As is well known, Section 1782(a) provides that a “the district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal”.

The applicability of 28 U.S.C. § 1782 to international arbitration has generated an interesting debate, especially on this blog (see lastly G. Born’s post, L. Reed’s post, E. Triantafilou’s post, adde, Y. Lahlou, l’applicabilité de l’article 28 USC 1782 à l’arbitrage commercial international, Gaz. Pal., 2009-3). The debate is essentially concerned with the question whether an international arbitral tribunal constitutes a “foreign tribunal” for purposes of § 1782 (see the recent: In re Application of Chevron, 2010 WL 1801526, at *6 (S.D.N.Y. May 6, 2010 and Roger Alford’s blog). Conflicting solutions on this issue have been rendered in the United States (against the application of § 1782 to international arbitration see e.g.: National Broadcasting Co. Inc and NBC Europe v. Bear Steans & Co., Inc et al, 165 F.3d 184 (2d Cir. 1999); El Paso Corp. v. La Comision Ejecutiva Hidroelectrica del Rio Lempa No 08-20771, 2009 US App. Lexis 17596 (5th Cir. Aug. 6 2009); In re Arbitration in London, England, No. 09-C-3092, 2009 US Dist. Lexis 49827. For the application of § 1782 to international arbitration see e.g. In re Oxus Gold plc, MISC 06-82-GEB, 2007 WL 1037387 (D.N.J. April 2,2001), In re Roz Trading Ltd, 469 F. Supp. 2d 1226; In re Hallmark Capital Corp., 534 F Supp. 2d 951 (D. Minn. 2007), Comisión Ejecutiva, Hidroeléctrica del Río Lempa v. Nejapa Power Co., LLC, No. 08-135, 2008 WL 4809035, at *1 (D. Del. Oct. 14 2008).

A related, and somewhat minor question, has however attracted little interest, and that is whether costs incurred by the party to an arbitration procedure in court proceedings based on § 1782 (“the Discovery costs”) may be treated as costs of the arbitration and allocated by the arbitral tribunal. The question will be relevant to the parties since, as it is known, costs are not refunded to the prevailing party in the context of Discovery court proceedings in the United States.

The critical issue is whether the Arbitral Tribunal has jurisdiction to allocate Discovery costs as costs of the arbitration.
The first element of answer may be found in the arbitration agreement.
Proceedings related to a Discovery application in aid of the arbitration may well be considered as a dispute arising out or relating to the underlying contract. Hence, there should not be any difficulty to admit that, in principle, Discovery applications are related to the contract. As a consequence, a broadly formulated arbitration clause (such as a clause worded as follows “all disputes arising out of or in connection with the present contract shall be finally settled through arbitration by one or more arbitrators”) may well be construed as applying to Discovery costs. This is not the end of the story, however.

A first argument against the arbitral tribunal’s jurisdiction to apportion Discovery costs is that applications for Discovery in aid of the arbitration applications usually involve third parties in possession of the evidence sought. Such circumstance, however, should not be relevant as long as the parties in dispute in the arbitration are also parties to the Discovery court proceedings.
Another possible objection relates to the concept of “costs of the arbitration”.

In the context of UNCITRAL or institutional arbitration, it should be seen whether the applicable arbitration rules permit to treat such costs as costs of the arbitration.

It is for example doubtful that, under Article 38 of the 1976 UNCITRAL rules, Discovery costs can be treated as costs of the arbitration. Article 38 provides that “the term ‘costs’ includes only: (a) the fees of the arbitral tribunal to be stated separately as to each arbitrator and to be fixed by the tribunal itself in accordance with article 39; (b) the travel and other expenses incurred by the arbitrators; (c) the costs of expert advice and of other assistance required by the arbitral tribunal; (d) The travail and other expenses of witness to the extent such expenses are approved by the arbitral tribunal; (e) the costs for legal representation and assistance of the successful party if such costs were claimed during the arbitral proceedings, and only to the extent that the arbitral tribunal determines that the amount of such costs is reasonable; (f) Any fees and expenses of the appointing authority as well as the expenses of the Secretary-General of the Permanent Court of Arbitration at the Hague”.

The new 2010 UNCITRAL rules, however, include a new wording of § (e) below. The new Article 40 (e) of the Rules now provides that costs include “the legal and other costs incurred by the parties in relation to the arbitration to the extent that the arbitral tribunal determines that the amount of such costs is reasonable”. Arguably, Discovery costs are costs incurred “in relation to the arbitration”. As a consequence, Discovery costs would be treated as costs of the arbitration.

The ICC rules, with respect to costs, provide in Article 31(3) that “The final Award shall fix the costs of the arbitration and decide which of the parties shall bear them or in what proportion they shall be borne by the parties”. Article 31(1) also provides that the costs of the arbitration include the “reasonable legal and other costs incurred by the parties for the arbitration”. Such a provision does not seem to encompass costs incurred “in relation” to the arbitration. It is generally admitted, however, that arbitrators have wide discretion in apportioning costs. Whether such discretion could be used to allocate Discovery costs remains to be seen.
The LCIA rules confer to an arbitral tribunal the power to “order in its award that all or part of the legal or other costs incurred by a party be paid by another party” (Article 28.3). However, this provision seems to relate to the costs incurred in the arbitration, and would thus not apply to costs incurred in court proceedings. The ICDR rules refer in Article 31 to “the costs of arbitration”. Although the rules also provide for a non-exhaustive list of what “may” be included as such costs, , the concept of costs of arbitration is arguably not equivalent to that of costs incurred “in relation to” the arbitration. The same observation applies with respect to Article 38 of the Swiss Rules.

Another possible ground to recover Discovery costs could be as damages for breach of the arbitration agreement. It is unlikely that the lex arbitri would prevent a party from seeking Discovery in aid of the arbitration, but it may well be that the arbitral tribunal enjoined the party from doing so or from pursuing an application made without the tribunal’s leave.

A U.S. court has, in this respect, decided that § 1782 application suppose the consent of the arbitral tribunal (see In re Bacock Borsig AG, 583 F. Supp. 2d a 233 (D. Mass. 2008)). Such principle is healthy as Discovery applications – as they include leave to depose witnesses and suppose broad discovery – are likely to be inconsistent with the tribunal’s procedural directions. In such a scenario, an application made in disregard of the tribunal’s directions or order would constitute a breach of the arbitration agreement insofar as the arbitration agreement obliges the parties to cooperate in good faith to the proceedings. There should be no valid reason why such a breach could not give rise to damages.

Alexis Mourre/Alexandre Vagenheim

27 June 2010 marks the 20^th anniversary of investment treaty jurisprudence.  On 27 June 1990, the tribunal in Asian Agricultural Products Ltd. v. Sri Lanka (ICSID Case No. ARB/87/3) (AAPL) dispatched its final award to the parties.  The AAPL tribunal (Dr. Ahmed Sadek El-Kosheri (President), Professor Berthold Goldman and Dr. Samuel Asante) was the first to be “seized by an arbitration request exclusively based on a treaty provision and not in implementation of a freely negotiated arbitration agreement directly concluded between the Parties…” (para. 18, Final Award).  This despite the fact that “arbitration without privity” had been available under investment treaties since at least 1969.  AAPL turned out to be the launching point for a body of distinct investment treaty jurisprudence and the first of over 350 investment treaty cases that have arisen over the past 20 years.

