I. Introduction

In judgment T 4982-11 of November 23, 2012, the Swedish Supreme Court (the “Supreme Court”) upheld an arbitral award challenged primarily on the ground that the matter was non-arbitrable since it was regulated by mandatory law at the time of the conclusion of the arbitral agreement.^[1] The Supreme Court discussed the limits of arbitrability and addressed the question of when arbitrability should be assessed. This paper evaluates the Supreme Court’s conclusions, with regard to this latter issue, which has been little explored by Swedish courts. First, the factual and procedural background is outlined, followed by a description of the Supreme Court’s decision. The decision is then evaluated before final conclusions mark the end of the paper.

II. The factual and procedural background

On January 24, 1990, the Soviet entity, Moscow City Golf Club OOO (“City Golf”), entered into a loan agreement (the “Loan Agreement”) with a Swedish bank, Nordea Bank AB (publ.) (the “Bank”), to finance the construction of a golf course in the former Soviet Union. Under the Loan Agreement, which was governed by Swedish law and contained an arbitration clause providing for arbitration in Stockholm, the Bank was to lend to City Golf SEK 22,000,000 (USD 3,584,155.48). The loan was made through drawdowns by City Golf’s Swedish general contractor. However, when the Loan Agreement was entered into, mandatory law that prohibited, invalidated, and imposed penal sanctions on import and export of currency without due authority approval was in force in both Sweden and the former Soviet Union.^[2]

The Swedish general contractor made its drawdowns and performed the construction but City Golf later failed to repay the loan. The Bank initiated arbitration to recover the outstanding amount and on May 11, 2010, the sole arbitrator gave a final award under which the Bank was allowed to recover from City Golf. At this point, the Swedish and Soviet mandatory currency laws were no longer in force. City Golf challenged the award before the Svea Court of Appeal (the “Court of Appeal”), which upheld it.^[3]City Golf therefore appealed to the Supreme Court.

III. The decision by the Supreme Court

City Golf argued that the award was invalid since it concerned a matter that, at the time of the conclusion of the arbitration agreement, was regulated by mandatory Swedish and Soviet laws requiring authority approval for transfer of currency and therefore was non-arbitrable. City Golf alleged that approval never was granted and that Russian laws to similar effect still were in force. However, the Supreme Court deemed the dispute arbitrable and upheld the award.

The Supreme Court determined that Swedish law was applicable, not only to the Loan Agreement, but also to the arbitration agreement^[4] and made reference to Section 33 of the Swedish Arbitration Act (1999:166) (the “SAA”), under which an arbitral award is invalid “if it includes determination of an issue which, in accordance with Swedish law, may not be decided by arbitrators.”The Supreme Court stated that generally under Swedish law, an issue may be decided by arbitrators, and is arbitrable, if it is amenable to out-of-court settlement. This follows from Section 1 of the SAA. The Supreme Court also stated that foreign mandatory provisions of economic or political nature generally do not affect arbitrability under Swedish law.

The Supreme Court conceded that the issue of when arbitrability is assessed depends to some extent on the circumstances of the case. However, it deemed the amenability to out-of-court settlement when the dispute was resolved to be determinative in this regard, irrespective of the amenability to out-of-court settlement when the arbitration agreement was concluded.  

The Supreme Court noted that there were no longer any Swedish mandatory currency regulations in force when dispute was resolved, which was the relevant time to assess arbitrability. The only mandatory currency regulations allegedly still in force at that point in time were Russian provisions and the Supreme Court held that those foreign provisions were not of such nature that they could affect arbitrability under Swedish law. The dispute was deemed amenable to out-of-court settlement and arbitrable.

IV. Evaluation and comments

Admittedly, the outcome of this case may not have been entirely contingent on when arbitrability was assessed. The Supreme Court did point out that the mandatory provisions did not target the creditor-debtor relationship under the Loan Agreement; only the actual transfer of currency. Even if the repayment contemplated by the Loan Agreement was proven invalid and punishable under current Swedish law, the Supreme Court may still have deemed the issue of payment liability amenable to out-of-court settlement. However, it is easy to see that had the circumstances been just slightly different, the issue might certainly have prejudiced the outcome of the entire dispute.^[5] The Supreme Court correctly found the issue relevant enough to address specifically.

The question of when a dispute needs to be amenable to out-of-court settlement in order to be arbitrable has been subject to debate.^[6]Some argue that the relevant time is when the arbitration agreement was entered into,^[7]whereas others think it is when the dispute was resolved and that arbitrability should be assessed only at that point.^[8] 

The wording of Section 1 of the SAA, which draws up the limits of arbitrability, appears inconclusive in respect of the point at which arbitrability is to be assessed. On the one hand, it stipulates that “[d]isputes concerning matters in respect of which the parties may reach a settlement may, by agreement, be referred to one or several arbitrators for resolution.”The use of present tense, “may reach a settlement,”here suggests that the relevant time is when the matter is referred to the arbitrators. However, on the other hand, the same section stipulates that “[s]uch an agreement may relate to future disputes,”which makes the words “may reach a settlement”rather seem to relate to whether the parties could settle when the arbitration agreement was concluded.

However, the Supreme Court takes a strong position that a dispute, in order to be arbitrable, only needs to be amenable to out-of-court settlement when the dispute is resolved. Although the Supreme Court expresses the caveat that the issue to some extent depends on the specific arbitration agreement and the circumstances in general, it does state that “the determining factor must be whether the parties could have reached an out-of-court settlement at the time when the dispute was resolved, irrespective of whether the arbitration clause could be deemed in breach of peremptory legislation when it was entered into.”^[9]Several arguments may be made in support of the Supreme Court’s conclusion.

Importantly, the restriction that only disputes amenable to out-of-court settlement may be referred to arbitration originates from a principle of party autonomy.^[10] Logically, if parties are free to reach a settlement they should be equally free to refer the matter to arbitration. Therefore, if a dispute currently is amenable to out-of-court settlement, it may be argued that the underlying principle of party autonomy permits either of them to refer it to arbitration even if they previously were not allowed to settle. Mandatory substantive laws change with time and it would seem reasonable that arbitrability change with them.

