The Supreme Court of Germany cited a paper by Franco Ferrari, professor of law, in a decision concerning the law applicable to liability for medical malpractice in a case involving a lawsuit brought by a German patient against a Swiss doctor. Professor Ferrari, who is also the Director of the Law School’s Center for Transnational Litigation and Commercial Law, is an expert on European conflict of laws.

The Court was faced with deciding whether the law applicable to the lawsuit brought by the German patient against the Swiss doctor was subject to the laws of Germany (where the plaintiff had its place of business) or those of Switzerland (where the defendant had its place of business). The German Supreme Court resorted to its conflict of laws rules, which have since been replaced by the Regulation (EC) No 593/2008 of the European  Parliament and of the Council of 17 June 2008 on the law applicable to contractual (so-called Rome I Regulation), to get to the application of Swiss law as the law that was most closely connected to the contract. In writing its 19 July 2011 opinion (http://lexetius.com/2011,4531), the German Supreme Court relied on a paper by Ferrari asserting that for the purpose of identifying the law applicable to a doctor-patient relationship, one would have to look at the law of the doctor, as the doctor is the party effecting the performance that is characteristic to the doctor-patient relationship and, thus, the party whose law is most closely connected to that kind of contractual relationship.

Linda Silberman, Martin Lipton Professor of Law, testified before the House Judiciary Committee’s Subcommittee on Courts, Commercial and Administrative Law on November 15 as that body wa sconsidering federal legislation on a national standard for recognizing and enforcing foreign judgments in the U.S. She brought the specialized knowledge gleaned from serving as co-reporter, along with Herbert and Rose Rubin Professor of International Law Emeritus Andreas Lowenfeld, of an American Law Institute project that developed a proposal for such a federal statute.

“I think the need for federal legislation is more important now than ever before,” said Silberman, who previously appeared before the subcommittee in February 2009 to discuss the issue of libel tourism. “A comprehensive federal statute will have an impact in two areas. First, it will provide a federal uniform standard for recognition and enforcement of foreign judgments in the United States. And second, it has the potential to enhance recognition and enforcement of U.S. judgments in other countries.”

Pointing to the disparities among individual states’ laws, Silberman said, “Only a federal statue can ultimately achieve the maximum level of uniformity.” She added: “In the absence of uniformity, the judgment creditor in an enforcement proceeding or the judgment debtor in a declaratory judgment proceeding for non-enforcement can forum-shop for a state law favorable to its position.”

Ultimately, Silberman argued, broader issues than even interstate legal confusion were in play: “Questions about the quality and fairness of a foreign judicial system would seem to easily fall within foreign relations concerns of the United States, and so there should be uniform federal criteria…. Recognition and enforcement of foreign judgments, as well as non-recognition and non-enforcement, is and ought to be a matter of national concern. We are in an age of globalization and international commerce, and the relevant standards and criteria should be in the hands of the federal government.”

Silberman is currently part of an advisory group to the State Department helping to prepare federal legislation to implement the Hague Choice of Court Convention, which pertains to choice of court agreements between parties in international civil and commercial cases. She also participated in a November 28 forum organized by the Law School’s Center on Transnational Litigation and Commercial Law, of which she is co-director, as well as in symposia at the University of South Carolina School of Law and Brooklyn Law School earlier in the fall.

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

The external dimension

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

But it very largely ignores the rest of the world. With just three exceptions, it governs jurisdiction only against defendants domiciled in the member states, providing a framework of rules governing the jurisdiction of the courts of the member state to entertain civil or commercial proceedings. (For these purposes, ‘domicile’ is a much more liberal concept than the rather narrow common law concept of domicile). What it does in this regard, and what it leaves undone, are both significant.

First, what it leaves undone. Article 4(1) of the Brussels I Regulation says,

“If the defendant is not domiciled in a Member State, the jurisdiction of the courts of each Member State shall, subject to Articles 22 and 23, be determined by the law of that Member State.”

Article 22 contains rules conferring exclusive jurisdiction on the courts of member states with which, by reason of their particular subject-matter, the proceedings are considered to have a particularly close relationship. Thus, proceedings concerned with rights in rem in immovable property in a member state, or the constitutions of companies incorporated in a member state, or public registers, or patents, or the execution of judgments are all assigned exclusively to the member state in question, irrespective of where the defendant is domiciled.

Article 23 confers jurisdiction –exclusively so unless the contrary is agreed – on the courts of member states which the parties have chosen in a forum selection agreement. There are a number of conditions for the efficacy of such an agreement, one of which is that either party must be domiciled in a member state. So a plaintiff who is domiciled in a member state and who has such an agreement with a defendant who is non-European domiciliary can still rely on Article 23 both to confer jurisdiction on the chosen court, provided it is within a member state, and to derogate from the jurisdiction of an otherwise competent court.

The only other exception is of marginal interest: Article 9(2) deems a non-European insurer to be domiciled where its European branch is domiciled.

With those three exceptions, when it comes to non-European defendants, national law rules the day, including the widely varying and sometimes exorbitant rules which the national laws contain. Some of these are mentioned in Annex I to the Brussels I Regulation. In Germany, for example, Article 23 of the Zivilprozessordnung (ZPO, the Code of Civil Procedure) provides for jurisdiction based on the presence of property, irrespective of whether the dispute has any connection with that property. In France, Articles 14 and 15 of the Civil Code notoriously provide a forum for any dispute brought by or against a person of French nationality. In England, jurisdiction may be founded on the service of the claim on a person during their presence in England, even if it is only transitory (although in this case the exorbitance of the rule is tempered by the doctrine of forum non conveniens).

As against persons domiciled in member states, these and other rules of national law are excluded by Article 3(1), which says that persons domiciled in a member state may be sued in the courts of another member state only by virtue of the rules set out in the Regulation. And it is now clear, following the decision of the European Court of Justice in Owusu (case C-281/02, [2005] ECR I-1383) that not only ‘may’ they be sued in the courts of the member states but, if they are to be sued at all, they must be sued there. In other words, proceedings properly brought under the jurisdictional rules of the Brussels-Lugano regime cannot be stayed under national law powers for jurisdictional reasons, either in favour of the courts of another member state which might also be competent under the regime or in favour of the courts of a non-member state.

Which brings us to what the regime Brussels-Lugano leaves undone. What it does not do is to provide exceptions to take account of the external dimension. The three areas which have long been recognized as giving rise to problems are (1) where there is a close connection with a third state, the paradigm case being one concerning title to land in that third state; (2) where there is a valid forum selection agreement giving exclusive jurisdiction to the courts of a third state; and (3) where there are prior proceedings on foot in the third state between the same parties and involving the same cause of action as later proceedings commenced in a member state. In any of those cases, proceedings commenced in a member state under the Brussels-Lugano regime will  not be stayed or dismissed in favour of the third state (or at least they should not be – there is anecdotal evidence suggesting that, at least in the case of forum selection clauses, the clause is sometimes given effect and the Brussels-Lugano regime ignored).

The proposal

The European Union has an unusual legislative process. Legislative proposals are made, and can only be made, by the European Commission. But they are adopted, and can only be adopted, by the Council (which represents the governments of the member states and which has a system of qualified majority voting) and, in a fairly recent development, by the European Parliament, which is directly elected. Both the Council and the Parliament have to give their approval.  As it was mandate to do by the Brussels I Regulation, the Commission has carried out a review of the working of the Brussels I Regulation and in December 2010 put forward a proposal for its revision  or ‘recast’  (COM(2010) 748/3).

It is by no means clear that this proposal will pass into law in its present form, not least because the European Parliament is taking a close interest in the matter and has made a number of criticisms, as behind the scenes, no doubt, have the member states. Nevertheless, the Commission is in a powerful position and will be keen to press for some at least of its proposals.

The Regulation in the international legal order

Among the proposals is the repeal of Article 4, removing the power of member states to apply their own laws to defendants domiciled in non-member states, and the removal of the ‘domiciled in a member state’ qualification in most of the Regulation’s jurisdictional rules. This would have the effect that the jurisdiction of the courts of member states over persons domiciled anywhere in the world would then be subject to the Brussels I Regulation. At present, for example, English courts will assume jurisdiction over a contract case where the contract is governed by English law – a common state of affairs in international sale or transport contracts, for example. But if the proposal were adopted, they would no longer be able to do so. Admittedly, if England was the place of performance of the obligation in question, they would then be able to assume jurisdiction on that basis under Article 5(1) of the Regulation, but that is a power which, albeit on slightly different terms, they have already. It seems very likely, especially in the shipping field, that if the proposal is adopted in this form it would result in a significant loss to Europe of dispute-resolution business from around the world. It is probably for this sort of reason that the European Parliament has expressed concern that the repeal of Article 4 should not occur without a lot more detailed analysis and consultation.

An exception to the generalised extension of the Regulation’s jurisdictional rules to defendants domiciled in non-member states is provided by Article 6(1). That provision enables a defendant domiciled in a member state to be sued as a co-defendant in the courts for the place where any of the other defendants is domiciled; but it is not proposed to extend this rule to found jurisdiction against defendants domiciled in non-member states.

One deficiency of the present system is addressed by the proposal, although curiously two more are not.  What the proposal contains is a welcome provision, in Article 34, designed to deal with the problem which may occur when proceedings in relation to the same cause of action and between the same parties are pending before the courts of a third state at a time when a court in a member state is seised.  As we saw, at present the latter court has no power to stay its proceedings, notwithstanding the parallel proceedings in the third state.  Under the proposed revision, the court seised in the member state would have a discretion to stay its proceedings if certain conditions are satisfied, including that,

‘it may be expected that the court in the third State will, within a reasonable time, render a judgment that will be capable of recognition and, where applicable, enforcement in that Member State; and the court is satisfied that it is necessary for the proper administration of justice to do so.’

These conditions are both, to a common lawyer, gratifyingly discretionary and mark something of a shift towards a flexible realism and away from a dogmatic adherence to legal certainty. The court would have power to lift the stay at any time and the stay would not prejudice the plaintiff’s position on limitation. This proposal has been generally welcomed and it seems likely that it will be adopted, whatever the fate of Article 4.

What the Commission’s proposal does not contain, however, is either a provision dealing with cases involving a close connections with a third state of a kind which, within the European Union, would give rise to exclusive jurisdiction under Article 22, or a provision enabling effect to be given to choice of court agreements in favour of third states. The case for the former is less clear cut, but the case for the former is very strong.

As regards the latter, an argument which Commission officials have been advancing in public for this omission is that such agreements will soon be dealt with by the Hague Convention on Choice of Court Agreements of 30 June 2005, and that if the Brussels I Regulation were to contain a more favourable rule, then third states would have a reduced incentive to ratify the Convention.  Ratification by the EU and by other states around the world is doubtless a desirable objective, but it is not a sufficient reason to exclude a provision from the recast Brussels I Regulation on this question. It is far from certain when, if ever, this Convention will come into force at all, let alone as between the EU and enough states around the world to make any other rule of marginal significance. So far only Mexico has ratified the 2005 Convention, and its eventual effectiveness is likely to depend to a great extent on whether the United States SA ratifies it. But this question is bogged down in a constitutional dispute within the USA on whether its implementation falls within the exclusive competence of the Federal government, or also of the individual states. Even if it does come into effect, it will exclude significant numbers of international contracts and, for a significant period at least, many countries.

The case for legislation on forum selection agreements in favour of third states is now generally agreed, and perhaps the simplest way of doing it would be to adopt wholesale the terms of the 2005 Hague Convention, which could if necessary be done by reference, even in circumstances where that convention itself does not apply. It would, however, be sensible to extend the subject-matter scope of the rule to the subject-matter scope of the Brussels I Regulation, so that the difficulties which the current rules present are not perpetuated for cases which fall outside the subject-matter scope of the Hague Convention, but within the Brussels I Regulation.

Arbitration

The Brussels-Lugano regime expressly excludes arbitration from its scope: Article 1(2)(d). It is clear that for most purposes the law which governs arbitrations is unaffected by the Brussels-Lugano regime. It does not apply to the recognition and enforcement of arbitration awards as such, nor to court judgments which incorporate such awards. Equally, proceedings which form part of the arbitral process – such as the appointment of an arbitrator, setting aside an award or ruling on points of law in the course of the arbitral proceedings – fall outside the regime. But the scope of the exclusion is unclear at the margins and the effectiveness of arbitration as a parallel system of dispute resolution has been potentially compromised by the famous West Tankers decision of the European Court of Justice (case C-187/07, [2009] ECR I-663). The Commission’s proposal contains a provision designed to overcome this difficulty, although whether it does actually do so is less clear.

The critical questions are (1) the extent to which court proceedings which aim to protect or give effect to arbitration agreements and arbitration proceedings are excluded from the regime; and (2) the effect of a dispute involving an incidental or preliminary question relating to arbitration. Both questions are affected by the decision in West Tankers.

West Tankers

In brief, the case involved a jetty in Italy owned by Erg Petroli SpA which was damaged in a collision with a tanker owned by West Tankers Inc. There was a contract between Erg and West Tankers which included a London arbitration clause. Erg was paid by its insurers for the damage up to the policy limits and then made a claim against West Tankers in a London arbitration for the excess. Meanwhile, the insurers, in exercise of their subrogation rights, brought proceedings against West Tankers in Italy. West Tankers disputed the jurisdiction of the Italian court and also sought and obtained from the English courts an anti-suit injunction to restrain the insurers from pursuing the Italian proceedings, arguing that these were covered by the arbitration clause. The question of whether that was permissible under the Brussels I Regulation was referred by the House of Lords to the European Court.

In deciding that that was not permissible, the European Court affirmed two principles. First, it decided that despite even if the London proceedings were their being outside the scope of the Regulation, it could nevertheless have a collateral effect on them if those proceedings would have the consequence of undermining the effectiveness of the regime, “namely preventing the attainment of the objectives of unification of the rules of conflict of jurisdiction in civil and commercial matters and the free movement of decisions in those matters” (para. 24).  This is an example of the ‘principle of effectiveness’ in European law.

Secondly, therefore, it went on to consider whether the Italian proceedings themselves fell within or outside the subject-matter scope of the Regulation. The critical question for these purposes was whether the fact that the dispute was subject to an arbitration agreement (which was assumed for the purposes of the argument) took what was otherwise a straightforward civil or commercial dispute outside the Regulation’s scope. It concluded that it did not: a dispute that fell within the Regulation was not removed from it by reason of a preliminary or incidental issue relating to the validity of an arbitration agreement. It was for the Italian court to rule on its own jurisdiction, even if that involved ruling on the validity or applicability of the London arbitration clause, without interference by the London anti-suit injunction.

