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.

Professor Franco Ferrari co-edited (with Professor Fracnesco Galgano et al.) and co-authored the fifth edition of a book in Italian entitled “Atlas of Comparative Private Law”. The book collects articles on twenty topics in the area of private law, ranging from transfer of property to tort law, from contract formation to bankruptcy.

In the past decade, conflict of laws rules relating to corporations have undergone a dramatic change in Europe. At the outset of this development, many European countries, such as Germany, France or Austria followed the real seat doctrine. This doctrine makes applicable to a pseudo-foreign corporation the law of the real seat and thus imposes on the corporation a different law than the one under which it had been founded. The results can be dramatic and mostly lead to the loss of the shareholders’ limited liability. From 1999 onwards, the European Court of Justice was faced with three landmark cases on cross-border mobility of corporations (all of them concerning inbound mobility, i.e. from the perspective of the country of arrival), the “Centros” case of 1999 (Case C-212/97, ECR 1999 I-1459), the “Überseering” case of 2002 (Case C-208/00, ECR 2002 I-9919) and the “Inspire Art” case of 2003 (Case C-167/01, ECR 2003 I-10155). The essence of these cases is that, at least for intra-European fact patterns, the application of the real seat doctrine or substantive laws for pseudo-foreign corporations that impose minimal capital requirementsviolate the corporation’s freedom of establishment, Art. 43, 48 (now: 49, 54) of the Treaty and cannot be applied any more to corporations arriving at the borders of the new host state. Instead, the relevant conflict of laws rule for inbound mobility within Europe has to be the theory of incorporation. Yet, one unclarity remained: In 1988, in the “Daily Mail” case (Case C-81/87, ECR 1988 I-05483), the ECJ had decided that the freedom of establishment does not, in the present state of European law, confer to a corporation founded under the laws of a member State the right to relocate its real seat to another member State. This decision concerned the perspective of the country of departure, and the ECJ essentially argued that the country of departure, i.e. the country of incorporation, had given life to a corporation and thus was allowed to take it away again when the corporation intended to relocate to another country. The three above-mentioned cases (Centros, Überseering and Inspire Art) did not overturn Daily Mail as they explicitly referred to inbound fact-patterns.

Nevertheless, most commentators criticized the distinction between outbound mobility and inbound mobility. In particular, a corporation’s freedom of establishment and the changes brought by Überseering and Inspire Art depend on the interplay of the laws of both countries, and this interplay can effectively block outbound mobility, thus making the right to inbound mobility in the new host state virtually useless. Let us illustrate this with a short example: A corporation is incorporated in country A, a real seat country, and shifts its real seat to country B, a country that follows the theory of incorporation. On the conflict of laws level, the real seat theory refers us to the law of country B, but the conflict rule of country B (theory of incorporation) refers us back to country A, whose substantive corporate rules then apply. However, many real seat countries consider, on the substantive level, a corporation’s decision to relocate to another country as a decision to liquidate. Thus, country B cannot welcome the corporation; instead the corporation has to liquidate and be created anew in country B. In 2008, in the “Cartesio” case (Case C-210/06, ECR 2008 I-9641), the ECJ was faced with the very same fact pattern: A Hungarian partnership wanted to relocate its real seat – not its place of incorporation – to Italy yet remain incorporated in the Hungarian commercial register. This was not possible according to Hungarian substantive corporate law. The Hungarian appellate court, tough not being entirely clear whether it meant the real seat or the place of incorporation, referred the case to the ECJ. Contrary to what the final remarks of the General Advocate Poiares Maduro had suggested, the ECJ confirmed its solution of Daily Mail, yet also added another layer of distinction between two different constellations of outbound mobility: On the one hand, a corporation, such as in Cartesio, might wish to preserve its legal identity and remain organized under the laws of its country of origin. In this respect, the ECJ essentially repeated the reasons mentioned in “Daily Mail” (items 104 et seq.). On the other hand, an outbound corporation might wish to relocate and adopt one of the legal forms of the new host state. In this case, according to the ECJ, national substantive law or conflict of laws are not “immune” against the corporation’s freedom of establishment. In such a situation, the requirement of a prior winding up falls within the scope of Art. 43, 48 (now 49, 54) of the Treaty and could only be justified by compelling general interests (items 110 et seq.). In the meantime, the European Commission had thought about a new directive that would allow a corporation to shift its place of incorporation – not its real seat – to another European country. Yet, prior to Cartesio, these plans were abandoned because the directive on cross-border mergers was considered as a viable alternative.

