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

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

I. Background of the Case

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

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

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

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

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

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

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

B. Prior Judicial Treatment of Mandatory Rules

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

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

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

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

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

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

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

III. Conclusions

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

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

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

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

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

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

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

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

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

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

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

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

[8] German Supreme Court, supra note 1.

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

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

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

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

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

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

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

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

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

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

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

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

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

[22] Quinke, supra note 19, 251.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

[9] www.bundesgerichtshof.de.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Petr Briza

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

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

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

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

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

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

In Search of a Global Jurisprudence, 38 U.C.Dav. L. Rev. 1049 (2005) – was cited in Justice Ginsburg’s concurring opinion in the recent decision Chafin v. Chafin (Feb. 19, 2013).  The Court held unanimously that an appeal from an order of return of the child to Scotland was not moot, notwithstanding that no stay had been issued and the child was now in Scotland.  Both the possibility of a re-return order and a vacatur of the lower court’s expense orders meant that the case was not moot.  Justice Ginsburg, in an opinion joined by Justices Breyer and Scalia, offered suggestions for proposed legislation to limit appeals with respect to return orders.

The Supreme Court of Germany cited a paper by Professor Franco Ferrari in a decision concerning the value to be attributed to a given INCOTERM. Professor Ferrari, who is the director of the Law School’s Center for Transnational Litigation and Commercial Law, is an expert on international sales law. In its November 7, 2012, the German court relied on a paper by Ferrari asserting that INCOTERMS are not necessarily to be interpreted on the basis of the understanding attributed to them by the ICC, but may be subject to domestic interpretation where no express reference is made to ICC INCOTERMS.
For the full text of the decision, please click here:

http://www.globalsaleslaw.org/content/api/cisg/urteile/2374.pdf

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jaroslav Kudrna

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

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

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

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

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

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

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

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

[viii] Cohen, supra note 3.

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

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

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

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

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

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

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

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

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

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

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

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

[xxi] Fontmichel, supra note 9.

[xxii] Id.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

NYU’s Center for Transnational Litigation, Arbitration and Commercial Law will host a conference on “Forum Shopping in the International Commercial Arbitration Context”

The list of speakers include Prof. George A. Bermann, Mr. Christopher Boog, Prof. Jack Coe, Jr., Prof. Filip De Ly, Mr. Domenico Di Pietro, Mr. John Fellas, Prof. Franco Ferrari, Mr. Brian King, Mr. Alexander Layton, Mr. Pedro Martinez-Fraga, Prof. Loukas Mistelis, Prof. Peter B. Rutledge, Prof. Maxi Scherer, Prof. Linda Silberman, Mr. Aaron Simowitz, Mr. Robert H. Smit.

Thursday, Feb. 28th,  4-7:00pm

Friday, March 1st, 9:30am-6:30pm

Saturday, March 2nd, 9:15am-12:45pm

245 Sullivan St., Furman Hall, Pollack Room, 10012 NY.

Free registration

Since space is limited, RSVP to Ms. Cassy Rodriguez at  cassy.rodriguez@nyu.edu

For more information, please refer to program brochure

Forum Shopping in The International Commercial Arbitration Context Program Brochure

On February 11th, the Center – in collaboration with The American Society of International Law – will host a panel discussion on the role of the Permanent Court of Arbitration today. The event will feature keynote remarks by PCA Secretary General Hugo H. Siblesz and a distinguished panel of experts, Michael Reisman, Yale Law School and Garth Schofield, Permanent Court of Arbitration. This gathering will commemorate the launch of ASIL’s new Howard M. Holtzmann Research Center for the Study of International Arbitration and Conciliation and will be moderated by Donald Donovan, and Debevoise & Plimpton.

Monday, February 11, 2013
New York University School of Law – Furman Hall – Room 210
245 Sullivan Street New York, NY
6:00 p.m. – 8:00 p.m.

Free registration

For more information and to register, visit
www.asil.org/nyevent

1. Introduction

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

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

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

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

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

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

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

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

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

During the Milan Annual Conference two opposite opinions emerged.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This approach is based on several arguments.

