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.

Will a court injunct arbitral proceedings if parties, before an arbitration hearing, allegedly reach a settlement agreement and a dispute subsequently arises over the existence of such an agreement? Is the tribunal functus?

Recently, the Singapore High Court in Doshion Ltd v Sembawang Engineers and Constructors Pte Ltd [2011] SGHC 46 (“Doshion”) rightly held that no injunction would lie in such an instance. It is a decision to be welcomed.

In that case, the two parties were parties to arbitration proceedings under certain construction contracts (“the Sub-Contracts”). The arbitration was scheduled to start on 28 February 2011. The claimant contended that an oral settlement was reached between the solicitors for the parties on 15 February 2011 and the arbitration proceedings should be terminated as of that date. The defendant denied the existence of any settlement.

The defendant characterised the claimant’s argument as one where the tribunal had become functus officio because of the settlement. The defendant cited a recent English High Court decision of Martin Dawes v Treasure & Son Ltd [2010] EWHC 3218 (“Dawes”) and contended that the issue of whether an arbitrator was functus went to the jurisdiction of the arbitrator, which was a matter for the arbitrator to decide.

In finding for the defendant, the Singapore High Court’s reasoning was built on three pillars:

(a) the arbitrator was not functus since the tribunal had not even begun to hear the dispute;

(b) adopting the commercially sensible approach in Fiona Trust & Holding Corp v Privalov [2007] UKHL 40, that an dispute over the existence of an settlement agreement would be caught by the ambit of the arbitration agreement in the Sub-Contracts; and

(c) in any event, any dispute about the scope of an arbitration agreement was a matter for the arbitral tribunal based on the doctrine of Kompetenz-Komptenz.

It was not strictly necessary for the defendant to characterize the plaintiff’s argument as one relating to functus officio – the plaintiff faced an uphill task from the get go. Section 6 of Singapore’s International Arbitration Act (the Act incorporates the Model Law) requires a court to refer the dispute to arbitration unless the agreement was “null and void, inoperative or incapable of being performed”. In Tjong Very Sumito v Antig Investments Pte Ltd [2009] SGCA 41, the Singapore Court of Appeal astutely held that in line with its prevailing philosophy of judicial non-intervention in arbitration, the Court would interpret the word “dispute” in Section 6 broadly, and would readily find that a dispute existed unless the defendant had unequivocally admitted that the claim was due and payable. In circumstances where the defendant prevaricates (i.e., first making an admission and then later purporting to deny the claim on the ground that the admission was mistaken, or fraudulently obtained, or was never made), the matter would ordinarily still be referred to arbitration. The Court’s approach is commendable in giving full effect to the parties’ specified mode of dispute resolution.

When we apply this reasoning to Doshion, whether any alleged settlement was reached before or during the arbitral hearing would not, as a matter of principle, affect the question of which fora decides whether the settlement exists. It is important to ask the right question. That question is whether the underlying dispute remains unresolved. Any settlement would be in relation to the underlying dispute arising out of the Sub-Contracts. Accordingly, any dispute about the settlement originates from the underlying dispute. To answer the question, any dispute about the settlement means that the underlying dispute remains unresolved. So unless the defendant unequivocally admits the claim or acknowledges that there has been a settlement such that there is no longer a dispute, the Court will refer the matter to arbitration. Conceptually, since any prevarication by the defendant on the admission of the claim would be a matter to be referred to arbitration, any prevarication by the defendant on the settlement of the claim must have the same outcome.

This reasoning based on first principles would have been sufficient to dispose of Doshion. The claimant did not, and presumably could not, show that there had been a waiver of the arbitration agreement or an agreement to end the tribunal’s jurisdiction.

The going only gets tougher for the claimant if it embarks on the functus officio route. Akenhead J in Dawes rejected the argument that a tribunal becomes functus once a settlement has been reached during arbitral proceedings.

In Dawes, the claimant (Dawes) engaged a contractor (Treasure) to carry out construction works at his country estate. Disputes arose and Treasure commenced arbitration proceedings before Mr Ian Salisbury. After the parties had pleaded their respective cases, they agreed upon a settlement. However, the scope of the settlement was not documented in a consent order or final award. Subsequently, Dawes issued his own arbitration notice in respect of related disputes but appointed a different arbitrator. Treasure asked Mr Salisbury to rule that he retained jurisdiction in relation to the “new” dispute, and that it had been compromised by the settlement agreement. The first arbitrator ruled in favour of Treasure on both points, which was challenged by Dawes on the ground that Mr Salisbury was already functus officio after the settlement.

In dismissing Dawes’ application, Akenhead J relied on, inter alia, Section 51 of the English Arbitration Act 1996. Section 51 provides that if parties settle the dispute during arbitral proceedings, the tribunal shall terminate the substantive proceedings and, if so requested, produce a consent award. Accordingly, Akenhead J held that the settlement of a dispute after it had been referred to arbitration, but before any final award, did not generally bring an end to the arbitrator’s jurisdiction and make him functus officio. Even if the dispute was settled “there remains a jurisdiction to terminate the substantive proceedings and to resolve issues of costs or any other matters in dispute”. That jurisdiction was otherwise not statutorily limited, and neither did parties preclude or limit such jurisdiction in their settlement.

Akenhead J also observed that Mr Salisbury “would undoubtedly still have retained jurisdiction if there had been an issue between the parties as to whether there was any settlement at all. He would still have been the arbitrator to resolve the underlying disputes which would include ruling upon a defence that the claim had been settled.”

