 2012).

[16] Id. at p. 225.

[17] See also the disqualification provision of national arbitration laws and also those of the arbitral institutions. For instance Sections 1(a), 24(1)(a) and 33(1)(a) of the UK Arbitration Act 1996;  Article 1033 of the Dutch Arbitration Act 1986 and Article 180 (1)(c) of the Swiss Private International Law Act. Under Institutional Arbitral Rules, see Article 6(4) of the Permanent Court of Arbitration Rules; also Article 10.2 and 10.3 of the London Court of International Arbitration Rules 1998 and Article 13 and 14 of the International Chamber of Commerce Rules of Arbitration 2012.

[18] See Sam Lutrell, supra note 13, at p.448,

[19] See Luke Eric Peterson, ICSID removes Arbitrator in Blue Bank v. Venezuela Case due to his Law Firm elsewhere acting against Venezuela  www.iareporter.com/articles/20131118_4

[20] Contrast with the decision of Messrs Fernandez-Armesto and  Jurgen Voss in the Lemire v. Ukraine case, where in rejecting the challenge of Lemire’s appointed arbitrator Jan Paulsson by Ukraine on the basis of a disclosure that his firm, Freshfields Bruckhaus Deringer had taken in instruction to represent the Ukraine in an ICSID arbitration, they held that no manifest lack of the qualities required of an ICSID arbitrator had been demonstrated.

[21]  It will be recalled that in early May 2007, Bolivia announced that it withdrew its ascension to the ICSID Convention, this was believed to be a fallout of the resurgent Calvo-ist sentiment in late April 2007 echoed by the Bolivarian Alliance for Americas (ALBA) comprising of Bolivia, Nicaragua and Venezuela which condemned the pressure exercised by some multinational companies operating in their countries. See Antonio R.Parra, The History of ICSID, 236 (Oxford University Press 2012)

[22] See Sam Luttrell supra note 13, at p.482.

[23] See ICSID Secretariat Discussion Paper, ‘Possible Improvements of the Framework for ICSID Arbitration (22 October 2004).

[24] See Auddley Sheppard, Arbitrator Independence in ICSID Arbitration in International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer http://www.oxfordscholarship.com/view/10.1093/acprof:oso/9780199571345.001.0001/acprof-9780199571345-chapter-10  .

[25] It should be noted that it is only ICSID that requires the non-challenged arbitrators to determine a challenge proposal. See Article 58 of the ICSID Convention.

Sovereign Immunity in Enforcement Proceedings – The decision of the German Supreme Court in Walter Bau vs. Government of Thailand

According to a study by the School of International Arbitration of the Queen Mary College, University of London[1] over 90 % of the awards are complied with voluntarily. In recent years arbitral awards rendered against states or state parties have often resulted in multijurisdictional battles at the post award stage when the private party tried to enforce the award against the recalcitrant state party or execute into the property of the state party. The various decisions rendered by German and Swedish courts in the dispute between Mr. Sedelmayer and Russia[2] or by French and English Courts in the dispute between Dallah and Pakistan[3] are just two very prominent examples. They are a useful reminder that winning the arbitration may just be a start for a long lasting battle in the state courts.

The success of such battles often depends on the attitude taken by the relevant state courts to sovereign immunity and possible waivers thereof. That is one of the lessons the insolvency administrator of Walter Bau AG, a German construction company, had to learn recently when he tried to enforce an award rendered against Thailand. Notwithstanding certain particularities of the case, which are of no relevance for the present comment, the dispute itself is typical for this type of arbitrations resulting from investments by private investors which are frustrated by actions taken by the host state.

The dispute arose out of a contract for the construction and operation of a toll road to the central airport of Bangkok which the predecessor of Walter Bau AG[4] concluded with the government of Thailand. The contract had been concluded though Walter Bau had never obtained the formally required “Certificate of Admission” from Thailand’s Ministry of Foreign Affairs. Equally the missing Certificate of Admission did not prevent Thai Board of Investment issued to issue several Certificates of Investment for the construction of the toll road. The operation of the toll road did not yield the anticipated revenues as Thailand refused to increase the toll to the level requested by the project company and allowed for the construction of alternative toll-free roads to the airport.