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

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

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

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

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

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

1)      the arbitration proceedings itself

2)      the courts’ supportive function for the arbitration

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

–          Can any logistical issues be satisfactorily dealt with?”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2.1. Confidentiality: is it a real interest?

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

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

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

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

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

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

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

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

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

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

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

2.2. Transparency: is it a real need?

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

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

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

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

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

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

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

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

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

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

3. The interests of the other players

3.1 The arbitrators

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

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

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

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

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

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

3.2 The scholars

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

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

3.3 The Institutions

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

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

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

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

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

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

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

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

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

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

4.1 Decisions on the arbitral proceedings

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

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

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

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

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

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

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

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

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

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

4.2 Decisions on arbitrators’ independence and impartiality

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

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

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

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

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

4.3 Arbitral awards

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[10] Queen’s Mary College Report, 29

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

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

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

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

A.            Introduction

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

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

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

B.            Procedural challenge

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

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

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

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

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

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

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

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

C.            Substantive challenges

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

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

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

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

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

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

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

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

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

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

D.           Conclusion

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

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

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

[2] Art. 25 ICSID Convention.

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

[4] Ibid., para. 110.

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

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

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

[8] Ibid., para. 162.

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

[10] Ibid., para. 7.6.4.

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

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

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

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

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

[16] Ibid., para. 128 f.

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

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

[19] Ibid., para. 527.

[20] Ibid., para. 530.

[21] Ibid., para. 529.

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

[23] Ibid., para. 14.2.66.

[24] Ibid., para. 14.2.2.

In the Middle Ages a new set of rules, based on usages and customs, was developed by merchants with the intention of settling disputes arising between them through an a-national body of rules. This system, named Lex mercatoria, allowed merchants to conclude transactions with different peoples without fear of being subjected to foreign rules in the event of a dispute. This note draws a parallel between Lex mercatoria and the need for a unification of Private Contract Law in the European Union, based on the assumption that both sets of rules are designed with the same aim in mind: the good functioning of cross-border commercial relations between different peoples.

I. Lex mercatoria: origins, content and codification

The historical background of Lex mercatoria is controversial. Some authors suggest that Lex mercatoria is based on Ius gentium, the body of Roman law that regulated economic relations between Roman citizens and foreigners . It is accepted that Roman citizens entered into cross-border commercial relationships and that those transactions were governed by certain rules. However, the hypothesis according to which Ius genitum is the precursor to today’s Lex mercatoria has been severely criticized . Some authors question Ius gentium’s independent status vis-à-vis Roman Ius civile and state that, since Ius gentium was part of Roman law rather than an autonomous body of law, it cannot be conceived as the precursor of today’s Lex mercatoria.

Other authors claim that the origins of Lex mercatoria can be traced back even further, to before the Roman Empire, in Ancient Egypt, or even back to Greek and Phoenician trade . This theory is plausible since Lex mercatoria is used by merchants in international trade, and commercial exchanges in the Antiquity are considered to have been governed by customary commercial rules.

The debate about the origins of Lex mercatoria is far from over, although the majority of authors suggest that Lex mercatoria has its origins in the merchant law of the Middle Ages . Often qualified as trans-national law, Lex mercatoria is considered to be both a rebirth of medieval merchant law and a new understanding of the concept.

Even though the origins of Lex mercatoria are vague, for the aim of this paper it is important to note that the need to unify the law governing international private relations has existed since the first commercial transactions.

It has been said that there are as many definitions of Lex mercatoria as there are authors writing about it. However, when it comes to explaining the concept of Lex mercatoria, it is essential to highlight the importance of two authors: SCHMITTHOFF who developed the theory of the new merchant law, and GOLDMAN, who developed the theory on Lex mercatoria itself.

SCHMITTHOFF wrote that Lex mercatoria is the “expression of both spontaneous and official unification by means of general conditions, trade usages, customs and international conventions” . This new merchant law theory combines two inter-related elements: the importance of the international origin of rules and the uniformity of rules at an international level. However his vision of Lex mercatoria remains attached to national systems.

