Transnational Notes

The Center, together with other institutions, will host a conference around the submissions for the Cambridge Compendium of International Commercial and Investment Arbitration to be edited by Professor Franco Ferrari, the Center’s Director, as well as Professors Andrea Bjorklund (McGill University, Montreal) and Stefan Kröll (Bucerius Law School, Hamburg). The most innovative element of the Compendium lies in many topics being addressed from both a commercial and an investment arbitration perspective whenever appropriate in order to highlight the commonalities as well as the differences between both fields. The talks to be given are a means of introducing the audience to the Compendium project. The event is graciously hosted by the University of Vienna just prior to the commencement of the 24th annual Willem C. Vis International Commercial Arbitration Moot. For the detailed program, please click here.

On March 22, 2017, the Center for Transnational Litigation, Arbitration and Commercial Law will host a seminar entitled “How the US Government copes with Transnational Litigation”, which will take place from 6.00 – 8.00 pm in the Lester Pollack Colloquium Room, Furman Hall 900 (245 Sullivan Street, New York, NY 10012).

It is a great pleasure to be able to announce that Professors Harold Hongju Koh and Donald E. Childress, III, will give talks on the aforementioned topic.

Harold Hongju Koh is Sterling Professor of International Law at Yale Law School, where he served as Dean (2004-09) and is formerly Legal Adviser to the U.S. Department of State (2009-13) and Assistant Secretary of State for Democracy, Human Rights and Labor (1998-2001).  He is the author of Transnational Litigation in U.S. Courts (2008), co-author of Transnational Business Problems (5th ed. 2014 with Vagts, Dodge, and Buxbaum), and Transnational Legal Problems (3d ed. 1995 with Steiner & Vagts) and author of many articles on international and foreign relations law. He has received the Wolfgang Friedmann Award from Columbia Law School and the Louis B. Sohn Award from the American Bar Association for his lifetime achievements in international law. He is also a member of the Council of the American Law Institute and Counselor to the Restatement (Fourth) of the Foreign Relations Law of the United States, and is currently on the Executive Committee of the American Arbitration Association and the U.S. National Group of the Permanent Court of Arbitration.

Donald E. Childress, III, is professor of law at Pepperdine School of Law. Prior to joining the School of Law 2008, Professor Childress was associated with the international law firm Jones Day in Washington, D.C., as a member of their Issues and Appeals practice, where he focused on Supreme Court litigation, general appellate litigation, and significant motions practice in trial litigation. Professor Childress’ primary research interests are international civil litigation and arbitration, private international law, comparative law, and ethics. His scholarship has appeared in the Duke Law Journal, the U.C. Davis Law Review, the Northwestern Law Review, the Georgetown Law Journal, the Virginia Journal of International Law, the William and Mary Law Review and the North Carolina Law Review. He has also published an edited volume with Cambridge University Press entitled “The Role of Ethics in International Law”. He is working extensively on the role that international civil litigation and arbitration plays in an increasingly global world. He is the American co-editor of the private international law blog ConflictOfLaws.net.

NYU’s  Center  for  Transnational  Litigation,  Arbitration  and  Commercial  Law  will  hold  its  Sixth Annual Arbitration Practice Moot  on  Saturday,  11 March 2017. The  event will be co-hosted by Hogan Lovells US LLP  and NYU’s International  Arbitration  Association. The  principal  objective  of  the  NYU  Practice  Moot  is  to provide  a  forum  within  which  students  participating  in  this  year’s  Willem  C.  Vis  International  Commercial Arbitration  Moot  can  refine  their  oral  presentations  by  pleading  before,  and  receiving  constructive  feedback  from, panels of distinguished arbitrators.

For the program please click here.

Introduction

In November 2015, the Dutch Council for the Judiciary published a plan for the establishment of a Netherlands Commercial Court (hereafter: ‘NCC’), a special state court in the Netherlands for large national and international commercial disputes.^[1] This commercial court with specialized judges that is supposed to conduct proceedings in the English language follows the recent establishment of international commercial courts around the world, most notably in Singapore and Dubai.^[2] This paper will argue that the plan by the Council for the Judiciary is of a more conservative nature than the Singapore International Commercial Court (hereafter: SICC) and the Dubai International Financial Centre (hereafter: DIFC) Courts. The plan for the NCC seems less ambitious in its international scope, arguably showing that, unlike its counterparts in Singapore and Dubai, its primary goal is to attract domestic companies. This will be illustrated by looking at three factors: the language of proceedings in appeal and cassation (paragraph 1), the composition of the court (paragraph 2) and the court’s evidence rules (paragraph 3).

It is important to evaluate the plans for the NCC. A court that is tailored to the needs of commercial parties has the potential to reverse the current downward trend in large trade cases being brought before Dutch courts in times of increasing need for cheap and efficient solution of complex transnational trade disputes.^[3] Thus, the plan for the NCC explicitly states that it aims to compete in the international dispute resolution market, in particular with the nearby Commercial Court of England and Wales in London, by offering cheaper and faster resolution of trade disputes by specialized judges in the English language.^[4]

In order to implement the plan, a Netherlands Commercial Court Bill has been introduced on 16 December 2016 that relates to the amount of court fees and the use of English as a language of proceedings.^[5] The limited scope of these amendments already constitutes a striking difference with the courts in Singapore and Dubai, which were established through the enactment of comprehensive legislation.^[6] A closer look at the NCC’s planned structure and composition will further show that the changes brought about by the new court are relatively modest compared to the other international commercial courts.

 

1. The language of proceedings at the Supreme Court

An appeal of an NCC judgment is possible in the English language. However, cassation at the Supreme Court will always take place in Dutch.^[7] The plan for the NCC does not give an explanation for this limitation. It is not at once clear why proceedings at the Supreme Court cannot be in English. There is currently no explicit legal basis for Dutch as the official language of proceedings.^[8] In comparison, a pending legislative proposal for international commercial court chambers in Germany does provide for the possibility of conducting proceedings in English before the German Supreme Court, the Bundesgerichtshof (Article 184(3) Gerichtsverfassungsgesetzes).^[9] The absence of such an initiative in the Netherlands once again shows the limited international focus of the NCC compared to similar commercial courts in other states.

 

2. Composition of the court: no foreign judges and no additional domestic judges envisaged

In terms of the composition of the court, the NCC again seems less revolutionary than the courts in Singapore and Dubai. The NCC will take the form of a special chamber of the Amsterdam District Court and the Court of Appeals in Amsterdam and will consist of judges who are appointed based on their specialized knowledge, experience and English language proficiency.^[10] These judges will come from other courts in the country. Since the Plan does not offer the possibility of hiring new or foreign judges, it seems that there will be no foreign judges appointed to the NCC.

By comparison, the SICC and the DIFC Courts are comprised of a unique mix of local judges and foreign judges from major jurisdictions around the world.^[11] Such a mix is intended to improve the court’s ability to resolve disputes governed by laws from foreign jurisdictions and to enhance its international reputation in terms of neutrality and impartiality when it handles cases that do not involve parties from Singapore.^[12] Chief Justice of Singapore Sundaresh Menon expressed a vision for the SICC as a court that is ‘blind to the nationality or domicile of a litigant’.^[13]

The lack of foreign judges shows that these goals are not pursued in the same fashion by the NCC. The Dutch Court seems to put more emphasis on the internal specialization of national judges, rather than relying on the expertise of international professionals. This choice is consistent with the above-mentioned considerations concerning the purely domestic nature of the evidentiary rules on which the parties can rely.

The minimal changes envisaged by the plan with regard to the composition of the Court are unfortunate, since the NCC obviously aims to attract more commercial parties than Dutch courts currently do, whilst judges in the Netherlands are already deemed to be under great pressure due to excessive workload.^[14]

 

3. Absence of international standards of evidence

Another indication of the modest nature of the NCC’s international ambition compared to that of the other international commercial courts relates to the court’s evidence rules. The plan for the NCC does not offer flexibility as to the type of evidence rules to be applied, since it does not state explicitly that parties can choose what kind of evidence rules they would like to be applicable. Consequently, the NCC seems to rely exclusively on existing evidence rules in Dutch civil procedure law.^[15] In contrast, the SICC is empowered to apply rules of evidence other than the ones under Singaporean law, such as the IBA Rules on the Taking of Evidence in International Arbitration (Article 18K(1) Supreme Court of Judicature Act). The absence of such freedom of choice, which in the case of the Singaporean court was welcomed as innovative and reflective of a strong international ambition, suggests that the NCC’s aspiration in this respect is more limited.^[16]

It could be argued that there is no urgent need for the NCC to offer such alternative international standards, because Dutch procedural law generally is considered efficient, expeditious and predictable.^[17] Nonetheless, this only reinforces the argument that the efficiency of the procedure is considered more important than its international dimension.

 

Conclusion

Where the SICC has been praised as a ‘visionary step’ and a judicial forum with unrivaled international legal sophistication, it is hard to say the exact same of the NCC as currently envisaged in the plan.^[18] The NCC’s overall idea and structure can be considered a welcome institutional innovation and its specialized judges and the English language of proceedings will likely prove attractive to commercial parties.^[19] However, a comparison with other international commercial courts reveals that the NCC’s set-up is not as revolutionary as its counterparts in Singapore and Dubai in terms of international ambition and focus.

As opposed to the SICC, the NCC does not offer the option to use alternative international evidence rules as an alternative for Dutch procedural rules. Furthermore, the composition of the court, lacking foreign judges, stands in contrast with the mix of domestic and international judges at the courts in Dubai and Singapore. Similarly, the imposition of Dutch as the only language of proceedings at cassation level confirms the limited international vocation of the NCC.

This inward-looking dimension is somehow acknowledged by the plan itself, which mentions the interests of Dutch companies in saving costs by avoiding recourse to Anglo-American courts for specialized commercial procedures as one of the rationales for the court.^[20] Therefore, the goal of the NCC appears to be different from that of the SICC and the other international commercial courts. It would seem that the focus of the plan for the NCC is more about providing Dutch and foreign companies operating in the Netherlands with effective and familiar procedural remedies than about the establishment of a truly international commercial court. This choice is perhaps hard to justify, given the absence of any stated reason for this restraint in the attempt to internationalize the rule of law for the benefit of the international community.^[21] It is to be hoped that the NCC will gradually develop its international focus in the future.

 

Annette Scholten, LL.B. Leiden University; LL.M. Candidate, New York University (2017).

^[1] Dutch Council for the Judiciary, Plan tot oprichting van de Netherlands Commercial Court inclusief kosten-batenanalyse (Plan for the establishment of the Netherlands Commercial Court including cost-benefit analysis), November 2015, http://www.netherlandscommercialcourt.nl and http://netherlands-commercial-court.com. The court was originally scheduled to start functioning from 1 January 2017, but this deadline has not been met due to delays in the passing of the necessary legislation. Although no official revised opening date of the court has yet been stated, the Netherlands Commercial Court Act is planned to come into force on 1 January 2018. See http://netherlands-commercial-court.com.

^[2] Dutch Council for the Judiciary, supra note 1, p. 8-10, 12, D.H. Wong, The rise of the international commercial court: what is it and will it work?, 33(2) Civil Justice Quarterly 205 (2014), p. 206-207, E. Bauw, Ondernemerschap in de Rechtspleging (Entrepreneurship in Legal Procedures), Ars Aequi 93 (February 2016), p. 93, D.P. Horigan, From Abu Dhabi to Singapore: The Rise of International Commercial Courts, 3(2) International Journal of Humanities and Management Sciences 78 (2015), p. 78.