The basics facts and outcome in AAPL are well known.  The majority of the tribunal found Sri Lanka had breached its obligation under the Sri Lanka/UK BIT to exercise due diligence in the protection of the investor’s shrimp farm during military operations.  The majority awarded damages of US$460,000 based on AAPL’s 48% shareholding in the joint venture company, Serendib, which operated the shrimp farm.  The damages in question represented the value of Serendib’s tangible assets.   In a forceful dissent, Dr. Asante disagreed with the majority’s interpretation of the treaty, found that the investor had not established Sri Lankan forces were responsible for the damages in question and stated that damages should have been limited to US$ 300,000, the amount of AAPL’s equity investment.

Although the Final Award is probably best known for its finding that a treaty-based “full and protection security” obligation imposes an obligation of due diligence on the state and not strict liability for damages (and that this obligation is essentially a codification of customary international law), the Final Award is regularly cited for a variety of legal issues.  Indeed, AAPL has been cited in over 50 investment treaty arbitration decisions and awards.

Interestingly, and unlike the many cases that have followed, Sri Lanka does not appear to have contested jurisdiction, despite the fact that AAPL was a minority shareholder and was claiming damages in a shrimp farm that was owned by a Sri Lankan company.  As a result, the Final Award is often cited for the proposition that shareholders can bring an investment treaty claim regardless of whether the treaty explicitly permits indirect claims.

AAPL is also cited for the proposition that an investor is entitled to the more favourable treatment in another treaty by virtue of an MFN clause.  The majority was of the view that AAPL could obtain the benefit of more favourable treatment provisions in other investment treaties, but rejected the argument that other treaties provided more favourable treatment.  The case is also regularly cited for its findings on burden of proof, that consent to ICSID jurisdiction can arise from an investment treaty and that claims for future profits should be disregarded where there is an insufficient history of actual operations.

Rereading the award I was struck by the familiarity of the preliminary issues to be addressed—applicable law, interpretation, attribution and the depth of the tribunal’s reference to international law sources, in particular older international arbitration decisions and the writing of publicists.  The Tribunal emphasized that bilateral investment treaties are “not a self-contained legal system” but have to be “envisaged within a wider juridical context in which rules from other sources are integrated though implied incorporation methods, or by direct reference to certain supplementary rules…”   This is an important principle to highlight in light of current debates about the fragmentation of international law and the relationship between a state’s investment treaty and other obligations under public international law.

The United States’ Supreme Court opinion in Stolt-Nielsen S.A. v. Animalfeeds International Corp. has already been the focus of much discussion in both U.S. and international arbitration circles. One area of interest for arbitration practitioners is the impact which the decision may or should have on how drafters of arbitration clauses should address the issue of class action arbitrations.

Stolt-Nielsen involved an arbitration brought in New York by AnimalFeeds against Stolt-Nielsen, a commercial shipping company, after Stolt-Nielsen had been subject to a U.S. Department of Justice criminal investigation involving charges of illegal price-fixing. The arbitration was brought pursuant to a broad arbitration clause (“[a]ny dispute arising from the making, performance or termination . . . .”) in a standardized shipping contract that did not mention class arbitration. AnimalFeeds demanded a class arbitration on behalf of itself and similarly situated shipping customers. The parties entered a supplemental agreement which, consistent with the AAA Supplementary Rules on Class Arbitration, submitted to the arbitrators the question whether the clause authorized class arbitration. During the course of the arbitration, the parties stipulated that the arbitration clause was “silent” on the question of class arbitration

The arbitral tribunal issued a partial award stating that the arbitration clause permitted class arbitrations, citing a consensus of arbitral awards interpreting “a wide variety of clauses in a wide variety of settings.” Stolt-Nielsen challenged the award in the federal courts. The Supreme Court found that the arbitrators had exceeded their authority by basing their decision on policy grounds rather than on the applicable law. The Supreme Court found that the FAA barred class arbitrations where the arbitration clause was “silent.” Justice Alito’s majority opinion based this holding on the premise that arbitration is a creature of consent, and that class arbitration cannot be forced on parties who have not consented to it.

As Justice Ginsburg’s dissenting opinion points out, “the Court does not insist on express consent to class arbitration,” and Justice Alito’s majority opinion specifically noted that the Court had “no occasion to decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration.” This leaves little guidance to tribunals and courts interpreting arbitration clauses as to what contractual or factual basis can support a finding that the parties agreed to authorize class arbitration. While the Stolt-Nielsen opinion implies a restrictive interpretation of broad arbitration clauses on the issue of class arbitration, given the uncertainty noted by the dissent, and the singular fact that in Stolt-Nielsen the parties had stipulated that the arbitration clause was silent on the issue of class arbitration, the impact of Stolt-Nielsen on clause drafting in different contexts is uncertain.

The best option for drafters of arbitration clauses who want to provide for class arbitration is to make consent express in the clause, for example by including language such as “the parties agree that class action arbitration shall be available under this clause.” Drafters intent on including class arbitration should also consult the AAA’s Supplementary Rules for Class Arbitration, which provide a mechanism for the administration of class arbitration, and may wish to incorporate those Rules into their arbitration clause. It is to be noted, however, the AAA’s Supplementary Rules for Class Arbitration are likely subject to amendment in the wake of the Stolt-Nielsen decision. Drafters who want to exclude class arbitration should do so expressly by stating in their clause that “there shall be no class action arbitration.”

White & Case represented Stolt-Nielsen in the dispute. The writers of this post were not part of the team representing Stolt-Nielsen and this post is based exclusively on information available to the public.

By Paul Friedland and Michael Ottolenghi

The arbitrability of a dispute is not generally limited to private law. In many countries, including Germany and Switzerland, it is admitted that arbitration can also bear on claims derived from public law, and in particular on rights conferred upon by contracts subject to administrative law. Arbitrability of such disputes may however be more problematic in countries, like France, where the administrative jurisdiction plays an important role in the judicial system alongside with civil courts.

In that respect, French law has traditionally been said to be restrictive in permitting arbitration for administrative law disputes.

In France, under Article 2060 of the Civil Code, domestic disputes involving the State, as well as public entities (such as municipalities) and public establishments may not be referred to arbitration. Article 2060 provides, to that effect, that “there can be no arbitration […] in disputes concerning public collectives and public entities”. However, this provision has since long been excluded by the Cour de cassation (highest French jurisdiction in civil matters) as far as international disputes are concerned (Cour de cassation, 1re civil chamber, 2 May 1966, Galakis). The Court held on that occasion that “the State is not prohibited from concluding arbitration agreement in international matters”.

In 1975, a new provision was added to Article 2060 of the Civil Code, whereby “certain categories of public entities of an industrial and commercial character can be authorised to arbitrate by decree”. However, pursuant to an opinion given by the Conseil d’Etat (highest French jurisdiction in administrative matters), this provision is applied in a very restrictive manner and only authorises such entities to enter into an arbitration agreement after the dispute has arisen (compromis d’arbitrage).

The question then arose of the capacity of the French State and public entities to validly enter into an arbitration agreement with the American company Walt Disney in the contracts related to the construction of the Eurodisney Park.

In its Walt Disney opinion of 6 March 1986, the Conseil d’Etat pointed out that legal entities of public law could not circumvent the rules determining the jurisdiction of the French administrative courts if the dispute touches upon rules of French administrative law that are considered as being of public policy. It came to the conclusion that the contract envisaged with Walt Disney “resorts to the French domestic legal order” and can therefore not contain a valid arbitration clause, which would be null and void as a matter of public policy.

It therefore appeared that the Walt Disney opinion tended to restrict, in spite of the Cour de Cassation’s ruling in Galakis, the arbitrability of international disputes touching upon administrative law. In fact, the Walt Disney contract was certainly to be considered as international pursuant to Article 1492 of the French Code of Civil proceedings, as it involved the interests of international trade.