GOLDMAN’s approach to the definition of Lex mercatoria is revolutionary. He states that in International Commercial Arbitration, “arbitrators and parties could detach legal relationships from applicable national legal rules and submit these relationships to the Lex mercatoria”. Like SCHMITTHOFF, GOLDMAN also considered this body of law to be composed of general conditions, usages, customs and international conventions, but he added a new component: the general principles of law . Indeed, GOLDMAN does not consider Lex mercatoria to be dependent upon national legal orders. This autonomous approach claims that Lex mercatoria is a self-governing set of rules in an international trade framework, without reference to any particular national system.

As the different definitions demonstrate, not only is the concept of Lex mercatoria controversial but so is its content. In order to determine the real basis of Lex mercatoria, LANDO’s opinion is instructive. Far from distinguishing between sources and content –a pure theoretical issue-, LANDO proposes a list of “existing elements”. In fact, even if LANDO declares that it is not possible to compile an exhaustive list of elements forming Lex mercatoria, he gives a fairly complete list of elements constituting this set of trans-national rules. The elements are: public international law, uniform law, general principles of law, the rules of international organisations, customs and usages, standard form contracts and the reports of arbitral tribunal awards. Although there is no need to explain the content of this list, it is essential to remember that, even if arbitral awards are confidential in nature, there has been a tendency to publish them, investing this source of Lex mercatoria with a greater importance over time.

 This body of rules is still not concrete and, as a consequence, is both controversial and unclear. It has no evident limits and its parameters, despite academic efforts, are not clearly defined. As a result, it is unsurprising that some authors suggest that Lex mercatoria is a “myth” or even an “enigma” . However, it is clear that its importance has grown with the unification of rules at an international level. And even though its opponents claim that it lacks sufficient solidity and substantive force to govern a contract, it is increasingly applied, especially in international commercial arbitration, where parties choose it as the law applicable to their dispute.

International institutions and scholars have reacted to the above criticism regarding the lack of clarity in this body of Law. In the past three decades, international institutions have taken on a role of unifying and standardising the general principles of this “a-national” law and have created model contracts that are increasingly used in the international trade community due to their flexibility and simplicity . International organisations such as the International Chamber of Commerce (ICC), and the United Nations Commission for International Trade Law (UNCITRAL) have played a key role in this harmonisation of international trade rules.

Although there are a significant number of instruments that have contributed to harmonizing international trade practice, this essay will focus on the UNIDROIT principles, because that is where we see, most clearly, a codification of Lex mercatoria.

The majority of commentators agree that, unlike international conventions or model law, such as UNCITRAL (that has to be used alongside national legal rules and serves to assist States in their legislative unification), UNIDROIT principles are trans-national in nature. The fact that those principles are a non-binding codification, is due to their drafters’ shared view that mandatory instruments often result in “dead letter” law.

The preamble to the UNIDROIT principles foresees the application of those principles when the parties have referred to Lex mercatoria but there is no express reference to the UNIDROIT principles or the general principles of law . In fact, when parties refer in their contract to Lex mercatoria or to general principles of law as the law applicable to that contract, it is automatically assumed by the arbitrators that the parties wish to incorporate these principles as the law applicable to the contract. Logically, this leads us to the conclusion that the UNIDROIT principles are a codification of Lex mercatoria.

We can assume that when arbitratrors act as amiable compositeur –and are, therefore, not constrained to solve the dispute by reference to a national law but according to the requirements of justice- the role of the UNIDROIT principles would be weakened. However, this is not the case: arbitrators also apply the UNIDROIT principles in these circumstances. An old case remains a good explanation of this phenomenon: a partial arbitral award issued by the International Chamber of Commerce of Paris in 1995 in which the parties had decided to submit their dispute to “natural justice” and the arbitrators decided to apply the UNIDROIT principles even though the contracts in dispute had being signed fifteen years before the completion of the Principles! There were three reasons given by the arbitrators to justify the application of the UNIDROIT principles. Firstly, the arbitral tribunal said that the Principles were a codification created by recognised, independent and neutral experts. Secondly, the arbitrators held that the Principles were inspired by the United Nations Convention on Contracts for the International Sale of Goods (CISG) and therefore were specially designed to deal with cases like the one under consideration and, finally, that the principles are not vague and unclear but concrete and simple to apply.