Also, it may be inappropriate if historical political whims were to affect present day arbitrability of disputes over old agreements. Sweden is a popular forum for “east-west arbitrations”involving parties from the former Soviet Union. The issue of when to asses arbitrability is particularly important for such arbitrations since the highly politicized law of the Soviet Union may differ much from the present law of the remaining republics. If arbitrability were to be assessed at the conclusion of the arbitration agreement, such old politicized legislation may be perpetuated within the parties’relationship. 

Admittedly, the Court of Appeal came to the opposite conclusion on the issue of when arbitrability was to be assessed. It stated that “[t]he relevant time for ruling on whether the dispute is arbitrable is the time of entry into the [L]oan [A]greement.”Already at that point, reasoned the Court of Appeal, should the parties have been able to foresee its consequences; “at least with respect to invalidity.”^[11] Given that the entry into of the Loan Agreement coincided with that of the arbitration agreement, the conclusion is not unreasonable since arbitrability is a requirement for a valid arbitration agreement.^[12] If the arbitration agreement was flawed at its conclusion due to lacking arbitrability it would therefore seem incoherent if that flaw was allowed to “heal”with time.

In support of the Court of Appeal’s view, it may also be argued that assessing arbitrability based on the conditions after the conclusion of the disputed agreement might weaken the effect of certain mandatory legislation. Some mandatory law, such as currency regulations, may be of temporary nature yet serve a valid purpose. If a party knew that once such law is repealed the party would be able to arbitrate and later obtain enforcement of an agreement forbidden by the mandatory provisions, the impetus of such legislation may be weakened.

However, the Court of Appeal did attach significance to the entry into of the Loan Agreement rather than that of the arbitration agreement, which renders these arguments in support of its conclusion weaker. In contrast, the Supreme Court’s view appears more persuasive since it gives maximum effect to party autonomy and takes into account an international trend of increasing arbitrability.^[13] The Supreme Court’s view is also more pragmatic. It would seem unnecessarily formalistic to prevent arbitration of an issue that the parties have already agreed to arbitrate and that under the current political values is amenable to out-of-court settlement. The Supreme Court’s view may be positive for Sweden’s attractiveness as a forum for international arbitrations since it favors a broad notion of arbitrability and slightly less room for finding an award invalid due to lacking arbitrability. It should also increase foreseeability as to whether a dispute is arbitrable since arbitrability will depend on current conditions rather than the conditions at the conclusion of the arbitration agreement, which may be less lucid.^[14] 

V. Conclusions

In the court proceedings between City Golf and the Bank, the Supreme Court answered the question of when arbitrability should be assessed under Swedish law. It held that a dispute is arbitrable if the matter it concerns is amenable to out-of-court settlement when the dispute is resolved. This holding by the Supreme Court is persuasive since it is pragmatic, well in line with the principle of party autonomy and with the international trend of increasing arbitrability. It is positive for Sweden since it contributes to a broader and more foreseeable notion of arbitrability, which should work to maintain Sweden’s attractiveness as a forum for international arbitrations.

 

Eric Schultz

I.      Introduction

The purpose of this article written exclusively for the “Transnational Notes” of NYU’s Center for Transnational Litigation, Arbitration and Commercial Law, directed by Professor Franco Ferrari, is to provide a brief overview of recent case law regarding the recognition of foreign arbitral awards in Brazil.

According to the Brazilian Arbitration Act (“Lei 9.307/96” or “BAA”), an arbitral award rendered outside Brazil shall be recognized by the competent authority to produce its effects within the Brazilian territory.

Since the 2004 Amendment to the Brazilian Federal Constitution[i], the Superior Court of Justice (“Superior Tribunal de Justiça” or “STJ”) is the competent authority to decide on the recognition of foreign awards in Brazil, including arbitral awards.

Such recognition is governed by three sets of rules: (i) first, international treaties adopted by Brazil, such as the Inter-American Convention on International Commercial Arbitration (1975)[ii], adopted in 1996, the Inter-American Convention on the Extraterritorial Effectiveness of Foreign Arbitral Award (1979)[iii], adopted in 1997, and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (“the New York Convention”), adopted in 2002[iv]; (ii) the BAA, already referred to; and (iii) the STJ Resolution 9, of 4 May 2005 (“Resolution 9/2005”).

II.      Case law from 1996 to 2009

In 2010, the Brazilian Arbitration Committee (“CBAr”), an academic nonprofit organization, concluded a comprehensive empirical research on judicial decisions related to arbitration matters and the application of the BAA[v].

One of the reports dealt specifically with the recognition of foreign arbitral awards, analyzing judicial decisions rendered between November 1996 and July 2009. It concluded that the STJ and the Federal Supreme Court (which was the competent authority to recognize foreign awards until 2004) were highly favorable to the recognition of foreign arbitral awards. Recognition was denied only in a small percentage of cases.

III.      Recent developments (2011-2013)

STJ’s “pro arbitration” approach is confirmed by recent case law.

We analyzed twelve arbitral awards submitted for recognition to the STJ between 2011 and 2013. Out of those awards, only one was not recognized (Kanematsu v. Advanced Telecommunications Systems), due to the lack of proof of a valid arbitration agreement. Such cases are presented in more detail below. All the cases and facts discussed below are public and may be found in the STJ’s website[vi], searching by the reference included in the footnotes.

A.     Comverse v. American Telecommunications do Brasil^[vii]

Claimant Comverse Inc.sought the recognition of the arbitral award rendered in New York City. The arbitral tribunal decided that the American Telecommunications Inc. Chile and the American Telecommunications do Brasil Ltda. – a Brazilian subsidiary of the Chilean company – should pay damages to Claimant. The Brazilian subsidiary, Respondent in the recognition proceedings, alleged that it was not a party to the original contract and was not bound by the arbitration clause. Claimant responded that, during the arbitral proceedings, counsel for the Chilean company sent a letter to the arbitral tribunal declaring that the affiliated companies (including Brazilian affiliate) (i) agreed to be bound by the arbitration clause, (ii) accepted the Arbitral Tribunal’s jurisdiction and (iii) that the counsel was going to represent them. The question was whether or not such letter could be considered a valid arbitration agreement and a valid counsel nomination.