Since then, there has been considerable debate on how to open arbitration in France to public law disputes. On 7 April 2006, the Ministry of Justice commissioned a working group to consider the future of arbitration in the context of administrative law. The working Group issued its report (called the Labetoulle report, by the name of its author) on 13 March 2007 (Rev. arb., 2007, Vol. 3: p. 651, on which see J.-L. Delvolvé, Une véritable révolution inaboutie, remarques sur le projet de réforme de l’arbitrage en matière administrative ; and S. Lemaire, Rapport du groupe de travail, ib.).

The Labetoulle report proposed to abolish the prohibition preventing public bodies from agreeing to arbitrate, as set out in article 2060 of the Civil Code. As a result, a draft law was prepared in order to “broaden the possibility for recourse to arbitration for public bodies and to clarify the procedural regime of arbitrations involving public law” (Rapport du groupe de travail sur l’arbitrage en matière administrative, 13 mars 2007 in Rev. arb., 2007, Vol. 3, p. 651). This report was nonetheless criticized in the arbitration community for it set a special regime for the arbitration in administrative cases, distinct from that prevailing under the Code of Civil Procedure for other arbitrations. As a consequence, difficult issues of characterisation would arise, in particular in the context of an international arbitration, to define what would and what would not be an “administrative arbitration”. The Labetoulle report, however, has not so far been converted into law.

A particular and sensitive aspect of that debate is the allocation of jurisdiction between administrative and civil courts to hear challenges.

As it stands, challenges against international awards are brought before the Court of Appeal of the place of the arbitration, pursuant to Article 1505 of the Code of Civil Procedure, which court applies the rules provided for challenges by the French Court of Civil proceedings.

However, the question whether administrative courts should have jurisdiction in cases involving mandatory administrative laws has never been clearly settled.

This issue was however raised in the recent Inserm case.

A dispute arose between the French National Institute for Health and Medical Research (Inserm), a French public entity, and a Norwegian foundation, with respect to an international cooperation agreement. The agreement provided for inter alia the construction in France of a building dedicated to research in neurobiology. It included an arbitration agreement.

A dispute arose, and the French party seized a French court, which declined to hear the case because of the existence of an arbitration agreement between the parties. Subsequently, the Inserm requested the Paris First Instance Tribunal to appoint an arbitrator.

The arbitrator was appointed and rendered an award in favour of the Norwegian company. A challenge against the award was brought before the Paris Court of Appeal. The Paris Court of Appeal decided (Inserm v. Association Fondation Letten F. Saugstad, Paris Court of Appeal, 13 November 2008, Rev. arb., 2009, Vol. 2, p. 389) that it had jurisdiction to hear the challenge, but rejected it on two grounds. Firstly, it found that the prohibition for States and State entities to arbitrate was limited to domestic contracts, and secondly that, pursuant to the principle of validity of arbitration clauses admitted in French law, the prohibition to arbitrate was not part of international public policy.

However, an action was also brought in parallel by the French party before the French administrative courts, which were requested to annul the award on the basis that the arbitration agreement was null and void.

The case was directly called to the French highest administrative jurisdiction, the Conseil d’Etat.

The question was therefore to determine which of the two judicial bodies, civil or administrative, had jurisdiction to hear the matter in the last resort.

The Conseil d’Etat decided that there were reasonable doubts with respect to the allocation of jurisdiction between civil and administrative courts, and it therefore decided to raise the case to the Tribunal des conflits, which is the French jurisdiction empowered to settle a conflict of jurisdiction between civil and administrative courts.

The Tribunal des conflits rendered its judgement on 17 May 2010. That decision has given rise to a certain level of criticism in the French arbitration community (See Th. Clay, Les contorsions byzantines du Tribunal des conflits en matière d’arbitrage, JCP G, n° 21, 2010, p. 1045, and E. Gaillard, Le Tribunal des conflits torpille le droit français de l’arbitrage, ib., p. 1096).

The Tribunal des Conflits decided that “a challenge against an arbitral award rendered in France on the basis of an arbitration agreement contained in a contract concluded between an entity of French public law and a foreign company, which contract has been performed on the French territory and which concerns the interests of international trade, is to be brought before the court of appeal where the award is rendered pursuant to article 1505 of the Code of Civil Procedure even if the contract is to be characterized as administrative according to French domestic law”.

The Tribunal however added that “the situation is different where a recourse brought under the same circumstances implies that the award be reviewed according to French mandatory rules of public law on the occupation of the public domain or according to the rules governing public expenditure that are applicable to public procurement, to public partnerships or to the delegation of public services, as such agreements are subject to a mandatory administrative regime that is of public policy. A recourse with respect to those contracts is subject to the jurisdiction of the administrative court”.

In other words, a challenge against an international award concerning an international administrative contract which involves the application of the mandatory rules of French administrative law is to be brought before the administrative court rather than before the civil court as it is normally the case. With respect to that particular dispute, the Tribunal found that the civil courts have jurisdiction, but the door is left open to the administrative jurisdiction if French administrative law’s mandatory rules are at stake.

It would certainly have been preferable if the Tribunal des conflits had clearly established that all international awards, even if they relate to administrative mandatory laws, are subject to the rules for vacatur provided by the Code of Civil proceedings and to the jurisdiction of the civil courts of the place of the arbitration. After all, such is the case when mandatory rules of another nature are at stake (such, for example, as European mandatory rules), and there is no real logic to treat administrative mandatory law differently. From that perspective, the decision is certainly a missed opportunity. It is, in addition, likely to increase the procedural difficulties in challenges against contracts concluded with the French State or with French State entities and that are performed in France. Ultimately, it is likely that parties will tend to place the seat of the arbitration in those contracts out of France in order to avoid these difficulties.

It should be noted, however, that the decision does not do much more than clarifying the situation as it resulted after the Walt Disney episode. Since Walt Disney, very little difficulties arose with respect to the jurisdiction of the French civil courts to hear challenges against international awards involving French public entities, and it is to be hoped that no more will arise after the decision of the Tribunal des conflits. If this is the case, hopefully, the Labetoulle report and the Inserm case will remain a storm in a teacup.

Alexis Mourre/Alexandre Vagenheim

The Court of Appeals for the state of Bahia in Brazil recently handed down an arbitration-friendly decision and vacated an injunction intended to stay an arbitration proceeding. In FAT Ferroatlàntica S.L. vs. Zeus Mineração Ltda. and others (see link to English translation below), the Court of Appeals addressed the issue of whether the existence of conflicting arbitration clauses in contracts pertaining to a single economic transaction justifies judicial intervention at the outset of the arbitration. The Court of Appeals held that, provided an arbitration agreement exists, such issue is to be dealt with by the arbitrators, not by the Courts.

Ferroatlàntica, on one hand, and Zeus and Zeus’ individual owners (altogether “Zeus”), on the other, had entered into a joint venture agreement for the research and exploitation of minerals in Brazil. They had also formed a company incorporated in Brazil, FAT Brasil, to perform the research and the exploitation. Zeus had to contribute mining rights to FAT Brasil while Ferroatlàntica had to invest US$22 million in FAT Brasil. The joint venture agreement contained an arbitration clause, which referred to the International Chamber of Commerce (ICC) Rules of Arbitration, whereas the articles of incorporation of FAT Brasil provided for arbitration under the Rules of Arbitration of the Brazil-Canada Chamber of Commerce. The place of arbitration in both agreements was São Paulo, Brazil.

The joint venture agreement also granted Ferroatlàntica an exit option: in the event the research results did not meet certain targets, Ferroatlàntica had the right to exit the joint venture and be repaid the US$22 million invested minus FAT Brasil’s research expenses.