The Model Law’s counterpart of Section 51 of the English Arbitration Act is found in Article 30 which deals specifically with settlement. The lesson taught by the two cases highlighted here is that if a party wants to put an end to a tribunal’s jurisdiction immediately after settlement, it will generally have to show an agreement to end the tribunal’s jurisdiction, whether as part of the settlement itself or as a separate agreement. Unfortunately for the claimant in Doshion, there is no shortcut.

Darius Chan

Darius Chan is a candidate for the LLM in International Business Regulation, Litigation & Arbitration at NYU. 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 LLM, he practised international arbitration at the chambers of Michael Hwang SC.

Switzerland may be one of the world’s most important arbitral seats, even so one would scarcely expect arbitration to hold much interest for the tubercular residents of Davos in Mann’s novel Der Zauberberg or The Magic Mountain.  Yet aficionados of arbitration who persevere to the sixth chapter of his lengthy book are treated to a little exchange on the subject.  In a usually overlooked passage, the Italian Ludovico Settembrini, purporting to speak as the voice of progress, and the conservative Jesuit Leo Naphta cross swords over the merits of arbitration during an afternoon of tea and chocolate “Baumkuchen” cake in the company of the main character Hans Castorp and his cousin Joachim Ziemßen.

Mann began The Magic Mountain in 1912 only to interrupt its composition during the First World War.  The novel, which first appeared in 1924, tells of the adventures of Hans Castorp, an otherwise prosaic young German of heightened sensibilities, in the fictional Berghof sanatorium in Davos during the seven years leading up to the First World War.  The routine of sanatorium life, the medical minutiae of early twentieth-century treatment of tuberculosis and the motley constellation of its sufferers in Davos become the vehicle for the hero’s coming of age and an exploration of pre-First World War culture.  The novel is not rich in external action and reflections on the arbitral process and much else remain confined to the drawing-room.

Settembrini and Naphta do not shirk difficult subjects.  Indeed the complexity of their topics is proportionate to the impotence of two sick men trapped on a mountain top.  In a series of virtuoso rhetorical exchanges, they debate illness, the nation state, education, penal reform, free trade and the progress of human history.  Settembrini adopts the view that mankind is not only capable of progress but that the previous century has brought great progress already, while Naphta sees the human condition as unrelievedly bleak, miserable and entirely dependent on divine grace for salvation. 

Unsurprisingly given these basic positions, it is Settembrini who comes out in favour of arbitration as an effective means for solving international disputes and Naphta who condemns it as one of the vain hopes of a deluded bourgeoisie.  Settembrini looks to arbitration as a way of resolving disputes, in particular those which will inevitably arise between nation states, in a rational and peaceful fashion.  To Settembrini arbitration is a forum whose jurisprudence can transcend the constraints of national, positive law and can be derived from natural law or international law, which he conflates in a speech to Naphta:

“What I venerate as natural law or the law of nations, you are free to call ius divinum.  The main thing is that there is a higher general law that transcends the positive rights of nation states and that allows for the resolution of disputed interests through arbitral tribunals.”

Naphta’s reaction is skittishly dismissive: “Arbitral tribunals, indeed!  The very idea of them!  A bourgeois arbitral tribunal that rules on questions of life and death, divines God’s will and determines the course of history!”  Writing in the aftermath of the First World War, Mann had an easy time showing up the hopelessness of Settembrini’s belief in international arbitration.  The nation states of Europe had succumbed to war and carnage rather than appointing tribunals to resolve their disputes.  This will not have been lost on his readers. 

Settembrini’s project challenges the latterday arbitral practitioner with its unanswered questions rather than its grim historical ironies.  Almost a century after the novel was published, controversy surrounds the powers that Settembrini attributes to arbitral tribunals.  Although arbitration is widely accepted as the preferred means of resolving international commercial disputes, its legitimacy in relation to investment and interstate disputes is sometimes put in doubt.  Some jurists question whether private tribunals should decide over the interests of sovereign states at all as Settembrini envisages.

To Settembrini arbitration is superior to other forms of dispute resolution by virtue of transcending the constraints of positive law and deriving its principles directly from reason rather than statute.  Such principles are supranational since they originate in universal rationality as opposed to a given national legal tradition.  Settembrini’s bold claim foreshadows the impassioned debate surrounding the lex mercatoria as a supranational legal set of commercial principles applicable to international arbitration.  Sceptics would say the content of such principles is as obscure now as it is in Mann’s novel. 

Naphta’s cavalier dismissal of Settembrini’s “bourgeois” arbitral tribunals formulates the greatest continuous challenge to all arbitration practitioners, to show that parties, their counsel and their tribunals are able to agree to arbitrate, generate meaningful awards and implement them.  Only then can arbitration offer an alternative to the constraints of national courts and indeed change the course of history.  Whatever the challenges of arbitrating disputes successfully, arbitration is preferable to Naphta’s alternatives.  At the end of the novel, after a succession of heated arguments, Naphta challenges Settembrini to a duel, who then deliberately shoots past him.  Infuriated Naphta thereupon turns his gun on himself.  One wonders if they might not have tried ADR instead.

* The authors wish to thank King’s College London for granting them access to the German collection in the Maughan Library when they were preparing this article.

            Maxi Scherer and Daniel Greineder

Dr. Maxi Scherer is a Global Hauser Fellow at NYU Law School and Counsel in Wilmer Cutler Pickering Hale and Dorr’s Dispute Resolution team in New York/London.  She is a member of the Paris bar and a solicitor (England and Wales).  She graduated from University of Paris Panthéon-Sorbonne, France, and University of Cologne, Germany, and obtained her PhD at the University of Paris Panthéon-Sorbonne with highest honors.  Maxi Scherer teaches International Arbitration and Litigation, International Private Law, European Civil Procedure and Comparative Law. She is an adjunct professor at SciencesPo Law School Paris, Georgetown CLTS London, University of Melbourne, Pepperdine Law School London and University of Fribourg.