In the aftermath of Überseering and Inspire Art, many authors suggested a situation of competition between the different national legislators in Europe and alluded to the situation in the United States, whose corporate law is dominated by the law of Delaware. Given the massive rise in numbers of British Limited companies in the German territory, the German legislator decided to reform the German law on limited liability companies. Essentially, the traditionally strict capital requirements of German law have been eased and a new, “slim” form of limited corporation (Unternehmergesellschaft) has been created for start-ups and small business founders. This new forms seems to be very successful among its target group and is about to outnumber the pseudo-foreign British Limited companies in Germany. Moreover, the German legislator, in an attempt to make the “export” of German law possible, abolished substantive limitations similar to the Hungarian ones of the “Cartesio” case and now – although not being required to do so by European law – allows corporations founded under German law to move to another country and take their German legal form with them, see § 4a GmbHG (German law on limited liability companies).

Gunnar Groh

Gunnar Groh, an Arthur T. Vanderbilt Scholar and LL.M. candidate in Corporate Law of New York University School of Law, graduated from Ludwig-Maximilians-University of Munich. Mr. Groh also holds a licence and maîtrise en droit from Université Panthéon-Assas (Paris II), with distinction. From 2007 to 2010, he worked as a research assistant and lecturer at Ludwig-Maximilians-University of Munich, Institute of Comparative Law.

On the occasion of the seminar on “The New French Law on International Arbitration”, Professor Catherine Kessedjian will give an overview of the salient features of the new French law. Professor Kessedjian, who is currently a Global Visiting Professor of Law at NYU School of Law, is Director of a Master in European Law and Professor of European Business Law, Private International Law, International Dispute Resolution and International Commercial Arbitration at the University of Panthéon-Assas, Paris II, France. She is regularly invited to teach, in different countries, either at regular programs or as a visiting. She currently acts as mediator or arbitrator in a selected number of transnational disputes either ad hoc or under the auspices of, among others, ICSID, the ICC, LCIA and the AAA. Before joining Paris II, she was Deputy Secretary General of the Hague Conference on Private International Law (1996-2000), on secondment from the Université de Bourgogne in France.

One of the enduring issues about which courts in different states that have adopted the CISG continue to disagree are the requirements under which that body of law will not apply, even though the requirements necessary to its application under Article 1 have been satisfied.  Of course, Article 6 permits the parties to a contract otherwise subject to the CISG to exclude its application. The case law on the mechanism for exclusion, however, suggests that the parties must be quite deliberate and explicit in their efforts to derogate from the terms of the Convention. Merely invoking domestic law as the governing law of the contract will not do the trick, as domestic law typically incorporates treaties and conventions. Either some express limitation to domestic sales law or an explicit exclusion of the CISG is necessary. In the United States, for instance, it is by now well recognized that a clause making “New York law” the governing law of the contract does not exclude the CISG, although a clause that recites that the contract is subject to “the New York Uniform Commercial Code, and not the United Nations Convention on Contracts for the International Sale of Goods” will be sufficient.

The requirement of an explicit invocation of specific domestic sales law or exclusion of the CISG suggests that parties cannot avoid the applicability of the CISG through inadvertence. Thus, one might think that courts would be hesitant to infer the inapplicability of the CISG simply because the parties failed to recognize its existence or relevance to their dispute. Indeed, case law from other jurisdictions states exactly that. For instance, an opinion of the Tribunale di Padova in 2004 (February 25, 2004, available at http://cisgw3.law.pace.edu/cases/040225i3.html) concluded that exclusion of the CISG is possible only where the parties were aware of its applicability. Given that the pleadings in that case revealed ignorance of the CISG, the parties “could not have excluded – even implicitly – the application of the CISG, by choosing to make an exclusive reference to the Italian law.” Cases from other jurisdictions are to the same effect (see, e.g., Oberlandesgericht Linz [Germany], January 23 January, 2006, available at http://cisgw3.law.pace.edu/cases/060123a3.html).

A recent case from the United States District Court for the Southern District of New York, however, has taken a broader view of the effects of party pleadings that fail to recognize the applicability (or the existence) of the CISG. The court thus grafts onto the requirement that any exclusion be explicit an exception where the parties have assumed at some point in the litigation proceedings that domestic (or State) law governs their contract, even though one of the parties subsequently recognizes the applicability of the CISG. In Ho Myung Moolsan, Co. Ltd. v. Manitou Mineral Water, Inc., (S.D.N.Y. December 2, 2010), available at http://cisgw3.law.pace.edu/cases/101202u1.html, a South Korean buyer of mineral water filed a breach of contract action against an American seller. In its initial complaint and in all pleadings through the discovery stage – including a motion for a preliminary injunction and an appeal from denial of that motion – the buyer had relied on New York law and asserted that its claims were brought “under state law.” After the close of discovery and thereafter, however, the buyer maintained (correctly it appears) that the CISG governed the transaction.