Considering the research results targets had not been met, Ferroatlàntica exercised its exit rights and requested the reimbursement of the balance of its investment in the joint venture. After Zeus refused to pay, Ferroatlàntica initiated an ICC arbitration seeking payment of those sums. In response, Zeus filed a lawsuit before a court in Caetité, in the state of Bahia, Brazil, and obtained an ex parte injunction requesting a stay of the arbitration. Ferroatlántica thereafter filed an interlocutory appeal against the injunction before the Court of Appeals of the State of Bahia, which issued an order vacating the injunction.

When seeking a stay of the arbitration, Zeus had relied on the conflict between the two arbitration clauses and argued such conflict raised “doubts” as to which rules should govern the arbitration.

Since Brazilian law on arbitration provides for judicial assistance at the outset of the arbitration, the Court of Appeals of the State of Bahia had to determine whether the conflict between the arbitration clauses justified such judicial intervention.

The Court of Appeals decided that the existence of conflicting arbitration agreements does not constitute a sufficient cause for a provisional stay of an arbitration. The court found that although conflicting arbitration agreements may raise difficulties for the resolution of a dispute, such difficulties did not justify judicial intervention to allow the arbitration to proceed.

Parallel arbitration proceedings pose a risk of insecurity regarding the outcome of the adjudication procedure. This risk derives from the likelihood that different arbitral tribunals will reach contradictory or incompatible decisions. In some cases, the two decisions may even out at the end. In others, the application of one or both becomes impossible. The most likely consequence is that one or both parties will continue to litigate in the available fora, making compliance with the award(s) unlikely and defeating what many consider to be the purpose of choosing arbitration in the first place: to have an effective and technical decision on the merits using a reasonable amount of resources.

Consolidation of proceedings would be advisable to avoid parallel proceedings. This can always be done in international commercial arbitration if the parties agree to it after the dispute arose. Such an agreement is not uncommon, because, as we have commented above, the prospect of parallel proceedings is a grim enough incentive to opt for consolidation.

In some cases, one of the parties, who is usually the party that has more to lose from the arbitration than the status quo, instead opts for dilatory tactics and litigation in court. More often than not, it is the respondent in the arbitration that takes this road, which is exactly what Zeus, in the possession of US$ 22 million, did.

The dispute that gave rise to the decision commented here was quite simple in practice because all the claims presented by Ferroatlàntica were related to the joint venture agreement. However, in other cases, the relation between the various agreements at issue or the nature of the claim may be such that it is more complex for the parties to determine which arbitration agreement governs their dispute. In those cases, the need for judicial intervention to determine which arbitration agreement prevails could arise. The rationale for such intervention would be similar to the arguments in favor of judicial intervention to support the enforcement of an arbitration agreement where (i) the terms of the agreement themselves are not sufficient to start the arbitration; (ii) one of the parties resists arbitration; or (iii) another obstacle to arbitration arises. The decision by the Court of Appeals of Bahia is an indication, however, that no such action is possible in case of conflicting arbitration

FAT Ferroatlàntica S.L. vs. Zeus Mineração Ltda.

On April 27, 2010, the Supreme Court of the United States issued its decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., No. 08-1198, 559 U.S. ___ (2010). The Court reversed a Second Circuit ruling permitting arbitrators to impose class arbitration upon four shipping companies—including White & Case client Stolt-Nielsen S.A.—under those shipping companies’ shipping contracts with their customers, holding that arbitrators exceed their authority under the Federal Arbitration Act (FAA) if the arbitrators impose class-action arbitration on parties whose arbitration agreement undisputedly is silent on the question of class arbitration.

The FAA expressly governed the parties’ arbitration agreements, and the Supreme Court, reaffirming the foundational importance of consent under the FAA, held that “[A] party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so. In this case, however, the arbitration panel imposed class arbitration even though the parties concurred that they had reached ‘no agreement’ on that issue . . . . The panel’s conclusion is fundamentally at war with the foundational FAA principle that arbitration is a matter of consent.”

The parties had agreed before the arbitration panel that there was no agreement on whether the clause allowed or precluded class action arbitration leaving in the Court’s estimation “no room for an inquiry regarding the parties’ intent, and any inquiry into that settled question would have been outside the panel’s assigned task.” In this context, the Court expressly declined to decide what evidence of an agreement to arbitrate on a class basis is sufficient to support a ruling that class arbitration is available, noting that “[h]ere . . . the parties stipulated that there was ‘no agreement’ on the issue of class action arbitration.”

Additionally, the Court described the fundamental differences between class arbitration and standard, bilateral arbitration, including, among other things: the addition of numerous claims from “hundreds or perhaps even thousands of parties”; loss of confidentiality; the far-reaching effect of an award; and significantly increased financial stakes. These differences caused the Court to conclude “that the differences between bilateral and class-action arbitration are too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties’ mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings.”

Stolt-Nielsen also referenced two other recent Court decisions that potentially bore on its ruling, Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003) and Hall Street Assocs. L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008). The Court discussed at length its earlier decision in Bazzle, following which arbitrators in increasing frequency began to construe arbitration agreements to permit class arbitrations. The Stolt-Nielsen Court explained that in Bazzle, “no single rationale commanded a majority” and that the Court’s plurality opinion in Bazzle had decided only that arbitrator should make the initial determination as to whether an arbitration agreement is silent as to class arbitration. Regarding Hall Street, however, the Court was less expansive, expressly declining to decide whether the “manifest disregard of law” standard in fact survived the Hall Street decision. Instead, the Court held that the arbitrators’ focus on policy rather than the default rule that applies when an arbitration agreement is silent concerning class arbitration would have satisfied the manifest disregard standard.

Following Stolt-Nielsen, there is likely to be some significant wrangling between arbitrating parties over at least the following hot-button issues:

Is the agreement really silent? As the Stolt-Nielsen Court noted on several occasions, the parties agreed that their arbitration agreements were silent as to class arbitration. Parties seeking to pursue class arbitration likely will not stipulate that their agreements are silent anymore. Instead, both sides will highlight the “textual clues” that speak to whether a particular agreement authorizes class arbitration, as Justice Rehnquist emphasized in his dissenting opinion in Bazzle. But, Stolt-Nielsen may stand for the proposition that the “any disputes” language at issue in this case and found in many arbitration agreements, without more, is “silent” and therefore does not permit class arbitration.

What standard applies to vacatur of an arbitral award? Having expressly declined to determine the fate of the “manifest disregard of law standard,” the standard that the district court applied to vacate the arbitral awards, parties (and lower courts) will continue to dispute the availability of “manifest disregard.” Indeed, Stolt-Nielsen may have made it easier to overturn an unfavorable award. It appears that an arbitrator’s reliance on policy over settled law, i.e., his manifest disregard of the law, is now a ground for vacatur. Perhaps the arbitrator has merely “exceeded his powers,” as Section 10(b)(4) of the FAA provides, but this is sure to be a point of contention in the lower courts. Similarly, the Court’s determination that a clause construction award is ripe for review—to the chagrin of the dissenters, who questioned the Court’s reaching the merits “so early in the game”—gives parties renewed hope for immediate review of the ultra vires acts of arbitrators. Finally, the Court’s clarification that Bazzle did not produce a majority opinion on any issue also raises the possibility for disputes over who—the court or the arbitrator—should decide whether a particular arbitration agreement authorizes class arbitration.