Daniel Greineder is an Associate in the arbitral practice of Python & Peter in Geneva and an English-qualified barrister.  Previously he worked in the Arbitration Group of Wilmer Cutler Pickering Hale and Dorr LLP in London.  Before being called to the Bar by the Inner Temple in 2005, he completed a doctoral thesis in eighteenth-century German literary theory at Magdalen College, Oxford, and  lectured on German literature at St Hilda’s College, Oxford.

In the recent case of Hanwa Corp. v. Cedar Petrochemicals, Inc., 2011 WL 165404 (S.D.N.Y.), the court concluded that a Korean buyer of the petrochemical toulene had not made an effective offer to purchase under Article 14 of the CISG because it did not reveal an intent to be bound when it made its bid for the goods.  The court determined that the parties had created a practice between themselves of a two-step process of contract formation in which neither party performed until they had reached agreement on terms that were not included in initial bids.  Analysis of the circumstances in which the parties’ prior transactions occurred supported the proposition that they had not entered into a final contract when they disagreed about a choice of law clause, even if they had already agreed on product, quantity, and price.

In the course of reaching that decision, however, the court made broader allusions to the role of intent in contract formation under the CISG. Unfortunately, those allusions reveal a possible misunderstanding of the CISG’s position on the use of subjective versus objective intent. Moreover, the court’s comment is consistent with remarks made in at least one other American CISG opinion and thus requires some clarification.

The court in Hanwa Corp. began its analysis of the intent to contract issue by referencing CISG Article 8 for the proposition that “although the CISG expresses a preference that the offeror’s intent be considered subjectively, that consideration is not possible in this case since neither party submitted any competent evidence of their subjective intentions.”  It is certainly true that in the hierarchy of intent, subjective intent of the parties, when properly applicable, takes priority over other tools of interpretation.  But that is a far cry from a claim that the CISG “expresses a preference that the offeror’s intent be considered subjectively.”  The latter comment suggests that subjective intent consistently dominates objective evidence in the formation or interpretation of contracts.  The court’s comment might be dismissed as an overstatement or a casual dismissal of an issue not really before the court, given that no evidence of subjective intent was available.  Nevertheless, it is reminiscent of other judicial references to the relevance of subjective intent under the CISG.  Perhaps most notably, the court in the well-known case of MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D’Agostino, S.P.A., 144 F.3d 1384 (11^th Cir. 1998), purported to juxtapose Article 8(1)’s invocation of subjective intent with the American “preference for relying on objective manifestations of the parties’ intentions,” and cited Justice Holmes for the proposition that the law was unconcerned with “the actual state of the parties’ minds.”

One might infer from these comments that the CISG has embraced 19^th century notions of subjective intent that required an actual meeting of the minds before contracts were concluded.  American contract jurisprudence has subsequently replaced reliance on largely unverifiable subjective intentions with more objective measures, as evidenced by the Restatement (2d) of Contracts reference to “manifestations” of a party’s intent rather than to the intent itself.  One underlying rationale is that it is less costly for the idiosyncratic actor whose subjective meaning or hidden intentions deviate from normal expectations of counterparties to explain his or her actual intentions than for each actor to attempt to discern the actual meaning of his or her counterparty.  The judicial references to the CISG’s elevation of the subjective view therefore suggests a view of contract more concerned with protecting the autonomous intentions of commercial actors than with reducing the transactions costs.

But these references to the primacy of subjective intent in Article 8(1) appear to misunderstand the scope of its application.  Article 8(1) does, of course, make subjective intent the measure of a party’s meaning, whether to determine the existence of a contract or to interpret its terms.  But it does so only when the other party could not have been unaware of that subjective intent.  A well-hidden, subjective intent of which the counterparty neither was nor should have been aware plays no role in the process.  An expression of desire to enter into a contract that commercially reasonable actors would take as sincere is not undermined by a subsequent claim that the speaker had private reservations.  Nor should it be.  Transactions costs would increase dramatically if actors had to discern the secret, if honestly held, beliefs of counterparties rather than rely on what reasonable actors would infer in the circumstances.

This does not mean that subjective intent is irrelevant.  Rather, it means that the circumstances matter.  Under Article 8(1), if the circumstances reveal that I understand your offer to me is, in your mind, insincere or incomplete, then no contract will be concluded by my purported acceptance, even if some third party would infer just the opposite from your manifestations.  The result is fully consistent with the standard understanding of American contract law.  Take the classic example of Lucy v. Zehmer¸ to which the court in MCC-Marble referred as the model of the American approach. In that case, the court famously observed that a binding contract existed even if an offeree signed a proposed contract in jest, as long as the context allowed the offeror to conclude that the acceptance was serious.  But the court was equally clear that if all parties had or should have understood that the offer was in jest, the act of accepting it would not create a contract.  In the language of the court in Lucy, subjective intent prevails notwithstanding objective manifestations if the personal meaning “is known to the other party.”  Article 8(1) limits the application of subjective intent to those same circumstances when it provides that statements and conduct are to be interpreted according to the actor’s intent “where the other party knew or could not have been unaware of what that intent was.”  American courts should be more cautious about proclaiming an expanded scope for subjective intent in international sales law.

Clayton P. Gillette

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

The Center, in collaboration with the Investment Law Forum run by Professor Robert Howse, Lloyd C. Nelson Professor at NYU, hosted the third session of its Arbitration Forum. On that occasion, Mr. Mark Kantor and Mr. David Bigge spoke on “Transparency in investment related ad hoc arbitrations”. Mr. Barry Appleton and Professor Robert Howse acted as commentators. The event took place on February 7th, 2011.