As a footnote, what happened next was that the London arbitration proceeded and was extended to include a counterclaim by West Tankers against Erg and the insurers for a declaration that it was under no liability. Although Erg participated the insurers did not and the arbitrators made an award in West Tankers’ favour against the insurers. West Tankers then applied for and obtained an order that that award be registered as a judgment of the English court. The English court held ([2011] EWHC 829 (Comm)) that although such an order would not normally be made in respect of a declaratory award, where, as in this case, the successful party’s objective was to establish the primacy of its award over any inconsistent judgment, an order would be made because that would make a positive contribution to obtaining the material benefit of the award. That order was appealed, the appeal was heard on 22 November and judgment is awaited. Meanwhile, the Italian proceedings are stayed.

The proposal

The difficulty with the West Tankers decision is that it removed from the London courts the ability to rule on the validity of the London arbitration agreement. It is this difficulty which the Commission’s proposal seeks to address. The way in which it seeks to do so is by providing an exception to the general exclusion of ‘arbitration’ in Article 1(2)(d) of the Regulation. The exception is in a new Article 29(4), which would require a court whose jurisdiction is contested on the basis of an arbitration agreement to stay its proceedings once the arbitral tribunal, or the courts of the member state of the seat of the arbitration, have been seised of proceedings to determine the existence, validity or effects of the arbitration agreement, even if that is merely an incidental question in those proceedings.

It remains to be seen whether this proposal, if adopted, will have its intended effect, the main difficulty being that the original court whose jurisdiction is challenged will have to decide as a threshold matter whether its jurisdiction is actually contested on the basis of an arbitration agreement. It is not hard to imagine that frivolous recourse may be had by recalcitrant defendants to alleged arbitration agreements as a delaying tactic. But abuse of that kind aside, it seems that a proposal along these lines is probably the best that can be achieved in keeping courts away from disputes that really ought to be decided by arbitration. (Other concerns about the proposal, such as its application to insurance disputes, or its potential effect on the competences of member states, are beyond the scope of this paper).

Other proposals

In addition to the proposals relating to the Regulation’s external dimension and to arbitration, the Commission’s proposal contains a number of other matters.

Perhaps of greatest interest to non-Europeans is the inclusion of  two proposed new fora of last resort, for cases in which no court of a member states has jurisdiction under the Regulation’s other rules. Under the first of these – a type of forum arresti – a member state’s courts would have jurisdiction if the defendant’s property was located in that state its value was not disproportionate to the value of the claim and the dispute had a sufficient connection with that member state (Article 25 of the draft). Under the second, which is subsidiary to the first, the courts of a member state with which a dispute is sufficiently connected could accept jurisdiction if the right to a fair trial or the right to access to justice so required, particularly if proceedings could not reasonably be brought or conducted in a third state with which the dispute was closely connected, or if a third state judgment would not be afforded recognition and enforcement in that state, thus counteracting the claimant’s rights – a forum necessitates – (Article 26 of the draft).

Other proposals in the draft recast of the Regulation include

• the abolition of exequatur in respect of judgments from other member states – a proposal which is exciting controversy because of public policy concerns;
• proposals to ameliorate the rigidity of the lis pendens priority rule, including a proposal to give priority to the putatively chosen courts to determine the effects of a forum selection clause,
• provisions to increase communications between courts to aid the co-ordination of interim measures with substantive proceedings and other detailed proposals relating to interim measures,
• a proposal to give priority over cases involving rights in rem in movable property to the courts of the situs, and
• a strange proposal affirming the priority of workers’ rights to engage in collective action to protect their rights.

Conclusion

It remains to be seen how much of the Commission’s proposal survives the inter-institutional wrangling which is already under way, and what amendments are finally adopted. With some amendment, it seems likely that much of it will find its way into the law, although a big question-mark still hangs over the extension of the Brussels I Regulation to cover claims against persons domiciled outside the European Union.

Alexander Layton

Queen’s Counsel (barrister) in practice at 20 Essex Street, London. Visiting fellow at NYU School of Law’s Center for Transnational Litigation and Commercial Law. Expert adviser to the Legal Affairs Committee of the European Parliament on the proposed reform of the Brussels I Regulation. Immediate past chairman of trustees, British Institute of International and Comparative Law.

This is to announce the November session of the Forum of the Center for Transnational Litigation and Commercial Law, which will take place on November 28th, 2011, from 6.15-8.00 pm., in 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 Prof. Bo Rutledge has accepted the invitation to give a talk on the topic “International Civil Litigation in US courts in the last five years” that Mr. Alexander Layton and Professor Linda Silberman have agreed to act as commentators.

Professor Rutledge is a Professor of Law at the University of Georgia School of Law.  His research interests include international litigation, international arbitration and the United States Supreme Court.  He is the author of several books and book chapters which have been published by Yale University Press, Cambridge University Press, Oxford University Press and others.  His articles have appeared in a diverse array of journals including the University of Chicago Law Review, the Vanderbilt Law Review and the Journal of International Arbitration.  Professor Rutledge has filed more than twenty briefs and petitions in the United States Supreme Court and lower courts on topics such as arbitration, international litigation and criminal law.  Respected by his peers abroad, he also has lectured at a diverse array of institutions including Oxford University, Cambridge University, the London School of Economics, Stockholm University, the University of Mainz and the University of Oslo, among others.  This will be his first public lecture at New York University.

Mr. Alexander Layton is an English Queen’s Counsel (barrister) and a specialist in private international law, practicing from 20 Essex Street chambers in London. He has acted in a number of important cases in this field, including representing the United Kingdom government before the European Court of Justice in the well-known West Tankers case on anti-suit injunctions in support of international arbitration. He is the co-author of European Civil Practice, which has become a standard work on the European regime for  jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, and this year acted as an expert assisting the European Parliament with its legislative work on a revision of the Brussels I Regulation on this topic. He is also the author of various other papers and book chapters on private international law issues. He has recently completed a six-year term as the chair of trustees of the British Institute of International and Comparative law, where he has been instrumental in establishing the Bingham Centre for the Rule of Law. He is also a past-chairman of the British-German Jurists’ Association and of the Bar European Group.

Professor Linda J. Silberman is the Martin Lipton Professor of Law at New York University and Co-Director of the Center. She is a leading figure in the United States in private international law and transnational litigation, and her academic and scholarly interests range from numerous areas of commercial law to personal and family matters. At NYU Professor Silberman teaches a range of courses, including Civil Procedure, Comparative Procedure, Conflict of Laws, International Litigation/Arbitration and International Commercial Arbitration.  She is co-author of an important Civil Procedure casebook (now in its 3rd edition) and of a recent book on Comparative Civil Procedure.  She was the co-Reporter for the American Law Institute Project–Recognition and Enforcement of Foreign Judgments: Analysis and Proposed Federal Statute, and an adviser to two other American Law Institute projects: Intellectual Property: Principles Governing Jurisdiction, Choice of Law and Judgments in Transnational Disputes and the Restatement Third on International Commercial Arbitration. Professor Silberman is also a Member of the State Department’s Advisory Committee on Private International Law and has been a member of numerous U.S. State Department delegations to the Hague Conference. Professor Silberman combines her scholarship and academic work with other roles, such as special referee, expert witness and consultant in a number of important cases. Her work was cited by the Supreme Court of the United States in two recent Supreme Court decisions.

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

As only limited space will be available, those interested are kindly asked to rsvp by November 20th by writing to transnational@nyu.edu.

Introduction

The 1958 New York Convention for the recognition and enforcement of arbitral awards is frequently celebrated for what it has achieved in terms of facilitation of international trade and harmonization of arbitration law and practice.  It is somehow interesting that such a successful international instrument contains no description about the subject matters the recognition and circulation of which it is intended to facilitate.  During the negotiation of the Convention, several attempts were made with a view to providing some kind of definition. However, fears of unnecessary qualification and the wish to secure the broadest possible application resulted in any such attempts being eventually abandoned.

It must be underlined that the New York Convention is not the only major instrument dealing with arbitration lacking any such definition. The UNCITRAL Model Law, for example, refrains from describing what constitutes an arbitral award even though the adoption of a definition was considered and discussed throughout its negotiation and drafting.

What are the decisions falling within the scope of the New York Convention? The analysis that we are highlighting here is not connected to the issue of whether an award is a foreign one or should be considered as such pursuant to Article I of the Convention. The issue here is two-fold and is concerned with (a) the definition of what is arbitration (for the purpose of identifying the means of dispute resolution that may produce a decision enforceable under the Convention) and, having settled that, (b) the orders issued in an arbitration that can be validly enforced under the Convention.

The alternativity test and the finality test

There seems to be general agreement that the Convention is only intended to cover dispute resolution processes which can be regarded as a truly definitive alternative to the jurisdiction of domestic courts and whose awards have the same legal force as a court judgment. This apparently easy path of analysis may be quite complicated to follow in practice. Not least because the terminology employed in practice can be confusing at times. However, it must be remembered in this last respect that, as leading commentators and court decisions have explained, the identification of the actual nature of a means of dispute resolution is not affected by the name or title employed to describe it.

The identification of what is arbitration for the purpose of applying the Convention is only the first part of the two-fold analysis. Indeed, not all orders rendered in arbitration are covered by the Convention. As is well known, arbitral tribunals employ a great variety of orders to direct the development of the arbitral process. It is clear that directions issued by a tribunal to allocate tasks and deadlines in the proceedings are unlikely to qualify as awards covered by the Convention. However, in some cases, tribunals’ orders can give rise to a considerable amount of uncertainty as to their actual nature and therefore as to their enforceability under the Convention. It is advocated that only orders which finally settle one or more of the issues which have validly come within the jurisdiction of the arbitral tribunal should qualify for recognition and enforcement under the Convention. Such awards are not necessarily those that exhaust the tribunal’s mandate. The awards that should qualify for recognition and enforcement under the Convention are all the awards which finally adjudicate one or more of the several differences which have been submitted to the jurisdiction of an arbitral tribunal. The word final implies that once the issue has been adjudicated it would be no longer possible, not even if the tribunal wished, to reopen the issue.

Applying the tests: interpretation

Two clear examples of borderlines situations that may or may not follow within the scope of application of the Convention are described below. Before doing so, however, it may be appropriate clarifying what standard of interpretation should be applied with a view to establishing whether those two instances should follow within the scope of the Convention.

It has been discussed whether the analysis aimed at establishing the nature of both a given dispute resolution process and the decisions taken therewith should be carried out with reference to the relevant domestic law(s) or whether an analysis centered on the international nature as well as the harmonization goals of the Convention should be preferred. More precisely, on one hand, it has been argued that the nature of a dispute resolution process should be identified and assessed with reference to the provisions of the law which creates and regulates such process. This law may clarify, for example, either expressly or implicitly, whether the process undertaken by the parties should be considered as a true alternative to the jurisdiction of national courts and therefore whether such process is capable of producing decisions which may be enforced abroad under the Convention. On the other hand, other authors believe that the analysis should be carried out with predominant focus on the scope and purpose of the Convention rather than the provisions of the relevant domestic law. [1] This latter point of view is certainly appealing and does not seem to be inconsistent with the approach advocated in a considerable number of cases, according to which the Convention should be interpreted and enforced having in mind its ‘international’ character. The solution to this question is perhaps found in between the two mentioned views. It seems possible to agree with the opinion that the Convention, as an international legal instrument, should be interpreted having in mind its peculiar nature and scope in accordance with the rules for the interpretation of international conventions provided by the 1969 Vienna Convention on the Law of Treaties. This view, however, should not automatically rule out any reference to the relevant domestic law(s). It is here suggested that – in assessing the nature of a dispute resolution process and the nature of orders issued therewith – domestic courts should form an independent view on the nature of both the process and the relevant award, irrespective of the definitions or categorizations employed in the jurisdictions where the award was made. The domestic courts may, however, also look at the provisions of the relevant domestic law and use them as ‘facts’. Such facts would obviously provide a strong indication as to the actual nature of the means of dispute resolution under analysis. However, they should bear neither binding force nor a definitive answer to the problem.

Adjudication

The recent development of ADR has brought about sophisticated forms of dispute resolution that both from a linguistic and a substantive point of view seem to be germane to genuine arbitration. As we have seen above, where the ADR process does not make its outcome final and binding upon the parties, similarly to court judgments, then the Convention should not be applied.

However, some forms of dispute resolution – which at first sight should be outside the scope of application of the Convention – depending on the circumstances, may, in principle, fall within its scope. This is the case, for example, of adjudication in the United Kingdom. In 1996 a new means of dispute resolution called adjudication was introduced in the United Kingdom through the Housing Grants, Construction and Regeneration Act (the ‘Act’). Adjudication is aimed at providing a fast mechanism for settling on an interim basis disputes arising out of construction contracts. The Act requires the decisions of adjudicators to be enforced pending the final determination of disputes by arbitration or litigation, depending on the choice made by the parties in the relevant contract. Therefore, the adjudicator’s decisions are immediately binding and domestic courts would assist with their enforcement until the dispute is finally settled before the chosen forum. However, it is not clear whether adjudication decisions should be enforced abroad under the Convention. Many would, on first reaction, say no. However, certain provisions of the Act may tip the balance towards the opposite answer. Section 108(3) of the Act provides that ‘the decision of the adjudicator is binding until the dispute is finally determined by legal proceedings, by arbitration (if the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement’. It follows that the decisions of adjudicators are only temporarily binding and cannot therefore be regarded as final decisions on the dispute between the parties. Indeed, adjudication is not a genuine alternative to litigation as any proceedings commenced after adjudication are not an appeal to the decision taken by the adjudicator but completely autonomous and fresh proceedings in which the decision of the adjudicator would carry no weight.

There are however circumstances in the presence of which the nature of the decision of the adjudicator is not as clear-cut. Indeed, the Act provides the parties with the option to agree that the decision of the adjudicator would finally settle the dispute. It seems at least possible to argue that, in such circumstances, the agreement of the parties might have the effect of transforming adjudication into some form of arbitration, the outcome of which could be enforced abroad under the Convention. The fact that adjudication is a much less procedurally-structured process than arbitration should not be enough, at least on its own, to dismiss the view favoring the enforceability of adjudications abroad. While it is true that adjudication can be regarded as a bare bones process in which the parties are not always able to make their case as fully as they desire, it is also true that the principle of party autonomy allows the parties to structure their dispute resolution mechanism as they please, provided that the relevant mechanism is carried out and puts the parties on an equal footing.

Consent Awards

Not infrequently, parties are fortunate enough to settle their differences at the outset of or during arbitration proceedings. The options available to the parties in such circumstances are to either formalize their agreement in a contract and terminate the arbitral proceedings or, where the lex arbitri and the relevant arbitration rules so permit,  to have their settlement agreement embodied by the arbitral tribunal in an award. The arbitral award which is the result of this option is often referred to as a ‘consent’ award.