In Germany, there is currently a legislative proposal pending that would also make it possible to establish international commercial courts: Gesetzentwurf des Bundesrates, Entwurf eines Gesetzes zur Einführung von Kammern für internationale Handelssachen (Draft law on the introduction of chambers of international trade), 30 April 2014.

^[3] Dutch Council for the Judiciary, supra note 1, p. 2, 4-6, 9, S. Menon, The Transnational Protection of Private Rights: Issues, Challenges and Possible Solutions, 108 American Society of International Law Proceedings 219 (2014), p. 224, C. Sikkel, P.A.M. van Schouwenburg-Laan, Actualiteiten maritieme kamer Rechtbank Rotterdam (News maritime chamber Rotterdam Court), 1 Tijdschrift Vervoer & Recht 20 (2016), p. 22, Bauw, supra note 2, p. 96.

^[4] Dutch Council for the Judiciary, supra note 1, p. 2. G.A. van der Steur, Kamerbrief NCC (Letter of Minister of Justice to Parliament), 23 November 2015, p. 2, S. Menon, International Arbitration: The Coming of a New Age for Asia (and Elsewhere), Keynote Address Opening Plenary Session ICCA Congress 2012, p. 13-14, E. Lein et alia, Factors Influencing International Litigants’ Decisions to Bring Commercial Claims to the London Based Courts, Ministry of Justice Analytical Series 2015, p. 16, C. Jeloschek, ‘Netherlands Commercial Court’: eindelijk een alternatief voor grote (inter)nationale handelsgeschillen vanaf 1 january 2017 (‘Netherlands Commercial Court: finally an alternative for large (inter)national trade disputes from 1 January 2017), 34(11) Bedrijfsjuridische berichten 129 (2016), p. 130-131.

A similar initiative is already taking place in Rotterdam, where a pilot started in January 2016 in the Rotterdam District Court enabling proceedings in maritime, transport and international trade sale cases to be conducted in English. See https://www.rechtspraak.nl/Organisatie-en-contact/Organisatie/Rechtbanken/Rechtbank-Rotterdam/Nieuws/Paginas/Pilot-project;-civil-court-procedures-in-English.aspx, Sikkel, van Schouwenburg-Laan, supra note 3, p. 20, C.J.M. Klaassen, Producties in een vreemde taal (Documents in a foreign language), Ars Aequi 843 (November 2016), p. 847, R.J. Tjittes, Een Netherlands Commercial Court vereist reclame voor Nederlands recht (A Netherlands Commercial Court asks for advertisement of Dutch law), 6 THEMIS 261 (2014), p. 261.

^[5] Wet houdende wijziging van het Wetboek van Burgerlijke Rechtsvordering en de Wet griffierechten burgerlijke zaken in verband met het mogelijk maken van Engelstalige rechtspraak bij de internationale handelskamers van de rechtbank en het gerechtshof Amsterdam (Act concerning the modification of the Code of Civil Procedure and of the Act on Fees for Civil Proceedings in order to make proceedings in the English language possible in the Netherlands Commercial Court chamber of the Amsterdam District Court and the Court of Appeals in Amsterdam), consultation version, December 2016. See also Van der Steur, supra note 4, p. 2.

^[6] SICC: Articles 18A – 18M Supreme Court of Judicature Act. DIFC Courts: Dubai Law establishing the Judicial Authority at the Dubai International Financial Centre No. 12 of 2004, the DIFC Court Law No. 10 of 2004.

^[7] Dutch Council for the Judiciary, supra note 1, p. 10.

^[8] T. Veling, Vreemde talen in de civiele procedure (Foreign languages in the civil procedure), 5 Tijdschrift voor de Procespraktijk 109 (2016), p. 109.

^[9] See footnote 2 for more information about the German legislative proposal.

^[10] http://www.netherlandscommercialcourt.nl/news/ncc/, Veling, supra note 8, p. 111, Dutch Council for the Judiciary, supra note 1, p. 10.

^[11] Article 5A Supreme Court of Judicature Act Singapore, A. Emmerson, S. Jhangiani, J. Lewis, Why international courts may be the way forward, Global Arbitration Review News (16 February 2015), R. Hermans, A Netherlands Commercial Court, Ars Aequi 187 (May 2015), p. 195, Wong, supra note 2, p. 208, W.Y. Kenny, Exploring a New Frontier in Singapore’s Private International Law, 28 Singapore Academy of Law Journal 649 (2016), p. 650.

^[12] S. Leong, Planting the Seeds for an International Rule of Law – The Commercial Court of England and Wales and the SICC, Practical Law UK (12 May 2015), p. 10, S. Menon, International Commercial Courts: Towards a Transnational System of Dispute Resolution, Opening Lecture for the DIFC Courts Lecture Series 2015, p. 24-25. See for example the International Judges of the SICC, a group of reputable judges from both common and civil law backgrounds: http://www.sicc.gov.sg/Judges.aspx?id=30.

^[13] Menon, supra note 12, p. 42.

^[14] J.C. Oord, Geschillenbeslechting als business model (Dispute resolution as business model), 5 Tijdschrift Ondernemingsrechtpraktijk 370 (2016). Concerning the complaints about high workload for Dutch judges, see for example http://www.mr-online.nl/juridisch-nieuws/23356-hoge-werkdruk-rechterlijke-macht-bewezen, http://www.volkskrant.nl/binnenland/president-hoge-raad-bezorgd-om-werkdruk-rechters~a3388115/.

^[15] E. van de Kuilen, Netherlands Commercial Court to launch next year, AKD 16 February 2016, https://www.akd.nl/o/Paginas/PublicatiesEN/Netherlands-Commercial-Court-to-launch-next-year.aspx.

^[16] Kenny, supra note 11, p. 650. For example, the Commercial Court of England and Wales in London does not offer such a choice of evidence rules: HM Courts & Tribunals Service, The Admiralty and Commercial Courts Guide 2014, p. 57ff.

^[17] Dutch Council for the Judiciary, supra note 1, p. 9, Hermans, supra note 11, p. 193, Lein et alia, supra note 4, p. 27, Leong, supra note 12, p. 7-8.

^[18] S.J. Brogan, Singapore’s Leadership in Advancing the Rule of Law, The Straits Times 19 January 2016.

^[19] Horigan, supra note 2, p. 80, C.A. Kern, English as a Court Language in Continental Courts, 5(3) Erasmus Law Review 187 (2012), p. 190-191.

^[20] Dutch Council for the Judiciary, supra note 1, p. 6.

^[21] Leong, supra note 12, p. 12.

When does an arbitration agreement bind a non-signatory? Comment on a decision by the Swiss Bundesgericht from June 6 2016[1]

In this decision, the Swiss Supreme Court had to deal with a fundamental question, which touches upon the idea of consent as the core principle for arbitral proceedings: When does an arbitration agreement bind a non-signatory? This comment will address the requirement, under which the court allowed for a third-party application of the agreement, and will deal with the implications such an application has on the concept of consent.

I.          Summary of the facts

In 1980, two Aktiengesellschaften (A.G.) – companies limited by shares under Swiss law –  D and E concluded a framework contract for the operation of a wastewater treatment facility. The contract included the following Art. 2.4: “D and E guarantee to each other that their named subsidiaries and the agents of their subsidiaries will fulfill all the parties’ obligations under this contract.”[2] It also included an arbitration clause, in which Basel was chosen as the seat of arbitration. The parties chose Swiss arbitral and substantive law. In 1995, D sold its chemicals division to A, another A.G. For this demerger D and A concluded an umbrella agreement that included two provisions, which are relevant to this dispute. The first read that A would assume “all assets and liabilities pertaining to the chemical business of D.” The second read: “Assumption of Guarantees. A. undertakes to assume as per the Closing Date all guarantees, letters of comfort and undertakings of similar nature of A. Affiliates.” In 1996, D and E merged into the B A.G. In 2014, B initiated arbitration against A for claims in connection with the shutdown of the wastewater treatment facility. A argued that the arbitral tribunal did not have jurisdiction, because A was not bound by the arbitration agreement. In an interim decision, the tribunal rejected those arguments and confirmed its jurisdiction. This interim decision was the matter in dispute before the Bundesgericht.

II.       Decision

The Bundesgericht had to decide whether A and B were bound by the arbitration agreement that was only signed by D and E – which had merged into B. It applied the national arbitration law of the ZPO[3] as opposed to its international arbitration law, because of the domestic character of the dispute and the express choice of the parties. The court started by acknowledging that, generally, only signatories to an arbitration agreement are bound by it because of privity of contracts. It then cited some exceptions from that rule, namely assignments of claims, assumptions of debts and obligations, and transfers of contracts. The Bundesgericht applied the doctrine of business takeover as found in OR[4] Art. 181. Pursuant to that rule, a party who takes over a business assumes as the previous owner’s obligations in respect of the business once the obligee is informed of the takeover. The previous owner, however, is still jointly liable for the obligations for three years. According to the court, the arbitration agreement is transferred as an ancillary right to the obligations in accordance with OR Art. 178 para. 1.

Next, the court interpreted Art. 2.4 of the framework agreement. The arbitral tribunal had held that this provision included at least a “quasi-guarantee” by which the parent companies – D and E – guaranteed that each subsidiary of theirs would fulfil its obligation. A argued that the provision was only a non-binding “Patronatserklärung”, or letter of comfort. However, the Bundesgericht agreed with the arbitral tribunal: the wording of the provision (“guarantee to each other”) and position in the contract allowed the conclusion that Art. 2.4 actually created a binding obligation. A also argued that the tribunal did not qualify the agreement more precisely but only called it a “quasi-guarantee”. But the court held that the specificities of the obligations are a matter of the substance of the claim. For the matter of jurisdiction, it is only relevant that there is in fact an obligation that was transferred.

The court turned on to address the question whether the tribunal had correctly found that the chemical branch was taken over by A, as required by OR Art. 181 para. 1. The defendant challenged this finding as obviously contrary to the record and therefore arbitrary. The court held that the defendant had not shown that the findings were in fact clearly wrong. The arbitral tribunal had held that the obligation, and with it the arbitration agreement as an ancillary right, was transferred to A on the basis of the first provision of the umbrella agreement. A argued that this was a false interpretation of the umbrella agreement as it contradicted the second provision of the umbrella agreement, Art. 9.1. The Bundesgericht agreed with the tribunal: Art. 9.1. did in fact only address the transfer of guarantees of subsidiaries, but the tribunal had not relied on Art. 9.1 for the transfer, but on first provision. They did not contradict each other.

The Bundesgericht agreed with the tribunal’s interpretation of both the framework agreement as well as the umbrella agreement. Consequently, it concluded that both the obligation and the arbitration agreement as ancillary rights had been transferred to A. A was therefore bound by the agreement and the tribunal had jurisdiction. The interim decision was upheld.

