Transnational Notes

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

I.              The Vivendi decision

A.           The decision of the Supreme Court

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

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

B.            Critique

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

II.           Revision of Vivendi in 2012

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

A.           Facts and decision of arbitral tribunal

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

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

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

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

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

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

C.           Definition of legal capacity and its consequences

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

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

D.           Comments to its Vivendi decision

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

E.            Conclusion regarding subjective arbitrability

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

III.        Comments

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

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

A.           The characterization of the insolvency problem

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

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

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

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

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

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

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

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

 

Simon Marc Hohler

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

 

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

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

Background to the TCL Case

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

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

Application to the High Court

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

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

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

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

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

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

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

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

Relevance to the United States

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

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

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

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

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

Beverley Newbold

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

A. Introduction

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

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

B. Summary of Facts and Decision of the Chairman

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

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

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

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

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

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

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

The ICSID Convention and Rules Standard

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

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

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

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

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

The UNCITRAL Model Law and Rules Standard

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

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

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

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

The IBA Guidelines Standard

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

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

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

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

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

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

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

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

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

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

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

D. Analysis of the Decision

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

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

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

E. Conclusion

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

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

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

Ikemefuna Stephen Nwoye

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

According to a study by the School of International Arbitration of the Queen Mary College, University of London[1] over 90 % of the awards are complied with voluntarily. In recent years arbitral awards rendered against states or state parties have often resulted in multijurisdictional battles at the post award stage when the private party tried to enforce the award against the recalcitrant state party or execute into the property of the state party. The various decisions rendered by German and Swedish courts in the dispute between Mr. Sedelmayer and Russia[2] or by French and English Courts in the dispute between Dallah and Pakistan[3] are just two very prominent examples. They are a useful reminder that winning the arbitration may just be a start for a long lasting battle in the state courts.

The success of such battles often depends on the attitude taken by the relevant state courts to sovereign immunity and possible waivers thereof. That is one of the lessons the insolvency administrator of Walter Bau AG, a German construction company, had to learn recently when he tried to enforce an award rendered against Thailand. Notwithstanding certain particularities of the case, which are of no relevance for the present comment, the dispute itself is typical for this type of arbitrations resulting from investments by private investors which are frustrated by actions taken by the host state.

The dispute arose out of a contract for the construction and operation of a toll road to the central airport of Bangkok which the predecessor of Walter Bau AG[4] concluded with the government of Thailand. The contract had been concluded though Walter Bau had never obtained the formally required “Certificate of Admission” from Thailand’s Ministry of Foreign Affairs. Equally the missing Certificate of Admission did not prevent Thai Board of Investment issued to issue several Certificates of Investment for the construction of the toll road. The operation of the toll road did not yield the anticipated revenues as Thailand refused to increase the toll to the level requested by the project company and allowed for the construction of alternative toll-free roads to the airport.

As a consequence, in 2005 Walter Bau started arbitration proceedings in Geneva against Thailand. It alleged that Thailand had through its actions breached the investment contract existing between the parties. The arbitration proceedings were based on Articles 8 and 10 of the German-Thailand BIT of 2002. The latter provided that also “approved investments” made before the BIT’s entry into force could benefit from the protection granted, in particular from Thailand’s offer to arbitrate any disputes arising from such investments. Thailand challenged the jurisdiction of the arbitral tribunal alleging that the underlying investment was not an approved investment in the sense of the Art. 8 BIT, as Walter Bau had never obtained the required Certificate of Admission. In a first award rendered in 2007 the arbitral tribunal rejected that challenge and decided that it had jurisdiction. Thailand did not challenge that award on jurisdiction in Switzerland but continued to participate in the arbitration. In its final award in 2009 the arbitral tribunal found Thailand liable to have breached the investment contract and ordered it to pay around 30 million Euros.

As Thailand did not voluntarily comply with the award Walter Bau initiated enforcement actions in the US and Germany. In both actions, which were supplemented by unsuccessful setting aside proceedings in Switzerland, [5] Thailand alleged that the arbitral tribunal lacked jurisdiction to decide the case and invoked inter alia[6] its sovereign immunity. At first instance, the District Court for the Southern District of New York as well as the Kammergericht Berlin (KG Berlin),[7] both rejected Thailand’s objections and declared the award enforceable. Thailand appealed in both cases complaining inter alia that the courts should have investigated in detail the existence of jurisdiction of the arbitral tribunal and its alleged waiver of immunity.

On 8 August 2012 the Court of Appeals for the Second Circuit upheld the decision of the District Court, criticizing the latter, however, for the general approach taken to Thailand’s objection to the tribunal’s jurisdiction.[8] According to the Court of Appeals the District Court should have investigated in detail whether there was “clear and unmistakable evidence that the parties agreed that the scope of the arbitration agreement would be decided by the arbitrators” before adopting a deferential approach to the arbitral tribunal’s decision on its own jurisdiction. On the basis of the evidence before it the Court concluded that such evidence existed and did not investigate the findings of the arbitral tribunal any further. That decision raises interesting questions as to the scope of Kompetenz-Kompetenz at the enforcement stage which would justify a separate article. The focus of this contribution, however, will be the decision of the German Supreme Court (Bundesgerichtshof)[9] in the matter rendered on 30 January 2013.[10]

The decision is of particular interest because it addresses a number of questions relating to sovereign immunity in proceedings to have foreign awards declared enforceable. The Supreme Court made clear that according to the German understandings the proceedings for the recognition and enforcement of foreign awards under the New York Convention (NYC)[11] are not yet part of the execution proceedings. They are still part of the adjudication proceedings albeit “adjudication proceedings sui generis”. In light of this classification the Supreme Court held that the sovereign immunity defense raised by Thailand would be determined on the basis of the rules on immunity from jurisdiction relevant for adjudication proceedings and not those on immunity from execution which apply in execution proceedings. As a consequence German courts could only assume jurisdiction to adjudicate over Thailand if the matter in dispute either concerned commercial activities of Thailand, the so called “acta iure gestiones” as opposed to “acta iure imperii”, or Thailand had waived its immunity. In its decision the Supreme Court could largely concentrate on the waiver exception. It was largely uncontested that the incriminated decisions by the Thai government concerned ”acta iure imperii” as they related to the country’s infrastructure.

In front of the KG Berlin Thailand had argued that in the case at hand the arbitration clause could not be considered to constitute a waiver of its sovereign immunity from adjudication as it did not cover the dispute between the parties. In its view the arbitration tribunal had misinterpreted the BIT by finding that the investment in the toll road constituted an “approved investment” in the sense of the BIT despite the lack of a Certificate of Admission. Pursuant to Thailand the KG Berlin was also not bound by the tribunal’s interim award on jurisdiction. Walter Bau still had to prove that a valid arbitration agreement existed between the parties concerning the investment in question.

The KG Berlin dealt with the sovereign immunity defense at the admissibility stage fairly superficially.[12] It merely stated that Thailand had waived its immunity by having agreed to arbitrate under the BIT without going at that stage into any details whether the arbitration provision in the BIT covered the investment in dispute. A more detailed enquiry into the scope of the arbitration agreement only occurred at the merit stage in the context of whether Thailand could invoke the defenses under Art. V(1)(a)(c) NYC. The KG Berlin held in essences that while Thailand could in principle invoke the lack of a valid arbitration agreement as a defense against the enforcement of the award it was in the case at hand precluded from doing so because it had not attacked the tribunal’s interim award on jurisdiction.

Interesting is the court’s reasoning in this respect. It held first that the NYC itself does not contain an obligation to make use of the remedies against awards at the place of arbitration and could therefore not constitute the basis for precluding the defenses under Art. V(1)(a)(c) NYC. Such a preclusion provision is, however, contained in Art. V(1)(2) first sentence of the European Convention on International Commercial Arbitration of April 21, 1961 (European Convention – ECICA)[13] to which Germany is a party. The court held the provision or at least the underlying idea to be applicable by virtue of Art. VII NYC which entitles a party to rely on more favorable provisions of a different enforcement regime. In the view of the KG Berlin Art. V ECICA constituted a part of the German enforcement regime and therefore prevented Thailand from relying on an alleged lack of the tribunal’s jurisdiction in the enforcement proceedings.

In deciding Thailand’s appeal against the decision the Supreme Court held in essence that in determining the admissibility of the enforcement action, i.e. whether Thailand is submitted to the jurisdiction of the German courts, the KG Berlin should have investigated in detail whether Thailand waived its immunity for the present dispute. That would have required an investigation by the KG Berlin whether the arbitration agreement contained in the BIT and forming the basis for the assumed waiver actually covered the investment or not. The Supreme Court held that in the context of the sovereign immunity defense reliance on preclusion arguments of the kind adopted by the KG Berlin is not possible. A waiver of sovereign immunity should not be assumed lightly but requires clear and unequivocal statements or behavior in this regard. As a consequence the Supreme Court set aside the decision by the KG Berlin and referred the case back to the court for an examination of whether the Thailand waived its immunity from jurisdiction.

Beyond its relevance for the particular dispute the decision of the Supreme Court contains a number of clarifications which may be relevant for the treatment of the waiver exception in future cases at least in Germany but potentially also in other countries.

The Supreme Court confirmed its jurisprudence concerning the general scope of the waiver of sovereign immunity contained in an arbitration agreement. On the one hand it is not limited to the arbitration proceedings as such but also extends to court proceedings in support of the arbitration at the adjudication stage. On the other hand the waiver contained in an ordinary arbitration agreement does not extend to execution proceedings for which an additional waiver would be necessary. In relation to the first statement, the Supreme Court was unfortunately not required to decide whether the waiver in general only extends to court proceedings at the place of arbitration or covers also court proceedings in a third country. In the Supreme Court’s view the BIT explicitly provided that in the present case the waiver contained in it also extended to enforcement proceedings in Germany. The court deduced that from a phrase in Art. 10(2) third sentence of the BIT according to which the “award will be enforced according to domestic law”. In the court’s view Thailand thereby submitted to all proceedings in Germany which are necessary for the enforcement of an award, i.e. in particular the proceedings for having foreign awards declared enforceable.

While such an interpretation is without doubts possible, it would have been preferable if the Supreme Court had used the opportunity to give a convincing ruling on the controversial question of whether the waiver of immunity contained in an arbitration agreement also covers enforcement proceedings in a third country. In the author’s view the answer can only be “yes”. Otherwise the waiver would be deprived of large parts of its effect in practice. As in the present case the place of arbitration is often chosen for its neutrality and the lack of any connection with either party. That has as a consequence that enforcement proceedings will necessarily be initiated in a different country. Thus, to be of any relevance in practice also the waiver should extend to such proceedings in a third country. Otherwise, a state party could easily circumvent its obligation, generally implied into the submission to arbitration, to comply with the award by invoking sovereign immunity in such enforcement proceedings.

Of greater relevance for the outcome of the case is the second determination of the Supreme Court in relation to the scope of the waiver. In principle it only states the obvious: the waiver of sovereign immunity only extends to those cases which are covered by the arbitration agreement. In so far it is surprising that the KG Berlin did not already at the admissibility stage really address the issue of the scope of the arbitration clause which was at the heart of Thailand’s defense. Instead it merely stated that the BIT contained an arbitration clause which could form the basis for a waiver without, however, determining whether the arbitration clause covered the dispute in question. It can only be assumed that the KG Berlin considered it sufficient to deal with the question at the merits stage when addressing the defenses under the New York Convention.

At first sight it does not appear to make a great difference at which stage of the enforcement proceedings the question is addressed: whether in the context of the admissibility of the action or in the context of its merits. Notwithstanding the different setting, the question as to whether the dispute is covered by a valid arbitration agreement involves as such largely the same analysis. In particular, it has to be determined first at both stages to which extent the state court is bound by the existing finding of the arbitral tribunal in this regard. However, the present case shows clearly that there may be different considerations involved at both stages in determining whether a party is precluded from raising the lack of a valid arbitration agreement.

Concerning the required standard of review both the KG Berlin and the Supreme Court came in principle to the same result. The enforcement court can in general review the findings of the arbitral tribunal as to its jurisdiction and is not bound by its factual or legal determinations. Germany was originally one of the countries which allowed for transferring to the arbitral tribunal not only the power to decide on its own jurisdiction in the first place but also the power to make that final determination of its jurisdiction, often referred to as absolute Kompetenz-Kompetenz. However, this jurisprudence has been abandoned with the adoption of the new arbitration law. As a consequence neither of the courts considered itself bound by the findings of the arbitral tribunal that the investment in question was an “approved investment” in the sense of the BIT. The Supreme Court considered in this respect a clause in the BIT to be irrelevant that the arbitral tribunal was to render a binding decision. In its view that clause only concerned disputes which were within the scope of the arbitration clause but not the question of whether the arbitral tribunal had jurisdiction.

In this respect the position of the German courts differs from that adopted by the American courts in the matter. In line with a dicta of the Supreme Court in First Options of Chicago vs. Kaplan[14] the Court of Appeals for the Second Circuit came to the conclusion that the parties could largely transfer the final decision as to the arbitral tribunal’s jurisdiction to the arbitral tribunal itself. The consequence of such a referral is that the enforcement court is largely prevented from reviewing any factual or legal determinations by the tribunal in regard to its jurisdiction, i.e. the arbitrability of the dispute in the American terminology. The Court of Appeals considered that the parties in the present dispute had “clearly and unmistakably” done so by agreeing in their terms of reference on an application of the UNCITRAL Arbitration Rules. The latter provide in Art. 20 that the arbitral tribunal has the power to “rule on objections that it has no jurisdiction”. Following earlier decisions, the Court of Appeals considered that to be a clear empowerment of the tribunal to have a final say on its own jurisdiction. Notwithstanding the fact that the American decisions are not the focus of this blog it is submitted that such a view is based on a misunderstanding of the purposes of Art. 20 UNCITRAL Arbitration Rules and the different concepts of Komptenz-Kompetenz.

Where the German Supreme Court disagreed with the KG Berlin was the issue of the effect of the tribunal’s award on jurisdiction which Thailand did not challenge in Switzerland. In the context of commercial arbitration between private parties German courts have regularly considered private parties to be precluded from raising the lack of a valid arbitration agreement as a defense against the enforcement of awards in cases where the tribunal had rendered  preliminary ruling on its jurisdiction which had not been attacked by that party within the time frame provided for such a remedy. The KG Berlin had transferred this jurisprudence to the sovereign immunity defense relying inter alia on a provision to this effect in the European Convention.

The Supreme Court rightly held that the European Convention as such could not be relied upon as Thailand is not a member to it. Furthermore, it held that the jurisprudence concerning the jurisdictional defense could not be applied in relation to the question of whether a state party waived its sovereign immunity. It confirmed its jurisdiction that such a waiver should only be assumed under narrow circumstances if the behavior of the state party clearly evidences a will to renounce it immunity. The court held that the mere non-use of remedies against an award on jurisdiction does not evidence such a will. Thus it referred the case back to the KG Berlin to determine whether the underlying investment was covered by the arbitration clause in the BIT.

Concerning the application of existing legal principles the decision of the Supreme Court is probably the most convincing of all the decisions rendered in the enforcement proceedings.[15] However, one would have hoped for a more pro-enforcement view concerning the preclusion argument. The German Supreme Court is correct in its analysis that the arbitration agreement can only be considered to constitute a waiver for those disputes which it covers. However, that says nothing about a possible preclusion of the sovereign immunity defense. If the arbitral tribunal, rightly or wrongly, determines in an award on jurisdiction that it has jurisdiction also state parties should be obliged to make use of the remedies existing at the place of arbitration against such an award, at least in cases where the issue is not the existence of an arbitration agreement as such but merely its scope. If the state party entitled to sovereign immunity decides not to do so but continues to participate in the arbitration and to defend on the merits it should be considered to be also precluded with its immunity defense in enforcement proceedings. To what extent these considerations will influence the decision by the KG Berlin on the scope of the arbitration clause in the BIT remains to be seen.

 Stefan Kröll, a former scholar-in-residence of the Center for Transnational Litigation and Commercial Law, is an independent arbitrator in Cologne and an honorary professor at Bucerius Law School. He is a visiting Reader at the School of International Arbitration at CCLS (Queen Mary, University of London) and a national correspondent for Germany to UNCITRAL for arbitration and international commercial law. He has published widely in the field of international commercial arbitration and commercial law, including inter alia the books “Comparative International Commercial Arbitration” (co-authored with Lew/Mistelis), and “Conflict of Law in Arbitration” (co-editor with Ferrari). Recently he has been retained by UNCITRAL as one of the three experts to prepare the Digest on the UNCITRAL Model Law on International Commercial Arbitration.

 

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[1] 2008 International Arbitration Study “Corporate Attitudes and Practices: Recognition and Enforcement of Foreign Awards”, available at:  www.arbitrationonline.org/docs/IAstudy_2008.pdf.

[2] Final Arbitral Award Rendered in 1998 in an Ad Hoc Arbitration in Stockholm, Sweden, Observations by Walid Ben Hamida, by Stefan Kröll and Jörn Griebel, by Domenico di Pietro, Stockholm International Arbitration Review (SIAR) 2005-2 for the decisions in the setting aside proceedings in Sweden see SIAR 2005-2;  see further for some of the enforcement actions in Germany  Germany No. 72, Russian Federation v. Franz Sedelmayer (Germany), Oberlandesgericht [Court of Appeal], Frankfurt am Main, 26 W 101/02, 26 September 2002, XXX Yearbook Commercial Arbitration (2005) pp. 505 – 508; Germany No. 77, Franz Sedelmayer (Germany) v. State agency (Russian Federation), Oberlandesgericht [Court of Appeal], Cologne, 16 W 35/02, 6 October 2003, XXX Yearbook Commercial Arbitration (2005)  pp. 541 – 546;  Germany No. 91 / W1, Franz J. Sedelmayer (Germany) v. Russian Federation, Federal Republic of Germany, Bundesgerichtshof [Federal Supreme Court], 4 October 2005, XXXI Yearbook Commercial Arbitration (2006) pp. 698 – 706; Germany No. 92 / W2, Franz J. Sedelmayer (Germany) v. Russian Federation, Deutsche Lufthansa AG (Germany), Bundesgerichtshof [Federal Supreme Court], 4 October 2005, XXXI Yearbook Commercial Arbitration (2006)  pp. 707 – 717; case summary with observation on the two Supreme Court decisions by Hilmar Raeschke-Kessler, published in SIAR 2006:1, available at: www.sccinstitute.com/filearchive/2/21311/franz_sedelmayer_v_russian_federation.pdf; for enforcement and execution proceedings in Sweden see the decision by the Swedish Supreme Court of 1 July 2011 – Mål nr Ö 170-10.

[3] For England see the decision by the Supreme Court Dallah Real Estate and Tourism Holding Company v. The Ministry of Religious Affairs, Government of Pakistan, Supreme Court, 3 November 2010, XXXVI Yearbook Commercial Arbitration (2011) pp. 357 – 362; for France see the decision of Court of Appeal in Paris, Government of Pakistan, Ministry of Religious Affairs v. Dallah Real Estate and Tourism Holding Company, Cour d’Appel, Paris, First Pole, First Chamber, 17 February 2011, XXXVI Yearbook Commercial Arbitration( 2011) pp. 590 – 593.

[4] For the ease of presentation in the following the claimant’s side, whether it is the insolvency administrator, the original contract party or Walter Bau AG itself will all be referred to as “Walter Bau”.

[5] See the decision by the Swiss Supreme Court, 23 July 2012 – Case No. 4 A_570/2011.

[6] In the German proceedings Thailand raised three additional defenses. First, it alleged that Walter Bau had not been party to the arbitration award. Second, it considered Walter Bau to be bound by an agreement with the purchaser of its interest in the project company, according to which the latter could request from Walter Bau to stop the arbitration proceedings which the purchaser had done. Third, it alleged that the award had been obtained fraudulently as Walter Bau had acted against that agreement with the purchaser.

[7] The Kammergericht Berlin is one of the 24 Higher Regional Courts, the second-highest instance on civil and commercial matters in the German court system. The Higher Regional Courts are competent in first instance for applications concerning the declaration of enforceability of arbitral awards (section 1062 (1) of the German Code of Civil Procedure).

[8]Schneider v. Kingdom of Thailand (2d Cir. 2012).

[9] www.bundesgerichtshof.de.

[10] Case No.III ZB 40/12.

[11] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 330 U.N.T.S. 3.

[12] Decision of March 26, 2012, Case No. 20 Sch 10/11.

[13] European Convention on International Commercial Arbitration, April 21, 1961, 484 U.N.T.S. 349.

[14] 514, U.S. 938, (944, 947)(1995).

[15] Additionally, the Swiss Supreme Court had to deal with the award in setting aside proceedings based on the above mentioned agreement with purchaser of Walter Bau’s interest in the project company that it would withdraw its claim in the arbitration; see Swiss Federal Tribunal, 23 July 2012 – Case No. 4 A_570/2011.

The right of access to justice guaranteed by article 6 of the European Convention of Human Rights (ECHR) and arbitration are predetermined to have a difficult relationship. The ECHR secures everyone the right to have their civil claims brought before a court or a tribunal[i] and financial obstacles should not impact this right.[ii] On the contrary, arbitration is a form of private justice paid by the parties.[iii] Therefore, a lack of financial resources is likely to close access to the arbitrator. Nevertheless, their “marriage” was recently celebrated when, on 17 November 2011, the Paris Court of Appeal (Court) decided that “arbitral tribunals are not exempt from applying [the right of access to justice]”.[iv]

The Court was invited by a party to uphold, based on article 6 of the ECHR, the right of access to justice. The Court was faced with the following issue: shall an arbitral award, in which arbitrators followed the ICC court’s decision to withdraw counterclaims of an impecunious defendant because of the non-payment of the advance on costs, be annulled for violation of right of access to justice?

The facts of the case arose in 2001, when the Italian company Pirelli and Spanish company Licensing Project (LP) entered into a license agreement allowing LP to produce and sell shoes under several Pirelli’s brands. Later in 2007, a dispute arose in relation to the use of one of the brands. LP suspended payments of royalties, and Pirelli subsequently terminated the agreement. In 2007, a Barcelona court declared LP insolvent and in 2009, opened liquidation proceedings against it.

In 2007, Pirelli started arbitration under the International Chamber of Commerce Arbitration Rules (ICC Rules) in Paris in accordance with the arbitration clause in the agreement. Pirelli notably requested the acknowledgment of the regular termination of the agreement and the payment of outstanding royalties by LP. LP formed several counterclaims stating particularly that Pirelli should compensate it because Pirelli granted LP a license for a brand not in its possession and terminated the agreement unlawfully.

In 2009, Pirelli requested the ICC Court to fix separate advance on costs according to article 30.2 of the 1998 ICC Rules (article 36.3 of the 2012 ICC Rules). The ICC Court granted Pirelli’s request despite LP’s objection of lacking financial means. LP could not pay the advance on costs and as a result, the ICC court decided that the counterclaims were deemed to have been withdrawn pursuant to article 30.4 of the 1998 ICC Rules (article 36.6 of the 2012 ICC Rules). The ICC Court noted that in accordance with the ICC Rules, LP is not precluded to present its claims in future proceedings. In the final award rendered in Paris in October 2009, the arbitral tribunal admitted all of Pirelli’s claims and did not consider LP’s counterclaims.

LP initiated the proceedings to set aside the award. It argued that the arbitral proceeding, in which the arbitral tribunal did not hear its counterclaim because of its failure to pay the advance of costs even if LP was materially unable to make such a payment, violated its right of access to justice and principle of equal treatment both guaranteed by article 6 of the ECHR. The Paris Court of Appeal annulled the award on these two grounds.

The “marriage” between right of access to justice and arbitration is to some extent forced because the right of access to justice triumphs over party autonomy to submit dispute to arbitration governed by procedure agreed by the parties (I). Nevertheless, the Court’s decision in this author’s view does not provide an appropriate solution for cases when a party to arbitration is impecunious. Therefore, the tips for a “successful marriage” between right of access to justice and arbitration are needed and some alternative solutions will be explored (II).

I. Forced Marriage: Right of Access to Justice Triumphs over Party Autonomy

The relationship between right of access to justice and arbitration is not one of equals. The “marriage” is forced because right of access to justice can in certain circumstances, such as a presence of an impecunious party, override the parties’ choice of arbitration as a forum and of the ICC Rules as a procedure. In this case, the Court decides to give effect to right of access to justice and principle of equal treatment of parties and annuls the award.[v]

The Court reaffirmed right of access to justice. Nobody shall be deprived of the ability to have its claims decided by a judge. Any restrictions to this right must be proportionate to requirements of sound administration of justice.[vi] When applying the rule to this case, the Court found that the decision to hold LP’s counterclaims as withdrawn constituted an excessive measure in circumstances of this case. LP was in liquidation and was unable to pay the advance on costs, which deprived LP of the possibility of having its claims decided by a judge. The Court highlighted that for a company in liquidation proceedings the ability allowed to it by the ICC Rules to introduce its counterclaims in another arbitral proceeding was purely theoretical.[vii]

By this decision, the Court emphasized the jurisdictional nature of the arbitration[viii] by stating that arbitral tribunals are not exempt from applying the right of access to justice. The jurisdictional nature is reinforced to the detriment of its contractual nature in order to protect fundamental rights of a party faced with a lack of financial resources.[ix]

The regress of the contractual nature of arbitration is characterized in this case by a non-application of one of the provisions of the ICC Rules by the Court. And yet, a party autonomy is recognized to play a large role in choice of procedural rules in international arbitration.[x] When parties agreed on particular rules to govern the arbitration, this choice has a contractual nature and obliges parties as well as arbitrations.[xi] Therefore, the Court’s decision was received with criticism.[xii] According to one author, the judge cannot pick in the contract only the provisions, which he approves, as he does here in the ICC Rules transformed in consequence into a sieve.[xiii]

To avoid any confusion, the Court did not declare void the ICC Rules’ provision on advance on costs; it only refused to apply it after finding in concreto that its application leads to a disproportionate restriction of the right of access to justice.[xiv] To avoid the annulment, the arbitral tribunal should have disregarded the parties’ contractual choice of the ICC Rules in respect to the provision on advance on costs and assured the respect of the fundamental principles such as access to justice and principle of equal treatment of parties.[xv]

Even if in this case, the relationship between the right of access to justice and arbitration seems to be a “forced marriage,” it is important to note that in other circumstances it can well be seen as a “marriage of convenience.” The right of access to justice helped the constitution of arbitral tribunals[xvi] as well as the enforcement of an arbitral award.[xvii]

II. Tips for a Successful Marriage: How to Articulate Right of Access to Justice and Arbitration in Presence of an Impecunious Party?

The solution of the Court could be perceived as a balanced and optimal solution between two other alternatives: either give full effect to the parties’ autonomy by applying all the provisions of the ICC Rules, which would lead to the denial of justice for LP, or refuse completely to give effect to party’s autonomy, declare the arbitration agreement inapplicable, and allow LP accessing to state courts.[xviii]

In this author’s view, the Court’s solution is not satisfactory, first, given the nature of the arbitration as a private justice paid by the parties. The result of the Court’s decision would turn arbitration centers “into philanthropic institutions and arbitrators into workers animated by the ideal of gratuity.”[xix]

Secondly, leaving the control until the annulment stage is also not satisfactory because the annulment of the award – as in this case – results in two years of arbitral proceedings for nothing, another two years of state proceedings for annulment and resources wasted.[xx] In addition, Pirelli did not receive justice as well as LP, which was not able to present its counterclaims. These considerations invite a search for more satisfactory solutions in situations when a party to arbitration is impecunious in a business-to-business context.

It has been suggested that arbitration centers could create funds providing aid to impecunious parties to arbitration. [xxi] This proposal would avoid recourse to state courts and at the same time guarantee right of access to justice.[xxii] However, it would necessarily lead to an increase of arbitration costs. Institutional costs would encompass a premium financing this mutual fund. Solidarity hardly goes together with the nature of arbitration as a private justice paid by the parties. It also conflicts with a current pressure to reduce costs of arbitration. Furthermore, this solution does not provide any help in cases of ad hoc arbitrations.

In this author’s view, a feasible solution, which would guarantee right of access to justice in presence of impecunious to respondents as well as claimants, would consist in allowing parties to turn to competent state courts.

In the presence of an impecunious respondent, a claimant could have an option[xxiii] to start the litigation directly in a state court.[xxiv] A claimant would be sure to receive a judgment, and right of access to justice of an impecunious respondent would be protected.[xxv] It would avoid starting arbitral proceedings, which would lead to a deadlock when an impecunious party would assert counterclaims. In that situation an arbitral tribunal would, either need to hear them for free,[xxvi] or risk the annulment of the award because the right of access to justice was violated.

What would happen if a respondent would assert arbitral jurisdiction?[xxvii] The respondent would have the burden of proof to demonstrate that it has sufficient means to carry on the arbitration. In appropriate circumstances, a judge could ask for a security for costs, which would be, if necessary, used to pay the subsequent arbitral proceedings.

If a claimant is impecunious, he should bear a heavy burden of proof to convince a state court that his financial conditions do not allow him to start arbitration.[xxviii] The threshold for not giving effect to the arbitral agreement should remain high.[xxix]

The solution consisting in letting an impecunious claimant to start litigation directly in a state court notwithstanding an arbitral agreement was approved in 2000 by a German Federal Court of Justice[xxx] and disapproved in 1980 by the Court of Appeal of England and Wales.[xxxi]

In consequence of the present decision, the ICC could amend its rules as it did after Dutco case.[xxxii] But the ICC will surely wait until the final decision of the French Supreme Court on the matter.[xxxiii]

The French Supreme Court could vacate the present decision and give full effect to parties’ autonomy. However, considering that the ECHR is directly applicable to French courts, a court refusing to give effect to rights guaranteed by the ECHR would engage the state responsibility before the European Court of Human Rights.[xxxiv]

The French Supreme Court could also confirm the Court’s decision, which could eventually bring changes to the ICC Rules and practice as well as a possible future evolution towards a greater intervention of a French judge in cases involving an impecunious party to arbitration.

There exist worries that if the Court’s decision was confirmed, it could negatively impact the choice of Paris as an arbitral seat in international arbitrations.[xxxv] In this author’s view, such worries are overstated, notably because the cases involving an impecunious party to arbitration in business-to-business relations, such the present case, are rare.[xxxvi]

This author fully supports a strong pro-arbitration policy in a great majority of the cases. However, in a case such as the present one, arbitration as well as state courts from the member states to the ECHR cannot disregard the fundamental rights such as the right of access to justice enshrined in the ECHR. The Court’s decision confirmed this view. Nevertheless, the appeal to the French Supreme Court is to be highly followed.

This blog is a shorter version of a blog posted at NYU’s JILP online forum that can be found here: http://nyujilp.org/arbitration-and-right-of-access-to-justice-tips-for-a-successful-marriage/

Jaroslav Kudrna

The author is an LL.M. student in the International Business Regulation, Litigation and Arbitration program at New York University School of Law, Class of 2013. He is a Graduate Editor at the NYU Journal of International Law and Politics. Kudrna obtained his first degree in law in France at Sciences Po Paris. He completed cum laude a Master of European Economic Law at the University of Strasbourg and summa cum laude a Diploma of International Business Dispute Settlement at the University Paris XII.