The STJ answered those questions in the affirmative. It found that, according to Art. 38 II of BAA[viii] and article V (1) (a) of the New York Convention, the award shall be recognized if the arbitration agreement is valid “under the law to which the parties have subjected it”. The STJ clarified that the applicable law to party representation is not necessarily Brazilian law, but the rules chosen by the parties. According to the institutional arbitration rules applicable to the case, the parties were allowed to nominate their counsel by sending a letter to the arbitral tribunal. Furthermore, the representative of the Brazilian company had been present in the hearings, including when the Arbitral Tribunal and the parties decided to include the Brazilian company, as well as the other subsidiaries, in the proceedings, and never objected to the arbitral tribunal’s jurisdiction. The STJ concluded that, according to the principle of good faith, a Respondent in an arbitration proceeding cannot accept to abide by the arbitration clause and then oppose to the jurisdiction of the arbitral tribunal. The STJ also decided that the party opposing the recognition of an arbitral award bears the burden of proving the existence of grounds for such recognition to be denied, burden which was not fulfilled in the present case.

B.     Western Bulk Carriers v. A.P. Oxidos^[ix]

Western Bulk Carriers sought the recognition of the award rendered by an arbitral tribunal in London ordering A.P. Oxidos Industria e Comercia Ltda. (“Respondent”) to pay damages for breach of contract. Respondent alleged that the requirements of articles 37 of the BAA[x], 5 III and IV of the Resolution 9/2005 were not fulfilled, because only the signature of the English notary was legalized, not the signature of the arbitrator, and the arbitral award annexed to the recognition proceeding was neither complete nor translated.

First, STJ rejected the argument concerning the arbitral award since two copies had been annexed to the proceedings and one of them was complete. The STJ then analyzed the meaning of the word “authenticated” in Art. 37 I of the BAA. It reasoned that, according to case law, the recognition of the notary’s signature is valid under this article of the BAA. Secondly, the STJ acknowledged that the award had become binding on the parties. Thus, the requirements were fulfilled. Thirdly, it added that there was no violation of public policy. The arbitral award was granted recognition.

C.     LDCB v. LVL de C^[xi]

Louis Dreyfus Commodities Brasil S.A sought the recognition of the arbitral award rendered by the arbitral tribunal of the International Cotton Association. The Arbitral Tribunal decided that LVL de C (“Respondent”) should pay damages for breach of the purchase agreement of cotton. Respondent opposed to the recognition of the arbitral award alleging that the arbitration agreement was invalid due to formal requirements for standard form contracts under Art. 4 §2 of the BAA[xii]. It also alleged that it had not been duly notified (Art. 5 II of the Resolution 9/2005).

STJ stated that the parties had signed every page of the contract (even the page containing the arbitration clause), and that the clause seemed to be valid according to the law chosen by the parties (Art. 38 II of the BAA). Furthermore, the STJ reminded that it is not allowed to re-examine the merits of the dispute in a proceeding for recognition of foreign award. Hence, the STJ clarified that it could not, in the case at hand, define the nature of the contract, and determine whether the contract was a standard form contract or not, an issue which had not been dealt with by the arbitral tribunal. The arbitral award was granted recognition.

D.    YPFB Andina v. Univen Petroquímica^[xiii]

YPFB Andina S.A. and Univen Petroquímica Ltda. entered into a contract for the supply of natural gas during three years. According to the allegations, YPFB Andina suspended the supply of gas before the end of the three years. The arbitral tribunal decided that the contract was validly suspended in light of “force majeure” events. Univen Petroquímica Ltda. (“Respondent”) argued that the arbitral award could not be recognized in Brazil because: (i) the arbitral tribunal had been partial, (ii) public policy had been violated, and (iii) a setting aside procedure was pending in the place of arbitration.

The STJ rejected the first argument because there was nothing in the facts indicating that Respondent opposed to the arbitral tribunal when it had the opportunity to do so. As regards the suspension of the contract and the alleged public policy violation, the STJ reminded that it is not allowed to re-examine the merits of the case, since its power was limited by articles 38 and 39[xiv] of the BAA. Finally, as regards the setting aside procedure, the STJ decided that Respondent did not prove it, and therefore the argument could not be considered. The arbitral award was granted recognition.

E.     Nuovo Pignone v. Petromec^[xv]

In this case, the STJ clarified that, according to Art. 34 of the BAA[xvi], an arbitral award is considered foreign when it is rendered outside Brazil. The BAA does not take into consideration the location of the arbitration chamber which administered the arbitral proceedings. For a comprehensive analysis of this case, we refer to Daniel Aun’s article also published in the NYU “Transnational Notes”[xvii].

F.      Kanematsu v. Advanced Telecommunications Systems^[xviii]

Kanematsu USA Inc. sought the recognition of the award rendered by the AAA, which decided that the Advanced Telecommunications Systems do Brasil Ltda. (“Respondent”) should pay damages. Respondent opposed to the recognition arguing the inexistence of a contract signed by the parties and the absence of legal reasoning in the award.

The STJ denied recognition, finding that the contract between the parties had not been signed and Respondent objected to the jurisdiction of the arbitral tribunal during the arbitral proceedings. The STJ cited Plexus[xix], in which it was decided that, since the choice of arbitration is an exception, the express and clear will of the parties is mandatory. Hence, the STJ concluded that there was no proof of the existence of the arbitration agreement and that recognizing this award would be a violation of articles 37 II  and 39 II  of the BAA.

G.    GE Medical Systems v. Tecnimed Paramedics^[xx]

The recognition of this arbitral award rendered in Miami, FL, United States (SEC 853/EX) is related to two US state judgments validating the arbitration agreement, which had been also submitted for recognition to the STJ (SEC 854/EX).