As a consequence, in 2005 Walter Bau started arbitration proceedings in Geneva against Thailand. It alleged that Thailand had through its actions breached the investment contract existing between the parties. The arbitration proceedings were based on Articles 8 and 10 of the German-Thailand BIT of 2002. The latter provided that also “approved investments” made before the BIT’s entry into force could benefit from the protection granted, in particular from Thailand’s offer to arbitrate any disputes arising from such investments. Thailand challenged the jurisdiction of the arbitral tribunal alleging that the underlying investment was not an approved investment in the sense of the Art. 8 BIT, as Walter Bau had never obtained the required Certificate of Admission. In a first award rendered in 2007 the arbitral tribunal rejected that challenge and decided that it had jurisdiction. Thailand did not challenge that award on jurisdiction in Switzerland but continued to participate in the arbitration. In its final award in 2009 the arbitral tribunal found Thailand liable to have breached the investment contract and ordered it to pay around 30 million Euros.

As Thailand did not voluntarily comply with the award Walter Bau initiated enforcement actions in the US and Germany. In both actions, which were supplemented by unsuccessful setting aside proceedings in Switzerland, [5] Thailand alleged that the arbitral tribunal lacked jurisdiction to decide the case and invoked inter alia[6] its sovereign immunity. At first instance, the District Court for the Southern District of New York as well as the Kammergericht Berlin (KG Berlin),[7] both rejected Thailand’s objections and declared the award enforceable. Thailand appealed in both cases complaining inter alia that the courts should have investigated in detail the existence of jurisdiction of the arbitral tribunal and its alleged waiver of immunity.

On 8 August 2012 the Court of Appeals for the Second Circuit upheld the decision of the District Court, criticizing the latter, however, for the general approach taken to Thailand’s objection to the tribunal’s jurisdiction.[8] According to the Court of Appeals the District Court should have investigated in detail whether there was “clear and unmistakable evidence that the parties agreed that the scope of the arbitration agreement would be decided by the arbitrators” before adopting a deferential approach to the arbitral tribunal’s decision on its own jurisdiction. On the basis of the evidence before it the Court concluded that such evidence existed and did not investigate the findings of the arbitral tribunal any further. That decision raises interesting questions as to the scope of Kompetenz-Kompetenz at the enforcement stage which would justify a separate article. The focus of this contribution, however, will be the decision of the German Supreme Court (Bundesgerichtshof)[9] in the matter rendered on 30 January 2013.[10]

The decision is of particular interest because it addresses a number of questions relating to sovereign immunity in proceedings to have foreign awards declared enforceable. The Supreme Court made clear that according to the German understandings the proceedings for the recognition and enforcement of foreign awards under the New York Convention (NYC)[11] are not yet part of the execution proceedings. They are still part of the adjudication proceedings albeit “adjudication proceedings sui generis”. In light of this classification the Supreme Court held that the sovereign immunity defense raised by Thailand would be determined on the basis of the rules on immunity from jurisdiction relevant for adjudication proceedings and not those on immunity from execution which apply in execution proceedings. As a consequence German courts could only assume jurisdiction to adjudicate over Thailand if the matter in dispute either concerned commercial activities of Thailand, the so called “acta iure gestiones” as opposed to “acta iure imperii”, or Thailand had waived its immunity. In its decision the Supreme Court could largely concentrate on the waiver exception. It was largely uncontested that the incriminated decisions by the Thai government concerned ”acta iure imperii” as they related to the country’s infrastructure.

In front of the KG Berlin Thailand had argued that in the case at hand the arbitration clause could not be considered to constitute a waiver of its sovereign immunity from adjudication as it did not cover the dispute between the parties. In its view the arbitration tribunal had misinterpreted the BIT by finding that the investment in the toll road constituted an “approved investment” in the sense of the BIT despite the lack of a Certificate of Admission. Pursuant to Thailand the KG Berlin was also not bound by the tribunal’s interim award on jurisdiction. Walter Bau still had to prove that a valid arbitration agreement existed between the parties concerning the investment in question.

The KG Berlin dealt with the sovereign immunity defense at the admissibility stage fairly superficially.[12] It merely stated that Thailand had waived its immunity by having agreed to arbitrate under the BIT without going at that stage into any details whether the arbitration provision in the BIT covered the investment in dispute. A more detailed enquiry into the scope of the arbitration agreement only occurred at the merit stage in the context of whether Thailand could invoke the defenses under Art. V(1)(a)(c) NYC. The KG Berlin held in essences that while Thailand could in principle invoke the lack of a valid arbitration agreement as a defense against the enforcement of the award it was in the case at hand precluded from doing so because it had not attacked the tribunal’s interim award on jurisdiction.

Interesting is the court’s reasoning in this respect. It held first that the NYC itself does not contain an obligation to make use of the remedies against awards at the place of arbitration and could therefore not constitute the basis for precluding the defenses under Art. V(1)(a)(c) NYC. Such a preclusion provision is, however, contained in Art. V(1)(2) first sentence of the European Convention on International Commercial Arbitration of April 21, 1961 (European Convention – ECICA)[13] to which Germany is a party. The court held the provision or at least the underlying idea to be applicable by virtue of Art. VII NYC which entitles a party to rely on more favorable provisions of a different enforcement regime. In the view of the KG Berlin Art. V ECICA constituted a part of the German enforcement regime and therefore prevented Thailand from relying on an alleged lack of the tribunal’s jurisdiction in the enforcement proceedings.

