Transnational Notes

Civil law systems like the German one address jurisdictional questions through inflexible, statutorily-defined grounds of jurisdiction. Courts lack power to dismiss cases for forum non conveniens, and they have no discretion to accept jurisdiction when a valid choice-of-court agreement specifies a different forum. German legal scholars are particularly skeptical towards “flexible” common law jurisdictional doctrines such as forum non conveniens or the reasonableness test. Under German rules, German courts simply have no discretion to ask whether they, or whether another country’s courts, provide the more appropriate forum for a dispute.    

Civil law’s traditional dogmatism towards jurisdiction makes a recent German case all the more surprising. In a September 2012 decision, the German Supreme Court^[1] refused to enforce a forum-selection agreement between an American company and its German sales agent that provided for exclusive jurisdiction in Virginia. Instead, the Court held that German courts retained jurisdiction over the dispute despite a valid and exclusive choice-of-court clause. The Court’s decision means that US companies doing business in the EU can no longer assume that German courts will honor their forum-selection agreements.

I. Background of the Case

In November 2005, an American company headquartered in western Virginia entered into an agency agreement with a German sales agent. Under the contract, the German agent was responsible for sales not only in Germany, but also throughout the EU. Both parties agreed to resolve all disputes exclusively in courts within the Western District of Virginia. Moreover, the contract contained a choice-of-law clause designating Virginia law as governing law.   

Importantly, the contract expressly excluded the agent’s German-law right to a post-termination indemnity. The German Commercial Code (GCC) provides sales agents with a right to demand a substantial settlement after the principal terminates the agency relationship that appears to exceed common law agents’ right to reasonable reimbursement.^[2] Under German law, parties may not contractually exclude the agent’s right to post-termination indemnity.^[3] 

In April 2009, the American principal terminated its German sales agent. The agent filed suit in the District Court of Heilbronn, Germany, for outstanding commissions, damages caused by terminating the agency, and for a post-termination indemnity.^[4] When the American company moved to dismiss on the basis of the exclusive forum-selection clause, the German agent countered that the court had jurisdiction in spite of the clause under § 23 of the German Civil Procedure Code (GCPC). Under § 23 GCPC, a German court has personal jurisdiction and venue if the defendant owns assets located within the court’s geographical district.^[5] Since the American company had founded a subsidiary in the District of Heilbronn, the agent argued that it owned assets (i.e. the subsidiary’s stock) located within the court’s § 23 GCPC jurisdiction. The court agreed and asserted jurisdiction over the American company.

What makes this case remarkable is that the court asserted jurisdiction despite a perfectly valid forum-selection agreement. § 38 GCPC permits parties to enter into choice-of-court agreements exclusively in favor of non-German courts. Nonetheless, the District Court in Heilbronn as well as the Higher Regional Court of Stuttgart (which heard the case on appeal)^[6] refused to enforce the parties’ choice-of-court agreement. Whereas the court in Heilbronn saw its jurisdiction survive the forum-selection clause through § 23 GCPC’s asset-ownership provisions, the appeals court in Stuttgart asserted jurisdiction based on § 21 GCPC that provides general jurisdiction over a defendant anywhere it maintains a registered branch or office. When the American company petitioned the court in Stuttgart for permission to appeal to the German Supreme Court, the Stuttgart court denied its motion.^[7] The German Supreme Court^[8] then upheld the Stuttgart court’s denial of an appeal and remanded the case to the District Court in Heilbronn.

In favoring their own jurisdiction over the exclusive forum-selection clause, all three courts cited the same policy reason. The forum-selection clause had been coupled with a choice-of-law clause designating Virginia law as governing law. Virginia law contained no right to post-termination indemnity. As a result, the German agent would likely lose his right to claim post-termination indemnity from the American principal.

This was an unpalatable result for several reasons. § 89b GCC, which guarantees agents’ rights to a post-termination indemnity, is Germany’s implementing legislation for Articles 17 and 18 of European Council Directive 86/653/EEC on the Coordination of the Laws of the Member States Relating to Self-Employed Commercial Agents. In 2000, the European Court of Justice held in its famous Ingmar decision^[9] that these rules were mandatory rules for purposes of private international law. As a result, principals in non-EU countries may not avoid their application through a choice-of-law clause. The ECJ justified the mandatory nature of commercial agent regulations by stating that Directive 86/653/EEC was not merely designed to protect commercial agents, but instead to ensure the freedom of establishment and the operation of undistorted competition in the internal EU market. Protecting these public policy objectives required prohibiting non-EU principals from contracting out of EU agent regulations whenever they hired sales agents within the EU. Thus, Articles 17 and 18 of Directive 86/653/EEC apply to contracts with EU sales agents even if the agency agreement specifies non-EU law as governing law.^[10]

Admittedly, the ECJ in Ingmar was concerned only with a choice-of-law clause, whereas in this case the agency agreement contained a choice-of-law clause coupled with an exclusive forum selection agreement. And generally speaking, mandatory rules’ usual purpose is to override choice-of-law clauses that seek to circumvent national regulations. Through its September 2012 decision, the German Supreme Court has now applied mandatory rules’ “override effect” to choice-of-court agreements. Where the combined effect of an exclusive choice-of-court agreement and a choice-of-law clause is that a foreign court will likely not apply mandatory EU law, the need to enforce mandatory EU law overrides the policy of respecting choice-of-court agreements. As a result, the forum-selection agreement is unenforceable and EU courts may maintain jurisdiction over disputes between the EU agent and its foreign principal. In reaching this result, none of the German courts that looked at the case offered an adequate dogmatic rationale for their approach. It is not clear how mandatory provisions of substantive law can affect an agreement on the appropriate forum for a dispute. Moreover, neither the Higher Regional Court in Stuttgart nor the German Supreme Court saw a need to certify the question to the ECJ under Article 267 of the Treaty on the Functioning of the European Union.[11]

B. Prior Judicial Treatment of Mandatory Rules

This case is not the first time a European court has cited mandatory provisions as the reason for not enforcing a choice-of-court or arbitration agreement. The German Supreme Court has stated in several decisions that German courts may not relinquish jurisdiction over a dispute if they fear that a foreign court or arbitral tribunal will not apply mandatory rules.^[12] Even more closely connected with the present case is a decision rendered by the Higher Regional Court of Munich in 2006.^[13] There, a California company hired a German commercial agent. The contract stated that California law governed the agency agreement; it contained an exclusive forum-selection clause in favor of Santa Clara courts; and it also contained an arbitration clause. Sidestepping the question of whether a forum-selection clause was enforceable at all when standing next to an arbitration agreement^[14], the court refused to enforce the forum-selection clause for the same reason the German courts cited in 2012: ceding jurisdiction to Santa Clara courts would permit the California company to eliminate the German agent’s right to post-termination indemnity and damages. Since these rights constituted mandatory EU rules under Directive 86/653/EEC as interpreted by Ingmar, they could not be contracted away in advance through a forum-selection clause. Thus, the forum-selection clause had to be invalidated in the interest of EU public policy.  

Not only German courts have reached this conclusion. In the English case Accentuate Ltd v Asgira Inc^[15], a Canadian company (Asgira) appointed Accentuate to distribute its software in the UK. Their agreement named Ontario law as governing law and provided for disputes to be settled by arbitration in Toronto. After the agency relationship ended, Asgira commenced arbitration in Toronto pursuant to the contract. Accentuate nonetheless filed suit in the UK, arguing that the arbitration clause, combined with the choice-of-law clause, deprived it of its right to post-termination indemnity and therefore ran afoul of Directive 86/653/EEC’s mandatory nature.^[16] Like the German Supreme Court would do two years later, the High Court in London agreed: an arbitration clause that submits disputes to a forum and a governing law that will fail to enforce mandatory EU law was null and void. As a result, the High Court affirmed English courts’ jurisdiction over the case. Furthermore, the Court declared that the Canadian arbitral award would be unenforceable on grounds of public policy.

These decisions have led to much criticism. Within German jurisprudence, the extent to which mandatory EU rules override valid forum-selection clauses remains highly controversial. Most scholars agree that EU regulations should not automatically invalidate otherwise proper forum-selection agreements; instead, the decision of whether to enforce a forum-selection clause should be dictated by the specific circumstances of the case. The issue presents a peculiar tension. On the one hand, refusing to enforce any forum-selection clause in cases involving mandatory EU rules severely restricts the arbitrability of disputes for no good reason and violates the principle of comitas. On the other hand, forcing parties to litigate in their chosen forum when a court knows that the foreign judgment is unenforceable violates their fundamental constitutional right to access to justice. Scholars agree that the only way to resolve these concerns is by performing a case-by-case assessment of the specific forum-selection or arbitration clause and the enforceability of the foreign judgment or award.

Within this case-by-case method, two distinct approaches have emerged. Under the first, courts resort to international private law rules—in Germany either Article 6 of the Introductory Act to the German Civil Code or Article 21 of the Rome I Regulation^[17]—to answer the validity question.^[18] Both provisions permit courts to refuse to apply foreign law if doing so would be manifestly incompatible with the public policy (ordre public) of the forum. Applied to forum-selection agreements, a court may refuse to enforce a forum-selection or arbitration clause if doing so would lead to an ordre public violation. Importantly, the constitutional right to access to justice is then considered a fundamental principle of public policy—and this right is violated when a party is forced to litigate in a forum whose judgments cannot be enforced. When it is uncertain that a foreign court will apply mandatory EU rules, it is also uncertain as to whether German courts will enforce its decision. There is a significant chance that parties will have to file a second suit in German courts, resulting in unreasonable costs and excessive delay. Thus, in general, forum-selection or arbitration agreements should be disregarded whenever there is a danger that the foreign forum will not enforce mandatory EU provisions. Only in exceptional circumstances should such agreements remain valid—for example, if a foreign court is known for applying mandatory EU rules.