Both recognition proceedings were suspended because one of the parties had previously sought the declaration of invalidity of the arbitration agreement before a Brazilian court, in the State of Rio Grande do Sul. The State Court of Appeals decided that the arbitration agreement was invalid and an appeal related to such procedure was pending in the STJ at the time both recognition proceedings were initiated. This is why, at the request of one of the parties, the STJ decided to suspend both recognition proceedings.

Later on, GE Medical Systems Information Technologies Inc. and General Electric do Brasil S.A. requested the continuation of the recognition proceedings before the STJ. In granting such request in the Regimental Appeal of SEC 854/EX, in 2011, the STJ decided that setting aside proceedings and recognition proceedings may exist and develop in parallel (no lis pendens)

The appeals against the State Court of Appeals decision to the STJ were found invalid for violation of formal procedural requirements under Brazilian law[xxi]. Therefore, the State Court of Appeals decision rendering the arbitration agreement invalid turned into res judicata.

However, in deciding SEC 854, the STJ found that such res judicata did not affect the recognition of the two US state judgments validating the arbitration agreement because the grounds (“causa de pedir”) for such lawsuits were different. Therefore, the STJ decided to grant partial recognition to the US state judgments, excluding some civil and criminal sanctions. The recognition of the arbitral award is still pending in the STJ (SEC 853/EX).

H.    Weil Brothers Cotton Inc. v. Espólio Pedro Ivo de Freitas[xxii]

Weil Brothers Cotton Inc. sought the recognition of the arbitral award rendered by the arbitral tribunal of the International Cotton Association in 2008. The arbitral award decided that the assets (“espólio”) of Pedro Ivo de Freitas  – Pedro Ivo de Freitas being deceased – should pay damages for breach of the cotton purchase agreement. Respondent’s arguments against recognition were, among others, that (i) the arbitral tribunal was not competent since there were two different contracts, (ii) the arbitration agreement contained in a standard form contract did not observe the form requirements of the BAA and, therefore, was invalid and ineffective (Art. 4 §2 of the BAA), (iii) the contract was tainted with fraud, and (iv) it was not duly notified according to Art. 39 of the BAA.

In dismissing all of Respondent’s arguments and granting the enforcement of the award, the STJ decided that (i) the arbitral tribunal was competent because the International Cotton Association was mentioned in both contracts; (ii) the STJ cannot determine the validity and effectiveness of the contract in a proceeding for recognition of a foreign award, because such analysis would entail an examination of the merits of the dispute, which is prohibited by Brazilian law, and also in light of the fact that there was a lawsuit pending in Brazil to deal with the fraud allegations; and, finally, (iii) Claimant proved the existence of Respondent’s notification and Respondent’s awareness of the arbitral proceeding.

I.       Keytrade AG v. Ferticitrus Indústria e Comércio de fertilizantes[xxiii]

Keytrade AG sought the recognition of an arbitral award rendered against Ferticitrus Indústria e Comércio de fertilizantes Ltda. (“Respondent”) by an arbitral tribunal in London. The dispute concerned “demurrage” expenses related to Respondent’s debarkment’s delay. Respondent opposed to the recognition of the award alleging that it had not been duly notified (Art. 38 III of the BAA) and that the compound interests in the sentence were a violation of public policy (Art. 39 II of the BAA).

The STJ rejected both arguments, deciding that (i) the notifications were made according to the law chosen by the parties, that is, the law of the place of arbitration (London), which allows for notification by email, fax or letter, in accordance with Art. 39 of the BAA, and the receipt of those notifications was proven; (ii) as regards the public policy argument, the STJ reminded that it is not any divergence with Brazilian law that shall suffice to fulfill the conditions of violation of public policy. The fundamental values of the Brazilian law system must be threatened to allow the STJ to re-examine the merits of the dispute, which is not the case at hand, because compound interests are also accepted in Brazil in certain types of contracts provided for in the Brazilian Civil Code (“contrato de mútuo”) and according to the requirements of Brazilian law.

J.        Mandate Holdings LLC. v. Consórcio Europa[xxiv]

Mandate Holdings LLC. sought the recognition of an arbitral award rendered against Consórcio Europa  by an arbitral tribunal seated in Los Angeles. The dispute related to the breach of the licensing agreement, containing an arbitration agreement.

Consórcio Europa (“Respondent”) argued that the arbitral award should not be recognized in Brazil because (i) there was no proof of power of attorney attributed to the vice-president of Mandate Holdings Llc., (ii) the Supreme Court of California had not recognized the award, as should be done according to the Californian civil procedure code, (iii) there was no proof that the award is the final judgment (res judicata), (iv) the contract is a standard form contract rendering the arbitration agreement invalid, and (v) Respondent had not been duly notified.

The STJ rejected all the arguments deciding that (i) the powers of the vice-president was recognized by the notary of Los Angeles; (ii) the recognition of a foreign award in Brazil is made only in accordance with Brazilian laws (the BAA and the Resolution 9/2005); (iii) according to the arbitration agreement, the award would be binding on both parties and had to be executed; (iv) the STJ cannot determine the nature of a contract in a proceeding for recognition of foreign award, since this would conduct to a re-examination of the merits of the dispute; and finally (v) a “letter rogatory” is not necessary to notify a party, since email, fax or a simple letter is enough, as long as the receipt can be proven.

K.    Queensland Cotton Corporation Ltd. v. Agropastoril Jotabasso[xxv]

Claimant, Queensland Cotton Corporation Ltd., sought the recognition of the arbitral award rendered by the arbitral tribunal of the International Cotton Association in Liverpool against Respondent, Agropastoril Jotabasso Ltda. (former Agropecuária Basso Ltda.).

Respondent alleged that the award could not be recognized because (i) it had not been duly notified, (ii) the contracts signed by the parties were not included in the records, (iii) the award was unfair, (iv) the amount claimed in the recognition proceedings was higher than the amount included in the award, and (v) Olam International Ltd. is not a legitimate successor of Claimant since there was no proof of its power of representation in the records.