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[i] Golder v. United Kingdom, Eur. Ct. H.R. (ser. A) at §36 (1975). The right of access to justice is not absolute, id. §38. However, restrictions must not be excessive. See Aerts v. Belgium, 1998-V Eur. Ct. H.R., in Jean-François Renucci, Introduction to the European Convention on Human Rights: The rights guaranteed and the protection mechanism 69 (Council of Europe Publishing, 2005).

[ii] Airey v. Ireland, Eur. Ct. H.R. (ser. A) (1979) [obligation for states to establish legal aid systems]; Kreuz v. Poland, 2001-VI Eur. Ct. H.R. [violation of right of access to justice by excessive procedure costs]; Aït-Mouhoub v. France, 1998-VIII Eur. Ct. H.R. [violation of right of access to justice by excessive amount of security for costs], in Renucci, supra note 1.

[iii] Daniel Cohen, Non-paiement de la provision d’arbitrage, droit d’accès à la justice et égalité des parties : avancée ou menace pour l’arbitrage ?, 1 Paris J. of Int’l Arb. 159, II.A (2012).

[iv] Cour d’appel [CA] [regional court of appeal] Paris, 1e ch., Nov. 17, 2011, n° 09/24158.

[v] The grounds for annulment were article 1520 4° (violation of due process) et 5° (violation of international public policy) of the French Code of civil procedure.

[vi] The substance and limit of right of access to justice formulated by the Court echoed ECtHR’s case law.

[vii] The Court also reaffirmed the principle of equal treatment of parties. It would be violated when a defendant could only answer to the claims of an adverse party and would not be able to submit to the arbitral tribunal its counterclaims, sufficiently connected to principal claims, which could eventually result in defendant‘s release by offsetting mutual debts.

[viii] Cohen, supra note 3.

[ix] Maximin de Fontmichel, La force obligatoire du règlement d’arbitrage à l’épreuve des principes fondamentaux du procès, 142 Petites affiches 3, I. (2012).

[x] See for example article 1509 of French Code of Civil Procedure; Cohen, supra note 3.

[xi] Tribunal de grande instance [TGI] [ordinary court of original jurisdiction] Paris, ord. réf. [preliminary order], June 23, 1988, République de Guinée (3^e esp.), note Philippe Fouchard (Fr.), Rev. arb. 657 (1988); Cour d’appel [CA] Paris, Sept. 15, 1998, Sté Cubic, note Pierre Lalive (Fr.), Rev. arb. 103 (1999) in Cohen, supra note 3.

[xii] Thomas Clay, Recueil Dalloz 3023, E.2 (2011); Cohen, supra note 3.

[xiii] Clay, supra note 12. For another recent case where the French court decides not to apply a specific provision of the ICC Rules see Cour d’appel [CA] [regional court of appeal] Reims, Nov. 2, 2011, Sté Tecnimont.

[xiv] It is worth noting that the Court’s methodology of analyzing the breach of right of access to justice seems identical to one followed by the ECtHR. Xavier Boucobza & Yves-Marie Serinet, Les principes du procès équitable dans l’arbitrage international, 1JDI 41, §20 (2012).

[xv] Boucobza & Serinet, supra note 14, at §27; Fontmichel, supra note 9.

[xvi] Cour de cassation [Cass.] [supreme court for judicial matters] civ. 1e ch., Feb. 1, 2005, Bull. civ. 2005, I, n° 53. The right of access to justice prevented the denial of justice and gave efficiency to the parties’ intent to submit their dispute to arbitration. Boucobza & Serinet, supra note 14, at §31. For another example see Cour d’appel [CA] [regional court of appeal] Paris, June 19, 1998, UNESCO v. Boulois, Rev. arb. 343 (1999).

[xvii] Regent compagny c/ Ukraine, Eur. Ct. H.R., April 3, 2008, n° 773/03 [Ukraine violated article 6 of the ECHR and engaged its responsibility by refusing to enforce an arbitral award]. The right of access to justice guaranteed in this case an effective enforcement of arbitral award. Jean-Baptiste Racine, Note – April 3, 2008, Eur. Ct. H.R. (5^th Section), Rev.d’Arb. 802, 807 (2009).

[xviii] Fontmichel, supra note 9; Boucobza &,Serinet, supra note 14.

[xix] Cohen, supra note 3 [translation from French by the author].

[xx] The award condemned LP to pay 288.750$ for arbitration fees and 100.835€ for Pirelli’s legal costs.

[xxi] Fontmichel, supra note 9.

[xxii] Id.

[xxiii] A claimant would still keep his right to start arbitration but in that case he should bear the risk in accordance with the Court’s holding. If he does not pay the advance on costs also for the impecunious defendant’s counterclaims, there will be a risk that the award could be annulled.

[xxiv] Carine Dupeyron & Flore Poloni, Procédure de liquidation d’une partie, arbitrage et droit d’accès à la justice : l’impossible équation?, 30 ASA Bulletin 467, 477 (2012).

[xxv] Dupeyron & Poloni, supra note 24, at 477.

[xxvi] The situation would be different if claimant would decide to pay advance on costs on behalf of respondent. But the most of the time the claimant has no interest to do so, because the recovery of its own claim against an impecunious party is already uncertain. Dupeyron & Poloni, supra note 24, at 476.

[xxvii] Dupeyron & Poloni, supra note 24, at 477. A bad faith respondent could try to make a claimant bear either the costs of arbitral proceedings, or the risk of annulment of the award. Id.

[xxviii] A French trial judge has recently decided to disregard an arbitral agreement because of the violation of the right of access to justice in a case where he concluded that commencing the arbitration was materially impossible for a French company. Tribunal de commerce [TC] [trial court for commercial matters] Paris, May 17, 2011, R.G. 2011003447, unreported.

[xxix] “If the claimant’s evidence as to his lack of means is inadequate, then no doubt the court will be quick to draw the inference that he is simply trying to avoid the arbitral process.” Imran Benson, In search of justice, 162 N.L.J. (7519) 839 (2012). “The courts are well able to determine the financial means of a person, it is the sort of decision which judges reach every day in security for costs applications”. Id.

[xxx] The Federal Court of Justice declared an arbitration agreement incapable of being performed because the claimant was not able to afford the arbitration costs. The claimant had the only chance to introduce his claim before a state court, thanks to the legal aid for which he had qualified. Bundesgerichtshof [BGH] Sept. 14, 2000 (CLOUT case 404) in Albert Jan van den Berg, XXVII Y.B. Comm’l Arb. 265 (2002).

[xxxi] Haendler & Natermann GmbH v. Mr. Janos Paczy, Court of Appeal, Dec. 3, 1980, in Pieter Sanders, IX Y.B. Comm’l Arb. 447 (1984). This decision could, however, come differently today notably because of the promulgation of the Human Rights Act in 1998. Benson, supra note 29, at 839.

[xxxii] Cour de cassation [Cass.] [supreme court for judicial matters] civ. 1e ch., Jan. 7, 1992, n°89-18708. The ICC could for example let arbitral tribunals to hear counterclaims of an impecunious party and leave the arbitration costs to be decided in the award and possibly recovered at the enforcement stage. Boucobza &,Serinet, supra note 14, at §40.

[xxxiii] The appeal (pourvoi en cassation) against the commented decision was introduced on 8 December 2011. Dupeyron & Poloni, supra note 24, at note 27.

[xxxiv] R c/ Suisse, App. No. 10881/84, 51 Eur. Comm’n H.R. at 83 (1987); Christophe Seraglini, Cass., 1e ch. civ., Feb. 20, 2001, REV. CRIT. DIP 124, §9 (2002); Alexis Mourre, Le droit français de l’arbitrage international face à la Convention européenne des droits de l’homme, 337 GAZ. PAL. 16, §5 (2000).

[xxxv] Cohen, supra note 3, at II.B.

[xxxvi] Other main arbitral seats in Europe such as London, Geneva or Stockholm are all situated also in states parties to the ECHR. Therefore, if a case similar to the present one occurs in these countries, the solution in the light of the requirements of article 6 of the ECHR should be similar.

1. Introduction

On November 16, 2012, the Milan Chamber of Arbitration has hosted its 3^rd Annual Conference in international arbitration.

The aim of this contribution is to briefly report the lively discussion related to the main topic of the conference – the seat of arbitration – to express some comments on this issue and hopefully to stimulate a broader debate among practitioners and scholars.

Nowadays, it is not unusual for the parties to determine the seat of the arbitration in their arbitration agreement.[1] But what are the factors taken into account by the parties when selecting such place?[2]

As it has been pointed out by the moderator of the first session[3], the questions we should try to answer to are the following:

–          Do parties pay attention more to the legal or to the practical factors when choosing the seat?

–          Is the place of arbitration related to the origin of the parties and to their place of business?

–          To what extent a good and estimated arbitral institution, placed in a particular city, influences the choice of the party?

No doubt one of the leading factors influencing the choice of the seat is the substantive law of the contract. For example, dispute resolution lawyers find it coherent to choose England as the place of the arbitration if the substantive law of the contract is English law. Today, the four most popular places of international arbitration are London, Paris, Geneva and New York.

But does the choice of the seat still really matter? Or is the so-called “seat factor” facing a progressive decline?

During the Milan Annual Conference two opposite opinions emerged.

2. “Transnational” approach vs. “Traditional” approach

2.1 “Transnational” approach: the decline of the role of the “seat”

For some scholars (well represented at the Milan Conference by Antonias Dimolitsa), the choice of the seat is becoming gradually less important due to multiple factors.

First of all, the progressive harmonization of the rules governing international arbitration under national legal systems (such as the UNCITRAL Model Law, which has been adopted by an high number of States).

Secondly, the increasing recognition of party autonomy in the determination of a large number of aspects of the arbitral process, such as, for example, the substantive applicable law or the rules of procedure.

It seems that factors like these make the location of the seat of the arbitration less important.

According to the well-known Emmanuel Gaillard’s work on “Philosophical Aspects of the Law of International Arbitration”[4], there are three different representations of international arbitration and each of them leads to a different role played by the “seat” of arbitration:

–          “Monolocal” representation[5]: this is the traditional vision according to which the arbitration has a forum and the award has a nationality, which is the nationality of the seat. In this case, the seat plays a crucial role.

–          “Multilocal” or “Westphalian” representation[6]: according to this approach, there is no lex fori and the award has no nationality. There is a connection between the arbitration and the seat, but not so significant and relevant as in the “Monolocal” representation.

–          “Transnational” representation[7]: it assumes the existence of a transnational legal order composed by States, collectively, willing to recognize an award if it does present certain features. In this case, there is no connection between the arbitration and the seat.

For scholars supporting the third approach, the “seat” of the arbitration is no longer a decisive factor, neither for the arbitration proceedings nor for the destiny of the award. This is due to the harmonization of arbitration laws and to the homogenization of rules and practices. Several elements seem to support such a position:

–          as far as arbitrator’s jurisdiction is concerned, the principle of “competence-competence” is accepted and recognized in almost every legal system (even though there are few strongly criticized exceptions);

–          as for the proceedings, the procedural autonomy of the parties in determining the “rules of the game” – as well as the procedural powers of the arbitrator to conduct the process – is recognized by all arbitration laws and institutional rules. This happens also thanks to codified practices like, for example, the IBA Rules on the Taking of Evidence[8];

–          regarding the action of the State judge in support of the arbitration (the so-called juge d’appui), it is worth mentioning that such support is rarely required and that, even when requested, it is not necessarily addressed to the judge of the “seat” of the arbitration;

–          there is a common principle of non-intervention concerning the supervisory jurisdiction of the courts of the seat over the arbitration. Such a principle is widespread with limited, ineffective or avoidable exceptions. Any supervision is minimal and the real exception to this principle is in relation to the phenomenon of anti-suit injunctions;

–          the law of the seat has no impact on the choice of the law applicable to the merits. The eventual applicability of whatever public policy rule depends on the worthiness of its application and on the consequences of its non-application. The applicability of the public policy rules (lois de police) of the seat depends on factors different than their identification as “mandatory rules of the seat”;

–          last but not least, the grounds of annulment of arbitral awards are internationally limited and very similar (with exceptions in some country, like the United States and its “manifest disregard of the law” case law). Such grounds, that are similar to the grounds for refusing enforcement, are reproduced almost identically in the various arbitration laws, with very few instances of local annulment standards. Some arbitration laws grant to the parties the right to exclude setting aside proceedings. There are then different approaches regarding the recognition and enforcement of an annulled award.

All the above mentioned arguments – as well as a realistic approach towards the practice of international commercial arbitration – entitle a group of scholars to state that the seat of arbitration is gradually losing its legal importance and that, on the contrary, the “transnational” approach has to be followed.

The arbitral process – and its efficiency – is more influenced by the quality of the arbitration agreement (and by pathological clauses) rather than by the choice of the seat.

The most important factors are others: first of all, the choice of the arbitrator and the reasoning of the award. On the other hand, the role of the choice of the seat cannot be excluded at all, but only diminished in its importance.

2.2 “Traditional” approach: the choice of the seat has still significant legal and economic consequences

According to a more traditional approach, the selection of the seat has still a legal and economic significance because it creates a link between the country where the arbitration is placed and the arbitration itself. Such link presents significant legal and economic consequences for the parties and for the arbitrators.

This approach is based on several arguments.

First of all, some of the grounds for refusal of recognition and enforcement of foreign arbitral awards under Article V of the New York Convention (specifically those relating to the validity of the arbitration agreement, the composition of the arbitral authority or the arbitral procedure) refers to the law of the country either where the award was made or where the arbitration took place and all these elements point to the law of the seat.

Another point is that the seat of the arbitration shall determine whether an award is “foreign” for purposes of the New York Convention.

The seat shall also determine whether any reservation made by the State of the seat regarding its acceptance of the New York Convention does apply.

There is another important element that should be taken into account: when selecting the place of arbitration, the parties consider the choice from an economic point of view. The significance of the place of arbitration relates to issues of convenience and costs. Let’s think about accommodation, transportation (including flight connections), hearing facilities and technical support. It is true that hearings may be held at locations other than at the arbitral seat, but it also true, on the other hand, that this frequently does not occur. Parties usually make the location of the seat a matter of practical and logistical importance.

According to many scholars (represented at the Milan Conference by Stefan Kroell), this more “traditional” approach should be followed. They believe that the selection of the seat is still one of the most important factors and has great consequences for the parties. If the choice of the place is made with consciousness there will be a cheaper and less painful process for the clients. So, parties to an international arbitration should pay great attention to this choice.

The seat may have a potential influence on three fundamental factors:

1)      the arbitration proceedings itself

2)      the courts’ supportive function for the arbitration

3)      the arbitration-related proceedings on the third country (the process of enforcement).

It is absolutely true that arbitration is based on an agreement between the parties and that party autonomy has a central and fundamental role. But it is undeniable that the local law, the law of the seat of arbitration, plays a fundamental role as well (for example, as far as the setting aside of the award and the enforcement process are concerned). This approach can be seen as “traditional” and, according to the scholars supporting the “transnational” approach, it is gradually losing its importance.

For all those reasons, the choice of the seat definitely influences the arbitration proceedings. There is no doubt that, when choosing the place, parties make legal and non-legal considerations.

Legal considerations such as, for example, the existence of a modern arbitration friendly legal environment, the attitude and the efficiency of State courts and the neutrality of the seat.

Non-legal considerations include, for example, accommodations, direct flights and hearing facilities.

This approach seems to be supported also by the “final” users of arbitration, as expressed in Milan by a senior counsel of a Germany-based company[9]. According to his approach, if we do analyze the issue from a practical point of view, the seat is important for three reasons:

1)      because of the need of “predictability”: the seat may be not so important for the arbitrator but it is important for the parties. They have to manage a legal risk and predictability of the outcome is extremely important to them. The legal risk can be very different if you have an arbitration in Hungary rather than in India, in India rather than in Italy, and so on. Predictable situations may influence companies’ legal strategies and decisions;

2)      even though it is true that international arbitration laws and practices are tending towards harmonization, it is also true that the seat still determines and influences the approach taken by the arbitrators towards procedural issues (like, for example, disclosure);

3)      because the approach of State judges still influences the enforceability of arbitral awards.

In conclusion, we can say that the two opposite approaches, the “transnational” and the “traditional” one, are based on different considerations and are both considerable and interesting.

3. Italy as the seat of arbitration: heaven or hell?

 It is a fact that the importance of the seat of arbitration has not escaped the attention of national legislators and national courts. In the last thirty years a large number of States have competed to ensure the best legal environment for arbitration within their territory, in order to attract foreign parties to choose their country as the seat of their arbitration. This was done in view of the economic benefits expected in terms of custom to local counsel and possibly arbitrators, as well as benefits to hotels and other support services. Many examples can be brought: England, Switzerland, Belgium, France, Singapore.

We can say there is some sort of international competition in modernizing arbitration law in order to make a country’s environment more attractive as a place for international arbitration.

It is undeniable that, notwithstanding the standardization of the arbitration rules and practice, there is still a significant difference between an arbitration conducted in Milan and an arbitration conducted in Zurich or somewhere else.

The fact that international commercial arbitration is going towards some kind of harmonization and standardization does not mean that we have to lose the different legal traditions developed in each country.

On the contrary, we are entitled to be proud of the intrinsic differences of each legal framework and to maintain some peculiarities, even though we operate in the field of international arbitration. I do strongly believe that “diversities”, in commercial arbitration, is a value and not an obstacle to be overcome. 

Many scholars believe that is counterproductive and not forward-looking for the international arbitration community. They propose a move towards a fixed standardization of the procedure, but it is not reasonable to use the same procedural rules everywhere and in any case. It does not make sense to select the common law system and the general principles background if it is not the case. And the same applies for the civil law system.

Parties should be free to use the rules that are congenial to their juridical background and to the specific needs of the case.

So, a proper investigation on the main features of the “place” of arbitration is still essential.

Does the Italian arbitration legislation (and moreover its application by the Courts) satisfy the foreign parties’ needs?  

In the past, certain aspects of Italian arbitration regulation, such as the distinction between “arbitrato rituale” and “arbitrato irrituale”, may have cast doubts about the convenience of selecting Italy as the seat of arbitration.

The situation after the reform of 2006 has changed significantly. The most serious issue, still pending and not properly governed by the Italian legislation, is the absence of the power to issue interim measures for the arbitrator sitting in Italy. Such lack of power may be seen, by practitioners,  as an obstacle for placing the arbitration in Italy.

But, apart some specific technical solution provided for Italian law, the fundamental question seems to be another one: can Italy be considered an “arbitration friendly” country? And to what extent? Can this country be chosen by the parties as a suitable place of their arbitration?

Undoubtedly, many foreign investors have the perception of the existence of some legal and technical problems concerning the Italian framework and for these reasons Italy is definitely not the first place that come into mind when thinking about the choice of the seat. The complexity of the Italian legal system affects the perception of foreign investors and, as a consequence, the possibility of choosing Italy as the seat of an international arbitration.

The general perception that many foreign investors have is that in Italy the court system is pretty slow. Generally speaking, they may take into consideration an arbitration placed in Northern Italy and administered by an arbitral institution.

Otherwise, choosing Italy as the seat of the arbitration is considered not appropriate.

 It is understandable that, if the initial general perception is negative (no matter whether right or wrong, deserved or not), most parties tend to stay away from that country. Most of the time, parties do not have the opportunity, the time, the resources to deeply analyze and study in detail a legal (and political) framework and its case law. But the evaluation should not be based on an aprioristic perception. And the suitability of a place should not be excluded “a priori”, because of the existence of some pathological cases.

Of course, it is wise to avoid places because of the interventions of the courts and because of setting aside provisions. And it is of fundamental importance to provide the parties with a place with good and serene atmosphere.

Concretely speaking, there are many factors that are considered in such an evaluation: flexibility of the juridical system, predictability of the outcome of the arbitration (parties generally like arbitration to be “one shot” process that remains outside from the courts’ structure), political and economic stability and also an uniform and “stable” application of the law.

If we do look at all these factors, we can say that Italy’s bad reputation is only partially deserved. It is true that there is some work to be done by the Italian legislator to improve Italian framework in order to make it more attractive and satisfactory for foreign investors. Parties’ perceptions and expectations should not be underestimated. But, again, I do believe it is more an issue of “perception” rather than of real obstacles.

One example for all: the data collected by the Milan Court of Appeal shows that – regarding the recognition in Italy of foreign awards – from 2005 to 2012, thirty-eight requests for recognition and enforcement have been filed to the Milan Court of Appeal.

Thirty-five of these requests were granted, while only three were rejected: one for non-arbitrability of the subject matter, the other two for lack of formal requirements.

This statistic clearly shows the increasing sensitivity and positive attitude of the Italian judiciary towards international arbitration.

Stefano Azzali
The author, presently Fellow at the NYU Centre for Transnational Litigation and Commercial Law, is the Secretary General of the Milan Chamber of Arbitration and acts as Secretary Treasurer of the International Federation of Commercial Arbitration Institutions (IFCAI). Since 2005, he is Visiting Professor of Arbitration Law at Bocconi University – School of Law in Milan and, from 2001 to 2007, he chaired the Disciplinary Commission of the Italian Football Federation (FIGC), where he is now member of its Federal Court of Justice.

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[1] ICC statistics tell us that in the last five years the selection by the parties of the place of arbitration has intervened in over 85% of the cases

[2] Some interesting drafting tips from Paulsson J. – Rawding N. – Reed L., “Choosing the place of arbitration”, The Freshfields Guide to Arbitration Clauses in International Contracts, 31-33: “In choosing the place (seat) of arbitration, consider the following:

–           Is the country in question a signatory to the New York Convention?

–           Has the country in question adopted the UNCITRAL Model Law? If it has, are there any significant qualifications to its adoption? If it has not, are its procedural laws up to date and arbitration friendly?

–          What is the approach of the local courts, e.g. towards enforcing the parties’ agreement to arbitrate, supporting the arbitration process, and enforcing awards? Are they jealous guardians of their own jurisdiction and powers, or co-operative? Should a clause be included to cater specifically for enforcement of the agreement to arbitrate, limiting any review by the courts to those in the place of arbitration? 

–          Does the proposed country have sufficient pool of resident experienced and qualified arbitrators?

–           Will all those likely to be involved in the arbitration be able to travel easily to and from the arbitration venue?

–          Can any logistical issues be satisfactorily dealt with?”

[3] Stavros Brekoulakis (Senior Lecturer in International Dispute Resolution, Queen Mary University of London, UK)

[4] Gaillard E., “Legal Theory of International Arbitration”, Martinus Nijhoff  Publishers, Boston, 2010, 115

[5] This representation of international arbitration assimilates arbitrators to national judges and resolves many questions by inviting arbitrators to act exactly as the national judges of the place of arbitration would. The international public policy that the arbitrator should uphold is that of that particular State. He/she must also ensure that the overriding mandatory rules (lois de police) of that State are complied with. Mandatory rules contained in a legal order other than those of the seat are considered to be “foreign” and the arbitrator can only give them effect if and to the extent that the legal order of the seat so allows

[6] According to this representation, the fact that a number of States – and not only that of the place of arbitration – have an equal title to impose their views on the arbitral process, be it as regards the conduct of the arbitration or the solutions reached in relation to the merits of the dispute. The State where enforcement of the award may be sought does not have less of a title than the State where the arbitration is conducted, to require that the norms it considers important prevail over the lex contractus

[7] This representation, recognizing the existence of an arbitral legal order, addresses the question of possible limitations to party autonomy in the determination of the law applicable to the merits through the concept of transnational public policy or truly international public policy

[8] 2010 IBA Rules on the Taking of Evidence in International Arbitration,

http://www.ibanet.org/Publications/publications_IBA_guides_and_free_materials.aspx#takingevidence

[9] Jan-Michel Ahrens, Senior Counsel, Siemens AG, Germany

1. Introduction: the general context of confidentiality in commercial arbitration

As it has been stated by the French newspaper “Le Figaro” on September 9, 2008, “the custom is not to say who arbitrated what”. Confidentiality is considered to be one of the crucial features of commercial arbitration. Historically, arbitration proceedings – as well as arbitral awards – have been considered fully confidential.

During the revision of the Uncitral Arbitration Rules, the need of an higher level of transparency emerged, more specifically for treaty-based investor-State arbitration[1]. Since then, the debate has been also focused, among scholars, to commercial arbitration.

We know that arbitration is an expression of party autonomy. This autonomy has to be expressed in a contract: the arbitration agreement. Most of the times, parties agree upon the features of the future proceedings in such agreement. Among those features – or “rules of the game”, such as the applicable law, the seat of arbitration, the language of the proceedings – parties may also include a provision to govern confidentiality issues. For this reason, an arbitration clause may contain, among others, a specific provision on confidentiality. No question, then, that an arbitration clause may contain provisions like the following:

“…awards should be treated as confidential and not be communicated to third parties unless all parties [and the arbitrator] consent; or they fall into the public domain as a result of enforcement actions before national courts [or other authorities]; or they must be disclosed in order to comply with a legal requirement imposed on an arbitrating party or to establish or protect such a party’s legal rights against a third party”; or, even with a broader wording, “…no information concerning an arbitration, beyond the names of the parties and the relief requested, may be unilaterally disclosed to third party by any participating party unless it is required to do so by law or by a competent regulatory body, and then only: (i) by disclosing no more than what is legally required, and (ii) furnishing to the arbitrator details of the disclosure and an explanation of the reason for it[2]”.

The IBA Guidelines for Drafting International Arbitration Clauses[3] – adopted in 2010 – at paragraphs 60-65 expressly suggest that the parties, if concerned about confidentiality, should address this issue in their arbitration clause.

But how often do we see arbitration clauses dealing with confidentiality issues? I would say, very rarely. Nevertheless, confidentiality is considered to be a feature of all arbitration proceedings, as part of the original arbitration clause or as a “natural” consequence of such agreement, no matter whether a confidentiality clause has been included or not in the contract.

The survey conducted by Queen’s Mary College[4] expressly shows that 50% of the corporations interviewed considers arbitration confidential even where there is no specific clause to that effect in the arbitration rules adopted or in the arbitration agreement.

But the same survey reports also that 30% of those interviewed believe that, in the absence of an express agreement of the parties, arbitration is not confidential.

Accordingly, legislation, arbitration rules, Court decisions, international treaties either did not address the issue or did not precisely define confidentiality[5].

Some countries and arbitral institutions incorporate confidentiality provisions into their national laws and sets of rules, some others chose not to.

As far as arbitration rules of the major institutions are concerned, not all of them incorporate confidentiality provisions, although the majority provides for some degree of confidentiality. However, even in the case that these rules expressly lay down confidentiality obligations, often they relate only to some issues to which the duty of confidentiality can pertain.

Case law itself offers different solutions, to the point that a coherent doctrine is still a mirage. It was only in the 1990s, when some Courts decisions rejected the idea that arbitration is per se confidential[6], that the above mentioned assumption was questioned.

Also scholars are divided between an inherent nature of confidentiality on one side, and a legal concept which is relatively limited[7] on the other side. For the latter, arbitration does not have a confidential nature per definition but it may be confidential if the parties so wish and expressly agree (directly, in an ad hoc proceedings, or by reference to a set of Rules, containing a provision on confidentiality, in administered arbitration).

For all these reasons, we cannot reasonably affirm that confidentiality is a duty strictly and automatically related to the parties’ choice to arbitrate. The different sources just mentioned show that there is no general and absolute recognition of the duty of confidentiality in arbitration.

Consequently, in the present scenario, confidentiality obligations vary substantially depending on the arbitration agreement, in which the parties may have addressed the issue, the lex loci arbitrii and the applicable rules of arbitration. Furthermore, even when these sources provide to some extent a confidentiality obligation, questions on the scope, limits and enforceability are still far from being settled.

Exceptions include the possibility to disclose confidential information in specific circumstances, such as in proceedings to enforce or to set aside an arbitral award, to establish a party’s legal right, to comply with a compulsory order or request of a governmental or regulatory body or with law requirements.

Personally, I believe that this debate – and the related “dualistic” view – has very limited significance. Rather than investigate the legal background (if any) of confidentiality in commercial arbitration, we should pay much attention to understand, on one side, whether the interest of the parties to confidentiality is a real interest and, on the other side, whether transparency is a real need. Furthermore, we should wonder how and to which extent other players in arbitration, such as arbitral institutions, may contribute to find a balance between the two (I believe, only apparently) opposing interests: confidentiality on one side, transparency on the other.

As transparency comes across confidentiality, “the conflict between transparency and confidentiality cannot permit the victory of one on the other, and their settlement turns out necessary”[8]. Let’s see how such balance can be achieved.

The present contribution – focused on commercial arbitration only, investment arbitration excluded for obvious reasons – does not mean to offer an exhaustive analysis of confidentiality versus transparency. The topics are very complicated and not easy to be covered in few pages. My aim is to raise some ideas on which, hopefully, a more extensive debate will follow.

2. The interests of the parties: confidentiality vs. transparency

2.1. Confidentiality: is it a real interest?

A vast majority of scholars, when listing the main advantages of arbitration for the parties, includes confidentiality. 

It is worth just to be mentioned that privacy and confidentiality – important and interrelated features of international commercial arbitration – are different concepts. While the privacy of the proceedings precludes any stranger from attending it, confidentiality is concerned with the obligation not to disclose information relating to the content of the arbitration. Here we will deal with the latter only. 

But is confidentiality really one of the main reasons for a company to opt for arbitration? No question that, in some very specific situations, confidentiality may play a crucial role in the parties’ choice. For example, in intellectual property agreements or when business information and trade secrets are involved[9].

In other circumstances, parties may not wish to make public allegations of bad faith, incompetence or lack of adequate financial resources.

The above mentioned Queen’s Mary College survey shows that 62% of corporate counsel interviewed considers confidentiality not the essential reason for recourse to arbitration, although “very important”. Several reasons could explain this.

First of all, corporations are often obliged to report to shareholders, and to disclose their annual accounts which might include information that cuts across confidentiality. Indeed, the duty of confidentiality disappears once there is an obligation to reveal information.

Furthermore, many commercial arbitration matters do not involve sensitive commercial information, making confidentiality not such a serious concern[10].

Concretely speaking, it is hard to find a real interest of the parties – i.e. companies and/or individuals involved, not their counsel or the arbitrators – not to disclose information about the existence of a dispute and of an arbitration proceedings, as well as about the way such a dispute has been decided; not even for the losing party, whose alleged strong interest to confidentiality vanishes quickly when it decides to challenge, on a serious or specious ground, the award before a State Court (or, before the award, it challenges an arbitrator or seeks an interim measure of protection by a State Court).

It is rarely the case that a company’s image may be damaged because of its involvement in a dispute (nowadays, more and more a physiological – rather than pathological – event of any complex business relation). In the vast majority of situations, such involvement would not cause any serious business loss to the parties.