Alternatively, some scholars argue that § 328 GCPC provides a better framework for reconciling forum-selection clauses and mandatory rules.^[19] § 328(1)(4) GCP provides that a German court may not recognize or enforce a foreign judgment that violates Germany’s ordre public. Applied to the validity of forum-selection clauses, it results in the reverse of the first approach: forum-selection clauses are generally valid and parties must litigate in their chosen forum; only in exceptional cases may courts disregard the forum-selection clause in favor of their own jurisdiction.

This second approach aligns with the procedural nature of choice-of-court or arbitration agreements. Public policy exceptions under Art. 6 of the Introductory Act to the Civil Code or Art. 21 of the Rome I Regulation govern substantive law. In contrast, forum-selection clauses and arbitration agreements are procedural devices that, without more, leave the question of governing law to the conflict-of-laws rules of the chosen forum. Moreover, the second approach is more consistent with other ways in which German courts defer to foreign fora. In the context of lis pendens, German courts must examine whether a foreign judgment is likely to be enforceable before issuing a stay in favor of foreign proceedings. If this so-called “recognition prognosis” is positive, the court must treat the foreign suit as if it were a parallel proceeding in another German court.^[20]  Although Germany usually follows a strict first-filed rule in determining which proceeding has priority, the stay analysis is a logical fit for determining whether a German court should cede jurisdiction in favor of a foreign court. In both the lis pendens and forum-selection agreement contexts, the court must forecast whether a foreign judgment or arbitral award will violate German ordre public under § 328(1)(4) GCPC. This will occur only when a foreign tribunal’s failure to apply mandatory EU rules violates fundamental principles of the European legal system. And not every failure to apply mandatory rules amounts to an ordre public violation—the ordre public exception is interpreted narrowly to encompass only serious violations of particularly fundamental legal principles. Thus, even if a foreign tribunal fails to apply mandatory EU law, its decision will not necessarily rise to the level of an ordre public exception under §328(1)(4) GCPC. In the case of EU sales agents working for American principals, no ordre public violation would occur so long as common law agency and contract remedies offer compensation roughly similar to EU indemnity rights.^[21] Furthermore, the question of costs and duration of the proceedings is seen from another perspective. The first approach generally invalidates forum-selection clauses out of fear that EU residents will be forced to litigate in an expensive and burdensome foreign forum. However, § 89b GCC was passed only to guarantee a post-termination claim for indemnity to EU agents; it was not enacted to make sure EU agents never have to leave the EU to litigate their claims. In fact, by agreeing to exclusive forum-selection clauses in favor of US jurisdictions, EU agents expressly assume the risk that they might have to litigate abroad. They should remain bound to their commitment under the principle of pacta sunt servanda.^[22]

In the end, both approaches differ on the surface but will only rarely lead to different results. What remains open is whether a court must determine that an ordre public violation is certain to result from foreign proceedings from a perspective ex ante^[23], or whether a readily apparent danger of an ordre public violation is sufficient to invalidate a forum-selection agreement^[24]. In the Author’s opinion, courts should compel parties to litigate in their chosen forum unless they can determine with certainty that an ordre public violation will result from the foreign proceedings. Such a rule would not leave EU parties without protection from ordre public violations. If an ordre public violation occurs, the foreign decision is without effect in Germany and the EU party can pursue remedies through a second suit in German courts.

III. Conclusions

Although the German Supreme Court might have reached the right decision, its judgment is not fully convincing. The relationship between mandatory EU rules and forum-selection clauses remains hazy and ill-defined. The Court also failed to provide any criteria for developing a case-by-case enforceability assessment for forum-selection and arbitration clauses.

In particular, the Court left one very important point open: In the Author’s opinion, whether EU courts should disregard a valid choice-of-court agreement if they fear that a foreign tribunal will not apply mandatory EU commercial agent regulations, was tailor-made for the ECJ since this is a question on the effet utile (practical effect) of Directive 86/653/EEC.^[25] And it becomes even more important when one considers other EC Directives that could (one day) be considered mandatory, e.g. consumer protection provisions under 85/577/EEC^[26], consumer credit protections under 87/102/EEC^[27], or products liability regulations under 85/374/EEC^[28]. One would hope that, in the future, the ECJ will set high standards for considering the rules contained in a Directive mandatory—which critics^[29] of the Ingmar decision argue the ECJ did not do when faced with EU commercial agent regulations. The more mandatory rules exist within the EU, the more tension these rules will create in international litigation and arbitration.

According to most German legal scholars (including the Author), a forum-selection clause, in combination with a non-EU choice-of-law clause, must remain valid and binding unless a court determines with certainty that the foreign decision will be unenforceable due to ordre public violations under § 328(1)(4) GCPC. To make this determination, the court must forecast the law governing the case as well as the legal system at the foreign court or seat of arbitration. In doing so, the German judge must check whether the foreign legal system applies the Restatement (Second) of Conflict of Laws and, as a result, whether the foreign system would thus apply mandatory EU provisions.^[30] Moreover, the German judge must take into account the manner in which applicable foreign law compensates an agent after termination and compare it to the agent’s remedies under § 89b of the German Commercial Code. If EU provisions are likely to be applied, or if an agent can expect to receive comparable compensation, the judge should enforce the forum-selection agreement.

Unfortunately, US companies cannot count on German courts to conduct such a detailed assessment of their forum-selection or arbitration clauses. When a forum-selection agreement is paired with a choice-of-law clause designating non-EU law, the more likely result is that German courts will invalidate the forum-selection clause and allow litigation to proceed in Germany. Invalidation becomes even more likely if the parties agree to exclude an agent’s right to post-termination indemnity. Until the ECJ sorts out the impact that mandatory EU rules have on forum-selection and arbitration agreements, US companies will not be able to fully eliminate the legal risks of EU lawsuits. In the meantime, US parties are well advised to carefully draft choice-of-law clauses expressly adopting § 89b GCC (or another EU member state’s implementing legislation for Articles 17 and 18 of Directive 86/653/EEC) as applicable, even if they ultimately choose non-EU law as governing law. They should treat any other mandatory EU regulations that could foreseeably affect their relationships with EU parties in the same manner.

Jennifer Antomo, who studied both in Mainz, Germany, and Athens, Greece, obtained her First Final State Examen (J.D. equivalent) in 2011 at University of Mainz. Currently, she is a Ph.D. candidate at Johannes Gutenberg University of Mainz, Germany.

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[1] German Supreme Court, Sep. 5, 2012 – VII ZR 25/12 = 2013 Internationales Handelsrecht (IHR), 35. Available at: <http://juris.bundesgerichtshof.de/cgi-bin/rechtsprechung/document.py?Gericht=bgh&Art=en&az=VII%20ZR%2025/12&nr=61762>. See also Lars Eckhoff, 2012 Gesellschafts- und Wirtschaftsrecht (GWR), 486 and Patrick Ayad / Sebastian Schnell, 2012 Betriebsberater (BB), 3103.

[2] See German Commercial Code § 89b(2) (setting the “commercial agent’s average annual remuneration” as the basis for calculating his indemnity claim) and § 89b(1)(2) (stating that the agent’s post-termination settlement is limited to an amount that is equitable).

[3] See German Commercial Code § 89b(4): “The right [to a reasonable post-termination settlement] cannot be excluded in advance.”

[4] District Court Heilbronn, Aug. 16, 2011 – 21 O 33/10 KfH.

[5] § 23 GCPC is famous in Germany as the so-called “umbrella rule” – forget your umbrella in Germany, and you are forever subject to German courts’ jurisdiction.

[6] Higher Regional Court Stuttgart, Dec. 29, 2011 and 16 January 2012 = Internationales Handelsrecht (IHR) (2012), 163.

[7] For Americans, this procedure may seem strange, but it is in fact the Court of Appeals itself that determines whether a party has the right to appeal its decision to the next level. If it denies a motion to permit an appeal that denial – but only that denial, not the merits of the case – can be appealed to Germany’s Supreme Court; see § 522 GCPC.

[8] German Supreme Court, supra note 1.

[9] ECJ, Nov. 9, 2000, Ingmar GB Ltd v Eaton Leonard Technologies Inc., Case C-381/98, ECR 2000, I-9325, paragraph 20. See Wulf-Henning Roth, 369 Common Market Law Review 39 (2002) and Rick Verhagen, 51 Int’l & Comp. L.Q. 135 (2002).

[10] Cf. ECJ, supra note 5, paragraphs 20 et seqq.                                                 

[11] Moreover, the German Supreme Court determined that an ECJ ruling was not necessary for determining whether the choice-of-law clause was entirely invalid, or merely invalid in part. This was an important determination because partial invalidity would have only permitted German courts to hear the agent’s claim for post-termination indemnity, whereas entire invalidity allowed German courts to hear all the agent’s claims. In the end, the German Supreme Court held that invalidity was a question of German law, that the clause was partially invalid, but that its partial invalidity rendered it wholly void. As a result, German courts could properly hear all the agent’s claims against his American principal.

[12] Decisions of German Supreme Court: Jan. 1, 1961 – VII ZR 180/60; Dec. 12, 1970 – II ZR 39/70; May 5, 1983 – II ZR 135/82; March 12, 1984 – II ZR 10/83; June 15, 1987 – II ZR 124/86.

[13] Higher Regional Court Munich, May 17, 2006 , 7 U 1781/06 = 2006 Internationales Handelsrecht (IHR), 166.

[14] See for the problem of conflicting arbitration and forum selection clauses Simone Stebler, Association Suisse de l’Arbitrage (ASA Bull.) 1/2013, 27.