The majority of arbitration laws and arbitration rules expressly permit consent awards. Article 30 of the UNCITRAL Model Law, for example, states that: “If, during arbitral proceedings, the parties settle the dispute, the arbitral tribunal shall terminate the proceedings and, if requested by the parties and not objected to by the arbitral tribunal, record the settlement in the form of an arbitral award on agreed terms. An award on agreed terms shall be made in accordance with the provisions of article 31 and shall state that it is an award. Such an award has the same status and effect as any other award on the merits of the case.”

The main reason for agreeing to a consent award is that the parties may, where necessary, benefit from the application of the Convention. It is not clear, however, whether the application of the Convention to consent awards should be taken for granted. Even though – as we have seen above – the wording used in the Model Law (‘Such an award has the same status and effect as any other award on the merits of the case’) provides for a strong indication as to the nature of consent awards and therefore as to their enforceability under the Convention, it has been observed that consent awards lack the fundamental characteristics of arbitral awards and therefore should be outside the scope of the Convention.

The main three arguments against the enforcement of consent awards under the Convention are the following:

(a) the activity carried out by the arbitral tribunal with consent award is totally deprived of any

jurisdictional character and content. As there is no actual judicial activity there cannot be a genuine arbitral award;

(b) in order for an arbitral tribunal to exist and carry out its duties there must be an actual dispute between the parties.  According to this argument, as soon as the parties enter into a settlement agreement the tribunal should be considered as functus officio;

c) the consent award may serve a purpose the in inconsistent with mandatory provisions of law or be altogether illegal.

The arguments are certainly fascinating but, perhaps, not entirely convincing. With regard to argument (a) it is possible to observe that judicial activity can be carried out in many different ways and in accordance with many different rules. The role of arbitrators, as well as that of court judges, is to preside over a process aimed at resolving a dispute. Whether the dispute is settled through a decision of the tribunal or an agreement of the parties should not make much difference. Furthermore, it should also be considered that, while the role of arbitral tribunals may be limited by the agreement of the parties to settle their dispute, arbitral tribunals retain powers of a fundamental importance. Indeed, tribunals are under no obligation to sanction the agreement if the agreement is illegal or aimed at circumventing the application of public policy provisions.

Argument (b) is somewhat formalistic and in any event unconvincing. As we have seen above, the fact that parties enter into settlement agreements during arbitral proceedings does not automatically deprive arbitral tribunals of their judicial authority. Arbitral tribunals are indeed required to perform further judicial activity before they can be considered functus officio.

If one were to espouse such formalistic method of analysis, then, it would be possible to observe, by the same token, that arbitral tribunals become functus officio only after a final award has been issued or where the proceedings are formally declared closed. Until that moment tribunals are still in function.

Finally, and with the same formalistic approach, it would be possible to argue that the settlement agreement may be implicitly entered into on condition that it is going to be validly incorporated into an award. As the settlement agreement implies the participation of the tribunal in the settlement process, the signing of the settlement agreement by the parties cannot by itself have the effect of making the arbitral tribunal functus officio.

Argument (c) does not seem to pose any insuperable problem. Legality and general compliance with public policy of the award would be in any event scrutinised ex officio by the court of the territory where enforcement is sought under Article V(2) of the Convention. This would be the case irrespective of whether the arbitral tribunal had an opportunity to ascertain the legality of the subject matter of the dispute or it has ignored the issue altogether.

Conclusion

The combined application of the two above-mentioned tests should help identify the decisions which fall within the scope of the Convention. Admittedly the two tests are not infallible. The ever developing practice of alternative dispute resolution may indeed create hybrid means of dispute resolution which could be difficult to classify.

Any analysis as to the applicability of the Convention should be carried out bearing in mind the Convention’s scope and purpose as well as the rules of interpretation provided under international law. It is advocated that no predominant role should be given in such task to the relevant provisions of domestic law. Such provisions should certainly be taken into account but should rather be used as facts which, as such, may provide for a non-binding indication as to the nature of the means of dispute resolution and the decisions under analysis.

Domenico Di Pietro

Lecturer, International Arbitration, University or Rome, “Roma Tre” and Fellow, Center for Transnational Litigation and Commercial Law, New York University School of Law. The present paper is a reviewed, edited and abridged version, for student discussion purposes, of the author’s article “What Constitutes an Arbitral Award Under the New York Convention?” in Enforcement of Arbitration Agreements and International Arbitral Awards – The New York Convention in Practice, (E. Gaillard and D. Di Pietro eds., 2008).

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[1] See Emmanuel Gaillard and John Savage (eds.), Fouchard Gaillard Goldman on International Commercial Arbitration 735–80, Kluwer (1999) 7 Albert Jan van den Berg, The New York Arbitration Convention of 1958: Towards a Uniform Judicial Interpretation 49, Kluwer (1981); Gino Lörcher, ‘Enforceability of Agreed Awards in Foreign Jurisdictions’, 17(3) Arb. Int’l 275, 280 (2001).

As mentioned in a recent post, the existence of Regulation 261/2004 opens space for multiple forum shopping strategies, especially in flights connecting an EU airport and a non-EU airport belonging to a signatory State to the Montreal Convention. A paradigmatic case would be the regular flights between the US and the EU, considering the number of daily flights connecting both regions.

In accordance to its Article 1, EU Regulation 261/2004 will apply to all flights departing from an EU airport as well as all flights departing from a third country to an EU airport, provided that the air carrier is an EU Community carrier.

Moral and emotional distress damages are some of the most relevant aspects to consider when filing a claim based on the delay or cancellation of a flight.

Often times, the importance of moral damages, in both financial and emotional terms, will be at least as important as recovering the price of the flight ticket. Therefore, it will be strategically important to know in advance whether in a particular jurisdiction (either in the EU or not) claims for moral damages are allowed at all, or if only the material losses (price of the ticket, lodging, damaged luggage) can be claimed.

U.S. courts usually interpret the Montreal Convention¾since EU Regulation 261/2004 is not likely to be applicable¾to exclude non-physical injuries, since such injuries were not covered under the Warsaw Convention, which preceded the Montreal Convention[1]. Consequently, what is not allowed by the Montreal Convention is not available at all[2]. Therefore, as one court has held, only economic loss or physical injury damages are recoverable[3].

Also in Bassam v. American Airlines, 287 Fed. App’x 309 (5th Cir. 2008), the Fifth Circuit concluded that “purely emotional injuries are not available under the Montreal Convention”[4], allowing little room for doubt.

Conversely, the ECJ explicitly admitted moral damages in the EU in its decision C-63/09, Click Air Case. However, the decision did not clarify either the burden of proof requested from the party alleging the damage or the applicable law deciding the existence of moral damages. As a consequence, the ECJ failed to set a reliable uniform interpretation in the EU.

In a recent decision handed down on 13 October 2011, the ECJ clarified that “further compensation” in Article 12 of Regulation 261/2004 is to be read to allow passengers compensation for the entirety of the material and non-material damages they suffered due to the failure of the air carrier to fulfill its contractual obligations.

However, this decision links compensation for moral damages to the conditions and within the limitations provided for by the Montreal Convention or by national law. Since the Montreal Convention does not specify any of these conditions, resort will have to be made to the domestic laws of the EU countries.

This is where the confusion remains, because depending on which EU countries have concurrent jurisdiction, moral damages will be appreciated or not, and if so, under a variable burden for the passenger.

In Spain, for instance, compensation for moral harassment can generally be claimed because the case law of the Supreme Court has established that partial breaches of contract can give rise to moral damages in accordance to Articles 1089, 1091 and 1101 of the Civil Code (judgments dated 22 May 1995 and 19 October 1996). In the particular subject matter of flights, the Supreme Court has declared in a famous decision of 31 May 2000 that, although moral damages may arise from delayed flights, this must not be confused with the usual stress and tension caused by the delay. However, some lower courts have established that moral damages are warranted even in cases where the only issue was that no special assistance was provided at the airport. Other decisions compare the situations of stress created by flight delays and cancellations to set up an iuris et de iure presumption: If delay is the cause of stress leading to moral damages, cancellation, which is more severe than delay, should always be enough for moral damages.

The Italian Supreme Court, by contrast, allows (in judgment no. 26972 dated 11November 2008)for moral damages but, unlike Spanish courts that require a very low burden of proof, requires substantial proof.

If Italian lower courts are consistent with their Supreme Court, parties seeking to obtain moral damages with a possibility to choose between both fora should logically opt for Spanish courts, where the onus probandi is less strict.

A number of similar situations may appear within other countries in the EU, and lawyers should carefully analyze where to sue. It is clear, however, that after the ECJ decision in case C-83/2010, litigants would assume less risks if, having the possibility to sue before U.S. and EU courts, they opt for the latter.

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

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[1] Nature of cause of action under Warsaw and Montreal Conventions; convention remedy as exclusive”, in 8A Am. Jur. 2d Aviation § 149

[2] In 8A Am. Jur. 2d Aviation § 149: El Al Israel Airlines, Ltd. v. Tsui Yuan Tseng, 525 U.S. 155, 119 S. Ct. 662, 142 L. Ed. 2d 576 (1999); Mbaba v. Societe Air France, 457 F.3d 496 (5th Cir. 2006), cert. denied, 127 S. Ct. 959, 166 L. Ed. 2d 706 (U.S. 2007); Carey v. United Airlines, 255 F.3d 1044 (9th Cir. 2001); Marotte v. American Airlines, Inc., 296 F.3d 1255 (11th Cir. 2002); Auster v. Ghana Airways Ltd., 514 F.3d 44 (D.C. Cir. 2008); In re Air Crash at Lexington, KY, August 27, 2006, 501 F. Supp. 2d 902 (E.D. Ky. 2007); Bernardi v. Apple Vacations, 236 F. Supp. 2d 465 (E.D. Pa. 2002).

[3] Daniel, 59 F. Supp.2d at 992-94 (citing Eastern Airlines, Inc. v. Floyd, 499 U.S. 530 (1991)).

[4] Bassam v. American Airlines, 287 Fed. App’x 309 (5th Cir. 2008) at 14

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[3] Id.

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

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

[6] Article 29, Basis of claims.

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

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

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

[9] Id.

In its recent decision of 20 September 2011, 4A_103/2011, the Federal Supreme Court of Switzerland had to determine whether a panel consisting of three arbitrators of the Court of Arbitration for Sport (CAS) in Lausanne, Switzerland, had rightly decided that an arbitration clause contained in a licensing agreement also encompassed disputes arising out of sales agreements entered into by the same parties.

The facts of the case are straightforward. On January 1, 2006 a manufacturer of sports equipment and a boxing association entered into a licensing agreement which, inter alia, entitled the manufacturer to produce and commercialize boxing equipment carrying the label of the boxing association against payment of royalties. The arbitration clause contained in the licensing agreement read as follows:

“Should a disagreement over the interpretation of any terms of this Agreement arise, the Parties agree to submit the dispute to the Court of Arbitration for Sport, Lausanne, Switzerland, whose decision shall be final and binding on both Parties. While the pending question is being arbitrated, the remainder of this Agreement shall remain in effect.”

Subsequent to the execution of the licensing agreement the parties concluded several sales agreements according to which the manufacturer furnished the boxing association with boxing equipment produced under the licensing agreement.

In 2007, the boxing association claimed that the licensing agreement had expired on 31 December 2006. As a result, the manufacturer initiated arbitration proceedings before the Court of Arbitration for Sport (CAS). In turn, the boxing association objected to the jurisdiction of the CAS by submitting that the phrase “disagreement over the interpretation of any terms of this Agreement” contained in the arbitration clause of the licensing agreement merely referred to the licensing agreement rather than to the sales agreements. The CAS panel rejected this argument and assumed jurisdiction over the case by construing the arbitration agreement to encompass disputes connected with the licensing agreement.

On 4 February 2011, the boxing association challenged the issued CAS award before the Federal Supreme Court of Switzerland including for lack of jurisdiction of the arbitral tribunal (article 190(2)(b) of the Swiss Private International Law Act).

After observing that the existence of an arbitration agreement shall not be assumed off-handedly, the Federal Supreme Court of Switzerland – confirming prior case law on this issue (e.g. BGE 116 Ia 56; BGE 129 III 675) – stated that once there is no doubt about the parties’ consent to subject to arbitration the scope of the arbitration agreement is to be interpreted extensively.

The court then turned towards the issue of construction of the arbitration clause. Again confirming existing case law on the point, the court observed that the phrase “any dispute related to the interpretation of this Agreement” was not restrictive in any way and particularly included (i) disputes relating to the existence, validity and termination of contractual relationships originating from the contract containing the arbitration clause in question, as well as (ii) questions which were merely indirectly connected to the dispute submitted to arbitration. The court further held that, as a rule, the scope of an arbitration agreement contained in a contract could encompass additional contracts and annexes as long as the latter did not contain specific clauses providing for other dispute resolution mechanisms.

Albeit noting that the wording of the arbitration clause in question suggested that only the licensing agreement was subject to arbitration, the Federal Supreme Court of Switzerland concluded that such narrow interpretation of the arbitration clause would not account for the specific circumstances of the case at hand. The circumstances that militated for a broader interpretation were the following: First, the bylaws of the boxing association provided that any disputes shall be arbitrated before the CAS. Although these bylaws were not applicable in the present case, the court nevertheless found that the boxing association was acting inconsistently. Second, the court was not able to detect any objective reason why the dispute at hand should be resolved by a state court. Third and finally, the Swiss Federal Supreme Court found decisive that the parties had come to an understanding that exceeded the licensing agreement in itself and that was closely related to the subsequent sales agreements.

On all these grounds, the Federal Supreme Court of Switzerland held that the CAS tribunal had rightly asserted jurisdiction over the case at hand, and dismissed the challenge to the CAS award.

This recent decision is important in that it confirms the Swiss Federal Supreme Court’s practice to interpret the scope of an arbitration clause extensively once the parties’ intent to arbitrate is established. The reason why the court rather restrictively approaches the issue of consent to arbitrate is that an arbitration clause has far-reaching consequences insofar it ousts the jurisdiction of the state courts – at least as long as any one of the parties invokes the arbitration clause (see e.g. BGE 129 III 675). The Swiss Federal Supreme Court’s broad construction of the scope of the arbitration clause in the case at hand is not only a manifestation of the strong pro-arbitration policy underpinning the SPILA but also helps ensuring judicial economy and efficiency.

Simone Stebler graduated summa cum laude from the University of Fribourg School of Law and holds an LL.M. in International Business Regulation, Litigation & Arbitration from NYU (Arthur T. Vanderbilt Scholar). She is admitted to practice in Switzerland.

Introduction

Decisions by judicial bodies, in general, are often the result of complex debate arising out of different perceptions of law and evidence. Issuing a decision, irrespective of the importance of the dispute, is most delicate a task that invariably requires not just legal skills but also, and perhaps especially, a great deal of balance and common sense.