What is the effect on consumer arbitrations? Stolt-Nielsen involves sophisticated, multi-national parties on both sides and, as the majority opinion notes, an arbitration clause that the customer (AnimalFeeds) selected. But what of consumer disputes? Stolt-Nielsen itself does not distinguish between consumer and business-to-business arbitrations, but many believe that courts will be more receptive to invalidating arbitration agreements that waive or preclude class arbitration as unconscionable. For its part, the Court, in light of Stolt-Nielsen, recently vacated and remanded a Second Circuit decision that struck a class arbitration waiver provision as unconscionable. Like Stolt-Nielsen, however, the Second Circuit case, In re American Express Merchants’ Litigation, 554 F.3d 300 (2009), involved businesses on both sides. The Supreme Court’s recent resolution of the case—granting certiorari, and vacating and remanding the case in light of Stolt-Nielsen—could mean that invalidation of the entire arbitration clause as unconscionable, and not merely the class arbitration waiver provision, may be required to avoid bilateral arbitral resolution of a dispute, a much tougher task sure to spawn significant litigation in the future. See Am. Express Co., et al. v. Italian Colors, 2010 WL 1740528 (U.S.).

Stay tuned.

By Christopher M. Curran and Charles C. Moore

On April 27, 2010, the United States Supreme Court held in Stolt-Nielsen S.A. v Animalfeeds International Corp., that under the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (”FAA”), “[A] party may not be compelled . . . to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so”. Slip. Op. 20 (emphasis in original).

The practical import of Court’s recent decision will likely be to heighten significantly the hurdle to be cleared before class arbitration procedures are upheld under the FAA. In addition, the Court has effectively opened the door to challenges by parties now being forced to participate in class arbitrations on the basis of anything less than a finding of consent consistent with what the Court has declared is required under the FAA. Parties bringing such challenges will no doubt include those whose attempts to opt out of class procedures through contractual “waivers” have been deemed unenforceable on various public policy grounds. Indeed, on May 3, 2010, the Court vacated and remanded for further consideration in light of Stolt-Nielsen a decision of the United States Court of Appeals for the Second Circuit declining to enforce such a “waiver” as unconscionable. See In re American Express Merchants’ Litigation, 554 F.3d 300 (2d Cir. 2009) (finding that to enforce the clause at issue would grant de facto immunity from antitrust liability).

These developments will no doubt come as welcome news to many users of international arbitration, particularly those based outside of the United States whose legal systems view class procedures as incompatible with due process requirements. Thanks to the Stolt-Nielsen decision, which puts into place a substantive standard limiting any claimed procedural discretion with respect to any attempted imposition of class procedures, international parties under agreements subject to the FAA (including the New York Convention), will now be in a position to insist upon a finding, grounded in contractual analysis, that such procedures were an intended term of their agreement to arbitrate.

While the Court’s ultimate holding in Stolt-Nielsen is likely to come as very good news to many, the decision raises a number of important questions concerning the future of class arbitration and court review thereof in the United States courts. The issues described below are not by any means exhaustive.

First, the majority opinion raises questions as to the level of deference that will be shown by United States courts in the future toward arbitral decisions involving class arbitration. In particular, the majority decision appears to remove class procedures from the sphere of deference traditionally afforded to matters of arbitral procedure. To understand why this is the case, it is necessary to consider how the majority characterized an earlier decision regarding class arbitration in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003).

There, a plurality of the Court deemed the question of whether the parties’ agreement authorizes class arbitration to be one of a procedural nature for the arbitral tribunal to resolve. Id. at 452-53. In Stolt-Nielsen, the majority took great pains to emphasize that the plurality opinion in Bazzle neither settled “for the Court” the question of “who should decide” whether class action is authorized under a contract, nor provided the standard for resolving the underlying issue. Stolt-Nielsen at 15-16. Ultimately, the Court declined to resolve this question because the parties to the litigation sub judice had entered into a form of submission agreement referring the question to the arbitral tribunal, a decision the Court left undisturbed.

However, in going on to rule that class procedures cannot be authorized in contracts based solely upon the existence of an agreement to arbitrate, the Court placed a significant substantive limitation upon the discretion that would ordinarily be enjoyed by any arbitral tribunal deciding what the Bazzle plurality considered to be a matter of “arbitration procedure” (once again, an open question remains as to whether arbitral tribunal or court should decide whether an agreement is “silent” as to the availability of class procedures). In this sense, the Court has cabined Bazzle, deeming class procedures to be ontologically different, and thereby requiring any arbitral tribunal visiting the question to respect additional safeguards, i.e. performing a contractual analysis in search of affirmative intent, before procedural deference will attach.

While the Court declined to say what exact principles would justify a finding of consent (Stolt-Nielsen at 23, n. 10), any arbitral tribunal deciding a petition for class certification will have to take particular care to justify its analysis in terms recognized under ordinary contract law principles.

Second, the decision is interesting in relation to what it says (and does not say) about the standard of review that is to be applied in adjudicating a motion for vacatur (setting aside) under the FAA. In particular, the Court referred to but did not decide the status of “manifest disregard”, see Wilko v. Swan, 346 U.S. 427, 436-37 (1953) (“[T]he interpretations of the law by the arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation”), after Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 585 (2008) (which held that the grounds enumerated under the FAA for vacatur are exclusive, but did not decide the status of “manifest disregard”). Frustrating the hopes of many who sought clarification of the exact grounds on which an award may be vacated under the FAA, the Court declined to decide whether “manifest disregard” “survives . . . as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. §10″. Stolt-Nielsen at 7, n.3.

Because Section 10 of the FAA governs vacatur of awards under the New York Convention, a resolution of the existing split of authority in the United States courts as to the status of “manifest disregard” (for further discussion of this issue see Gary Born’s post here) would have been welcome.

While declining to decide the status of “manifest disregard”, the Court in Stolt-Nielsen did observe that if the standard meant “kn[owing] of the relevant [legal] principle, appreciat[ing] that this principle controlled the outcome of the disputed issue, and nonetheless willfully flout[ing] the governing law by refusing to apply it”, as advocated by the party seeking to uphold the class certification, that standard was satisfied on the facts presented. Stolt-Nielsen at 7 n.4. In short, the Court found that the arbitral tribunal, faced with a situation in which the parties had stipulated that no agreement existed between them on class arbitration, had committed an error sufficient to vacate under Section 10(a)(4) of the FAA (based upon the Court’s finding that the arbitrators “exceeded their powers”), because the arbitral tribunal failed to perform a choice of law analysis to identify and apply a contractual rule of decision for resolving the issue.

Instead, in the view of the Court’s majority, “what the arbitration panel did was simply to impose its own view of sound policy regarding class arbitration”. Id. at 7. This, the Court found, was inconsistent with a substantive requirement under the FAA that arbitration must be based upon consent, and that a decision to refer a dispute to class procedures could not be inferred in the absence of some contractual basis for finding such consent.

Many will debate whether majority fairly characterized the distinguished arbitral tribunal’s analysis. From the Court of Appeals’ perspective, the arbitral tribunal did more than pure “policy” analysis because it considered whether New York or federal maritime law contained any clear “custom or usage” or rule of decision requiring a finding that a “silent” clause should be construed as precluding authorization of class procedures. 548 F.3d 85, 97-99 (2d Cir. 2008). In her dissenting opinion, Justice Ginsburg agreed, characterizing the majority’s analysis on this point as a form of “de novo review”, inappropriate where “[t]he arbitrators here not merely ‘arguably’, but certainly, constru[ed] . . . the contract’ with fidelity to their commission”. Stolt-Nielsen at 10 (Gibsburg, J. dissenting).

However such debates are resolved, future litigants seeking to find a way around Stolt-Nielsen for clauses that do not expressly govern class procedures are likely to argue implicit consent under traditional contract law principles. For instance, arguments of implied consent may be seen on the basis of the parties’ selection of institutional rules, such as the AAA’s “Supplementary Rules for Class Arbitrations”, authorizing class arbitration proceedings (although, the same rules provide that “the arbitrator shall not consider the existence of these Supplementary Rules . . . to be a factor either in favor of or against permitting the arbitration to proceed on a class basis”(Rule 3)).