In deciding Thailand’s appeal against the decision the Supreme Court held in essence that in determining the admissibility of the enforcement action, i.e. whether Thailand is submitted to the jurisdiction of the German courts, the KG Berlin should have investigated in detail whether Thailand waived its immunity for the present dispute. That would have required an investigation by the KG Berlin whether the arbitration agreement contained in the BIT and forming the basis for the assumed waiver actually covered the investment or not. The Supreme Court held that in the context of the sovereign immunity defense reliance on preclusion arguments of the kind adopted by the KG Berlin is not possible. A waiver of sovereign immunity should not be assumed lightly but requires clear and unequivocal statements or behavior in this regard. As a consequence the Supreme Court set aside the decision by the KG Berlin and referred the case back to the court for an examination of whether the Thailand waived its immunity from jurisdiction.

Beyond its relevance for the particular dispute the decision of the Supreme Court contains a number of clarifications which may be relevant for the treatment of the waiver exception in future cases at least in Germany but potentially also in other countries.

The Supreme Court confirmed its jurisprudence concerning the general scope of the waiver of sovereign immunity contained in an arbitration agreement. On the one hand it is not limited to the arbitration proceedings as such but also extends to court proceedings in support of the arbitration at the adjudication stage. On the other hand the waiver contained in an ordinary arbitration agreement does not extend to execution proceedings for which an additional waiver would be necessary. In relation to the first statement, the Supreme Court was unfortunately not required to decide whether the waiver in general only extends to court proceedings at the place of arbitration or covers also court proceedings in a third country. In the Supreme Court’s view the BIT explicitly provided that in the present case the waiver contained in it also extended to enforcement proceedings in Germany. The court deduced that from a phrase in Art. 10(2) third sentence of the BIT according to which the “award will be enforced according to domestic law”. In the court’s view Thailand thereby submitted to all proceedings in Germany which are necessary for the enforcement of an award, i.e. in particular the proceedings for having foreign awards declared enforceable.

While such an interpretation is without doubts possible, it would have been preferable if the Supreme Court had used the opportunity to give a convincing ruling on the controversial question of whether the waiver of immunity contained in an arbitration agreement also covers enforcement proceedings in a third country. In the author’s view the answer can only be “yes”. Otherwise the waiver would be deprived of large parts of its effect in practice. As in the present case the place of arbitration is often chosen for its neutrality and the lack of any connection with either party. That has as a consequence that enforcement proceedings will necessarily be initiated in a different country. Thus, to be of any relevance in practice also the waiver should extend to such proceedings in a third country. Otherwise, a state party could easily circumvent its obligation, generally implied into the submission to arbitration, to comply with the award by invoking sovereign immunity in such enforcement proceedings.

Of greater relevance for the outcome of the case is the second determination of the Supreme Court in relation to the scope of the waiver. In principle it only states the obvious: the waiver of sovereign immunity only extends to those cases which are covered by the arbitration agreement. In so far it is surprising that the KG Berlin did not already at the admissibility stage really address the issue of the scope of the arbitration clause which was at the heart of Thailand’s defense. Instead it merely stated that the BIT contained an arbitration clause which could form the basis for a waiver without, however, determining whether the arbitration clause covered the dispute in question. It can only be assumed that the KG Berlin considered it sufficient to deal with the question at the merits stage when addressing the defenses under the New York Convention.

At first sight it does not appear to make a great difference at which stage of the enforcement proceedings the question is addressed: whether in the context of the admissibility of the action or in the context of its merits. Notwithstanding the different setting, the question as to whether the dispute is covered by a valid arbitration agreement involves as such largely the same analysis. In particular, it has to be determined first at both stages to which extent the state court is bound by the existing finding of the arbitral tribunal in this regard. However, the present case shows clearly that there may be different considerations involved at both stages in determining whether a party is precluded from raising the lack of a valid arbitration agreement.

