This is to announce the February 2016 session of the Arbitration Forum of the Center for Transnational Litigation, Arbitration and Commercial Law, entitled “Arbitrator Power: The Transatlantic Divide”, which will take place on Monday, 29February 2016, from 6.00 – 8.00 pm, in the Lester Pollack Colloquium Room, Furman Hall 900 (245 Sullivan Street, New York, NY 10012).

It is a great pleasure to be able to announce that Professor Margaret Moses will give a talk on the aforementioned topic and that Dr. Monique Sasson and Mr. Christian Alberti agreed to act as commentators.

NYU’s  Center  for  Transnational  Litigation,  Arbitration  and  Commercial  Law  will  hold  its  Fifth  Annual Arbitration Practice Moot  on  Saturday,  27  February  2016  and  Sunday,  28  February  2016.    The  event  will  be  co-hosted  by  Hogan  Lovells US  LLP  and  NYU’s  International  Arbitration  Association.    The  principal  objective  of  the  NYU  Practice  Moot  is  to provide  a  forum  within  which  students  participating  in  this  year’s  Willem  C.  Vis  International  Commercial Arbitration  Moot  can  refine  their  oral  presentations  by  pleading  before,  and  receiving  constructive  feedback  from, panels of distinguished arbitrators.

For the program please click here.

I. Introduction

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

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

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

II. Parallel Enforcement Proceedings in Astro and PT First Media

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

V. Conclusion

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

 

David Isidore Tan

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[34] Ibid, para. 5.

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

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

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

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

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

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

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

Professor Ferrari, the Director of the Center, an expert on the United Nations Convention on Contracts for the International Sale of Goods (CISG), has just published a paper on said Convention and its applicability in arbitral proceedings. In the paper, Professor Ferrari examines, on the basis of three common hypotheticals, the difference between the Convention’s applicability in state court proceedings and in the arbitral context. In doing so, Professor Ferrari focuses on how arbitrators get to the law applicable to the merits in international commercial arbitration. The paper is one of many papers published in “A Tribute to  Joseph M. Lookofsky”, an expert on the CISG and two time scholar-in-residence at the Center.

This is to announce the November session of the Arbitration Forum of the Center for Transnational Litigation, Arbitration and Commercial Law, entitled “How Singapore became a successful arbitration centre using the UNCITRAL Model Arbitration Law,” which will take place on Monday, 23 November 2015, from 6.00 – 8.00 pm, in the Lester Pollack Colloquium Room, Furman Hall 900 (245 Sullivan Street, New York, NY 10012).

It is a great pleasure to be able to announce that Professor Gary F. Bell will give a talk on the aforementioned topic and that Ms. Alexandra Dosman agreed to act as commentator.

Associate Professor Gary F. Bell teaches arbitration, Indonesian law and the international sale of goods at the National University of Singapore where he was the founding director of the Asian Law Institute (ASLI). He has law degrees in both civil and common law from McGill, where he was the Editor-in-Chief of the McGill Law Journal.  He clerked for Justice Stevenson of the Supreme Court of Canada. He has an LL.M. from Columbia Law School.  He has acted as sole arbitrator, member of a panel or chair in numerous ICC and SIAC arbitrations. He presently works on a research project on the use of the UNCITRAL Model Arbitration Law in Asia.

Alexandra Dosman is the first Executive Director of the New York International Arbitration Center (“NYIAC”). Prior to joining NYIAC in May 2013, Ms. Dosman practiced commercial litigation and international arbitration at Shearman & Sterling LLP for seven years. She writes and speaks widely on commercial and investment treaty arbitration matters.

To RSVP (required), please send an email to: cassy.rodriguez@nyu.edu

The Center for Transnational Litigation, Arbitration and Commercial Law is pleased to announce that it will host a conference entitled, “Convergence or Divergence of EU and US Private International Law?”, which will take place on Monday, 26 October 2015, from 2:00 – 7:30.00 p.m., in the Lester Pollack Colloquium Room, Furman Hall 900 (245 Sullivan Street, New York, NY 10012).

Entries prepared for the European Encyclopedia of Private International Law will be used to look into whether the private international laws of the US and the EU are really as far apart as people generally believe them to be.

Our distinguished list of speakers include Jürgen Basedow, Samuel Baumgartner, George Bermann, Andrea Bonomi, Donald Childress, William Dodge, Tim Dornis, Franco Ferrari, Diego Fernandez Arroyo, Stéphanie Francq, Joseph Lookofsky, Ralf Michaels, Horatia Muir Watt, Luca Radicati di Brozolo, Francesca Ragno, Kermit Roosevelt, Linda Silberman and Louise Ellen Teitz.

For the conference program, click here.