Similarly, arguments may be seen on the basis of the parties’ selection of substantive or procedural law permitting (explicitly or implicitly) class arbitration, for instance based upon the selection of state law that declines to enforce class arbitration “waivers” as contrary to public policy.

Such arguments will have to overcome the fact that the majority in Stolt-Nielsen clearly requires something affirmative in nature to satisfy the FAA’s substantive requirements – whether indirect references suffice will no doubt be the subject of future litigation.

Third, the decision forces companies to think about how best to protect themselves from class arbitration, if this is their preference. Given that it is impossible to say how the debates described above will play out, international entities that find themselves party to agreements providing for arbitration under rules permitting class arbitration or for arbitration to take place in jurisdictions where the law of the seat permits class arbitrations, should remain vigilant.

One solution would be to attempt to amend existing agreements or to ensure that future agreements make clear that the parties do not wish to be subject to class procedures. Whether such provisions will be upheld, however, is another open question in the United States courts, particularly in connection with adhesion contracts not negotiated by “sophisticated parties” (indeed, Justice Ginsburg argues in her dissent that the majority’s rationale would not appear to apply to such contracts). As noted above, courts in several United States jurisdictions have refused to enforce “waiver” provisions on a number of different policy grounds; some have even deemed such provisions not to be severable, thereby rendering the arbitration clauses in which such “waivers” are contained unenforceable (potentially leaving the party who manages to negotiate “waivers” of class arbitration faced with a pyrrhic victory).

Given the complex federal nature of the American judicial system, analyzing a party’s best options for managing these choices and risks is no easy matter. At a minimum, however, it appears safe to say that parties seeking to minimize exposure to the risk of class arbitration should avoid (to the greatest extent possible) agreeing to arbitrate under rules allowing for such procedures or in a jurisdiction the laws of which have been construed to prohibit the enforcement (as a general matter) of “waivers” of class arbitration.

Aren Goldsmith*

*The views expressed here are those of the author alone and should therefore in no way be construed as expressed on behalf of Cleary Gottlieb Steen & Hamilton LLP or any of the firm’s clients.

The principle of good faith arises in investment treaty arbitrations in various contexts. Tribunals, of course, regularly refer to Article 31(1) of the Vienna Convention for the rule that treaties shall be interpreted in good faith. Tribunals have noted that states must perform their treaty obligations in good faith. References to good faith occur in the interpretation of substantive obligations, notably fair and equitable treatment and the minimum standard of treatment in customary international law. Further, states sometimes seek to defend their actions on the basis that there was good faith in government conduct. This blog focuses on the obligation of good faith in the conduct of investment treaty arbitration proceedings. This procedural obligation should be distinguished from the separate issue of whether the investment in question and any claims arising from it are made in good faith.

Whenever there are allegations of misconduct by investors or states references to the principle of good faith are likely to follow. Not surprisingly, good faith has been relevant in cases involving issues of investor misconduct (Plama v. Bulgaria; Phoenix Action, Ltd. v. Czech Republic; Fraport v. Philippines; Inceysa Vallisoletana S.L. v. El Salvador). These cases have, however, involved questions of good faith in the making of the investment and the subsequent conduct of the investor, rather than whether the investor’s claim was made and pursued in good faith (the exception is Phoenix—see below). In contrast, in a 2008 Decision on Preliminary Issues in Libananco Holdings Co. Limited v. Turkey, good faith was discussed in the context of the alleged interception and surveillance by Turkish police of legally privileged communications between the claimant, its counsel and witnesses. In addressing, the parties’ submissions on the issue, the Tribunal (Mr. Michael Hwang S.C.; Mr. Henri C. Alvarez Q.C.; Sir Franklin Berman Q.C.) stated:

Nor does the Tribunal doubt for a moment that, like any other international tribunal, it must be regarded as endowed with the inherent powers required to preserve the integrity of its own process – even if the remedies open to it are necessarily different from those that might be available to a domestic court of law in an ICSID Member State. The Tribunal would express the principle as being that parties have an obligation to arbitrate fairly and in good faith and that an arbitral tribunal has the inherent jurisdiction to ensure that this obligation is complied with; this principle applies in all arbitration, including investment arbitration, and to all parties, including States (even in the exercise of their sovereign powers).

Libananco Holdings Co. Limited v. Turkey, Decision on Preliminary Issues, 23 June 2008, para. 79.

The Tribunal cites no authority for these principles, presumably because they are self-evident ground norms. The idea that there is a duty to arbitrate in good faith is well-established (see Born, International Commercial Arbitration at pp. 1008-1014) and, in the investment treaty context, has been recognized in other investment treaty awards (for example, see Methanex Corporation v. United States of America, Final Award, Part II – Chapter I, para. 54 at p. 56). The second principle flows as a necessary incident of a tribunal’s jurisdiction and is implicit in arbitration rules that allow a tribunal to make decisions regarding the conduct of the arbitration proceedings.

If we accept that there is an obligation to arbitrate fairly and good faith, does that duty also apply to the making of a claim, or does it apply only to the procedural obligations that come with an agreement to arbitrate (i.e. co-operation and conduct in the proceedings)? Here I am thinking of Phoenix v. Czech Republic where the Tribunal referred to the principle that in order to have access to ICSID arbitration, investments must be made in good faith. The Tribunal referred to Phoenix’s “initiation and pursuit of this arbitration” as “an abuse of the system of international ICSID investment arbitration” (para. 144). The Tribunal found an abuse of rights by the Claimant’s “creation of a legal fiction in order to gain access to an international arbitration procedure to which it was not entitled” (para. 143). Phoenix, however, is unlike cases such as Inceysa or Fraport, where there was misconduct (fraud and illegality respectively) in the initial investment. In Phoenix, the Tribunal characterized the claimant’s wrong as a “détournement de procédure”, but the good faith issues in Phoenix are unlike those in Libananco, Quiborax or Methanex, where the issue was party conduct during the proceeding.

The obligation to arbitrate fairly and good faith identified in Libananco applies to party conduct during the proceedings. With respect to the investor’s conduct in bringing a claim, good faith and other concepts, such as abuse of process, abuse of rights and détournement de procedure, may be relevant either as jurisdictional impediments (as suggested in Phoenix) or as issues of admissibility of claims (see my earlier post).

Given that the arbitration clause is often relegated to the status of boiler-plate during contractual negotiations, it will come as no surprise that arbitration clauses may be inadequately drafted. While not every clause will be so deficient as to be ‘pathological’, many readers of this blog will have first-hand experience of dealing with the fall-out from an arbitration clause which has suffered from ambiguities in drafting or a lack of comprehensiveness of thought.

The ‘IBA Guidelines for Drafting International Arbitration Clauses’, recently published in draft form (at http://www.ibanet.org/LPD/Dispute_Resolution_Section/Arbitration/Default.aspx) will surely improve appreciation of the complexities surrounding this indispensible clause. The draft Guidelines are the IBA’s latest addition in their growing, influential contribution to international arbitration, already comprising the ‘Guidelines on Conflicts of Interest in International Arbitration’, the ‘Rules on the Taking of Evidence in International Arbitration’ and ‘Rules of Ethics for International Arbitrators. The draft Guidelines are now open for comment from the wider international arbitration community.

The Guidelines comprise a series of rules or ‘guidelines’, followed by model clauses which put into practice the advice given in relation to each of the Guidelines. The Guidelines are wide-reaching in scope and not only offer advice in relation to generic arbitration clauses, but also deal with more specific clauses and situations, including multi-tier dispute resolution clauses, arbitration clauses for multi-party contracts, and arbitration clauses in the multi-contract context.