[15] Queen’s Bench Division, [2009] EWHC 2655 (QB). Cf. Stuart Dutson / Thierry Berger, International Arbitration Law Review, vol. 14 (2001), 73 and Hew R. Dundas, Arbitration, vol. 76 (1) (2010), 159.

[16] The case is also interesting in terms of arbitration, as it opens the question whether a party can litigate an issue in one state court, invoking the arbitral clause’s invalidity, and at the same time try to enforce the arbitral award in another court. The Canadian court, although Asigra was apparently acting contrary to the award by continuing the dispute in another court, decided that this did not amount to a policy reason for not enforcing the award; Accentuate Ltd v. Asigra Inc, 2010 ONSC 3364; 2011 ONCA 99 (CanLII).

[17] Regulation (EC) No 593/2008 of the European Parliament and the Council of 17 June 2008 on the law applicable to contractual obligations (Regulation Rome I) for contracts concluded after 17 December 2009 (see Art. 28).

[18] For this approach see Matthias Weller, Ordre-public-Kontrolle internationaler Gerichtsstandsvereinbarungen im autonomen Zuständigkeitsrecht (Mohr Siebeck 2005), p. 181 et seqq., 319 et seqq.

[19] Reinhold Geimer, Internationales Zivilprozessrecht (Otto Schmidt, 6th. ed. 2009), paragraph 1770; Giesela Rühl, 2007 Praxis des Internationalen Privat- und Verfahrensrechts (IPRax), 294, 298; David Quinke, 2007 Zeitschrift für Schiedsverfahren (SchiedsVZ), 246, 249 et seq.; Uwe Dathe, 2010 Neue Juristische Online Zeitschrift (NJOZ), 2196, 2197 et seq.

[20] In an analogy to § 261(3)(1) GCPC, the German lis pendens rule for parallel domestic proceedings. See German Supreme Court, March 20, 1964 – V ZR 34/62.

[21] Cf. Dathe, supra note 19, 2198: violation of ordre public in case the agent’s commission is below average (“Provisionsdumping”).

[22] Quinke, supra note 19, 251.

[23] See also Quinke, supra note 19, 248 et seq.; Rühl, supra note 19, 298; Ayad/Schnell, supra note 1, 3104; Higher Regional Court Stuttgart, supra note 6.

[24] See Higher Regional Court Munich, supra note 13.

[25] Cf. Quinke, supra note 19, 252.

[26] Council Directive 85/577/EEC of 20 December 1985 to protect the consumer in respect of contracts negotiated away from business premises. 

[27] Council Directive 87/102/EEC of 22 December 1986 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit.

[28] Council Directive 85/374/EEC of 25 July 1985 on the approximation of the laws, regulations and administrative provisions of the Member States concerning liability for defective products.

[29] Roth, supra note 9, 378 ff.; Verhagen, supra note 9, 151 et seqq.; Rühl, supra note 19, 302; Dathe, supra note 19, 2197 et seq.; Robert Freitag / Stefan Leible, 2001 Recht der internationalen Wirtschaft (RIW), 287, 291 et seq.; Ralf Michaels / Hans-Georg Kamann, 2001 Europäisches Wirtschafts- und Steuerrecht (EWS), 301, 305.

[30] According to the doctrine of comparative impairment or public policy US courts might apply mandatory EU provisions; cf. Rühl, supra note 19, 298. EU courts apply non-EU mandatory provisions pursuant to Art. 9(3) of Regulation Rome I.

As of January 2014 a new private law recodification will enter into effect in the Czech Republic. While the cornerstone of this significant change of the Czech private law landscape is primarily the new Civil Code (No. 89/2012 Coll.) and the new Business Corporations Act (No. 90/2012 Coll.), international readers might be interested in the third element of the recodification effort, namely the new Act on Private International Law (“NAPIL”), adopted under No. 91/2012 Coll. This note briefly outlines its main features and differences as compared to the existing rules contained in Act No. 97/1963 Sb., as amended.

In comparison to the existing rules comprised of 70 sections, the new Act with its 125 sections establishes more detailed regulations of private law and procedural relationships involving an international (cross-border) element. The main benefit of the new law is that it regulates issues not explicitly addressed in the old law, that up to now have had to be inferred from legal doctrine or often ambiguous case law.

For instance, NAPIL contains specific conflict rules on the law applicable to a legal entity’s status issues (until now, a general rule under Section 3 of the old law did not even distinguish between a natural and legal person,[1] and additionally regulates conflict rules for trusts, including the recognition of foreign trusts in the territory of the Czech Republic.[2] Contrary to the old act, NAPIL prescribes principles for determining the jurisdiction and governing law for a registered (same-sex) partnership (civil union) having an international element.[3] NAPIL also regulates cross-border bankruptcy law, which is relevant for the practice particularly in respect of bankruptcy with a non-EU factor (i.e. in the area not governed by EU Regulation No.1346/2000). Furthermore, some principles contained in the Arbitration Act relating to arbitration issues with an international element and the recognition of foreign arbitration awards have been transposed to NAPIL (Sections 117-122).

The NAPIL regulates certain entirely novel issues in detail, which have not been covered by the old law (and judges and lawyers have thus had to have consult international private law textbooks). These issues include the interpretation of the problem of characterisation (qualification/classification) regulated by Section 20 of NAPIL; preliminary questions/issues (Section 22); overriding mandatory (imperative/supermandatory) rules (Section 3 governing lex fori and Section 25 for third state overriding mandatory rules); or subsidiary (residual) application of a governing law other than that which is primarily stipulated by the law and the use of analogy within the Act (Section 24). More detailed and instructive are also the rules concerning the establishment and application of foreign law (Section 23), which has often been the cause of problems in judicial practice.[4]

In addition, in comparison to the structure of the existing law, NAPIL is more “user-friendly. Currently, conflict rules and procedural rules are regulated in two separate parts; NAPIL has abandoned this approach and has instead thematically interlinked these within one section. Upon arriving at the provisions regulating a relevant matter (for example, the law of inheritance), a judge or a practising lawyer will find in one place both the rules on establishing jurisdiction as well as on the governing law.

Last but not least, NAPIL has modernised certain connecting factors – e.g., replaced an outdated criterion of citizenship with habitual residence, which is a factor that much more accurately reflects today’s high level of mobility. Unfortunately, the legislator was not consistent and has not replaced it everywhere that it was possible and advisable. The NAPIL also attempts to reflect the interest in preserving the validity of legal acts and their effects (by preference for law that upholds the validity of the legal acts) and hence reflect the will of those doing the acts.

Although NAPIL contains some very useful provisions, its real significance is quite limited in some key areas, as there are directly applicable EU rules in existence. EU law has priority over national law, and NAPIL will thus not apply. This goes, for instance, for the area of determining jurisdiction for civil and commercial matters where the Brussels I Regulation (Regulation No. 44/2001) will apply (save for certain exceptions, such as when a plaintiff is a non-EU resident and there is no exclusive jurisdiction or jurisdiction agreement in favour of an EU Member State’s court). The Regulation also concerns the recognition and enforcement of judgments from other EU countries (however, the recognition and enforcement of judgments from non-EU countries will be subject to NAPIL unless an international treaty governing these issues exists with the given country). The Rome I Regulation (No. 593/2008) or the Rome II Regulation (No. 864/2007) will apply instead of NAPIL to determine governing law for contractual and non-contractual obligations. Also, some other matters have been or soon will be regulated at the EU-level,[5] which also reduces room for NAPIL application.

Regardless, there are still matters to which NAPIL will be applied (EU regulation in a given area is either non-existent or non-binding on the Czech Republic – the latter is true for the Rome III Regulation regulating applicable law for divorces). Therefore, NAPIL’s benefit is not limited to the regulation of general issues of international private law and should be of interest to any legal practitioner who has to deal with a private law situation that has some connection to the Czech Republic.

Petr Briza

Petr Briza is senior associate/counsel at Havel, Holásek & Partners, the largest Czech law firm. He is a graduate from NYU (LL.M. 2008) and Charles University in Prague (J.D. equivalent 2004, Ph.D. 2012). He can be reached at petr.briza@nyu.edu.

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[1]See Section 30 of NAPIL laying down governing law not only in respect of legal personality and internal relationships of a legal entity, but also covering the issue of who represents the legal entity as its body (issue of a statutory representative). The governing law is the law of incorporation.

[2]See Section 73 of NAPIL; the applicable law is the law of the closest connection with the trust, unless the settlor selects the applicable law. The rule is to large extent modelled after the Hague Convention on the Law Applicable to Trusts and on their Recognition (http://www.hcch.net/index_en.php?act=conventions.text&cid=59).

[3] See Section 67 of NAPIL; the applicable law is the law of a country where the registered partnership was celebrated (occurred).

[4] The foreign law is treated as a law not a fact, the content of foreign law is ascertained by court ex officio, i.e., it is mandatory for the court to take all necessary measures to find out what the content of foreign law is. The court may ask the Ministry of Justice for assistance with this task, but the Ministry’s opinion on the foreign law’s content is not binding upon the court. If all the court’s efforts fail and it is not possible to ascertain the foreign law’s content in due time, the Czech law will be applied instead.

[5]A unified regulation of conflict and jurisdictional issues related to inheritance was adopted in July 2012 (Regulation No. 650/2012) and will be in effect from August 2015; the regulation governing maintenance obligation is already in effect from June 2011 (see Regulation No. 4/2009).

The Latin maxim iura novit curia means that the court knows the law. Civil law systems have interpreted this maxim as the authority of the court to base its decisions on legal theories that have not been advanced by the parties. Common law systems generally reject the maxim, favoring a more limited role for court in the adversarial search for the truth.