Such a difficult equation becomes even more complex in the field of international disputes, public or private, to be adjudicated by judges or arbitrators with different legal and cultural background. The struggle endured by international adjudicators goes too many times unnoticed. The vast number of unanimous decisions rendered every day is indeed an achievement that has never been properly celebrated.

The complexity of international adjudication is particularly clear in the case of international commercial arbitration, where arbitrators coming from countries with different legal traditions are faced with complex issues to be settled under a law that they may have a limited knowledge of. Furthermore, and perhaps most importantly, they are faced with issues of a procedural nature that may be alien to their legal background.

In this context, the idea of insurmountable disagreement should neither surprise nor, indeed, concern excessively. The question, however, is whether such disagreement should be expressed through the issuance of dissenting opinions.

International Courts

Dissenting opinions have been an important feature of international courts for many years. Particularly, the dissenting opinions rendered in the jurisprudence of the International Court of Justice have played a remarkable role in the development of international law.[1] The importance of dissents before international courts, particularly the ICJ, is due to the public nature of the proceedings and the fact that such decisions often address novel issues over which no solid body of jurisprudence has yet developed. Nonetheless, and in spite of this, dissent has not been spared a share of criticism. It has been suggested, for example, that: “disastrous consequences might follow for a high judicial institution which can command observance of its judgment and opinions only by its prestige and by the persuasion which the statement of its conclusions imparts.”[2]

History is, in fact, proving the contrary. The frequent and highly regarded dissenting opinions rendered by ICJ judges, for example, if anything, have somehow added to the prestige and reliability of the Court. It has been observed in support of dissenting opinions that anonymity of the judgment may encourage a judge to vote in support of the cause of his State without incurring the embarrassment of partisanship. On the other hand, a well reasoned and earnest dissent serves the purpose of showing that the case was thoroughly assessed and evaluated.[3]

It is therefore debatable whether – as it has been suggested on the issue with regard to the ICJ’s predecessor, the Permanent Court of International Justice – when dissenting opinions multiply, contradict and attack each other on the basis of the majority decision itself and affirm contradictory and sometimes erroneous theories, the very authority and the prestige of the Court and its decisions are downgraded.[4] To the contrary, as it has been observed by a great scholar such as Sir Hersch Lauterpacht, dissenting opinions have contributed a great deal to the development of international law and, particularly, to the authority of international justice. According to Sir Hersch, moreover, dissenting opinions act as a safeguard of the independence and impartiality of the judges and provide a better understanding of the Court’s judgments.[5]

State courts

Dissenting opinions have served the important purpose of law development also under domestic law. Some of the best-known dissenting opinions rendered in the US, for example, might be described as tools through which the law managed to move to a higher and more civilized stage during time. It is often recalled in this respect the dissenting opinion rendered by Justice Harlan in 1896 in a Supreme Court racial segregation case.[6] That dissenting opinion was at the heart of the decision, almost fifty years later, in the case of Brown v. Board of Education,[7] which ended racial segregation in American schools. The importance of dissenting opinions in the US legal system has been aptly described by United States Supreme Court Chief Justice Charles Evans Hughes. In his often-quoted remark he explained that: “[a] dissent in a court of last resort is an appeal to the brooding spirit of the law, to the intelligence of a future day, when a later decision may possibly correct the error into which the dissenting judge believes the court to have been betrayed.”[8]

Similarly, in the United Kingdom, a dissenting opinion is believed to have contributed to a radical change, interestingly enough, of the law on arbitration. In the well-known Ken Ren case the then House of Lords, now Supreme Court, addressed the issue as to whether or not to make an order for security for costs in an arbitration. The Lord Justices agreed that the English courts had a discretionary power to issue any such orders. In Lord Mustill’s dissenting opinion, which Lord Browne-Wilkinson agreed upon, it was argued that an order for security for costs did not conform to the type of procedure that the parties had selected for the protection of their rights and that any court application to that effect should have been denied.[9]

Interestingly, the 1996 English Arbitration Act, which was enacted one year later the Ken Ren decision, took the power to order security for costs in arbitration away from the English courts and vested it in the arbitrators.[10]

Dissenting opinions in international arbitration

It is undeniable that dissenting opinions in international and domestic courts can contribute to the development of law. A dissenting opinion by an ICJ judge may be relied upon in subsequent ICJ cases. Similarly, a dissenting opinion by a domestic court judge may well provide guidance and inspiration to appellate or supreme court judges as well as to future court judges in similar cases.

It is, however, less obvious how dissenting opinions could serve any such purpose in international commercial arbitration, where the proceedings are predominantly confidential and awards are generally not published. Furthermore, in most jurisdictions, domestic courts cannot review the merits of arbitral awards. In other words, there is generally no appellate system in international arbitration and domestic courts’ scrutiny is mainly limited to issues of jurisdiction and due process.

What is then the role of dissent in international commercial arbitration? Should this be encouraged, tolerated or altogether prohibited?

The issue was addressed, a while ago, by the International Chamber of Commerce’s Commission on International Arbitration through the Working Party on Dissenting Opinions. In that Report it was agreed that: “[…] it is neither practical nor desirable to attempt to suppress dissenting opinions in ICC arbitrations. A minority opinion was expressed to the effect that the ICC should seek to minimize the role of dissenting opinions, but the prevailing view was that the ICC should neither encourage nor discourage the giving of such opinions.” [11] That criticism had been expressed by the French National Committee according to which (a) dissenting opinions underscore the link between the arbitrator and the party who nominates him; (b) the arbitrators no longer feel obliged to search for a unanimous decision after confronting each other’s opinions and (c) a dissenting opinion may introduce a debate on the merits of the case before the Court of Arbitration.

The ICC Commission recognized the force of the French National Committee’s arguments. However, it was noted that the vast majority was in favor of the opposite opinion and that the freedom of expression of each arbitrator should have been respected.[12]

While the policy behind the freedom for each arbitrator to issue dissenting views may be understandable, it remains to establish whether, more generally, such a freedom might serve any systemic purpose.

This is surely an issue that should not be underestimated because, irrespective of the position that one may wish to take in this respect, it is undeniable that a dissenting opinion is likely to create a certain degree of turbulence in any arbitration proceedings. It has been suggested in this regard by international arbitration specialists Larry Shore and Kenneth Figueroa that “when serving on a commercial panel, an arbitrator should strive to reach unanimity with his or her colleagues. Unanimity is an important part of the panel’s mission, and is consistent with the development of commercial arbitration.”[13]

Moreover, dissenting opinions are, by themselves, evidence of starch disagreement, if not controversy, amongst the members of arbitral tribunals. Indeed, dissenting opinions are sometimes acrimonious and filled with disheartening language towards the majority. This, however, has more to do with lack of courtesy and consideration rather than dissenting opinions. Arbitrators should never forget that they are performing judicial functions and should therefore adjust their behavior accordingly. Needless to say that disagreement might be extreme. Yet, language should not.

Having said that, the dissenting opinions the purpose of which is being taken into account, here, are those issued out of a genuine and civilized disagreement as to how the dispute should have been decided and, perhaps, how the proceedings should have been carried out. Partisanship and dishonesty are of course out of any meaningful analysis.

Having clarified this, it is observed that dissenting opinions may increase the quality of majority awards. In other words, when confronted with structured dissents, the majority may somehow feel compelled to address all controversial issues more in depth and draft the award with the utmost care. For this reason, if the dissenting opinion is genuinely meant to fulfill constructive and cooperative purposes, it should be provided to the majority arbitrators before the majority award is finalized.  Indeed, while it is true and indeed desirable that the dissenting arbitrator would have already made his or her position clear to the fellow arbitrators, providing them with the written dissent may amount to an additional and final chance to review and reconsider any controversial issues.

Moreover, dissenting opinions, instead of weakening the arbitral tribunal’s authority, can instill confidence in the process. In other words, a balanced and non-acrimonious dissenting opinion may provide evidence to the losing party that all arguments were taken into account and exhaustively analyzed by the arbitral tribunal during deliberation.

Finally, it is signaled that the last decade has registered an increasing call for publication of arbitral awards with a view to creating some kind of consistent jurisprudence on certain recurrent features of international trade law. It goes without saying that the more “public” arbitral decisions are the stronger the case for dissenting opinions would be. Indeed, what has been said with regard to dissenting opinions in international and domestic courts would become increasingly applicable and relevant to international commercial arbitration.

The peculiar case of dissenting opinions in investment arbitration

It is perhaps worth signaling a recent debate on dissenting opinions in international investment arbitration. As is well-known, investment arbitration aims at settling dispute between a foreign investor and a sovereign State. This is a special type of arbitration which, in its most frequent form, is governed by public international law. An important feature of investment arbitration is that most of the awards, in fact virtually of all them, are normally published. The publication of investment arbitral awards is part of a generally shared view according to which States’ accountability should be pursued through transparency and the general public’s access to information. As a result, it is believed that any State conduct potentially in breach of an international duty should be the object of public scrutiny. In line with this trend, ICSID amended its Rules in 2006 and, more recently, UNCITRAL launched a working Group on transparency in investment arbitration.

It has been observed, with some understandable disconcert, by the leading scholar and arbitrator Albert Jan van den Berg that dissenting opinions have been issued in about 22% of the around 150 investment arbitral awards rendered so far in this comparatively recent and expanding forum. According to data that the prominent author describes as astonishing, nearly all of those dissenting opinions were issued by the arbitrator appointed by the party that lost the case.[14]

Without entering into an “in depth” analysis about the issue raised by such a distinguished author, as far as the number of dissenting opinions is concerned, there seems to be little of a surprise or indeed of a concern. The percentage of dissenting opinions recorded in his study does not differ too much from the the data available in relation to ICJ cases, where dissenting opinions are just as frequent. Any decision relating to a novel or developing body of law will inevitably, and perhaps hopefully, entail different opinions. Moreover, it is perhaps desirable that any views about such a comparatively new and developing body or rules, such as foreign investment law, should be made available to the general public with a view to encouraging the discussion on that issue. It is well known, for example, how unsettled issues such as the scope of fair and equitable treatment provisions and the reach of MFN clauses are.

Shore & Figueroa seem to support the idea that “when serving as an arbitrator on an investment treaty tribunal, should take a different approach. The development of international investment law is usually tied to a treaty case. So an arbitrator on that side of the divide must be prepared to do precisely the opposite – and not bend his or her view to achieve unanimity. Instead an arbitrator should state his or her view both to develop the law and to demonstrate his or her thinking to the broader investment treaty community (which is very broad indeed, given that virtually every state is a member).”[15]

It is certainly also arguable that investment arbitrations should not be seen as a stage for mere academic debating. Some of the dissenting opinions issued in recent investment arbitrations share are very close to PhD thesis, sometimes stretching for hundreds of pages. It is sometimes to be wondered whether, at least as a professional courtesy to those that are somehow compelled to read, the dissenter could try and express himself or herself in a more concise and considerate fashion.

Having said that, novelty of issues and publicity of proceedings do play a role in many arbitrators’ decision to publish dissenting opinions. Irrespective of appropriateness and fashion, it is undeniable that those dissenting opinions can contribute to the analysis and the development of such new body of law.

While the number of dissenting opinions in general does not seem to be out of line with the general practice, the fact that most dissenting opinions are issued by arbitrators appointed by the losing party may, as suggested by Prof. van den Berg, also have some additional significance.

The standing of most individuals serving as arbitrators in investment disputes is such as to rule out, out of hand, any concerns in terms of partiality or lack of neutrality.

The answer may be found in the fact that investment arbitration is characterized by the same features that often advise judges sitting in international courts to issue dissenting opinions. That is, novelty of issues, which spurs need for debating, and publicity of the decisions, which provides for a medium allowing debate to effectively take place. Arbitrators in investment disputes may therefore feel to be under an obligation to dissent.

However, investment arbitration is characterized by an additional feature that might explain the remarkable data highlighted by Prof. van den Berg. This is the fact that parties in investment arbitration, unlike parties in court proceedings, do have the right to appoint arbitrators of their choice. Understandably, parties are minded to appoint arbitrators that, based on the available information, such as lecturing and publications, might have a certain take on the issues to be settled in the proceedings. Perhaps this is not enough, by itself, to explain the startling figures highlighted by Prof. van den Berg even though it is an additional element to be taken into account to analyze the above-mentioned path in dissenting opinions. Be it as it may, it is submitted that dissenting opinions are too important a tool in the development of investment arbitration to be discouraged or indeed prohibited.

Finally, as it can be observed with regard to dissenting opinions in general, dissent is often the judge of itself. Genuine and well-reasoned dissenting opinions can do a great deal of good. Partisan and impolite ones can only harm the dissenter.

Domenico Di Pietro

Lecturer, International Arbitration, University or Rome, “Roma Tre” and Fellow, Center for Transnational Litigation and Commercial Law, New York University School of Law.

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[1] Anand, The Role Of Individual And Dissenting Opinions In International Adjudication, International And Comparative Law Quarterly (1965), 14: 788-808.

[2] Hudson, Twenty-Eighth Year of the World Court, 44 Am. J. Int’l L. 21 (1950). This article was written mainly with reference to the work of the PCIJ but it also addressed the first few years of operation of the ICJ.

[3] Mosk & Ginsburg Dissenting Opinions In International Arbitration, Liber Amicorum Bengt Broms, 1999.

[4] Politis, How the World Court has Functioned (1926) 4 Foreign Affairs 451 (April).

[5] Lauterpacht, The Development of International Law by the International Court, 1958, 68.

[6] Plessy v. Ferguson (1896).

[7]Brown v. Board of Education, 347 U.S. 483 (1954).

[8] Hughes, The Supreme Court of the United States, 1928, 68.

[9] Chopée Levalin NV v. Ken Ren Chemicals and Fertilisers Ltd. [1995] 1 A.C. 38.

[10] See on this issue Redfern, Dissenting Opinions in International Commercial Arbitration: The Good, the Bad and the Ugly, 20 Arbitration International, 223, 242 (2004).

[11] Final Report on Dissenting and Separate Opinions of the Working Party on Dissenting Opinions and Interim and Partial Awards of the ICC Commission on International Arbitration. Adopted by the Commission on April 21, 1988. Available at www.iccdrl.com

[12] It may be argued that the publication of the French Committee’s minority might lend some evidence about the role that may be played by dissenting opinions.

[13] Shore & Figueroa, Dissents, Concurrences and a Necessary Divide Between Investment and Commercial Arbitration, 3 Global Arbitration Review. 18, 20 (2008).

[14] van den Berg, Dissenting Opinions by Party-Appointed Arbitrators in Investment Arbitration Arsanjani et al. (eds.), Looking to the Future: Essays on International Law in Honor of W. Michael Reisman.