One recurring theme is the need for certainty and to agree on as many elements in the arbitration clause as possible in advance, rather than waiting for a dispute to materialise when agreement between the parties on such matters may be less forthcoming. The greater degree of certainty embodied in a comprehensive arbitration clause allows the parties to consider the strategy to adopt in resolving disputes and, in theory at least, a more efficient means to obtaining a final and binding decision.

The guidelines consider the different choices made by international parties. Guideline #1 commences with the choice between institutional and ad hoc arbitration and concludes in favour of institutional arbitration. Guideline #2 emphasises the availability of UNCITRAL rules if ad hoc arbitration is chosen and the importance of choosing an arbitral institution as the appointing authority. Of course some institutions will administer arbitrations under UNCITRAL rules (eg the LCIA). There have even been some more unusual examples of one institution administering arbitrations under the rules of another institution (such as SIAC administering arbitration under ICC rules in Alstom v Insigma SGCA [2009] 24). In the event parties do opt for ad hoc arbitration, Guideline #2 provides a detailed recommended clause.

Guideline #3 also encourages parties not to limit the scope of the disputes which will be subject to arbitration. While in certain circumstances parties may have good reasons to exclude some disputes from the scope of the arbitration clause, even carefully drafted exclusions can lead to jurisdictional problems.
It is clear from the commentary to Guideline #4 that the task force has given careful consideration to the important distinction between the parties’ choice of “seat”, or juridical place of an arbitration and the choice of logistical venues for hearings.

The other Guidelines #5 to #8 comment on key considerations for parties drafting an arbitration clause, including the method of selection of arbitrators and choice of the rules of law governing the contract.
After the principal drafting issues, the Guidelines provide recommended clauses for optional elements, such as:

• Provisional and conservatory measures (the authority of the arbitral tribunal and of the courts)
• Document production
• Confidentiality
• Allocation of costs and fees
• Qualifications required of arbitrators
• Time limits
• Finality

The Guidelines warn of the dangers in limiting these optional elements but recognise that corporate choice may lead to specific drafting requirements.

The Guidelines also consider arbitration clauses for multi-tier, multi-party and multi-contract dispute resolution. The authors of the Guidelines recognise that such clauses present specific drafting challenges and set out the issues to be considered and recommended clauses.

The draft Guidelines, developed by arbitration practitioners, will be complemented by the results of the empirical study being conducted by the Queen Mary University of London School of Arbitration of the factors that influence corporate choices in international arbitration, which is being sponsored by White & Case LLP. The study is currently in its data-gathering phase and can be accessed at http://www.arbitrationonline.org/survey/. The survey targets in-house counsel with substantial experience of arbitration (as a guide, about five years in-house experience – although this is not a strict requirement).

The study will provide invaluable insight into the corporate decision-making in this area, identifying issues that influence corporate choice in many of the factors raised by the draft Guidelines. The results of previous studies align with many of the Guidelines’ recommendations, such as the conclusion in favour of institutional rather than ad hoc arbitration. Readers are encouraged to bring this survey to the attention of suitable in-house counsel.

Phillip Capper, Clare Connellan, Morris Schonberg
[White & Case LLP partner and global head of international arbitration, Paul Friedland, was Chair of the IBA Task Force on Drafting International Arbitration Clauses]

I am grateful to Professor Hess for his comments on my 3 March 2010 blog. It greatly contributes to advancing the debate. However, it also perfectly illustrates the difficulties of a proposition – the total or partial deletion of the arbitration exception in Regulation 44/2001 – that has not been sufficiently thought through.

1. Professor Hess now introduces a very significant change in the Heidelberg proposal.

In his 14 February post on ConflictsofLaw.net, he had acknowledged that “the proposal of the Heidelberg Report to delete the arbitration exception entirely maybe goes too far”.

Professor Hess now proposes for the first time an alternative to the Heidelberg proposal by drafting Article 1-2 (d) of the Regulation as follows “The Regulation shall not apply to… (d) Arbitration, save supporting measures and declaratory relief proceedings as provided for under Articles 22(6), Article 27A and Article 31”.

In other words, the arbitration exception would not de deleted, as initially proposed by the Heidelberg Report, but maintained, save for ancillary proceedings (proposed new Article 22(6)), for the proposed new declaratory action (new Article 27A), as well as for provisional and conservatory measures (Article 31).

The question which immediately arises is therefore: what about court decisions which do not fall within the three limited exceptions to the exception? Will a court decision on the validity of an arbitration agreement or of an award still be excluded from the scope of the Regulation?

Normally, one would tend to answer positively to that question. If the arbitration exception is maintained (although with limited exceptions), it is hard to see why a judgment annulling an award should be recognized under the Regulation. Putrabali would thus survive to the new Regulation.

And what about a judgment on the validity of the arbitration agreement? Here, a distinction would have to be made.

In case of a judgment rendered at the seat of the arbitration in the context of the proposed new declaratory action, one would have to admit, under the amended Hess proposal, that it should be recognized under the Regulation.

If, on the contrary, the judgment is not rendered at the seat (or rendered at the seat but not in the context of a declaratory action), what would the situation be?

Then, March Rich is likely to survive.

If the main scope of the action giving rise to the judgment is the validity of the arbitration agreement, the judgment would thus presumably fall outside the scope of the Regulation.

But the situation would be more difficult in the case of an interim judgment on the validity of the arbitration agreement rendered by a court seized on the merits. There, as it is known, the Court of Appeals of Paris answered by excluding the application of the Regulation in Fincantieri (Paris, 15 June 2006, Legal Department du Ministère de la Justice de la République d’Irak v/ Sociétés Fincantieri Cantieri Navali Italiani, Finmeccanica et Armamenti e Aerospazio, Rev. Arb. 2007.90, note Bollée), while the English Court of Appeals admitted that the Regulation is applicable in Endesa (National Navigation Co c. Endesa Generacion SA, [2009] EWCA Civ 1397 ). Which of those two solutions should prevail?

Professor Hess, however, seems to follow an entirely different line of reasoning. He in fact rejects my proposal for a safeguard clause inspired from Article IX of the Geneva Convention (new Article 34A). Let me recall that my proposed clause would read as follows:

“A judgment shall also not be recognized:

(a) if it has been rendered in disregard of a valid arbitration agreement that is valid under the law of the country of recognition;
(b) as regards judgments rendered on the validity of an award, if (i) it has not been rendered by the courts of the country where the arbitration has its seat, or (ii) in case of annulment of the award, if it was not made on one of the grounds set out in Article V(1)(a) to (d) of the New York Convention”.

Such proposal was made on the assumption that the arbitration exception would be entirely deleted, with the consequence that a judgment rendered in a Member State deciding on the validity of an award would fall within the scope of the Regulation and would have to be recognized (possibly with no formalities or requirement of exequatur under the new regime).

It would however become unnecessary in case the arbitration exception is maintained with limited exceptions, as suggested by Professor Hess. In such case, a judgment deciding on the validity of an arbitral award should in fact fall outside the scope of the Regulation and have to be recognized under the general private international rules of the country of recognition.

Professor Hess, however, does not reject my proposal on the basis that it becomes unnecessary under the limited arbitration exception that he suggests.

In order to justify his rejection of such a provision, Professor Hess states that it would “completely runs counter the objective of the ongoing reform of Brussels I which shall reduce the grounds of non-recognition and replace exequatur proceedings by the principle of mutual trust”.

One has therefore to understand that, under Professor Hess proposed limited arbitration exception, a judgment rendered in a Member State on the validity of an arbitral award would have to be recognized under the principle of “mutual trust”.