In conclusion, it seems to me that there is no real basis in stating that most of the parties choose arbitration because of its confidential nature. Whenever such interest is essential for the parties, they can expressly state the confidentiality requirement in the arbitration agreement, exactly as they do for the other crucial “rules of the game”.

If parties do not do it, the broader interest of the business and legal community in transparency may prevail.

2.2. Transparency: is it a real need?

But which are the reasons calling for transparency in commercial arbitration? In which cases and why should confidentiality give way to transparency? Is transparency a real need?

The reasons for transparency – or the downsides of confidentiality – are several.

First of all, although arbitration is binding only for the parties who are signatories, “quality” awards can have persuasive value for future parties and arbitrators. The access to an highly competent and specific “case law” may lead to many advantages for arbitration practitioners and, in general, for arbitration.

There are also reasons of predictability and consistency. Business people do not like uncertainty and unpredictability. More visible proceedings and transparent awards would guarantee an higher level of consistency and predictability, which, in turn, would enhance the legitimacy of the process itself, with the parties having a greater understanding of it. If they are more satisfied, and because of transparency, have the perception that the process is fair, they are likely to use arbitration again.

Obviously, the publication of awards would make people learn of mistakes and misbehaviors of others, avoiding future disputes.

Furthermore, confidentiality of arbitral decisions may lead to inconsistent resolution of disputes arising out of the same business transaction but decided by different arbitral tribunals. This carries the risk of conflicting awards. In these circumstances, more transparency is desirable, especially for the stakeholders in order to benefit of documents and information relevant to each of the disputes.

The access to arbitral awards may also contribute to the education and training of future and less experienced arbitrators. The non-publication of arbitral awards leaves parties, arbitrators and judges without guidelines in legally and factually similar cases. Again, the efficiency of the proceedings would benefit from the public availability of arbitral awards. 

Moreover, transparency may help users to control and evaluate the quality of service provided by individual arbitrators and arbitral institutions. Reading arbitral awards, future arbitrating parties will be able to assess how a particular arbitrator has handled past similar proceedings, whether that individual would be appropriate to be appointed in a similar future arbitration, his/her level of specific technical skills, how an arbitral center has fulfilled its duties etc. 

Not rare are claims for greater transparency by the users of arbitration. The situation leads to a paradox: indeed, parties want confidentiality but at the same time, they search for predictability while choosing the right person who will have the power to render a decision on their dispute.

There is a lack of information which transparency can easily help to correct, without going against confidentiality. The present contribution is not devoted to support transparency against confidentiality, but it intends to “simply” show how arbitration may be more accessible and more transparent without any harm to the parties’ interests.

3. The interests of the other players

3.1 The arbitrators

As I just underlined, transparency would allow practitioners to check the quality of arbitrators, as to the conduct of the proceedings and their awards. Such information may play a crucial role in future cases for the selection of the “ideal” arbitrator.

The same survey of Queen’s Mary College points out that arbitrators’ skills and experience, knowledge of the applicable law and reputation are the major features taken into consideration by the parties in the selection process.

Therefore, transparency may contribute to an higher level of awareness in the appointment of arbitrators, and for the arbitrators, a sort of “publicity” of their decision making abilities.

It is understandable that parties want to have information, as detailed as possible, before appointing arbitrators. This includes not only the information contained in the candidate’s curriculum vitae but also information about his/her performance as arbitrator.

High visibility of their performance should presumably suggest that arbitrators would take greater care in conducting the arbitration proceedings and in drafting the final award. The quality of their work, under the control of the public opinion, should be higher.

Therefore, (good…) arbitrators should also be in favor of transparency in commercial arbitration.

3.2 The scholars

Arbitration has always been presented as a little community in which everyone knows each other. Nowadays, with the development of arbitration throughout the world, with more than 140 States part of the New York Convention, it is undoubtedly true that practitioners are more and more numerous and the related practice more sophisticated.

Through transparency, scholars can have easier access to information related to the arbitral process, contributing to the study of arbitration and to its development.

3.3 The Institutions

Parties using arbitration can, on one hand, opt for an ad hoc proceedings in which they are free to determine the rules of the process. On the other one, they can refer to an institution, its Rules and its administration activity.  

Arbitral awards rendered under the auspices of a center can contribute to the promotion of arbitration itself and to the creation of a wider arbitration culture.

But the way institutions deal with the issue of confidentiality shows an heterogeneous context of the different regimes adopted. For instance, the Rules of the London Court of International Arbitration (art. 30.1) provide that “unless the parties expressly agree in writing to the contrary, the parties undertake as a general principle to keep confidential all awards in their arbitration…”.

The Milan Chamber of Arbitration-CAM in its 2010 Arbitration Rules, expressly provides the existence of a duty of confidentiality in arbitration, including the parties among the entities bound by the scope[11]. But it also considers, for purposes of research, the possibility to publish the content of arbitral awards.

Despite the different approach followed by the major arbitral centers, I strongly believe that the first player involved in surmounting the false debate of confidentiality vs. transparency is the Institution.

As most of the cases are administered, it is an obligation for the Institution to point out the conditions of a good balance between them. Let’s see how and to what extent.

4. Which role can an Institution play among those different interests?

Transparency does not mean that all information related to a specific proceedings should be disclosed to everyone.

The information may be related to the proceedings (to the hearings and to the documents produced), to the status of the arbitrators and to the final arbitral decision.

In administered arbitration, the institution can play – because of its neutrality – a very important and unique role in balancing the right of the parties to keep some information confidential, on one side, and the interests of the various players (users, practitioners, scholars, arbitrators and institutions) to have access to information related to arbitration proceedings, on the other. Thanks to the institution, those interests can be equally taken into consideration and the integrity of the proceedings preserved. 

4.1 Decisions on the arbitral proceedings

How confidential are arbitral proceedings? This is a highly controversial and difficult issue.

On the one hand, and mostly in intellectual property disputes, confidentiality of certain documents is sometimes of crucial importance. The situation does arise (and, e.g., has arisen in the IBM/Fujitsu arbitration[12]) that a party may wish to rely on documents which should not be seen by the other party (which may be its main competitor in this specific field).

Unless there is a specific provision to this effect within the arbitration clause – or in the Arbitration Rules applicable, according to the arbitration agreement – it will be almost impossible, once a dispute has arisen, to agree on a procedure whereby such confidential documents (or further confidential information) can be validly introduced and considered by the arbitrators without making such documents or information directly available to the other party (since the other party will say that its right to be heard will not be satisfied unless it has been able to have full and unrestricted access to any such documents or information and to comment thereon accordingly).

However, within the arbitration clause it would be possible and appropriate to contemplate and specifically agree that such confidential documents and information (which will have to be defined carefully) will only be made known and fully disclosed to the arbitrators (but not to the other party), or will be disclosed and made available to a neutral third party (such as an expert, or auditing firm), which would then issue a certification, or a report, or an assessment for the arbitral tribunal.

The following various wordings[13] – as well as the ones suggested at paragraph 1 – may be proposed for inclusion in the arbitration clause or in an arbitration agreement:

“1. Any documentary or other evidence given by a party or a witness in the arbitration shall be treated as confidential, and shall not be disclosed, by any party whose access to such evidence arises exclusively as a result of its participation in the arbitration, to any third party for any purpose without the consent of all parties or order of a court [or arbitral tribunal] having jurisdiction. (For the purpose of this rule, a witness called by a party shall not be considered a third party. To the extent that a witness is given access to evidence obtained in the arbitration in order to prepare his testimony, the party calling such a witness shall be responsible for his maintaining the same degree of confidentiality as that required of the party).

2. [To the extent that they describe or refer to evidence] written pleadings shall not be disclosed to third parties for any purpose save as stated in 1 above.

3. An arbitrator, when issuing an order for the production of documentary or other evidence, may in his discretion make such order conditional upon the other party or parties’ specific written undertaking not to disclose any of the evidence (or details of it) to third parties”.

“Any person serving as arbitrator, or expert appointed by an arbitral tribunal, or appearing as the representative of a party in an arbitration, thereby undertakes on his own behalf mutatis mutandis to respect the rules of confidentiality defined in Articles, etc“.

But, again, very rarely do we see such detailed agreements on confidentiality. And the majority of  Arbitration Rules do not cover – so precisely – all the above mentioned aspects related to the confidentiality of the proceedings.     

4.2 Decisions on arbitrators’ independence and impartiality

Something we are certain about is that challenges to arbitrators are numerous. The more arbitration is used, the more conflicts of interest exist. The situations in which arbitrators, counsel or parties, have had relationships between them, have increased in the last few years.

The IBA Guidelines on Conflict of Interests are useful reference for parties, counsel and arbitrators in order to identify specific recurrent cases in which these actors can be implied. The goal of these Guidelines is to propose common standards in order to identify possible circumstances of partiality and/or dependence of those relationships.

Arbitral institutions pay much attention to this issue. Many arbitral centers promote various initiatives in order to better regulate conflicts of interest. Some of the major arbitral institutions (like ICC, LCIA, CAM etc) provide that each arbitrator must disclose to the Institution all the information concerning past or present relationship with the proceedings and/or the players involved in the case. In those cases, the institution – through either a specific committee or the technical body in charge with the supervision of the proceedings – decides whether the appointment is confirmed or not and whether a challenge is grounded or not.

Having access to the decisions on arbitrators’ independence can be of fundamental importance for the parties and for the arbitrators themselves, reducing the risk of “unsuccessful” appointments and, therefore, of additional costs and waste of time.

This is the reason why the LCIA has published, through a Special Edition of Arbitration International, a Digest of its decisions on arbitrators’ challenges, and the Milan Chamber of Arbitration, although with a different approach, has decided to launch in 2013 a similar project.

4.3 Arbitral awards

Usually, transparency in commercial arbitration is mostly focused on the publication of sanitized arbitral awards. For instance, the ICC Secretariat publicizes synthesis of awards in the ICC International Court of Arbitration Bulletin for educational purposes. In this publication reference is made only to the docket number and the award is sanitized by removing the names of the parties, geographical and industrial facts that would risk to render the case and its participants identifiable.

More recently, the Milan Chamber of Arbitration has adopted a set of guidelines for the anonymous publication of arbitral awards. Their purpose is clearly embodied in paragraph (1) of the Preamble, which reads: “The Guidelines aim to provide a set of common and uniformly applicable standards in order to publish arbitral awards and provisions anonymously and confidentially…”, especially when the parties have not expressly and directly agreed on confidentiality issues”[14].

Generally speaking, as we said an higher transparency – and, consequently, wider predictability – would also represent a crucial step forward in the promotion of arbitration in the business community. Arbitration, although having a contractual nature, is a system for rendering justice. Arbitration plays a sort of “social” role, having a social impact. For this reason, we must render commercial arbitration – starting from the awards – more accessible, more transparent. We cannot see arbitration as a purely private phenomenon. But how can we reach all these advantages, combining the general interest to transparency with the parties’ interest to confidentiality?

First of all, a good “sanitization” of the arbitral award (an intervention to make it entirely anonymous, being impossible for anyone to understand the identity of the parties involved in the case) would render such interest (if any) real.  

The “sanitization” of arbitral awards can be better guaranteed in an administered arbitration, where the Institution – thanks to its Rules – can take into equal consideration, on one hand, parties’ interest to confidentiality and, on the other hand, the wider interest of potential users to access information about arbitration practice and arbitral decisions.

In order to ensure that parties would not be easily recognizable, an efficient treatment – that the Institution has the duty to guarantee – is essential.

For this purpose, many Arbitral Institutions specifically provide for a discipline of such treatment in their Rules. It must be pointed out that those provisions are extremely useful: they give the parties the certainty that during all the proceedings, their needs would be protected. The Institution is the first actor in arbitration to have the obligation to insure the maximum privacy of the whole proceedings and its integrity.

As regards to the Milan Arbitration Rules, they provides also the publicity of awards for purposes of research (see above, note 11) and, of course, any additional publicity the parties may wish.

Among all the information related to an arbitral proceedings, awards are surely the most important ones. But the general interest for transparency is definitely not to show the whole world which parties were involved in the arbitration and why. The goal of transparency is not to disclose everything but mostly to promote research and at the same time to improve the quality of arbitrations in general.

In institutional arbitration, the center has a general duty of constantly building case law, and in so doing, it also provides information on performances of arbitrators.

But, of course, such case law has to be carefully built. If publicity is made properly – that is to say, without any evidence for recognizing what has to be hidden – there would not be any problem with transparency. Transparency is not criticized per definition, as a principle, but for what it could lead to if publicity has been made incorrectly.

Therefore, quality has to be met not only by the arbitrators in the award but also by the arbitral institution in publishing such awards. Publication that has not to harm parties’ rights.

As we said, the solution to prevent such risks is a good “sanitization” of the arbitral award. This technique consists of cleaning the entire text by selecting only the elements which have a general interest for arbitration users and scholars, avoiding the disclosure of any aspects irrelevant for those purposes and able to identify the identity of the parties. CAM’s Guidelines are very detailed on these techniques.  

5. Conclusion: a balance between confidentiality and transparency in arbitration

As we have seen, apart the common understanding that the arbitral process is inherently private, there is no general consensus as to its confidential nature. The rules not only differ significantly amongst jurisdictions and arbitral institutions, but very often they are also unclear and not exhaustive on their scope and extent.

The present situation leads to uncertainties even on some fundamental issues. Accordingly, it is difficult to identify a solid legal entitlement to preserve confidentiality, as well as to delimitate its subjective and substantive reach. And the absence of a coherent judicial support contributes to such uncertainties.

Very often, even the identification of the relevant applicable provisions is not easy, due to the different principles of conflicts of laws and jurisdiction.

Furthermore, the applicable law of many countries may be inconsistent with each other. Consequently, an individual bound by an obligation of confidentiality may also be subject to an opposing obligation to disclose the very same information.

As a result, it is impossible to draw any general conclusion to establish the existence or non-existence of a confidentiality obligation in international commercial arbitration.

Given the different approaches to confidentiality and the absence of universally recognized standards, the best way to safely guarantee confidentiality is to sign (either prior to or during the proceedings) specific clauses in which parties should specify the scope, the extent, the duration of the confidentiality obligation, its exceptions and how it may be enforced. Agreements that most legal systems do recognize and enforce.

But they are clauses that, as we know, are very rarely included in the contract. Should we then, in the absence of such agreements, give up any possible use of arbitration to meet the above mentioned expectations and interests? Because of the uncertainties surrounding the issue of confidentiality, should we abandon the possibility to create a specialized case law, to educate future arbitrators, to contribute to an higher level of predictability, to provide useful information about arbitrators and institutions’ performances? I would say no.

No doubt the interests of the parties must be protected, as well as the integrity of the process. But I strongly believe that such interests (whether specific or more general) are not frustrated by an higher level of transparency, if properly governed by an arbitral institution, under its control and guidance, thanks to its neutrality, its competence, its professionalism. 

Let’s briefly return to the Queen’s Mary College survey, where it emerged that corporations select arbitral centers because of their internationalism, their neutrality and their reputation in the market.

If the reputation of a given arbitral center is strong, parties may be sure that, by selecting its rules and relying on its administration activity, the proceedings will be confidential and the use (if any) of the award will not harm their interests and rights. This applies even more whether the institution has defined – as the Milan Center has – a set of guidelines to be followed in the “sanitization” of its awards.

It is not whether confidentiality is better than transparency or transparency is more important than confidentiality: it is just a question of balance between two different (but not necessarily, opposing) interests.

Balance that can be found through the important role of an arbitral institution.

Stefano Azzali
The author, presently Fellow at the NYU Centre for Transnational Litigation and Commercial Law, is the Secretary General of the Milan Chamber of Arbitration and acts as Secretary Treasurer of the International Federation of Commercial Arbitration Institutions (IFCAI). Since 2005, he is Visiting Professor of Arbitration Law at Bocconi University School of Law in Milan and, from 2001 to 2007, he chaired the Disciplinary Commission of the Italian Football Federation (FIGC), where he is now member of its Federal Court of Justice.

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[1] Official records of the General Assembly, 63rd Session, Supplement No. 17 (A/63/17)

[2] Paulsson, J. and Rawding, N., “The Trouble with Confidentiality”, Arbitration International, 1995, 3, 315-319

[3] http://www.ibanet.org/Document/Default.aspx?DocumentUid=D94438EB-2ED5-4CEA-9722-7A0C9281F2F2

[4] “2010 International Arbitration Survey: Choices in International Arbitration”, http://www.arbitrationonline.org/research/2010/index.html

[5] For a comparative study, see Noussia K., “Confidentiality in International Commercial Arbitration. A Comparative Analysis of the Position under English, US, German and French Law”, Springer, Heidelberg, 2010. See also ILO Report on “Confidentiality in International Commercial Arbitration”, October 2010, 5-10

[6] Australian High Court, Esso Australia Resources Limited v Plowman (1995) 183 CLR 10 and Swedish Supreme Court, Bulgarian Foreign Trade Bank Ltd v Al Trade Finance Inc N T 1881-99, judgment 27 October 2000 (“Bulbank”)

[7] “Expert Report of Stewart Boyd QC” (in Esso/BHP v. Plowman), Arbitration International, Kluwer Law International, 1995, 3, 266-268

[8] Fages F., “La confidentialité de l’arbitrage à l’épreuve de la transparence financière”, Revue de l’Arbitrage, Comité Français de l’Arbitrage, 2003, 1, 5-39 [The translation is not official]

[9] Dessemontet F., “Arbitration and Confidentiality”, The American Review of International Arbitration, 2001, 7:1, 299

[10] Queen’s Mary College Report, 29

[11] “Art.8: 1. The Chamber of Arbitration, the parties, the Arbitral Tribunal and the expert witnesses shall keep the proceedings and the arbitral award confidential, except in the case it has to be used to protect one’s rights. 2. For purposes of research, the Chamber of Arbitration may publish the arbitral award in anonymous format, unless, during the proceedings, any of the parties objects to publication”

[12] Smit H., “Case-note on Esso/BHP v. Plowman (Supreme Court of Victoria)”, Arbitration International, Kluwer Law International, 1995, 3, 299 – 302

[13] Paulsson, J. and Rawding, N., “The Trouble with Confidentiality”, Arbitration International, 1995, 3, 315 and 318

[14] The Guidelines are available at the CAM website (http://www.camera-arbtrale.it/Documenti/guidelines_anonym_aw.pdf). A commented edition will be soon published by Juris Publication.

A.            Introduction

There have recently been various cases where investors successfully asserted a violation of an international investment treaty on the grounds that the host State failed to recognize and enforce a commercial arbitral award as foreseen in the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the “New York Convention”).

Effectively, investors have thus been able to recover damages for the non‑compliance with obligations under the New York Convention within the framework of investment arbitration. In the following, it will be set out that this is due to a shift towards more systemic integration: instead of applying international investment law in clinical isolation, arbitral tribunals are increasingly willing to take into consideration other sources of international law such as the New York Convention.

Importantly, however, this development has not led to a defragmentation[1] of international law: international investment law remains a separate regime, which cannot be used as a mere vehicle to enforce obligations beyond investment law. For this reason, the possibility to obtain damages for non-compliance with obligations under the New York Convention within the framework of investment arbitration only exists under limited circumstances.

B.            Procedural challenge

Investors who want to assert their rights before an ICSID tribunal face the procedural challenge that ICSID is not a forum where States can generally be held responsible for the non-compliance with their obligations under the New York Convention. Instead, its jurisdiction is limited to legal disputes arising “directly out of an investment”.[2]

This jurisdictional requirement can, however, be met, if the transaction underlying the commercial award qualifies as an investment. To put it differently: an investor may initiate ICSID arbitration, if the host State fails to recognize and enforce a commercial arbitral award, which resulted from a transaction that qualifies as an investment.

The main precedent for this view was established by the arbitral tribunal in Saipem S.p.A. v. The People’s Republic of Bangladesh.[3] In this case, the arbitral tribunal had to decide whether a dispute arising from the non-enforcement of an ICC award fell within its jurisdiction. The arbitral tribunal confirmed this. It held that the “entire operation” would have to be considered in order to determine whether there is an investment under Article 25 of the ICSID Convention.[4] Given that the ICC award crystallized rights, which had arisen under a pipeline construction contract, an investment under Article 25 ICSID Convention would be given. The arbitral tribunal left open whether the ICC award as such qualified as an investment.

A similar approach was taken by the arbitral tribunal in ATA Construction, Industrial and Trading Company v. the Hashemite Kingdom of Jordan.[5] In this case, the arbitral tribunal was confronted with the question whether an arbitral award, which had resulted from a dispute concerning a dike construction contract, qualified as an investment. The arbitral tribunal confirmed this on the grounds that the “entire operation” of which the arbitral award formed part, i.e., the construction of the dike, qualified as an investment.[6]

The only case, where an ICSID tribunal refused to consider whether the underlying transaction, from which the arbitral award had arisen, qualified as an investment, was GEA Aktiengesellschaft v. Ukraine.[7] Here, the arbitral tribunal argued that a sharp analytical distinction would have to be maintained between the commercial arbitral award and the transaction from which it arose.[8] Given that the award itself involved none of the elements of an investment, such as a contribution to or relevant economic activity within Ukraine, the arbitral tribunal denied its jurisdiction.

While the arbitral tribunal was correct in its characterization that the commercial award did not – in and of itself –constitute an investment, there is little support for its proposition that a sharp analytical distinction has to be maintained between the commercial award and the underlying transaction. The practical consequence of this approach would be that parts of an investment (here,: the commercial award) could be denied protection simply by assessing them out of context (here, the underlying transaction). This is hardly desirable.

The jurisprudence of non-ICSID tribunals also confirms that arbitral awards cannot be assessed without taking into account the underlying transaction. As an example, one might consider the decision in White Industries Australia Limited v. The Republic of India.[9] In this case, the question arose whether an ICC award, which had been rendered following a dispute under a contract for the supply of equipment and development of a coalmine, constituted an investment within the meaning of the Australia-India BIT. The arbitral tribunal confirmed this and endorsed the claimant’s view that the award, while not being an investment in itself, was part of the original investment.[10] Even if one takes for granted that the notion of investment under Article 25 ICSID Convention cannot be equated with the notion of investment pursuant to the respective BIT, this decision lends support for the proposition that tribunals have to consider all relevant circumstances in taking their decisions, instead of considering parts of an investment in isolation.

The decisions of the arbitral tribunals in Frontier Petroleum Services vs. the Czech Republic[11] and in Romak S.A. vs. The Republic of Uzbekistan allow for the same conclusion.[12] While the arbitral tribunal in Romak S.A. vs. The Republic of Uzbekistan denied its jurisdiction to hear a dispute arising from the non-enforcement of a GATFA Award, it did so on the grounds that the underlying transaction was a wheat supply transaction and thus not an investment within the BIT. Again, this confirms that arbitral tribunal may have to look at the contractual relationship from which the commercial arbitral award arose in ruling upon its jurisdiction.

C.            Substantive challenges

Even if ICSID tribunals have jurisdiction, they are not entitled to award damages based on a mere finding that the New York Convention has been violated. Instead, they have to assess, whether the non-enforcement of the commercial award triggers responsibility under the respective investment treaty. This is not to suggest that the New York Convention would be irrelevant. To the contrary, it is part of the normative environment, which will have to be taken into consideration by arbitral tribunals.

1.             The New York Convention is relevant for the assessment of whether a treaty standard has been violated

Above all, the New York Convention provides interpretative guidance for the assessment of whether one of the treaty standards has been violated. In Saipem S.p.A. v. The People’s Republic of Bangladesh, for example, the arbitral tribunal had to assess whether Bangladesh had violated the protection against unlawful expropriation by depriving Saipem of the benefits under an ICC award. The arbitral tribunal confirmed this. It underlined that Bangladesh had acted unlawfully by abusing its rights and violating its obligations under the New York Convention.[13] The arbitral tribunal thus had recourse to the New York Convention in order to assess the lawfulness of the deprivation of benefits under the commercial award. Conceptually, one might designate this as a form of systemic integration as foreseen by Article 31 (3) (c) Vienna Convention.[14]

In ATA Construction, Industrial and Trading Company v. The Hashemite Kingdom of Jordan took a similar approach. The arbitral tribunal based its finding that Jordan had “violated both the letter and the spirit of the Turkey-Jordan BIT”[15] on the fact that Jordan had unlawfully extinguished Claimant’s right to arbitration contrary to Article II New York Convention.[16] While the arbitral tribunal refrained from specifying in greater detail which guarantee of the Turkey-Jordan BIT was violated, it mentioned that Jordan had assumed the obligation to accord Respondent’s investment fair and equitable treatment as well as treatment no less favorable than that required by international law.[17]

Likewise, the arbitral tribunal in Frontier Petroleum Services vs. the Czech Republic took into consideration the New York Convention in assessing whether the host State had violated the fair and equitable treatment standard. The arbitral tribunal explicitly confirmed that it had the power to review the decision of a national court’s conception of the public policy exception under the New York Convention and rejected Respondent’s allegation to the contrary.[18] However, it only examined whether the Czech courts had applied a plausible interpretation of the New York Convention, i.e., an interpretation that was tenable and made in good faith.[19] This deference to the decision of the State courts seems reasonable in view of the fact that the fair and equitable treatment standard is only a yardstick for certain minimum treatment. Not every form of illegality triggers responsibility under this standard. In the case at hand, the arbitral tribunal considered that the Czech courts’ interpretation of the New York Convention was not unreasonable or impossible.[20] Accordingly, the Czech courts had not acted arbitrarily, discriminatorily, or in bad faith so that no breach of the fair and equitable treatment standard was given.[21]

2.             The New York Convention is relevant for the assessment of the damages

The New York Convention is not only relevant when determining whether a BIT has been breached. It also has to be considered when assessing the quantum of damages flowing from such breach. Arbitral tribunals even have to enter into a more in-depth examination of the New York Convention in order to assess the damages.

The decision in White Industries v. The Republic of India is highly instructive in this regard. In that decision, the arbitral tribunal found that India had violated its obligation to provide for effective means of asserting claims and enforcing rights by delaying the decision on enforceability of an arbitral award over a period of nine years.[22] In order to determine the damages flowing from this violation, the arbitral tribunal determined whether the arbitral award was enforceable in India. In doing so, it carefully examined whether there was a ground for refusing the recognition and enforcement of the award under the New York Convention. It concluded that the award was enforceable, since no such ground was given.[23] In the view of the arbitral tribunal, White Industries was therefore entitled to full compensation for the loss it had suffered.

Interestingly, the arbitral tribunal seems to have felt a certain unease to enter into such full-fledged examination of grounds for refusing a declaration of enforceability under the New York Convention. It therefore explicitly asked the parties for a mandate to do so. Both parties agreed that the tribunal had been provided with sufficient material and that it should engage in a determination of the enforceability of the award in India.[24]

One might wonder whether such mandate was necessary in the case at hand? While it is true that the New York Convention leaves it up to the domestic State courts to assess the enforceability of commercial arbitral awards, it is important to note the decision of the arbitral tribunal only resulted in an award to pay damages. The ICSID tribunal did not order the execution of the arbitral award as such. Against this background, it seems reasonable to conclude that the arbitral tribunal only acted out of precaution and in order to respect to the parties’ right to be heard.

D.           Conclusion

International investment law stands in systemic relation with other sources of international law. As can be concluded from the above-mentioned jurisprudence, arbitral tribunals are increasingly willing to apply sources beyond international investment law such as the New York Convention. Importantly, however, such systemic integration only occurs, provided that the jurisdiction of the respective tribunal is given. Investors who seek damages for the non-enforcement of a commercial arbitral award before an ICSID tribunal therefore have to demonstrate that the underlying transaction, from which this award resulted, constitutes an investment.

Dr. Friedrich Rosenfeld, Hanefeld Rechtsanwälte, Hamburg, Germany.

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[1] On fragmentation see Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law, Report of the Study Group of the International Law Commission, Finalized by Martti Koskenniemi, UN Doc. A/CN.4/L.682, 13 April 2006.

[2] Art. 25 ICSID Convention.

[3] Saipem S.p.A. (Claimant) v. The People’s Republic of Bangladesh, ICSID Case No. ARB/05/7, Decision on Jurisdiction and Recommendation on Provisional Measures, 21 March 2007.

[4] Ibid., para. 110.

[5] ATA Construction, Industrial and Trading Company (Claimant) and The Hashemite Kingdom of Jordan (Respondent), ICSID Case No. ARB/08/2, Award, 18 May 2010.

[6] Ibid., paras. 115, 120.

[7] GEA Group Aktiengesellschaft v. Ukraine, ICSID Case No. ARB/08/16, 31 March 2011.

[8] Ibid., para. 162.

[9] White Industries Australia Limited and The Republic of India, UNCITRAL Arbitration in Singapore under the Agreement between the Government of Australia and the Government of the Republic of India on the Promotion and Protection of Investments, Final Award, 30 November 2011.

[10] Ibid., para. 7.6.4.

[11] Frontier Petroleum Services v. The Czech Republic, Final Award, PCA – UNCITRAL Arbitration Rules, 12 November 2010, para. 233.

[12] Romak S.A. (Switzerland) and The Republic of Uzbekistan, PCA Case No. AA280, Award, 26 November 2009.

[13] Saipem S.p.A. (Claimant) v. The People’s Republic of Bangladesh, ICSID Case No. ARB/05/7, Award, 30 June 2009, para. 170.

[14] On systemic integration see C. McLachlan, The Principle of Systemic Integration and Article 31 (3) (c) of the Vienna Convention, 54 ICLQ (2005) 279 (279 ff.). See also Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law, Report of the Study Group of the International Law Commission, Finalized by Martti Koskenniemi, UN Doc. A/CN.4/L.682, 13 April 2006, paras. 410 ff. and M. Waibel, International Investment Law and Treaty Interpretation, in: R. Hofmann and C. Tams (eds.), International Investment Law and General International Law (Baden Baden, 2011), p. 29 ff.

[15] ATA Construction, Industrial and Trading Company (Claimant) and The Hashemite Kingdom of Jordan (Respondent), ICSID Case No. ARB/08/2, Award, 18 May 2010, para. 125.

[16] Ibid., para. 128 f.

[17] Ibid., para. 125 and footnote 16.

[18] Frontier Petroleum Services v. The Czech Republic, Final Award, PCA – UNCITRAL Arbitration Rules, 12 November 2010, para. 525.

[19] Ibid., para. 527.

[20] Ibid., para. 530.

[21] Ibid., para. 529.

[22] White Industries Australia Limited and The Republic of India, UNCITRAL Arbitration in Singapore under the Agreement between the Government of Australia and the Government of the Republic of India on the Promotion and Protection of Investments, Final Award, 30 November 2011, para. 10.4.19. By contrast, it held that the obligation to provide fair and equitable standard was not violated. In the view of the arbitral tribunal, White Industries could not have the legitimate expectation that India would apply the New York Convention properly (para. 10.3.13). While the delay of the Indian courts would be unsatisfactory, it would not yet have reached the stage of constituting a denial of justice, either (para. 10.4.22). Besides, the arbitral tribunal held that the delay in declaring the award enforceable would not constitute a form of expropriation (12.3.6).