There is little doubt that those principles are seen in International Commercial Arbitration as a codification of the usages of trade law, and therefore, a codification of the new Lex mercatoria. However, the application of the UNIDROIT principles is not only a matter of arbitration; they are also increasingly applied by national courts.

 II. Towards a unification of European Private Law: Contract Law

It is unrealistic to imagine that the unification of private law can occur on a global scale, however, unification at a European level is far more likely. Indeed, until the eighteenth century there were no frontiers in the study of private law in Europe. Scholars all around Europe studied the same private laws, stemming from a common legal tradition: Roman law.

There are many different views concerning the form that a ‘real’ unification should take. Some commentators have argued that a legal dictionary giving definitions of civil terminology would be enough ; other authors are fervent advocates for a real codification and, finally, there are proponents of a Common Frame of Reference (CFR) . The possibility of enacting a European Civil Code and the concrete codification of European Principles on Contract Law were also options that have been considered at a European level.

However, the unification of laws and its codification is not without problems. Many questions and uncertainties arise when thinking about the unification of Private law by means of codification, for example: How does one define the content of “Private law”? What means of codification should be used? What is the real meaning of the word “Code”? What should be codified? How does one ensure a uniform interpretation of the code by national courts? This mass of questions suggests that Europe may not be prepared for a real codification replacing national private rules. Indeed, “such a major step requires more time and more detailed knowledge about each other’s systems than we possess today” .

In order to draw the parallel between the unification of European Private Law and Lex mercatoria, it is essential to understand that the major objective of the European Union is the achievement of a single market. For instance, we can imagine the difficulties for the participants in trans-national transactions due to the fact that there is no harmonised contract law in the common market and each contracting party has its own perception and interpretation of the contract. As a result, the conclusion of trans-national contracts could involve such high risk that entrepreneurs will keep out of foreign markets. Therefore, the harmonisation or unification of European Private Law is an essential component in achieving an effective internal market. The exact same conclusion can be transposed to a global context and to Lex mercatoria, since it applies to international commercial transactions.

European institutions –by way of Directives issued by the European Commission and European Parliament Resolutions– and scholars have attempted to codify and harmonise European Private Law. However, while the European Institutions’ role has been to highlight the need for further harmonisation of private law, it was under the auspices of academic comparative research that the main practical work was carried out. Groups of scholars have been identifying a common core of legal solutions in order to achieve the codification of private law . Some of the work of those groups, such as the Pavia Group, the Trento Common Core Approach to European Private Law, the Study Group on a European Civil Code and the Commission on European Contract Law, offered clear solutions for unifying private law.

A special mention should be made both of the Common Frame of Reference (CFR) and of the Draft Common Frame of Reference (DCFR) and to the Principles of European Contract Law (PECL), since these provide the clearest expression of codification of commercial principles and practices at a European level.

In 2003, after several discussions at a European level, the Common Frame of Reference was the option finally chosen by the ‘Commission Action Plan on a more coherent European Contract Law’.

The European Commission’s Action Plan aimed to provide “fundamental principles, definitions and model rules that could assist in the improvement of the existing acquis communautaire” . The Commission not only insists on the CFR as an instrument to improve the acquis communautaire, but also as the basis of an optional instrument, that is to say an instrument that parties can use when entering into commercial transactions, but with no binding character. In order to do so, two groups contracted with the Commission’s Research Directorate General of the European Commission in order to produce the DCFR: an already-existing group directed by Professor C. von Bar – the ‘Study Group on a European Civil Code’ – and the ‘Research Group on Existing EC law’ or the ‘Acquis Group’ as it is known.