III.    The dogmatic approach

The application of an arbitration agreement to a non-signatory is a common issue in arbitral proceedings. Various legal doctrines have been used to give effect to arbitration agreements as to non-signatories.[5] The Bundesgericht applied a sub-category of the doctrine of transfer in Swiss law: the business takeover. Swiss law usually adheres to the widely-accepted principle[6] that an obligation can only be completely assumed by a new obligor, if the obligee agrees to it.[7] OR Art. 181 para. 1 provides an exception to that rule, as it allows the transfer without the obligees approval. But since the old obligor remains liable for three years, the obligee is sufficiently protected. According to the court, an arbitration agreement is transferred with the obligation by virtue of OR Art. 181 para. 3 and Art. 178 para. 1. OR Art. 178 para. 1 ensures that the obligee’s ancillary rights bind the new obligor after the transfer.[8] By designating the arbitration agreement as an ancillary right, the court agreed with the prevailing opinion in Swiss scholarly literature.[9]

This dogmatic approach to the transfer of the arbitration agreement is more comparable to an assignment than to a regular transfer of obligation. In assignment, the natural party to an arbitration is substituted without the approval of the other party, which is not the case for a regular transfer. The policy reason for binding assignees to an arbitration agreement is to prevent assignors from circumventing arbitration agreements by assigning the underlying claim.[10] This does not apply here, as the old obligor remains liable and could therefore still be sued under the agreement. But OR Art. 178 is based on the concept of an unchanged obligation,[11] hence it requires that the new obligor must take the obligation as is, in spite of the old obligor’s remaining liability. Thus, the court did not consider the transfer of the arbitration agreement separate from the obligation. It implicitly applied the following two-pronged test: First, was there was an obligation that was subject to an arbitration agreement? Second, was this obligation effectively transferred?

It tackled the first prong of the test by interpreting Art. 2.4 of the framework agreement. Here, it determined whether this provision actually created an obligation or merely constituted a letter of comfort. Given the wording of the provision, the court’s conclusion is the correct one. The court also correctly decided that it is unnecessary to consider the details of the obligation to determine jurisdiction. The obligation is the “vessel” that transports the arbitration agreement as an ancillary right to the newly bound party. Therefore, its mere existence is decisive for the jurisdictional questions. Naturally, a transferred obligation can only bind a new party to an arbitration agreement, if that agreement actually covers it. The court did not address this, but since arbitration agreements are interpreted broadly,[12] this is not a problem.

For the second prong of the test, the court needed to determine whether the requirement for a successful transfer of obligations under OR Art. 181 para. 1 were fulfilled. Here, the Bundesgericht accepted to the fact-finding of the arbitral tribunal, which it considered not obviously contrary to the record. It also interpreted the umbrella agreement to see whether it constituted a takeover contract. Its interpretation of the relevant provisions by the court was convincing.

IV.    The dogma of consent

The binding effect of an arbitration agreement in non-signatories seems to be at odds with what is considered to be the most fundamental principle of arbitration: arbitration is based on the consent of the parties to the arbitration.[13] How can A be bound by an arbitration agreement, if it never expressly agreed to it? This case deals with an assumption of claim without involvement of the debtor, which is effectively the counterpart to an assignment. For assignments, scholars argue that assignees are presumptively bound by an arbitration agreement over the assigned claim.[14] Where the parties to the assignment agreement make a different arrangement, the presumption could be rebutted.[15] So, what if A and D had included an “anti—arbitration” agreement in their umbrella agreement, declaring that all claims should be assumed without related arbitration agreements? In this scenario, A had decidedly not consented to participate in arbitration. According to this opinion, A would not be bound by the arbitration agreement.

In Swiss law, such an agreement would directly contradict the function OR Art. 181 para. 3 and Art. 178 para. 1 of guaranteeing that the obligee is not negatively affected by the transfer[16]. In relying on this provision, the court did not base the transfer of the arbitration agreement on a presumed consent. Instead it implied that an arbitration agreement is inseparable from the main obligation in matters of transfer.[17] Does this contradict the separability doctrine[18]? The original purpose of this doctrine is to ensure the survival of an arbitration agreement in case of the invalidity of the main contract.[19] The doctrine does not contradict the notion that there is an inherent connection between an arbitration agreement and the main contract. Such a connection is easily proven: An arbitration agreement, which does not refer to a defined legal relationship such as a contract, is no arbitration agreement at all.[20] So as to preserve the usefulness of an arbitration agreement, any (potential) dispute, which at one point is subject to an arbitration clause, should remain so until the agreement is revoked.

Applying comparable German rules on business takeover the Kammergericht even decided that a new business owner is bound by an arbitration agreement, even if the takeover is only factual and not contractual.[21] The general rule should be that every time an obligation or claim is transferred without the other party’s consent, the new party must be bound by a related arbitration agreement. An “anti-arbitration” agreement would be a contract at the expense of a third party, specifically the other party to the arbitration agreement. Agency aside, nobody has the power to dispose of another person’s rights. Doctrines of assignment and, to a lesser degree, transfer give people the right to dispose over their position as party to a contract. But other aspects of the contract are not up to disposition by third parties. For example, A and D could not have agreed to repeal Art. 2.4. of the framework agreement as a whole. Likewise, A and D could not dispose of E’s right to have the claim settled in arbitration.

This shows that consent to arbitrate cannot play a role in any case of succession of claims or obligations, where the other party to the legal relationship does not have to approve. The binding effect much rather comes from the fact that the new party does not have the right to dispose over the agreement.

V.       Conclusion

The Bundesgericht was confronted with an uncommon situation for the application of arbitration agreements to non-signatories, but solved it convincingly. The decision allows the reader to gain insight into the dogmatic structure of such applications and invites the reader to ponder their implications: in all cases of succession, where the other party to the obligation does not need to approve, the absence of the power to dispose explains the binding effect of the arbitration agreement to the new party better than consent.

Maximilian Schlueter

The author is a Class of 2017 LL.M. student in the International Business Regulation, Litigation and Arbitration program at the New York University School of Law. He graduated in law from the University of Bayreuth (Germany) in 2014 and completed his First State Examination in the same year. He finished his doctoral studies at the same university in January 2017.

[1] Bundesgericht [BG] [Federal Supreme Court of Switzerland], Jun. 6, 2016, http://relevancy.bger.ch/php/aza/http/index.php?lang=de&type=show_document&highlight_docid=aza://06-06-2016-4A_82-2016 (Ch.).

[2] „D und E garantieren sich gegenseitig, dass ihre genannten Tochtergesellschaften und deren Vertreter sämtliche ihnen in diesem Vertrag zugedachten Pflichten erfüllen,“ translation by the author.

[3] Zivilprozessordnung [ZPO] [Code of Civil Procedure], (Ch.).

[4] Obligationenrecht [OR] [Law on Obligations], (Ch.).

[5] These include among others theories of agency, alter ego status (or veil piercing), “group of companies,” estoppel, guarantor relations, third party beneficiary rights, succession, assignment, assumption and other doctrinal bases, Gary Born, International Commercial Arbitration 1405 (2nd ed. 2014).

[6] See e.g., Art. 9.2.3 of the UNIDROIT Principles on International Commercial Contracts.

[7] See OR Art. 176 para. 2.

[8] Cf. Peter Reetz & Christof Burri, CHK – Handkommentar zum Schweizer Privatrecht – Obligationenrecht, Allgemeine Bestimmungen Art. 178 ¶ 1 (Andreas Furrer & Anton K. Schnyder eds., 2nd ed. 2012); Eugen Spirig, Zürcher Kommentar – Art. 175-183 OR. Die Abtretung von Forderungen und die Schuldübernahme Art. 178 ¶ 8 (Peter Gauch ed., 3rd ed., 1993).

[9] See e.g. Peter Reetz & Christof Burri, supra note 8, at Art. 178 ¶ 4; Eugen Spirig, supra note 8, at Art. 178 ¶ 46.

[10] Cf. Konstadinos Massuras, Die Dogmatische Struktur der Mehrparteienschiedsgerichtsbarkeit 119-120 (1998).

[11] Eugen Spürig, supra note 8, at Art. 178 ¶ 2.

[12] See Pierre A. Karrer & Peter A. Straub, Practitioner’s Handbook on International Commercial Arbitration ¶ 12.20-12.21 (Frank-Bernd Weigand ed., 2nd ed., 2009) for Switzerland; cf. Gary Born, supra note 5, at 1325 in general.

[13] E.g. Nigel Blackaby et al., Redfern and Hunter on International Arbitration, ¶ 2.01 (6th ed. 2015); but see Gary Born, supra note 5, at 1417, for references to nonconsensual theories for binding non-signatories.

[14] Cf. Gary Born, supra note 5, at 1467.

[15] Id.

[16] See Eugen Spirig, supra note at 8, at Art. 178 ¶ 3.

[17] This is comparable with the approaches of other courts in civil law jurisdictions on matters of assignment, see Bernard Hanotiau, Consent to Arbitration: Do We Share a Common Vision?, 27 Arb. Int’l 541-42 (2011).

[18] For Swiss law cf. Zivilprozessordnung [ZPO] [Code of Civil procedure], Art. 357 para. 2 [Ch.].

[19] See Nigel Blackaby et al., supra note 13, at ¶ 2.101.

[20] Cf. Nigel Blackaby et al., supra note 13, at ¶ 2.25-2.28.

[21] Kammergericht [Court of Appeal in Berlin], Aug. 13, 2015, 20 Sch 9/14, http://www.gerichtsentscheidungen.berlin-brandenburg.de/, paras. 46-53 (Ger.).

1. Introduction

When resorting to arbitration, parties choose their applicable rules of procedure, often by referring to those of an arbitral institution. Such arbitration rules set time limits regarding the challenge of the arbitrators. The ICC rules, for example, provide for a 30-day time limit to challenge an arbitrator’s appointment.[1] Once an award is rendered, the question as to whether a party may try to have the award set aside on the grounds of lack of impartiality and independence of a member of the tribunal may arise. A fundamental part of such question, is whether that is possible even when the arbitrator had not been previously challenged pending the arbitration or such challenge occurred beyond the agreed upon time limits. In France, the question was most recently answered by the Cour de Cassation[2] and by the Cour d’Appel de Paris[3] in the latest episodes of Tecnimont v. Avax. Both courts confirmed the strict application of the principle of procedural estoppel. Such principle has been defined as “the procedural behavior [of a party] […] constituting a change in position, on the merits, the nature of which misleads [the opposing party] on the intentions [of the challenging party]”.[4] Such principle was introduced into French legislation by Article 1466 of the French Code of Civil Procedure,[5] which provides that: “a party who abstained from asserting an irregularity in due time before the arbitral tribunal, is deemed to have waived its right to assert such irregularity at a later stage”.[6]

The principle is aimed at preventing parties from raising, in the setting aside stage before the French Courts, procedural challenges which should have been raised, or could have been raised, during the arbitration. Article 1466 of the French Code of Civil Procedure refers to all types of procedural irregularities, such as, for example, the improper constitution of the arbitral tribunal, as in the Tecnimont v. Avax case,[7] or violations of due process, as in Democratic Republic of Congo v. FG Hémisphère Associates LLC.[8]

 

2. Tecnimont v. Avax – a long journey towards the strict application of the parties’ agreement

The decision rendered by the Cour d’Appel de Paris on 16 April 2016 was the fifth decision of a long line of judgments by the French Courts on Avax’s attempt to set aside the partial award rendered by the ICC administered tribunal in 2007.