[23] Ibid., para. 14.2.66.

[24] Ibid., para. 14.2.2.

For a long time, the prospect of enforcing arbitral awards under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the “New York Convention”) has set great incentives to comply with arbitral awards voluntarily.[1] One of the often-quoted advantages of arbitration is the perceived certainty that the national courts of the New York Convention member states will enforce an arbitral award unless one of the limited grounds for refusal is met.

However, experience from recent years has shown that voluntary compliance with arbitral awards is no longer a matter of course. Parties, which have lost in arbitral proceedings, are increasingly defending their interests in enforcement proceedings.

A possible defense strategy that was recently argued in a case before the German Federal Court of Justice (BGH)[2] is to assert that the award is not capable of being executed under the applicable domestic enforcement law.  In this post, I recommend anticipating and avoiding this problem from the outset when commencing and conducting arbitral proceedings.

The execution pitfall results from the intricate interplay of international law and domestic law when enforcing arbitral awards. International law governs the conditions under which arbitral awards are accorded the status of an enforceable title. Pursuant to the New York Convention, to which the German Code of Civil Procedure refers, there is a duty to declare foreign arbitral awards enforceable, unless one of the exhaustively enumerated reasons for refusal exists.[3] Only this declaration of enforceability and not the arbitral award itself is enforceable in Germany.[4] Once a declaration of enforceability has been rendered, the further execution proceedings are governed by domestic law.[5] In that regard, German law requires that titles be capable of execution. Notably, the operative part of domestic titles must be sufficiently specific.[6]

Does this mean that parties can defend their interests at the recognition and enforcement stage by asserting that the respective arbitral award is incapable of being executed under the applicable domestic enforcement law, because, for example, it is not sufficiently specific?

The New York Convention provides no clear answer to this question. While the New York Convention stipulates that awards have to be enforced “under the conditions laid down in [its] articles”, it also explicitly acknowledges that awards shall be enforced “in accordance with the rules of procedure of the territory where the award is relied upon”.[7]

German courts have also struggled to find an answer to this question. A recent decision of the BGH is highly instructive in this regard.[8]

The facts underlying this decision are the following: The Claimant had sued the Respondent before an arbitral tribunal in Spain. Claimant’s claims were dismissed and Claimant was ordered to bear the costs of the proceedings. In a further award on costs, the arbitral tribunal decided that the costs to be borne by Claimant included the invoiced fees for the arbitral tribunal to the extent they had not yet been paid by Claimant. In addition, Claimant would have to pay the lawyers’ fees of EUR 24,145.15 plus “corresponding” interest from the date a certified request for payment was filed. The exact amount of fees for the arbitral tribunal and the interest rate were not specified in the operative part of the award.

Respondent, who was apparently anticipating potential problems in the execution proceedings in Germany, requested the competent Higher Regional Court of Düsseldorf (OLG Düsseldorf) to recognize the two awards and to amend and supplement the award on costs by declaring the arbitral tribunal’s and lawyers’ fees plus 4% interest rate enforceable. Specifically, Respondent requested a declaration of enforceability for the fees for the arbitral tribunal in the amount of EUR 10,214.73 as well as lawyers’ fees in the amount of EUR 24,145.15 plus 4% interest as of 24 April 2009. In support of this request, Respondent argued that the amount of EUR 10.214,74 for the fees of the arbitral tribunal could be deduced from an invoice issued by the arbitral tribunal. An interest rate of 4% would have to be applied for the lawyers’ fees since this would be the statutory interest rate in Spain. Spanish law would not require an exact quantification of the interest rate owed.

The OLG Düsseldorf recognized both awards and declared them enforceable verbatim but dismissed Respondent’s further request to amend and supplement the award regarding the exact quantification of court fees and interest.[9] The OLG Düsseldorf held that a State court is not authorized to supplement or correct an existing award.

On appeal, the BGH annulled the decision of the OLG Düsseldorf in so far as it was disadvantageous to Respondent.[10] The BGH amended the order of enforcement by declaring the arbitral tribunal’s fees enforceable. According to the BGH, the OLG Düsseldorf had wrongly dismissed the request for substantiation and supplementation of the award.

The reasoning of the BGH can be summarized as follows: German enforcement law requires the enforcement order to identify the creditor’s legal claim and the content and extent of the obligation to perform. Interpretation by the enforcement authority, if necessary, is only possible in case the enforcement order is sufficiently specific. However, the specificity requirement is only applicable to a German decision on enforceability and not a foreign one. In the event that a foreign decision does not meet the standards as applicable to domestic decisions, the foreign decision must be substantiated to cause the same effects as a corresponding German order if needed after taking evidence regarding the foreign law. While a German court would be barred from substituting an arbitral award with its own decision or to amend its content, it would be entitled to clarify it and to make sure it comes into effect.[11] In contrast, in cases where a substantiation or supplementation of the arbitral award would not be possible, a request for declaration of enforceability would have to be rejected. It would be contrary to German public policy to render a declaration of enforceability that is incapable of being executed.

The aforesaid decision of the BGH raises several questions. First, the BGH explicitly acknowledged the competence of State courts to substantiate and clarify foreign arbitral awards. While the BGH underlined that State courts are prevented from substituting the decision of arbitral tribunals with their own decision, the BGH still did not exclude that a clarification and substantiation could imply the taking of evidence regarding foreign law. Are such far-reaching powers of State courts in the enforcement stage consistent with Section 1058 German Code of Civil Procedure and Article 33 UNCITRAL Model Law, pursuant to which it is up to the arbitral tribunal to correct, interpret and amend arbitral awards?[12]

Second, would it really be contrary to public policy, as suggested by the BGH, to render a declaration of enforceability which is incapable of being executed? While the exact boundaries of German public policy are difficult to draw, there is consensus that the mere misapplication or infringement of German mandatory rules is not in itself sufficient to constitute a violation of public policy.[13] Instead, there must be a qualified violation of such rules.

In my view, there are good reasons to argue that rendering a declaration of enforceability that is incapable of being executed in Germany would not constitute a qualified violation of mandatory rules. This is because the question whether a title is capable of being enforced by execution can still be decided in the further execution proceedings. Interestingly, this is exactly the reason why in the past, German courts and the BGH itself have declared arbitral awards enforceable irrespective of whether they are capable of being enforced by execution.[14] Concerning a domestic award, the BGH has held in an earlier decision that the declaration of enforceability served not only to prepare the execution stage, but also to safeguard the award against requests to set it aside. Therefore, the BGH declared an unspecified award enforceable without specifying the operative part.[15]

This earlier German case law is, in my view, the more straightforward solution under the New York Convention, pursuant to which there is a duty to declare foreign arbitral awards enforceable, unless one of the exhaustively enumerated reasons for refusal exists. Arbitration has a private nature. It is the arbitrators’ duty to render an enforceable award and the parties’ risk to achieve a title that is capable of being executed. A correction and improvement of an arbitral award can neither be expected in State court proceedings, nor are State courts the proper forum to second-guess what an arbitral tribunal under foreign law could have meant or should have included in the operative part of an award.

It will be interesting to see how courts in other jurisdictions will decide, when enforcement of a foreign arbitral award is sought that is incapable of being executed under domestic enforcement law. So far, this question does not seem to have gained much attention. In any event, parties should anticipate this execution pitfall and pay the necessary attention to domestic enforcement particularities already in the course of the arbitral proceedings. They should notably make sure that their prayers for relief are sufficiently specific and that the operative part of the award will be capable of being executed under the laws of the country where the award debtor has its assets. This increased care will contribute to ensure that arbitral awards keep their appeal of being easily enforced.

Dr. Inka Hanefeld LL.M. (NYU)

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[1] Pursuant to the 2008 survey by Queen Mary University of London entitled “International Arbitration: Corporate attitudes and practices”, there was still a high degree of voluntary compliance with arbitral awards in 2008 (p. 8). The survey is available at: http://www.arbitrationonline.org/docs/IAstudy_2008.pdf (last accessed 30 August 2012).

[2] BGH SchiedsVZ 2012, 41 (41 f.).

[3] Section 1061 German Code of Civil Procedure refers to the New York Convention for the recognition and enforcement of foreign arbitral awards.

[4] Lackmann, in: Musielak, German Code of Civil Procedure, 9^th edition 2012, Section 794 German Code of Civil Procedure, margin no. 47.

[5] Cf. S.M. Kröll, in: K.H. Böckstiegel / S.M. Kröll / P. Nacimiento (eds.), Arbitration in Germany, The Model Law in Practice, Introduction to Sections 1060, 1061 German Code of Civil Procedure, p. 481 f.

[6] Lackmann, in: Musielak, German Code of Civil Procedure, 9^th edition 2012, Section 704 German Code of Civil Procedure, margin no. 6.

[7] Art. III New York Convention.

[8] BGH SchiedsVZ 2012, 41 (41 f.).

[9] OLG Düsseldorf, decision of 1 March 2011, reference number: I-4 Sch 11/10.

[10] BGH SchiedsVZ 2012, 41 (41 f.).

[11] For a similar approach see Higher Regional Court Rostock, decision of 18.09.2007, reference number:  1 Sch 04/06.

[12] Equivalent provisions can be found in institutional arbitration rules, such as in Article 35 of the Rules of Arbitration of the International Chamber of Commerce (ICC) dated 1 January 2012, which also leaves it in the hands of the arbitral tribunal to correct and interpret arbitral awards and provides for certain procedures (application by the parties, deadlines etc.) that the parties need to observe.

[13] S.M. Kröll, in: K.H. Böckstiegel / S.M. Kröll / P. Nacimiento (eds.), Arbitration in Germany, The Model Law in Practice,  Section 1061 German Code of Civil Procedure, p. 553.

[14] BayOblG, SchiedsVZ 2003, 142 (142 ff.); BGH SchiedsVZ 2006, 278 (278 f.).

[15] BGH SchiedsVZ 2006, 278 (278 f.). For a different approach see: KG Berlin, decision of 27 May 2005, reference number: 20 Sch 7/05. See also Voit, in: Musielak, German Code of Civil Procedure, 9th edition 2012, Section 1060 German Code of Civil Procedure, margin no. 5; Münch, in: Munich Commentary on the German Code of Civil Procedure, 3rd edition 2008, Section 1060 German Code of Civil Procedure, margin no. 11.

When I recently conducted research on “Arbitration in Banking and Finance”, the following question caught my particular attention: “Is there a need for a sovereign debt tribunal?”. Some authors have answered this question in the affirmative.[1] Others argue that “in accordance with the standard jurisdictional clauses in modern debt instruments, national courts are the proper forum for disputes arising out of sovereign debt”.[2] Furthermore, this issue has been thrust into the limelight by the decision in Abaclat and Others v. Argentina.[3]

This post seeks to summarize the current debate and concludes that a special sovereign debt tribunal is not likely to emerge any time soon. Rather, one can possibly expect that the number of sovereign debt cases brought before tribunals under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID) will increase given the recent developments, for example, in Greece.

Until recently, Fedax v. Venezuela[4] and CSOB v. Slovak Republic[5] were the two main cases confirming that government debts can qualify as an investment in the sense of Article 25 ICSID Convention.[6] In spite of these decisions, there remained considerable uncertainty whether sovereign bonds – notably those traded on secondary markets – would fall within ICSID’s jurisdiction. Scholars pointed out that such bonds would constitute commercial transactions as opposed to investments in the sense of Article 25 ICSID Convention. Besides, they would fail to meet various other requirements of an investment including a long term transfer of funds, the existence of commercial risk, as well as a territorial link with the host State.[7]

These concerns faced a backlash in Abaclat and Others v. Argentina where the Arbitral Tribunal confirmed that sovereign bonds may constitute an investment in the sense of Article 25 ICSID Convention.

In this arbitration, investors, who had not been compensated for Argentina’s default on sovereign bonds, alleged a violation of the Italy Argentina BIT. Argentina objected to the jurisdiction of the ICSID Centre contending that sovereign bonds would not constitute an investment within the meaning of Article 25 ICSID Convention. Among others, Argentina argued that the sovereign bonds would not meet the objective criteria laid down in Salini v. Morroco.[8] In addition, the investment would neither have been “made within the territory of Argentina”, nor “in compliance with Argentinean law” as required by Article 1 of the Italy Argentina BIT.

By a majority decision of Pierre Tercier and Albert Jan van den Berg, the Arbitral Tribunal rejected these objections and confirmed its jurisdiction. In the majority’s view, the sovereign bonds qualified as an investment in the sense of the BIT as well as in the sense of Article 25 ICSID Convention. As regards Article 25 ICSID Convention, the majority considered that the bonds were generated by a value that Argentina and Italy intended to protect under the BIT. Given the ICSID Convention’s aim to encourage private investment while giving the Parties the tools to further define what kind of investment they wish to protect, this would be relevant. The application of the Salini test, by contrast, would be contradictory to this aim. The result would remain unchanged if one were not to follow a double-barred test pursuant to which an investment has to meet the requirement of both, the pertinent BIT as well as the ICSID Convention.

The majority proceeded by confirming that the investment was made in Argentina. In doing so, it considered that the nature of the investment is decisive in order to determine its place. As regards investments of a purely financial nature, it would matter where and/or for the benefit of whom the funds are ultimately used.  There would be no need that the investment be further linked to a specific economic enterprise or operation taking place in the territory of the host State. In the instant case, the bonds would have generated funds that would have been made available to Argentina and contributed to its economic development.[9]

While the majority decision met with strong dissent by Georges Abi-Saab[10], it has lent additional support to the existing case law pursuant to which sovereign bonds can constitute an investment in the sense of Article 25 ICSID Convention. Given the high authoritative value of ICSID decisions, it is well possible that other tribunals will follow this decision and assert jurisdiction over disputes involving sovereign debt.

However, even if ICSID tribunals affirm their jurisdiction over sovereign debt cases, the question remains whether an ICSID tribunal is the proper forum to resolve sovereign debt disputes. Or can such disputes only be effectively addressed by the creation of a new sovereign debt tribunal?

At first glance, the idea of a special sovereign debt tribunal is appealing. Also in the field of commercial arbitration, new arbitral institutions have emerged that are specifically designed for the settlement of banking and finance disputes. Earlier examples of special institutions with an exclusive mandate for the settlement of disputes in the financial and banking sector include the London City Dispute Panel[11], Diriban (for interbank settlement)[12] or Euroarbitration[13]. The latest development in this field was the creation of the “Panel of Recognized International Market Experts in Finance” (P.R.I.M.E. Finance), an institution for the resolution of complex financial disputes by means of arbitration or mediation. It was created in early 2012 and has its seat in The Hague, The Netherlands.

Do sovereign debt disputes merit even greater attention and require a special dispute resolution institution as well?

In the absence of a public international insolvency law and uniform rules on sovereign debt treatment in case of sovereign debt crises, I question the need for a special sovereign debt tribunal. The resolution of sovereign debt disputes faces complex substantive challenges regardless of which institution will administer the case. These challenges include, among others, so-called “holdouts” from sovereign debt restructuring and the so-called “moral hazard problem”.

Holdouts designate situations where creditors do not participate in sovereign debt restructuring, i.e., changes in the originally envisaged payment terms of sovereign debt which are undertaken in order to create a more manageable liability profile or to reduce the debt’s net present value.[14] To the extent that investors can expect to recover a higher amount of money in arbitral proceedings than by agreeing to the modified terms of the investment, they have little incentive to participate in sovereign debt restructuring.[15] This is problematic for two reasons: First, an effective sovereign debt restructuring presupposes the participation of a high percentage of creditors.[16] Otherwise, sovereign debt restructuring risks failure, which usually goes to the detriment of the population of the insolvent State. Second, the enforcement of a limited number of creditor rights to the detriment of other creditors compromises the principle of inter-creditor equality.

A related challenge for any deciding tribunal lies in the so-called “moral hazard problem”. According to the definition offered by Paul Krugman, “moral hazard” describes “any situation in which one person makes the decisions about how much risk to take, while someone else bears the cost if things go badly”.[17] Such situations of moral hazard may easily arise if creditors can be assured of recovering the full value of sovereign bonds in an arbitration. These creditors will have little incentive to evade unwarranted risks, since the consequences will be borne by others, including the taxpayers of the countries financing the bailout of the insolvent State.[18]

It seems unlikely that these challenges can be effectively countered solely by creating a sovereign debt tribunal, as recently suggested.[19]

Above all, the mere creation of a sovereign debt tribunal would fail to solve the above-mentioned substantive challenges unless it would come along with a set of substantive rules on public international insolvency law. Even if such rules existed, the problem would remain how such rules would interact with existing international investment agreements which explicitly mention sovereign bonds as protected investments. What would be the benefit of creating a sovereign debt tribunal if bondholders were not barred from asserting contractual or treaty claims before other fora?

Apart from this, it seems hardly likely that States will reach consensus on a sovereign debt tribunal and a possible convention on international public international insolvency law in the near future. Notably, previous attempts to create similar tribunals have failed. Prominent examples include the League of Nations Loans Tribunal[20] and the IMF Sovereign Debt Rescheduling Mechanism (SDRM)[21], which both never became reality.

In conclusion, it seems that, apart from proceedings before national courts, ICSID arbitration is – for the time being – one of the few available avenues to be pursued by creditors in case of sovereign debt crises. While the exact contours of ICSID’s jurisdiction over disputes involving sovereign debt are yet to be defined in greater detail, the decision in Abaclat and Others v. Argentina provides strong authority for the assumption that at least some of these disputes will continue to be resolved within the framework of the ICSID Convention in the future. ICSID’s affiliation with the World Bank Group is an institutional advantage, since it gives strong incentives to comply with awards voluntarily.[22] Moreover, ICSID awards enjoy a high degree of publicity and, thus, contribute to legal certainty and to the development of further case law. Contrary to the suggestions of some authors[23], there is no proof that the neutrality of ICSID tribunals is affected by the lending activities of the World Bank.

To the extent that ICSID tribunals will assert jurisdiction over disputes involving sovereign debt, they will face the challenge of protecting investors’ rights without undermining the equally important goal of sovereign debt restructuring. As of now, international investment law provides hardly any guidance as to how this conflict of interest might be solved. Will ICSID tribunals find a BIT violation on the merits? If yes, will they award only partial compensation to creditors of sovereign States?[24] Will the economic situation of the pertinent State be taken into account in assessing the legitimate expectations of investors?[25] It will have to be seen how ICSID tribunals will respond to these challenges of sovereign debt arbitration. The decision on the merits in Abaclat and Others v. Argentina could be an important contribution to the development of case law in this regard.

Dr. Inka Hanefeld, LL.M. (NYU)
Hanefeld Rechtsanwälte, Hamburg, Germany 

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[1] See for example C.G. Paulus, A Resolvency Proceeding for Defaulting Sovereigns, IILR (2012), 1 (12) proposing a Sovereign Debt Tribunal.

[2] See M. Waibl, Sovereign Defaults before International Courts and Tribunals (Cambridge, 2011), p. 316.

[3] Abaclat and Others (Case formerly known as Giovanna A Beccara and Others) (Claimants) and the Argentine Republic (Respondent), Decision on Jurisdiction and Admissibility, ICSID Case No. ARB/07/5, 4 August 2011.

[4] Fedax N.V. (Claimant) and The Republic of Venezuela (Respondent), Case No. ARB/96/3, Decision of the Tribunal on Objections to Jurisdiction, 11 July 1997.

[5] Ceskoslovenska Obchodni Banka, A.S. (Claimant) versus The Slovak Republic (Respondent), Case No. ARB/97/4, Decision of the Tribunal on Objections to Jurisdiction, 24 May 1999.

[6] Cf. K. Halverson Cross, Arbitration as A Means of Resolving Sovereign Debt Disputes, 17 No. 3 Am. Rev. Int’l Arbitration (2006), 335 (348 ff.).

[7] See M. Waibl, Sovereign Defaults before International Courts and Tribunals (Cambridge, 2011), p. 226 ff.; M. Waibl, Opening Pandora’s Box: Sovereign Bonds in International Arbitration, 101 Am. J. Int’l L. (2007), 711 (719). For a different view see D. Strik, Investment Protection of Sovereign Debt and its Implications on the Future of Investment Law in the EU, 29 No. 2 Journal of International Arbitration (2012), 183 (192 f.).

[8] Para. 341. See also Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco (ICSID Case No. ARB/00/4), Decision on Jurisdiction of 23 July 2001, para. 52.

[9] See paras. 341, 365, 364, 371, 374, 375, 378.

[10] See e.g. Abaclat and Others (Case formerly known as Giovanna A Beccara and Others) (Claimants) and the Argentine Republic (Respondent), Decision on Jurisdiction and Admissibility, ICSID Case No. ARB/07/5, 4 August 2011, Dissenting Opinion of Georges Abi-Saab.

[11] S. Cirelli, Arbitration, Financial Markets and Banking Disputes, 14 Am. Rev. Int’l Arb. (2003), 243 (254); G. Affaki, A banker’s approach to arbitration, in: G. Kaufmann-Kohler and V. Frossard, Arbitration in Banking and Financial Matters, ASA Special Series No. 20 (2003), 63 (67).

[12] G. Affaki, Nouvelles réflexions sur la banque et l´arbitrage, in: Liber Amicorum Serge Lazareff, 2011, p. 42; G. Affaki, A banker’s approach to arbitration, in: G. Kaufmann-Kohler and V. Frossard, Arbitration in Banking and Financial Matters, ASA Special Series No. 20 (2003), 63 (66).

[13] www.euroarb.org. See A. Hirsch, Presentation of “Euroarbitration”: European Center for Financial Dispute Resolution, in: G. Kaufmann-Kohler and V. Frossard, Arbitration in Banking and Financial Matters, ASA Special Series No. 20 (2003), 55 (55 f.).

[14] Cf. J. Simoes, Sovereign Bond Disputes Before ICSID Tribunals: Lessons From the Argentina Crisis, 17 L. & Bus. Rev. Am. (2011), 683 (687).; M. Waibl, Sovereign Defaults before International Courts and Tribunals (Cambridge, 2011), p. 14.

[15] Cf. J. Simoes, Sovereign Bond Disputes Before ICSID Tribunals: Lessons From the Argentina Crisis, 17 L. & Bus. Rev. Am. (2011), 683 (718); M. Waibl, Opening Pandora’s Box: Sovereign Bonds in International Arbitration, 101 Am. J. Int’l L. (2007), 711 (758).

[16] See K.P. Gallagher, The New Vulture Culture: Sovereign Debt Restructuring and Trade and Investment Treaties, The IDEAs WORKING PAPER SERIES, Paper no. 02/2011, p. 8; S.L. Schwarcz, “Idiot’s Guide” to Sovereign Debt Restructuring, 53 Emory L.J. (2004), 1189 (1193 ff.).

[17] P. Krugman, The Return of Depression Economics and the Crisis of 2008 (New York, 2009), p. 63.

[18] M. Waibl, Sovereign Defaults before International Courts and Tribunals (Cambridge, 2011), p. 300; O. Lienau, Who is the “Sovereign” in Sovereign Debt?: Reinterpreting a Rule-of-Law Framework From the Early Twentieth Century, 33 Yale J. Int’l L. (2008), 63 (95 ff.); S.L. Schwarcz, “Idiot’s Guide” to Sovereign Debt Restructuring, 53 Emory L.J. (2004), 1189 (1194 ff.).

[19] See for example C.G. Paulus, A Resolvency Proceeding for Defaulting Sovereigns, IILR (2012), 1 (12) proposing a Sovereign Debt Tribunal. See also C.G. Paulus and S.T. Kargman, Reforming the Process of Sovereign Debt Restructuring: A proposal for A Sovereign Debt Tribunal, Workshop on Debt, Finance and Emerging Issues in Financial Integration, Financing for Development Office (FFD), DESA, 8 and 9 April 2008, available at: http://www.un.org/esa/ffd/events/2008debtworkshop/papers/Kargman-Paulus-Paper.pdf (last visited: 08 August 2012), p. 3.

[20] Cf. M. Waibl, Sovereign Defaults before International Courts and Tribunals (Cambridge, 2011), p. 324 ff.; K. Halverson Cross, Arbitration as A Means of Resolving Sovereign Debt Disputes, 17 No. 3 Am. Rev. Int’l Arbitration (2006), 335 (363).

[21] Cf. International Monetary Fund, Sovereign Debt Restructuring Mechanism – Further Considerations, Prepared by the International Capital Markets, Legal, and Policy Development and Review Departments in consultation with other Departments, 14 August 2002, available at: http://www.imf.org/external/np/pdr/sdrm/2002/081402.pdf (last visited: 08 August 2012).

[22] Cf. M. Waibl, Sovereign Defaults before International Courts and Tribunals (Cambridge, 2011), p. 319.

[23] Cf. C.G. Paulus, A Standing Arbitral Tribunal as a Procedural Solution for Sovereign Debt Restructurings, in: C.A. Primo Braga / G.A. Vincellette, Sovereign Debt and the Financial Crisis – Will this Time be Different (Washington, 2010), p. 317 (320 f.) contending that the World Bank Group is “a source of perceived bias”.

[24] Cf. M. Waibl, Sovereign Defaults before International Courts and Tribunals (Cambridge, 2011), p. 301 ff.

[25] Cf. D. Strik, Investment Protection of Sovereign Debt and its Implications on the Future of Investment Law in the EU, 29 No. 2 Journal of International Arbitration (2012), 183 (196).

The Euro zone crisis is a sovereign debt crisis. It results from the enormous amounts of debt accumulated by a number of currency union member states. The markets question the sustainability of their debt and suspect default. As a result, investors abstain from investing in sovereign bonds from these countries or require high risk yields. However, sovereign bonds are the main source of financing for modern industrialized nations. For a number of Euro zone countries the lack of market financing has been replaced by public funding, predominantly from other Euro zone member states.[1] In the case of Greece, this aid was insufficient. Greece debt was restructured in March 2012. Private creditors of the Hellenic Republic accepted an exchange offer which led to a haircut on their debt. Greek domestic bonds were exchanged for new bonds with lower principal, lower interest rates and longer maturity.[2]

I. Private Sector Involvement

The Greek restructuring took place in the form of a so-called Private Sector Involvement (PSI). It was a voluntary haircut accepted by the private holders of Greek bond debt that excluded the debt held by the public sector, in particular the substantial amount of sovereign bonds held by the Euro zone central banks.[3] Over 90% of Greek’s private creditors participated. However, the remaining holders of Greek bonds withstood political pressure and did not agree to what was called a “voluntary” bond restructuring. In particular some hedge funds did not trade in their old bonds. As a result, the restructuring was accompanied by Greece’s announcement that all remaining old bonds would never be paid. The remaining creditors who defied the exchange would either lose everything or be forced into an exchange. Greece intends to compel this exchange by the introduction of retroactive (also called retrofit) Collective Action Clauses.[4]

II. Retroactive Collective Action Clauses

Collective Action Clauses in sovereign bond issues can be defined as a compendium of standardized provisions in sovereign bond contracts.[5] Their major purpose is to introduce a principle of majority voting into the bond terms. If a (qualified) majority of bondholders agree to a proposed restructuring of the bond obligations all bonds are modified.[6] Majority provisions in Collective Action Clauses thereby deviate from one of the most basic principles of contract law. The contractual claims of the dissenting minority are modified without the creditors’ consent.[7] This mechanism intends to overcome the so-called holdout problem – the phenomenon that bondholders will wait for their peers to give in to the demands of the creditor in order to profit from the compromise and to get paid in full.[8]

Prior to the haircut, domestic bonds were issued under Greek law, and the underlying issuance contract does not contain terms that protect the investors from negative changes of the legal framework (e.g. in the form of a “stabilization” or “freezing” clause). Taking advantage of that, Greece plans to enact a law which automatically amends all domestic bonds if a set majority of the bondholders accepts the voluntary exchange offer. What sounds like a legislative measure that leaves the decision about the amendment to the private sector, is actually a mere paltry excuse: the decision by the (qualified) majority of bondholders had already been taken before the enactment of the law.

III. Legal issues

Therefore, the question arises whether such a procedure leads to an expropriation of the bondholders. An expropriation might violate the Greek constitution that protects the right of property.[9] It may also violate the European Convention on Human Rights (ECHR).[10] However, this contribution will leave these aspects aside and entirely focus on the effect of Bilateral Investment Treaties (BITs) on the Greek CACs. BITs generally contain rules on the expropriation of foreign investment and provide that expropriation measures “must generally be non‐discriminatory, for a public purpose, accompanied by prompt, adequate and effective compensation and in accordance with due process of law”.[11]

IV. Expropriation of bondholders

Bondholders’ protection under these provisions depends on the issue of whether the exchange of bond debt by way of retroactive Collective Action Clauses qualifies as an expropriation (and in the case of BITs additionally on the controversially assessed preliminary question whether sovereign bond debt is covered by BITs)[12]. It could be argued that the actual haircut follows from the voluntary decision taken by a qualified majority of the bondholders, not by the legislative act.[13] However, in the current scenario, this line of argumentation must fail. It is merely formalistic and ignores the predetermined outcome of the law as well as the obvious intentions of the legislator. The Greek scenario is incomparable to the general exercise of standard Collective Action Clauses. The necessary number of bondholders has given its consent prior to the enactment of the law. Furthermore, this law does not define (and amend) the legal situation in a general way and for an indefinite number of cases. It is meant for exactly one case, and the beneficiary is the country itself. These benefits do not come as a mere reflex, but are the very purpose that the law is being enacted for. In contrast to that, a typical legislative measure regulates legal relationships in a general way and with no regard to a specific case that benefits the government. If, for example, the legislator changes the laws on rental property, the government may well benefit as part of a multitude of affected landlords. However, this effect is merely reflexive and not the pursued legislative purpose. The principle should be that when a sovereign chooses to deal with investors on a contractual basis, it waives its sovereign powers. As a consequence, the entire legal relationship should be subject to general principles of private law. It seems contradictory to turn to sovereign powers when conflicts arise in order to avoid being held by contractual promises.

It is for these reasons that the Greek law is incomparable to what might be considered an example for the legitimacy of retroactive Collective Action Clauses. The German statutes on corporate bonds allow the introduction of retroactive majority provisions into existing bond terms by majority vote.[14] However, this law does not apply to German sovereign bonds, and the German legislator therefore enacted it in its general legislative capacity and regulated the contractual relationship of third parties in an abstract and general way.

V. Inequality of treatment

In addition to that, matters of inequality of treatment arise. The restructuring only affects the private sector. All public debt is exempted. This includes all bonds held by the European financial facilities and especially the high number of Greek bonds owned by the central banks. This does not necessarily manifest a breach of the principle of equal treatment. Unequal treatment is open to justification. This justification could lie in the fact that the public sector provided and provides the liquidity which is necessary to guarantee the future sustainability of Greek debt. The Euro system has purchased the bonds as part of their Securities Markets Program in order to – in the words of the ECB – implement its monetary policy in times of perturbed transposition mechanisms (see above at B. III.). However, a proper assessment requires that these reasons are communicated clearly by the legislator.