In 2008, the ‘Study Group’ and the ‘Acquis Group’ presented a draft edition of the DCFR that had been revised in order to take comments into account and to improve the text. This new edition was published in 2009. Both texts are basic editions in the sense that they are published without notes or comments. As is indicated in the introduction of the DCFR, we should distinguish between the DCFR and the CFR. The DCFR is a text that serves as a “draft for drawing up a ‘political’ Common Frame of Reference”, academic in nature while the CFR is more political, meaning that the CFR and DCFR are different in content and coverage. The DCFR was developed by academics and scholars and, as an academic text, has no political validity in the European Union.

One year after the publication of the UNIDROIT principles, in 1995, the Principles of European Contract Law (PECL), were published and later revised in 1999 . As with the American Restatement of the Law of contracts, the PECL are designed to provide legal solutions common to all Member States allowing the differences of national laws to converge and find common concepts and a common legal method. In the PECL, as in the American Restatement, the articles are complemented by commentary and explanations on practical examples. Compared to US contract law, the European Union contains a broad range of contract laws, owing their diversity to their different origins and to different legal traditions. The PECL take those different legal traditions into account and has become a codification with a mixture of influences. In order to do so, the Lando Commission applied a comparative method in order to establish the principles that best reflect the social and economic conditions prevailing in Europe and therefore attach varying weights of influence to the Member States’ laws.

As with the UNIDROIT principles, the European Principles were designed to be more than just a model or a checklist of principles. However, the application of both sets of principles differs because, contrary to the UNIDROIT principles, the PECL covers national commercial contracts as well as consumer agreements . Although the principles are also intended to serve other functions, it is true to say that the purpose of the PECL is to serve as the basis of a European Civil Code and, more concretely, of a European Code of Contracts that will replace national contract law in the Member States.

When it comes to solving a dispute, arbitrators often have to examine general principles of law that will allow them to solve the dispute without being bound by a specific set of national rules. In this sense, the PECL were also conceived to be used in arbitration . Indeed, when parties refer to Lex mercatoria as the law applicable to solve a dispute, arbitrators can and often do apply the PECL.

III. Conclusion

Lex mercatoria was born out of the need to codify the customs already in existence in international trade. On the other hand, European private law was created from different legal traditions with the objective of becoming, in the long term, the only law applicable to intra-EU and national transactions. Undoubtedly, both sets of rules contribute to the improvement of trade, but on a different level and for different reasons.

It is important to note that the European Union tries to protect the consumer, and above all, the European citizen. Without intending to be simplistic, Lex mercatoria is much more concerned with trade than it is about consumer protection.

However, in the field of contract law, Lex mercatoria and European contract law have many common features. The best way to illustrate this is by comparing the UNIDROIT principles and the PECL. International arbitrators as well as national courts have referred to both sets of principles when interpreting the contracts submitted to them for adjudication and in confirming their own legal solutions. Both works have a similar structure. However, the same cannot be said for the DCFR. Therefore, it is important to bear in mind that no real connection exists between Lex mercatoria and the acquis communautaire. The latter is based on enacted Directives and the European Court of Justice’s case law, while Lex mercatoria is a canon of practices and resolutions derived from international disputes panels and focusing on Contract law.

In conclusion, it could be said that, in the field of contracts, both the European private law and Lex mercatoria, aim to facilitate commercial trade at a European and global level. However, differences exist in the sources, content and legal traditions that make up these rival sets of trans-national legal principles.

Mariana Pendás Mariana Pendás is a Spanish qualified lawyer. She has worked in the Litigation and Arbitration department of an International Spanish law firm in Madrid since 2010. Prior to this, she worked as a trainee in the International Arbitration department of Shearman & Sterling in Paris and completed a traineeship with the European Commission. She holds a Masters of European Legal Studies form the College of Europe (Bruges) and completed her undergraduate law degree at the University of Fribourg (Switzerland).