On 13 January 2011, France revealed its long-awaited new arbitration law.  The décret n° 2011-48 portant réforme de l’arbitrage, was published in France’s Official Journal, alongside a report commenting on the reform.  The new law can be found at http://www.legifrance.gouv.fr/jopdf/common/jo_pdf.jsp?numJO=0&dateJO=20110114&numTexte=9&pageDebut=00777&pageFin=00781, as well as the accompanying commentary http://www.legifrance.gouv.fr/jopdf/common/jo_pdf.jsp?numJO=0&dateJO=20110114&numTexte=8&pageDebut=00773&pageFin=00777

The reform concerns both domestic and international arbitration and the new provisions will comprise Articles 1442 to 1527 of the French Code of Civil Procedure.  The new law becomes effective and applicable as of 1 May 2011, except for a number of specifically enumerated provisions which apply only if the arbitration agreement was entered into, the arbitral tribunal constituted, or the award rendered, after that date.

The French arbitration community has long lobbied for this updated of the law, the first overall reform of French arbitration legislation since the 1980s.  The reform keeps with the long-standing tradition of innovative and arbitration-friendly arbitration law in France, which has contributed to establishing Paris as one of the world’s most popular seats of arbitration.  The aim of the new law is to sustain Paris’ leading role in international arbitration.  The accompanying official report states that “after thirty years, the reform appeared necessary to consolidate case law [in the area], as well as to complement the existing text and conserve its efficacy.”  The report also specifically draws attention to the fact that the new law has “integrated some provisions inspired by foreign laws which have proven useful.”

By codifying well-established French case law, the reform also significantly enhances the accessibility of French arbitration law for foreign users and observers.  For instance, Article 1447 codifies the well-established and fundamental principle of the autonomy of the arbitration agreement, according to which the arbitration clause remains unaffected even if the underlying contract is found void.  The provision states that “[t]he arbitration agreement is independent from the contract it relates to.”

Another example of codifying existing case law can be found in Article 1466.  According to this provision, which is inspired by previous French case law as well as the common law concept of estoppel, a party who – in knowledge of the facts and without any legitimate excuse – fails to invoke an irregularity of the arbitral process in due course, is prevented from doing so at a later stage.

The new law also contains some important innovations which will surely be subject of abundant commentary.  For instance, Article 1522 contains a significant and substantial change concerning the parties’ ability to waive their right to seek annulment of an award in front of the national courts at the seat of the arbitration.  Article 1522 provides that “the parties may, by specific agreement, waive at any time their right to challenge the award [by way of annulment].”  This new provision will become effective for arbitration agreements entered into after 1 May 2011.

According to the report accompanying the new law, the parties’ waiver under Article 1522 does not affect, however, their right to appeal any decision to enforce the award in France.  The report also explains that Article 1522 was inspired by “existing foreign law.”  Indeed, a few jurisdictions with pro-arbitration statues permit the parties to waive or exclude judicial review of the award by way of annulment proceedings.  For instance, Swiss and Belgian law permit such waivers as long as the parties are foreign, i.e., have no connection to Switzerland/Belgium respectively.  Contrary to Belgian or Swiss law, however, the new French provision grants the right to exclude judicial review in annulment proceedings not only to foreign but also to French parties.

Another notable innovation is contained in Article 1526, which provides that a challenge of the award does not automatically result in suspension of enforcement proceedings.  Rather, according to Article 1526 para. 2, a suspension has to be specifically requested and is granted only if the enforcement would be highly detrimental to the rights of the party requesting the suspension.  The report accompanying the new law notes that the aim of this provision is to discourage bad faith annulment proceedings which seek to delay the enforcement of fully valid and legitimate awards.  Article 1526 will apply to awards rendered after 1 May 2011.

Finally, some changes which are not supposed to introduce any substantive modifications according to the official accompanying report, will nonetheless not go unnoticed.  For instance, one of the grounds for challenging an award has been significantly re-worded.  While Articles 1504/1502-2 previously referred to the fact that the tribunal “has rendered the award without an arbitration agreement or based on an arbitration agreement that was void or expired,” Article 1520-2 instead now allows setting aside of the award if the tribunal “has mistakenly declared itself to have or not to have jurisdiction.”

Without any attempt to draw an exhaustive list, further clarifications or changes in the new law include the fact that (i) international arbitration agreements – contrary to the solution contained in the New York Convention – do not have to meet any particular form requirements (Article 1507); and (ii) the original of the award is no longer required with the petition for seeking exequatur; rather, it is now sufficient to present a copy which fulfils “the conditions required to establish its authenticity” (Article 1515).  The new law also, among other things, re-organizes the legal definition of an arbitration agreement, clarifies the role and powers of the local French court in support for arbitration (the so-called juge d’appui), strengthens the rules on arbitrators’ impartiality and possible challenges, and simplifies remedies available against arbitral awards.

Overall, the new law has been well-received by the arbitration community.  The first reactions described the reform as innovative and trend-setting.  Interestingly, the French newspaper Les Echos has quoted the French Justice Minister, Michel Mercier, as saying that the new law is also aimed at keeping the ICC headquarters in Paris.  Mr. Mercier said that in enacting the new law, “[t]he government had paid particular attention to the situation of the international chamber of commerce.”  He concluded that Paris was the premier place in the world for arbitration and that the new law would ensure that it continued to thrive.