[15] Shore & Figueroa, Dissents, Concurrences and a Necessary Divide Between Investment and Commercial Arbitration, 3 Global Arbitration Review, 18, 20 (2008).

Introduction

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

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

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

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

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

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

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

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

The ICSID Convention

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

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

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

The system devised by the Convention: Article 42

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

Article 42 of the Convention states that:

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

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

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

Parties’ agreement

The “rules of law”

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

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

Application of domestic law(s)

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

International law as the parties’ choice

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

Absence of agreement as to the applicable law

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

The relationship between domestic law and international law

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

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

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

International law as identified and applied by ICSID Tribunals

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

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

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

Consequences for failure to apply the law

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Argentinian financial crisis in 2001 and the entailing legislation provoked a considerable number of ICSID arbitral proceedings. But disputes at the very heart of the crisis, those concerning the Argentinian default on its state bonds, were left to be decided by domestic courts in New York, London or Frankfurt, the jurisdiction of which was based on choice of forum clauses contained in the terms and conditions of the debt instruments.

However, in its recent Decision on Jurisdiction of August 4, 2011, the ICSID arbitral tribunal in the case Abaclat and Others v. Argentine Republic, ICSID Case No. ARB/07/5 (available at: http://italaw.com/documents/AbaclatDecisiononJurisdiction.pdf) held that it has jurisdiction to rule on a dispute concerning Argentina’s sovereign debt restructuring despite the choice of forum clauses. This award is remarkable in two regards: First, it is the first ICISD award concerning sovereign debt restructuring. Second, it is also the first mass arbitration ever, involving on the side of the claimants over 180,000 persons. For the purpose of this article, only the first aspect will be elucidated and the second – despite the interesting questions it involves – left to a later discussion.

A. The facts underlying the dispute are as follows: On December 23, 2001, Argentina publicly announced that it would default on over USD 100 billion of its bond debt denominated in foreign currencies, which were owed to foreign and domestic creditors. In order to restructure its debt, Argentina made the so-called Exchange Offer 2005: Argentina offered its creditors new bonds either with a lower principal or a lower interest rate. By law of February 11, 2005, the Government was prohibited to re-enter into the exchange process with respect to those bonds that were eligible for the exchange and that were not exchanged though. By February 25, 2005, approximately 75% of all bond holdings participated in the exchange.

On September 14, 2006, a group of 180,000 Italian holders of Argentinian bonds that did not participate in the Exchange Offer 2005 filed a Request for Arbitration with the International Center for the Settlement of Investment Disputes (“ICSID”). They claimed that Argentina had breach the bilateral investment treaty concluded between Argentina and Italy in 1990 (“the BIT”), which contained an ICSID arbitration clause. Due to the large number of claimants, the claim was administered by the Task Force Argenina (“TFA”), an associazione non riconosciuta under Italian law. After Argentina made another exchange offer in 2010, approximately 120,000 claimants withdrew from the arbitration.

B. In its Decision on Jurisdiction of August 4, 2011, the Tribunal (Tercier, Abi-Saab, van den Berg) held that it has jurisdiction over the dispute. It rejected the preliminary objections raised by Argentina concerning its jurisdiction and the admissibility of the claim.

Argentina’s first objection concerning jurisdiction was that the claims raised by the claimants were not “treaty claims”, i.e. that they did not concern a breach of the BIT. According to Argentina, deferring payments due under the bonds was a mere breach of contract, which could not amount to a violation of Argentina’s obligations under the Argentina-Italy BIT (para. 307).  However, the Tribunal reasoned that, for purposes of determining jurisdiction, it was not necessary to establish that the BIT was breached. Rather, it only had to establish whether – on the basis of the facts brought forward by the claimants – a breach of the BIT could be established prima facie (para. 311). This prima facie standard would only not apply to the assessment of the facts, but also the “determination of the meaning and scope of the relevant BIT provisions invoked”. The Tribunal found that the facts alleged by the claimants could constitute an unfair and inequitable treatment, an expropriation as well as discrimination (para. 314).

Although the Tribunal agreed that it has no jurisdiction to rule on mere contractual claims, which had to be brought before the state courts having jurisdiction, the claims at stake could not be considered merely contractual. It reasoned that the Emergency Law adopted by Argentina “had the effect of unilaterally modifying Argentina’s payment obligations” (para. 321). Therefore, also the choice of forum clauses in the terms and conditions of the debt instruments were irrelevant (para. 499). It is worth noting that the Tribunal did not discuss Argentina’s argument that the bonds were not governed by Argentinian law (but Swiss or New York law) and that thus the Argentinian legislation was unable to affect the claimants’ rights.

The Tribunal further reasoned that the deferral of payments was not justified by contractual or legal provisions like force majeure. Argentina tried to justify its non-performance by referring to its situation of insolvency. However, the Tribunal was not convinced by this argument since the debt contracts contained no provisions in this regard. Although insolvency could constitute a justification for non-payment under domestic law, this would not apply to the situation at hand: the Tribunal pointed out that Argentina was – by adopting the Emergency Law – acting as a sovereign. No international insolvency regime for States would exist, although the Tribunal acknowledged that some legal principles concerning the insolvency of states had evolved. However, these questions would concern the merits of the dispute and not a matter of jurisdiction (para. 323).

Second, Argentina contested that the dispute arose out of an investment as required by the BIT and Art. 25 ICSID Convention. In particular, Argentina argued that the bonds were subscribed to by certain banks and sold to intermediary banks, which then divided and distributed security entitlements in the bonds to their individual customers (like the claimants). The security entitlements could not be considered an investment. The Tribunal was not convinced by this argument: it found that the security entitlements had no value independent of the bonds; the process of distribution happened electronically, there was no physical transfer of title. But the bonds themselves constituted obligations and thus an investment as defined by the BIT (para. 356). As to Art. 25 ICSID Convention, the Tribunal rejected the so-called Salini criteria and contented itself by finding that there was an investment in the sense of the ICSID Convention because there was a contribution on behalf of claimants. It defined as contribution a value that is protected under the BIT (para. 365).

Argentina raised further objections concerning the specific nature of this dispute. It argued that its consent to arbitration contained in the BIT could not be construed in such a way as to include disput-es concerning sovereign debt restructuring. Since Argentina could have limited the scope of its consent under Art. 25(4) ICSID Convention, but did not so, the Tribunal refuted Argentina’s first contention (It is worth noting that some investment agreements, like for instance the Chile-US FTA, Annex 10-B, limit the scope of the protection to national treatment and MFN as far as debt restructuring is concerned).

In the following, the Tribunal elaborated on the specific procedural questions arising out of the fact that, initially, there were 180,000 claimants and that nearly 120,000 of them had withdrawn from the dispute after the Exchange Offer 2010.

C. The Tribunal’s decision is remarkable in several regards, as has been mentioned in the introductory remarks. Although this arbitration is the first ICISD case on the restructuring of foreign debt and although the jurisdiction of ICSID over such disputes is highly disputed in scholarly writing (an overview is provided by: Michael Waibel, Opening Pandora’s Box: Sovereign Bonds in International Arbitration, 101 Am.J.Int’l L. 711 (2007), available at SSRN: http://ssrn.com/abstract=1566482; id., Sovereign Defaults before International Courts and Tribunals 209-272 (CUP, 2011)), the Tribunal’s findings as to whether the bonds as well as the security entitlements are investments in the sense of the ICSID Convention are rather concise. Despite the fact that the Tribunal argued in favor of a “double barreled” test, which distinguishes between term “investment” used by the BIT and by Art. 25(1) ICSID Convention, it made a “contribution” that is “apt to create the value that is protected under the BIT” (para. 365) the only requirement of an investment under the ICSID Convention. Thus, the Tribunal de facto followed a subjective approach.

Bearing in mind the choice of forum clauses contained in the debt instruments, it first seems awkward that the Tribunal assumed its jurisdiction. However, the Tribunal followed a common distinction between contract and treaty claims. It is well accepted by international tribunals and scholarly writing that the mere breach of a contract between a state and an investor does not amount to a breach of an investment protection agreement. However, in case the State exercises its sovereign powers and no longer acts as a “normal” contracting party, a breach of contract can also constitute a breach of an investment treaty. Although it is not undisputed, most tribunals agree that a choice of forum clause in such a state contract can only affect contractual claims.

Thus, the Tribunal is thus in line with the rulings of other tribunals. However, one may ask whether the Tribunal’s decision is really convincing in this case.

First, the Tribunal’s finding that the dispute prima facie really concerns a breach of the treaty is largely labeling, but no analysis.

Second, the Tribunal’s approach is rather formal. Yes, Argentina enacted a law that prohibited to re-enter into the negotiation process with claimants and thus exercised sovereign powers. But from a legal perspective, the Argentinian legislation had no influence on the rights of the Claimants since a. the debt instruments were not governed by Argentinian law and b. Argentinian courts had no jurisdiction. Argentina’s creditors could still (and did so) seek legal redress in the courts of New York, London or Frankfurt. Thus, the Emergency law merely had internal effects on making-up the mind of the Argentinian state. It can be compared to a decision to default by the Board of Directors in a company directed to its chairman. The formal fact that a law was enacted can – at least in this case – not be decisive whether there was sovereign conduct. On the other hand, in case of Greek state bonds, which confer jurisdiction mostly to the courts of Athens, the situation would be different. A Greek law on debt restructuring would make it impossible to seek redress before the Greece or any other courts.

D. The decision raises several questions as to the future of sovereign debt restructuring. This is even truer in the light of the looming insolvency of Greece and other PIIGS-states (i.e. Portugal, Italy, Ireland and Spain). Will it be possible for States to restructure their foreign debts if the affected creditors can challenge these complex economic measures, which were taken in close cooperation with the World Bank, solely on the basis of legal criteria? Are ICSID Tribunals are really the pertinent forum to decide about sovereign debt restructuring?

Apparently, the Tribunal treated the abovementioned questions only superficially in order to be able to proceed to the merits of the case and to make general statements on sovereign debt restructuring under international law. Although the Tribunal did not accept the objection by Argentina, that it was insolvent, it acknowledged that there are principles under international law that govern the insolvency of states; it announced to discuss these principles during the merits-phase. Thus, one can assume that the Tribunal is aware of the relevance of its ruling for the coming state insolvencies.

Depending on the outcome, the Tribunal could set up criteria that would help to create legal certainty also for States in a state of economic necessity. One has to bear in mind that in the case of Argentina domestic courts in a dozen different jurisdictions have ruled on the admissibility of the Argentinian foreign debt restructuring measures – and thus have implicitly challenged the World Bank’s decisions. A decision on the merits then would not be the end, but the beginning of a new era of foreign debt restructuring – although there are doubts as to whether a Tribunal of three arbitrators is really a legitimate institution to re-define the law of State insolvency. Anyhow: The Tribunal has assumed this great responsibility; it remains to be seen whether it uses its power wisely.

Jan Asmus Bischoff

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

Introduction

Just a few weeks ago, the International Chamber of Commerce (“ICC”) revealed its new Arbitration Rules, which will enter into force on January 1st, 2012 (the “Rules”). With the revised Rules comes the introduction of a new Emergency Arbitrator Procedure, a concept previously known to other institutional arbitration rules such as those of SCC, SIAC or AAA ICDR, yet new to the arbitral process under the rules of the ICC. The framework of the new procedure is Article 29 of the Rules, which is accompanied by Appendix V setting out the procedure for obtaining relief from an emergency arbitrator.

The Need for Pre-Arbitral Interim Relief

It is generally known that the constitution of an arbitral tribunal can take a considerable amount of time. Before the arbitral tribunal is constituted, a party seeking to apply for interim relief will usually have no option other than turn to a competent state court.

In many cases, that party will find its needs met if the court grants the relief requested and such relief can be enforced accordingly. In other cases, however, applying to a state court may not be a valid option. In some instances, it might be impossible, e.g. where the parties have validly excluded any state court jurisdiction, including the power to grant interim relief.

Yet, even when not impossible, it may prove inconvenient or otherwise undesirable for a party to apply to a state court for interim relief. Applying to a state court is arguably against the parties’ initial intention to exclude such courts from their disputes, i.e. against the very reason why they entered into an arbitration agreement in the first place. This holds true especially in cases where the parties opted for arbitration because they have a particular desire for confidentiality, or chose arbitration because the nature of their relationship calls for special expertise which a state court may not have. In other instances, the relief sought may not be available from the competent state court, which will usually be bound by its own lex fori when determining the content of interim measures. Finally, the party seeking interim relief may be unwilling to resort to the state courts in the territory of its adversary and to the laws of such state after having avoided such a situation by opting for arbitration on “neutral” terrain and under “neutral” laws. This is where the ICC’s new emergency arbitrator comes in. Pursuant to Article 29(1) of the Rules, a party in need of urgent interim or conservatory measures that cannot await the constitution of an arbitral tribunal (defined as “Emergency Measures”) may make an application for such measures pursuant to the Emergency Arbitrator Rules in Appendix V.

The Key Principles governing the New ICC Emergency Arbitrator Rules

The new ICC Emergency Arbitrator Rules can be summarized in five key principles:

The first key principle of the new emergency arbitrator rules is that they apply automatically to parties having opted to arbitrate their dispute under the ICC Rules. There are, however, specific requirements that must be met in order for the “Emergency Arbitrator Provisions” as defined in Article 29(5) of the Rules (“EAP”) to apply automatically, namely that (a) the application is submitted prior to the transmission of the file to the arbitral tribunal in terms of Article 16 of the Rules (Article 29(1) of the Rules), (b) the arbitration agreement was concluded after 1 January 2012 (Article 29(6)(a) of the Rules), (c) there is no agreement on another pre-arbitral procedure providing for similar relief (Article 29(6)(c) of the Rules), and (d) there is no agreement of the parties to opt-out of the EAP (Article 29(6)(b) of the Rules). In order to allude the parties to the latter possibility, the ICC has added a new Standard Arbitration Clause to its repertoire which includes the respective “opt-out wording”.

A second key principle is that the ICC emergency arbitrator is an additional option available to the parties to an ICC arbitration agreement which corresponds to their chosen means of dispute resolution. Article 29(7) of the Rules expressly provides that the EAP are not intended to prevent any party from seeking urgent interim or conservatory measures from a competent judicial authority. This rule applies without restriction before an application has been made for Emergency Measures and “in appropriate circumstances” even thereafter.

A third key principle is that Emergency Measures are only obtainable in cases of “true” urgency. Because it was decided to apply an opt-out system for the ICC’s emergency arbitrator, it was felt necessary in order to avoid abuse of the EAP to narrow the scope of application of such rules to situations where a measure truly cannot await the constitution of an arbitral tribunal, and to explicitly stipulate such substantive prerequisite in Article 29(1) of the Rules.