Because arbitration differs from both civil law litigation and common law litigation, the application of iura novit curia in the arbitration context gives rise to unique problems. These problems arise because the parties’ choice of law does not resolve the question of the applicability of the principle in the arbitration context. The arbitrator is, therefore, left with the difficult question of whether or not and more importantly to what extent to apply the principle to a case at hand.

To highlight the difficulties confronting arbitrators in the application of iura novit curia, I wish to focus on the interplay of the principle with two particular aspects of arbitration: party autonomy, and uniformity in the application of choice of law. I chose these two aspects because they highlight effectively the conflicting considerations that arbitrators must balance in deciding to how to use their discretion in the application of iura novit curia in the arbitration context.

The Parties’ Choice of Law Is Not Dispositive

The issue of whether and to what extent iura novit curia should be applied in the arbitration context is not settled by the parties’ underlying choice of law. This is due to two main reasons.

First, national law rules of procedure are do not apply in the arbitration context. Indeed, most arbitral tribunals follow predetermined rules of procedure, which, if selected by the parties to the contract, trump national procedural rules. As the United States Supreme Court recently reaffirmed in Preston v. Ferrer, 552 U.S. 346 (2008), the procedural law of the jurisdiction selected in a choice of law provision will not displace the procedural rules incorporated in an arbitration clause.  Thus, to the extent that iura novit curia is a procedural rule, the parties’ choice of law does not settle the question of its applicability in the arbitration context.

For this reason, some arbitral institutions have attempted to set default rules on exactly this issue. Article 22(1)(c) of the London Court of International Arbitration, for example, states, “Unless the parties at anytime agree otherwise in writing … the Arbitral Tribunal shall have the power … of its own motion … to conduct such enquiries as may appear to the Arbitral Tribunal to be necessary or expedient, including whether and to what extent the Arbitral Tribunal should itself take the initiative in identifying the issues and ascertaining the relevant facts and the law(s) or rules of law applicable to the arbitration, the merits of the parties’ dispute and the Arbitration Agreement.”[i] Most arbitral tribunals, including the International Court of Arbitration (ICC), however, have not yet developed default rules regarding the applicability of the iura novit curia principle.

Second, arbitration has a different statutory mandate than litigation. The English Arbitration Act of 1966, for example, states that an arbitral tribunal “shall” decide a dispute “in accordance with the law chosen by the parties” or “such other considerations as are agreed by them or determined by the tribunal.”[ii] Thus, to the extent that iura novit curia is not a purely procedural rule, there is still a question as to how much the parties should be able to vary the mandate of arbitrators by contract.

Party Autonomy Counsels Against Use of Iura Novit Curia in Arbitration

Arbitration clauses have now become commonplace in commercial agreements. Indeed, they have become so prevalent that some have infamously called “midnight clauses,” because negotiators leave them until the end, and then, late at night or early in the morning, simply use boilerplate arbitration language.[iii] Although no empirical data has been compiled on the frequency of arbitration provisions in international commercial contracts, an often-cited estimate is that “ninety percent” of all international commercial contracts contain arbitration clauses.[iv]

An important point to remember, however, is that arbitration is formed and governed by the agreement of the parties. Without an agreement among the relevant commercial parties, no arbitral panel has jurisdiction over a dispute that may arise between those parties. It has thus been said that party autonomy is the “core concept” of arbitration.[v]

This is the first important aspect of arbitration that makes the application of iura novit curia difficult. If parties to an arbitration proceeding, the existence of which is based entirely on the exercise of autonomy by those parties, do not present a particular legal claim to the arbitral panel, why should the panel do so on its own accord?

In fact, much of the attractiveness of arbitration lies in the autonomy of the parties to exercise control over the choice of law and procedure to be applied in potential future disputes. It is entirely plausible that a proactive and robust use of iura novit curia in arbitral proceeding may deter some commercial parties from agreeing to submit future disputes to arbitration. Party autonomy, as a core concept of arbitration, thus counsels against a robust application of the principle of iura novit curia in arbitral proceedings.

Uniformity in Application of Choice of Law Counsels In Favor of Use of Iura Novit Curia in Arbitration

Another important aspect of arbitration, however, is uniformity in the application of the parties’ choice of law. This is especially important when the parties have chosen a body of law that aspires towards uniformity: for example, an international convention, such as the United Nations Convention on Contracts for the International Sale of Goods (“CISG”). Developed by the United Nations Commission on International Trade Law (UNCITRAL), the CISG is a treaty offering a uniform international sales law that has been ratified by 77 countries as of 2010. Article 7(1) of the CISG states that in interpreting the CISG, “regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.” Commentators have interpreted this requirement to mean that courts and arbitral tribunals must construe the provisions of the CISG in a uniform manner and not against the background of their own domestic law, as difficult as that may be.[vi] But what if, in an arbitral proceeding, neither party introduces a legal theory that is required for the Convention’s uniform application?

Consider the following simple example. Article 84(1) of the CISG states, “If the seller is bound to refund the price, he must also pay interest on it, from the date on which the price was paid.” Suppose a case is brought before an arbitral panel, such as the ICC. Neither party disputes the ICC’s jurisdiction or that the CISG governs the case at hand. The seller claims that, although he must refund the price, he does not owe any interest on it. The buyer claims that he is entitled to both a price refund and interest, though not from the day on which the price was paid, but from the earlier date of the underlying contract. Neither legal theory is consistent with the express letter of Article 84(1); in fact, both legal theories contradict the express terms of the Article. What is the arbitral panel to do in this situation?

One can make a strong argument that the arbitral panel is under a duty to follow the CISG’s unambiguous text¾the choice of law of the parties anyway¾and its states purpose, to provide a uniform law governing commercial contracts. This example is admittedly simple, but one can easily think of more complicated situations. For example, what if both parties’ theories are consistent with the CISG’s text, but contradict earlier holdings by national courts and arbitral tribunals dealing with the same substantive issue? If uniformity was the ultimate goal, as some commentators have suggested, then the arbitral panel should apply a robust version of the iura novit curia principle. This, however, substantially undermines the parties’ autonomy, essentially rendering their choice of law autonomy devoid of much meaning.

What Is an Arbitrator to Do?

The issues raised above highlight just some of the difficulties associated with the application of iura novit curia to the arbitration context. These theoretical issues are compounded by the practical difficulties inherent in international commercial arbitration. For example, ICC statistics record that, in 2009 alone, 91 different laws or systems were applied in 817 cases.[vii] Applying iura novit curia requires intimate knowledge of the body of law to be applied. Do we really expect the ICC arbitrators to research and become experts in 91 different bodies of law in order to effectively administer the principle in arbitration proceedings?

Arbitral panels face further problems caused by the conflicting views of national courts on this issue. In the 2008 case Wefren Austria GmbH v. Polar Electro Europe B.V., the Supreme Court of Finland denied the respondent’s claim that its right to be heard was violated by the tribunal’s award of compensation for the termination of the commercial agreement between the parties, an issue that was never argued. The Court upheld the tribunal’s application of iura novit curia and found that the tribunal was not bound by the legal positions raised by the parties.

But awards have been set aside by other courts in similar circumstances. In a 2007 case OAO Northern Shipping Company v. Remolcaderos de Marin SL, the High Court of England and Wales annulled a tribunal award because of the tribunal’s improper reliance on iura novit curia. In OAO, the counsel for buyers had proceeded on the assumption that a specific point was no longer in issue, and therefore did not need to be addressed. The tribunal, without inviting submissions on the issue, went on to use it as an “essential building block” for its conclusion. The Court found this to be “a serious irregularity” causing “substantial injustice” to the buyers, therefore setting aside the award.

For now, at least, there seems to be no convergence on the application of iura novit curia in the arbitration context. A further difficulty is that it may be costly or premature for the parties to address their issue in their arbitration agreements. As noted earlier, most arbitration clauses are boilerplate and parties may not prefer to expend additional time and cost negotiating over the application of iura novit curia. Moreover, the appropriate scope of the principle’s application may depend on the specific issues in dispute or the qualification of arbitrators, and their expertise in the choice of law of the parties.

Perhaps a better solution is for arbitral institutions to follow the lead of LCIA and address this issue in their default rules of procedure. This approach will, at least, create certainty of expectations for the parties at the outset. Parties may then choose whether or not to opt out of the default rule under the particular circumstances of their case and depending on their level of trust in the tribunal.

Until then, this old Latin maxim of law will continue to cause headaches for practitioners and arbitrators alike.

Ali Assareh

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[i] See also the China International Economic and Trade Arbitration Commission (CIETAC) Arbitration Rules, Articles 29(3) and 27; the Singapore International Arbitration Centre (SIAC), Article 24(d).

[ii] English Arbitration Act of 1996, Article 46(1).

[iii] Don Peters, Can We Talk? Overcoming Barriers to Mediating Private Transborder Commercial Disputes in the Americas, 41 Vand. J. Transnat’l L. 1251, 1301 (2008) (discussing “midnight clauses”); see also Kathy A. Bryan & Helena Tavares Erickson, Business Arbitration Can and Should be Improved in the United States, 14 Disp. Resol. Mag. 20, 21 (2008) (“There are more arbitration horror stories resulting from poor drafting than from any other single aspect of the process.”).

[iv] See, e.g., Brandon Hasbrouck, If it Looks Like a Duck: Private International Arbitral Bodies are Adjudicatory Tribunals Under 28 U.S.C. § 1782(a), 67 Wash. & Lee L. Rev. 1659, 1660–61 (2010); Christopher R. Drahozal, Commercial Norms, Commercial Cods, and International Commercial Arbitration, 33 Vand. J. Transnat’l L. 79, 94 (2000).