In dismissing all of Respondent’s arguments and granting the enforcement of the award, the STJ made it clear that it cannot determine the nature of a contract and the fairness of an award in a proceeding for recognition of a foreign award, because such analysis would entail a re-examination of the merits of the dispute, which is prohibited by Brazilian law.

L.      Queensland Cotton Corporation Ltd. v. Espólio Pedro Ivo Freitas[xxvi]

Queensland Cotton Corporation Ltd sought the recognition of the arbitral award rendered by an arbitral tribunal under the International Cotton Association in Liverpool against the assets (“espólio”) of Pedro Ivo de Freitas (“de cujus”) (“Respondent”) – Pedro Ivo de Freitas being deceased.

Respondent opposed to the recognition alleging that it did not sign the contract containing the arbitration agreement and was never aware of the choice of arbitration.

The STJ decided that the successor of the de cujus is responsible for all debts, and there was proof of a duly notification made according the law chosen by the parties. The arbitral award was granted recognition.

 

Rafael F. Alves

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

 

Joséphine Marmy

Master of Law at the University of Fribourg, Switzerland. Currently working as a law clerk at Baker & McKenzie Zurich. Former intern at L.O. Baptista Schmidt Valois Miranda Ferreira Agel Advogados in São Paulo, and former assistant of Professor Pierre Tercier in Switzerland.

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

I.              The Vivendi decision

A.           The decision of the Supreme Court

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

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

B.            Critique

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

II.           Revision of Vivendi in 2012

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

A.           Facts and decision of arbitral tribunal

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

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

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

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

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

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

C.           Definition of legal capacity and its consequences

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

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

D.           Comments to its Vivendi decision

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

E.            Conclusion regarding subjective arbitrability

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

III.        Comments

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

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

A.           The characterization of the insolvency problem

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

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

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

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

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

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

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

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

 

Simon Marc Hohler

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

 

This is to announce the February 24^th, 2014, session of the Arbitration Forum of the Center for Transnational Litigation, Arbitration and Commercial Law, entitled “International Commercial Arbitral Awards as Investments”.

The event will take place on Monday, February 24^th, 2014, from 6.00 – 8.00 pm, in the Lester Pollack Colloquium Room, Furman Hall 900 (245 Sullivan Street, New York, NY 10012).

It is a great pleasure to be able to announce that on the occasion of that session, Prof. Luca G. Radicati di Brozolo will give a talk on the aforementioned and that Prof. José Alvarez, Mr. Brian King and Mr. Laurence Shore agreed to act as commentators.

Luca G. Radicati di Brozolo is a tenured professor of Private International Law at the Catholic University of Milan, where he also teaches International Arbitration and Transnational Commercial Law. He is the author of five books and a co-editor of a commentary on international arbitration, as well as of over 100 articles and other contributions on a variety of topics of public and private international law, arbitration law, the law of the European Union, competition law, telecommunications and banking law. He gave a course on Mandatory Rules and International Commercial Arbitration at the Hague Academy of International Law in 2003. Prof. Radicati di Brozolo is a founding partner of the arbitration and litigation boutique Radicati di Brozolo Sabatini in Milan, where he practices both as counsel and as arbitrator. He is a member of the International Court of Arbitration of the ICC. He was, inter alia, counsel for the claimant in ICSID Case ARB/05/07 Saipem v. People’s Republic of Bangladesh. He is a member of the ICC Court of International Arbitration. Prior to founding his firm, he was for thirty years a partner in two of the leading Italian firms, having started his professional career at the Office of the Legal Advisor of the Bank of International Settlements.

José Enrique Alvarez, a former president of the American Society of International Law and a member of the Council on Foreign Relations, has made substantial scholarly contributions to a wide range of subjects within international law, including the law-generating roles of international organizations, the challenges facing international criminal tribunals, and the international investment regime. Along with NYU colleague Benedict Kingsbury, Alvarez is the co-editor-in-chief of the leading peer-reviewed journal in the field, the American Journal of International Law. In September 2013, he was elected to the Institut de Droit International, a Nobel Prize–winning organization consisting of the world’s leading public international lawyers. Prof. Alvarez has been special adviser on international law to the prosecutor of the International Criminal Court, an attorney adviser with the Office of the Legal Adviser of the US Department of State, and has taught at Columbia, the University of Michigan, George Washington, and Georgetown law schools. He received a BA summa cum laude from Harvard University, first-class honors in jurisprudence from Oxford University’s Magdalen College, and a JD cum laude from Harvard Law School, where he was topics editor of the Harvard International Law Journal. In 2009, he delivered a series of lectures at The Hague Academy of International Law on the subject of foreign investment, subsequently published as The Public International Law Regime Governing International Investment (2011).

Brian King is a partner in the international arbitration group at Freshfields Bruckhaus Deringer. Prior to returning to New York in 2007, he headed the arbitration group in the firm’s Amsterdam office for seven years. Mr. King’s practice centers on acting as counsel or arbitrator in investment treaty and international commercial disputes. He has represented both investors and States, as well as some of the largest European and U.S. corporations. A 1990 graduate of the NYU Law School, Mr. King, who joined NYU as scholar-in-residence in November 2013, regularly speaks and publishes on arbitration-related topics.

Laurence Shore is a partner in the New York City office of Herbert Smith Freehills LLP.  He is a member of the firm’s international arbitration practice group. His law degree is from Emory University, where he was Editor-in-Chief of the Emory Law Journal (1988-89), and he holds a Ph.D. in American History from The Johns Hopkins University. Laurence’s publications include “You Can Bet the Company But Not the State: The Proper and Improper Conduct of Sovereigns in Arbitration”, World Arbitration and Mediation Review (2009); and “Arbitration, Rhetoric, Proof: The Unity of International Arbitration Across Cultures”, in Contemporary Issues in International Arbitration and Mediation: The Fordham Papers (A.W. Rovine ed., 2010). He is also the co-author of International Investment Arbitration: Substantive Principles (2007).