Maxi Scherer

Dr. Maxi Scherer is a Global Hauser Fellow at NYU Law School and Counsel in Wilmer Cutler Pickering Hale and Dorr’s Dispute Resolution team in New York/London.  She is a member of the Paris bar and a solicitor (England and Wales).  She graduated from University of Paris Panthéon-Sorbonne, France, and University of Cologne, Germany, and obtained her PhD at the University of Paris Panthéon-Sorbonne with highest honors.  Maxi Scherer teaches International Arbitration and Litigation, International Private Law, European Civil Procedure and Comparative Law. She is an adjunct professor at SciencesPo Law School Paris, Georgetown CLTS London, University of Melbourne, Pepperdine Law School London and University of Fribourg.

The “Lex Sportiva” is a hotly debated concept at the moment. While some commentators promote the “Lex Sportiva” and try to define its content and characteristics others are reluctant to recognize its very existence (see e.g. Frank Latty, La Lex Sportiva (Martinus Njihoff Publishers 2007); for a recent contribution see Lorenzo Casini, The Making of a Lex Sportiva: The Court of Arbitration for Sport “The Provider”, IILJ Working Paper 2010/5 Global Administrative Law Series, available at http://www.iilj.org/publications/2010-5.Casini.asp). In this context the question may arise as to what significance should be attached to a contractual choice-of-law clause wherein the parties refer to the “Lex Sportiva” (here understood as “l’ensemble des normes coutumières privées qui se sont dégagées de l’interaction entre les normes de l’ordre juridique sportif et des principes généraux propres aux ordres juridiques étatiques, telles qu’elles se concrétisent dans les arbitrages sportifs” (Antoni Rigozzi, L’arbitrage international en matière de sport, 628 (Helbing & Lichtenhahn, L.G.D.J./Bruylant, 2005)? Further, one might also wonder whether in international arbitration the arbitrators themselves can apply the “Lex Sportiva” to the merits of the dispute. While these questions are too complex to be answered in this short note, I would try to shed some light on them by having a glance at Swiss law, especially the case law of the Federal Supreme Court of Switzerland. Swiss law is of particular interest since Switzerland is the seat of all arbitration proceedings before the Court of Arbitration for Sport “CAS” (Rule 28 of the CAS Code 2010 Edition), and a relevant amount of sports law disputes are adjudicated by Swiss state courts.

Swiss law provides parties to state court proceedings with great autonomy in choosing the law applicable to a contract (Article 116 of the Swiss Code on Private International Law “PILA”). This autonomy is even greater in international arbitration proceedings with its seat in Switzerland. Parties, and the arbitrators themselves, are allowed to apply “rules of law”, as opposed to a “law”, to govern the merits of the dispute (Article 187 Para 1 PILA; see, e.g., Jean-François Poudret & Sébastien Besson, Comparative Law of International Arbitration, 603 (Sweet & Maxwell, 2nd edition, 2007)).  Hence, scholarly writers almost unanimously suggest that in international arbitration non-state law such as for example the “Lex Mercatoria” can be applied to the merits (Id. at 603-604). The question whether the “Lex Sportiva” constitutes such “rules of law” is disputed amongst scholars (Ulrich Haas, Die Vereinbarung von “Rechtsregeln” in (Berufungs-) Schiedsverfahren vor dem Court of Arbitration for Sport, CaS 2007 271, 272 (who also provides a good overview over the relevant case law of the CAS); see also Jean-François Poudret & Sébastien Besson, Comparative Law of International Arbitration, 604 (Sweet & Maxwell, 2nd edition, 2007)).

The Federal Supreme Court of Switzerland has, to date, issued only one decision dealing with a choice-of-law issue in the peripherals of the “Lex Sportiva” (Decision of the Federal Supreme Court of Switzerland of 20 December 2005, BGE 132 III 285). In that decision the court was reluctant to recognize the “Lex Sportiva” as a “law” under Article 116 of the PILA.

The parties in that case debated whether a statute of limitation rule contained in a set of rules issued by the FIFA prevailed over a mandatory statute of limitation rule of the Swiss Code of Obligations. The parties had stipulated the following provision in a transfer agreement: “This agreement is governed by FIFA rules and Swiss law”.  The state court of first instance held that the choice of FIFA rules constitutes a valid choice of law. It thus concluded that both FIFA rules and Swiss law shall apply, but that FIFA rules shall prevail over Swiss law as a matter of lex specialis. Accordingly, the court of first instance applied the FIFA statute of limitation and not the mandatory statute of limitation rule set forth in the Swiss Code of Obligations.

On appeal, the Federal Supreme Court of Switzerland reversed this decision. The court observed generally that according to Article 116 of the PILA the parties are free to choose the law applicable to their contract and that the law chosen supersedes all rules of the law otherwise applicable, whether mandatory or not. The court then questioned whether within the scope of Article 116 of the PILA the parties are allowed to choose a non-state law, such as the FIFA rules. After considering that this question was disputed amongst scholars, the court reasoned that bodies of rules and regulations issued by private organizations cannot be considered “law”, even in cases where they are elaborate and detailed. According to the court, such rules are subordinated to state law and apply only within the framework of state law. The court thus held that FIFA rules do not constitute “law” in the sense of Article 116 of the  PILA and neither can it be accepted as “lex sportiva transnationalis”. The court concluded that the FIFA statute of limitation rule cannot trump the mandatory statute of limitation rule of the Swiss Code of Obligations. However, the court accepted the integration of the FIFA rules into a contract. Accordingly, those rules were at least able to trump non-mandatory rules of Swiss Law.

It results from this decision that the parties to a dispute before Swiss state courts cannot choose rules issued by private organizations. Not even in the case where one regards them as forming part of the “Lex Sportiva”. The court expressly rejected the recognition of the “Lex Sportiva” as a “law” under Article 116 of the PILA. However, in my view, nothing speaks against incorporating private rules and regulations as well as particular rules of the “Lex Sportiva” in a contract. But it bears emphasis that such contractual provisions can only prevail over non-mandatory provisions of Swiss law.