[v] Okuma Kazutake, Arbitration and Party Autonomy, 38 Seinan L. Rev. 1, 2(2005).

[vi] Franco Ferrari, The CISG’s Interpretative Goals, Interpretative Method and General Principles in Courts

[vii] ICC Bulletin, Volume 21(1) 2010, at 12.

When uniform laws are enacted, one usual criticism is that the absence of a jurisdictional body to interpret them gives place to contradictory applications and inconsistent decisions. One explanation for this contradiction is the lack of binding force of domestic court decisions of different countries when they apply uniform laws[1]. The “nationalistic” interpretation of uniform law would certainly be “contrary to the goals intended to be achieved by the elaboration of a uniform law,” as affirmed by Franco Ferrari[2].

Most of the time, it follows that consistency can only be “attained if the interpreter in interpreting the provisions has regard to the practice of the other Contracting States.”[3] There is sometimes a more ambitious possibility when there is an international interpretative court entitled to issue binding decisions on a particular uniform law.  That is the case with the Court of Justice of the European Union (“ECJ”), the binding interpretative body of European Union law. However, this has proven to be untrue at least in the case of liability of air carriers for the delay or cancellation of flights, where the ECJ has not contributed to a more homogenous interpretation of uniform law. Conversely, it has increased the number of conflictive court decisions inside and outside the EU.

There are two uniform laws in the EU regarding air carrier liability whose interpretation falls to the ECJ: Regulation (EC) No 261/2004 of the European Parliament and of the Council of 11 February 2004 establishing common rules on compensation and assistance to passengers in the event of denied boarding and of cancellation or long delay of flights; and the Convention for the Unification of Certain Rules for International Carriage by Air signed in Montreal, 28 May 1999 (the “Convention” or the “Montreal Convention”)[4], part of EU Law, by Council Decision 2001/539/EC of 5 April 2001 (OJ 2001 L 194, p. 38).

The two statutes should not give rise to a conflict or create contradictory application. The Montreal Convention is exclusively concerned with delays, whereas Regulation 261/2004 does not create any compensation rights in cases of flight delays[5], but isapplicable only to cases of denial of boarding (Article 4), and cancellation of flights (Article 5), creating the right of a lump sum payment for an amount determined under Article 7. On the other hand, the Montreal Convention sets in Article 19 its applicability in cases of flight delays, with a liability cap of SDR 4,150 as stated in Article 22.

The autonomous concept of delay can be inferred from Regulation 261/2004. As stated in ECJ Joined Cases C-402/07 and C-432/07 Christopher Sturgeon and Others v Condor Flugdienst GmbH and Stefan Böck and Cornelia Lepuschitz v Air France SA (“Sturgeon”): There is a delay in the case where none of the elements of the trip but the times of departure and arrival are altered. If the number of the flights changes or new boarding passes are issued, we therefore face a cancellation.

As defined, delays and cancellation not only have different spheres of application, but also give rise to different liabilities.  The Regulation constitutes neither an instrument to determine the amount of the damage nor a cap on the compensation, if any. The payment under the Regulation is aimed to be simply a lump sum, or “flat rate compensation”, as defined by the ECJ in Case C-204/08 Peter Rehder v. Air Baltic Corp.

The Montreal Convention established that any liabilities that arose under its application would be limited to a maximum of SDR 4,150 (Article 22). The content of the compensation it creates is thus very clear: compensation in the case of flight delays only if the plaintiff proves the damages suffered, limited to the Article 22 cap.

However, the ECJ affirmed in the Sturgeon case that it is in accordance with the high level of protection of consumers governing the EU to equate long delays (Article 6) with cancellation (Article 4) and denial of boarding (Article 5). The ECJ not only re-wrote the Regulation, granting the lump sum payment of Article 7 to flight delays, but also created a conflict in the application of uniform laws that did not exist before: The ECJ does not mention Article 29 of the Montreal Convention[6], nor does it clarify how this Article is affected. The ECJ based its decision on Case C-344/04 International Air Transport Association v. Department for Transport [2006] (“IATA”)[7]. However, in that case, the ECJ just affirmed the validity of Regulation 261/2004 and recognized the powers of the Commission to legislate on EU flight passengers, irrespective of the Montreal Convention. The IATA decision never discussed the lump sum payment defined in Article 7. Neither the IATA decision nor the Regulation itself allowed the ECJ to reach the conclusion of the Sturgeon decision.

Prior to the Sturgeon case, the Montreal Convention was the right instrument to obtain compensation in case of flight delays, and the Regulation was the right instrument to obtain compensation in case of flight cancellations or denials of boarding. Now, both norms are in conflict.

The inconsistency created by the ECJ in the Sturgeon case may have multiple consequences.

In principle, compensation is excluded in cases of extraordinary circumstances: Article 5(3) of Regulation 261/2004 and Article 19 of the Montreal Convention so establish.

The concept of extraordinary circumstances is to be interpreted strictly when Regulation 261/2004 is concerned, as clarified by the ECJ in case C-549/07 Friederike Wallentin-Hermann v. Alitalia [2008] (“Alitalia”). The ECJ affirmed that political instability or meteorological conditions incompatible with the operation of the flight are relevant only if they create an unexpected risk, but are not directly an exemption. For instance, a technical problem in an aircraft would be “extraordinary” only if it comes out from an event that is not normal to the activity of the aircraft. This has multiple technological implications and makes the air carrier responsible for assuming all regular checks to avoid these inconveniences. This is acceptable in the context of a lump sum payment, and in cases of flight cancellation or denial of boarding, but seems clearly burdensome in cases of delays. After Sturgeon, this distinction is no longer possible .

Furthermore, the value of Article 19 of the Montreal Convention, which excludes liability in case of delay if the carrier proves that it and its servants and agents took all measures that could reasonably be required to avoid the damage, or that it was impossible for it or them to take such measures, is partially derogated without justification. If we accepted the argument of the ECJ that Regulation 261/2004 intervenes at an earlier stage than the Convention, exclusion of liability under the Regulation would amount to an exclusion of the more burdensome liability under the Montreal Convention. This is unpersuasive: First, because the nature of both amounts is different; second, because the text of both clauses is also different.

Unlike affirmations by some commentators[8], this is not necessarily the last word. In 9 December 9 2010 (case no. Xa ZR 80/10)[9], the BGH filed a question before the ECJ regarding the position of the Regulation with respect to its application to delays.

However, even if these particular situations are eventually clarified by the ECJ, they will shed only a small amount of light into a sky full of clouds. The ECJ has proven unable to give reliable orientation to domestic courts and litigants and the binding character of its decisions only makes the situation more inconsistent because it inoculates an element of incoherence into the European judicial system. It can be argued that the European Union should consider establishing a system of informal inter-court communication that would operate at a lower level of coordination¾less ambitious but certainly more useful, given the deep differences between European courts at this moment of the European integration.

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

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[1] For this conclusion in case law, see Tribunale di Padova (Italy), 25 February 2004, available at: http://cisgw3.law.pace.edu/cases/040225i3.html; Last Checked: 9 May 2011.

[2] See Franco Ferrari, Uniform Interpretation of the 1980 Uniform Sales Law, 24 Ga. J. Int’l & Comp. L. 183, 198 (1994).

[3] Id.

[4]Available at http://www.jus.uio.no/lm/air.carriage.unification.convention.montreal.1999/

[5] Delayed flights (Article 6) just give rise to some “assistance obligations” under Article 9.

[6] Article 29, Basis of claims.

In the carriage of passengers, baggage and cargo, any action for damages, however founded, whether under this Convention or in contract or in tort or otherwise, can only be brought subject to the conditions and such limits of liability as are set out in this Convention without prejudice to the question as to who are the persons who have the right to bring suit and what are their respective rights.

[7] For an overview of the decision, see the summary of important judgments at:  http://ec.europa.eu/dgs/legal_service/arrets/04c344_en.pdf (last checked, 29 April 2011) or the full text of the decision at:

[8] Christiane Leffers, The Difference Between Cancellation and Long Delay under Regulation 261/2004: This is a commentary on the judgment of the European Court of Justice dated 19 November 2009 (Sturgeon v Condor Flugdienst GmbH and Böck & Lepuschitz v Air France SA, joined cases C-402/07 and C-432/07)” Travel Law Quaterly, 2010, available at: http://www.avocado-law.com/fileadmin/avocado-law.de/downloads/Difference_Cancellation_Delay_261_2004.pdf (Last checked 9 May 2011)

[9] Id.

Introduction

The debate about the law applicable to foreign investment disputes developed into an operational discussion at beginning of the twentieth century, when the number of private investments in foreign countries increased considerably. The debate gained momentum as a result of the spreading feeling that applying traditional private international law (or conflict of laws rules) rules to foreign investment disputes may not be entirely appropriate. The feeling was grounded on the observation that most foreign investment agreements were entered by sovereign States to fulfil their institutional obligations as acta jure imperii. Because of this, treating such relationships as mere commercial agreements seemed somehow inappropriate.

However, the suggestion that public international law should be applied was not received without controversy. It was indeed traditionally maintained that any legal relationship where one of the parties was not a subject of international law should not be governed by the rules of international law but rather by the domestic law of a country. This argument was supported by the famous words of the Permanent Court of Justice in the case of the Serbian Loans where it stated that: “any contract which is not a contract between States in their capacity as subjects of international law is based on municipal law of some country.”[1]

The commentators favouring the application of international law, however, observed that investment agreements should be regarded as quasi public international or internationalised contracts because of “the brooding omnipresence”[2] of international law in such transactions. It was indeed suggested that a foreign investment transaction is sui generis. For this reason, it should be regarded as a treaty or as a quasi-international self-contained instrument which, as such, should be, to the possible extent, be detached from domestic courts and domestic law.