Professor Franco Ferrari, the Director of the Center, will give a talk and act as a moderator at a conference focusing on International Sales Law to be held on Nov. 15.th-16th, 2012, at Verona University School of Law, in Verona, Italy. Professor Ferrari, an expert on international sales law, will open the two-day conference and give two talks, one focusing on the exclusion of the United Nations Convention on Contracts for the International Sale of Goods, the other on that Convention’s rules on non-conformity. For the full conference program, please click here.

On Nov. 26th and 27th, the Center will co-host a conference on the effects of the CISG’s adoption in Brazil. Scholars from Brazil, Europe and the U.S. will discuss the impact the coming into force of the CISG will have in Brazil and the differences that exist between the CISG and Brazilian law. This event is one of a series of events that the Center has co-hosted around the world on issues relating to international sales law.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dr. Inka Hanefeld LL.M. (NYU)

---

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

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

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

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

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

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

[7] Art. III New York Convention.

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

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

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

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

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

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

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

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

The NYU Center for Transnational Litigation and Commercial Law, the NYU Journal of International Law and Politics and the NYU International Law Society are pleased to invite you to the 18th Annual Herbert Rubin And Justice Rose Luttan Rubin International Law Symposium:

Tug of War: The Tension Between Regulation and International Cooperation
Thursday, October 25th, 9:00am – 4:30pm
Greenberg Lounge, NYU School of Law, 40 Washington Square South

An all day symposium featuring internationally recognized practitioners, academics, and judges, including former U.K. Supreme Court Justice Lord Collins of Mapesbury and Judge Diane P. Wood of the Seventh Circuit Court of Appeals.

Registration is free. 5 CLE CREDITS AVAILABLE!

Contentious issues arise at every stage of transnational litigation from initial jurisdictional inquiries all the way to  judgment recognition and enforcement.  In this sense, transnational litigation is the nexus of law, business, and international politics.  “Tug of War” will examine how U.S. courts balance our regulatory interest against the need for international cooperation throughout the transnational litigation process. We will focus on situations where the tension is most controversial, including:
•             forum non conveniens dismissal
•             the application of foreign law
•             judgment enforcement and recognition, and
•             the effect of corruption in foreign courts.
With every issue, we will question whether the status quo is working and the extent to which it can be improved through changes in practices and procedures.

Speakers and moderators will include:
•             Lord Collins of Mapesbury, former Justice of the Supreme Court of the U.K.
•             Judge Diane P. Wood, U.S. Court of Appeals, 7th Circuit
•             Prof. Louise Ellen Teitz, First Secretary, Hague Conference on Private International Law
•             Prof. Steven B. Burbank, University of Pennsylvania Law School
•             Prof. Samuel P. Baumgartner, University of Akron School of Law
•             Prof. Ronald A. Brand, University of Pittsburgh School of Law
•             Prof. Peter “Bo” Rutledge, University of Georgia School of Law
•             Prof. Matthew J. Wilson, University of Wyoming College of Law
•             John Fellas, Hughes Hubbard & Reed
•             John B. Bellinger III, Arnold & Porter
•             Prof. Linda J. Silberman, NYU School of Law
•             Prof. Franco Ferrari, NYU School of Law
•             Prof. José E. Alvarez, NYU School of Law

To register, visit http://nyulaw.imodules.com/tugofwar.

For more information and the agenda visit http://nyujilp.org/symposia/tug-of-war/

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Professor Franco Ferrari, Director of the Center for Transnational Litigation and Commercial Law, was voted Titular Member of the International Academy of Comparative Law (IACL). The IACL consists of scholars the principal aim of whom is, according to article 2 of its By-laws, “the comparative study of legal systems”. The Academy, which was founded at The Hague on September 13, 1924, is composed of eighty Titular Members, elected by a two-thirds vote of the Titular Members preceding them. The names of Roscoe Pound, Louis Milliot, Baron Frédericq, C.J. Hamson, Imre Szabo, John Hazard, Paul Crépeau, who have served as presidents of the organization, are indicative of the prestige that the Academy has always enjoyed. For more information of the history of the IACL, please click here: http://www.iuscomparatum.org/141_p_1551/history.html