Société Tecnimont S.p.A. (“Tecnimont”) had entered into a contract with S.A.J.&P. Avax (“Avax”) for the construction of a plant in Greece. A dispute arose between the parties and, pursuant to the arbitration clause contained in their contract, Tecnimont commenced ICC proceedings in Paris. Pending such proceedings, in September 2007, Avax challenged the chairman of the tribunal alleging his lack of impartiality and independence. In October 2007, the tribunal dismissed Avax’s challenge, holding that, in any event, the challenge had been made after the 30-day time limit set by the ICC rules. On 10 December 2007, the tribunal rendered a partial award on liability in favour of Tecnimont. Avax soon initiated annulment proceedings before the Cour d’Appel de Paris. The court quashed the award by holding that the chairman had a “continued obligation” to disclose facts which could give rise to a challenge and that the appealing party had become aware of these facts solely after the arbitral tribunal had dismissed the challenge.[9] Tecnimont then appealed the decision before the Cour de Cassation, which reversed the judgment. However, the decision by the Cour de Cassation was rendered on the technical grounds that such facts had already been discussed before the arbitral tribunal. The case was then remitted to the Reims Court of Appeal, which set aside the award.

The Reims decision was considered controversial in light of the reasoning adopted. [10] Indeed, the Court held: first, that arbitrators were bound by a duty to disclose all facts which could give rise to questions of impartiality and independence at any time during the arbitration proceedings; second, that it was not bound by the ICC tribunal’s decision on the challenge. On this second point, the court reasoned that the decision on the challenge was administrative in nature, thus it did not have res iudicata effect.[11] Moreover, the court found that since Avax had discovered new facts regarding the chairman’s lack of independence and impartiality pending the arbitration, but had not brought a new challenge before the arbitral tribunal, it could not be barred from filing for annulment of the award on those same grounds.[12]

It is the author’s opinion that such approach seems to encourage dilatory tactics. Indeed, by allowing parties to ignore agreed upon time limits, they may strategically plan to save relevant information for the possible setting aside stage, thus ignoring the time limits’ protective function.[13]

The case was remitted once more to the Cour de Cassation and once more, on 25 June 2014, the Cour de Cassation reversed the decision. In that instance, the Cour de Cassation ruled on the res iudicata effect of the arbitral tribunal’s decision on the challenge and held that: “[A] party who knowingly refrains from challenging an arbitrator on the grounds of circumstances related to his alleged lack of independence and impartiality within the timeframe provided for by the applicable arbitration rules is deemed to have waived the right to invoke such facts before the annulment judge”.[14]

With this judgment of the Cour de Cassation determined that the arbitration rules chosen by the parties should be complied with and are binding on the parties throughout the arbitration. The decision thus forces the parties to be more active in complying with the set time limits when bringing their challenges.

Since the Cour de Cassation may only decide on points of law, the case was remitted to the Cour d’Appel de Paris to decide on “whether, for each of the facts and circumstances that it retains as constitutive of a breach of the arbitrator’s duty of independence and impartiality, the 30-day time limit provided for by the arbitration rules to challenge the arbitrator had been complied with”.[15]

 

3. The 2016 decision of the Cour d’Appel de Paris

The Cour d’Appel de Paris ruled once more on the proper constitution of the arbitral tribunal and dismissed the application to annul the award. The Court dismissed the request for annulment on three different grounds.

First, it maintained that Avax could not invoke circumstances which it had already raised in its original challenge to the arbitrator. Indeed, the Court reiterated that such original challenge was untimely. Second, as to the ties between Sofregaz, a company belonging to Tecnimont’s same group, and the chairman’s law firm, it found that such circumstances could not be taken into account not only because, even being aware of these facts, Avax did not ground its original September 2007 challenge upon them, but also because the facts raising doubts on impartiality and independence “were public and easily accessible”.[16]

Third and finally, the Court held that although there were some facts invoked by Avax which had come to light after the challenge, specifically other ties between the chairman’s law firm and Sofregaz, they “were not of a nature to intensify the doubts on the arbitrator’s independence and impartiality in a significant manner that could have resulted from the information already available to Avax before its request to challenge”.[17] It follows that although such ties had not been known by the parties, they still could not lead to the annulment of the award.

The Cour d’Appel de Paris thus dismissed Avax’s request to set aside the award on the grounds that Avax had failed to timely challenge the arbitrator according to the agreed upon arbitration rules. Indeed, this meant that unless Avax had discovered new circumstances, which were not in the public’s domain, and substantially increasing doubts as to the independence and impartiality of the arbitrator, it would have had to submit its challenge within the time limit set by the agreed upon rules.

 

4. Conclusion

The final episode of the Tecnimont v. Avax saga confirms a return to a strict application of the principle of procedural estoppel. Indeed, by affirming that parties will be deemed to have waived their right to challenge an arbitrator if they did not do so on time pending the arbitration proceedings, strengthens the biding nature of the time limits set by the agreement of the parties and firmly applies Article 1466 of the French Code of Civil Procedure. Parties will no longer be allowed to circumvent their agreement by holding onto information which may lead to the obstruction of the correct circulation of the arbitral award.

Although the decision seems to impose upon the parties a significant obligation to inquire extensively on the existing ties between the parties and the arbitrators, it is a welcome confirmation of the French courts’ deference to the arbitration rules selected by the parties. Indeed, the decision evidences the central importance of party autonomy in arbitration, which is expressed by the possibility granted to the parties to freely select the arbitration rules applicable to their dispute and have them expect that those rules be binding throughout the proceedings.[18]

This however does not mean that parties are no longer allowed to bring challenges once the time limit to do so has expired. The Paris Court of Appeals leaves the door open to challenges which are brought on the basis of new facts which give rise to fundamental doubts as to the arbitrator’s independence and impartiality. If the contrary were true, parties would be deprived from their ability to challenge an arbitrator for facts arising after the expiration of the time limit provided by the applicable rules, which could compromise a party’s right to due process.[19]

 

Eva Paloma Treves, 2013 J.D. Università degli Studi di Milano, IBRLA Candidate (2017).

[1]           ICC 2012 Arbitration Rules, Article 14.2: “For a challenge to be admissible, it must be submitted by a party either within 30 days from receipt by that party of the notification of the appointment or confirmation of the arbitrator, or within 30 days from the date when the party making the challenge was informed of the facts and circumstances on which the challenge is based if such date is subsequent to the receipt of such notification”.

[2]           Cour de Cassation, Chambre Civil 1, Société Tecnimont S.p.A. v. J.&P. Avax (Case No. 11-26529), 25 June 2014.

[3]           Cour d’Appel de Paris, Société J.&P. Avax v. Société Tecnimont S.p.A. (Case No. 14/14884), 12 April 2016.

[4]           Cour de Cassation, Chambre Civil 1, Société Merial v. Société Klocke Verpackungs (Case No. 08-21288), 3 February 2010. The French original text states as follows: “le comportement procedural […] constitutive d’un changement de position, en droit, de nature à induire [l’opposant] en erreur sur ses intentions”. The Principle of Procedural Estoppel, although not explicitly expressed, was already part of French Case Law: v. Cour d’Appel de Paris, Sociétés T.A.I, E.S.W. et I.E.C. v. sociétés S.I.A.P.E., Engrais de Gabè and others (Case No. 88/8256), 2 June 1989, Revue de l’Arbitrage, Vol. 1991 Issue 1, p. 87.

[5]           Article 1466 of the French Code of Civil Procedure was introduced by Decree 48/2011 of 13 January 2011.

[6]           The French original text reads as follows: “La partie qui, en connaissance de cause et sans motif légitime, s’abstient d’invoquer en temps utile une irrégularité devant le tribunal arbitral est réputée avoir renoncé à s’en prévaloir”.

[7]           v. infra, 2. Tecnimont v. Avax – a long journey towards the strict application of the parties’ agreement.

[8]           Cour d’Appel de Paris, Républic Démocratique du Congo v. FG Hémisphère Associates LLC (Case No. 11/20732), 12 April 2016. The Democratic Republic of Congo claimed that the award rendered in Switzerland could not be enforced in France since it was contrary to due process. The Paris Court of Appeal dismissed such claim on the basis of the principle of procedural estoppel by holding that the Democratic Republic of Congo had not raised such claim during the arbitration proceedings, and thus it was barred from doing so in the enforcement stage.

[9]           Cour d’Appel de Paris, J.&P. Avax v. Société Tecnimont S.p.A. (Case No. 07/22164), 12 February 2009, Revue de l’Arbitrage, Vol.  2009 Issue 1, p. 186.

[10]          M. Henry, Note – 2 novembre 2011, Cour d’appel de Reims (Aud. solennelle), Revue de l’Arbitrage, Vol. 2012 Issue 1, p. 120.

[11]          Cour d’Appel de Reims, J.&P. Avax v. Société Tecnimont S.p.A. (Case No. 10/02888), 2 November 2011, Revue de l’Arbitrage, Vol. 2012 Issue 1, p. 112.

[12]          Ibid.

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

[14]          Cour de Cassation, Chambre Civil 1, Société Tecnimont S.p.A. v. J.&P. Avax (Case No. 11-26529), 25 June 2014.

[15]          Cour de Cassation, Chambre Civil 1, Société Tecnimont S.p.A. v. J.&P. Avax (Case No. 11-26529), 25 June 2014.

[16]          Cour d’Appel de Paris, Société J.&P. Avax v. Société Tecnimont S.p.A. (Case No. 14/14884), 12 April 2016.

[17]          Ibid.

[18]          G. Born, International Commercial Arbitration (Second Edition), Kluwer Law International 2014, p. 83; M.L. Moses, The principles and practice of international commercial arbitration, Cambridge University Press 2012, p. 1.

[19]          Cour de Cassation, Chambre Civil 1, Chambre Arbitrale Maritime de Paris v. Nycool AB (Case No. 14-20396), 31 March 2016.

Both the Swiss Supreme Court and the Court of Appeals of the Canton Ticino cited Professor Ferrari’s works to corroborate the results reached on matters relating to international sales, on which Professor Ferrari, the Director of the Center, has written extensively.

In its 8 November 2016 ruling (docket n. 4A_451/2016), the Swiss Supreme Court relied, among others, on a paper by Professor Ferrari to hold that an international sale by auction should not be subject to the United Nations Convention on Contracts for the International Sale of Goods (“CISG”), but rather to the law applicable by virtue of the Swiss private international rules. On 20 April 2016, in a ruling (docket n. 15.2016.26) that was only recently published, the Court of Appeals of the Canton Ticino relied on a commentary by Professor Ferrari to hold that the effects of a retention of title clause on the property of the goods sold contained in a contract subject to the CISG are not governed by the CISG, but rather by the law applicable by virtue of the forum’s rules of private international law.

Introduction

Relatively few US court cases deal with the United Nations Convention on Contracts for the International Sale of Goods (hereinafter CISG). Indeed, parties to contract usually agree to exclude its application, probably due to the reluctance of lawyers to familiarize themselves with it^[1]. Even more disconcerting is the fact that US judges are also unfamiliar with the CISG and tend to misapply it, often looking to the Uniform Commercial Code for guidance^[2], and ignore^[3] that the CISG’s provisions are subject to an autonomous and non-nationalistic interpretation, seeking guidance from foreign decision, pursuant to Article 7(1) of the CISG^[4]. Foreign cases have persuasive value^[5], and only this approach will fulfil the objective of the Convention; to establish uniform rules on the formation and performance of international commercial contracts for the sale of goods.

In Rienzi & Sons, Inc. v. N. Puglisi & F. Industria Paste Alientari^[6] (hereinafter Rienzi), the Court of Appeals followed the District Court’s nationalistic approach stating that there was no controlling case on the issue^[7]. Rienzi is a case where all applicability conditions of the CISG were met, but through-out the litigation the parties only pleaded national law. Three years after the submission of the initial complaint, the plaintiff, Rienzi, asserted for the first time that the CISG applied. Had the Court just taken a look at foreign cases, it would have noticed that case law on the application of the CISG addressing the parties conduct in litigation exist and is sufficiently prevalent^[8].