The court concluded that the buyer “by its actions” had consented to the application of the New York Uniform Commercial Code and it was “far too late” to withdraw that consent without undue prejudice to the seller. The court relied on New York law that allowed parties in litigation to consent by their conduct to the law to be applied – even though that decision was erroneous under prevailing legal principles. The court further concluded that the “course of the case would not have changed” even if the CISG applied. The decision is consistent with other cases that have precluded parties from asserting CISG claims after the commencement of litigation, although those cases often concern efforts to raise the claims for the first time during the appellate process.

These divergent opinions reveal one more example of the limitations of implementing uniform international commercial law. The procedural law of the forum state will determine the willingness of courts to circumscribe the pleadings or to bind parties to their understanding of applicable law. It is not clear that either procedure is clearly superior to the other. Courts that override parties’ understanding of the relevant law are more likely to decide cases in accordance with the legal principles that legislators and courts have adopted to govern situations of the type that the case presents. Indeed, there seems something odd about the notion that parties, by their ignorance, can exclude the application of a body of law that the legislature has determined should govern a particular transaction. And there is something anomalous about a system that makes explicit opting out of the CISG so burdensome, while simultaneously permitting implicit opting out through inadvertence.

Nevertheless, a rationale for essentially finding that parties have waived any rights under a statutory framework that they have ignored may be found outside the realm of commercial law. While the maxim iura novit curia suggests that the court can determine the law on its own (for a reference to this maxim in CISG case law, see, e.g., Tribunale di Vigevano [Italy], July 12, 2000, available at http://cisgw3.law.pace.edu/cases/000712i3.html) the plethora of statutory rights combined with courts of general jurisdiction often make that assumption, where it exists at all as part of the applicable procedural law, into a fiction. Thus, a desire to economize on judicial time may appropriately lead a court to bind attorneys to the law that they have invoked. Perhaps more importantly, a broad concept of waiver induces attorneys to be diligent in comprehending the law that governs their transactions. While the court in Ho Myung Moolsan believed that the UCC and the CISG were identical in all pertinent respects, there will clearly be cases where that is not true, and an implicit exclusion of the CISG can lead one party to pull defeat from the jaws of victory.

Clayton P. Gillette

Proferssor Gillette is Max E. Greenberg Professor of Contract Law, New York University School of Law

The Center hosted the fifth session of its Arbitration Forum. On that occasion, Dr. Maxi Scherer, Global Hauser Fellow at NYU Law School and Counsel in Wilmer Cutler Pickering Hale and Dorr’s Dispute Resolution team in New York/London gave a talk on “The Extraterritorial  Effect of Judgments Relating to International Arbitral Awards”. Professor Horatia Muir Watt, Professor of Law at Sciences Po in Paris, France, and currently James S. Carpentier Visiting Professor of Law at Columbia Law School, and Professor Catherine Kessedjian, currently a Global Visiting Professor of Law at NYU School of Law, as well as Mr. John Fellas, lawyer at Hughes Hubbard & Reed LLP, New York, acted as commentators. The event took place on April 25th, 2011.

Professor Franco Ferrari published a paper (in Portuguese) entitled “The Relationship between international uniform law conventions and the need for an interconventional interpreation”, in Estudio de direito comparado e de direito internacional privado (I. de Aguilar Vieira ed., Curitiba, 2011).

Professor Franco Ferrari gave a talk on “CISG and conflict of laws” at a conference held in Vienna on April 14th, 2011. View the full program.

On March 28th, 2011, the Center hosted the fourth session of its Arbitration Forum. On that occasion, Dr. Stefan Kröll and Mr. Domenico Di Pietro will speak on “What law for international commercial arbitration?”. Mr. Robert H. Smit acted as commentator.

In 2003, Spain promulgated a new arbitration law 60/2003, (the “Act”) that encapsulated many of the modern concepts of international arbitration. The law adopted the UNCITRAL Model Law of 1985, and advanced Spain to a position whereby it is now a favourable environment for the practice of international arbitration. 

Of course, the practice of arbitration is always dependent on the adherence by the local judiciary to principles embodied in the arbitration law, and the modern practice of international arbitration.  The modern practice of international arbitration essentially means that the courts should ideally observe a minimal yet efficient degree of intervention in arbitral proceedings, and once an award is rendered, the courts should display a clear and consistent understanding of the law concerning the recognition and enforcement of arbitral awards (and the interpretation of the New York Convention 1958).