To RSVP (required), please send an email to: cassy.rodriguez@nyu.edu by 21 October 2015.

The Center for Transnational Litigation, Arbitration and Commercial Law is pleased to announce that it will host a conference entitled “Limits to Party Autonomy in International Commercial Arbitration” on 17 and 18 September 2015. The list of speakers include Prof. George A. Bermann, Dr. Andrea Carlevaris, Prof. Giuditta Cordero-Moss, Prof. Kevin Davis, Prof. Filip De Ly, Prof. Diego Fernandez Arroyo, Dr. Inka Hanefeld, Prof. Helen Hershkoff, Mr. Brian King, Prof. Stefan Kröll, Prof. Luca Radicati di Brozolo, Dr. Francesca Ragno, Dr. Friedrich Rosenfeld, Prof. Maxi Scherer, Prof. Linda Silberman, Mr. Nathan Yaffe.

The event will start on Thursday, 17 September, at 3 pm. The event will take place at 245 Sullivan St., Furman Hall, Pollack Room, 10012 NY.

For the conference program click here

To RSVP (required), please send an email to: cassy.rodriguez@nyu.edu

I. Introduction

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

II. What’s new on arbitration?

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

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

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

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

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

III. What’s new on mediation?

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

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

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

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

IV. Conclusion

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

 

—

Rafael F. Alves

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

Laura Gouvêa de França Pereira

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

___________________________

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I. Introduction

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

II.  The Sovereign Debt Restructuring Process

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

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

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

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

a). The Purpose of Holdout Litigation

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

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

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

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

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

III. Argentine Pari Passu Litigation

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

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

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

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

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

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

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

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

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

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

a). Free-market based alternatives

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

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

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

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

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

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

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

b). Advantages of a UN Convention

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

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

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

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

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

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

V. Conclusions

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

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

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

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

 

Manuel Jordán Bassó

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

Juan Pablo Hugues Arthur

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

_________________________________________

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

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

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

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

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

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

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

[6] Ibid.

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

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

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

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

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

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

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

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

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

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

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

[18] Ibid., p. 7.

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

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

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

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

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

[24] Ibid. p. 254.

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

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

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

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

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

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

[31] See footnote 2 supra.

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

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

[34] Ibid.

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

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

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

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

[38] Ibid.

[39] Ibid.

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

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

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

[42] Ibid.

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

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

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

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

[46] Ibid. Pp. 113-113.

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

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

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

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

[51] Ibid.

 

On 10 June 2015, Professor Franco Ferrari, the Director of the Center for Transnational Litigation, Arbitration and Commercial Law, and the former Vice-President of the International Court of Justice, Ambassador Ambassador Bernardo Sepulveda Amor, formerly Ambassador to the United States of America and to the United Kingdom and Secretary of Foreign Affairs of Mexico, will discuss the positive effects of investment arbitration on the development of projects in Mexico by foreign companies. Please click here for the official program.

 

The Center for Transnational Litigation, Arbitration, and Commercial Law and  the Office of Global Programs will host a two day conference on Teaching Transnational Business Law and Arbitration. On Thursday, June 4^th the Center will host “Teaching International Commercial Arbitration Globally.” On Friday, June 5^th the Office of Global Programs will host “Teaching International Business Transactions Globally.”

 

Teaching Transnational Business Law and Arbitration

June 4-5, 2015 from 9:00 a.m. – 6:00 p.m.

The Lester Pollack Colloquium Room

245 Sullivan Street, 9^th Floor

New York, NY 10012

I. Introduction

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

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

II. Background to Carr v. Gallaway Cook Allan

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

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

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

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

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

III. Broad Definition of An Arbitration Agreement

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

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

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

IV. Limiting the Severability Doctrine

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

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

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

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

V. Conclusion

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

 

James Ng

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

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

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

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

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

[5] Carr (SC) para. 84.

[6] Id. at para. 8.

[7] Id. at para. 6.

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

[9] Id. § 14.

[10] Carr (SC) para. 39.

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

[12] Carr (SC) para. 41.

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

[14] Id. at para. 14.

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

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

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

[18] Carr (SC) para. 62.

[19] Id.

[20] Id. at para. 68.

[21] Id. at para. 70.

[22] Id.

[23] Id. at para. 80.

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

The Center will host the April 2015 session of the Arbitration Forum entitled “Legitimacy of transnational commercial arbitration,” on Monday, April 27^th, 2015, from 6.00 – 8.00 pm, in the Lester Pollack Colloquium Room, Furman Hall 900 (245 Sullivan Street, New York, NY 10012).