Not addressed in the said decision was the question whether the concept of “Lex Sportiva” could be recognized as a “rule of law” according to Article 187 Para 1 of the PILA in the context of international arbitration. Hence, this question remains open to debate. One could argue that the Federal Supreme Court of Switzerland in the said decision expressed a general concern regarding the concept of “Lex Sportiva” and it would thus answer the question in the negative. However, the Federal Supreme Court of Switzerland attaches great importance to the policy of arbitration friendliness inherent in the PILA and it might thus adopt a different view in an international arbitration context.

Simone Stebler

Simone Stebler, who is an Arthur T. Vanderbilt Scholar and LL.M. candidate in International Business Regulation, Litigation and Arbitration of the New York University School of Law, graduated summa cum laude from the University of Fribourg Law School in Switzerland in 2005. She was an exchange student at the University of Paris II Panthéon-Assas in 2003.  In 2007, Simone Stebler was admitted to the Basel Bar. In 2008, Simone Stebler joined the renowned dispute resolution boutique Nater Dallafior, where she has been engaged in international commercial and sports arbitration as well as in corporate and commercial litigation.

On 7 July 2010, the European Commission published a proposal for a Regulation establishing transitional arrangements for bilateral investment agreements between Member States and third countries (COM (2010) 343 final, hereinafter: the Regulation Proposal; available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52010PC0344:EN:NOT). By adopting this Regulation Proposal, the Commission reacts to the changes by the Treaty of Lisbon concerning the division of competences in the field of investment law: According to Article 207 of the Treaty on the Functioning of the European Union (TFEU), the Common Commercial Policy (CCP) now expressly extends to foreign direct investments. Since the competences in the field of the CCP are exclusive, EU Member States are generally no longer allowed to conclude new agreements concerning foreign direct investment (see Article 2 para. 1 TFEU). Furthermore, the Member States are obliged to denounce agreements, for which they have lost their competence (compare Article 351 s. 2 TFEU; see Joined Cases 3, 4 and 6/76, Cornelis Kramer and others, 1976 E.C.R. 1279, ¶ 45; concerning investment agreements compare 205/06, Commission of the European Communities v Republic of Austria, 2009 E.C.R. I-1301 (Mar. 3, 2009); Case C-249/06, Commission of the European Communities v Kingdom of Sweden, 2009 E.C.R. I-1335).

However, it would not be desirable if the Member States would have to denounce all their BITs as a consequence of the EU having acquired exclusive competences for FDI. The EU Member States have concluded an impressive number of bilateral and also multilateral investment treaties: The numbers of BITs concluded by all EU Member States range between 1000 to 1300. With a total number of 130 BITs ratified (compare http://www.bmwi.de/BMWi/Navigation/aussenwirtschaft,did=194058.html), Germany can be considered the “BIT world champion”. Besides, all EU Member States are contracting parties to the ICSID-Convention, which offers a mechanism for the settlement of investment disputes between States and investors.

In case the EU Member States would have to denounce all their BITs, EU investors would be left unprotected until the EU concludes BITs on its own.  Therefore, like in similar cases before (compare, e.g., Regulations (EC) No. 662 and 664/2009), the European Commission seeks to establish a transitional procedure by the Regulation Proposal, which allows the Member States to maintain their existing BITs concluded with third countries and even to conclude new BITs. However, this Regulation Proposal must be criticized mainly for two reasons. First, the Commission incorrectly assumes that the EU has exclusive competences for all issues covered by the Member States’ BITs. Therefore, questions of “mixity” are neither discussed by the Regulation Proposal, nor by the Communication concerning a future European International Investment Policy (COM (2010) 343 final, available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52010DC0343:EN:NOT), which has been published on the same day as the Regulation Proposal. Second, the Proposed Regulation is poorly and incoherently drafted.

Concerning competences, most authors come to the conclusion – and rightly so – that Article 207 TFEU does not cover all issues addressed by current BITs (see, e.g., Markus Krajewski, External Trade Law and the Constitution Treaty, 42 Common Market Law Review 91, 112 (2005); Lorenza Mola, Which role for the EU in the development of international investment law? 15 (Society of International Economic Law Inaugural Conference, 2008), available at http://ssrn.com/abstract=1154583; Joachim Karl, The Competence for Foreign Direct Investment, 5 Journal of World Investment & Trade 413, 425 (2005); Jan Ceyssens, Towards a Common Foreign Investment Policy?, 32 Legal Issues of Economic Integration 259, 274-75 (2005)). For example, Article 207 TFEU is limited to direct investments, which require “lasting and direct links between the persons providing the capital and the undertakings to which that capital is made available in order to carry out an economic activity“ (see Case C-446/04, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, 2006 E.C.R. I-11573 at ¶ 181). However, current BITs generally use a broader definition of investment, which refers to all kinds of assets. In addition, it is arguable that the competences under Article 207 TFEU are limited to question of the admission of investments and do not govern the protection of admitted investments. Nevertheless, „[the]Commission is of the view that any legal uncertainty on the status and validity of these agreements, which could be detrimental for the activities of EU investments and investors abroad or foreign investments and investors in Member States, is to be avoided.“ (Regulation Proposal, at 3). It is certainly true that the investors’ major concern is not who will conclude future BITs, but whether the protection granted by existing BITs will remain in force (until replaced by an adequate standard of protection). Nevertheless, the EU cannot dispose over its own competences merely by adopting a regulation. Thus, the Draft Regulation is not a suitable instrument to create legal certainty regarding the extent of the competences of the EU or the Member States. Rather, such an attempt would contravene against the principle of conferral.