VI. Bilateral Investment Treaties (BITs)

Bilateral Investment Treaties (BITs) seem bondholders’ best chance to argue their case for expropriation compensation. BITs are bilateral treaties between two governments which intend to mutually protect private foreign investment. BITs give rise to individual claims and remedies. They generally protect foreign investment from expropriation by requiring strict conditions for expropriation and appropriate compensation. They further provide non-discrimination and fair and equitable treatment clauses which necessitate that the foreign investors may not be discriminated in comparison to nationals or third parties.[15]

1. Application of BITs to investments in bonds

The typical investment protected by BITs is a direct investment in the host’s territory including the acquisition of assets held in the host country or the acquisition of a majority shareholding position. It is, on the other hand, an unresolved issue whether indirect investment also benefits from the protection, especially investments in sovereign bonds.

a) The Argentine default

A recent arbitration decision, however, helps to shed light on the issue. The Arbitral Tribunal at the International Centre for Settlement of Investment Disputes (ICSID) in Washington, D.C., decided in Abaclat et al. and the Argentine Republic about various claims against Argentina resulting from sovereign bonds. It was decided on the basis of the Argentina-Italy BIT which entered into effect on 14 October 1990. It is a decision affecting the claims of over 180,000 individuals and corporations. Argentina had defaulted on its sovereign bonds in December 2001 and in the following years extended exchange offers to the investors. In 2005, Argentina enacted a law (the “Cram Down” or “Emergency” Law) which provided that the exchange procedure would not reopen for bonds that had not been exchanged.

b) Exercise of sovereign powers

One of the essential issues in Abaclat concerned the tribunal’s jurisdiction in light of the contractual nature of the investors’ claims against Argentina and is equally important in the Greek scenario. The tribunal held that “(…) with respect to a BIT claim an arbitral tribunal has no jurisdiction where the claim at stake is a pure contract claim (…) because a BIT is not meant to correct or replace contractual remedies (…).” But it added that “(…) where the equilibrium of the contract and the provisions contained therein” were “unilaterally altered by a sovereign act of the Host State” the claim could not be considered a pure contract claim. The tribunal decided to apply this exception where “(…) the circumstances and/or the behavior of the Host State appear to derive from its exercise of sovereign State power. Whilst the exercise of such power may have an impact on the contract and its equilibrium, its origin and nature are totally foreign to the contract.”[16]

The tribunal saw these circumstances in the Argentine Emergency Law of 2005.[17] In the case of Greece, the retroactive Collective Action Clauses enacted by a Greek law fulfill these exceptional requirements. By passing such a law Greece applies means which have no basis in the bond contracts and do not derive from its rights as a party to the contract, but are wholly based on its sovereign powers.

c) Qualification of investment

A further issue in the Argentine that is elementary to the Greek scenario concerns the meaning of “investment”. The BIT was only relevant insofar as the bond claims could be qualified as investment claims under the scope of the BIT. In determining the matter, the tribunal interpreted the wording of the BIT. It decided that the BIT pursued a wide approach. Art. 1 of the unofficial English translation provides that “(i)nvestment shall mean, in compliance with the legislation of the receiving State and independent of the legal form adopted or of any other legislation of reference, any conferment or asset invested or reinvested by an individual or corporation of one Contracting Party in the territory of the other Contracting Party, in compliance with the laws and regulations of the latter party”. Art. 1 further named certain examples of investments, among which were “bonds, private or public financial instruments or any other right to performances or services having economic value, including capitalized revenues”. The tribunal started its analysis by looking for “(…) rights and values which may be endangered by measures of the Host State, such as an expropriation, and therefore deserve protection”. It came to the conclusion that in respect to the protective purpose of the BIT and in light of the wording of Art. 1, the Argentine sovereign bonds were a form of investment covered by the protection under the BIT.[18]

A further issue was whether the bond purchases constituted an investment “in the territory of the other Contracting Party” which is a common requirement in BITs. Argentina argued that the bondholders’ purchases did not qualify as such investment since the investment had taken place between investors and banks as intermediaries. Therefore, no actual transfer of money from the investors to Argentina had taken place.  In answer to these objections, the tribunal defined the criteria applying to investments of purely financial nature. It held that it was essential “(…) where and/or for the benefit of whom the funds are ultimately used, and not the place where the funds were paid out or transferred.”[19] It dismissed the argument that the intermediaries as primary underwriters extended the principal to Argentina and only afterwards received payments from their customers. For the tribunal, the solely relevant factor was the fact that the underwriters extended their lump payment only in regard to the fact that they would “(…) be able to collect sufficient funds from the individual purchasers of security entitlements (…)” and that “(…) the funds generated through the bonds issuance process were ultimately made available to Argentina (…)”.[20]

All of these holdings by the tribunal support the qualification of Greek sovereign debt as investments under the BITs that Greece entered into.

d) Dissenting opinions

The decision in Abaclat is the holding of the majority of the tribunal members, and the dissenting opinion has argued for a more limited definition of investments.[21] Argentina has filed for an annulment of the decision, and the result of the annulment procedure seems unpredictable. This is due to the fact that there is no established opinion on the definition of an investment. Other ICSID have come to different conclusions. Whereas the majority in Abaclat held that the definition of investment should be decided independently on the basis of the provisions of the individual BIT, other tribunals favor a more general approach and base their definition of investments on the wording of the ICSID Convention. Art. 25(1) of the Convention provides that “(t)he jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (…) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre”. Some tribunals decided that this provision of the Convention contained an objective standard from which the parties to a treaty could not deviate.[22]

However, even the supporters of such an “objective standard theory” have not agreed on a uniform definition of investment. Whereas one tribunal excluded contingent liabilities form the scope of investment, another required that the investor participate in the risks of the transaction.[23] The latter approach could exclude sovereign bonds from the definition of an investment since the bondholders do not bear typical business risks. Their risks are limited to a sovereign default and therefore to the situation that gives raise to the dispute.

However, such a limited interpretation of the term “investment” seems unfounded. Bondholders are as exposed to arbitrary sovereign measures as other investors. Furthermore, the purpose of BITs and other treaties on the protection of Foreign Direct Investment (FDI) should be considered. The amount of money invested in sovereign bonds is enormous, and Argentina and Greece illustrate how vulnerable these investments are. Low levels of protection cause insecurities in the markets for foreign investments, and other sovereigns feel the negative impact.  In the absence of sovereign debt restructuring regimes (see above at C I), arbitration promises to (re-)establish market confidence. In the light of that, it is neither helpful nor required to limit the scope of arbitration on BITs to non-securitized forms of investment. Therefore and in unison with the majority in Abaclat, the matter whether sovereign bond debt qualifies as investment should be decided by interpretation of the wording of the individual BIT.

2. The Greek BITs

Greece has entered into 38 BITs. The contractual partners of these treaties are Albania, Algeria, Argentina, Armenia, Azerbaijan, Bosnia and Herzegovina, Bulgaria, Chile, China, Croatia, Cuba, Czech Republic, Egypt, Estonia, Georgia, Germany, Hungary, Republic of Korea, Latvia, Lebanon, Lithuania, Moldova, Romania, Slovenia, South Africa, Turkey, Uzbekistan, Serbia, Mexico, Kazakhstan, Morocco, Poland, Russian Federation, Syrian Arab Republic, Tunisia, Jordan, India and Iran.[24] As can be seen from this list, typical hedge fund hubs are not among these countries so that hedge funds will hardly profit from the protection provided form these BITs. However, not only hedge funds, but also retail investors are among the bondholders which oppose the voluntary haircut.[25]

Some of these BITs define the term investment in a very similar way as the Argentine-Italian treaty in the Abaclat decision. A randomly picked BIT, the one between Greece and Bosnia and Herzegovina, defines investment as “(…) every kind of asset by an investor of one Contracting Party invested in the territory of the other Contracting Party, and in particular, though not exclusively includes (…) claims to money or any performance having economic value, as well as loans connected to an investment (…)”. An expropriation is deemed lawful in this BIT if it takes place in the public interest, under due process of law, on a non-discriminatory basis and against prompt, adequate and effective compensation.[26]

Similar provisions can be found in other BITs that Greece signed. If the Abaclat interpretation is applied to these BITs, it could well follow that the investment in Greek sovereign bonds is protected by the BITs and that Greece infringed its obligations as to equal treatment because the entire public sector – Greek and foreign – had been spared by the latest restructuring.[27] In any case Greece would owe prompt, adequate and effective compensation. The Greek scenario is comparable to the findings in Abaclat in that “(i)t may (…) constitute an act of expropriation where the new regulations and/or laws deprive an investor from the value of its investment or from the returns thereof.”

Another problematic matter is the determination of the amount of compensation that would have to be granted to the bondholders for expropriation. Are the bondholders entitled to full compensation for the full principal and interest even if they purchased their bonds on secondary markets and paid significantly less than the bonds were sold for in the primary markets or should this fact reduce their claims to the market value of the bonds? If the market value seems appropriate, how should it be determined?

Purchases in the secondary market are problematic for another reason. Can they be considered investments in the territory of Greece given that the purchase price may flow from one foreign investor to another? This issue is not explicitly addressed in the Abaclat decision. However, the line of argumentation helps. The tribunal emphasizes the fact that in transactions involving intermediaries, the ultimate beneficiary is the issuer of sovereign bonds. From that it could be derived that transactions in the secondary markets are a consequence of the issuance of sovereign bonds and therefore indirectly benefit the sovereign. Investors in the primary markets may be found only because the bonds are transferable and therefore tradable on secondary markets. A different line of argumentation might simply hold that all further investors merely succeed into the legal position that the primary purchaser acquired.

The amount of compensation depends on the approach taken. If the rights of the bondholders are seen as derived from the primary purchasers, compensation should cover the full amount promised by the issuer at the time of the underwriting. The alternative approach which emphasizes the fact that every transfer of title is part of the bond scheme approved by the issuer would lead to the more satisfactory result that compensation would have to reflect the market value of the bond. The market value could be determined according to what can be considered a recognized standard for BITs. The 2012 U.S. Model BIT provides that the value of the investment is decided by the price paid prior to the act of expropriation and may not reflect any change in value occurring because the intended expropriation had become known earlier.[28] This corresponds to the findings of international arbitrators who applied customary international law to determine the standard of compensation for expropriation.[29]

3. New challenges to Arbitration

In respect to BITs, there is a dimension to the newly introduced inter-governmental financial facilities of the Euro zone which seems unique. The traditional wording of BITs seems ill-prepared for the new approaches taken by the Euro zone governments. Generally speaking, BITs include most favorable nation (MFN) clauses as well as fair and equitable treatment (FET) clauses. These clauses guarantee that all investors regardless of their nationality and affiliation to the public or private sector enjoy equal treatment. In the event of a sovereign default, these clauses intend to prevent investors from losses resulting from the preferential treatment of a third party. The new Euro zone financial facilities, however, create a category of investors for which the BITs seem ill-prepared. The European Stability Mechanism (ESM) which will start operating later in 2012 ESM[30] claims preferential creditor status.[31] This is not unheard of. The IMF enjoys this status, not explicitly granted by international law, but due to customs and general recognition.[32] However, with more and more emergency funding pouring into troubled Euro zone countries and enjoying preferred creditor status, the intention of the BITs to guarantee investor protection in the situation of sovereign default seems challenged.

E. Conclusions

The first restructuring in the Euro zone took place in March 2012 when Greece offered a voluntary exchange of its sovereign bonds and simultaneously announced that non-participating bondholders would be forced to comply. This event is remarkable since the imminent legal issues have not been addressed and might lead to a number of law suits of bondholders against the Hellenic Republic. It has been argued here that an involuntary restructuring could not only be challenged in Greek courts for infringements of the Greek constitution, but also find its way to arbitral tribunals for potential breach of BIT clauses. The holdings of the ICSID arbitration tribunal in its Abaclat decision against Argentina provide persuasive arguments that bondholders could use in disputes against Greece if they are nationals of a country that has entered into a BIT with Greece.

A further dimension of the current restructuring regime in the Euro zone deserves attention. The European Stability Mechanism (ESM) that is supposed to become a permanent source of funding for Euro zone sovereigns (and other benefactors such as financial institutions) claims preferred creditor status. This conflicts with traditional clauses in BITs. Non-Euro zone countries entering into BITs with Euro zone countries will have to decide whether they are willing to accept such a disadvantage to their investors. If they do they will not do it for free, and the Euro zone will face yet another increase in costs resulting from its rescue efforts.

Christian Hofmann

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[1] On the European Stability Facility see the framework agreement and the articles of incorporation, both available at http://www.efsf.europa.eu/about/legal-documents/index.htm; on an up-to-date summary of the lending operations of the EFSF see at http://www.efsf.europa.eu/about/operations/index.htm. On the future European Stability Mechanism (ESM) see the Treaty establishing the European Stability Mechanism of 2 Feb 2012, available at http://www.european-council.europa.eu/media/582311/05-tesm2.en12.pdf; see also the ECB Monthly Bulletin 7/2011, 71-84; on the financing by the European Financial Stability Mechanism (EFSM) see the Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism, OJEU 2010 L 118/1. On all of these funding mechanisms in detail J.-V. Louis, 47 Common Market Law Review (CMLR) 971 (2010); D. Zandastra, 3 Capital Markets Law Journal (CMLJ) 285; S. Seyad, 9 Journal of International Banking Law and Regulation 421 (2011).

[2] On some of the facts of the Greek restructuring see http://www.spiegel.de/international/europe/historic-opportunity-greece-pulls-off-debt-restructuring-deal-a-820343.html. On the negative effect of a restructuring on the markets see S. Choi/M. Gulati/E. Posner, 6 Capital Markets Law Journal 163, 175 et seq. (2011). However, restructuring of domestic bond by legislative means did happen in the past, see on Russia and Uruguay L. Buchheit/M. Gulati, How to Restructure Greek Debt, Duke Law Working Papers 2011, p. 6 and p. 11, available at http://scholarship.law.duke.edu, on the dangers involved.

[3] The Euro zone central banks have provided a number of measures to aid the indebted Euro countries. The most significant ones are the sovereign bond purchasing programs. On an updated list on the volume of the sovereign bond purchase programs see at http://www.ecb.int/mopo/liq/html/index.en.html#portfolios. On the latest announcement of the ECB of its new purchasing program, called “Outright Monetary Transactions (OMT)”, see at http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html.

[4] On retroactive Collective Action Clauses in general and the Greek restructuring see M. Boudreau, 2 Harvard Business Law Review 164, 166 (2012). Generally on Collective Action Clauses L. Dixon/D. Wall, 8 Financial Stability Review 142, 148 (2000); C. Hofmann/C. Keller, 175 Zeitschrift für das gesamte Handels- und Wirtschaftsrecht (ZHR) 684-723 (2011).

[5] On the terminology F. Elderson/M. Perassi, 4 European Banking and Financial Law Review (Euredia) 239, 241 (2003): “Collective action clauses (CACs) are the denominator usually given to a number of different clauses found in various forms and to a varying degree in bond contracts under the laws of various jurisdictions which have in common, principally, that they enable a majority of bondholders to bind a minority against their will to the amendment of the terms of the contract and to a number of other actions in relation to the bonds (such as acceleration and de-acceleration)“. Compare also the report by the G-10 of May 1996, “The Resolution of Sovereign Liquidity Crises“, p. 16.

[6] On majority provisions in Collective Action Clauses following the English law model L. Burn, “Bond issues under U.K. law: how the proposed German legislation compares“, in: Baums/Cahn (ed.), Die Reform des Schuldverschreibungsrechts, 2004, p. 219, 238. On New York law style Collective Action Clauses L. Buchheit/M.  Gulati, 51 Emory Law Journal (2002) 1317, 1329. On the impediments for Collective Action Clauses resulting from the Trust Indenture Act (TIA) which has been applied beyond its limited scope to sovereign bonds see G. Shuster, “The Trust Indenture Act and International Debt Restructurings“, 14 American Bankruptcy Institute (ABI) L.R. 431 (2006). On an international approach to majority provisions see the report of the G-10 Working Group on Contractual Clauses of 26.9.2002, p. 3.

[7] On this principle see H. Beale (ed.), Chitty on Contracts, Vol. 1 (General Principles), 29^th ed. 2004, para 1-5; E. McKendrick, Contract Law, Text, Cases and Materials, 3^rd ed. 2008, p. 939 et seq.; G. Treitel, The Law of Contract, 6^th ed. 2004, p. 312 et seq. On the protection of contractual expectations see p. 5 et seq.

[8] On the holdout problem L. Buchheit/M. Gulati, 48 U.C.L.A. Law Review 59, 65 et seq. (2000); L. Alfaro/N. Maurer/F. Ahmed, “Gunboats and Vultures: market Reaction to the ‘Enforcement’ of Sovereign Debt”, Working Paper 2007, p. 4, available at http://www.econ.ucla.edu/workshops/papers/History/Maurer,%20Gunboats%20and%20Vultures,%20version%205.2.pdf; P. Kenadjian, “Bond Issues under New York and U.S. Law: Considerations for the German Law Maker from a U.S. Perspective“, in: Baums/Cahn (ed.), Die Reform des Schuldverschreibungsrechts, 2004, p. 245, 263. See also S. Choi/M. Gulati/E. Posner, 6 Capital Markets Law Journal 163-187 (2011). The authors reach the conclusion that Collective Action Clauses should create creditor confidence and potentially lower the cost of financing, at least for financially stable sovereigns. On this see also F. Elderson/M. Perassi, 4 European Banking and Financial Law Review (Euredia) 239, 262 (2003); L. Dixon/D. Wall, 8 Financial Stability Review 142, 148 (2000). On the harmonized Colective Action Clauses of the Euro zone see the Common Terms of Reference of 17 February 2012, available at http://europa.eu/efc/sub_committee/pdf/cac_-_text_model_cac.pdf, as well as the supplemental provisions at http://europa.eu/efc/sub_committee/pdf/cac_-_supplemental_provisions.pdf.

[9] Art. 17(2) of the Greek constitution provides that “(n)o one shall be deprived of his property except for public benefit which must be duly proven, when and as specified by statute and always following full compensation corresponding to the value of the expropriated property at the time of the court hearing on the provisional determination of compensation (…)”.

[10] To a similar effect, Art. 1 of the Protocols to the European Convention on Human Rights (ECHM) guarantees that “(e)very natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law”.

[11] See Art. 6 of the 2012 U.S. Model Bilateral Investment Treaty; see also J. Dunoff/S. Ratner/D. Wippman, International Law, Norms, Actors, Process: A Problem-oriented Approach, 2^nd ed. 2006, p. 87 et seq.

[12] On the approach to covered debt and the investors entitled to claims see UNCTAD, Investor-State Dispute Settlement and Impact on Investment Rulemaking, p. 9 et seq, and also the changing opinion on minority shareholders on p. 15-17.

[13] Compare L. Buchheit/M. Gulati, How to Restructure Greek Debt, Duke Law Working Papers 2011, p. 11, available at http://scholarship.law.duke.edu, who consider Greek retroactive Collective Action Clauses in a less drastic scenario.

[14] See sec. 24(2) of the Gesetz über Schuldverschreibungen aus Gesamtemissionen of 31 July 2009, BGBl. I, p. 2512.

[15] On all of the above see J. Alvarez, The Public International Law Regime Governing International Investment, 2011, p. 30-33.

[16] Decision on Jurisdiction and Admissibility by the Arbitral Tribunal at the International Centre for Settlement of Investment Disputes Washington, D.C., Abaclat and others and the Argentine Republic of 4 August 2011, at 316-318.

[17] Abaclat (fn. 16), 321-326.

[18] Abaclat, (fn. 16), at 347-356.

[19] Abaclat, (fn. 16), at 374.

[20] Abaclat, (fn. 16), at 376-378.

[21] See the dissenting opinion by Georges Abi-Saab at http://italaw.com/documents/Abaclat_Dissenting_Opinion.pdf.

[22] ICSID tribunal decision Joy Mining Machinery Limited and The Arab Republic of Egypt (ICSID Case No. ARB/03/11) of 6 Aug 2004, at 50; Salini Costruttori SpA v Morocco (ICSID Case No. ARB/00/4), 42 ILM 609, 622 (2003).

[23] ICSID tribunal decision Salini Costruttori SpA v Morocco (ICSID Case No. ARB/00/4), 42 ILM 609, 622 (2003).

[24] See the full list of countries at http://icsid.worldbank.org/ICSID/FrontServlet.

[25] On the definition of a retail investor see Abaclat, (fn. 16), at 23: “Retail investors are those who are individuals, investing on their own behalf (…)”.

[26] See Art. 1 and 5 of the agreement on the Promotion and Protection of Investments between the Hellenic Republic and Bosnia and Herzegovina of 1 May 2002.

[27] On fair and equitable treatment Enron Corp. v. Argentine Republic, ICSID Case No. ARB/01/3 of 22 May 2007; J. Dunoff/S. Ratner/D. Wippman, International Law, Norms, Actors, Process: A Problem-oriented Approach, 2^nd ed. 2006, p. 814 et seq.

[28] Art. 6 No. 2 b and c of the 2012 U.S. Model Bilateral Investment Treaty provides that “(t)he compensation referred to in paragraph 1(c) shall (…) be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place (“the date of expropriation”) and not reflect any change in value occurring because the intended expropriation had become known earlier”. See also the 1992 World Bank World Bank Guidelines on the Treatment of Foreign Direct on the Treatment of Foreign Direct Investment, available at http://italaw.com/documents/WorldBank.pdf. See also Metalclad Corp. and Mexico, ICSID CASE No. ARB(AF)/97/1 of August 30, 2000, para. 122: “(…)any award to the claimant should, as far as is possible, wipe out all the consequences of the illegal act and reestablish the situation which would in all probability have existed if that act had not been committed (the status quo ante)”.

[29] See the decision by the Iran-United States Claims Tribunal in SEDCO, Inc. v. National Iranian Oil Company and the Islamic Republic of Iran, 10 Iran-U.S. Cl. Rep. 180 (1986).

[30] On the ESM see the ESM treaty of 2 Feb 2012, above fn. 1. The ratification of the ESM was delayed by Germany because its federal constitutional court (Bundesverfassungsericht) had asked for a delay in the ratification process until its ruling in a preliminary hearing on the compatibility of the obligations arising from the ESM with the German constitution. On the ruling see the Press release no. 67/2012 of 12 September 2012 of the German Constitutional Court, available at http://www.bundesverfassungsgericht.de/pressemitteilungen/bvg12-067en.html.

[31] See the ESM treaty of 2 Feb 2012 at 13 (fn. 1). See also ECB Monthly Bulletin, July 2011, p. 82.

[32] On the preferred creditor status of the IMF see ECB Monthly Bulletin, July 2011, p. 80.

In its Decision[1] of May 10, 2012, the Frankfurt Higher Regional Court (the “Court”) upheld the Award[2] on Jurisdiction, Arbitrability and Suspension (the “Award”) of 26 October 2010 in the UNCITRAL arbitration Eureko B.V. v. The Slovak Republic. The Award concerns a dispute between the Slovak Republic and a Dutch company, which arose out of the 1991 Netherlands-Czechoslovakian BIT (the “BIT”)[3]. In the Award, the Tribunal (Lowe, van den Berg, Veeder ) rejected the jurisdictional objections raised by the Respondent concerning the prevalence of European Union law over the BIT. The Frankfurt Higher Regional Court now confirmed that the Award is not in conflict with EU Law.

I. Background of the Dispute

The dispute underlying the Award arose out of a Slovakian legislation on health insurance from 2006.

In 1991, the Netherlands and Czechoslovakia signed the BIT, which entered into force in 1992. After the dissolution of Czechoslovakia, Slovakia became a party to the BIT by virtue of succession. On May 1, 2004, Slovakia acceded to the European Union.

Also in 2004, Slovakia opened its market for foreign insurance companies. However, the liberalization of the market was soon reversed in 2006 after a change of government. The Dutch insurance company Eureko B.V. (“Eureko”), which had invested in Slovakia after 2004, claimed that this legislation led to a de facto expropriation of its investment in Slovakia. In 2008, the Eureko filed a notice of arbitration under Article 8 of the BIT, which provides for arbitration according to the UNCITRAL Rules.

After its constitution, the Tribunal decided that the seat of arbitration would be Frankfurt am Main, Germany. Subsequently, the parties filed their written observations. In its Statement of Defence, Slovakia challenged the jurisdiction of the tribunal inter alia because the BIT would be superseded by the EC Treaty (now the Treaty on the Functioning of the European Union, “TFEU”). The Tribunal rejected this argument in the Award and held that it has jurisdiction.

On November 26, 2010, Slovakia filed a request with the Court, asking it to rule on the jurisdiction of the Tribunal pursuant to Section 1040(3) of the German Civil Procedure Code (Zivilprozessordnung, “ZPO”)[4].

II. The Decision of the Court

The Court affirmed the Award and thus rejected the Slovakian request. The Court reasoned that it has jurisdiction to review the jurisdiction of the Tribunal (1.), which rightly had assumed its jurisdiction (2.).

1. Jurisdiction of the Court to review the Award

Since the seat of the arbitration was Frankfurt am Main, Germany, the Court itself had jurisdiction to rule on the jurisdiction of the Tribunal according to Sections 1040(3) and 1062(1)(2) ZPO. In contradistinction to arbitrations under the auspices of ICSID, investment arbitrations according to the UNCITRAL Rules (as provided for in the BIT) are not de-nationalized. Recourse against the Awards according to the domestic law of the seat of the arbitration as lex arbitri remains possible[5].

2. Conformity of the Award with EU Law

After having affirmed that the arbitration clause in Article 8 BIT would satisfy the requirement of a written agreement under domestic German law (cf. Section 1029 ZPO), the Court turned to the central issues of this dispute: Whether the Award was in accordance with EU Law.

The first question to be discussed by the Court was the conformity of the arbitration clause with Article 344 TFEU, which provides that the “Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein.” The Court reasoned that this provision would only apply in relation between the EU Member States, but not in relation between an EU Member State and an individual. The apprehension expressed by Slovakia, that a future award on the merits would not be in accordance with EU Law or that EU Law could be completely disregarded, would not justify the application of Article 344 TFEU. The Court took into account that a future award on the merits would be itself – within certain limits – subject to review by the German courts. The Court pointed out that the Opinion 1/09 expressly limited the application of Article 344 TFEU to disputes between EU Member States. It could find to indicators that the Mox Plant-Judgment[6] would provide to the contrary. Finally, the Court stressed that the EU itself is a contracting party to the Energy Charter Treaty[7]. Therefore, the Court concluded that the EU has expressed its consent to investment arbitration under the auspices of ICSID as well as by other institutions.

The Court rejected the general proposition that only the ECJ would competent to apply EU law regardless of Article 344 TFEU. Instead, the courts of the EU Member States would be obliged to apply EU law. Conversely, the ECJ would not be competent to interpret treaties concluded by the EU Member States. In this regard, the Court referred to a judgment of the ECJ concerning the Swiss-Slovakia BIT of September 15, 2011[8]. No argument to the contrary could be inferred from the so-called ECJ’s Eco-Swiss Judgment[9]. In this judgment, the ECJ held that Community law can constitute a question of public policy, which has to be considered by the courts of the EU Member States when deciding whether an arbitral award is recognized or annulled.

Furthermore, the Court rejected the argument that the Article 8(2) of the BIT would be inapplicable because of Article 30 VCLT, which concerns the conflict of treaties governing the same subject matter. Since Article 8(2) of the BIT would not be in breach of Article 344 TFEU, there would be no conflict as required by Article 30 VCLT.

Neither the alleged contravention against the equal treatment principle under Article 18 TFEU nor against the principle of mutual trust could justify annulling the Award. Even if the BIT was discriminating third party nationals from EU Member States, the consequence could not be to disregard the BIT. Instead, nationals of another EU Member State would also be entitled to recourse to arbitration under the BIT. Although the Court recognized that there are ongoing discussions concerning the relationship between EU Law and investment arbitration, investment arbitration could not be as such incompatible with EU Law, as evidenced by the accession of the EU to the Energy Charter Treaty.

Finally, the Court justified its decision not to request a preliminary rules by the ECJ since the interpretation of Article 344 TFEU would be clear in this regard. Furthermore, a preliminary ruling by the ECJ could not clarify issues concerning the interpretation of Article 8(2) of the BIT, as the ECJ could only rule on EU Law.

III. Comment

The fact that, from the EU Law perspective, an investment agreement between the EU Member States might be “illegal” does not necessarily entail the consequence that, from an international law perspective, an arbitral tribunal, which derives its jurisdiction from an international treaty and which is authorized to apply only international law, should disregard the BIT. Investment tribunals confronted with this question have repeatedly rejected the argument brought forward by respondent EU Member States that EU Law would supersede the BIT[10]. Likewise, the Tribunal in Eureko B.V. v. The Slovak Republic followed this approach.

But the decision by the Court concerns a different constellation: In this case, a Court of an EU Member State had to rule on an arbitration based on an intra-EU BIT that was in force between two other EU Member States. Unlike an arbitral tribunal bound to apply international law in the first place, a Court of an EU Member State is bound to apply the law applicable in the EU Member State, which most notably includes EU Law as the supreme law of the Union[11].

After the entry into force of the Lisbon Treaty, the relationship between EU Law and Investment Treaties concluded by the EU Member States is complex. According to Article 207 TFEU, the Common Commercial Policy (“CCP”) now expressly extends to foreign direct investments. This competence is exclusive[12]. Thus, the EU Member States have no longer the competence to conclude BITs with third countries alone[13]. It is arguable that this applies a fortiori to BITs concluded with EU Member States, especially because the exception of Article 351 TFEU does not apply to intra-EU agreements. On the other hand, the CCP now belongs to “Part V” of the TFEU on the external action by the EU. Therefore, it is arguable that the compatibility of intra-EU BITs with EU law as to be primarily assessed in the light of the provisions governing the internal market. As the EU-competence for the internal market is a shared competence[14], one can suggest that the EU Member States still retain their competence unless and to the extent the EU has enacted legislation and the intra-EU BITs are incompatible with this EU legislation.

In its assessment, the Court merely took into account the compatibility of the dispute settlement provisions of the respective BIT and EU law. It did not consider the compatibility of the investment treaty as a whole with EU law. Although he acknowledged the possibility of conflicts between substantive provisions of EU law and the treaty, he considered this to be a matter to be discussed in potential annulment proceedings concerning the award. The consequential question is whether it is really possible to differentiate between the dispute settlement procedure and the actual dispute[15]? If the exclusive competence for the CCP also covers intra-EU BITs, it is hardly arguable that only the substantive provisions of the BIT are incompatible with EU law, but that the dispute settlement provisions remain in valid.

Therefore, the Court should have made use of its competence to request a preliminary ruling. The argument that this is a clear case and therefore requires no preliminary ruling is rebutted by the extensive reasoning by Court itself. Slovakia filed an appeal against the decision of the Court with the German Supreme Court (Bundesgerichtshof, “BGH”). Hopefully, the BGH will not try to avoid a preliminary ruling, as this would provide the much needed legal certainty regarding the extent of the EU’s external competences in the field of investment law.