The fourth key principle is that the application of the EAP is limited to signatories to the arbitration agreement or successors thereof (Article 29(5) of the Rules). The main purposes of this limitation are to provide the responding party faced with an application for Emergency Measures with a certain degree of protection and to provide an easy substitution test for the prima facie test under Article 6 of the Rules (see Article 1(5) of Appendix V). An additional benefit is that the application of the EAP to treaty-based arbitrations is excluded.

And finally, the fifth key principle is the protection of the responding party. This principle is reflected in the fact that there is no default answer to the application for Emergency Measures within a certain short deadline, that the applicant must pay a fee for the emergency arbitrator procedure to the ICC upfront (Articles 1(3)(h), 7 of Appendix V), but also that the applicant must, as a rule, file a request for arbitration within 10 days from the application, absent which the President will terminate the emergency arbitrator proceedings (Article 1(6) of Appendix V).

The emergency arbitrator’s decision is rendered in the form of an order (the “Order”; Article 29(2) of the Rules, 6(1) of Appendix V) which is binding on the Parties and which the parties undertake to comply with (Article 29(2) of the Rules, Article 6(6) of Appendix V). The Rules and Appendix V are silent on the question of enforcement of the Emergency Arbitrator’s Order. It is submitted that the Order has the same legal nature as an order for interim measures by an arbitral tribunal under Article 28(1) of the Rules. Therefore, it should be enforceable in state courts under provisions such as Articles 17H and 17I of the UNCITRAL Model Law providing for the recognition and enforcement of interim measures granted by arbitral tribunals. Whether – applying a “substance-over-form” approach – the Order could qualify as an award so as to be enforceable under the New York Convention or national legislation based thereupon, is questionable.

Conclusion

In sum, the new Emergency Arbitrator Rules are a well-drafted, well-balanced, tailor-made solution for an emergency arbitrator procedure under the auspices of the ICC. The ICC has succeeded in drafting a tool which will further the attractiveness of ICC arbitration and which will serve the parties to ICC arbitration by effectively protecting their rights for years to come.

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

Democratic Republic of Congo and ors v FG Hemisphere Associates LLC

To most clients a judgment or an arbitral award is only worth the paper it is written if it can be enforced.  Enforcement of judgments and arbitration awards against States poses particular challenges. In the former context, the English Supreme Court recently provided guidance in NML Capital Ltd v Republic of Argentina [2011] UKSC 31 (“Argentina”). In the latter context, the difficulties are exemplified by the epic 3:2 decision of the Hong Kong Court of Final Appeal in Democratic Republic of Congo v FG Hemisphere Associates LLC, FACV Nos. 5, 6 & 7 of 2010 (“Congo”). Both cases saw “vulture funds” seeking to enforce a judgment or an award against a sovereign.

While the fund in Argentina drew blood, the fund in Congo drew a blank. The Hong Kong Court of Final Appeal held that a State enjoys absolute immunity from enforcement proceedings in Hong Kong.  While Congo has already enjoyed its fair share of coverage elsewhere, this brief note sets out some thoughts on what the comparative position in Singapore is, and what the practical effects of the decision are for practitioners advising clients between Singapore and Hong Kong as a potential seat of arbitration.

Facts

In 2003, an engineering company Energoinvest obtained two ICC awards against Congo. Energoinvest transferred the benefit of the awards to a US distressed debt fund, FG Hemisphere Associates. FG sought to enforce the awards in Hong Kong. Congo resisted enforcement mainly on the grounds of State immunity. One of the issues confronting the Court of Final Appeal was whether Hong Kong applied the doctrine of:

(a) absolute immunity, where the domestic courts of one State would not normally have    jurisdiction to adjudicate upon matters in which another State is named as defendant        unless there is a waiver; or

(b) restrictive immunity, which recognizes that States do not enjoy immunity from suit      when they are engaged in purely commercial transactions, and do not enjoy immunity       from execution if the relevant assets are used for a commercial purpose.

Countries such as Australia, US and the UK have adopted the latter, whereas China adheres to the former.

Despite vigorous dissents by Bokhary PJ and Mortimer NPJ which saw the former opening his judgment with characteristic flourish on judicial independence, the majority of the Court of Final Appeal (Chan PJ, Ribeiro PJ and Sir Anthony Mason NPJ) held, inter alia, that because Hong Kong could not have a doctrine of state immunity that was inconsistent with China, the doctrine of absolute immunity applied.  A foreign State is immune from suit, enforcement and execution in Hong Kong, unless waived by that State. An effective waiver is made by an unequivocal submission “in the face of the court”. Written waiver clauses, including jurisdiction clauses and arbitration agreements, do not constitute good waiver.  Because the Court of Final Appeal found no waiver by Congo, the awards in question could not be enforced.  This ruling was upheld upon referral to the Standing Committee of China’s National People’s Congress.

The same principle applies to Crown immunity, which concerns whether a State government or a State entity is able to raise immunity before its own courts. The Hong Kong Court of First Instance held that the PRC government and PRC state entities enjoy absolute Crown immunity before Hong Kong courts: Intraline Resources Sdb Bhd v The Owners of the Ship or Vessel Hua Tian Long HCAJ 59/2008.

Whither Singapore?

The Singaporean position concerning sovereign immunity is codified in the State Immunity Act (Cap 313, 1985 Rev. Ed.). The relevant provision concerning arbitration is section 11, which very simply provides as follows:

Arbitrations.

11. —(1) Where a State has agreed in writing to submit a dispute which has arisen, or may arise, to arbitration, the State is not immune as respects proceedings in the courts in Singapore which relate to the arbitration.

(2) This section has effect subject to any contrary provision in the arbitration agreement and does not apply to any arbitration agreement between States.

In the second reading of the State Immunity Bill (Hansard Vol. 39, 7 Sep 1979, Col 408 – 409), the Minister said that the Bill was meant to move Singapore away from the doctrine of absolute immunity, which according to the Minister, had been the “subject to a great deal of criticism” before the UK courts and the Privy Council. The Bill deliberately mirrored the UK State Immunity Act 1978 shorn of the provisions concerning the European Convention on State Immunity.

Consequently, Section 11 of Singapore’s State Immunity Act is in pari materia with section 9 of the UK State Immunity Act 1978.  While the former has yet to see any action, section 9 of the UK Act came under scrutiny in Svenska Petroleum Exploration AB v Government of the Republic of Lithuania and anor [2006] EWCA Civ 1529 (“Svenska”).

In that case, Svenska sought to enforce an ICC award in England against Lithuania. Counsel for Lithuania argued that section 9 of the UK Act is concerned only with proceedings relating to the conduct of the arbitration itself and does not extend to proceedings to enforce any award which may result from it.  Moore-Bick LJ rejected this interpretation. His Lordship was of the view that “if a State has agreed to submit to arbitration, it has rendered itself amenable to such process as may be necessary to render the arbitration effective” and that an application for leave to enforce an award is one aspect of the recognition of an award and “is the final stage in rendering the arbitral procedure effective”.  Execution on property belonging to the State comes under section 13 of the UK Act (mirrored by section 15 of the Singapore Act), which provides that execution on property belonging to a State can only be in respect of property “which is for the time being in use or intended for use for commercial purposes”.

Moore-Bick LJ also quoted the Lord Chancellor in the course of Parliamentary debates over the relevant provision, who explicitly said that the provision was “intended to remove the immunity currently enjoyed by States from proceedings to enforce arbitration awards against them”.

The intent of the English Parliament therefore could not have been clearer. In choosing to enact the English Act as law in Singapore, the intent of the Singapore legislature is unlikely to differ.  Consequently, if a Congo situation arises in Singapore Svenska is likely to be highly persuasive. If this is accepted, this means that in Singapore, unlike Hong Kong, a foreign State is unable to claim immunity against award enforcement proceedings.  To be complete, any subsequent execution pursuant to a successful award enforcement proceeding against a foreign State can only be on State property “being in use or intended for use for commercial purpose”.

Practical implications

One thing is now clear. Practitioners dealing with State counterparties should be slow to adopt a Hong Kong court jurisdiction clause since a State enjoys absolute immunity in Hong Kong. Conversely, State parties may be attracted to Hong Kong as a safe haven to transfer their assets.

Practitioners in Hong Kong are taking pains to explain that Congo has little impact on Hong Kong’s attractiveness as a seat of arbitration. That is because the decision does not affect in any way an arbitral tribunal’s jurisdiction over a State who is party to an arbitration agreement. An arbitration award rendered anywhere in the world, be it Singapore or Hong Kong, will encounter the same hurdle concerning sovereign immunity when sought to be enforced in Hong Kong.

Would the result in Hong Kong be different if the foreign State against which an award is rendered is also party to the New York Convention? China is a signatory to the Convention, Congo is not. The Hong Kong Court of Appeal suggested that, if an award against a foreign State which is signatory to the New York Convention is sought to be enforced in Hong Kong, that may amount to an effective waiver in the form of consent given in an international treaty.

That proposition remains to be tested. It has been pointed out that the New York Convention arguably imposes upon State signatories only an obligation to recognize and enforce foreign arbitral awards — that does not ipso facto translate into a representation by signatory States that any immunity enjoyed will be waived. The drafting history of the New York Convention does not appear to suggest otherwise. The title of the Convention itself underscores this point: it is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Another open and perhaps more pertinent point concerns the status of an arbitration seated in Hong Kong involving a foreign State party. Will the Hong Kong courts enjoy supervisory jurisdiction over that arbitration?  Practitioners observe that an arbitration clause is generally accepted as an implied waiver of immunity under customary international law. That was the view of Lady Hazel Fox CMG QC in her treatise cited by the Hong Kong Court of Appeal in Congo. But until this point is tested before the Hong Kong courts, a non-State party runs the risk of not being able to seek the judicial assistance of the Hong Kong courts in aid of an arbitration against a State party seated in Hong Kong. Even if the Hong Kong courts ultimately rule on this issue affirmatively, the delay and expense that may ensue from a State party challenging the supervisory jurisdiction of the Hong Kong courts may effectively render moot any judicial measure that was being sought, particularly if such measures are time-sensitive. To that extent parties may prefer the speed and certainty Singapore provides, ceteris paribus.

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Darius Chan

Associate, Wilmer Cutler Pickering Hale & Dorr, London.  LL.B. (First), National University of Singapore, LL.M. (Int’l Business Regulation, Litigation & Arbitration), NYU. Advocate & Solicitor, Supreme Court of Singapore, Attorney & Counselor at law, State of New York.

On 26 September 2011, the Center will host a talk by Professor Jürgen Basedow, Director of the Max Planck Institute for Comparative and International Private Law and Professor of Law at the University of Hamburg, on “A Theory of Party Autonomy in the Conflict of Laws”.

A century ago, authors on both sides of the Atlantic would reject the parties’ ability to choose the law applicable to a contract. Such choice was considered to be a legislative act reserved to the state. The private persons were perceived as being governed by the law, not as determining the governing law. A hundred years later party autonomy is almost generally acknowledged as the primary method of finding the law applicable to a contract. And it is progressively recognized in further areas of the law, too: for torts, matrimonial property regimes, divorce, maintenance etc. Yet, the theoretical foundation for this fundamental change remains elusive. How is it then possible to convince the lawmakers of those countries that have not yet implemented party autonomy? A theory of party autonomy has to explain the consistency of our own law in order to convince others. Departing from a comparative survey over party autonomy in modern legislation, Professor Basedow will deal with the main objections against the freedom to elect the applicable law. He will then outline a theoretical approach that is essentially based on the origin of state and law as described by the political philosophy of the Enlightenment and that is reflected by the modern developments of human rights.

The event will take place on 26 September 2011, in Room 214, Furman Hall 900, 245 Sullivan Street, New York, NY 10012, 6.15-8.00 pm.

In Galsworthy Ltd of the Republic of Liberia v Glory of Wealth Shipping Pte Ltd [2010] SGHC 304 (“Galsworthy”), the Singapore High Court held that a losing party to an arbitration seeking to challenge an arbitral award had the “alternative and not cumulative options” of applying to set aside the award, or, applying to set aside any leave granted to enforce the award. This choice of wording is unfortunate because it gives the mistaken impression that the options described are mutually exclusive, when they are not.

The facts of the case are easy. There was a dispute over a charter party and an arbitration seated in London had issued an award against Glory of Wealth Shipping Pte Ltd (“Glory of Wealth Shipping”). Glory of Wealth Shipping applied to challenge the award before the English High Court on grounds of irregularity (“the first English application”). The opposing party, Galsworthy, applied for security of costs, which was granted by the English High Court. Glory of Wealth Shipping failed to furnish security, leading to a dismissal of their application without a hearing on the merits. Glory of Wealth Shipping also appealed against the arbitral award on a point of law, but the appeal was heard and dismissed by the English High Court.

Subsequently, Galsworthy obtained permission from the Singapore courts to enforce the award in Singapore. Glory of Wealth Shipping applied to set aside the order granting permission to enforce the award. The application was heard and dismissed by an Assistant Registrar, and failed again on appeal.

But the view of the learned Judge hearing the appeal at the High Court differed from the Assistant Registrar’s on one preliminary issue. That issue was whether Glory of Wealth Shipping was entitled to apply to set aside the order granting permission to enforce the arbitral award when it had already challenged the award before the English courts.

The Assistant Registrar was of the view that Glory of Wealth Shipping was still entitled to take up the application to set aside the leave to enforce the award and had proceeded to hear the application on its merits. The learned Judge, however, held that Glory of Wealth Shipping was not entitled to make the application because it had “elected” to proceed in the English courts and the application in the Singapore High Court amounted to “an abuse of process”.

The reasoning of the learned Judge can be summarised as follows:

(a)            Glory of Wealth Shipping’s application to set aside the order granting leave to enforce was a “considered decision on its part to avoid the need to furnish security to the English court”.

(b)            Glory of Wealth Shipping had “elected their forum of challenge and they ought to be bound by it”.

(c)            There were no exceptional circumstances permitting the derogation from the principle of comity of nations requiring the Singapore courts to be slow to undermine the orders of foreign courts.

(d)            If the application was allowed, it could result in a “duplication or conflict of judicial orders”.

(e)            If the first English application was heard on the merits and failed, Glory Wealth Shipping would be entitled to challenge the enforcement of the final award in the enforcement court if the grounds and standards between the supervising and enforcement jurisdiction are different.

The learned Judge consequently held that a party seeking challenge of an arbitral award can either apply to the curial court to set aside the award, or, apply to the enforcement court to set aside any leave granted to the opposing party to enforce. These options were, as he described, “alternative and not cumulative”.