This has been the challenge for most countries, in terms of being able to say they are truly arbitration-friendly. The statute book can say what it likes, but if it is not backed up by the conduct of state courts, it is worthless. In recognition of this, the international arbitration communities of numerous countries have made concerted efforts to involve the judiciary in any reform, and Spain is no different. Those efforts were realised in Spain when a new state court specialising in arbitration was established in Madrid, Spain (“Court of First Instance N° 101”). This was enacted by virtue of the Agreement of the General Council of the Judiciary, on 25 November 2010 (published in BOE No.310 of 22 December 2010). Previously, in Barcelona –the other principal centre of arbitration in Spain– a specific Section of the Court of Appeal had been granted exclusive competence in relation to actions setting aside arbitral awards rendered in the municipality of Barcelona.

The Spanish court system is divided according to Judicial Districts, which cover one or more municipalities. Each Judicial District is served by a Court of First Instance which covers civil matters.  For most major international arbitrations, the two principal seats of arbitration in Spain are Madrid and Barcelona. As between the two, the majority of Spain-based arbitrations will have Madrid as their seat, and accordingly, in issues concerning, for example, applications for interim measures, applications for assistance with the taking of evidence, and the recognition and enforcement of awards, the Madrid courts may be seized. 

The newly created court is competent for all arbitration matters that previously fell under the jurisdiction of the First Instance Courts of Madrid.  Thus, while the Act transferred the competence of arbitrations matters from the Supreme Court to the Court of First Instance, this new development sees a specialised Court of First Instance being established.    

This development is good news for Spain (and more particularly Madrid) in terms of moving towards a dedicated sitting judiciary whose attention can be focused on international arbitration (although the court does have competence to deal with non-arbitration matters as well).  Subject to the quality of decisions of the new Court, this will also hopefully raise the bar for other arbitration-friendly jurisdictions.

Article 8 of the Act specifies the circumstances in which the Court of First Instance would have had competence before this recent change.  This was derived from the seat of arbitration.  If the seat of arbitration had not yet been determined, then jurisdiction would reside with the Court of First Instance at the domicile or habitual place of residence of any of the respondents, and failing that, of the claimant, or failing that, at the selection of the claimant.

The new Court of First Instance N° 101 will have specific competence in relation to the assistance and supervision of arbitration regarding the following areas (article 8 of the Act):

1. Judicial requests for the appointment of arbitrators (article 15 of the Act);
2. Judicial assistance for the taking of evidence in support of arbitral proceedings (article 33 of the Act);
3. Orders of provisional or interim relief in support of arbitration (article 8(3) of the Act); and
4. The recognition and enforcement of arbitral awards (article 44 of the Act).

Notably, an application to set aside an arbitral award does not fall within the competence of the Court of First Instance N° 101, and remains within the competence of the Provincial Court of Appeal.  This may seem surprising to those who have read BOE No.310 of 22 December 2010, since that agreement expressly indicates that setting aside the award would seemingly fall within the competence of the Court of First Instance N° 101.  However, Spain’s Organic Law which stipulates that such an application falls exclusively within the jurisdiction of the Provincial Court of Appeal cannot be trumped by the Agreement of the General Council of the Judiciary.  Therefore, its appearance in BOE No.310 of 22 December 2010 is an error.  This has been confirmed by the judge who will preside in the Court of First Instance N° 101, Judge Begoña Pérez Sanz.

It is most welcome that a dedicated judiciary can develop Spanish jurisprudence with a sense of ownership and hopefully, a non-hostile attitude to the role international arbitration plays in the domestic and international legal order.

The only exception to the competence of the Court of First Instance N° 101 is that certain subject matter competencies remain with the Commercial Courts.  For example, intellectual property disputes, unfair competition matters, transport and some corporate disputes, even if raised in the context of an arbitration, will remain within the jurisdiction of the Commercial Courts.  This is unfortunate and rather unsatisfactory.  If the Court of First Instance N° 101 is designed to achieve consistency in the treatment of international arbitration, it undermines its own raison d’être if there is such an exception simply predicated on the subject matter of the dispute. 

Conclusion

It remains to be seen whether this anomalous competence of the Commercial Courts will be removed during the passage of the new Arbitration Act which is currently before the Spanish Parliament. In the meantime, however, this development is extremely positive for the development of international arbitration in Spain.

            Christian Leathley and Ignacio Diez-Picazo

            Christian Leathley is Of Counsel at the law firm Herbert Smith (London) and a specialist in international arbitration. He is English and New York qualified and a former graduate of NYU School of Law (LL.M in International Legal Studies). 

            Ignacio Diez-Picazo is Partner at Herbert Smith (Madrid) and Chaired Professor of Procedural Law at the Faculty of Law of the University Complutense of Madrid.