But apart from questions of competence, the Proposed Regulation may be subject to criticism. First, the legal certainty aimed at by this Regulation Proposal will be limited or may even be deceptive. Existing BITs will be – after a notification by the Member States –automatically authorized and then be published in the Official Journal (Articles 3 and 4 Regulation Proposal). The Commission may withdraw such an authorization, inter alia, in case of  a substantive conflict with the law of the Union (Article 6 para. 1 Regulation Proposal). But there is neither a binding decision by the Commission that there is no substantive conflict between the agreement and EU law, nor are there time limits for a review by the Commission. Thus, the publication of the agreement in the Official Journal as well as the fact, that the authorization has (not yet) been withdrawn, does not mean that he Commission will not do so in the future. Or worse, it can review the agreement immediately and come to the conclusion that there is no substantive incompatibility; but some years later it can change its mind and withdraw the authorization. Second, neither the grounds for a withdrawal of an authorization and the grounds for a non-authorization correspond, nor do so the grounds for withdrawing the authorization and the aspects to be assessed during the review according to Article 5. Third, Article 6 para. 1 lit. c provides a rather far reaching and indeterminate reason for withdrawal. According to this provision, the authorization can be revoked in case an agreement constitutes an obstacle to the development and the implementation of the Union’s policies relating to investment. Neither the proposal nor the explanatory memorandum explain how the “Union’s policies relating to investment” can be determined. Thus, if adopted tel quel this ground for withdrawal could constitute a carte blanche for the Commission. Fourth, the Draft Regulation sets a strict time limit for a notification by a Member State of its intention to negotiate an agreement, which does not correspond to the time limits for a review by the Commission (Article 8 ).

Despite this criticism, a transitional regime for existing BITs is urgently needed to avoid the severe consequences foreseen by Article 351 TFEU, regardless of whether the EU enjoys exclusive competences for all or only some subjects covered by current BITs (i.e. if the competence is mixed). Conversely, questions of “mixity” will arise as far as future agreements are concerned unless the Commission is willing to exclude non-direct investments from future EU BITs and to leave them unprotected. Although in theory the Member States retain the competence to conclude their own BITs limited to non-direct investments, this will hardly be a workable solution in practice.

Mixed agreements are quite a common phenomenon today. Still, their conclusion entails intricate problems resulting from the interplay of public international law and EU law. In the case of investment agreements, two issues are of particular interest: international responsibility and dispute settlement.

In general, international organizations are only liable for the conduct of their own organs. However, EU law is normally not implemented by the organs of the EU itself, but by the Member States,  which enjoy a certain discretion in implementing EU legislation. According to Article 16 of the Draft Articles on the Responsibility of International Organizations, an international organization may be responsible if it orders a state to commit an act contrary to its international obligations. However, if a Member State breaches an obligation under the BIT while implementing EU legislation without having been ordered to do so, Article 16 of the Draft Articles provides no answer. Whether the Member State itself is liable depends on the actual design of the BIT: Most modern mixed agreements delimitate the scope of rights and obligations of the EU and Member States according to the internal allocation of competences (compare, e.g., Article. 5, 6 para. 1 UNCLOS Annex IX). If such a clause is missing, the EU and its Member States are jointly liable for a breach (compare Opinion by Advocate General Jacobs, delivered on Nov. 10, 1994, Case C-316/91, Parliament/Council, 1994 E.C.R. I-625, ¶ 69). Assuming that a future EU BIT contains such a delimitation clause, neither the EU nor the Member State could be held responsible in the just mentioned case. To avoid such strange consequences, it thus will be necessary to treat the EU like a federal state and to attribute the conduct of the Member States to the EU itself (compare Article 4 para. 1 of the Draft Articles on Responsibility of States for Internationally Wrongful Acts).

As far as dispute settlement is concerned, a direct participation of the EU as a party to the dispute in an ICSID-arbitration is not feasible because the EU is not a contracting party to the ICSID-Convention. Therefore, an investor seeking redress from the EU will have to chose the rules of another arbitral institution, although this has some disadvantages compared to ICSID. Conversely, EU investors could still choose arbitration under the ICSID-Rules as long as the EU Member States remain contracting parties to ICSID. Thus, there is a serious imbalance between the rights of EU investors and investors of third countries. It seems doubtful whether, in a future EU-BIT, third countries are willing to submit to ICSID-arbitration under these circumstances. However, the ICSID-Convention would have to be amended in order to allow a direct participation of the EU because the participation of regional organizations for economic integration is not possible so far. But the revision of a multilateral treaty is always a delicate thing.

It becomes apparent that the extension of the CCP by the Lisbon Treaty has enormous consequences for existing and future investment agreements, which the drafters did not intend. The focus of the Commission in its Regulation Proposal and the Communication on exclusive EU competences for BITs tends to obscure the intricate questions of “mixity”, which inevitably will come up in the future. The Communication would have been a proper place to create a consciousness for these problems, to shape the discussion and to propose legal solutions. Although a uniform EU foreign investment regime can be a step towards more coherency in international investment law, mixed BITs will cause complications, which can undermine the whole process. If these complications prove to be insurmountable, a revision of Article 207 TFEU should be considered. Considering the frequent amendments of Article 207’s predecessors, such a revision is not unrealistic.

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 investment law.

Which jurisdiction is competent to regulate corporate law affairs? And which court is competent, in the international arena, to address cases involving corporations? My purpose is not to clarify all these issues, but more simply to ask the right questions regarding choice of law and jurisdiction criteria.