 

To RSVP, please send an email to Cassy Rodriguez at cassy.rodriguez@nyu.edu

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

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

Background to the TCL Case

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

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

Application to the High Court

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

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

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

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

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

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

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

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

Relevance to the United States

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

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

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

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

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

Beverley Newbold

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

A. Introduction

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

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

B. Summary of Facts and Decision of the Chairman

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

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

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

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

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

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

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

The ICSID Convention and Rules Standard

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

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

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

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

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

The UNCITRAL Model Law and Rules Standard

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

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

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

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

The IBA Guidelines Standard

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

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

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

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

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

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

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

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

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

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

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

D. Analysis of the Decision

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

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

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

E. Conclusion

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

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

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

Ikemefuna Stephen Nwoye

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

In his opinion rendered on April 25^th, 2013 (in Case C-9/12), Advocate General Jääskinen cited a paper by Professor Franco Ferrari, the Executive Director of the Law School’s Center for Transnational Litigation, Arbitration and Commercial Law to show the status of the law on a given issue. Advocate General Jääskinen rendered his Opinion in relation to a preliminary ruling, from a Belgian court, concerning mainly the interpretation of the rule of special jurisdiction laid down in relation to contractual matters in Article 5(1)(a) and (b) of Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, usually referred to as ‘the Brussels I Regulation’. More specifically, the Court of Justice of the European Union was asked to rule whether a distribution agreement, pursuant to which one party purchases goods from another party in one Member State for resale in the territory of another Member State, is to be classified as ‘sale of goods’ or ‘provision of services”. In getting to its conclusion, the Advocate General relied on a paper by Professor Ferrari excluding that distribution contracts can be compared to “sales of goods”, at least under the United Nations Convention on Contracts for the International Sale of Goods.

The Center will host an Arbitration Forum, entitled “Limits to Party Autonomy in International Arbitration” on Monday, February 3, 2014,  from 6.00 – 8.00 pm, in Vanderbilt hall, room 214 (40 Washington Square South, New York, NY 10012).

The event will be moderated by the center’s Executive Director, Prof. Franco Ferrari. Our distinguished speakers include Prof. Giuditta Cordero-Moss, professor and director of the Department for Private Law at the University of Oslo,   Prof. Diego P. Fernández Arroyo,  professor and co-director of Global Governance Studies at the School of Law of Sciences Po, Paris, Mr. Stefano Azzali, Secretary General of the Milan Chamber of Arbitration and Secretary Treasurer of the International Federation of Commercial Arbitration Institutions (IFCAI) and Prof. Luca G. Radicati di Brozolo,  professor of Private International Law at the Catholic University of Milan.

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

Since space is limited, those interested are kindly asked to R.S.V.P.  Please send an email to Cassy Rodriguez at cassy.rodriguez@nyu.edu to confirm your attendance.

On several occasions German Supreme Court cites papers by Professor Franco Ferrari

In two different rulings, the Supreme Court of Germany cited papers by Professor Franco Ferrari, the Executive Director of the Law School’s Center for Transnational Litigation, Arbitration and Commercial Law. In its October 23^rd, 2013, ruling, which was only recently made public, the German Supreme Court relied on a paper by Ferrari asserting that one of the general principles underlying the 1980 United Nations Convention on Contracts for the International Sale of Goods is that of estoppel. In a ruling of October 10^th, 2013, the German Supreme Court justified its holding by referring to a different paper authored by Ferrari, in which Ferrari argues that under the Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) issues relating to the statute of limitations are to be qualified as issues of substance.

The Center, in collaboration with the New York/Washington D.C. Chapter of the Spanish Arbitration Club, will host the January 2014 Arbitration Forum, entitled “The Star Expert” on Tuesday, January 21st, 2014, from 6.00 – 8.00 pm, in Lipton Hall, D’Agostino Hall, 108 West Third  St., New York, NY 10012.

The event will be moderated by the center’s Executive Director, Prof. Franco Ferrari. Our distinguished speakers include Prof. Bernardo Cremades,  leading Spanish international arbitration practitioner, Mr. Grant Hanessian, Co-Chair of Baker & McKenzie’s International Arbitration Practice Group and Mr. Pedro Martinez-Fraga, partner in DLA Piper’s international arbitration and litigation practice.

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

Since space is limited, those interested are kindly asked to R.S.V.P.  Please send an email to Cassy Rodriguez at cassy.rodriguez@nyu.edu to confirm your attendance.

 

The Center is proud to announce the November 2013 session of the Arbitration Forum of the Center for Transnational Litigation, Arbitration and Commercial Law, entitled “Abusive Claims, Impecunious Claimants and Security for Costs:  the Search for a Framework”, which will take place on Monday, November 25th, 2013, from 6.00 p.m. to 8.00 p.m., in the Lester Pollack Colloquium Room, Furman Hall 900 (245 Sullivan Street, New York, NY 10012).  The speakers will be Mr. Brian King, Mr. Domenico Di Pietro and Mr. Eric A. Schwartz.

Brian King is a partner in the international arbitration group at Freshfields Bruckhaus Deringer.  Prior to returning to New York in 2007, he headed the arbitration group in the firm’s Amsterdam office for seven years.  Mr. King’s practice centers on acting as counsel or arbitrator in investment treaty and international commercial disputes.  He has represented both investors and States, as well as some of the largest European and U.S. corporations.  A 1990 graduate of the NYU Law School, Mr. King regularly speaks and publishes on arbitration-related topics. Mr. King is also this November’s scholar-in-residence at the Center for Transnational Litigation, Arbitration and Commercial Law.

Domenico Di Pietro, who graduated in law at University of Rome La Sapienza and received his LLM from Queen Mary, University of London, practises international arbitration with Freshfields Bruckhaus Deringer in Rome and Milan. He has acted in numerous arbitrations under the rules of a great variety of arbitral institutions as well as in ad hoc proceedings. He is also active in investment arbitration, having advised and appeared in well-known ICSID cases, including annulment proceedings. Domenico has also acted in several sport disputes at the Athens and Beijing Olympics. Mr. Di Pietro lectures international arbitration at Roma Tre University. He has published extensively on international arbitration. He is qualified to practise in Italy and in England and Wales.