These foreign courts, including leading CISG scholars, have commonly accepted, although not always expressly, that the CISG is applicable ex officio^[9], and that the only escape from it is when parties exercise their rights under Article 6 of the Treaty and exclude its application^[10]. Moreover, their prevailing position is that arguing solely on the basis of domestic law does not lead to the exclusion of the CISG^[11]. However, with Rienzi, the Court of Appeals departed from these assertions.

While it stated that the CISG was “mandatory unless the parties expressly opt out”, it still concluded that Rienzi had excluded the CISG by “consent[ing] to the application of New York law”, and “untimely invoking the CISG”. It is unclear whether the judges’ ruling was based on the consent of the parties to opt out of the CISG following Article 6, as the Court ignored Article 6 in its decision (I), or if the untimely invocation of the CISG informed the decision (II).

I) Sufficient express consent to opt out of the CISG

First, the main critique relates to the wording of the judges’ ruling that consent to the application of New York law formed the intent of the parties to opt out of the CISG as the CISG is part of federal law. The selection of the law of New York cannot form an exclusion as the CISG, being part of the law of a Contracting State, is by extension the law of its territorial units^[12]. A choice of New York law should therefore be intended as “both making the CISG applicable (as part of the chosen law) and as determining the law applicable to the issues not governed by the CISG (…) thus avoiding to have to resort to the complex rules of private international law in order to determine the law applicable to the issues not governed by the CISG”^[13]. US Courts have diverged on this point; while some view selection of the law of a State as an exclusion^[14], other follow the majority opinion that it is insufficient^[15]. Such differences undermine uniformity and a consistent approach should be favored.

Second, it is questionable whether consent through conduct in litigation appropriately qualifies as the exercise of the Article 6 exclusion. There is nothing in Article 6 concerning the form of an effective exclusion. Article 8 provides that parties consent can be inferred^[16] and that “all relevant circumstances of the case including (…) any subsequent conduct by the parties”^[17] should be considered in discerning intent. Some scholars support the opinion that this conduct must be clearly manifested^[18], others say that Article 8(2) CISG points to a lower threshold; that the intent is the one that would be inferred by a reasonable person^[19]. Either way, courts should be careful to consider alternative explanations for the failure to plead or argue the CISG during the proceedings, as parties cannot intend to exclude it unless they are aware of it^[20]. Therefore the reasoning of the District Court in finding that since the CISG is mandatory “Rienzi had notice to the potential applicability of the CISG at the time it filed the Complaint”^[21] is unsatisfactory. The mandatory application of the CISG, renders Rienzi’s lawyer, and not Rienzi himself, under the obligation to be aware of the Convention^[22]. Even for those who argue that lawyers are agents of the parties, proof must still be found that they knew the CSIG was applicable and consciously excluded it. Should that be the case, this might constitute professional malpractice by the lawyer that has violated his client’s interest by excluding the CISG when the CISG would have been favorable to the latter^[23].

The reasoning of the Court of Appeals in finding that invocation of a New York statute incompatible with the CISG constitutes an effective derogation^[24] is also unsatisfactory as the Court should again be more careful in guessing the intent of parties. This approach is doubly problematic for US judges as it entails being familiar with the CISG; evidence will only exist when the state law that is relied on is found incompatible with the Convention. Indeed, this ruling suggests that reference to a domestic statute compatible with the CISG would not constitute intent to opt out under the Court’s reasoning. Another uncertainty that this holding brings is whether Rienzi’s assertion of the statute of frauds is sufficient to amount to consent to opt out as the Court of Appeals merely states that it “supports the conclusion”. Indeed, the Court then goes on to point to other factors that prove consent of Rienzi to opt out and it is unclear whether each factor taken separately would amount to consent or whether it is the accumulation of these factors that culminate in Rienzi’s consent.

II) Domestic procedural law should not be used to exclude the CISG

Procedural law has been used by some courts in order not to apply the CISG^[25]. It is very probable that in Rienzi, the district court was expressing its holding in terms of equity estoppel^[26]. Equity estoppel prevents one party from taking a different position at trial than it did at an earlier time if the other party would be harmed by the change. The district court’s refusal to apply the CISG was based on its concern for the defendant’s reliance on earlier pleadings^[27] as well as a concern that the plaintiff may be trying to achieve a strategical delay to the detriment of the defendant^[28].

Although the Court of Appeals’ reasoning was centered on proving that Rienzi has consented to the application of New York law, it expressed concerns about timeliness in its conclusion that “the district court did not err, much less abuse its discretion, in finding that Rienzi had consented to application of New York law to the contract claims at issue before its untimely 2011 invocation of the CISG”, suggesting that the procedural doctrine of untimeliness supported its conclusion, as it did in the GPL Treatment case^[29].

Some commentators have argued that as the provisions of the CISG do not displace local procedures, courts may use procedural domestic law in these cases as they involve not only the interpretation of Article 6, but also the expenditure of judicial resources^[30] . However, the majority argue that the CISG exclusively provides the conditions for its own applicability^[31], and notwithstanding procedural domestic law judges must apply the CISG in Contracting State as it is the corollary of the ex officio application of the CISG^[32]. If judges each apply their own procedural rules this undermines the uniform and predictable interpretation of Article 6, which has to be interpreted non-nationalistically, and this would lead to an increase in adjudication costs in the long run. Asking the parties early in the proceedings if they are aware that the CISG applies and if they have agreed to exclude it would be a better way to prevent strategic behavior of lawyers in a time and cost-effective manner^[33].

The Court of Appeals’ failure to apply the CISG when it is applicable amounts to a breach of international obligations^[34], and an untimely pleading of the CISG does not relieve courts from their duty to apply international conventions. The court in Rienzi should therefore have decided the case under the CISG sua sponte or requested additional briefs^[35].

Conclusion

In any international contract for the sale of goods, the drafters must be vigilantly aware of the inclination of US courts to hold as they have in Rienzi. Although the CISG is applicable ex officio, it is recommended to explicitly include the CISG in the choice of law clause of the contract.

In the future, it is hoped that lawyers and judges will become more CISG-friendly, paving the way towards uniformity, legal certainty and the development of international trade, reasons why the CISG was enacted. The position has already significantly improved over the past five years^[36]. The success of the Willem Vis International Moot Competitions in Vienna, which focuses on the application of the CISG and in which law students from more than forty US Universities participate each year^[37] can be expected to significantly enhance acknowledgement and interest of the CISG amongst future US lawyers.

Louise Malécot

The author is a Class of 2017 LL.M. student in the International Business Regulation, Litigation and Arbitration program at the New York University School of Law. She is a graduate of the English and French Law LL.B./Maîtrise Dual Degree Program from the Leicester Law School and the University of Strasbourg.

^[1]P.L. Fitzgerald, The International Contracting Practices Survey Project, https://jlc.law.pitt.edu/ojs/index.php/jlc/article/viewFile/15/15 at pages14 and 23; L. Spagnolo, A Glimpse through the Kaleidoscope: Choices of Law and the CISG, http://www.cisg.law.pace.edu/cisg/biblio/spagnolo3.html at pages 135 to 139.

^[2]See for e.g. US Southern District Court of New York, Eldesouky v. Aziz (2015) where the Court went as far as holding that “as a practical matter whether the UCC or the CISG governs is likely immaterial”.

^[3]F. Ferrari, Homeward Trend and Lex Forism Despite Uniform Sales Law, http://www.cisg.law.pace.edu/cisg/biblio/ferrari17.html at page 26; S. Salama, Pragmatic Responses to Interpretive Impediments: Article 7 of the CISG, An Inter-American Application, http://www.cisg.law.pace.edu/cisg/biblio/salama.html at page 231.

^[4]F. Ferrari, Have the Dragons of Uniform Sales Law Been Tame? Ruminations on the CISG’s Autonomous Interpretation by Courts, http://www.cisg.law.pace.edu/cisg/biblio/ferrari18.html at page 139.

^[5]Supra note 4 at page 164.

^[6]US Court of Appeals for the Second Circuit, Rienzi & Sons, Inc. v. N. Puglisi & F. Industria Paste Alientari (2016).

^[7]US District Court for the Eastern District Court of New York, Rienzi & Sons, Inc. v. N. Puglisi & F. Industria Paste Alientari (2014), reconsideration of its previous 2013 decision (“there is little case law interpreting the CISG, and the Court is not aware of any controlling case considering application of the CISG that addresses post-contract actions, particularly, the parties’ actions during the course of litigation”).

^[8]See for e.g. Slovak Republic Supreme Court, 3 Obo 247/2005 (2006); Germany Naumburg Court of Appeal, 12 U 153/12 (2013); Austria Linz Court of Appeal, GZ 3 R 46/08t-49 (2008); Mexico Federal Court of Appeals (Fifteenth Circuit Court), Georgia Pacific Resins, Inc. v. Grupo Bajaplay, S.A. de C.V (2007); Germany Rostock Court of Appeal, 6 U 126/00 (2001); Germany Hamm Court of Appeal, 11 U 191/94 (1995); Netherlands Rotterdam District Court, Eyroflam SA v. PCC Rotterdam BV (2008); Italy Tribunale di Padova, SO. M. AGRI s.a.s di Ardina Alessandro & C. v. Erzeugerorganisation Marchfeldgemüse GmbH & Co. KG (2004); Germany Saarbrücken District Court, 8 O 49/02 (2002); Italy Tribunale di Vigevano, Rheinland Versicherungen v. S.r.l. Atlarex and Allianz Subalpina S.p.A. (2000).

^[9]G.M. Grant, The CISG Should Apply Ex Officio in the U.S., https://www.peacepalacelibrary.nl/ebooks/files/398263361.pdf at page 5; C. Witz, Harmonization in the European Union, http://www.cisgbasel2015.com/index_htm_files/21_paper_Claude%20Witz_Harmonization%20in%20the%20European%20Union.pdf  at ¶ 34; L. Spagnolo, Iura Novit Curia and the CISG: Resolution of the Faux Procedural Black Hole http://www.cisg.law.pace.edu/cisg/biblio/spagnolo1.pdf at page 195; France Cour de Cassation, Société Muller Ecole et Bureau v. Société Federal Trait (2001); Austria Supreme Court, 4 Ob 179/05 k (2005).

^[10]F. Ferrari, Remarks on the UNCITRAL Digest’s Comments on Article 6 CISG, http://www.cisg.law.pace.edu/cisg/biblio/ferrari13.html#92.

^[11]See cases supra note 8.

^[12]L. Spagnolo, supra note 9 at pages 195 to 196.

^[13]F. Ferrari, Specific Topics of the CISG in the Light of Judicial Application and Scholarly Writing, http://www.cisg.law.pace.edu/cisg/text/franco6.html.

^[14]See for e.g. US Southern District Court of New York, Ho Myung Moolsan, Co. Ltd. v. Manitou Mineral Water, Inc. (2010); US District Court of Rhode Island, American Biophysics v. Dubois Marine Specialties (2006).