Despite the fact that the suggestion to apply international law to foreign investment disputes involving a State was gaining currency, many doubts remained as to the feasibility of this suggestion. Indeed, many authors recognised that there was still little solid evidence that such an idea could find support within the existing international law.

The uncertain legal status of international investments led to the adoption of contractual devices which would provide for the highest possible detachment from the courts and the law of the contracting States. This was attempted through the adoption of arbitration clauses providing for international arbitration and choice of law clauses providing for international law as the law governing the contract.

However, such new approach was heavily criticised on the ground that it confused the separate domains of public and private international law. Furthermore, it was observed that in the absence of any choice of law clause providing for the application of international law, the presumption in favour of the law of the host State should still be regarded as valid and applicable.

Although the efforts to detach international investment agreements from the law of the host State was gaining momentum, by the beginning of the 1960’s there was still uncertainty as to the actual rules of international law which would be taken into account by arbitral tribunals in any given case.

An attempt to identify the rules of international law which may be considered applicable to foreign investments was made by the United Nations in 1962, when a number of resolutions relating to national sovereignty over natural resources were drafted. In particular, the General Assembly adopted a statement to the effect that “foreign investment agreements freely entered into by or between sovereign States shall be observed in good faith.”[3] However, the General Assembly’s attempt failed to achieve more than that. Indeed, the task of the United Nations proved much more complex than originally thought. As a result, no decision was eventually taken by the Commission on the production of a draft Convention on State responsibility.[4]

The ICSID Convention

Despite the somewhat unsatisfactory result of previous negotiations in the field of foreign investments, in 1962 the Executive Directors of the World Bank were asked to explore the possibility of establishing an institutional framework for the conciliation and arbitration of investment disputes between States and foreign private parties. After wide-ranging and lengthy consultations, on March 18, 1965, the Executive Directors of the World Bank submitted what would eventually become the so-called ICSID Convention to the World Bank’s Member Governments. The Convention was approved and entered into force on October 14, 1966.

Amongst other things, the Convention incorporated the International Centre for the Settlement of Investment Disputes (ICSID) which was given the task of providing administrative and operational facilities necessary for the settlement of investment disputes under the Contention. The ICSID Convention was adopted and ICSID was established because it was evident that foreign investment disputes could not be effectively resolved either in the domestic judicial forum of the host State, or in the national courts of the foreign investors. It was felt that the provision of a neutral forum for the settlement of investment disputes would improve the investment climate by reducing the “fear of political risks [which] operate as a deterrent to the flow of private foreign capital.”[5]

Rather unsurprisingly, during the drafting of the Convention it appeared necessary to reconcile the above-mentioned factions that had formed on the issue of the law applicable to investment disputes. The compromise reached by the drafters of the Convention on the issue is fully reflected in the adopted text.

The system devised by the Convention: Article 42

As is well known, the Convention contains no substantive rules of law concerning investments in a State by nationals of another State. It is indeed believed that, if an attempt had been made to provide for such rules, the Convention would not have proved equally successful. The Convention limits itself to guaranteeing party autonomy and, in case no choice is made in the relevant contract, it provides for a default choice to be qualified, or limited, through the application of international law.

Article 42 of the Convention states that:

(1) The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.

(2) The Tribunal may not bring in a finding of non liquet on the ground of silence or obscurity of the law.

(3) The provisions of paragraphs (1) and (2) shall not prejudice the power of the Tribunal to decide a dispute ex aequo et bono if the parties so agree.

Parties’ agreement

The “rules of law”

Article 42(1) provides the parties with a broad discretion as to the identification of the law governing their relationship.[6] It is interesting to note that the first sentence of Article 42(1) allows parties to agree on the “rules of law” applicable to the substance of their dispute.[7] With this rather broad term, the Convention intends to make clear that the choice of the parties is not limited to one or more national laws or legal systems, but may, for example, “incorporate” a national law in existence at a certain moment in time or exclude certain provisions of such a law. As a matter of fact, the provision is believed to be so broad and permissive that the parties are not restricted to choosing a national law or part of it at all.[8] The parties are indeed permitted to agree to have their dispute governed by general principles of law as well as rules of international conventions, even if not yet in force in the States concerned.[9]

The permissive wording of the first sentence of Article 42(1) allows the application of complex choice of law clauses, which the parties can enter into by using, for example, well known techniques such as depeçage.[10]

Application of domestic law(s)

The application of the host State law is perhaps one of the most frequent choices in investment transactions, even though the parties would normally qualify their choice by requiring the arbitral tribunal to settle the dispute by applying the law of the host State in conjunction with either another domestic law or international law. Equally, because of the dynamics of investment relationships, it is also uncommon for the parties to select the law of the foreign investor rather than the law of the host State as the governing law.

International law as the parties’ choice

A choice by the parties of international law as the only applicable law, although not frequently adopted, would be enforced by an ICSID Tribunal. This is normally done in order to provide for the highest level of internationalisation of the contract and therefore to protect the rights of the foreign investor from either a change in the domestic law of the host State. The choice of international law as the law governing the relationship between the parties has also been made in important international conventions.[11]

Absence of agreement as to the applicable law

Cases involving no agreement as to the applicable law fall under the second sentence of Article 42(1) pursuant to which the dispute is to be resolved according to the law of the State party – including its rules of conflict of laws – and international law. Several important issues have been raised in this respect. Arguably, the most problematic of all such issues is the definition and role which international law must be given in adjudicating disputes falling under the provisions of Article 42(1) second sentence.

The relationship between domestic law and international law

The wording of the final version of Article 42(1) was adopted to balance the expectations of both capital-importing countries, which opposed the idea of giving ICSID tribunals the power to determine the applicable law, and capital-exporting countries, which feared that the exclusive application of the host’s State law could disadvantage foreign investors.

One of the issues which have arisen out of the final version of Article 42(1) is how the combination of host State law and international law should work. According to leading commentators, ICSID tribunals should normally apply the law of the State party. The result of the application of that law should then be tested against international law to detect any unfair outcomes. In case of inconsistency with or violation of international law the relevant ICSID tribunal may decide not to apply the host State’s law or part of it.[12]

Several ICSID cases seem to have supported this view as to the interplay of international law and the host State’s law. It seems now settled and undisputed that the second sentence of Art. 42(1) gives international law two roles. One is complementary and comes into play in the case of lacunae in the law of the host State. The other role, the so-called corrective role, comes into play if the State’s law does not conform to the principles of international law.

International law as identified and applied by ICSID Tribunals

As regards the actual rules of international law to be applied by ICSID tribunals, the Report of the Executive Directors[13] explains that the reference to international law which Article 42(1) makes reference to should be understood in the sense given by Article 38 of the Statute of the International Court of Justice (ICJ).[14]

As suggested by leading commentators, it is open to discussion whether the list of sources provided by Article 38 of the ICJ Statute actually resolves the problem of the identification of the actual rules of international law to be applied in investment disputes.[15]

The interesting aspect of the reference to Article 38(1) is that it provides ICSID tribunals with a broad range of sources on which the tribunals can rely upon to identify the most suitable rules of international law to settle the case. Indeed such reference provides ICSID tribunals with the same ample power for the identification of the actual rules of international law given to the ICJ[16] even though ICSID tribunals should exercise such power bearing in mind the peculiar nature of investment disputes and investment arbitration.

Consequences for failure to apply the law

Section VII of the Convention avails the parties to ICSID proceedings the right to file an application for the interpretation, revision or annulment of an ICSID award in the presence of certain circumstances.

An application for annulment can be brought, pursuant to Article 52(1), in the presence of one or more of the following grounds:

• that the Tribunal was not properly constituted;
• that the Tribunal has manifestly exceeded its powers;
• that there was corruption on the part of a member of the Tribunal;
• that there has been a serious departure from a fundamental rule of procedure;
• that the award has failed to state the reasons on which it is based.

The failure to identify and apply the correct applicable law is believed to amount to an excess of power for the purpose of applying Articles 50 and 52 of the ICSID Convention.

In MINE v. Guinea[17] the Ad Hoc Committee confirmed the view that failure to decide the dispute in accordance with the applicable rules of law would constitute an excess of power leading to the annulment of the award.

More recently, in the annulment proceedings related to the cases of Enron v. Argentina[18] and Sempra v. Argentina[19], the relevant Ad Hoc Committees annulled the arbitral award because the Arbitral Tribunals had exceeded their powers by failing to apply the applicable law. In those cases the Arbitral Tribunals had rendered decisions on the basis that Argentina was precluded from relying both on Article XI of the USA/Argentina BIT and the principle of necessity under customary international law. Identifying the applicable law proves particularly complex an exercise in cases, such as the two just mentioned,  arising out of bilateral investment treaties which – as opposed to those arising out of investment contracts – are often thought to require no reference to a domestic law. While this might be true generally, sometimes this may not be the case since some bilateral investment treaties do make reference to domestic law for the settlement of certain issues such as the definition of investment.

Domenico Di Pietro is a Lecturer of International Arbitration at University “Roma Tre” in Rome and Fellow of the Center for Transnational Litigation and Commercial Law of New York University School of Law. This is an abridged, revised and updated version of the author’s article Applicable Law Under Article 42 of the ICSID, in Weiler, ed., International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, 2005.

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[1] See the Serbian Loans case 1929 BCIJ, series A, No’s 20, 21 & 41.

[2] This interesting description was made by Lillich The Law Governing Disputes Under Economic Development Agreements: Re-examining the Concept of Internationalisation in Lillich & Brower International Arbitration in the Twenty-first Century, Towards Judicialization and Uniformity, 1993 at 92.

[3] United Nation Documents A/5100 ADD1 1962).