Eric A. Schwartz, a graduate of Dartmouth College and Yale Law School, is a partner in the New York and Paris offices of King & Spalding, where he specializes in international arbitration.  He is a former Secretary General and current Vice-President of the ICC International Court of Arbitration. Over the last 30 years, he has acted as counsel on behalf of some of the world’s largest companies, public authorities and sovereign states in international arbitration proceedings in all of the principal European arbitration venues, as well as in Africa, Asia and the US. In addition to his work as counsel, Mr. Schwartz regularly sits as an arbitrator. He has appeared as chair, sole arbitrator or co-arbitrator in proceedings under the rules of the AAA, CIETAC, ICC, ICSID, LCIA, SCC and UNICTRAL in arbitrations throughout the world.  He is also the author of dozens of articles on international arbitration practice as well as the co-author (with Yves Derains) of A Guide to the ICC Rules of Arbitration (Kluwer, 2nd ed. 2005). Mr. Schwartz is listed as one of the 25 “most highly regarded individuals” in the world in his field in Who’s Who Legal – Commercial Arbitration 2014.

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

To rsvp, please send an email to cassy.rodriguez@nyu.edu.

On November 22, the Center – in collaboration with the Jerusalem Arbitration Center – will host a conference on “Solving Israeli-Palestinian Commercial Disputes.”

The event will be moderated by the Executive Director of the Center for Transnational Litigation, Arbitration and Commercial Law, Prof. Franco Ferrari and Prof. Maya Steinitz, University of Iowa College of Law. Speakers include Mr. Oren Shachor, ICC Israel, Ms. Yara Asad, ICC Palestine, and Mr. Mazen E. Qupty, ICC Palestine.

 

Please join us as we introduce the Jerusalem Arbitration Center at the NYU School of Law.

 

Solving Israeli-Palestinian Commercial Disputes:

Introducing the Jerusalem Arbitration Center

Friday, November 22, 2013

10:00am-12:00pm

Lester Pollack Colloquium Room, Furman Hall 900

245 Sullivan Street. New York, NY 10012

 

To RSVP, please click here

Professor Franco Ferrari, the Executive Director of the Center for Transnational Litigation, Arbitration and Commercial Law, has just edited the proceedings of the conference, hosted by the Center, entitled “Forum Shopping in the International Commercial Arbitration Context”, held at NYU from Feb. 28^th – March 2^nd, 2013. The conference brought together arbitration practitioners and arbitration scholars from the U.S. and abroad to examine the question of whether and, if so, to what extent forum shopping is relevant in the context of international commercial arbitration. The introductory talk, given by Professor Ferrari, entitled “Forum Shopping in the International Commercial Arbitration Context: Setting the Stage”, as well as the table of contents can be found by clicking here.

On October 7th, 2013, the Center hosted a seminar entitled “Interim Relief: What, Why, When, How.” The event was moderated by Prof. Franco Ferrari and featured talks by Prof. Massimo Benedettelli, Prof. George A. Bermann, Dr. Andrea Carlevaris, Mr. Domenico Di Pietro, Mr. Brian King, and Mr. Eric P.Tuchmann. For full program brochure click here

Interim Relief: What, Why, When, How?

New York University School of Law

Professor Franco Ferrari, the Executive Director of the Center, publishes a paper on the homeward trend and lex forism (entitled Tendance insulariste et lex forisme malgré un droit uniforme de la vente) in the latest issue of the French law journal Revue critique de droit international privé. In the paper, Professor Ferrari shows that although interpreters are generally not supposed to read the United Nations Convention on Contracts for the International Sale of Goods through the lenses of domestic law,  case-law of the various Contracting States shows that courts do not always comply with such prohibition directed at avoiding both the homeward and lex forism. Professor Ferrari then goes on to suggest how to avoid both the homeward trend and lex forism.

The fourth Global ICC Young Arbitrator’s Forum conference took place in New York City on June, 27-29 2013. The conference gathered about two hundred practicing arbitration lawyers, young and old, from the four corners of the globe. The conference was co-hosted by the Center for Transnational Litigation and Commercial Law at New York University, School of Law.

Salim Moollan, vice-president of the ICC International Court of Arbitration, opened the first day with a keynote speech addressing how to foster legitimacy in international arbitration. Following Moollan’s opening remarks, the conference continued with a debate on the challenges to the current investment arbitration system: « Defying Investment Arbitration: Moral Hazards, Perceived Injustices and the Coming of a New Age.” which this blog attempts to briefly summarize.[1]

Clash of Paradigms

Before defying a system, one must be able to define it; which is no simple task. James Morrison (Allen Linklaters, Sydney) and Maxi Scherer (Wilmer Cutler Pickering Hale and Dorr LLP and Queen Mary University of London), who moderated the debate, highlighted this difficulty by drawing a comparison to the platypus, an animal living in Australia. They argued that investment arbitration was as hard to define as this rare creature: Is it a bird? A mammal? A reptile? Or is it some strange hybrid of the three?

The platypus analogy was borrowed from Anthea Roberts’ 2013 article “Clash of Paradigms: Actors and Analogies Shaping the Investment Treaty System” (American Journal of International Law) in which she wrote that investment arbitration is a hybrid of many fields of law: while arbitration is clearly a creature of public international law, it also contains private international law dispute resolution mechanisms. As if this was not enough, investment arbitration also contains facets of public regulatory capacity, sovereign interests, and trade and human rights law. Roberts suggests that since the field of international investment law is a relatively new one, it is under-theorized. As a result, “when seeking to fill gaps, resolve ambiguities or understand the system’s nature” observers usually employ comparisons in order to clarify concepts or draw upon case-law from other sub-fields of international law. Given investment arbitration’s platypus-like diversity, one’s understanding of investment arbitration can vary wildly depending on one’s background. Lawyers trained in public international law, administrative law, human rights law, trade law or from a commercial litigation will each employ a different paradigm when dealing in investment arbitration, thereby influencing which actors they believe should prevail and which direction the system  should take.