Jan Asmus Bischoff

Dr. Jan Asmus Bischoff studied law at Hamburg University from 2000 to 2005. After his graduation, he worked as a researcher at the Max Planck Institute for Comparative and International Private Law until 2010. In 2008, he completed his Master Degree in International Legal Studies at NYU, School of Law as a Hauser Global Scholar. In 2009, he completed his doctoral thesis on “The European Community and the Uniform Private Law Conventions” under the supervision of Prof. Dr. Dr. hc. Jürgen Basedow. In 2010, he passed the Second State Examination at the Hanseatic Regional Appelate Court, Hamburg. He is currently working as an attorney (Rechtsanwalt) at Dabelstein & Passehl, Hamburg in the field of maritime law and international dispute settlement.

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[1] Decision of the Frankfurt Higher Regional Court, 10 May 2012, 26 SchH 11/10, available at: <http://www.italaw.com/documents/26schh01110.pdf>.

[2] Eureko B.V. v. The Slovak Republic, UNCITRAL arbitration, PCA Case No. 2008-13,

Award on Jurisdiction, Arbitrability and Suspension, 26 October 2010, available at: <http://www.italaw.com/documents/EurekovSlovakRepublicAwardonJurisdiction.pdf>.

[3] Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic, available at: <http://unctad.org/sections/dite/iia/docs/bits/netherlands_slovakia.pdf>.

[4] A translation of the German arbitration legislation contained in the ZPO is available at: <http://www.dis-arb.de/de/51/materialien/german-arbitration-law-98-id3>.

[5] Douglas, The International Law of Investment Claims 115-116 (Cambridge University Press, 2009).

[6] ECJ, Judgment of May 30, 2006, Commission of the European Communities v Ireland, Case 459/03, ECR 2006, I-4635, <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62003CJ0459:EN:NOT>.

[7] As to questions on the relationship between the Energy Charter Treaty and EU Law in general, see the contributions in: Coop (ed.),  Energy Dispute Resolution: Investment Protection, Transit and the Energy Charter Treaty, part II (2011, Juris Publishing).

[8] ECJ Judgment of September 15, 2011, C-264/09, available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62009CJ0264:EN:NOT>

[9] ECJ, Judgment of June 1, 1999, Eco Swiss China Time Ltd v Benetton International NV, Case C-126/97, ECR 1999, I-3055, available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:61997CJ0126:EN:NOT>.

[10] AES Summit Generation Limited and AES-Tisza Emrömü Kft. v. Republic of Hungary, Award of September 23, 2010, para. 7.6; Telenor Mobile Communications A.S. v. The Republic of Hungary, Award of September 13, 2009, para. 47.; Eastern Sugar B.V. v. Czech Republic, Partial Awarad of March 27, 2007, paras. 114-181; Rupert Joseph Binder v. Czech Republic, Award on Jurisdiction of June 6, 2007, not published; Ioan Micula, Viorel Micula, S.C. European Food S.A., S.C. Starmill S.R.L., & Multipack S.R.L. v. Romania, Decision on Jurisdiction and Admissibility of September 24, 2008, para. 41; compare also: Saluka Investments B.V. v. Czech Republic, Partial award of March 17, 2006, para. 351; see also Happ and Bischoff, “Role and Responsibility of the European Union under the Energy Charter Treaty” in Coop(ed.), Energy Dispute Resolution: Investment Protection, Transit and the Energy Charter Treaty 156-63 (Juris Publ., 2011); Eilmannsberger, “Bilateral Investment Treaties and EU Law”, 46 CML Rev. 383, 399-401 (2009); Wehland, “Intra-EU Investment Agreements and Arbitration: Is European Community Law an Obstacle?”, 58 ICLQ 297 (2009); Burgstaller, “European Law and Investment Treaties”, 26 J. Int’l Arb. 181, 184-96 (2009); Ghouri, “Resolving Incompatibilities of Bilateral Investment Treaties of the EU Member States with the EC Treaty: Individual and Collective Options”, 16 ELJ 806 (2010).

[11] [No. 17. Declaration concerning primacy; C 83/344 Official Journal of the European Union 30.3.2010]

[12] Cf. Article 3(1)(e) TFEU.

[13] Bischoff, Just a little BIT of “mixity”?, 48 CMLR 1527, 1557 seq. (2011); see also in this Blog: <http://blogs.law.nyu.edu/transnational/2011/02/a-little-bit-mixed-%E2%80%93-the-eu%E2%80%99s-external-competences-in-the-field-of-international-investment-law/>.

[14] Cf. Article 4(2)(a) TFEU.

[15] The contrary is suggested by ECJ, Opinion 1/91, December 14, 1991 ECR, ECR 1991 Page I-6079, para. 40.

The Swiss Chambers’ Arbitration Institution has recently revealed its revised Arbitration Rules, which are set to enter into force as of June 1^st, 2012 (the “Swiss Rules” or the “Rules”). The Rules build on the success of their 2004 predecessor, yet introduce some interesting and well-received changes. This contribution provides a brief overview of some of the more significant amendments.

Background

The former version of the Swiss Rules, adopted in 2004 (“2004 Swiss Rules“), was based on the 1976 Arbitration Rules of the United Nations Commission on International Trade Law (“UNCITRAL Rules“), adapting the latter to administered arbitrations and taking into account modern arbitral practice at the time. Since their entry into force, some 500 cases have been settled under the 2004 Swiss Rules. The aim in revising the 2004 Swiss Rules was to undertake a “light” revision, taking into consideration the revised 2010 UNCITRAL Rules, recent developments in arbitral practice and the experiences gained under the previous rules. The three main goals were (a) to further enhance the efficiency of the arbitral process, particularly in terms of time and cost; (b) to give certain additional powers to the institution administering the arbitration proceedings, again mainly in view of the efficiency of the process; and (c) to preserve the flexibility of the proceedings and the autonomy of the parties on the one hand and the arbitral tribunal on the other to the largest extent possible.

Strengthening of the Institution

One of the changes brought about by the 2012 revision of the Swiss Rules is the strengthening of the Swiss Chambers’ Arbitration Institution (the “Institution”).

Still comprised of the Chambers of Commerce and Industry of Basel, Bern, Geneva, Neuchâtel, Ticino, Vaud and Zurich, the Institution has established the Arbitration Court (the “Court”). As compared to the powers vested in the previous Arbitration Committee and Special Committee, the competences of the Court have been broadened in the interest of the efficient and smooth running of the arbitration proceedings under the Swiss Rules. Thus, new Article 1(4) of the Rules provides in general terms that by submitting their dispute to arbitration under the Swiss Rules, the parties confer on the Court, to the fullest extent permitted under the law applicable to the arbitration, all of the powers required for the purpose of supervising the arbitral proceedings otherwise vested in the competent judicial authority, including specifically the power to extend the term of office of the arbitral tribunal and to decide on the challenge of an arbitrator on grounds not provided in the Swiss Rules.

Furthermore, the Court has been given extended powers with respect to the constitution of the arbitral tribunal. For instance, pursuant to Article 2(3) of the Rules, the Court may extend or shorten any time-limit it has fixed or has the authority to fix or amend if the circumstances so justify. This can include the shortening of the time-limits for the appointment of arbitrators. Moreover, the Court has the power to ensure the due and prompt constitution of an arbitral tribunal in the event of any failure in such constitution under the Swiss Rules, which includes the express power to revoke any appointment already made, to appoint or reappoint any of the arbitrators and to designate one of them as the presiding arbitrator (Article 5(3)).

The Court has also been vested with extended powers with respect to any decision of the arbitral tribunal on costs. Whereas under the 2004 Swiss Rules cost decisions were only to be submitted to the Chambers for consultation, Article 40(4) of the 2012 Rules provides for the submission of cost decisions to the Court for approval or adjustment, expressly stipulating that any decision in this respect by the Court is binding upon the arbitral tribunal.

The Court is assisted in its work by the Secretariat of the Court (the “Secretariat”). As a general rule, it is now also the Secretariat and no longer the arbitral tribunal that holds the deposits to be paid by the parties (Article 4(1) of Appendix B).

Time and Cost Efficiency

One of the main goals of the revision was to further increase the efficiency of the proceedings. Unlike other recently revised sets of arbitration rules, the drafters of the Swiss Rules decided not to introduce a separate catalogue of case management tools. Instead, the existing rules were partially modified where deemed necessary.

The key provision in this regard is Article 15(7) of the Rules, providing that all participants in the arbitral proceedings shall act in good faith and shall make every effort to contribute to the efficient conduct of the proceedings and to avoid unnecessary costs and delays. Unlike for instance Article 37(5) of the 2012 ICC Rules, the Swiss Rules do not contain an express provision that a party not having conducted the arbitration in an expeditious and cost-effective manner may be faced with consequences as to the bearing of costs. However, Article 40 of the Swiss Rules, providing that the arbitral tribunal may apportion any of the costs of the arbitration among the parties if it determines that such apportionment is reasonable, taking into account the circumstances of the case, does not exclude that the parties’ behavior with respect to efficiency and cost-effectiveness is a circumstance to be taken into account by the tribunal when apportioning the costs of the proceedings.

Besides this general provision, the revised Rules provide for several additional, yet more minor amendments geared towards time and cost efficiency, such as the competence of the Court stipulated in Article 2(3) to shorten time-limits, the appointment of party-appointed arbitrators together with the Notice of Arbitration and the answer thereto, respectively (Article 3(3)(h) and 3(7)(f)), the introduction of a 15 day deadline for the challenge of an arbitrator after the circumstances giving rise to the challenge became known to that party (Article 11), the general rule that the Statement of Claim and the Statement of Defence shall include all documents and other evidence on which the parties rely (Articles 18(3) and 19(2)), or the express provision of witness or expert examination “through means that do not require their physical presence at the hearing (including by videoconference)” (Article 25(4)).

Consolidation and Joinder

Article 4 of the 2012 Swiss Rules introduces some amendments to the existing provisions on consolidation of and joinder of additional parties to pending arbitration proceedings.

Article 4(1) further increases flexibility with respect to consolidation of arbitration proceedings by vesting the Court with the power to revoke the appointment and confirmation of arbitrators and to appoint arbitrators itself if necessary to enable consolidation. It is noteworthy that the Swiss Rules are less restrictive in terms of the prerequisites for granting consolidation from the ICC Rules in that they give the Court greater discretion. This being said, it is to be expected that the Court will exercise this discretion with appropriate restraint, giving due consideration to the privity of the contractual relationships in question.

Article 4(2) brings about only minor changes to the provision on joinder. In particular, by amending the wording from “third parties” to “third persons”, the Rules clarify that the provision includes third persons who are not yet and may not become “full” or principal parties to the arbitral proceedings, but can act as secondary parties (Nebenpartei). Moreover, the 2012 Swiss Rules allow for the participation of third persons in arbitral proceedings without a claim being raised against such third person. It is noteworthy that the Swiss Rules offer more options with respect to joinder than the ICC Rules, which do not allow for a third party to join proceedings on its own motion or to request the joinder of a third party without filing a claim against it.

Interim Relief and Emergency Arbitrator

The 2012 Swiss Rules also introduce some changes with respect to interim relief.

Many of the changes to the wording of Article 26 on tribunal-ordered interim relief reflect current arbitral practice in Switzerland. Thus, Article 26(1) now expressly states that upon the application of any party or, in exceptional circumstances and with prior notice to the parties, on its own initiative, the arbitral tribunal may modify, suspend or terminate any interim measures granted. Furthermore, new Article 26(4) stipulates that the arbitral tribunal may rule on claims for compensation for any damage caused by an interim measure which later proves to have been unjustified. Also, Article 26(5) now expressly recognized the concurrent jurisdiction enshrined in many arbitration laws between state courts and arbitral tribunals to grant interim relief in support of arbitration, and provides that by submitting their dispute to arbitration under the Rules, the parties do not waive any right that they may have under the applicable laws to submit a request for interim measures to a judicial authority.

Article 26(3) of the Swiss Rules is an entirely new provision and reads as follows: “In exceptional circumstances, the arbitral tribunal may rule on a request for interim measures by way of a preliminary order before the request has been communicated to any other party, provided that such communication is made at the latest together with the preliminary order and that the other parties are immediately granted an opportunity to be heard.” In other words, the Swiss Rules expressly allow for ex parte interim relief, provided that the party against whom the ex parte measure is directed is immediately granted the right to be heard. This provision, which strongly resembles the provision on preliminary orders in the UNCITRAL Model Law in its 2006 version, reflects the common view in Switzerland that, in order to prevent frustration of the purpose of the requested interim relief and to effectively protect the parties’ rights, it is necessary in exceptional circumstances to grant such interim relief on an ex parte basis.

Finally, Article 43 of the Swiss Rules introduces a new emergency relief procedure, enabling a party to a Swiss Rules arbitration agreement requiring urgent interim measures pursuant to Article 26 before the arbitral tribunal is constituted to submit to the Secretariat an application for emergency relief proceedings. The emergency arbitrator provisions under the revised Swiss Rules resemble other recently introduced emergency arbitrator regimes (see, e.g., the emergency arbitrator under the 2012 ICC Rules), but introduce some provisions specific to the Swiss Rules. For instance, the emergency arbitrator under the Swiss Rules, by reference to Article 26 of the Rules as a whole, has the power to grant preliminary orders in exceptional circumstances, a power not vested in the emergency arbitrator under other comparable rules. Furthermore, pursuant to Article 43(2)(b) of the Rules, it is at the Court’s discretion to refrain from appointing an emergency arbitrator if it appears more appropriate in a given case to proceed with the constitution of the arbitral tribunal and refer the application for urgent interim measures to the arbitral tribunal.

Conclusion

In sum, the recent “light” revision of the Swiss Rules constitutes a successful attempt at reflecting current arbitral practice and time and cost efficiency of the arbitral process whilst at the same time maintaining the core attributes of Swiss Rules arbitration, which has over the past eight years proven to be a highly successful means of dispute resolution. Compared to other institutional arbitration rules, the Swiss Rules continue to offer a leaner and more flexibility, yet effective administration of arbitration proceedings.

Dr. Christopher Boog is a Partner in Schellenberg Wittmer in Zurich and a member of its International Arbitration Practice Group. He is a member of the Zurich bar and a graduate from the Law Schools of the Universities of Fribourg (Master of Law, with honors), Amsterdam (International Law Certificate) and Zurich, where he obtained his doctorate summa cum laude. Christopher Boog was a research fellow at Columbia Law School in New York and regularly publishes and speaks on topics of international arbitration and transnational litigation.

Introduction

The Brazilian Arbitration Act (the “BAA” or the “Act”)[1] does not distinguish between domestic and international arbitration. It does, however, set different mechanisms for parties to seek and resist enforcement of an arbitral award, depending on whether it is deemed domestic or foreign.

On May 24, 2011, the Brazilian Superior Court of Justice (Superior Tribunal de Justiça, hereinafter the “STJ” or the “Court”), the country’s highest court for non-constitutional matters, rendered a decision concerning the distinction between domestic and foreign arbitral awards (hereinafter the “Decision”).[2]

Under the BAA, domestic arbitral awards amount to judicial decisions rendered by the Brazilian courts (BAA, Article 31). While potentially subject to motions for annulment before said courts, domestic arbitral awards constitute res judicata. Additionally, if not complied with voluntarily by the losing party, domestic arbitral awards are enforceable before the Brazilian courts as such. In other words, the courts need not confirm domestic arbitral awards in order for their enforcement to be sought, and there is no judicial review of the merits of an award.

In turn, foreign arbitral awards — that is, “arbitral awards made outside the Brazilian territory” (BAA, Article 34, sole paragraph) — can only be recognized and enforced in Brazil upon the authorization of the STJ (Articles 105, I, i of the Brazilian Constitution, 35 of the BAA and 483-484 of the Brazilian Code of Civil Procedure).[3] This process is commonly referred to in Brazil as the “homologation” of foreign arbitral awards, and is consistent with the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention,” or the “Convention”), ratified by Brazil in 2002.[4]

If the proper requirements are met, the STJ will grant an order recognizing the foreign arbitral award (thus giving it res judicata effect within the Brazilian territory) and authorizing its enforcement at the Brazilian courts, like domestic arbitral awards or local court decisions.[5] As with domestic arbitral awards, the merits of foreign arbitral awards are not subject to judicial review, neither during the homologation process at the STJ nor at the enforcement stage at the lower courts.

Thus, while subject to annulment, domestic arbitral awards constitute res judicata and can be directly enforced in Brazil, as of their issuance. Foreign arbitral awards, on the other hand, cannot be annulled in Brazil, but will only be recognized and thus become enforceable in the country upon their homologation by the STJ.

The BAA establishes that the homologation process shall be carried out in accordance with international treaties in force in Brazil or, in their absence, strictly according to the provisions of the Act itself (BAA, Article 34, caput). Articles 37–39 of the BAA deal with this process and mirror Articles IV and V of the New York Convention.

Importantly, the BAA (which was enacted prior to the ratification of the Convention) stroke down the double exequatur requirement that long prevailed in the jurisprudence of Brazilian courts (BAA, Article 35).

Finally, it is worth mentioning that, although Brazil is a party to the Convention since 2002, STJ’s decisions have traditionally referred exclusively to the BAA and/or Resolution 9.[6]

I.            The Arbitral Award and the Brazilian Courts

A.        The Arbitral Award

The Decision herein analyzed derives from an arbitral award in favor of Nuovo Pignone SPA rendered by a sole arbitrator in a dispute against Maritima Petroleo e Engenharia Ltda. and Petromec Inc. The International Court of Arbitration of the International Chamber of Commerce (hereinafter referred to as the “ICC”) administered the proceedings in accordance with its Rules. The award was made in Rio de Janeiro, Brazil. The arbitration was carried out in Portuguese, with Brazilian law governing the merits.

B.        The District Court’s Decision

Nuovo Pignone sought to enforce the award in the courts of Rio de Janeiro. The competent District Court upheld jurisdiction and authorized the seizure of the defendant’s assets. Petromec Inc. then appealed to the Court of Appeals of the State of Rio de Janeiro (hereinafter referred to as the “Rio Court of Appeals”).

C.        The Rio de Janeiro Court of Appeals’ Decision

Surprisingly, the Rio Court of Appeals reversed the District Court’s decision.[7] By a majority, it held that the award emanated from a “foreign arbitration organ” — the ICC.

Misinterpreting the parties’ choice for ICC arbitration and apparently conflating the notions of an administering institution and an arbitral tribunal, the Rio Court of Appeals concluded that, since the parties chose “the International Arbitration Tribunal of the International Chamber of Commerce, which is headquartered in Paris, to resolve their controversy, they sought a foreign decision.” It went on to state that, “despite being Brazilian, the sole arbitrator represented and was administratively bound to a foreign arbitral institution, whose foreign rules were followed.”

Accordingly, the Rio Court of Appeals concluded that the award was a foreign one, dismissing the case and requiring the STJ’s homologation order for its enforcement to be sought in Brazil.

D.        The STJ’s Decision

Claiming violation of the BAA and of the Brazilian Code of Civil Procedure, Nuovo Pignone appealed to the STJ, the country’s court of last resort for federal matters. The issue at stake before the STJ was whether an arbitral award rendered in Rio de Janeiro by a sole arbitrator of Brazilian nationality, in Portuguese, with Brazilian law governing the merits, but administered by an institution headquartered abroad, in Paris (the ICC), is a domestic or a foreign arbitral award.

The Court unanimously reversed the Rio Court of Appeals’ decision and affirmed the original District Court’s ruling. Pointing out that under the system established by the New York Convention (Article 1), each contracting State is entitled to set forth its own rules governing the nationality of arbitral awards, the STJ concluded that the place where the award is made is the sole criterion enshrined by the BAA, irrespective of whether the award deals with transnational commerce, involves multiple legal systems, or is administered by a foreign institution in accordance with its rules.

The Court further noted that, while the parties’ choice for a Brazilian arbitrator, Brazilian law to govern the merits, and Portuguese as the language of the proceeding, does not affect the nationality of arbitral awards under the BAA, it serves as an indication that they intended the award to be deemed domestic.

In light of those findings, the Court reversed the Rio Court of Appeals’ decision and confirmed that arbitral awards rendered in Brazil are deemed domestic, and thus directly enforceable at the competent local courts, regardless of other factors surrounding the arbitration.

II.        Commentary

A.        Positive Aspects

Given that Article 34 of the BAA clearly endorses the notion that awards made outside the Brazilian territory shall be deemed foreign, the STJ’s final conclusion is hardly innovative.

However, its relevance cannot be understated to the extent that a different outcome would have provoked deeply negative consequences to Brazil’s reputation as an arbitration-friendly jurisdiction: Had the STJ concluded that any elements other than the place where the award is made can affect the nationality of the award, a wave of annulment requests would likely have been filed at the Brazilian courts in order to prevent awards made in Brazil but administered by foreign institutions (or containing foreign elements) from being enforced in the country without prior homologation by the STJ.

In this sense, although the Paris-based ICC’s administration of the dispute was the only “foreign element” allegedly affecting the nationality of the award (as per the defense raised by the party resisting enforcement and upheld by the Rio Court of Appeals), in dicta the STJ expanded the coverage of its decision to clarify that no factor other than the place where the award is made (be it the law governing the merits, the language in which the proceedings are conducted, or the nationality of the arbitrators) matters.

It is also noteworthy that the STJ expressly referred to the Convention in its Decision, thus breaking up with its tradition of applying it indirectly through the BAA and Resolution 9. Nonetheless, as explained below, this progress might have come late.

B.        Negative Aspects and Potential Controversy

(i)         The Controversial Reasoning

Undeniably, the STJ reached the right conclusion. However, it seems to have done so by (perhaps, inadvertently) advancing an interpretation of a New York Convention-based concept — contained in the BAA[8] and in the Decree that enacted the Convention in Brazil[9] — that contradicts international practice and possibly leaves room for undesired controversy in similar cases.

The Court pointed out that in most jurisdictions the nationality of arbitral awards is determined by reference to the country freely chosen by the parties or the arbitrators as the legal seat of the arbitration (which, it emphasized, bears no relation to and is not affected by the place where the award is made or where the proceedings occur).[10] On the other hand, the STJ further advanced in its reasoning that, contrary to the comparative experience, the BAA upholds a territorial/geographic (ius solis) approach whereby the sole element determining the nationality of an arbitral award in Brazil is the place where the award is made.[11]

The inevitable question is: Does the STJ perceive the place where an award is made as being something other than the seat of the arbitration? Regrettably, the Court seems to consider that, under Brazilian law, the place where an award is made and the legal seat of the arbitration are at least not necessarily one and the same. The Decision thus seems to suggest that the former — which, as a result of Article 34, sole paragraph, of the BAA, determines the nationality of the award and thus the appropriate avenues to seek and resist the enforcement of arbitral awards in Brazil — corresponds to the place where the award is physically signed, as a result of what it claims to be the geographic, ius solis criteria underlying the Brazilian approach.

(ii)        The Potential Uncertainty Deriving from the STJ’s Reasoning

In the case at stake, the place where the sole arbitrator physically made the award coincided with the contractually-designed seat of the arbitration — the city of Rio de Janeiro. However, this will not always be the case.

While made in dicta, the STJ’s reasoning in reaching a correct decision arguably leaves room for controversy in a foreseeable scenario in which one or all arbitrators physically sign the award in a location other than the seat of the arbitration. Perhaps because this issue did not arise in this case, the STJ took its position for granted and did not explore this possibility or its implications.

If, in the future, the STJ follows the approach it seems to advance, inappropriate outcomes could easily be achieved: An award deriving from an arbitration seated in São Paulo would have to go through the homologation process if a Danish sole arbitrator signs the award in his hometown, while an award stemming from an arbitration seated in Copenhagen would need no homologation in order to be enforced in Brazil so long as the arbitrators sign it in Rio, by occasion of their fortuitous meeting for a conference in that city.

Despite the STJ’s largely satisfactory track record on arbitration matters and the positive features of the Nuovo Pignone Decision outlined above, it is impossible to resist respectfully criticizing the Court’s apparent indication that the decisive factor in determining the nationality of an arbitral award is the location in which it is physically made.

(iii)       Appropriate Reasoning

While the conclusion would have been the same in this case because the arbitrator signed the award in the legal seat of the arbitration, we contend that the above-mentioned reasoning is in dissonance with a broader teleological view advanced by the drafters of the New York Convention (which contains the similarly drafted expressions “arbitral awards made in the territory of a State,” “the country where the award was made,” and “the country in which, or under the law of which, that award was made”) and overwhelmingly upheld by foreign courts.

The better view is that the place, country, territory, or venue (to cite frequently used expressions) where an award is made is the legal seat of the arbitration, as agreed upon by the parties (in their arbitration agreement or any further document) or, in the absence of any such agreement, by the arbitrators (or administering institution).

The legal seat of the arbitration determines the nationality of the award, irrespective of where the hearings take place or where the arbitrators physically sign the award. It essentially anchors the proceedings in one legal system, whose law and courts are attributed important roles.

Although the Convention does not expressly clarify what it means by the “place where an award was made,” eminent international scholars and practitioners, and a vast majority of local courts (including those in the United States, England, France, Germany, Italy, and Japan) share the view herein expressed.[12] Several local statutes governing arbitration (i.e., the 1996 English Arbitration Act and the Swiss Law on Private International Law), the 1976 and 2010 versions of the UNCITRAL Model Law (Articles 20(1) and 31(3), and 18, respectively),[13] and the rules of most leading international arbitration institutions (see, for example, Article 31(3) of the 2012 ICC Rules) do so as well.[14]

Ironically described as “territorial,” this approach is based upon legal fictions (“seat,” “venue,” “country,” or “place” of arbitration)[15], not geographic definitions. ICCA’s Guide to the Interpretation of the New York Convention is particularly clear: “The vast majority of Contracting States considers that an award is made at the seat of the arbitration. The seat of the arbitration is chosen by the parties or alternatively, by the arbitral institution or the arbitral tribunal. It is a legal, not a physical, geographical concept. Hearings, deliberations and signature of the award and other parts of the arbitral process may take place elsewhere.”[16]

Gary Born is equally supportive of this interpretation: “The correct view is that an award is “made” in the place that the parties have contractually-selected (or, absent agreement, that an arbitral institution or competent national court has selected pursuant to the parties’ delegation) as the seat of the arbitration.…Under this approach, the place where an award is “made” is not affected by the physical location where the award is signed or by the holding of hearings in particular places for convenience. Rather, the only relevant consideration is where the parties have agreed upon as the place or seat of the arbitration.”[17]

(iv)       Possible Explanation for the STJ’s Criticized Reasoning

A possible explanation for the STJ’s reasoning might lie in the translation into Portuguese of the instruments upon which the legal provisions at stake (i.e., the Decree No. 4,311 and Article 34, sole paragraph, of the BAA) are based: the New York Convention and the 1988 Spanish Arbitration Act (the “1988 SAA”).

The Decree No. 4,311 of 2002 (the “Decree”), which internalized the New York Convention in Brazil, consists of a translation of the Convention into Portuguese. Article 34, sole paragraph, of the BAA openly drew from Article I, 1 of the New York Convention[18] and Article 56(2) of the 1988 SAA.[19]

Having the English version of the Convention as a reference, the expression whose translation is controverted is “to make [an award]” (as in Article I, 1, first paragraph’s “arbitral awards made at…”). Both the BAA and the Decree used the Portuguese word “proferido” (from the verb “proferir”) as a translation of that expression. The French and Spanish official versions of the Convention adopted “rendues” and “dictadas,” respectively. Finally, the 1988 SAA used “proferidas.”

To an author, the specific choice in Brazil for the word “proferido” (clearly stemming from the 1988 SAA) in both the BAA and the Decree is semantically more restrictive than other words into which it could have been translated. This author argues that the word adopted by the Decree and the BAA is thus hardly compatible with the broader notion internationally associated with the seat of the arbitration.[20]

However, as another author adds, a strictly grammatical interpretation of the term found in the relevant Brazilian legal instruments would lead to inconsistencies and unacceptable outcomes. Thus, given the controlling role of the law of the seat of the arbitration, he advances that a logical interpretation of the BAA and of the Brazilian translation of the Convention suggests that “the place where the award is made” is a purely legal (non-physical) concept, to which the law governing the proceedings is closely related.[21]

(v)        Escape Valves from Arguably Misleading Translations

It might be argued that the Brazilian courts are bound to apply the legal instruments in force in the Brazilian territory as such, which would include the application of the arguably misleading translations contained in the BAA and the Decree. However, it must also be borne in mind that the Court enjoys some discretion in interpreting these far-from-clear provisions.

Accordingly, in issuing its decision the STJ was entitled and indeed should have resorted to other equally available and arguably more appropriate hermeneutic techniques (for instance, by pursuing teleological or historical interpretations, or resorting to comparative experience, to cite a few). Had it done so, the inevitable conclusion would have been that the “place” or “venue” where arbitral awards are made can only correspond to the contractually-designed legal seat of the arbitration.

There is no hierarchy amongst the five official versions of the Convention and it may be argued that, according to the reader, nuances may set the concept or scope of certain provisions apart. It is noteworthy that even within the same language — Spanish– the official Spanish version of the Convention and the 1988 SAA used different words to designate the same concept. Yet, all of this only operates to reinforce the case for an autonomous, a-national interpretation and application of the text of the Convention.

Thus, the Court’s interpretation might be justifiable as a result of a strictly grammatical analysis of the relevant legal provisions, but it does not find support in the uniform interpretation of the New York Convention and arguably paves the way for inconsistencies and uncertainty, in case the award is not signed in the legal seat of the arbitration.

A longer tradition of directly applying the Convention could have avoided the herein criticized interpretation and allowed the STJ to draw lessons from valuable international experience, while preserving its independent decision-making power.

Not coincidently, Article 34 of the BAA established the prevalence of treaties over domestic legislation and the drafters of the Convention aimed at its uniform application.[22] In light of that, it is worth invoking Born’s irresistible conclusion that “the applicability of Article V(1)(e) and Article VI cannot sensibly be made to depend on individual national law definitions of where an award is made” at the risk of undermining the Convention’s objective “to centralize actions to annul awards in a single forum” by allowing “individual Contracting States to entertain actions to annul an award in almost any matter they desired.”[23]

III.       Conclusion

The STJ held that whether an arbitral award shall be considered domestic or foreign depends exclusively on the place where it was made, irrespective of the presence of foreign elements.

This seems to provide important legal certainty to the extent that it clarifies that the administration of arbitral proceedings by foreign institutions in accordance with their rules will not affect the nationality of the award. It thus consolidates the perception that Brazilian courts are supportive of arbitration and prevents a backlash that could have been unleashed by a different outcome.

However, the right conclusion appears to have been partly reached through a reasoning that is unsupported by the predominant international experience. To the extent the arbitrators sign the award in the legal seat of the arbitration, the matter seems to be settled. The outcome would be less than certain and potentially highly unsatisfactory, however, when there is a discrepancy between the contractually-designed seat and the place where the signatures take place.