Concerning the required standard of review both the KG Berlin and the Supreme Court came in principle to the same result. The enforcement court can in general review the findings of the arbitral tribunal as to its jurisdiction and is not bound by its factual or legal determinations. Germany was originally one of the countries which allowed for transferring to the arbitral tribunal not only the power to decide on its own jurisdiction in the first place but also the power to make that final determination of its jurisdiction, often referred to as absolute Kompetenz-Kompetenz. However, this jurisprudence has been abandoned with the adoption of the new arbitration law. As a consequence neither of the courts considered itself bound by the findings of the arbitral tribunal that the investment in question was an “approved investment” in the sense of the BIT. The Supreme Court considered in this respect a clause in the BIT to be irrelevant that the arbitral tribunal was to render a binding decision. In its view that clause only concerned disputes which were within the scope of the arbitration clause but not the question of whether the arbitral tribunal had jurisdiction.

In this respect the position of the German courts differs from that adopted by the American courts in the matter. In line with a dicta of the Supreme Court in First Options of Chicago vs. Kaplan[14] the Court of Appeals for the Second Circuit came to the conclusion that the parties could largely transfer the final decision as to the arbitral tribunal’s jurisdiction to the arbitral tribunal itself. The consequence of such a referral is that the enforcement court is largely prevented from reviewing any factual or legal determinations by the tribunal in regard to its jurisdiction, i.e. the arbitrability of the dispute in the American terminology. The Court of Appeals considered that the parties in the present dispute had “clearly and unmistakably” done so by agreeing in their terms of reference on an application of the UNCITRAL Arbitration Rules. The latter provide in Art. 20 that the arbitral tribunal has the power to “rule on objections that it has no jurisdiction”. Following earlier decisions, the Court of Appeals considered that to be a clear empowerment of the tribunal to have a final say on its own jurisdiction. Notwithstanding the fact that the American decisions are not the focus of this blog it is submitted that such a view is based on a misunderstanding of the purposes of Art. 20 UNCITRAL Arbitration Rules and the different concepts of Komptenz-Kompetenz.

Where the German Supreme Court disagreed with the KG Berlin was the issue of the effect of the tribunal’s award on jurisdiction which Thailand did not challenge in Switzerland. In the context of commercial arbitration between private parties German courts have regularly considered private parties to be precluded from raising the lack of a valid arbitration agreement as a defense against the enforcement of awards in cases where the tribunal had rendered  preliminary ruling on its jurisdiction which had not been attacked by that party within the time frame provided for such a remedy. The KG Berlin had transferred this jurisprudence to the sovereign immunity defense relying inter alia on a provision to this effect in the European Convention.

The Supreme Court rightly held that the European Convention as such could not be relied upon as Thailand is not a member to it. Furthermore, it held that the jurisprudence concerning the jurisdictional defense could not be applied in relation to the question of whether a state party waived its sovereign immunity. It confirmed its jurisdiction that such a waiver should only be assumed under narrow circumstances if the behavior of the state party clearly evidences a will to renounce it immunity. The court held that the mere non-use of remedies against an award on jurisdiction does not evidence such a will. Thus it referred the case back to the KG Berlin to determine whether the underlying investment was covered by the arbitration clause in the BIT.

Concerning the application of existing legal principles the decision of the Supreme Court is probably the most convincing of all the decisions rendered in the enforcement proceedings.[15] However, one would have hoped for a more pro-enforcement view concerning the preclusion argument. The German Supreme Court is correct in its analysis that the arbitration agreement can only be considered to constitute a waiver for those disputes which it covers. However, that says nothing about a possible preclusion of the sovereign immunity defense. If the arbitral tribunal, rightly or wrongly, determines in an award on jurisdiction that it has jurisdiction also state parties should be obliged to make use of the remedies existing at the place of arbitration against such an award, at least in cases where the issue is not the existence of an arbitration agreement as such but merely its scope. If the state party entitled to sovereign immunity decides not to do so but continues to participate in the arbitration and to defend on the merits it should be considered to be also precluded with its immunity defense in enforcement proceedings. To what extent these considerations will influence the decision by the KG Berlin on the scope of the arbitration clause in the BIT remains to be seen.

 Stefan Kröll, a former scholar-in-residence of the Center for Transnational Litigation and Commercial Law, is an independent arbitrator in Cologne and an honorary professor at Bucerius Law School. He is a visiting Reader at the School of International Arbitration at CCLS (Queen Mary, University of London) and a national correspondent for Germany to UNCITRAL for arbitration and international commercial law. He has published widely in the field of international commercial arbitration and commercial law, including inter alia the books “Comparative International Commercial Arbitration” (co-authored with Lew/Mistelis), and “Conflict of Law in Arbitration” (co-editor with Ferrari). Recently he has been retained by UNCITRAL as one of the three experts to prepare the Digest on the UNCITRAL Model Law on International Commercial Arbitration.

 


[1] 2008 International Arbitration Study “Corporate Attitudes and Practices: Recognition and Enforcement of Foreign Awards”, available at:  www.arbitrationonline.org/docs/IAstudy_2008.pdf.