The panelists were drawn from a variety of different backgrounds in order to provide a full spectrum of opinions concerning investment arbitration: John Crook, arbitrator and professorial lecturer at the George Washington University Law School who provided an academic perspective; Suzana Blades, Senior Counsel at ConocoPhillips, Houston who provided her view on arbitration from the investor side; Sophie Nappert, arbitrator and member of Three Verulam Buildings, London; and Anna Joubin-Bret, now in private practice but former Senior Legal Advisor on Investment, Technology and Enterprise Development of the U.N. Conference on Trade and Development (UNCTAD) each provided perspective from inside the arbitration practice mindset. Leidylin Contreras, lawyer at the Office of the legal Advisor to the President, Presidency of the Dominican Republic, gave attendees the precious perspective from the host State, which is seldom heard in these debates.

These distinguished personalities all strove to provide conference attendees with some perspective concerning the recent backlash against investment arbitration. The latters all had in mind the stir caused by the report, “Profiting from Injustice”, published in 2012 by the Corporate Europe Observatory and the Transnational Institute, which accused law firms, arbitrators and financiers of fueling an investment arbitration boom out of mere pecuniary interests and of perpetuating a deeply unfair system from which the host States and their citizens are the obvious losers.

Slightly more constructive but no less caustic was the criticism of investment arbitration made by Sundaresh Menon, Chief Justice of Singapore, at the occasion of the 2012 ICCA Congress opening session. The growing complexity and “judicialisation” of investment arbitration procedure is necessarily followed by the explosion of delays and costs; the exclusivity of the arbitral “club” consisting of a small pool of specialized arbitrators from Europe and the United States, experts in commercial law but who are out of touch with the public interests of the countries affected by their actions and who are not held accountable to the people they affect; the moral hazards necessarily entailed by such an endogamous profession, characterized by multiple hats-wearing and the tension between the role of judge and businessman is fact; the arbitral discretion in the interpretation of open-textured treaty commitments without any oversight often leads to conflicting results and a lack of coherence and predictability, all of these elements lead to a disconnect between arbitration and its users, both States and investors.

Efficiency and Consistency

As an in-house lawyer for an investing company, Suzana Blades reminded the conference attendees that arbitration should be primarily about solving disputes and that arbitrators are drifting away from this imperative. “We want a decision, not a thesis.” she said, regretting the sometimes academic posture of certain arbitrators. “At the end of the day, the goal is to solve a dispute, not to develop international law.” She also argued that arbitrators are sometimes too deferential to the parties, allowing them to create extension, bifurcations or even trifurcations (!) in the proceedings for fear of seeing their award annulled for lack of due process, the consequence being significant delays in the delivery of a biding and enforceable award. For Blades, a decision given by an arbitral panel after six or seven years of litigation is not timely. In order to reconcile investment arbitration with its users, Blades urged that investment arbitration procedure should allow arbitrators to have a bolder attitude in the process and render awards more quickly and efficiently. She also encouraged companies to develop in-house arbitration teams, able to grasp the stakes of investor-State litigation and to consider Alternative Dispute Resolution (ADR) as a serious alternative to arbitration.

Sophie Nappert, however, pointed out that we had to stop thinking about investment arbitration as a quick dispute resolution system. According to her, in disputes with so many domestic public interests at stake and so many outside actors involved, it was impossible for arbitral tribunal to deliver a short and technical award. Arbitrators thus felt compelled to elaborate lengthily on the legal grounds of the decision, in a way that will make the decision justified and satisfy the stakeholders and public opinion.

Leidylin Contreras mentioned the impression of abuse of the bilateral investment treaty system by investors, the disproportionate damages decided against developing countries that see their public policies and regulatory capacity challenged. She also emphasized the problem of inconsistent arbitration decisions stemming from diverging interpretations by arbitral panels working with the same treaty provisions and the lack of predictability the panel process entails.

Regulation and Accountability

According to Sophie Nappert, arbitration is now “out of the closet”; it is making front-page news and is now under the scrutiny of the international community. But there are many weeds in the investment arbitration garden…NGOs, academics, citizens are asking for increased accountability and transparency; namely, for the publication of awards, for the identity of the arbitrators, and information concerning the appointing process. What has been done to acknowledge these demands? Not much according to Sophie Nappert, who regretted that arbitral institutions have not taken the criticism seriously enough to take a collective stance on the matter. Nappert urged arbitral institutions to take a firmer role in the quality control of the arbitral product.

According to Anna Joubin-Bret, a possible solution lies in the development of Alternative Dispute Resolution (ADR). According to her, statistics show that 39% of ICSID cases are settled before the parties go to arbitration, demonstrating that ADR procedures are not so uncommon. “We often forget that arbitration is a sub-section of ADR.”

Contreras nuanced this point by explaining the difficulty for government officials to settle disputes using ADR because of the inevitable suspicion of corruption that will weigh on them in addition with the popular opprobrium that would necessarily stain the officials who accept to compromise rather than litigate. Very few politicians are eager to bear such a political cost.

The panelists all agreed that a good step forward would be to create a specific set of rules for investor-State mediation to be included in the relevant investment protection instrument. While there are specific rules on conciliation in the ICSID Convention, more cane be done.

The Seeds of Change

It finally appears that when it comes to discussing investment arbitration reforms, investors and States often share a common interest in having an efficient dispute resolution system. In the end, the ultimate goal for both is to put an end to a dispute and have the investor stay in the country and pursue his investment. Even though we often read that those interests as clashing, investors and States are both users of the investment arbitration system and have everything to win from seeing it improved.

The choice of launching a conference attended by young lawyers with this controversial and touchy subject matter is probably not a random choice by the ICC organizational committee. It underscores that a reform is of crucial importance to the perpetuation of investment arbitration and that there are no better people to achieve this than the upcoming generation of arbitrators.

Yael Halbron is a graduate from Sciences Po and an LL.M Candidate at Duke University School of Law.

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[1] This blog is based on the personal notes of the author; it does not reflect the opinion of the co-organizers, moderators or panelists of the ICC Global YAF event.

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).