[4] Garcia Amador’s reports appear in Yearbook of International Law Commentaries 1957, 1961.

[5] Broches, The Convention on the Settlement of Investment Disputes between States and Nationals of other States (1972) Recueil des Cours at 343.

[6] See Shihata & Parra, Applicable Substantive Law in Disputes Between States and Private Foreign Parties: The Case of Arbitration Under the ICSID Convention (1994) 9 ICSID Review, 183.

[7] The term “rules of law” (rather than “law” as in Art. 33(1) of the UNCITRAL Arbitration Rules) was subsequently used in Art. 28(1) of the UNCITRAL Model Law on International Commercial Arbitration.

[8] Broches Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 1965 Explanatory Notes and Survey of its Application Yearbook C. A. XVIII (1993) 627.

[9] As clearly stated in the UNCITRAL Model Law on International Commercial Arbitration which adopted the ICSID formula (Report of the Commission, U.N. Doc. A/40/17, para. 232).

[10] The principle of parties’ freedom allows the use of the so-called depeçage technique which consists in subjecting the contract to certain provisions of different domestic laws.

[11] The applicable law provision provided by Article 1131 of the NAFTA for example reads: “A Tribunal established under this Section shall decide the issues in dispute in accordance with this Agreement and applicable rules of international law.”

[12] See Broches, Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 1965 Explanatory Notes and Survey of its Application Yearbook C. A. XVIII (1993) at 627.

[13] International Bank for Reconstruction and Development. Report of the Executive Directors on the Convention on the Settlement of Investment Disputes between States and Nationals of other States (1965) at 13, 1 ICSID Reports 25.

[14] This provisions, which is considered a most authoritative statement of the sources of international law, reads at paragraph 1: The Court whose function is to decide in accordance with international law such disputes as are submitted to it shall apply:

(a)           international conventions whether general or particular establishing rules expressly recognised by the contesting states;

(b)           international custom as evidence of a general practice accepted as law;

(c)            the general principles of law recognised by civilised nations;

(d)           subject to the provisions of Article 59, judicial decisions and the teaching of the most highly qualified publicists of the various nations as subsidiary for the determination of rules of law.

[15] Schreuer, The ICSID Convention: A Commentary, 2001, at 610. See also the 2009, second edition, by the same author with Malintoppi, Reinish and Sinclair.

[16] Kahn, The Law Applicable to Foreign Investments: The Contribution of the World Bank Convention on the Settlement of Investment Disputes, 44 Indiana Law Journal 1 (1968) at 28.

[17] Maritime International Nominees Establishment v Government of Guinea, 5 ICSID Review (1990) at 95.

[18] ICSID Case No. ARB/01/3, annulment proceedings

[19] ICSID Case No. ARB/02/16, annulment proceedings

In the past decade, conflict of laws rules relating to corporations have undergone a dramatic change in Europe. At the outset of this development, many European countries, such as Germany, France or Austria followed the real seat doctrine. This doctrine makes applicable to a pseudo-foreign corporation the law of the real seat and thus imposes on the corporation a different law than the one under which it had been founded. The results can be dramatic and mostly lead to the loss of the shareholders’ limited liability. From 1999 onwards, the European Court of Justice was faced with three landmark cases on cross-border mobility of corporations (all of them concerning inbound mobility, i.e. from the perspective of the country of arrival), the “Centros” case of 1999 (Case C-212/97, ECR 1999 I-1459), the “Überseering” case of 2002 (Case C-208/00, ECR 2002 I-9919) and the “Inspire Art” case of 2003 (Case C-167/01, ECR 2003 I-10155). The essence of these cases is that, at least for intra-European fact patterns, the application of the real seat doctrine or substantive laws for pseudo-foreign corporations that impose minimal capital requirementsviolate the corporation’s freedom of establishment, Art. 43, 48 (now: 49, 54) of the Treaty and cannot be applied any more to corporations arriving at the borders of the new host state. Instead, the relevant conflict of laws rule for inbound mobility within Europe has to be the theory of incorporation. Yet, one unclarity remained: In 1988, in the “Daily Mail” case (Case C-81/87, ECR 1988 I-05483), the ECJ had decided that the freedom of establishment does not, in the present state of European law, confer to a corporation founded under the laws of a member State the right to relocate its real seat to another member State. This decision concerned the perspective of the country of departure, and the ECJ essentially argued that the country of departure, i.e. the country of incorporation, had given life to a corporation and thus was allowed to take it away again when the corporation intended to relocate to another country. The three above-mentioned cases (Centros, Überseering and Inspire Art) did not overturn Daily Mail as they explicitly referred to inbound fact-patterns.

Nevertheless, most commentators criticized the distinction between outbound mobility and inbound mobility. In particular, a corporation’s freedom of establishment and the changes brought by Überseering and Inspire Art depend on the interplay of the laws of both countries, and this interplay can effectively block outbound mobility, thus making the right to inbound mobility in the new host state virtually useless. Let us illustrate this with a short example: A corporation is incorporated in country A, a real seat country, and shifts its real seat to country B, a country that follows the theory of incorporation. On the conflict of laws level, the real seat theory refers us to the law of country B, but the conflict rule of country B (theory of incorporation) refers us back to country A, whose substantive corporate rules then apply. However, many real seat countries consider, on the substantive level, a corporation’s decision to relocate to another country as a decision to liquidate. Thus, country B cannot welcome the corporation; instead the corporation has to liquidate and be created anew in country B. In 2008, in the “Cartesio” case (Case C-210/06, ECR 2008 I-9641), the ECJ was faced with the very same fact pattern: A Hungarian partnership wanted to relocate its real seat – not its place of incorporation – to Italy yet remain incorporated in the Hungarian commercial register. This was not possible according to Hungarian substantive corporate law. The Hungarian appellate court, tough not being entirely clear whether it meant the real seat or the place of incorporation, referred the case to the ECJ. Contrary to what the final remarks of the General Advocate Poiares Maduro had suggested, the ECJ confirmed its solution of Daily Mail, yet also added another layer of distinction between two different constellations of outbound mobility: On the one hand, a corporation, such as in Cartesio, might wish to preserve its legal identity and remain organized under the laws of its country of origin. In this respect, the ECJ essentially repeated the reasons mentioned in “Daily Mail” (items 104 et seq.). On the other hand, an outbound corporation might wish to relocate and adopt one of the legal forms of the new host state. In this case, according to the ECJ, national substantive law or conflict of laws are not “immune” against the corporation’s freedom of establishment. In such a situation, the requirement of a prior winding up falls within the scope of Art. 43, 48 (now 49, 54) of the Treaty and could only be justified by compelling general interests (items 110 et seq.). In the meantime, the European Commission had thought about a new directive that would allow a corporation to shift its place of incorporation – not its real seat – to another European country. Yet, prior to Cartesio, these plans were abandoned because the directive on cross-border mergers was considered as a viable alternative.

In the aftermath of Überseering and Inspire Art, many authors suggested a situation of competition between the different national legislators in Europe and alluded to the situation in the United States, whose corporate law is dominated by the law of Delaware. Given the massive rise in numbers of British Limited companies in the German territory, the German legislator decided to reform the German law on limited liability companies. Essentially, the traditionally strict capital requirements of German law have been eased and a new, “slim” form of limited corporation (Unternehmergesellschaft) has been created for start-ups and small business founders. This new forms seems to be very successful among its target group and is about to outnumber the pseudo-foreign British Limited companies in Germany. Moreover, the German legislator, in an attempt to make the “export” of German law possible, abolished substantive limitations similar to the Hungarian ones of the “Cartesio” case and now – although not being required to do so by European law – allows corporations founded under German law to move to another country and take their German legal form with them, see § 4a GmbHG (German law on limited liability companies).

Gunnar Groh

Gunnar Groh, an Arthur T. Vanderbilt Scholar and LL.M. candidate in Corporate Law of New York University School of Law, graduated from Ludwig-Maximilians-University of Munich. Mr. Groh also holds a licence and maîtrise en droit from Université Panthéon-Assas (Paris II), with distinction. From 2007 to 2010, he worked as a research assistant and lecturer at Ludwig-Maximilians-University of Munich, Institute of Comparative Law.

The “Lex Sportiva” is a hotly debated concept at the moment. While some commentators promote the “Lex Sportiva” and try to define its content and characteristics others are reluctant to recognize its very existence (see e.g. Frank Latty, La Lex Sportiva (Martinus Njihoff Publishers 2007); for a recent contribution see Lorenzo Casini, The Making of a Lex Sportiva: The Court of Arbitration for Sport “The Provider”, IILJ Working Paper 2010/5 Global Administrative Law Series, available at http://www.iilj.org/publications/2010-5.Casini.asp). In this context the question may arise as to what significance should be attached to a contractual choice-of-law clause wherein the parties refer to the “Lex Sportiva” (here understood as “l’ensemble des normes coutumières privées qui se sont dégagées de l’interaction entre les normes de l’ordre juridique sportif et des principes généraux propres aux ordres juridiques étatiques, telles qu’elles se concrétisent dans les arbitrages sportifs” (Antoni Rigozzi, L’arbitrage international en matière de sport, 628 (Helbing & Lichtenhahn, L.G.D.J./Bruylant, 2005)? Further, one might also wonder whether in international arbitration the arbitrators themselves can apply the “Lex Sportiva” to the merits of the dispute. While these questions are too complex to be answered in this short note, I would try to shed some light on them by having a glance at Swiss law, especially the case law of the Federal Supreme Court of Switzerland. Swiss law is of particular interest since Switzerland is the seat of all arbitration proceedings before the Court of Arbitration for Sport “CAS” (Rule 28 of the CAS Code 2010 Edition), and a relevant amount of sports law disputes are adjudicated by Swiss state courts.