As this could lead to controversies in future cases, it would be of utmost importance for the Court to increasingly refer to the Convention in its decisions. While doing so, it should resort to an interpretation of its provisions that reflects the uniformity envisaged — and to a great extent, achieved, at this point — by its drafters.

Clarifying that the place where an award is made is the contractually-elected seat of the arbitration would be a positive start. For the time being, the safest approach is for the parties to expressly indicate the seat of the arbitration in their agreement to arbitrate and for the arbitrators to expressly refer to such venue (i.e., the legal seat) as the place where the award was made.

Daniel Aun

LL.M. candidate in International Business Regulation, Litigation & Arbitration at New York University School of Law and Vice President of the New York University School of Law International Arbitration Association. Formerly, practiced international arbitration with L.O. Baptista Advogados in São Paulo, acted as assistant professor of International Law at the Pontifical Catholic University of São Paulo, and interned at the Permanent Court of Arbitration at The Hague. The author can be contacted at daniel.aun@nyu.edu.

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[1] Law 9.307 of 1996.

[2] Superior Tribunal de Justiça, Recurso Especial No 1.231.554/RJ (2011/0006426-8), Reporting Justice Nancy Andrighi.

[3] The Code of Civil Procedure (“CCP”) broadly establishes that decisions rendered by foreign tribunals (which are deemed to include both judicial decisions and arbitral awards) will only be recognized (and later enforced, that being the case) in Brazil if homologated by the STJ. The BAA more specifically states that, in order to be recognized and enforced in the country, foreign arbitral awards will be subject exclusively to homologation by the Supreme Court (the internal competence to hear these requests was later transferred to the STJ, under Article 105, I, i of the Brazilian Constitution, by operation of the Constitutional Amendment 45/2004). (Carlos Alberto Carmona, Arbitragem e Processo, Atlas, 2009, pp. 445 and 449). It is noteworthy that the CCP is currently undergoing a revision at the Brazilian Congress as a result of which the homologation process might be amended.

[4] The New York Convention was internalized in Brazil through Decree No 4,311 of July 23, 2002, which contains its translation into Portuguese. While it does not represent one of the official versions of the Convention, this version and the similarly worded related provisions of the BAA (which incorporated its main features into the Brazilian legal system prior to Brazil’s ratification of the Convention) are the legal texts applied by the Brazilian courts to the cases within their scope and, as will be seen below, could arguably lead to future controversies.

[5] However, it its worth clarifying that, within the Brazilian judicial organization, requests for enforcement of domestic arbitral awards are heard by the competent District Courts, while requests for enforcement of foreign arbitral awards that have been homologated by the STJ’s are heard by the competent Federal Courts. The main difference between pursuing enforcement of an arbitral award in either of these courts is probably related to the variation in the length of each proceeding.

[6] Resolution 9 is part of STJ’s internal statute and generally incorporates relevant provisions of the BAA and the Convention. It also provides for matters beyond these instruments, such as the granting of provisional relief at the recognition and enforcement stage.

[7] Tribunal de Justiça do Estado do Rio de Janeiro, Décima Segunda Câmara Cível, Agravo de Instrumento No 0062827-33.2009.8.19.0000, dated February 23, 2010.

[8] Brazilian Arbitration Act, Article 34, sole paragraph: “Considera-se sentença arbitral estrangeira a que tenha sido proferida fora do território nacional.”

[9] Decree No. 4,311/2002, Article I, 1, first part: “A presente Convenção aplicar-se-á ao reconhecimento e à execução de sentenças arbitrais estrangeiras proferidas no território de um Estado que não o Estado em que se tencione o reconhecimento e a execução de tais sentenças, oriundas de divergências entre pessoas, sejam elas físicas ou jurídicas.”

[10] Decision, p. 5: “No direito comparado a “formula” mais consagrada for a que identifica a nacionalidade da sentença arbitral segundo o país eleito como sede da arbitragem.”

[11] Decision, pp. 6-7: “No ordenamento jurídico brasileiro, por sua vez, a adoção como elemento de conexão do ‘lugar onde foi proferida a sentença arbitral’ não suscita maiores dúvidas (…). (…) optou-se por uma definição mais simples e objetiva, ‘baseando-se apenas e tão somente no local onde o laudo sera proferido’ (…) Por conseguinte, apesar das criticas sofridas, (…) não ha dúvidas que o ordenamento jurídico pátrio adotou o sistema territorialista (…). O legislador pátrio, portanto, ao eleger o critério geográfico, do local onde for proferida a sentença (ius solis), desconsiderou qualquer outro element.”

[12] Gary B. Born, International Commercial Arbitration, 2009, pp. 2368-2369.

[13] Born, op. cit., p. 2369

[14].“…Beyond these provisions of national law and institutional rules, the better reading of the New York Convention is that it contains an international definition of where an award is “made,” which would prohibit Contracting States from adopting alternative definitions (and thereby affecting the scope of the arbitral awards subject to the Convention). That is, the Convention should be interpreted as contemplating uniform international standards defining where an award is “made” (to wit, in the contractual arbitral seat), which Contracting States are required to implement. The foregoing conclusion is consistent with the text of Article V(1)(e), which adopts an internationally-applicable formula (referring to the place where an award is “made”).” (Born, op. cit., pp. 2373-2374)

[15] “Thus, somewhat ironically, given what is described as the “territorial” applicability of national arbitration legislation only to arbitrations seated on local territory, the arbitral seat is itself defined entirely by reference to the parties’ agreement, and not as a purely geographic or territorial location (i.e., the place of the arbitral hearings). …Thus, the parties and the tribunal can proceed through an entire arbitration without ever setting foot in or otherwise engaging with the arbitral seat in any way – while being subject to the “territorial” arbitration legislation of the arbitral seat.” (Born, op. cit., p. 1249)

[16] ICCA’s Guide to the Interpretation of the 1958 New York Convention, p. 21.

[17] Born, op. cit., p. 2372.

[18] New York Convention, Article I, 1, first paragraph: “This Convention shall apply to the recognition and enforcement of arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought, and arising out of differences between persons, whether physical or legal”.

[19] Law 36/1988 (Spanish Arbitration Act), Article 56 (2): “Se entiende por laudo arbitral extranjero el que no haya sido pronunciado en España”.

[20] It is claimed that the ordinary meaning of the verb “proferir” is commonly associated the sole act whereby the adjudicator orally declares or communicates in writing its decision, while “fazer” or “realizar” encompass a broader sequence of acts carried out by an adjudicator (i.e. hearings, meetings) culminating in the rendering of a decision (José Augusto Fontoura Costa, Sobre Corvos e Ornitorrincos: Arbitragem Estrangeira e Internacional no Direito Brasileiro, RBA, n. 28, 2011, pp. 68-69).

[21] See Carlos A. da S. Lobo, A Definição de Sentença Arbitral Estrangeira, RAM, v. 9, 2009, pp. 62-69. The STJ cited another section of this article, but seems to interpret its central message differently.

[22] “The terms must be understood taking into account the context and the purpose of the Convention. Therefore, courts should not interpret the terms of the New York Convention by reference to domestic law. The terms of the Convention should have the same meaning wherever in the world they are applied. This helps to ensure the uniform application of the Convention in all the Contracting States.” (ICCA’s Guide, pp. 13-14). Brazilian authors also recognize the downside of the indirect approach traditionally employed by local courts: “…the survey of domestic precedents also shows that, in many ways, Brazil has not profited from adopting a mainly insular standpoint when enforcing foreign arbitral awards. Specifically, the interpretation given so far to standards and rules that are highly linked to the international practices…lack connection to the global knowledge accumulated around the New York Convention. …The problems faced abroad are analogous to those presented in the domestic setting. In that sense, the Brazilian practice would benefit significantly from broadening its legal interpretation to encompass the entire body of principles, policies, case law, debates, research and commentaries that encircle the New York Convention. …they would bridge the gap between the domestic reasoning and the argumentative repertory, methods of legal inquiry and set of legal materials employed in that Convention’s interpretation worldwide. In so doing, Brazilian case law would share the learning and achievements accumulated in fifty years of the New York Convention’s history, as well as join the international community in the ongoing development of this treaty.” André A. C. Abbud, Fifty Years in Five? The Brazilian Approach to the New York Convention, 2008, pp. 35-36.

[23] Born, op. cit., p. 2374.

Introducción

La Ley Brasileña de Arbitraje (la “Ley”)[1] no distingue entre arbitrajes domésticos e internacionales. Sin embargo, sí prevé mecanismos distintos para que las partes persigan o resistan la ejecución de laudos arbitrales, dependiendo de si estos son considerados domésticos o extranjeros.

El 24 de Mayo del 2011, la Corte Superior de Justicia de Brasil (Superior Tribunal de Justiça) (la “Corte”), el más alto tribunal infra-constitucional del país, dictó un importante fallo relacionado con la distinción entre laudos arbitrales domésticos y extranjeros (el “Fallo”).[2]

En virtud de la Ley, los laudos arbitrales domésticos equivalen a sentencias judiciales dictadas por los tribunales brasileños (artículo 31 de la Ley). Si bien están potencialmente sujetos a un proceso de anulación en los tribunales locales, los laudos arbitrales domésticos constituyen res judicata. Adicionalmente, los laudos arbitrales domésticos son inmediatamente ejecutables ante los tribunales brasileños. En otras palabras, los tribunales locales no necesitan confirmar los laudos arbitrales domésticos para que estos sean ejecutados y tampoco pueden revisar las cuestiones de fondo de un laudo.

A la vez, los laudos arbitrales extranjeros, es decir, “laudos arbitrales dictados fuera del territorio brasileño” (artículo 34, párrafo único, de la Ley), no podrán ejecutarse en Brasil sino hasta después de que sean homologados por la Corte, según el artículo 105, I, i de la constitución brasileña, el artículo 35 de la Ley y los artículos 483-484 del Código de Procedimiento Civil de Brasil.[3] Dicho procedimiento, denominado de “homologación” de laudos arbitrales extranjeros, es consistente con la Convención de Nueva York del 1958 sobre el Reconocimiento y la Ejecución de las Sentencias Arbitrales Extranjeras (“Convención de Nueva York”), ratificada por Brasil en el año 2002.[4]

Si se cumplen los requisitos correspondientes, la Corte dicta una sentencia reconociendo el laudo arbitral extranjero, otorgándole por lo tanto carácter de res judicata en el territorio brasileño y autorizando su ejecución ante los tribunales brasileños del mismo modo que los laudos arbitrales domésticos y los fallos judiciales locales.[5] Como sucede respecto a los laudos arbitrales domésticos, las consideraciones sobre cuestiones de fondo de los laudos arbitrales extranjeros tampoco podrán ser sometidas a revisión judicial, sea en la etapa de homologación por la Corte o en el momento de su ejecución en los tribunales inferiores.

En conclusión, aunque los laudos arbitrales domésticos estén sujetos a anulación, constituyen cosa juzgada y podrán ejecutarse en Brasil inmediatamente después de su dictado, mientras que los laudos arbitrales extranjeros no podrán anularse en Brasil, pero dependerán de la homologación de la Corte para constituir res judicata y poder ser ejecutados en Brasil.

La Ley establece que la homologación de laudos arbitrales extranjeros será conducida de acuerdo a los tratados internacionales vigentes en Brasil o, en su ausencia, estrictamente en conformidad con la propia Ley (artículo 34, caput). Los artículos 37-39 de la Ley gobiernan dicho proceso y reproducen el contenido de los artículos IV y V de la Convención de Nueva York.

Es importante notar que la Ley, promulgada anteriormente a la ratificación de la Convención de Nueva York por Brasil, eliminó formalmente el requisito de doble exequátur prevalente por mucho tiempo en la jurisprudencia anterior de los tribunales brasileños (artículo 35 de la Ley).

Finalmente, vale mencionar que a pesar de que Brasil es signatario de la Convención de Nueva York desde el año 2002, los fallos del STJ relacionados a laudos arbitrales extranjeros tradicionalmente hacen referencia exclusivamente a la Ley y/o a la Resolución 9.[6]

I.            El Laudo Arbitral y los Tribunales Brasileños

A.        El Laudo Arbitral

El Fallo aquí analizado se deriva de un laudo arbitral en favor de Nuovo Pignone SPA, dictado por un árbitro único en el contexto de una disputa comercial contra Maritima Petroleo e Engenharia Ltda. y Petromec Inc. El arbitraje fue administrado por la Corte Internacional de Arbitraje de la Cámara de Comercio Internacional (“CCI”) de acuerdo a su reglamento y conducido en portugués. El laudo fue dictado en Rio de Janeiro, Brasil, aplicándose al fondo de la disputa las leyes brasileñas.

B.        La Sentencia de Primera Instancia

Nuovo Pignone inició la ejecución del laudo arbitral ante los tribunales competentes de primera instancia de Rio de Janeiro, los cuales reconocieron su jurisdicción y autorizaron el embargo de los bienes de las demandadas. Petromec Inc. presentó luego una apelación a la Corte de Apelaciones del Estado de Rio de Janeiro (la “Corte de Apelaciones de Rio”).

C.        La Decisión de la Corte de Apelaciones de Rio de Janeiro

Sorprendentemente, la Corte de Apelaciones de Rio revirtió la sentencia de primera instancia.[7] Por mayoría, decidió que el laudo arbitral fue dictado por un “organismo de arbitraje extranjero”, la CCI.

Malinterpretando la elección de las partes de un arbitraje administrado por la CCI y aparentemente mezclando los conceptos de “institución administradora” y “tribunal arbitral”, la Corte de Apelaciones de Rio llegó a la conclusión de que, al elegir “el Tribunal Arbitral Internacional de la Cámara de Comercio Internacional, el cual tiene su sede en París, para resolver su disputa, buscaron una decisión extranjera”. Asimismo, “a pesar de su nacionalidad brasileña, el árbitro único, representaba y estaba administrativamente vinculado a una institución arbitral extranjera, cuyas reglas siguió”.

En vista de ello, la Corte de Apelaciones de Rio determinó que dicho laudo arbitral debería considerarse extranjero, rechazando la demanda ejecutoria en la ausencia de la homologación del STJ.

D.        El Fallo Dictado por el STJ

Alegando el incumplimiento de la Ley y del Código de Procedimiento Civil de Brasil, Nuovo Pignone presentó una apelación ante el STJ, la más alta corte infra-constitucional del país. El tema presentado ante la Corte fue si un laudo arbitral dictado en Rio de Janeiro, por un arbitro único de nacionalidad brasileña, tras un arbitraje conducido en portugués y regido por las leyes brasileñas, pero administrado por una institución con sede fuera de Brasil (i.e. la CCI, en París), debe considerarse domestico o extranjero.

El STJ revirtió, por unanimidad, la decisión de la Corte de Apelaciones de Rio y confirmó la sentencia judicial de primera instancia. Notando que, en el marco del sistema establecido por el articulo 1 de la Convención de Nueva York cada Estado signatario tiene la discreción para definir sus propias reglas relativas a la nacionalidad de los laudos arbitrales, la Corte concluyó que el lugar en que se dicta el laudo arbitral se presenta como el único criterio adoptado por la Ley, independientemente del hecho de que el laudo pueda tratar de temas de comercio internacional, involucre a diversos sistemas jurídicos o sea administrado por una institución extranjera de acuerdo con sus reglas.

La Corte además subrayó que, si bien el hecho que las partes eligieron un árbitro brasileño para decidir la disputa, la aplicación de las leyes brasileñas al fondo y el portugués como el idioma aplicable al procedimiento no afecta la nacionalidad del laudo, esos factores sirven como indicación de su deseo de obtener un laudo doméstico.

En consecuencia de lo anterior, el STJ revirtió la decisión de la Corte de Apelaciones de Rio y confirmó que los laudos arbitrales dictados en Brasil se consideran domésticos y, por tanto, directamente ejecutables ante los tribunales locales competentes, independientemente de otros elementos relacionados con el arbitraje.

II.        Análisis Critico

A.        Aspectos Positivos

Teniendo en cuenta que el artículo 34, párrafo único, de la Ley claramente establece que los laudos arbitrales dictados fuera de Brasil deberán considerarse extranjeros, la conclusión final del STJ no puede ser considerada innovadora.

Sin embargo, su relevancia no puede ser menospreciada, ya que una decisión en sentido contrario hubiera afectado negativamente la reputación de Brasil como jurisdicción favorable al arbitraje: si la Corte hubiera concluido que otros elementos además del lugar de dictado del laudo podrían afectar su nacionalidad, es probable que una gran cantidad de pedidos de anulación fueran presentados a los tribunales brasileños, con el propósito de impedir que laudos arbitrales dictados en Brasil pero administrados por instituciones con sede en el exterior (o involucrando a otros “elementos extranjeros”) fueran ejecutados sin su previa homologación por la Corte.

La administración del arbitraje por la CCI desde su sede en París fue el único “elemento extranjero” que supuestamente afectaba la nacionalidad del laudo arbitral invocado en la defensa presentada por la demandada y posteriormente reconocido por la Corte de Apelaciones de Rio. Sin embargo, en obiter dicta el STJ expandió el alcance de su Fallo y aclaró que ningún otro factor que el lugar en que se haya dictado el laudo arbitral afecta la definición de su nacionalidad  (sea la ley aplicable al fondo de la controversia, el idioma del procedimiento o la nacionalidad de los árbitros).

También merece destacar la referencia expresa a la Convención de Nueva York hecha por el STJ en su Fallo, en contraste con su tradición anterior de aplicarla de forma indirecta, a través de la Ley y de la Resolución 9. Sin embargo, quizás dicho avance haya ocurrido demasiado tarde, como veremos enseguida.

B.        Aspectos Negativos y Posible Controversia

(i)         El Razonamiento Controversial

Sin lugar a dudas, la Corte tomó la decisión correcta. Sin embargo, aparentemente el STJ lo hizo (quizás, sin intención) por medio de una interpretación de conceptos basados en la Convención de Nueva York – contenidos en la Ley[8] y en el Decreto que la promulgó en Brasil[9] – que contradicen la practica internacional y posiblemente crearán indeseadas controversias en casos similares.

La Corte indicó que en la mayoría de las jurisdicciones extranjeras la nacionalidad de laudos arbitrales es determinada en referencia al país elegido libremente por las partes o por los árbitros como la sede legal del arbitraje (la cual, opinó la Corte, no tiene relación con y tampoco es afectada por el lugar en donde el laudo es dictado o el sitio en donde ocurren los procedimientos).[10] En cambio, el STJ sostuvo en su fundamentación que, contrariamente a la experiencia del derecho comparado, la Ley establece un sistema territorial/geográfico (ius solis), en el que el único criterio relevante es el lugar donde el laudo arbitral sea dictado.[11]

La cuestión que inevitablemente se presenta, por lo tanto, es la siguiente: ¿cree el STJ que el lugar en el cual el laudo es dictado es algo distinto que la sede del arbitraje?

Desafortunadamente, la Corte aparentemente considera que, según la ley brasileña, el lugar en donde el laudo arbitral es dictado y la sede del arbitraje no serían necesariamente un único e idéntico sitio. El Fallo parece sugerir que el primer elemento – el lugar en que sea dictado el laudo, que, según el artículo 34, párrafo único, de la Ley determina la nacionalidad del laudo y, consecuentemente, los mecanismos apropiados para que las partes persigan o resistan su ejecución – corresponde al lugar en el que el laudo es físicamente dictado (i.e. firmado) por los árbitros, como resultado de lo que el STJ llama criterio territorial/geográfico (ius solis) que subyace el enfoque brasileño.

(ii)        La Posible Incertidumbre Resultante del Razonamiento Adoptado por el STJ

En el presente caso, el lugar en donde el árbitro único dictó físicamente el laudo arbitral coincidió con la sede del arbitraje elegida por las partes, es decir, la ciudad de Rio de Janeiro. Sin embargo, habrá casos en que dicha coincidencia no ocurrirá.

Aunque en dicta, el razonamiento utilizado por el STJ para alcanzar una conclusión correcta puede permitir que se presenten controversias cuando un árbitro o todo el tribunal firmen el laudo arbitral en un sitio distinto de la sede del arbitraje escogida por las partes. Probablemente porque esa circunstancia no se hizo presente en el caso, el STJ no llegó a analizarla ni a discutir las implicancias de su Fallo.

Si en el futuro el STJ aplica el argumento en que parece apoyarse para justificar su Fallo, sería sencillo obtener resultados inapropiados: la ejecución de un laudo arbitral resultante de un arbitraje con sede en São Paulo dependería de la homologación del STJ si un arbitro único danés lo hubiera dictado en su país, pero un laudo arbitral resultante de un arbitraje con sede en Copenhague no necesitaría la homologación del STJ para ejecutarse en Brasil si hubiera sido dictado en Rio en consecuencia del encuentro casual, para una conferencia en esa ciudad, de los árbitros que componen el tribunal arbitral competente para adjudicar la disputa.

A pesar de su jurisprudencia ampliamente satisfactoria en temas de arbitraje y de los aspectos positivos del Fallo mencionados con anterioridad, es imposible evitar una critica respetuosa a la indicación aparente de la Corte en cuanto a que el lugar en que los laudos arbitrales sean físicamente dictados es el criterio decisivo para la definición de su nacionalidad, ante el sistema establecido por la Convención de Nueva York

(iii)       El Razonamiento Apropiado

Aunque en el presente caso se alcanzaría un resultado idéntico ya que el árbitro firmó el laudo arbitral en la sede del arbitraje, proponemos que el razonamiento adoptado por el STJ en el Fallo entra en conflicto con una interpretación teleológica más amplia sugerida por los redactores de la Convención de Nueva York (que contiene expresiones similares como “las sentencias arbitrales dictadas en el territorio de un Estado”, “del país en que se haya dictado la sentencia”, “del país en que, o conforme a cuya Ley, ha sido dictada esa sentencia”) y confirmada por una gran mayoría de cortes extranjeras.

La mejor doctrina sostiene que el lugar, estado, país o territorio (para mencionar algunas expresiones frecuentemente utilizadas para designar el mismo concepto) en el que un laudo arbitral es dictado es la sede legal del arbitraje, escogida por las partes (en el convenio arbitral o documento posterior) o, en la ausencia de previsión en ese sentido, determinada por los árbitros (o la institución administradora).

La sede legal del arbitraje determina la nacionalidad del laudo arbitral, sin que importe el sitio en donde las audiencias ocurran o que el laudo sea físicamente dictado por los árbitros. La sede del arbitraje esencialmente radica el procedimiento en un sistema legal, cuya ley arbitral y tribunales judiciales adquieren roles importantes.

Aunque la Convención no defina expresamente el significado del concepto de “país en que se haya dictado la sentencia en que el laudo arbitral sea dictado”, eminentes académicos y abogados en ejercicio de la profesión y una inmensa mayoría de cortes judiciales (incluso las de Estados Unidos, Inglaterra, Francia, Alemania, Italia y Japón) comparten la interpretación propuesta en el presente estudio.[12] Importantes leyes de arbitraje (como la Ley de Arbitraje Inglesa del 1996 y la Ley Suiza de Derecho Internacional Privado), la Ley Modelo del CNUDMI (en sus versiones de 1976, artículo 20(1) y 31(3), y de 2010, artículo 18)[13] y los reglamentos de las principales instituciones arbitrales (incluyendo, por ejemplo, el artículo 31(3) del reglamento de la CCI versión 2012) también siguen dicha interpretación.[14]

Irónicamente descrita como “territorial”, esa interpretación no esta basada en conceptos geográficos, sino en ficciones legales (i.e. sede, lugar, local, territorio, Estado o país del arbitraje).[15] La interpretación de la Convención de Nueva York por el International Council for Commercial Arbitration (popularmente conocido como ICCA, por su acrónimo en inglés) es particularmente clara: “The vast majority of Contracting States considers that an award is made at the seat of the arbitration. The seat of the arbitration is chosen by the parties or alternatively, by the arbitral institution or the arbitral tribunal. It is a legal, not a physical, geographical concept. Hearings, deliberations and signature of the award and other parts of the arbitral process may take place elsewhere.”^[16]

Asimismo, Gary Born se expresa en igual sentido: “The correct view is that an award is “made” in the place that the parties have contractually-selected (or, absent agreement, that an arbitral institution or competent national court has selected pursuant to the parties’ delegation) as the seat of the arbitration. …Under this approach, the place where an award is “made” is not affected by the physical location where the award is signed or by the holding of hearings in particular places for convenience. Rather, the only relevant consideration is where the parties have agreed upon as the place or seat of the arbitration.”^[17]

(iv)       Una Explicación Posible para el Razonamiento del STJ

Una posible explicación para el razonamiento del Fallo del STJ podría estar en la traducción al portugués de los instrumentos sobre los cuales el Decreto 4.311 del 2002 (el “Decreto”) y el artículo 34, párrafo único, de la Ley se basaron: la Convención de Nueva York y la Ley Española de Arbitraje del 1988 (la “Ley Española”).

El Decreto internalizó la Convención de Nueva York en Brasil y contiene una traducción de su texto al portugués. A su vez, el artículo 34, párrafo único, de la Ley como es sabido se inspiró en el artículo I, 1 de la Convención de Nueva York[18] y en el artículo 56 (2) de la Ley Española. [19]

Teniendo la versión oficial en inglés de la Convención de Nueva York como referencia, la expresión cuya traducción se torna controvertida en el presente caso es “to make [an award]” (en el artículo I, 1, primera parte). En portugués, la Ley y el Decreto emplearon el termino “proferido” para expresar ese concepto. Las versiones oficiales en francés y en castellano optaron por “rendues” and “dictadas”, respectivamente. Finalmente, la Ley Española utilizó la expresión “proferidas”.

Para un autor, la elección en Brasil de la expresión “proferido”, la cual claramente proviene de la Ley Española del 1988, encontrada en la Ley y en el Decreto, sería semánticamente más restrictiva que otras palabras con las que pudiera haber sido traducida. Ese autor sostiene, por tanto, que difícilmente la palabra utilizada por el Decreto y la Ley podría compatibilizarse con el concepto amplio internacionalmente asociado a la sede del arbitraje.[20]

Sin embargo, otro autor aclara que una interpretación estrictamente gramatical del término utilizado en los textos legales brasileños aplicables conduciría a inconsistencias y a resultados inaceptables. Así, teniendo en mente el rol atribuido a la ley de la sede del arbitraje sobre los procedimientos, dicho autor sugiere que “el lugar en que sea dictado el laudo arbitral” (y expresiones similares utilizadas para designar la misma idea) representan conceptos puramente legales (no físicos), relacionados con la ley que rige el procedimiento (usualmente, la ley de la sede del arbitraje).[21]

(v)        Válvulas de Escape para Posibles Imprecisiones en la Traducción

Podría decirse que la cortes brasileñas están bajo la obligación de darle aplicación a los textos legales vigentes en Brasil tal como existen y están redactados, lo que incluiría las traducciones posiblemente imprecisas contenidas en la Ley y en el Decreto. Sin embargo, es necesario tener en cuenta que el STJ dispone de cierta discreción en la interpretación de dichos artículos cuyo significado no está inmune a cuestionamientos.

En consecuencia, en el razonamiento del Fallo la Corte debería haber recurrido a otras técnicas interpretativas disponibles y más apropiadas para la tarea que se le presentaba, como, por ejemplo, las interpretaciones teleológicas y históricas, o a la experiencia comparada, por citar algunas. Si lo hubiera hecho, la Corte hubiera llegado a la conclusión inevitable de que el lugar, sitio, Estado, país o territorio en que se hace el laudo arbitral sólo puede corresponder a la sede del arbitraje, según la determinación de las partes en el convenio arbitral u otro documento posterior.

No hay un orden de jerarquía entre los cinco idiomas oficiales en los que se hizo la Convención de Nueva York y se podría argumentar que, según el lector, hay diferencias sutiles respecto al concepto y alcance de ciertos términos. De hecho, incluso en el mismo idioma – el español – dos expresiones distintas fueron utilizadas para expresar conceptos idénticos en instrumentos legales distintos: la versión española de la Convención hace referencia a laudos arbitrales “dictados”, mientras que en la Ley Española los laudos arbitrales son “proferidos”. Eso no hace más que confirmar la necesidad de una interpretación y aplicación autónomas y a-nacionales del texto de la Convención.

En otras palabras, aunque la interpretación del STJ pudiera justificarse a partir de una lectura gramaticalmente estricta de las normas legales relevantes, no encuentra amparo en la interpretación uniforme que demanda la Convención de Nueva York. Es más, dicha interpretación abre el camino para inconsistencias e incertidumbre en los casos en que no se firme el laudo arbitral en la sede legal del arbitraje.

Una tradición más consistente en la aplicación directa de la Convención podría, por lo tanto, haber evitado el razonamiento imperfecto adoptado por la Corte y seguramente le hubiera permitido hacer buen uso de la relevante experiencia internacional, sin que tuviera que abdicar de su poder soberano de decisión.

No es casualidad que el artículo 34 de la Ley haya establecido la prevalencia de los tratados sobre las leyes internas en el reconocimiento y ejecución de laudos arbitrales extranjeros y que los redactores de la Convención de Nueva York vislumbraran la interpretación y aplicación uniforme de sus disposiciones.[22]

En conclusión, parece irresistible recurrir a la enseñanza de Gary Born, según la cual no se puede vincular la aplicación de los artículos V(1)(e) y VI de la Convención a definiciones locales del “lugar en que sea dictado el laudo arbitral”. Permitirlo implicaría sujetar el sistema creado por la Convención de Nueva York al riesgo inadmisible de que los pedidos de anulación de laudos arbitrales no se concentren en un único foro y pudieran ser adjudicadas de manera arbitraria por cualquier Estado contratante que desease hacerlo.[23]

III.       Conclusión

El STJ decidió en su Fallo que la nacionalidad de los laudos arbitrales – su carácter de domésticos o extranjeros – depende exclusivamente del lugar en donde hayan sido dictados, siendo irrelevante la presencia de elementos extranjeros para su caracterización.

La Corte parece proveer seguridad jurídica al aclarar de manera definitiva que la administración de arbitrajes por instituciones extranjeras (como la CCI) de acuerdo a sus reglas no afecta la nacionalidad de los laudos arbitrales. El Fallo, por lo tanto, refuerza la percepción positiva de la que gozan las cortes brasileñas en temas de arbitraje y, principalmente, evita la probable desestabilización del arbitraje en el país que resultaría de una decisión en sentido contrario.

Sin embargo, el STJ parece haber alcanzado la decisión correcta al menos en parte a través de un razonamiento que no encuentra apoyo en la experiencia internacional predominante. En la medida que los árbitros firmen el laudo arbitral en la sede del arbitraje, no habrán dudas sobre la nacionalidad del laudo. No obstante, bajo el razonamiento del Fallo, el resultado nos parecería insatisfactorio – o, a lo mejor, desnecesariamente incierto – cuando exista una discrepancia entre el lugar en que los árbitros dictaron físicamente el laudo (al firmarlo) y la sede del arbitraje escogida por las partes.

