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 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 clearly 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 on this blog and elsewhere. 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.

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).

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.”

Overall, the new law has been well-received so far by the arbitration community. The very 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.

By Maxi Scherer and Gary Born

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.

By Dr. Maxi Scherer and Daniel Greineder

This case concerns a multi-party arbitration conducted under the ICC Rules with its seat in Geneva. One of the co-respondents in the arbitration, a Polish company, informed the tribunal that insolvency proceedings had been opened against it in Poland and that Polish law provided for the invalidity of arbitration agreements to which the insolvent company was party. The Polish company relied on Article 142 of the Polish Insolvency Law (the “PIL”), which provides “any arbitration clause concluded by the bankrupt shall lose its legal effect as of the date bankruptcy is declared and any pending arbitration proceedings shall be discontinued.”

The insolvent Polish company filed a request to the arbitral tribunal seeking a ruling that the arbitration against it be discontinued. The tribunal, after hearing the parties on this matter, rendered an interim award granting the Polish company’s request. The arbitral tribunal held that Article 142 PIL dealt with the issue of a party’s “continued capacity” to participate in an arbitration. Applying Swiss conflicts of law rules, the tribunal further held that a company’s capacity must be determined on the basis of its law of incorporation pursuant to Article 154 et seq. of the Swiss Private International Law Act (the “SPILA”). The tribunal therefore discontinued the proceedings vis-à-vis the insolvent co-respondent.

The Claimant in the arbitration then initiated proceedings before the Swiss Supreme Court seeking to set aside the tribunal’s interim award. The Claimant argued that the effects of a foreign insolvency proceedings on an international arbitration seated in Switzerland should be governed by Swiss law.

In its decision dated 31 March 2009, the Swiss Supreme Court rejected the request to set aside the interim award and held that the arbitral tribunal was correct in discontinuing the proceedings against the insolvent party. According to the Supreme Court, “Swiss law is silent on the subjective capacity to arbitrate of non-state parties… . Therefore, the general procedural principle applies, according to which the capacity to be a party (Parteifähigkeit) depends on the preliminary substantive law question of legal capacity (Rechtsfähigkeit) … .” The Supreme Court thus applied Articles 154 and 155 SPILA which govern the legal capacity of corporations and held that “the assessment of the legal capacity and thus the capacity to be party to international arbitration proceedings [of a Polish incorporated company] is determined … in accordance with Polish law.”

The Swiss Supreme Court decision is interesting in many respects. In particular, it addresses important choice of law questions concerning the capacity of parties to international arbitration agreements. The Court’s decision also raises, but does not address, important questions regarding the effects of national legislation which arguably discriminates against arbitration agreements under the New York Convention.

The Swiss Supreme Court decision also contrasts with a ruling of the English High Court earlier this year ([2008] EWHC 2155 (Comm)), which upheld an award which came to a different conclusion in another arbitration seated in England against the same insolvent Polish company. In that case, the arbitral tribunal had decided not to discontinue the arbitral proceedings vis-à-vis the insolvent Polish party notwithstanding Article 142 PIL. The Polish company applied to the English High Court challenging the tribunal’s award on that issue.

The English Court rejected the request holding that English law rather than Polish law governs the question of the effects of the insolvency proceedings on the arbitration. The Court based its decision on Article 15 of the EU Insolvency Regulation (inapplicable in Switzerland) which provides that “[t]he effects of insolvency proceedings on a lawsuit pending … shall be governed solely by the law of the Member State in which that lawsuit is pending.” In doing so, the Court came to the conclusion that the term “lawsuit” in the sense of Article 15 applied not only to national court proceedings but also to arbitration proceedings.

Dr. Maxi Scherer