^[15]See for e.g. US 5th Circuit Court of Appeals, BP International, Ltd. v. Empressa Estatal Petroleos de Ecuador (2003); US Middle District Court of Pennsylvania, It’s Intoxicating, Inc. v. Maritim Hotelgesellschaft GmbH and Daniela Zimmer (2013); US District Court of Minnesota, Travelers Property Casualty Company of America v. Saint-Gobain Technical Fabrics Canada Ltd (2007); US District Court of Michigan, Easom Automation Systems, Inc. v. Thyssenkrupp Fabco (2007); US Western District Court of Washington, Beltappo Inc. v. Rich Xiberta, SA (2006); US District Court of Maryland, American Mint LLC v. GOSoftware Inc. (2006); US District Court of New Jersey, Valero Marketing &Supply Co. v. Greeni Oy (2005); US District Court of North Dakota, Ajax Tool Works, Inc. v. Can-Eng Manufacturing Ltd. (2003); US Southern District Court of New York, St Paul Guardian Insurance Company and Travelers Insurance Company v. Neuromed Medical Systems & Support, GmbH (2002).

^[16]Article 8(2) CISG.

^[17]Article 8(3) CISG.

^[18]F. Ferrari, supra note 10 at page 23; F. Enderlein and D. Maskow, International Sales Law

http://www.cisg.law.pace.edu/cisg/biblio/enderlein.html at page 48.

^[19]C.P. Gillette and S.D. Walt, Judicial Refusal to Apply Treaty Law: Domestic Law Limitations on the CISG’s Application, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2841055 at page 15: “nothing in Article 8’s rules for interpreting intent provide a presumption one way or the other with respect to application of the CISG”.

^[20]F. Ferrari, supra note 10 at pages 30 to 31; Schlechtriem & Schwenzer, Commentary on the UN Convention on the International Sale of Goods (CISG), 3rd ed., Oxford 2010 at page 113 ¶ 21.

^[21]US Eastern District Court of New York, Rienzi & Sons, Inc. v. N. Puglisi & F. Industria Paste Alientari (2013).

^[22]U.G. Schroeter, To Exclude, to Ignore, or to Use? Empirical Evidence on Courts’, Parties’ and Counsels’ Approach to the CISG, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1981742 at page 27: “Blessed ignorance of the Sales Convention is accordingly not an option for counsel, since it constitutes a violation of her or his legal obligation to know the law”.

^[23]Id. at pages 24-30.

^[24]Supra note 6, consent to opt out can be inferred from “Rienzi’(s) assert(ion of) a statute of frauds defence inconsistent with application of the CISG but cognizable under NY law”.

^[25]See for e.g. US Oregon Court of Appeals, GPL Treatment v. Louisiana-Pacific Corp. (1995); US Southern District Court of New York, Eldesouky v. Aziz (2015); US Southern District Court of New York, Ho Myung Moolsan, Co. Ltd. v. Manitou Mineral Water, Inc (2010).

^[26]C.P. Gillette and S.D. Walt, supra note 19 at page 6.

^[27]Supra note 22, “it was far too late to withdraw that consent without undue prejudice to defendant…it would be unduly prejudicial to hold otherwise”.

^[28]Supra note 22, “governing law upon which plaintiff proceeds is not an ace of spades to be held in counsel’s hand until discovery has closed and then sprung on an unsuspecting adversary”.

^[29]US Oregon Court of Appeals, GPL Treatment v. Louisiana-Pacific Corp. (1995).

^[30]C.P. Gillette and S.D. Walt, supra note 19.

^[31]CISG Advisory Council Opinion No 16, Exclusion of the CISG under Article 6, http://www.cisg.law.pace.edu/cisg/CISG-AC-op16.html#156, at ¶ 6.3.

^[32]L. Spagnolo, supra note 9 at page 196.

^[33]J.M. Grant, supra note 9 at page 39.

^[34]L. Spagnolo supra note 9 at page 192.

^[35]J.M. Grant, supra note 9 at pages 35 to 38.

^[36]J. Ziegel, The Scope of the Convention: Reaching Out to Article One and Beyond, http://www.cisg.law.pace.edu/cisg/biblio/ziegel7.html at page 69.

^[37]http://www.cisg.law.pace.edu/cisg/moot/mootlist.html, the country the most represented each year at the Vismoot is the US.

On 1 December 2016, Mr. Pedro Martinez-Fraga, Adjunct Professor at NYU School of Law, and Mr. Ryan Reetz, former scholar-in-residence at the Center, gave a talk at King’s College, London, on “The Certainty of Uncertainty in the Protection Standards & Policies of Investor-State Arbitration”.

 

In their discussion, the presenters asserted that international standards for investment protection are inadequate and command reconceptualization if they are to lead to uniformity, predictability, transparency and to process legitimacy. Specifically, it was argued that because international standards of investment protection arise from (1) domestic law liability rules, (2) domestic law property rules, (3) liability and damages doctrines pertaining to private international law, and (4) do not account for a globalization non- territorially based economic framework, they lead to uncertainty even at basic levels, such as defining with certainty and uniformity the very elements of protections. They called for the inclusion of a “plus factor” that shall consider (1) macroeconomic consequences, (2) microeconomic effects, (3) economic efficiencies, (4) distributive consequences, and the host-state’s (5) social policy budget.

 

Put simply, the presenters called for standards of investment protection that most uniformly may lead to distinguishing objectively between compensable and non-compensable state action.

 

For a video of the talk please click here.

 

The ideology of the legal profession critically shapes the law,[1] and transnational arbitration, litigation and commercial law is not an exception. Last week the 2016 Annual Conference of the International Bar Association (IBA) took place in Washington, DC. The IBA is the “world’s leading organization of international legal practitioners, bar associations and law societies”.[2] Its 2016 annual conference gathered more than 6.000 delegates coming from jurisdictions all around the world to discuss, over one week, about their professional experience, current legal developments in their fields of practice and enlarge and strengthen their international networks. The conference hosted more than 200 working sessions, workshops, panels and other activities, covering almost all areas of the legal profession, including general interest topics, legal practice and public interest lawyering.[3] Hence, the IBA Annual Conference provides a unique insight into the legal culture of international attorneys and its interplay with the development of the law, including international commercial law and dispute resolution (i.e., international litigation, arbitration and mediation).

Probably the most apparent phenomenon reflected by the 2016 IBA Annual Conference in this area of legal practice is the difference in the attention that international practitioners devote to international commercial dispute resolution law vis a vis international substantive uniform and model law. Excluding investment arbitration and mediation, the conference hosted at least four sessions directly concerned with international dispute resolution, including hot topics in international arbitration, the public policy and arbitrability exceptions under Article V (2) of the New York Convention, soft law in international arbitration and the Uncitral draft treaty on the enforcement of settlement reached through mediation. Moreover, frequent remarks on international dispute resolution were made by speakers and delegates in sessions not directly addressing this subject, evidencing a deep involvement of many assistants in this field, particularly in international arbitration. Remarkably, speakers and delegates in the Dispute Resolution Section showcase on effective advocacy for all modes of disputes resolution, especially addressed the challenges of panels conformed by arbitrators educated in different legal traditions. Indeed, how to achieve a meaningful and successful communication among civil law and common law educated attorneys seems to have been one of the most recurring topics at the conference, as evidenced by the many working sessions that directly addressed this subject (e.g., “Natural resources agreements: common law provision in civil law jurisdictions” and “Creating lawyers who can work across civil and common law jurisdictions”). This strongly suggest that, despite their global practice, international lawyers -including those dedicated to international dispute resolution- are still overwhelmingly attached to their domestic legal education and training.

The attention devoted by the IBA Annual Conference and its attendees to international dispute resolution highly contrast with the situation of uniform substantive law and model law. No working session was primarily concerned with uniform substantive law, the only one on model law addressed the developments of an instrument of a nature close to procedural law (the Uncitral model law on cross-border insolvency) and most sessions on related subjects did not refer in a relevant manner to the process of unification or harmonization of private substantive law. Informal opinions of different delegates attending the conference were illustrative of the reasons for this lack of interest: uniform substantive law remains relatively unknown compared with domestic law, it is rarely applied by courts and, when applied, it normally results in a completely unexpected surprise for the parties, arising from awards by national courts relying in the iura novit curia doctrine[4]. These views might be expected for many common law lawyers,[5] but it also holds true for practitioners of German speaking countries, despite that these jurisdictions evidence the most extensive and sophisticated case law on one of the most widely accepted instruments of uniform substantive law, the CISG.

This disparity in the importance of international commercial arbitration and uniform substantive law at the IBA Annual conference is not surprising. International commercial arbitration is a dispute resolution form normally agreed in contracts between highly sophisticated parties, counting with skilled professional legal assistance. Counsels normally advise their clients to exclude any applicable uniform law, e.g. the CISG,[6] and parties normally end up making a choice of law in favor of the domestic law of the one with stronger barging power or the law of a neutral mayor global commercial forum (e.g., the law of New York; England and Wales, Switzerland, etc.). The previous stresses that international attorneys still feel much more confident with the law of the tradition in which they were educated and explains that the challenge of communicating among common law and civil law lawyers remains one of the most recurring topics of the IBA Annual Conference.

This way, the 2016 IBA Annual Conference evidences that the professional ideology of international lawyers still distrust the process of harmonization and unification of private substantive law. Despite the relative success of Uncitral and Unidroit in obtaining the accession or enactment by many States to its most emblematic instruments, without a relevant change in the culture of the legal profession, this process will remain incomplete.[7] Hence, international organizations in this field not only need to target States to make them parties to the relevant international instruments. These organizations must also address the underlying legal communities in order to convince them that the process of unification and harmonization of private substantive law is useful and valuable for international lawyers and their clients: uniform and model law can provide them with a common language that helps them to face one of the most defying challenges of international legal practice: how to bridge the cultural gaps between lawyers educated in different legal traditions.

 

Ernesto Vargas Weil

LL.M. New York University, International Finance and Development Fellowship ‘14. LL.B. University of Chile. Partner at Anriquez Novoa Abogados (Santiago, Chile). Instructor at the Private Law Department of the University of Chile. He attended the 2016 IBA Annual Conference thanks to the “IBA Scholarship Programme for Young Lawyers from Developing Countries”.

[1] See Max Weber, Economy and Society. Berkley, California: University of California Press, 1978, pp. 784-808.

[2] http://www.ibanet.org/About_the_IBA/About_the_IBA.aspx.

[3] IBA 2016 Annual Conference of the International Bar Association Final Programme, available at http://www.int-bar.org/Conferences/conf664/binary/Washington-2016-final-prog-FULL-FOR-WEB-14-SEPT.pdf.

[4] See Roy Goode, Herbert Kronke and Ewan Mc Kendrick. Transnational Commercial Law: Text, Cases, and Materials. Oxford, UK: Oxford University Press, 2007, p. 264. For a classic example, see Tribunale di Vigevano, Italy, 12 July 2000 (Rheinland Versicherungen v. Atlarex), English translation available at http://cisgw3.law.pace.edu/cases/000712i3.html.

[5] E.g., on the familiarity of common law lawyers with the CISG, see Ingeborg Schwenzer and Christopher Kee, Global Sales Law – Theory and Practice”, in: Schwenzer and Spangolo (Eds.). Towards Uniformity. The Second Annual MAA Schlechtriem CISG Conference, March 13 2010, Hong Kong. International Commerce and Arbitration, vol. 8. The Hague, The Netherlands: Eleven International Publishing, 2011, p. 158.