Teniendo en cuenta que lo anterior podría dar lugar a controversias graves, el STJ debería pasar a recurrir sistemáticamente y de forma directa al texto de la Convención de Nueva York en sus decisiones. Al hacerlo, debería igualmente utilizar una interpretación de sus artículos que refleje la uniformidad buscada – y, hasta cierto punto, satisfactoriamente alcanzada – por sus redactores.

Aclarar que el lugar en donde son dictados los laudos arbitrales será la sede legal del arbitraje sería un buen primer paso. De momento, sería recomendable que las partes contratantes hagan referencia expresa a la sede legal del arbitraje en su convenio arbitral (u otro documento posterior) y que los árbitros indiquen expresamente que dictaron el laudo en el lugar indicado como tal por las partes litigantes.

Daniel Aun

Candidato a LL.M. en International Business Regulation, Litigation & Arbitration, New York University School of Law, en donde es Vice-Presidente de la Asociación de Arbitraje Internacional. Anteriormente formó parte del equipo de arbitraje internacional de L.O. Baptista Advogados en São Paulo, fue profesor asistente de Derecho Internacional en la Pontificia Universidad Católica de São Paulo e hizo una pasantía en la Corte Permanente de Arbitraje de La Haya. El autor puede ser contactado en la dirección daniel.aun@nyu.edu.

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[1] Ley 9.307 del 1996.

[2] Superior Tribunal de Justicia, Recurso Especial No 1.231.554/RJ (2011/0006426-8), Ministra Nancy Andrighi.

[3] El Código de Procedimiento Civil de Brasil (el “CPC”) establece de modo amplio que las decisiones dictadas por tribunales extranjeros (las cuales se considera que incluyen decisiones judiciales y laudos arbitrales) serán reconocidas (y posteriormente ejecutadas, si sea el caso) si son homologadas por el STJ. Más específicamente, la Ley determina que el reconocimiento y la ejecución de laudos arbitrales extranjeros en Brasil está sujeta exclusivamente a la homologación de la Suprema Corte (aunque la Ley no haya sido posteriormente revisada, la promulgación de la Enmienda Constitucional 45/2004 modificó la competencia interna para adjudicar dichos pedidos homologatorios y se la atribuyó al STJ, en los términos del el artículo 105, I, i de la Constitución de Brasil) (Carlos Alberto Carmona, Arbitragem e Processo, Atlas, 2009, pp. 445 y 449). El CPC está actualmente en revisión en el Congreso Brasileño, por lo que el proceso de homologación podría sufrir cambios.

[4] La Convención de Nueva York fue internalizada en Brasil por medio del Decreto 4.311 del 23 de Julio del 2002, que contiene una traducción de su texto al portugués. Aunque no represente una versión oficial de la Convención, dicha traducción y los artículos relacionados de la Ley redactados de modo similar constituyen los textos legales aplicados por los tribunales brasileños en los casos que estén bajo su alcance. Como demostraremos en seguida, la traducción al portugués de expresiones provenientes de la Convención de Nueva York podría dar lugar a controversias.

[5] Sin embargo, es importante aclarar que, en el marco legal brasileño, los tribunales provinciales tienen competencia sobre las solicitudes de ejecución de laudos arbitrales domésticos, mientras que los tribunales federales tienen competencia para resolver solicitudes de ejecución de laudos arbitrales extranjeros. La principal diferencia entre dichos procesos probablemente radique en el tiempo necesario para su resolución.

[6] La Resolución 9 forma parte del estatuto interno del STJ e incorpora aspectos relevantes de la Ley y de la Convención. Además, aborda ciertos temas que exceden el alcance de la Ley y de la Convención, tales como la concesión de remedios provisionales en las etapas de reconocimiento y ejecución de laudos arbitrales extranjeros.

^[7] Tribunal de Justicia del Estado de Rio de Janeiro, Décima Segunda Cámara Civil, Agravo de Instrumento No 0062827-33.2009.8.19.0000, de fecha 23 de Febrero de 2010.

^[8] Ley Brasileña de Arbitraje, artículo 34, párrafo único: “Considera-se sentença arbitral estrangeira a que tenha sido proferida fora do território nacional.”.

^[9] Decreto 4.311/2002, artículo I, 1, primera parte: “A presente Convenção aplicar-se-á ao reconhecimento e à execução de sentenças arbitrais estrangeiras proferidas no território de um Estado que não o Estado em que se tencione o reconhecimento e a execução de tais sentenças, oriundas de divergências entre pessoas, sejam elas físicas ou jurídicas.”.

^[10] Fallo, p. 5: “No direito comparado a “formula” mais consagrada for a que identifica a nacionalidade da sentença arbitral segundo o país eleito como sede da arbitragem.”.

^[11] Fallo, pp. 6-7: “No ordenamento jurídico brasileiro, por sua vez, a adoção como elemento de conexão do ‘lugar onde foi proferida a sentença arbitral’ não suscita maiores dúvidas… optou-se por uma definição mais simples e objetiva, ‘baseando-se apenas e tão somente no local onde o laudo sera proferido’… Por conseguinte, apesar das criticas sofridas, (…) não ha dúvidas que o ordenamento jurídico pátrio adotou o sistema territorialista…. O legislador pátrio, portanto, ao eleger o critério geográfico, do local onde for proferida a sentença (ius solis), desconsiderou qualquer outro elemento.”.

[12] Gary B. Born, International Commercial Arbitration, 2009, pp. 2368-2369.

[13] Born, op. cit., p. 2369

[14] “…Beyond these provisions of national law and institutional rules, the better reading of the New York Convention is that it contains an international definition of where an award is “made,” which would prohibit Contracting States from adopting alternative definitions (and thereby affecting the scope of the arbitral awards subject to the Convention). That is, the Convention should be interpreted as contemplating uniform international standards defining where an award is “made” (to wit, in the contractual arbitral seat), which Contracting States are required to implement. The foregoing conclusion is consistent with the text of Article V(1)(e), which adopts an internationally-applicable formula (referring to the place where an award is “made”).” (Born, op. cit., pp. 2373-2374)

[15] “Thus, somewhat ironically, given what is described as the “territorial” applicability of national arbitration legislation only to arbitrations seated on local territory, the arbitral seat is itself defined entirely by reference to the parties’ agreement, and not as a purely geographic or territorial location (i.e., the place of the arbitral hearings). …Thus, the parties and the tribunal can proceed through an entire arbitration without ever setting foot in or otherwise engaging with the arbitral seat in any way – while being subject to the “territorial” arbitration legislation of the arbitral seat.” (Born, op. cit., p. 1249)

[16] ICCA’s Guide to the Interpretation of the 1958 New York Convention, p. 21.

[17] Born, op. cit., p. 2372.

[18] Convención de Nueva York, artículo I, 1, primera parte: “La presente Convención se aplicara al reconocimiento y la ejecución de las sentencias arbitrales dictadas en el territorio de un Estado distinto de aquel en que se pide el reconocimiento y la ejecución de dichas sentencias, y que tengan su origen en diferencias entre personas naturales o jurídicas.”.

[19] Ley 36/1988 (Ley Española de Arbitraje), artículo 56 (2): “Se entiende por laudo arbitral extranjero el que no haya sido pronunciado en España”.

[20] El autor argumenta que el verbo “proferir” estaría comúnmente asociado al acto único llevado a cabo por el adjudicador en que declara oralmente o comunica por escrito a las partes de su decisión. Mientras tanto “fazer” o “realizar” teóricamente alcanzarían una secuencia más amplia de actos llevados a cabo por el adjudicador (como audiencias y reuniones), finalizando con el dictamen del laudo arbitral (José Augusto Fontoura Costa, Sobre Corvos e Ornitorrincos: Arbitragem Estrangeira e Internacional no Direito Brasileiro, Revista Brasileira de Arbitragem, n. 28, 2011, pp. 68-69).

[21] Carlos A. da S. Lobo, A Definição de Sentença Arbitral Estrangeira, Revista de Arbitragem e Medicação, v. 9, 2009, pp. 62-69. El STJ hizo referencia a otra parte de ese estudio en su Fallo, pero no parece haber llegado a la conclusión aquí presentada.

[22] “The terms must be understood taking into account the context and the purpose of the Convention. Therefore, courts should not interpret the terms of the New York Convention by reference to domestic law. The terms of the Convention should have the same meaning wherever in the world they are applied. This helps to ensure the uniform application of the Convention in all the Contracting States.” (ICCA’s Guide, pp. 13-14). Académicos brasileños también reconocen las desventajas de aplicar la Convención de Nueva York indirectamente “…the survey of domestic precedents also shows that, in many ways, Brazil has not profited from adopting a mainly insular standpoint when enforcing foreign arbitral awards. Specifically, the interpretation given so far to standards and rules that are highly linked to the international practices…lack connection to the global knowledge accumulated around the New York Convention. …The problems faced abroad are analogous to those presented in the domestic setting. In that sense, the Brazilian practice would benefit significantly from broadening its legal interpretation to encompass the entire body of principles, policies, case law, debates, research and commentaries that encircle the New York Convention. …they would bridge the gap between the domestic reasoning and the argumentative repertory, methods of legal inquiry and set of legal materials employed in that Convention’s interpretation worldwide. In so doing, Brazilian case law would share the learning and achievements accumulated in fifty years of the New York Convention’s history, as well as join the international community in the ongoing development of this treaty.” André A. C. Abbud, Fifty Years in Five? The Brazilian Approach to the New York Convention, 2008, pp. 35-36.

[23] Born, op. cit., p. 2374.

A pesar de que los procedimientos arbitrales comerciales son confidenciales, los casos más importantes raramente son secretos; informaciones relativas a estos procedimientos son desveladas por acciones judiciales paralelas, informaciones relativas a títulos, valores, comunicados de abogados, empresas involucradas en el caso o prensa económica especializada. Por consiguiente, los procedimientos arbitrales más importantes son conocidos, analizados e incluso clasificados por orden de importancia. Según el Arbitration Scorecard de la American Lawyer magazine de Julio de 2011, uno de los diez mayores arbitrajes del período 2010-11 ha sido el laudo arbitral de la diputa entre la empresa argelina Sonatrach y la española Gas Natural Fenosa. Este arbitraje de la CCI en Ginebra ha sido,con 2.1 billones de dólares,uno de los mas importantes de los últimos años. Esta decisión no ha sido ni cumplida ni ejecutada porque el laudo ha sido desafiado con una negociación entre las partes. Evitar el cumplimiento de un laudo arbitral con una negociación entre las partes implicadas no es una excepción en arbitraje internacional. Esta técnica aporta nuevas oportunidades a las empresas para encontrar soluciones a sus conflictos, desarrollar nuevas oportunidades y  alianzas y mantener las relaciones comerciales entre ellas.

Este arbitraje fue consecuencia de una disputa entre Sonatrach y Gas Natural relativa al precio y volumen de gas natural. Sonatrach, proveedor de un 25% del gas del mercado español gracias al gaseoducto del norte de África, inició un procedimiento arbitral en 2007 cuando Gas Natural rechazó pagar precios más altos como consecuencia de la revisión del precio acordado inicialmente. Esta disputa fue resuelta en un primer momento con un arbitraje CCI en Ginebra donde Gas Natural fue representada por Freshfields y Sonatrach lo fue por Bredin Prat. La corte decidió, en 2010, autorizar a Sonatrach a aumentar el precio del gas, distribuido en España desde 2007 vía el gaseoducto que aporta gas a Europa a través del Magreb.

Consecuentemente, el tribunal arbitral confirmó el derecho de la compañía argelina a revisar los precios de gas. Así pues, Gas Natural fue condenada a pagar la diferencia entre el antiguo y el nuevo precio por todo el gas recibido durante este período. El laudo, muy adverso para Gas Natural, conllevó dos importantes consecuencias: la primera, un aumento de 30% del precio de gas entre 2007 and 2009; esta cantidad fue estimada por Gas Natural alrededor de 1,5 billones de dólares, y la otra consecuencia fue la modificación de la base de precios en el futuro. Este segundo punto nunca fue cuantificado por la compañía.

La estrategia del comité ejecutivo de Gas Natural fue de ganar tiempo para encontrar un nuevo acuerdo, puesto que incluso si la decisión arbitral era final y definitiva, una negociación entre las partes es siempre posible en arbitraje comercial internacional. Para ganar tiempo, la empresa española inicio una acción de anulación del laudo en septiembre de 2010 y obtuvo medidas preventivas por un tribunal suizo. Simultáneamente, la empresa española trató de analizar el coste del cumplimiento del laudo y desarrollar una mejor relación con el nuevo equipo directivo de la compañía argelina a partir de discretas negociaciones.

Un año después del laudo, en Agosto 2011, un comunicado de prensa de la empresa española informaba que : “Gas Natural Fenosa integra como accionista a la compañía Argelina,Sonatrach,  después de la ampliación de capital” Además, en el mismo comunicado la empresa española señalaba que las partes aceptaban renunciar a cualquier recurso pendiente entre ellas, lo que representaba la anulación del laudo arbitral. Así pues, Sonatrach entró a participar en Gas Natural Fenosa después que el comité ejecutivo de la española aprobase la ampliación de capital. Sonatrach pagaría €514m por el  3,85 por ciento del holding, lo que suponía 38,183,600 de las nuevas acciones.

Este acuerdo representa un cambio de rumbo para las relaciones entre las dos compañías, las cuales tienen fuertes relaciones comerciales e intereses en común pero también numerosas disputas en los últimos años.

Además, la reciente adquisición de una parte del capital por Sonatrach, ha subrayado la intensificación del negocio y los vínculos entre las compañías de hidrocarburos. Portugal ha visto un incremento de inversión de Angola en los últimos años con la presencia de empresas como Galp and Millenium BCP y tal vez más en los próximos meses. Pero el acuerdo de Sonatrach en España es el primero en España. Argelia, miembro de la organización de países exportadores de petróleo, tiene una capacidad de producción de 1.4 millones barriles al día de petróleo y exporta alrededor de 60 billones de metros cúbicos cada año.

Esta negociación de un laudo arbitral no es una excepción en la resolución de conflictos comerciales internacionales. Un estudio de 2008 de Price Waterhouse Coopers muestra la importancia de los acuerdos posteriores al laudo arbitral. Este estudio confirma que  un 40% de las compañías negocian el laudo arbitral frente el 30% que dicen no negociar la decisión arbitral. Este estudio también muestra que la nacionalidad de la compañía tiene una cierta influencia en la negociación o no post arbitral, pues las empresas sudamericanas, japonesas y de UK raramente negocian. Sin embargo, las suizas, mejicanas y americanas estan más abiertas a  negociar el laudo.

Negociar un acuerdo arbitral significa llegar a un acuerdo entre las partes implicadas en un proceso arbitral después de que el tribunal haya dictado el laudo, el cual es final y definitivo y no permite generalmente ni recurso ni apelación. Este acuerdo post arbitral puede modificar o ajustar el laudo, cambiar los términos de su performance por ejemplo con uno nuevo y de menos importante monto pero con un pago mas rápido. En muchas ocasiones, estos acuerdos son beneficiosos para ambas partes.

La parte beneficiada por un laudo favorable puede presionar a la otra parte para retomar una nueva relación comercial o para la abstención de la actividad  comercial. Si esta presión no funciona la parte ganadora siempre puede solicitar la ejecución del laudo arbitral, como si se tratara de una decisión judicial, si el país es signatario de la Convención de Nueva York de 1958.

La parte perdedora puede cumplir el laudo, usarlo como base de una negociación o tratar de anularlo en base de una de las razones previstas en dicha Convención de Nueva York. Sin embargo, las bases para solicitar la anulación de una decisión internacional arbitral, previstas en los artículos 5 y 7 de la Convención de Nueva York son pocos y muy estrictos. La forma más exitosa de anular un laudo arbitral es por razones procesales. Esto sucede cuando un árbitro no decide o decide mas allá de lo previsto y solicitado por las partes.

Así pues, en varias ocasiones, para la parte que pierde puede ser mas interesante substituir la cantidad de dinero por una prestación especifica, o un pago aplazado en el tiempo. Para la parte ganadora, renegociar el laudo puede ser más interesante que perder tiempo y dinero en abogados para solicitar su ejecución. Además, la negociación del laudo puede dar a las partes nuevas formas de colaboración para nuevos negocios y mantener así la relación de trabajo que pudo existir en el pasado.

La decisión arbitral, tiene incluso un precio de Mercado, y puede ser considerado como un titulo de crédito e incluso ser vendido a terceras partes. Algunas compañías prefieren vender el laudo arbitral a algunas empresas o a fondos especializados en el cobro de decisiones arbitrales. En otros casos el laudo es vendido con el conjunto de la sociedad. Estos casos confirman el interesante debate en la comunidad internacional del arbitraje, especialmente en arbitrajes implicando inversiones estatales, sobre el sentido de vender un laudo arbitral. Estos son algunos ejemplos en los que los laudos son vendidos con 50% o 75% del monto del laudo.

Esencialmente, las razones para obtener un acuerdo después de una decisión arbitral son las mismas que pueden motivar a las partes a obtenerlo antes del procedimiento arbitral, pero es más fácil con el peso de un laudo arbitral que pueda servir de punto de referencia para la negociación entre las partes. La ejecución de la decisión arbitral puede tener algunas consecuencias negativas para la parte perdedora, para la relación entre compañías, la reputación de estas empresas y por esta razón a veces es más interesante negociar un acuerdo y no ejecutar la decisión arbitral. Básicamente, las empresas deciden negociar los laudos arbitrales para ganar tiempo y dinero. Incluso si la ejecución de la decisión es posible, como hemos visto, gracias a la Convención de Nueva York de 1958, en algunas situaciones, las empresas prefieren salvar tiempo y dinero y mas allá de estos dos aspectos, las empresas desean mantener relaciones de trabajo y colaboración.

Además, la negociación puede ser parcial y afectar tan solo una parte del laudo, ya que es posible ejecutar parcialmente un laudo bajo los principios previstos en la Convención de Nueva York

Así pues, la resolución de un conflicto posteriormente a la decisión arbitral es una practica común adoptada por las compañías implicadas en procedimientos arbitrales. En la fase post-arbitral, la voluntad de acuerdo es generada por varios factores como hemos podido analizar previamente. Mas allá de los beneficios clásicos de los procedimiento arbitrales; rapidez, confidencialidad y libertad para elegir a un árbitro neutral y competente, podemos añadir la posibilidad de negociar el laudo arbitral entre las partes implicadas. El caso Sonatrcah v Gas Natural Fenosa, muestra este considerable ventaja del arbitraje: la posible negociación del laudo con el fin de encontrar nuevas soluciones para resolver conflictos y desarrollar así, incluso, nuevas cooperaciones y nuevos proyectos comerciales.

Eduard Beltran is LLM candidate in the program of International Business Regulation, Litigation and Arbitration at New York University School of Law, attorney at law member of the Barcelona Bar and former deputy head of the international cooperation office of the French ministry of justice, responsible for the legal cooperation between Europe and Latin America.

Although international commercial arbitration procedures are confidential, the biggest cases are rarely secret; they are disclosed by domestic court actions, securities disclosures, lawyers, companies involved in the case and trade press. Therefore, the biggest international arbitration procedures and awards are known, analyzed and even ranked. According to Arbitration Scorecard of American Lawyer magazine of July 2011, one of the ten biggest arbitral awards of the period 2010-11 has been the arbitral award rendered in the dispute between the Algerian state-controlled company Sonatrach and the Spanish Gas Natural Fenosa. This ICC arbitration seated in Geneva has been with 2.1 billion dollars award one of the most important of the last years. This decision has not been complied or enforced because the award has been challenged by a negotiation between the parties. Challenging an arbitral award by negotiation is not an exception in international arbitration and brings new opportunities to the companies to settle a dispute increasing new ties and finding new alliances between them.

This arbitration follows a dispute between Sonatrach and Gas Natural relating to the price and volumes of natural gas supplies. Sonatrach, which provides a quarter of gas to the Spanish market through its North African pipeline, began arbitration in 2007 when Gas Natural refused to pay higher prices. This dispute was settled the first time through an ICC arbitration in Geneva where Gas Natural Fenosa was represented by Freshfields and Sonatrach was represented by Bredin Prat. The court ruled in August 2010 that it recognized the right of Sonatrach to boost the price of gas supplied to Spain since 2007 through the Maghreb Europe pipeline, which crosses Morocco and extends into Spain and Portugal.

Consequently, the arbitral tribunal confirmed the Algerian company’s right to revise its price formula. Gas Natural was ordered to pay the difference between the old and the new rates for all the gas received under both contracts in the relevant periods. The award, extremely adverse for the Spanish company, had two main consequences: the first , an increase of 30% of gas supplies between 2007 and 2009; this quantity was measured with an estimation by Gas natural around 1,5 billion USD, and the other consequence was the modification of the base to fix supplies in the future. The company never quantified this second point.

The strategy of the board of Gas Natural was to gain time to find a new settlement because, even if the award was full and final, a negotiation between parties is always possible in commercial arbitration. To win time the Spanish company started an action for annulment of the arbitral award in Switzerland justice in September 2010 and obtained precautionary measures by the Swiss tribunal. Simultaneously, the Spanish company tried to analyze the cost of comply the award and tried to develop a new relationship with the new board of the Algerian company by discrete discussions.

One year after the award, in August 2011, a press release of the Spanish company stated: “Gas Natural Fenosa adds the Algerian state-owned energy company, Sonatrach, as shareholder following the capital increases”. Furthermore, in this press release, the Spanish company informed that parties accepted to give up every pending case and so this represented the annulment of the award. Thus, Sonatrach has taken a stake in Gas Natural Fenosa after the Spanish company’s Board approved a capital expansion. Sonatrach will pay €514m for a 3,85 percent holding, which represents 38,183,600 new stock.

This deal represents a reversal in relations between these two companies, which have strong commercial ties and common interests but also a series of disputes in recent years.

Moreover, the recent acquisition of a stake in leading Spanish utility by Algerian state-owned energy company Sonatrach, has underlined the intensification of business transactions and links between companies in gas and oil. Portugal may have seen an influx of Angolan investment in the last few years with sizeable shareholding in companies like Galp and Millennium BCP and maybe more in the next months. But the deal of Sonatrach in Spain is the first in Spain. Algeria, a member of the Organization of Petroleum Exporting Countries, has a production capacity of 1.4 million barrels a day of oil and exports about 60 billion cubic meters of gas a year.

This negotiation of an arbitral award is not an exception in dispute resolutions in international business transactions. A study of 2008 by Price Waterhouse Coopers shows the importance of settlement after an arbitral award. This study confirms that 40% of the companies negotiate the arbitral award against 30% who said that they do not negotiate the award. The study also shows that the nationality of the companies counts and so South American, Japanese and UK corporations rarely negotiate the award. However, Swiss, Mexican and US companies are more used to negotiate the award.

Settlement post arbitral award is referred to as an agreement reached by the parties after the tribunal has rendered the award, which is often full and final. This settlement post arbitral can modify or adjust the award, changing the terms of its performance for example by a new, less important amount but with a prompter payment. In many situations this kind of settlement is convenient for both parties.

The winning party can often use the arbitral award to put pressure on the losing party, whether through explicit or implicit threats of commercial reprisal or noncooperation, or through the threat of adverse publicity. If such pressure fails, the winning party may have to seek execution by court proceedings on the bank accounts or other assets of the losing party. If the award has been deposited or registered, it may then be enforced as though it were a judgment of the court, if the country of the arbitration is member of the New York Convention.

A losing party can comply with the award, use it as a basis for negotiating a settlement, or may challenge the award. However, the basis for challenge, stated in articles 5 to 7 of the New York Convention, are few indeed. The principal successfully way to challenge an arbitration award deal is for procedural issues. Challenges on procedural issues may be made, for example, where the arbitrator failed to decide an issue submitted by the parties, failed to allow a continuance of the hearing even though good cause was shown, or considered and decided issues beyond the scope of the agreement or submission by the parties.

Thus, in several situations, for the losing party it could be more interesting to substitute damages for a specific performance or to pay a substantial amount over a period of time. For the winning party, renegotiating the award could be more interesting than spending time and lawyer’s fees for the enforcement. Moreover the negotiation of the award and a new settlement could allow parties to find new ways of collaboration for a new business and keep the working relations after the dispute.

The arbitral award has a market value, in the sense that it could be considered as credit title and even been sold to third parties. Some corporations revealed that they prefer to sell the arbitral award to some companies or funds specialize in recovering the damages covered by the arbitral award. In other cases the award is sold with the whole business. These cases confirm the interesting debate in the international arbitration community, especially in investment arbitration against states, to have the sense to sell the award to another company, fund, or law firm specialized in the enforcement. These are some examples where the award is sold with a 50% or 75% of the amount of the award.

Actually, the reasons to get a settlement after an arbitral award are the same as before but it is easier after the award because the award gives a reference point of negotiation, an “anchor point”. The enforcement could have some negative consequences for the losing party or the relation between the companies; the reputations and sometimes is more interesting negotiate a specific performance more than money, and the fees of the lawyer for the enforcement. Basically, companies decide to negotiate the award to save time and money. Even if the enforcement is possible, as we know by the New York Convention of 1958, in some situations companies prefer to save time, money and moreover keep the working relations with the other company by a discrete negotiation.

Moreover, the negotiation can be partial and touch just a part of the award, because it is always possible to enforce partially an award under the New York Convention.

Hence, settlement post arbitral award is a common practice adopted by companies involved in an arbitration procedure. At the post award stage, the settlement is generated by various factors, including time and cost efficiencies and the will to maintain a working relationship with the other company. To all the known classical advantages of international arbitration: speed, cost, confidentiality and freedom to choose a neutral and competent arbitrator, we can add the negotiation of the award between the parties after the award is released. The case Sonatrach v. Gas Natural Fenosa shows this advantage of the arbitration: the possible negotiation of the award and the possibility to reach new solutions in order to settle the conflict and develop new projects, new transactions and more business.

Eduard Beltran is LLM candidate in the program of International Business Regulation, Litigation and Arbitration at New York University School of Law, attorney at law member of the Barcelona Bar and former deputy head of the international cooperation office of the French ministry of justice, responsible for the legal cooperation between Europe and Latin America.

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

The external dimension

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

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

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

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

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

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

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

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

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

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

The proposal

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

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

The Regulation in the international legal order

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

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

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

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

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

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

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

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

Arbitration

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

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

West Tankers

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

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

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

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

The proposal

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

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

Other proposals

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

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

Other proposals in the draft recast of the Regulation include

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

Conclusion

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

Alexander Layton

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

Introduction

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

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

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

The alternativity test and the finality test

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

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

Applying the tests: interpretation

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

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

Adjudication

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

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

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

Consent Awards

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

Domenico Di Pietro

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

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

In its recent decision of 20 September 2011, 4A_103/2011, the Federal Supreme Court of Switzerland had to determine whether a panel consisting of three arbitrators of the Court of Arbitration for Sport (CAS) in Lausanne, Switzerland, had rightly decided that an arbitration clause contained in a licensing agreement also encompassed disputes arising out of sales agreements entered into by the same parties.

The facts of the case are straightforward. On January 1, 2006 a manufacturer of sports equipment and a boxing association entered into a licensing agreement which, inter alia, entitled the manufacturer to produce and commercialize boxing equipment carrying the label of the boxing association against payment of royalties. The arbitration clause contained in the licensing agreement read as follows:

“Should a disagreement over the interpretation of any terms of this Agreement arise, the Parties agree to submit the dispute to the Court of Arbitration for Sport, Lausanne, Switzerland, whose decision shall be final and binding on both Parties. While the pending question is being arbitrated, the remainder of this Agreement shall remain in effect.”

Subsequent to the execution of the licensing agreement the parties concluded several sales agreements according to which the manufacturer furnished the boxing association with boxing equipment produced under the licensing agreement.

In 2007, the boxing association claimed that the licensing agreement had expired on 31 December 2006. As a result, the manufacturer initiated arbitration proceedings before the Court of Arbitration for Sport (CAS). In turn, the boxing association objected to the jurisdiction of the CAS by submitting that the phrase “disagreement over the interpretation of any terms of this Agreement” contained in the arbitration clause of the licensing agreement merely referred to the licensing agreement rather than to the sales agreements. The CAS panel rejected this argument and assumed jurisdiction over the case by construing the arbitration agreement to encompass disputes connected with the licensing agreement.

On 4 February 2011, the boxing association challenged the issued CAS award before the Federal Supreme Court of Switzerland including for lack of jurisdiction of the arbitral tribunal (article 190(2)(b) of the Swiss Private International Law Act).

After observing that the existence of an arbitration agreement shall not be assumed off-handedly, the Federal Supreme Court of Switzerland – confirming prior case law on this issue (e.g. BGE 116 Ia 56; BGE 129 III 675) – stated that once there is no doubt about the parties’ consent to subject to arbitration the scope of the arbitration agreement is to be interpreted extensively.

The court then turned towards the issue of construction of the arbitration clause. Again confirming existing case law on the point, the court observed that the phrase “any dispute related to the interpretation of this Agreement” was not restrictive in any way and particularly included (i) disputes relating to the existence, validity and termination of contractual relationships originating from the contract containing the arbitration clause in question, as well as (ii) questions which were merely indirectly connected to the dispute submitted to arbitration. The court further held that, as a rule, the scope of an arbitration agreement contained in a contract could encompass additional contracts and annexes as long as the latter did not contain specific clauses providing for other dispute resolution mechanisms.

Albeit noting that the wording of the arbitration clause in question suggested that only the licensing agreement was subject to arbitration, the Federal Supreme Court of Switzerland concluded that such narrow interpretation of the arbitration clause would not account for the specific circumstances of the case at hand. The circumstances that militated for a broader interpretation were the following: First, the bylaws of the boxing association provided that any disputes shall be arbitrated before the CAS. Although these bylaws were not applicable in the present case, the court nevertheless found that the boxing association was acting inconsistently. Second, the court was not able to detect any objective reason why the dispute at hand should be resolved by a state court. Third and finally, the Swiss Federal Supreme Court found decisive that the parties had come to an understanding that exceeded the licensing agreement in itself and that was closely related to the subsequent sales agreements.

On all these grounds, the Federal Supreme Court of Switzerland held that the CAS tribunal had rightly asserted jurisdiction over the case at hand, and dismissed the challenge to the CAS award.

This recent decision is important in that it confirms the Swiss Federal Supreme Court’s practice to interpret the scope of an arbitration clause extensively once the parties’ intent to arbitrate is established. The reason why the court rather restrictively approaches the issue of consent to arbitrate is that an arbitration clause has far-reaching consequences insofar it ousts the jurisdiction of the state courts – at least as long as any one of the parties invokes the arbitration clause (see e.g. BGE 129 III 675). The Swiss Federal Supreme Court’s broad construction of the scope of the arbitration clause in the case at hand is not only a manifestation of the strong pro-arbitration policy underpinning the SPILA but also helps ensuring judicial economy and efficiency.

Simone Stebler graduated summa cum laude from the University of Fribourg School of Law and holds an LL.M. in International Business Regulation, Litigation & Arbitration from NYU (Arthur T. Vanderbilt Scholar). She is admitted to practice in Switzerland.