Why it should be so is unclear. But if this assumption is correct, and although Professor Hess declares that he “[does] not want to discuss the issue in more detail”, the question deserves much more attention.

For example: under the New York Convention, awards may be annulled at the seat, and courts in other countries may only refuse recognition on the limited grounds provided in Article V. Let us now imagine a Member State court in a country other than the seat of the arbitration which would annul a foreign award. This is by no means an unimaginable situation. It has occurred in India and elsewhere (See recently: Venture Global Engineering v. Satyam Computer Services Ltd, Supreme Court of India, 10 January 2008). Under Professor Hess’ suggestion (if I understood him well), such a decision would have to be automatically recognized under the Regulation in all other Member States. I trust that Professor Hess will accept that this would be plainly incompatible with the New York Convention.

Second example: a court in a EU Member State where the seat of the arbitration is located and which is also a member of the Geneva Convention of 1961 annuls an award for reasons not contemplated by Article V (1) (a) to (d) of the New York Convention. Recognition of said decision is sought in another Member State which is also a party to the Geneva Convention. Based on the principle of “mutual trust”, automatic recognition would prevent the enforcement of the arbitral award, in breach of Article IX of said Convention when applicable.

It is thus evident that, if the arbitration exception is to be totally or partially deleted in a way that would include judgments on the validity of an arbitral award in the scope of the Regulation, exceptions would need to be framed in order to make the Regulation compatible with the New York and Geneva Convention and to take into account the specificities of arbitration.

2. Let us now turn to the other punctus doli of the Hess/Heidelberg proposal: the automatic lis pendens provision of Article 27 and the proposed declaratory action.

I have expressed the legitimate concern that the proposed new Article 27A will not be compatible with the negative effect of Kompetenz-Kompetenz, as it is applied for example in France.

I have accordingly proposed to vary the proposed new Article 27A of the Regulation as follows:

“A court of a Member State shall stay the proceedings once the defendant contests the jurisdiction of the court with respect to the existence and scope of the arbitration agreement (i) if a court of a Member State that is designated as the place of the arbitration is seized for declaratory relief in respect to the existence, the validity, and/or scope of that arbitration agreement, or (ii) if a judge at the seat of the arbitration has been seized to put the arbitration in motion or has been seized of a difficulty relating to the constitution of the arbitral tribunal, or (iii) if an arbitral tribunal, sitting in or outside the European Union, has been seized of said question”.

Professor Hess maintains that “French procedural law explicitly provides for declaratory relief in the context of arbitration (if the juge d’appui finds the clause is manifestly void)” and adds that “it seems to me possible that a French juge d’appui who is seized by a party under Article 22 (6) JR will stay his proceedings and send the parties to arbitration”. Professor Hess adds that “If the arbitral tribunal finds that the clause is effective, it may give an interim award. The French juge d’appui can endorse the award (by a declaratory judgment). This judgment will be recognized in all other EU-Member States and the prevalence of the arbitration proceedings will be assured”.

Such statements are a bit confusing. As explained in my blog, proceedings before the juge d’appui are my no means comparable to declaratory proceedings. The juge d’appui does not take any decision on the validity of the arbitration agreement. He just puts the arbitration in motion (for example by appointing an arbitrator) unless the arbitration agreement is manifestly null and void. If the judge is seized on the merits, he will decline jurisdiction (not stay his proceedings) and refer the parties back to arbitration unless the clause is manifestly null or inoperative. There is no possible “stay” of the proceedings before the juge d’appui. Either the arbitration agreement is manifestly null or inoperative, and he will not put the arbitration into motion, or it is not, and he will send the parties to submit their jurisdictional objections to the arbitral tribunal.

Whatever Professor Hess meant in his analysis of the situation before the French juge d’appui, he seems to be in agreement that, in presence of an action in the merits before a Member State court where it is argued that the arbitration agreement is null and void, or even manifestly null and void, a judge in another Member State where the arbitration has its seat could nevertheless put the arbitration in motion by for example appointing an arbitrator. In such a scenario, the arbitration could proceed with no need for the judge to “endorse the award by a declaratory judgment” along the lines suggested by Professor Hess.

This is welcomed and – if this understanding is correct – Professor Hess should agree that Article 27A should be amended as suggested above.

3. I also have pointed out that the proposed declaratory action will not prevent situations of lis pendens between an action in the merits in breach of an arbitration agreement and an action to enforce an award in a country other than the seat, thus de facto obliging the parties to return to the old requirement of double exequatur that he New York Convention has suppressed.

To that effect, I have proposed a new Article 27B drafted as follows: “Article 27 shall not apply to the court of a Member State requested to enforce an arbitration award”.

Professor Hess did not comment this proposed new article. I hope he is also in agreement with this proposal.

4. Finally, I would like to make some comments on Eco Swiss and the public policy defense to enforcement, as this issue seems to be at the root of our disagreements.

Professor Hess maintains that “the objective of the NYC is certainly to provide for a uniform regime on the recognition of arbitral clauses and awards”. With due respect, I disagree. The scope of the NYC is to provide for a minimum threshold of recognition, not to unify the regime of recognition of arbitral clauses and awards.

Professor Hess then wonders “whether the EU-Member States are still free to interpret and apply the public policy exception of Article V NYC individually”. Professor Hess’ answer to that query is that: “the public policy clause of Article V (1) (c) of the New York Convention must be interpreted coherently within the EU” and that “eventually, the courts of the Member States must refer questions on the interpretation of mandatory EU law to the ECJ (Article 267 TFEU)”.

This calls for two observations.

First: as a general matter, I of course agree that, within the EU, courts should as much as possible apply EU mandatory laws in a coherent and uniform manner.

But, with due respect, this is not the issue which is debated with respect to the application of the public policy exception in the context of courts review of arbitral awards.

The true issue is that of procedural autonomy, i.e. whether Members States can be more or less intrusive in their review of arbitral awards. As I have shown in a recent study (note to SNF v Cytec, Cass. 4 June 2008, Clunet 2008, 1107), most jurisdictions in the EU would set aside an award only in case of a manifest or a flagrant breach of public policy (like in the Thalès case, a decision which is criticized by some, but which is rightly approved by most, including by such authors as Professor Schlosser, see: Articles 81 and 82 EC Treaty and Arbitration: a German perspective, Cahiers de l’arbitrage, 2009-1, p. 22,).

This is not the place to discuss whether this is appropriate and compatible with EU law. My view is that Eco Swiss permits Member States to restrict their review of awards. Eco Swiss, in deciding that courts must quash an award based on EU public policy if they would quash it based on their domestic public policy, sets a rule of equivalence according to which EU mandatory rules should not be treated differently than EU public policy. It thus permits courts to exercise limited review (or no review at all) of the compliance of an award to both domestic and EU mandatory rules.

Second: It is hard to understand why the need for a coherent and uniform enforcement of EU mandatory laws by courts within the EU is at all relevant in the context of a debate on the revision of the Regulation and the possible suppression of the arbitration exception.

The Heidelberg proposals (in their original version or as they are now amended by Professor Hess) provide no answer to that question because the scope of the Regulation is procedural and does not address issues of substance. Under the Regulation as it could to be amended by the suppression of the exequatur (an evolution that Professor Hess seem to welcome), a judgment having disregarded EU mandatory laws would have to be recognized exactly like a judgment having made a correct application of the same.

Likewise, the Regulation does not address referrals under Article 267 TFEU.

Those issues may be interesting in the context of a discussion on a new instrument providing for a uniform regional regime on arbitration, but they are entirely irrelevant to the revision of the Regulation.