[6] See Ingeborg Schwenzer and Pasacal Hachem. The CISG – Successes and Pitfalls. 57 American Journal of Comparative Law (Spring 2009), pp. 464 and Ulrich Magnus, Sales of Good, International (Uniform Law), in: Jürgen Basedow, Klaus J. Hopt and Reinhard Zimmermann (eds.), The Max Plank Encyclopedia of European Private Law. Oxford; New York: Oxford University Press, 2012, vol. II, p.1508; Peter Mankowski, Peter. Artikel 6 CISG und Abbedingung der CISG, in Festschrift für Ulrich Magnus zum 70. Geburtstag. Munich, Germany: Sellier European Law Publishers GmbH, 2014, pp. 257, 258.

[7] See José Antonio Moreno Rodriguez, Contracts and Non-State Law in Latin America. Uniform Law Review. NS – Vol XVI, 2011, p. 877.

Professor Ferrari will give several talks on matters related to the United Nations Convention on Contracts for the International Sale of Goods (CISG) and arbitration at a conference organized by the Center, to be held in Santo Domingo on 10 October 2016. Professor Marco Torsello, two-time Global Professor of Law at NYU, will also give a talk on CISG related topics. For the full program, please click here.

On January 28, 2015, the High Court of Justice of Madrid (“HCJ of Madrid”) rendered a decision[1] setting aside an award dated January 14, 2014 that dealt with an interest rate swap agreement signed between a retail company and a bank. The HCJ of Madrid concluded, after reviewing the law applicable to the merits of the dispute, that the award was contrary to economic public policy and, therefore, according to article 41(1)(f) of the Spanish Arbitration Act, it should be annulled.

Remarkably, the decision has not been an exception. In the past months, more judgments with a similar factual background (the purchase of an interest rate swap by a retail company) and analogous reasoning and outcome have been lodged by the HCJ of Madrid—Judgments of April 6, 2015, April 14, de 2015, and June 1, 2015—, pleasing those who blame the financial entities for the country’s economic crisis, but alarming Spain’s arbitral community.

Until recently, Spanish courts had respected that arbitral awards cannot be reviewed on their merits, and had interpreted the concept of public policy restrictively, applying it only when there had been a clear violation of a fundamental constitutional right. Do these decisions represent a change in trend?

 

1. The Award of January 14, 2014

In 2008, the sole administrator of a retail company negotiated and agreed with BBVA (Spain’s second largest bank) the novation of a mortgage loan. During the negotiations, the company expressed its concern regarding the possible increase of interest rates and asked the bank if there was any product that covered such risk. The bank then offered the company to subscribe an interest rate swap.

Before contracting the financial product, the bank applied the convenience test[2] to the sole administrator, from which it resulted that he had passed 4 out of 5 years of the degree in business administration. Moreover, a BBVA worker explained to him the terms of the interest rate swap[3]. After the explanation, the sole administrator subscribed the mortgage novation as well as the interest rate swap agreement.

Six years later, the company initiated arbitration proceedings (under the administration of the Court of Arbitration of the Official Chamber of Commerce and Industry of Madrid) against BBVA requesting the arbitral tribunal to annul the interest rate swap agreement due to an error in consent. In this regard, the company alleged that, at the time of the agreement, the sole administrator thought he was contracting an insurance agreement that could be cancelled at any time; that BBVA had not applied the suitability test[4], as it should have due to the complex nature of swaps, and that the bank had advised him to contract the product before having him take the convenience test.

The arbitral tribunal rejected all of these arguments. In summary, the tribunal concluded that the product had characteristics that clearly distinguished it from an insurance (the company had never paid a premium); that a swap could not be qualified as a specially complex product for a person with a minimum formation and experience in commercial and financial activities; that the information provided by the bank was clear, true, impartial and non-fraudulent, allowing the client to be conscious of the essential terms of the agreement; and that the anticipated cancelation of the product had a cost that had to be paid. Hence, the award determined that the company had to comply with the terms of the interest rate swap in order to cancel it.

Disappointed with the award, the company sought its annulment under two grounds: (1) the partiality of the Court of Arbitration[5] and the absence of independence and impartiality in the co-arbitrator; and (2) the infringement of public policy due to the misinterpretation and misapplication of the standard of conduct rules imposed by the Spanish Securities Act and the national and European Union case law that applies those rules[6].

 

1. The decision of the HCJ of Madrid of January 28, 2015

In the application to set aside the award, the company alleged that the award infringed public policy for four reasons: (1) it disregarded article 79(8) of the Spanish Securities Market Act when considering the swap a non-complex product; (2) it did not apply the statute of protection of retailers; (3) in view of the evidence, it could not be concluded that BBVA informed the company of the high risks and costs associated to the swap nor its probability of occurrence and possible range; and (4) it did not sanction the fact that the suitability test was not applied to the sole administrator.

BBVA rejected both grounds for the annulment of the award and, in relation to the second one, it held that the action to set aside awards does not open a second instance and could not allow the courts to review the merits of the case.

Although the decision seemed to agree with BBVA when quoting the Preamble of the Spanish Arbitration Act —“the grounds for setting aside an award must be appraised and must not allow, as a general rule, a review of the arbitrators’ decision on the merits”—, the fact that it underlined the words “as a general rule” gave a hint of what it would later dispose. The HCJ of Madrid stated that article 41(1)(f) of the Spanish Arbitration Act comprised not only the protection of fundamental rights (contained in the Spanish Constitution) but also, due to the imperative mandate of European Union Law, the protection of economic public policy.

In view of the court, “the distinguished paradigm of economic public policy is the principle of contracting in good faith (…), the observance of which is specially unavoidable when, in a particular transaction, a situation of unbalance, disproportion or asymmetry takes place between the parties due to the complexity of the product that is being bought and the disparate knowledge that parties have of such product”.

In order to determine if the award had breached economic public policy, the HCJ of Madrid reviewed the circumstances of the case in the light of the Judgment of the Supreme Court of January 20, 2014[7] —which contained essential doctrine that delimited the scope of the principle of contracting in good faith in relation to financial products—, and then concluded that the award erred in the following three aspects:

1. The award disregarded the facts of the case that proved that the tasks carried out by the bank “implied advice and not only commercialization”, which should have led BBVA to apply both the test of convenience and the test of suitability to the sole administrator.
2. The award ignored article 79 bis (8) of the Spanish Securities Market Act, which forbids to consider swaps as non-complex financial products.
3. The award failed to analyze whether the bank informed the company of the possibility of early terminating the interest rate swap agreement and its related costs.

In view of the aforementioned errors, the court concluded that the award’s motivation, based on legal grounds that are contrary to imperative applicable law, was arbitrary and that it, therefore, contravened public policy.

 

III. The decision of the HCJ of Madrid violates article 41(1)(f) of the Spanish Arbitration Act

While an appeal allows a court to re-examine the decision rendered in first instance, the action of annulment of an award is limited to the numerus clausus grounds listed on article 41 of the Spanish Arbitration Act. This grounds allow a three level control: (1) the existence and validity of the arbitral agreement; (2) the regularity of the proceedings; and (3) respect of public policy.

But, what is public policy and in what particular cases does it allow tribunals to review the merits?

Spanish courts have always interpreted and applied the concept of public policy in a very restrictive manner, respecting the fact that an arbitral award cannot be, as a general rule, reviewed on its merits. This limitation implies that the proven facts, the assessment of the evidence and the interpretation given to the applicable law should, in general, remain out of the scope of the action of annulment.

In other words, courts cannot replace the criterion of the award by their own. The court may disagree with the final decision of the award but that does not allow it to dispense justice when the parties have attributed jurisdiction to an arbitral tribunal. The courts role is reduced to verify if the award is reasoned and if it is not flagrantly incompatible with the practiced evidence, and not to verify if another conclusion could have been reached out of the evidence.

As the Provincial Court of Pontevedra clearly stated in its decision of January 21, 2010[8], through the action of annulment the courts may only challenge awards that absolutely ignore the rights and principles that form public policy (i.e. fundamental constitutional rights), but not the particular interpretation and application that of those rights and principles the arbitrator does.

In view of the above, it is not a surprise that the decision of the HCJ of Madrid, which bypassed the arbitral tribunal’s reasoning, has been harshly criticized in every arbitral forum. This decision has unlawfully taken advantage of a broad concept of public policy to expand the scope of the action of annulment and reverse an award that is perfectly reasoned, just because the court disagrees with the outcome.

This new tendency has led to subsequent judgments like the decision of 14 April, 2015 of the HCJ of Madrid[9] in which the court even affirms that law grants judges an “extraordinary control” that has the goal of “revoking any excess of the arbitral award”. Indeed, this view is mistaken. As it is alleged in the dissent of Judge Francisco Javier Vieira Morante, the powers of the annulment tribunal are not the ones of an appellate one; thus, the annulment tribunal may not replace the conclusions of the award for others it considers to be more just[10].

In order to respect the principle of party autonomy and avoid any abuse of discretion in the future, it would be advisable to determine and narrow a definition of economic public policy, bearing in mind that public policy should only be considered where there is a clear and serious violation of a fundamental right. Otherwise, the ability to set aside an award would be boundless.

The absence of certainty and precision of such an important concept menaces the exceptional scope of the action of annulment, which could become a forbidden second instance. However, even if a definition is not found, courts cannot ignore that an award cannot be set aside when it is reasoned and the assessment of the evidence does not result irrational.

 

1. Conclusion

Some authors[11] believe that the commented decision (as well as the ones that have followed it) “undermine the basis of arbitration and put in danger arbitrations with a seat in Madrid, which from now on are subject to appeal before the HCJ.” Others[12] believe “these judgments to be exceptional decisions on a very specific matter based on the specific circumstances of these cases [that] cannot be extrapolated to other types of controversies or disputes of a different nature.”

In this author’s opinion, the nature of the case should not justify the fact that courts go beyond their authority and, unless we want to detriment arbitration proceedings with a seat in Madrid, the concept of public policy should remain interpreted in a restrictive manner.

A broad interpretation of public policy, even if tied to arbitrations related to swap agreements, may (rectius, will) influence negatively in investors who will become reluctant to include arbitration clauses with a seat in Madrid in their agreements, because when deciding upon a dispute settlement clause, parties want to ensure an absolute legal certainty.

If the HCJ of Madrid misinterpreting article 41(1) of the Spanish Arbitration Act puts an end to the main virtues of arbitration —finality of the decisions, lower cost, enforceability of the award and speed—, by creating the possibility of reviewing awards on the merits, arbitrations with a seat in Madrid may be in danger. For now, these decisions have only affected a certain type of cases (arbitrations related to financial products acquired by retails companies), but what counsel can guarantee its clients that this reasoning will not be applied to other type of cases in the future?

As it was stated by a well-known dissertation, “the binding nature of the award, or indeed any legal instrument, cannot exist in isolation, but must stem from a legal system which recognizes that binding quality.”[13] In this regard, efficiency of arbitration proceedings does not only rely on the arbitrators but also on the support given to it by the courts. Only an intervention that shows a true support of the arbitral proceedings will allow arbitration to be a successful method of dispute resolution.

 

Lara Rodríguez Mulet

Class of 2016 graduate in the International Business Regulation, Litigation, and Arbitration (IBRLA) LL.M. program at New York University School of Law. Foreign Associate of the International Arbitration Practice Area at Freshfields Bruckhaus Deringer in New York.

[1] Civil and Criminal Chamber of the High Court of Justice of Madrid, decision number 13/2015, dated January 28, 2015 (Westlaw JUR\2015\79489).

[2] Test used to evaluate the knowledge and experience of the client in relation to the product being offered or requested.