The most important question is to establish what “corporate law matters” are. Corporations, indeed, can be involved in litigations on different kinds of issues, not only typical “internal affairs matters”, such as derivative actions or actions on the validity of corporate’s decisions. To such legal issues apply different choice-of-law criteria, which vary from jurisdiction to jurisdiction. For instance, the scope of the U.S. “Internal Affairs Doctrine” is narrower than the area covered by the corporate “personal statute” in Europe. Similarly, in jurisdictions where there is employees codetermination in place corporate law regulate an issue that in other countries belong exlusively to the province of labor law.

In the realm of typical “corporate law” matters, as is well known, a fierce debate oppose “incorporation theory” countries and “real seat” country. According to the former, the law of the country of incorporation applies, while for the latter the country of the administrative seat is competent to regulate corporate affairs. Of course, several different versions of these “theories” exist. The “real seat theory” is based upon a spatially-oriented criterion and the main legal issue is to establish where the administrative (or “real”) seat of the corporation is. Originally, the idea to attach the applicable law to the “real” or the “administrative” seat was aimed at attaining legal certainty. However, this goal seems to be uncertain now, since modern telecomunications make possible for the board to meet “virtually”, independently from the physical location of their members, and cheap flights make possible for the board to meet in countries different from such where corporate main activities are. [Luca Enriques, Silence is Golden: the European company as a catalyst for company law arbitrage, J. Corp. L. Stud., 82, 78 (2004)]. Therefore, to make the real seat theory workable, the concept of administratve seat can not coincide simply with the place of boards’ meetings. To resolve this problem, German scholars and case law have developed a more sofisticated concept, that rely upon the place where business decisions are conducted on a day by-day basis. By contrast, the “incorporation theory” – at least in the English, U.S. or Swiss versions – is not properly based upon a territorially-oriented conflict of law rules, but on the mere fact of the incorporation under the law of a certain state.

The second relevant issue is related to corporate litigation. The question is: Where are corporate matters litigated? This is issue is often negleted in the scholar debate on regulatory competition for corporate law, yet it is highly relevant, since to attain legal coherence and predictability substantive law should not be detached from the competent forum. A good example is Delaware law, which is fundamentally judge-made [see: Marcel Kahan & Rock Edward, Symbiotic Federalism and the Structure of Corporate Law, 58 Vand. L. Rev., 1573, 1591 – 1597 (2005)]. Nonetheless, corporate choice-of-law and choice-of-forum criteria diverge, so that Delaware law may be litigated outside of Delaware court [see: John Armour, Bernard Black & Brian Cheffins, Is Delaware Losing its Cases?, www.ssrn.com].  Differently from U.S. law, EU law has addressed this issue, yet only partially and with uncertain results. According to the Regulation on jurisdiction [EC Regulation 44/2001, art. 22(2)] part of the internal affairs matters (i.e.: the validity of the constitution, the nullity or the dissolution of companies or other legal persons or associations of natural or legal persons, or of the validity of the decisions of their organs) should be litigated in the member state of the “seat”. However, the concept of “seat” is to be established according to each member states’ own private international law, so that conflict of jurisdiction can still arise; in addition, other “internal affairs” matters, such as derivative suits, are not comprised in this list and can be litigated alternatively either in the state of the registered office, or of the central administration or of the principal place of business [EC Regulation 44/2001, art. 60(1)], so that the competent court can diverge from the applicable substantial law.

Another set of rules and procedures that are relevant for corporations is insolvency law, whose choice-of-law and forum criteria often diverge from those to be applied to corporate law matters. For instance, according to the Uncitral model law on cross-border insolvencies of 1997 as well as for the EU regulation on cross-border insolvencies [EC Regulation 1346/2000] the fundamental choice of forum criterion is the Centre of the Main Interests (“COMI”) of the insolvent debtor. If the debtor is a corporation, unless the contrary is proven, the COMI coincides with the country of the registered office (i.e. the country of incorporation). The COMI criterion should make the applicable insolvency law more predictable in the eyes of third parties and should avoid forum shopping. However, it does not seem to be always the case and the COMI concept has revealed to be fuzzy and that it can be manipulated. According to the European Court of Justice the COMI diverges from the state of incorporation only if evidence is given that third parties could recognize that corporate activities are managed from a certain coutry different from the registered office (European Court of Justice, C-341/04, Eurofood IFSC Ltd [2006] ECR I-3813). The COMI, therefore, is neither the “administrative seat” of the real set theory, nor the “central administration” or the “central place of business”, which are possible location of corporate domicile according to the EC Regulation on jurisdiction.

Federico M. Mucciarelli

Professor Federico M. Mucciarelli is Associate Professor of Business Law at the University of Modena and Reggio Emilia Business School. He is also Global Fellow at NYU School of Law

Professors Linda Silberman and Franco Ferrari publish a paper entitled “Getting to the law applicable to the merits in international arbitration and the consequences for getting it wrong”, in Conflict of Laws in International Arbitration (F. Ferrari and S. Kröll eds., 2010)

Professor Emmanuel Gaillard to speak on “The Legal Theory of International Arbitration” at NYU on Sept. 20th The Center will host its first Arbitration Forum. On that occasion, Prof. Emmanuel Gaillard will give a presentation on “The Legal Theory of International Arbitration”. The presentation will be based in part on the introduction to Professor Gaillard’s recent book with the same title, which you can find by clicking here. Columbia Professor George Bermann and NYU Professor Joseph H. Weiler will comment. The event will take place on September 20th, 2010, in the Pollack Colloquium Room, Furman Hall 900, 245 Sullivan Street, New York, NY 10012, 6.15-8.00 pm.

Professor Ferrari publishes a paper (with Dr. Francesca Ragno) entitled “Consumer Protection in International Private Relationships. European Union”, in Consumer Protection in International Private Relationships/La protection des consommateurs dans les relations privées internationales (D.P. Fernandez Arroyo ed., 2010)