Swiss law provides parties to state court proceedings with great autonomy in choosing the law applicable to a contract (Article 116 of the Swiss Code on Private International Law “PILA”). This autonomy is even greater in international arbitration proceedings with its seat in Switzerland. Parties, and the arbitrators themselves, are allowed to apply “rules of law”, as opposed to a “law”, to govern the merits of the dispute (Article 187 Para 1 PILA; see, e.g., Jean-François Poudret & Sébastien Besson, Comparative Law of International Arbitration, 603 (Sweet & Maxwell, 2nd edition, 2007)).  Hence, scholarly writers almost unanimously suggest that in international arbitration non-state law such as for example the “Lex Mercatoria” can be applied to the merits (Id. at 603-604). The question whether the “Lex Sportiva” constitutes such “rules of law” is disputed amongst scholars (Ulrich Haas, Die Vereinbarung von “Rechtsregeln” in (Berufungs-) Schiedsverfahren vor dem Court of Arbitration for Sport, CaS 2007 271, 272 (who also provides a good overview over the relevant case law of the CAS); see also Jean-François Poudret & Sébastien Besson, Comparative Law of International Arbitration, 604 (Sweet & Maxwell, 2nd edition, 2007)).

The Federal Supreme Court of Switzerland has, to date, issued only one decision dealing with a choice-of-law issue in the peripherals of the “Lex Sportiva” (Decision of the Federal Supreme Court of Switzerland of 20 December 2005, BGE 132 III 285). In that decision the court was reluctant to recognize the “Lex Sportiva” as a “law” under Article 116 of the PILA.

The parties in that case debated whether a statute of limitation rule contained in a set of rules issued by the FIFA prevailed over a mandatory statute of limitation rule of the Swiss Code of Obligations. The parties had stipulated the following provision in a transfer agreement: “This agreement is governed by FIFA rules and Swiss law”.  The state court of first instance held that the choice of FIFA rules constitutes a valid choice of law. It thus concluded that both FIFA rules and Swiss law shall apply, but that FIFA rules shall prevail over Swiss law as a matter of lex specialis. Accordingly, the court of first instance applied the FIFA statute of limitation and not the mandatory statute of limitation rule set forth in the Swiss Code of Obligations.

On appeal, the Federal Supreme Court of Switzerland reversed this decision. The court observed generally that according to Article 116 of the PILA the parties are free to choose the law applicable to their contract and that the law chosen supersedes all rules of the law otherwise applicable, whether mandatory or not. The court then questioned whether within the scope of Article 116 of the PILA the parties are allowed to choose a non-state law, such as the FIFA rules. After considering that this question was disputed amongst scholars, the court reasoned that bodies of rules and regulations issued by private organizations cannot be considered “law”, even in cases where they are elaborate and detailed. According to the court, such rules are subordinated to state law and apply only within the framework of state law. The court thus held that FIFA rules do not constitute “law” in the sense of Article 116 of the  PILA and neither can it be accepted as “lex sportiva transnationalis”. The court concluded that the FIFA statute of limitation rule cannot trump the mandatory statute of limitation rule of the Swiss Code of Obligations. However, the court accepted the integration of the FIFA rules into a contract. Accordingly, those rules were at least able to trump non-mandatory rules of Swiss Law.

It results from this decision that the parties to a dispute before Swiss state courts cannot choose rules issued by private organizations. Not even in the case where one regards them as forming part of the “Lex Sportiva”. The court expressly rejected the recognition of the “Lex Sportiva” as a “law” under Article 116 of the PILA. However, in my view, nothing speaks against incorporating private rules and regulations as well as particular rules of the “Lex Sportiva” in a contract. But it bears emphasis that such contractual provisions can only prevail over non-mandatory provisions of Swiss law.

Not addressed in the said decision was the question whether the concept of “Lex Sportiva” could be recognized as a “rule of law” according to Article 187 Para 1 of the PILA in the context of international arbitration. Hence, this question remains open to debate. One could argue that the Federal Supreme Court of Switzerland in the said decision expressed a general concern regarding the concept of “Lex Sportiva” and it would thus answer the question in the negative. However, the Federal Supreme Court of Switzerland attaches great importance to the policy of arbitration friendliness inherent in the PILA and it might thus adopt a different view in an international arbitration context.

Simone Stebler

Simone Stebler, who is an Arthur T. Vanderbilt Scholar and LL.M. candidate in International Business Regulation, Litigation and Arbitration of the New York University School of Law, graduated summa cum laude from the University of Fribourg Law School in Switzerland in 2005. She was an exchange student at the University of Paris II Panthéon-Assas in 2003.  In 2007, Simone Stebler was admitted to the Basel Bar. In 2008, Simone Stebler joined the renowned dispute resolution boutique Nater Dallafior, where she has been engaged in international commercial and sports arbitration as well as in corporate and commercial litigation.

Which jurisdiction is competent to regulate corporate law affairs? And which court is competent, in the international arena, to address cases involving corporations? My purpose is not to clarify all these issues, but more simply to ask the right questions regarding choice of law and jurisdiction criteria.

The most important question is to establish what “corporate law matters” are. Corporations, indeed, can be involved in litigations on different kinds of issues, not only typical “internal affairs matters”, such as derivative actions or actions on the validity of corporate’s decisions. To such legal issues apply different choice-of-law criteria, which vary from jurisdiction to jurisdiction. For instance, the scope of the U.S. “Internal Affairs Doctrine” is narrower than the area covered by the corporate “personal statute” in Europe. Similarly, in jurisdictions where there is employees codetermination in place corporate law regulate an issue that in other countries belong exlusively to the province of labor law.

In the realm of typical “corporate law” matters, as is well known, a fierce debate oppose “incorporation theory” countries and “real seat” country. According to the former, the law of the country of incorporation applies, while for the latter the country of the administrative seat is competent to regulate corporate affairs. Of course, several different versions of these “theories” exist. The “real seat theory” is based upon a spatially-oriented criterion and the main legal issue is to establish where the administrative (or “real”) seat of the corporation is. Originally, the idea to attach the applicable law to the “real” or the “administrative” seat was aimed at attaining legal certainty. However, this goal seems to be uncertain now, since modern telecomunications make possible for the board to meet “virtually”, independently from the physical location of their members, and cheap flights make possible for the board to meet in countries different from such where corporate main activities are. [Luca Enriques, Silence is Golden: the European company as a catalyst for company law arbitrage, J. Corp. L. Stud., 82, 78 (2004)]. Therefore, to make the real seat theory workable, the concept of administratve seat can not coincide simply with the place of boards’ meetings. To resolve this problem, German scholars and case law have developed a more sofisticated concept, that rely upon the place where business decisions are conducted on a day by-day basis. By contrast, the “incorporation theory” – at least in the English, U.S. or Swiss versions – is not properly based upon a territorially-oriented conflict of law rules, but on the mere fact of the incorporation under the law of a certain state.

The second relevant issue is related to corporate litigation. The question is: Where are corporate matters litigated? This is issue is often negleted in the scholar debate on regulatory competition for corporate law, yet it is highly relevant, since to attain legal coherence and predictability substantive law should not be detached from the competent forum. A good example is Delaware law, which is fundamentally judge-made [see: Marcel Kahan & Rock Edward, Symbiotic Federalism and the Structure of Corporate Law, 58 Vand. L. Rev., 1573, 1591 – 1597 (2005)]. Nonetheless, corporate choice-of-law and choice-of-forum criteria diverge, so that Delaware law may be litigated outside of Delaware court [see: John Armour, Bernard Black & Brian Cheffins, Is Delaware Losing its Cases?, www.ssrn.com].  Differently from U.S. law, EU law has addressed this issue, yet only partially and with uncertain results. According to the Regulation on jurisdiction [EC Regulation 44/2001, art. 22(2)] part of the internal affairs matters (i.e.: the validity of the constitution, the nullity or the dissolution of companies or other legal persons or associations of natural or legal persons, or of the validity of the decisions of their organs) should be litigated in the member state of the “seat”. However, the concept of “seat” is to be established according to each member states’ own private international law, so that conflict of jurisdiction can still arise; in addition, other “internal affairs” matters, such as derivative suits, are not comprised in this list and can be litigated alternatively either in the state of the registered office, or of the central administration or of the principal place of business [EC Regulation 44/2001, art. 60(1)], so that the competent court can diverge from the applicable substantial law.

Another set of rules and procedures that are relevant for corporations is insolvency law, whose choice-of-law and forum criteria often diverge from those to be applied to corporate law matters. For instance, according to the Uncitral model law on cross-border insolvencies of 1997 as well as for the EU regulation on cross-border insolvencies [EC Regulation 1346/2000] the fundamental choice of forum criterion is the Centre of the Main Interests (“COMI”) of the insolvent debtor. If the debtor is a corporation, unless the contrary is proven, the COMI coincides with the country of the registered office (i.e. the country of incorporation). The COMI criterion should make the applicable insolvency law more predictable in the eyes of third parties and should avoid forum shopping. However, it does not seem to be always the case and the COMI concept has revealed to be fuzzy and that it can be manipulated. According to the European Court of Justice the COMI diverges from the state of incorporation only if evidence is given that third parties could recognize that corporate activities are managed from a certain coutry different from the registered office (European Court of Justice, C-341/04, Eurofood IFSC Ltd [2006] ECR I-3813). The COMI, therefore, is neither the “administrative seat” of the real set theory, nor the “central administration” or the “central place of business”, which are possible location of corporate domicile according to the EC Regulation on jurisdiction.

Federico M. Mucciarelli

Professor Federico M. Mucciarelli is Associate Professor of Business Law at the University of Modena and Reggio Emilia Business School. He is also Global Fellow at NYU School of Law