The event will be moderated by the Center’s Executive Director, Franco Ferrari. Our distinguished speakers include  Diego P. Fernández Arroyo, Professor at the Sciences Po Law School in Paris, Global Professor at the NYU Paris Campus and Secretary-General of the International Academy of Comparative Law; Harold Hongju Koh, Sterling Professor of International Law at Yale Law School; Timothy G. Nelson, Partner at Skadden, Arps, Slate, Meagher & Flom LLP; and Edna Sussman, independent arbitrator and mediator and the Distinguished ADR Practitioner in Residence at Fordham University School of Law.

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

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

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

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

I. Facts and Procedure

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

1) Arbitration Proceedings

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

2) Annulment Proceedings

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

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

II) Decision

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

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

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

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

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

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

III) Analysis

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

1) The decision promotes the effectiveness of international arbitration

a) A little bit of background

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

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

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

b) Promoting the effectiveness of international arbitration

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

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

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

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

a) What about Facebook and other social media networks?

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

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

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

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

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

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

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

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

Anne-Lise Ménagé

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Professor Franco Ferrari, the Director of the Center for Transnational Litigation, Arbitration and Commercial Law, will deliver the keynote speech on the occasion of the conference on “Doing Business with the West” organized by the International Association of Young Lawyers held in Shanghai, from March 26-28, 2015. The talk by Professor Ferrari, an expert in the area of international sales law, entitled “The application of the 1980 Vienna Convention on International Sale of Goods in arbitration proceedings” will focus on the question of whether arbitral tribunals have to apply the aforementioned Convention in arbitral settings, an issue that in recent years has received a lot of attention. For the full program please click here.

I. Introduction

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

II. Factual Background

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

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

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

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

III. The Controversial Ruling of the Reims Court of Appeal

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

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

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

IV. The French Court of Cassation Ruling

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Concluding remarks

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

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

 

Chrysoula Mavromati

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

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

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

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

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

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

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

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

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

[9] Id at p.156

[10] Id. at p. 155

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

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

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

The Center will host the March 2015 session of the Arbitration Forum, entitled “Public Purpose in International Law: Rethinking Regulatory Sovereignty in the Global Era.” The event will take place on Monday, March 23^rd, 2015, from 6.00 – 8.00 pm, in the Lester Pollack Colloquium Room, Furman Hall 900 (245 Sullivan Street, New York, NY 10012).

The event will be moderated by the Center’s Executive Director, Franco Ferrari. Our distinguished speakers include Jack Coe, Jr., Faculty Director of Pepperdine’s LL.M in International Commercial Arbitration; Harold Hongju Koh,  Sterling Professor of International Law at Yale Law School; Pedro J. Martinez-Fraga, partner in Bryan Cave LLP’s International Arbitration and Litigation Practice Group; and C. Ryan Reetz, co-founder and office managing partner of the Miami, Florida office of Bryan Cave LLP.

On that occasion, the book just published by Cambridge University Press, co-authored by Mr. Pedro Martinez-Fraga and Mr. Ryan Reetz, with the same title will be discussed.

Since seating is limited, please rsvp by March 20th, 2015, by sending an email to cassy.rodriguez@nyu.edu.

Please note that the session will be videotaped.

Professor Linda Silberman has been selected as one of the Advisers on the American Law Institute’s recently launched project for The Restatement of the Law (Third) Conflict of Laws. The Chief Reporter for the project is Kermit Roosevelt (University of Pennsylvania).The Associate Reporters are Laura Little (Temple School of Law) and Christopher Whytock (UCLA).

The Center will host the February 2015 session of the Arbitration Forum, entitled “Iura novit arbiter” on Monday, February 23, 2015 from 6:00-8:00 p.m. in the Lester Pollack Colloquium Room, Furman Hall 900 (245 Sullivan Street, New York, NY 10012).

The event will be moderated by the Center’s Executive Director, Franco Ferrari. Our distinguished speakers include Mr. Christian Leathley, partner in the international arbitration group of Herbert Smith Freehills LLP; Mr. Christian P. Alberti, AVP/Director of the International Centre for Dispute Resolution (ICDR), the international division of the American Arbitration Association (AAA); and Mr. John Fellas, partner in the New York office of Hughes Hubbard & Reed LLP,  and co-chair of the Arbitration Practice and co-chair of the International Practice of that firm.

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

I. Introduction 

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

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

II. Legal and factual framework

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

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

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

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

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

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

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

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

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

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

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

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

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

b. The Court baldy interpreted the CISG

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

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

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

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

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

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

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

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

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

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

VI. Conclusion

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

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

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

 

Alexandre Hublet

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[15] Art. 6 of the CISG

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

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

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

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

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

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

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

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

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

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

[26] Id., p. 618

[27] See art. 58 of the CISG

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

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

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

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