This phrasing is inadequate because it covers too much and too little at once. It over-includes because it lends itself to the mistaken impression that the options are mutually exclusive, such that one option can no longer be exercised once the other has been elected. It under-includes because it does not explain whether one option can still be exercised if the legal grounds relied upon for the second option are different from the first.

It may be useful to set out with precision how the options of an unsuccessful party in an arbitration interact.  Generally, under the New York Convention, three general principles, which are by no means exhaustive, can be set out:

(a)            The unsuccessful party in the arbitration can resist enforcement at the enforcement jurisdiction, without having to first apply to set aside the award at the seat (see Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, per Lord Mance at [28]).

(b)            The unsuccessful party in the arbitration can apply to set aside the award at the seat, whilst at the same time, resist enforcement if enforcement is being sought in another jurisdiction. That explains why Art. VI of the New York Convention allows an enforcement court to order a stay of the enforcement proceedings if setting aside proceedings are pending at the curial court.

(c)            Regardless of whether the setting aside of an award is successful at the seat, the ruling of the curial court can create an issue estoppel in jurisdictions where such a doctrine (or its equivalent) exists (see Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, per Lord Collins at [98]). However, even if there is a successful annulment, the unsuccessful party in the arbitration may still find itself having to defend enforcement proceedings because certain courts may still enforce an award that had already been set aside (see Pabalk Ticaret Sirketi v Norsolor, Cour de cassation, 9 October 1984, 1985 Rev Crit 431; Hilmarton Ltd v OTV, Cour de cassation, 23 March 1994 (1995) 20 Yb Comm Arb 663; République arabe d’Egypte v Chromalloy Aero Services, Paris Cour d’appel, 14 January 1997 (1997) 22 Yb Comm Arb 691; Soc PT Putrabali Adyamulia v Soc Rena Holding, Cour de cassation, 29 June 2007 (2007) 32 Yb Comm Arb 299; Chromalloy Aeroservices v Arab Republic of Egypt, 939 F Supp 907 (DDC 1996).

The foundation of these principles stems from the way setting aside proceedings and enforcement proceedings are in fact designed as two separate and independent juridical proceedings. One may, and more critically, may not affect the other if, for instance, a result has already been reached in one or if setting aside proceedings are already pending.

Consequently, if a party aborts a setting aside proceeding before it is heard, that should not prejudice its application to defend enforcement proceedings in another jurisdiction. It is fully within that party’s prerogative to take the view that any security for costs ordered against it in the setting aside proceedings would not justify carrying through with the setting aside proceedings. In such a circumstance, it is entirely within that party’s option to terminate the setting aside proceedings, and respond to enforcement proceedings only when enforcement proceedings are commenced by the successful party in the arbitration.

It is therefore difficult to see how an “abuse of process” happened in Galsworthy. A possible abuse of process could arguably be made out in the rare instance where the unsuccessful party withdraws setting aside proceedings at the very last minute after a hearing of the merits when it became clear that it was losing that application, so as to avoid a final judgment which may have preclusive effect on subsequent enforcement proceedings. But even then, any abuse was of the process in the court of the seat, and not at the court of enforcement.

By dint of reasoning, the language of “election” used by the Singapore High Court in Galsworthy was unfortunate. There was no obligation on Glory Wealth Shipping to challenge the award in England, and even if it did so but aborted it ostensibly because of a security for costs order, that in itself does not affect its separate and independent right to defend enforcement proceedings in Singapore.

Darius Chan is an Associate at WilmerHale, London.

I am a bit surprised that the Supreme Court’s recent decisions in the stream of commerce cases have not been receiving more attention in the blog-o-sphere.  The issues are important, and the Court’s resolution of the cases contains some interesting developments in the law as well as some important signals of where future fights may lay [Disclosure – I filed briefs on behalf of an amicus in both cases.  The views expressed here are my own and do not reflect those of my client.]

For readers familiar with the cases, you can skip this paragraph which simply provides a bit of background.  The Court decided two cases – Goodyear and Nicastro.  Goodyear presented the question whether a state court could exercise general jurisdiction over foreign companies based on the flow of those companies’ goods (through intermediaries) into the state (the underlying facts involved forum state residents who were killed in a bus accident in France).  Nicastro presented the more standard question, created by the Supreme Court’s fractured opinion in Asahi – namely the conduct necessary to support specific jurisdiction based on the stream of commerce theory (the underlying facts involved a forum resident, injured in the forum state, by a machine manufactured in England and sold into the forum state by an independent US disributor with nationwide distribution rights).

In Goodyear, it was clear from the get-go that the Supreme Court was going to reverse and hold that the stream of commerce theory did not support general jurisdiction.  In doing so, the Court did a couple of interesting things.  First, and perhaps most importantly, the Court really narrowed the “continuous and systematic” contacts theory of general jurisdiction; the Court basically indicated that the theory was only available in an extraordinary case (like Perkins) where a foreign corporation relocated all of its operations to the US out of necessity.  Second, the Court explicitly linked purchases from the forum state (which had been at issue in Helicopteros) with sales to the forum state (at issue in Goodyear).  Prior decisions had suggested that, for export promotion reasons, purchaes from the forum state should be less likely to establish minimum contacts – Goodyear suggested there was no reason to treat the other differently.  Third, though the statement is technically dicta, the Court seemed to imply that a corporation could be subject to general jurisdiction not only in its state of incorporation but also in the state where it maintained its principal place of business (where that is a different state).  This strikes me as a rather radical statement- albeit dicta – especially becaues the Court offered no guidance on how to determine that place (particularly strange since, just last term, it had resolved a longstanding circuit split on that question in the context of determining the PPOB for diversity purposes).

In Nicastro, oral argument suggested that the vote would likely be 6-3, and that’s what happened albeit with another badly divided opinion (de ja vu from Asahi).  A couple of issues were at play in the Court’s decision.  One issue was the proper test.  Three justices (RBG, SS, and EK) embraced the Brennan view from Asahi.  The AMK plurality is a bit tougher to read but appears to embrace a modified version of the SOC view from Asahi.  It seems to say that stream of commerce theory still requires purposeful availment (the plurality uses the term “targeting”) of the forum state, but the plurality carefully avoids repearing the “additional conduct” factors that SOC identified in Asahi.  The Breyer/Alito concurrence is the most ambiguous.  It appears to reject the New Jersey Supreme Court’s rule (which drew on the Brennan Asahi opinion) but also cites the Brennan Asahi opinion (in my view, Breyer actually reinterprets that opinion without saying he’s doing so).  A second issue is the sovereign/forum analysis.  The AMK plurality pretty clearly wants to differentiate state sovereigns from national sovereigns and basically say that national sovereigns can consider nationwide contacts but state soveriegns can consider only contacts at the forum state itself (this has important implications for legislation pending before Congress).  The RBG dissent seems more willing to let forum states consider nationwide contacts at least where the foreign mfr uses a nationwide distributor.  Again, the Breyer/Alito concurrence is hardest to read on this point and probably cannot be understood to offer up a view.  A third issue is the methodology – the AMK plurality seems to be attempting to shift the Court away from fairness-based notions of constitutional limits on personal jurisdiction (note the repeated references to Scalia’s Burnham opinion which sought to do the same).  RBG doesn’t like that at all.  And again, Breyer and Alito are mum (though I suspect this may be a point on which these two might part ways).  Finally and perhaps most significantly, it’s worth noting that none of the justices cited the Asahi/Woodson “reasonableness” test, leaving one to wonder at least whether that prong of the test continues to hold appeal for a majority of the Court.

What does the future hold?  A couple of things.  As far as Goodyear, expect to see a lot more litigation on the issue of jurisdictional imputation of contacts – that was brimming beneath the surface in Goodyear, and RBG rightly concluded that the respondents had waived the issue.  But the law is all over the place, and some circuits (like CA9) are doing some nutty thing.  Additionally, expect to see a battle for the hearts and minds of Justice Alito and the Solicitor General.  Indeed, Alito’s vote in Nicastro is the most curious one in these cases, and I cannot help but think that Alito, a former ASG, was a bit tweaked that the SG didn’t file in that case (even though it filed in Goodyear), and the Breyer opinion basically says it’s awaiting the SG’s view.  Third, look for some internet cases.  Civ pro gurus know this has been a thorny area which Asahi did not contemplate and which dcts like the Zippo decision have struggled to address.  Breyer in particular appears keenly aware of the interplay between stream of commerce theory and internet contacts.

Peter Bowman Rutledge is Professor of Law at the University of Georgia School of Law

1. INTRODUCTION

Having to deal with the subject of arbitration and third parties feels like the Herculean task of dealing with Lernaean Hydra, the mythical beast that had several heads, and for each head cut off it grew two more. This is because third-party claims often relate to many aspects of commercial life and types of contracts, as different as construction contracts, guarantees, and maritime and reinsurance transactions. Third-party claims may also implicate different laws and theories, including agency or assignment, third-party beneficiary, incorporation-by-reference, ratification, even corporate law and ‘group of companies’ theories. Each one of these theories and laws requires different types of inquiries from different standpoints.

Even worse: very often in practice a single set of facts will involve the application of several overlapping theories at once. A third-party parent of a wholly owned signatory subsidiary will provide a guarantee for the obligations of the subsidiary, and also will be actively involved in the performance of the contract. In addition, the officer that negotiates and signs a contract containing an arbitration clause will usually be acting as a representative of both the parent and the subsidiary.

To refer to a characteristic example in the case of Bridas et alia v Government of Turkmenistan et alia, 345 F.3d 347 (5th Cir 2003) the claimant relied alternatively upon several third-party theories, including agency, instrumentality, apparent authority, alter ego, third-party beneficiary, theory of equitable estoppel, to prove that the government of Turkmenistan was bound by an arbitration clause signed by Turkmenneft, formed and owned by the government of Turkmenistan.

The importance of the topic is further increased in practice with the number of arbitration disputes involving third parties continuously growing. Typically, claimants will try all inventive ways to reach to non-signatory parties with an interest in the dispute, and more crucially to non-signatory parties with the necessary funds to recover the damages which the tribunal may award; whereas respondents will try to find ways to avoid the prospect of being brought before an international tribunal and the prospect of being held liable for a transaction in which they have an interest but for which they want to avoid accountability altogether.

For all the above issues, the subject of international arbitration process with third parties has become one of the most pervasive problems in current international arbitration. This post attempts to first, give a very brief overview of all the different legal theories relating to third-party claims and second, raise the issue of whether the current arbitration doctrine is well-equipped to deal with this complex matter, or commercial practice has started to outgrow the doctrine.

2. LEGAL THEORIES ON THIRD-PARTIES

Overall, there are four different groups of legal bases that a party can rely upon to bring a claim against a non-signatory, and vice versa. These are:

1. General theories of contact law
2. Two or more compatible arbitration clauses
3. Applicable arbitration rules or arbitration laws allowing for third-party claims
4. Theories of implied consent

The common denominator for all third-party legal bases is of course consent. Thus the above theories are the legal constructs, allowing courts and tribunals to identify ‘common will’ of both the signatory and the non-signatory to arbitrate. More specifically, a non-signatory may be introduced in arbitration through the following general theories of contract law:

1.  Representation and apparent authority
2.  Assignment and transfer
3. Alter ego
4. Incorporation by reference
5. Third-party beneficiary

Equally, third-party claims will be possible where several parties have signed different arbitration clauses in interrelated substantive contracts, on the condition that all the arbitration clauses are first, identical (or at least compatible) in their basic terms and, second, contain cross-references expressly allowing for multiparty proceedings or third-party claims. If the several arbitration clauses fail to meet either of the above conditions, consent for third-party claims might be problematic to infer.

Further, tribunals may allow third-party claims pursuant to certain institutional rules or arbitration laws that expressly allow for a third party to be joined or intervene in arbitration proceedings between to signatory parties. Here, however there are very few national laws that provide for third-party claims, and when they do they largely state the obvious allowing third-party claims on the basis of unanimous consensus among all the relevant parties, including the third party (e.g. the English Arbitration Act, s.35). On the other hand, a number of institutional rules expressly provide for third-party or multiparty disputes. Most of them though will allow third-party claims only on the condition of unanimous consent of all the relevant parties, including the original and the third parties (see for example, the 2010 UNCITRAL Arbitration Rules Art.17(5)). There are only a few progressive sets of institutional rules, such as the LCIA (Art. 22.1(h)), Vienna Rules (Art. 4(2)), and most notably the Swiss Rules (Art. 4(2)) that give tribunals wide power to decide on the matter, allowing for joinder and intervention of a third party even if some of the relevant parties disagree. Finally, third-party claims may still be introduced even under institutional rules that contain no express provision to that effect. This is the case under the ICC rules, for example, where the ICC Court, under its current practice, will allow third-party claims to proceed before a tribunal, if they prima facie meet the threshold of a particular theory of contract law including the theories of agency, transfer and assignment, alter ego, and lifting the corporate veil. Of course, the ICC will be introducing in 2012 new Arbitration Rules, which -as is safely expected- will contain express provisions on third party claims.

Finally, third-party claims may be introduced on the basis of the theory of implied consent. Here the idea is that a party that has not signed an arbitration clause may nevertheless be found to have actually consented to it, if the non-signatory has been actively involved in the negotiation, participation or termination of the main contract that contains the arbitration clause. The most prominent versions of the theory of implied consent are the doctrine of arbitration estoppel developed in the US and the famous, some would say infamous, group of companies doctrine developed in the European continent.

3. CONCLUSION AND NEW CHALLENGES FOR THE FUTURE

All the above theories –firmly based on the fundamental principle of consent- work in the majority of the cases well. However there are marginal cases of third parties that cannot fit in any of the above legal theories, notwithstanding the fact that –from a business point of view- they are obviously implicated in the commercial transaction, which is the subject matter of arbitration between two other parties.

Originally, it was exactly those cases that the theory of implied consent and the doctrine of group of companies in particular were developed to address. These theories were designed to allow tribunals to assume jurisdiction over non-signatories that were crucially implicated in the dispute before the tribunal. The problem with all these theories is that sometimes tribunals find “common intention” of the signatories and the non-signatories on the basis of tenuous evidence or facts. Here, common intention to arbitration is sometimes forced out of factual circumstances that may not allow normally for it. And when tribunals do that, there is always the danger that some national courts -that is other than French national courts- will refuse to accept that implied -some times even presumed- intention to arbitrate, and will either annul or resist the enforcement of the ensuing award.