[3] In summary: the bank would pay the company a 12 month EURIBOR rate and the company would pay the bank a fixed rate of 4.64% during a period of 13 years, being the amount equal to the one of the loan. Or, in other words, that he would have a fixed rate for the loan equal to 5.29%.

[4] Test used to evaluate the knowledge of the client in relation to the concrete product, his experience with such product, his financial situation and the objectives of his investment.

[5] The company alleged that the Court’s neutrality was jeopardized by the fact that at least one third of the arbitrators listed by the Court had had a direct relationship with BBVA or other banks who offer swaps.

[6] The HCJ of Madrid rejected the former ground, so we shall focus on the analysis of the latter.

[7] Note that this judgment was passed 6 days after the award was rendered.

[8] Provincial Court of Pontevedra, decision number 41/2010, dated January 21, 2010 (La Ley 8466/2010).

[9] Civil and Criminal Chamber of the High Court of Justice of Madrid, decision number 30/2015, dated April 14, 2015 (Westlaw JUR\2015\136198).

[10] In words of Judge Vieria, “it is true that when legal issues have been debated we may not agree with the judgment of the award, especially when it contradicts the Supreme Court’s decisions. But that does not allow us to impart justice in the particular case, since it is impeded by the decision of the parties to exclude tribunals of the dispute settlement.”

[11] Conthe, M., Swaps de intereses: la sentencia del Tribunal Superior de Justicia de Madrid de 28 de enero de 2015, Diario La Ley, n. 8515 (April 9, 2015).

[12] Ardila, G. and Fernandez-Miranda, B., No rain forecast for arbitration in Spain, LexisNexis (July 14, 2015).

[13] Fouchard, P., Gaillard, M., and Savage, J., Fouchard Gaillard Goldman on International Commercial Arbitration, Savage and Gaillard (1999).

Prof. Silberman, the Co-Director of the Center, will give a talk on the implications US court decisions can and do have abroad, both in the international litigation and arbitration contexts. The starting point of  Prof. Silberman’s remarks will be the US Supreme Court’s decision in Daimler AG v Bauman, on the occasion of which the US Supreme Court stated that as a constitutional matter, general jurisdiction over a corporation is limited to the state in the US where the defendant can be regarded “at home”. For more info, please click here.

Professor Franco Ferrari, the Director of the Center, and Dr. Friedrich Rosenfeld, a Global Adjunct Professor at NYU Law in Paris, Visiting Professor at the International Hellenic University in Thessaloniki and Lecturer at Bucerius, have just published a comment on the decision rendered on 20 April 2016 by the District Court of The Hague (the Netherlands), which set aside six arbitral awards that had been rendered in the proceedings Yukos Universal Limited (Isle of Man) et. al. against Russia. The arbitral tribunal had ordered Russia to pay compensation for its breach of the Energy Charta Treaty. According to the District Court of The Hague, the arbitral tribunal had erroneously found that the Energy Charta Treaty was provisionally applicable. For this reason, the arbitral tribunal could not base its jurisdiction on the arbitration clause set forth in Art. 26 Energy Charta Treaty. The case comment note examines the set-aside decision of the District Court of The Hague as well as its implications for ongoing enforcement proceedings.

On June 7, 2016, Professor Ferrari, the Director of the Center, was appointed President of the Thailand Arbitrator Committee established at the Thailand Arbitration Center (THAC). The tasks of the President of the Arbitrators Committee are outlined in the Arbitrator Committee Rules. In light of these Rules, Professor Ferrari will preside of the meetings in which the Thailand Arbitrator Committee will take decisions of the challenges to the arbitrators. As President of the Arbitrator Committee, Professor Ferrari will, however, be the sole responsible for appointments and removals of arbitrators.

The Center is pleased to announce this September’s session of the Forum of the Center for Transnational Litigation, Arbitration and Commercial Law, entitled “The EU Proposal for an Investment Court System”. The event will take place on Monday, 12 September 2016, from 6.00 – 8.00 pm, in the Lester Pollack Colloquium Room, Furman Hall 900 (245 Sullivan Street, New York, NY 10012).

It is a great pleasure to be able to announce that on the occasion of this session Dr. Inka Hanefeld will give a talk on the aforementioned topic and that Professor Robert Howse and Barry Appleton agreed to act as commentators.

Dr. Inka Hanefeld LL.M. (New York University), Attorney-at-law (New York), is a German and New York qualified lawyer specialized in dispute resolution and, in particular, in arbitration. Inka is the founding partner of the German dispute resolution law firm Hanefeld Rechtsanwälte, Hamburg, Germany. In 2013, Inka was appointed as arbitrator to the panel of arbitrators at the Centre for Settlement of Investment Disputes (ICSID) by the German Government. In 2015, Inka became Vice-President of the ICC International Court of Arbitration. Since 2015, she is also court member of the London Court of International Arbitration (LCIA) and designated member of the ICDR International Panel of Arbitrators. Inka primarily acts as arbitrator and counsel in domestic and international arbitration proceedings in the fields of international trade, industrial plant and machine building, energy, banking & finance, as well as in post-M&A and investor-State disputes. Her expertise has been recognized in various international rankings.

Robert Howse is the Lloyd C. Nelson Professor of International Law at NYU School of Law. Professor Howse received his B.A. in philosophy and political science with high distinction, as well as an LL.B., with honours, from the University of Toronto, where he was co-editor in chief of the Faculty of Law Review. He also holds an LL.M. from the Harvard Law School. He has been a visiting fellow at the London School of Economics and visiting professor at Harvard Law School, Tel Aviv University, Hebrew University of Jerusalem, the University of Paris 1 (Pantheon-Sorbonne), Tsinghua University, and Osgoode Hall Law School in Canada and taught in the Academy of European Law, European University Institute, Florence. He is a frequent consultant or adviser to government agencies and international organizations such as the OECD, the World Bank, UNCTAD, the Inter-American Development Bank, the Law Commission of Canada and the UN Office of the High Commissioner for Human Rights. He was a contributor to the American Law Institute WTO project. He is a co-founder and co-convener of the New York City Area Working Group on International Economic Law and serves on the American Bar Association Working Group on Investment Treaties. Professor Howse serves on the editorial boards of the London Review of International Law, Transnational Legal Theory, The Journal of World Trade and Investment, among others. Professor Howse’s article with Ruti Teitel “Beyond Compliance: Rethinking Why International Law Really Matters” was awarded the Global Policy Best Article Prize 2010 (shared with Joseph Stiglitz et al). Prior to pursuing legal studies, Howse held a variety of posts with the Canadian foreign ministry, including as a member of the Policy Planning Secretariat and a diplomat at the Canadian Embassy in Belgrade.

Barry Appleton is the Managing Partner of Appleton & Associates International Lawyers in Toronto. He is a member of the bars of Ontario, New York, the District of Columbia and the US Court of International Trade.  For more than twenty years, he has practiced international investment treaty arbitration under the NAFTA. bilateral investment treaties, appearing as lead counsel in many international arbitrations He also has represented client submissions at the World Trade Organization. Mr. Appleton is the author of the three volumes of NAFTA: Legal Text and Interpretative Materials, (Thomson West, 2007), the treatise Navigating NAFTA (Carswell,1994) and many articles involving the adjudication of international investment treaty law issues. He is the global editor of Westlaw’s Investor-State Reports and Investor- State Digest. He also acts as the Vice Chair of the International Arbitration Committee of the American Bar Association Section on International Law and co-chairs the International Arbitration Committee’s Investment Treaty Working Group which is currently drafting a Report on the EU Investment Court Proposal.

Please note that the Chatham House rule applies.

The Center co-sponsors an event organized under the auspices of ARBITRALWOMEN. The International Network of Women in Dispute Resolution to be held at the office of Bryan Cave on 15 September 2016, from 6.00 pm to 9.00 pm. The speakers will be Gabrielle Nater-Bass, Homburger (Switzerland), Claudia T. Salomon, Latham & Watkins (New York), Emma Lindsay, Bryan Cave (New York), Anna Tevini, Shearman & Sterling (New York), Rocío Digón, International Chamber of Commerce (New York), Yasmine Lahlou, Chaffetz Lindsey (New York), amd Katie Hyman, Akin Gump Strauss Hauer & Feld (Washington, D.C.). For the program brochure, please click here.

Professor Franco Ferrari, the Director of the Center, and Dr. Friedrich Rosenfeld, a former scholar-in-residence at the Center and currently a Global Adjunct Professor at NYU Law in Paris, a Visiting Professor at the International Hellenic University in Thessaloniki and Lecturer at Bucerius Law School in Hamburg, have just published a paper in the NYU Journal of Law & Business (vol. 12: 295) analyzing the interaction of between the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958(New York Convention) and international investment law. The starting point of their analysis are the cases in which the domestic authorities in the country where enforcement of an arbitral award is sought unduly interfere with the enforcement instead of taking the arbitration-friendly stance required by imposed by the New York Convention. In these instances, a success in arbitration proceedings may turn out to be a mere pyrrhic victory. This holds true, in particular, where all of the debtor’s assets are located in one jurisdiction. Here, a contracting state’s compliance deficit with the New York Convention cannot be mitigated by seeking enforcement in a different contracting state. In response to these shortcomings, investors have begun to exploit the linkages between the New York Convention and the regime of international investment law. And it is on these linkages that the authors have focused.

On July 5, 2016, the Republic of Argentina appointed Professor Diego P. Fernandez Arroyo, a professor of law at Sciences Po Law School in Paris, and formerly a scholar-in-residence of the Center as well as a Global Professor at the NYU Paris Campus, to the ICSID Panels of Arbitrators and Conciliators. The ICSID is a forum for international investment dispute settlement that was established by a 1966 convention.

Professor Arroyo teaches subjects related to international dispute resolution, arbitration, conflict of laws, and comparative law and his books and articles have been published in more than twenty countries. He is actively involved in the practice of international arbitration as an independent arbitrator and an expert. He represents Argentina at the UNCITRAL Working Group on Arbitration. Professor Fernández Arroyo is also a member of the Curatorium of the Hague Academy of International Law, a former President of the American Association of Private International Law, and the current Secretary-General of the International Academy of Comparative Law. Professor Fernández Arroyo is actively involved in the practice of international arbitration as an independent arbitrator and an expert. He has developed several projects in the field of arbitration and international business law for the European Union, the Andean Community, the MERCOSUR, and the Latin-American Integration Association. He has published several books and a number of articles and notes in publications of more than 20 countries.

This appointment brings to four the number of NYU Law community members who have been appointed as arbitrators/conciliators to the ICSID by various governments:

Professor Diego Arroyo, professor of law at Sciences Po Law School in Paris, appointed by the Republic of Argentina

Adjunct Professor Pedro Martinez-Fraga, partner at Bryan Cave, appointed by the United States

Adjunct Professor Brian King, partner at Freshfields Bruckhaus Deringer, appointed by Saint Lucia

Professor Franco Ferrari, Director of the Center for Transnational Litigation, Arbitration and   Commercial Law,  appointed by Saint Lucia

 

Upon the invitation of the head of the UN Office of Legal Affairs, International Trade Law Branch, who also acts as Secretary to the UN Commission on International Trade Law (UNCITRAL), Professor Ferrari, the Center’s Director, will give a talk on specific aspects of the rule of law at this year’s Commission session. More specifically, Professor Ferrari will address what efforts are being made to avoid that the uniform rules elaborated by UNCITRAL be applied in a way that undermines the very purpose behind the unification efforts leading to those very same rules.

For this year’s Commission session’s program, please click here.