[2] Final Arbitral Award Rendered in 1998 in an Ad Hoc Arbitration in Stockholm, Sweden, Observations by Walid Ben Hamida, by Stefan Kröll and Jörn Griebel, by Domenico di Pietro, Stockholm International Arbitration Review (SIAR) 2005-2 for the decisions in the setting aside proceedings in Sweden see SIAR 2005-2;  see further for some of the enforcement actions in Germany  Germany No. 72, Russian Federation v. Franz Sedelmayer (Germany), Oberlandesgericht [Court of Appeal], Frankfurt am Main, 26 W 101/02, 26 September 2002, XXX Yearbook Commercial Arbitration (2005) pp. 505 – 508; Germany No. 77, Franz Sedelmayer (Germany) v. State agency (Russian Federation), Oberlandesgericht [Court of Appeal], Cologne, 16 W 35/02, 6 October 2003, XXX Yearbook Commercial Arbitration (2005)  pp. 541 – 546Germany No. 91 / W1, Franz J. Sedelmayer (Germany) v. Russian Federation, Federal Republic of Germany, Bundesgerichtshof [Federal Supreme Court], 4 October 2005, XXXI Yearbook Commercial Arbitration (2006) pp. 698 – 706; Germany No. 92 / W2, Franz J. Sedelmayer (Germany) v. Russian Federation, Deutsche Lufthansa AG (Germany), Bundesgerichtshof [Federal Supreme Court], 4 October 2005, XXXI Yearbook Commercial Arbitration (2006)  pp. 707 – 717; case summary with observation on the two Supreme Court decisions by Hilmar Raeschke-Kessler, published in SIAR 2006:1, available at: www.sccinstitute.com/filearchive/2/21311/franz_sedelmayer_v_russian_federation.pdf; for enforcement and execution proceedings in Sweden see the decision by the Swedish Supreme Court of 1 July 2011 – Mål nr Ö 170-10.

[3] For England see the decision by the Supreme Court Dallah Real Estate and Tourism Holding Company v. The Ministry of Religious Affairs, Government of Pakistan, Supreme Court, 3 November 2010, XXXVI Yearbook Commercial Arbitration (2011) pp. 357 – 362; for France see the decision of Court of Appeal in Paris, Government of Pakistan, Ministry of Religious Affairs v. Dallah Real Estate and Tourism Holding Company, Cour d’Appel, Paris, First Pole, First Chamber, 17 February 2011, XXXVI Yearbook Commercial Arbitration( 2011) pp. 590 – 593.

[4] For the ease of presentation in the following the claimant’s side, whether it is the insolvency administrator, the original contract party or Walter Bau AG itself will all be referred to as “Walter Bau”.

[5] See the decision by the Swiss Supreme Court, 23 July 2012 – Case No. 4 A_570/2011.

[6] In the German proceedings Thailand raised three additional defenses. First, it alleged that Walter Bau had not been party to the arbitration award. Second, it considered Walter Bau to be bound by an agreement with the purchaser of its interest in the project company, according to which the latter could request from Walter Bau to stop the arbitration proceedings which the purchaser had done. Third, it alleged that the award had been obtained fraudulently as Walter Bau had acted against that agreement with the purchaser.

[7] The Kammergericht Berlin is one of the 24 Higher Regional Courts, the second-highest instance on civil and commercial matters in the German court system. The Higher Regional Courts are competent in first instance for applications concerning the declaration of enforceability of arbitral awards (section 1062 (1) of the German Code of Civil Procedure).

[8]Schneider v. Kingdom of Thailand (2d Cir. 2012).

[9] www.bundesgerichtshof.de.

[10] Case No.III ZB 40/12.

[11] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 330 U.N.T.S. 3.

[12] Decision of March 26, 2012, Case No. 20 Sch 10/11.

[13] European Convention on International Commercial Arbitration, April 21, 1961, 484 U.N.T.S. 349.

[14] 514, U.S. 938, (944, 947)(1995).

[15] Additionally, the Swiss Supreme Court had to deal with the award in setting aside proceedings based on the above mentioned agreement with purchaser of Walter Bau’s interest in the project company that it would withdraw its claim in the arbitration; see Swiss Federal Tribunal, 23 July 2012 – Case No. 4 A_570/2011.

The Center for Transnational Litigation and Commercial Law aims at the advancement of the study and practice of international business transactions and the way to solve related disputes either through litigation or arbitration. As commercial transactions become increasingly international, it is vital to the legal and business communities to understand and analyze the practices and legal principles that govern relationships between firms and between firms and consumers in the international arena