This was clearly the case in the famous Dallah v Government of Pakistan, [2010] UKSC 46 and previously in the Peterson Farms v C&M Farming, [2004] 1 Lloyd’s Rep. 603. Indeed, English courts, in Dallah, refused to accept that the non-signatory Government of Pakistan had consented to arbitration because, for example, one of its Ministers wrote a letter to Dallah on stationary with the Pakistani Government paper-head; or because the Government of Pakistan had agreed to act as the guarantor of the signatory Trust in its the financial transaction with Dallah. The English Court of Appeal and then the Supreme Court found that these too weak evidence to prove that the non-signatory had implicitly consented to arbitration, as the ICC tribunal had found. Lord Collins for the Supreme Court concluded that “there was no material sufficient to justify the tribunal’s conclusion that the Government’s behaviour showed and proved that the Government had always been, and considered itself to be, a true party to the Agreement and therefore to the arbitration agreement. On the contrary […] on the face of the Agreement the parties and the signatories were Dallah and the Trust”

Yet, for those that have read the case it is obvious that the Government of Pakistan was unmistakably implicated in the whole business transaction from the beginning to the end. This is why the Paris Cour d’appel a couple of months after the decision of the UK Supreme Court reached the opposite conclusion upholding the award on the basis that: “[The Government] behaved as if the Contract was its own;[…] this involvement of [the Government], in the absence of evidence that the Trust took any actions, as well as [the Government’s] behaviour during the pre-contractual negotiations, confirm that the creation of the Trust was purely formal and that [the Government] was in fact the true Pakistani party in the course of the economic transaction”.

And this is exactly the weakness of all the above theories and the theory of implied consent in particular: they look into the issue of third parties from a contractual point of view exclusively. However, arbitration is not only an advanced theory of contract law. It has serious jurisdictional aspects that are overlooked. From a contractual point of view, the issue of third parties is often reduced into an issue of evidence of consent, which misses the point. And the point here might be not whether a tribunal may find enough evidence that the non-signatory party has consented to the arbitration clause, but whether and how closely the non-signatory party is implicated in the main dispute before a tribunal. Thus the crucial question here is: if a third party is strongly implicated in a dispute, should a tribunal assume jurisdiction over this party on grounds that this equitable and fair to do so in order to accomplish its main goad, namely to effectively dispose of the dispute before it?

International commerce becomes increasingly complicated and companies are organized on the basis of previously unknown forms. In order to remain commercially pertinent and effective, arbitration must be able to take the new developments in international commerce into account, especially for jurisdictional purposes. We need to think that the commercial reality might soon outgrow the current contractual doctrine. Otherwise, parties with an important role in the commercial aspect of the dispute might be left outside the scope of arbitration for lack of sufficient evidence of consent.

 

 

This is a very brief overview of some of main issues concerning third parties, explored in detail in S. Brekoulakis, Third Parties in International Commercial Arbitration, (Oxford University Press 2010) (see http://ukcatalogue.oup.com/product/9780199572083.do)

Stavros L. Brekoulakis 

Attorney-at-Law and Senior Lecturer in International Dispute Resolution and Private International Law at the School of International Arbitration, Queen Mary, University of London.

As the European Union realizes the economic advantages of the internal market, and its Member States (fitfully) move closer to becoming a single economic entity, European patent law nevertheless remains highly national in character.  Patent protection in Europe is granted under two parallel regimes: the national patent system; and the regime of the European Patent Convention (EPC).  National patents are issued by, and afford protection within, individual states, whereas the EPC provides a centralized administration for the issuance of ‘bundled’ national patents by the European Patent Organization (EPO).  The ‘European patent’ granted by the EPO does not constitute a unitary patent extending throughout Europe, but rather grants national patent protection in each EPC state specified in the patent application.  Both regimes operate independently of the EU; in fact, the EPC regime extends to non-EU states.

The EPC seeks to harmonize European substantive patent law by providing uniform rules for European patents, including in relation to: the extent of protection (art 69); patentability (arts 52-57); and revocation (art 138).  Uniformity is thwarted, however, by the fact that implementation and interpretation of these rules is left to national law (and national courts), and there currently exists no supranational judicial mechanism for ensuring the harmonization of national patent laws.

At the same time, generously construed rules on jurisdiction commonly permit patent litigants in Europe a choice of fora, and therefore an opportunity to engage in ‘forum shopping’.   Where a suit for patent infringement (or non-infringement) involves a defendant domiciled in an EU Member State, national courts of Member States must exercise jurisdiction in accordance with the Brussels Regulation (or Lugano Convention).

Under this regime, suit may be brought before the courts of the defendant’s domicile (art 2), or in the state(s) in which an infringing product was manufactured or sold in breach of a local patent (art 5(3)).  Dutch courts have even exercised jurisdiction over foreign defendants for violations of foreign patents, under art 6(1), where the defendant companies constitute a corporate group, and the head corporation of the group is domiciled in the Netherlands (see, e.g., Expandable Grafts Partnership v. Boston Scientific B.V., F.S.R., 352 [1999]; Solvay S.A. v. Honeywell Fluorine Products Europe B.V., District Court The Hague, Case No. 09-227 [2010]).

In recent years, the ECJ has made clear that a restrictive view is to be taken of the special bases of jurisdiction of the Brussels Regulation (see, e.g., Shevill v. Presse Alliance, 1995 E.C.R. I-415; Gesellschaft für Antriebstechnik m.b.H. & Co. K.G. v Lamellen und Kupplungsbau Beteiligungs K.G., 2006 E.C.R. I-06509; Roche Nederland B.V. v. Primus, 2006 E.C.R I-06535).  Some commentators consequently expected forum shopping in European patent litigation to be significantly curtailed.  Due to what these cases left open for forum shoppers, however, forum shopping remains prevalent.

Forum shopping both reveals and exacerbates economic inefficiencies arising from discordant national patent laws in Europe.  Allowing litigants an “often outcome-determinative” choice of court – borne out in widely varying ‘win-rates’ between European fora – distorts the economic policy balance which national patent laws strike between incentivizing innovation and competition.

Thus, reform is much needed in the European patent system.  Properly structured, a ‘Community patent’, extending unitary protection across Europe, would address the legal disunity that results in forum shopping.  One commentator has noted, however, that “[t]he Community patent seems to become less acceptable the more it is needed”.  Both the Community Patent Convention of 1975, and the Luxembourg Convention of 1989, proposed a Community patent, but failed to obtain sufficient ratification by EU Member States.  In 2000, the European Commission put forward a draft Community Patent Regulation, designed to “complement” the EPC regime, but negotiations between Member States broke down in 2004.

The reasons for the failure of these proposals are manifold.  Primarily, however, each failed: (i) to develop mutually acceptable mechanisms for judicial enforcement and revocation of patent protection at the Community level; and (ii) to adequately address the cost of filing and translating patent specifications in each jurisdiction.

Most recently, in 2007, the European Commission presented a proposal for a Community Patent Regulation, under which the EPO would be responsible for granting a Community patent extending unitary protection throughout EPC member states.  At the same time, an autonomous European and Community Patents Court would be established to decide all patent actions.  In 2011, however, the ECJ held this proposed regime to be inconsistent with EU law.  The Regulation would impermissibly divest national courts of first instance jurisdiction over patent disputes, and invest the Community Patents Court with the responsibility of interpreting and applying not only the envisaged international agreement, but also Community law (see E.C.J. Opinion 1/09 of 8 March 2011).  Thus, as of 2011, a Community Patent for Europe remains elusive.

In light of these failed efforts, it is suggested that the following structural elements be considered when formulated a new Community patent regime.  Although a tenable proposal would of course need to be much more comprehensive, it is hoped that this discussion contributes to the Community Patent debate.  First, national patent regimes should be phased out in EU Member States.  Thus, only a Community patent would be available, which would be issued, infringed, or revoked as a whole.  Secondly, a new Regulation under EC Treaty Article 308 should provide substantive Community patent law, and set minimum procedural standards for European patent litigation.  Thirdly, although national courts must retain first instance jurisdiction in patent cases, these courts should be limited in number and specialized in hearing patent matters.  Fourthly, a Common Patent Court should be established as a second instance court of appeal at the Community level, attached to the ECJ Court of First Instance.  The existence of appeal courts at the Community level would further the goal of substantive harmonization of European patent law.  Moreover, the ECJ should operate as a court of referral on questions of Community patent law, from national or Community courts.

In order to limit ‘torpedo’ actions, it is further suggested that current rules on jurisdiction be buttressed by a mandatory preliminary hearing on jurisdiction in national courts.  And, if such a preliminary ruling is not made by a first-seized national court within six months of filing, an application should be available to the Community Patent Court for a binding ruling on the first-seized court’s jurisdiction.  Finally, in order to overcome the controversial matter of translation requirements, a patentee should be required, at the time of filing, to translate patent claims into the official languages of Member States.  Translations of patent specifications (a more costly enterprise), should be required only prior to the commencement of patent litigation. (Notably, technological innovation may soon resolve this issue, as automated translations are already being employed by the EPO in respect of certain languages).

As former EU Commissioner Frits Bolkestein has stated, the failure to agree on a Community patent regime “undermines the credibility of the whole enterprise to make Europe the most competitive economy in the world”.  Indeed, Europe has been criticized for being less successful than other regions at converting its “excellent scientific base” into new products and market share.  EU Member States should once again return to the negotiation table, with the knowledge that political compromise will assuredly beget significant economic reward.

Owen Webb

The Singapore Court of Appeal issued a decision recently articulating a principled framework for the arbitrability of insolvency-related claims. It provides useful guidance on when an insolvency-related claim would be considered non-arbitrable under Singapore law. In seeking to strike the delicate balance between its robust pro-arbitration stance and its insolvency regime, the Court’s underlying philosophy strives to give the private consensual model of arbitration as much effect as possible, whilst using the tool of non-arbitrability to draw a clear line in the sand only when third-party interests are implicated under the insolvency regime.

In Larsen Oil and Gas Pte Ltd v Petroprod Ltd (in official liquidation in the Cayman Islands and in compulsory liquidation in Singapore) [2011] SGCA 21, the Singapore liquidators of an insolvent Cayman Islands company, Petroprod, sought to avoid a number of payments made by Petroprod to the appellant, Larsen, on the statutory grounds that those payments amounted to unfair preferences or undervalue transactions and/or was made with the intent to defraud. Larsen applied for a stay of those avoidance proceedings on the basis of an arbitration agreement between the parties that stipulated Singapore as the seat of arbitration.

After a comparative jurisprudential analysis characteristic of prevailing judicial practice, VK Rajah JA writing for the Court of Appeal astutely laid down three key principles:

1)    Disputes involving an insolvent company that arise only upon the onset of the insolvency regime, such as disputes concerning transaction avoidance and wrongful trading, are non-arbitrable.

2)    Disputes involving an insolvent company that stem from its pre-insolvency rights and obligations are non-arbitrable when the arbitration would affect the substantive rights of other creditors.

3)    Disputes involving an insolvent company that stem from its pre-insolvency rights and obligations are arbitrable when the arbitration is only to resolve prior private inter se disputes between the company and other party.

In so far as the first principle is concerned, the Court incisively reasoned that many of the statutory provisions in the insolvency regime are enacted to recoup for the benefit of the company’s creditors losses caused by the former management, and this objective would be compromised if a company’s pre-insolvency management had the ability to restrict the avenues by which the company’s creditors could enforce the very statutory remedies which were meant to protect them against the company’s management. Some of these remedies may include claims against former management who would not be parties to any arbitration agreement.

There is perhaps another way which the Court could have arrived at the same result.

One could say that the insolvency provisions the Court was concerned about, such as transaction avoidance due to unfair preference, are not claims that are derivative of the debtor’s rights; they can only be brought by a liquidator (or a trustee or debtor in possession; or one of their assignees), none of whom were parties to the arbitration agreement: see In re Bethlehem Steel Corp. v. Moran Towing Co., 390 B.R. 784 (Bankr. S.D.N.Y. 2008), citing Allegaert v. Perot, 548 F.2d 432 (2d Cir. 1977); Hagerstown Fiber Ltd. P’ship v. Carl C. Landegger, 277 B.R. 181 (Bankr. S.D.N.Y. 2002); Hays and Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149 (3d Cir. 1989); OHC Liquidation Trust v. American Bankers Insurance Co. (In re Oakwood Homes Corp.), 2005 WL 670310 (Bankr. D. Del. 2005); Pardo v. Pacificare of Tex., Inc. (In re APF Co.), 264 B.R. 344 (Bankr. D. Del. 2001).

This is not novel and has already been foreshadowed by the Court in its earlier precedent of Ho Wing On Christopher and ors v ECRC Land Pte Ltd (in liquidation) [2006] SGCA 25, albeit in a different context concerning the recovery of costs by a successful litigant against an insolvent company in liquidation.

Indeed, in the present case the Court expressly considered the origin of the claim in elucidating the next two principles set out above. The Court observed that there were two policies militating against giving effect to arbitration agreements for disputes stemming from pre-insolvency rights and obligations.

First, because the insolvent regime is for the benefit of creditors who are not parties to the arbitration agreement, it is difficult to justify why the liquidator (or trustee) who represents the creditors should be compelled to arbitrate instead of pursuing the statutory remedies.

Second, allowing an insolvent company’s creditor to arbitrate its claim against the company in effect allows the creditor to contract out of the proof of debt process. It arguably falls foul of the principle that a company cannot contract with some of its creditors for the non-application of certain insolvency rules.

Weighing the competing policies, the Court took the final position that the right balance to be struck for disputes involving an insolvent company that stem from its pre-insolvency rights and obligations was to hold that if the resolution of a dispute through arbitration would “affect the substantive rights of other creditors”, then the dispute is non-arbitrable. Conversely, the dispute is arbitrable when it does not.

The Court reasoned that circumvention of the proof of debt process is tolerable because the process does not create new rights in the creditors or destroy old ones. Even if the claim is subsequently proved to be valid and enforceable against the liquidator (or trustee), the pool of assets available to all creditors at the time of the liquidation of the company is not affected.

The Court’s view that the proof of debt process should not operate as a complete barrier against arbitrability must be right as a matter of legal symmetry and consistency, since the Court has been granted the statutory power to permit certain actions or proceedings against a company in a liquidation, thereby allowing those creditors to derogate from the proof of debt process: see s 262(3) Companies Act (Cap. 50, 2006 Rev. Ed.) and s 148A Bankruptcy Act (Cap. 20, 2009 Rev. Ed.).

Darius Chan

Darius Chan graduated from NYU with a LL.M. in International Business Regulation, Litigation & Arbitration. He is qualified in Singapore and New York. Upon graduation he clerked at the Supreme Court of Singapore and was concurrently appointed an Assistant Registrar. He was also adjunct faculty at the law schools of National University of Singapore and Singapore Management University. Prior to the LL.M., he practised international arbitration at the chambers of Michael Hwang SC.

Professor Franco Ferrari, Executive Director of the Center for Transnational Litigation and Commercial Law, will give a talk at the New York State Bar Association Global Week, International Section. He will speak on “Drafting International Contracts”. The event will take place on 10-13 May, 2011, at the Yale Club.