An interesting issue regarding the enforceability of foreign arbitral awards, in relation to the provisions of the New York Convention of 1958 and its alleged conflict with domestic Greek Civil Code provisions in relation to conflict of laws and public policy doctrines arose in Greek jurisdiction. The matter is of specific interest as the dispute went all the way up to the Supreme Court for determining the viability of enforcing the particular foreign arbitral award in Greece.

The actual arbitration dispute arose in late 2004 in relation to a distribution agreement of 1998 between an American and a Greek company regarding medical equipment. The parties’ contractual arbitration clause called for an arbitration proceeding under the auspices of the International Center for Dispute Resolution of the American Arbitration Association. Both parties expressly submitted to arbitration after the dispute arose, and recognized the competence of the appointed sole arbitrator (the “Arbitrator”) to decide the matter.

The Claimant (the American company) filed a claim for the amount of 1.062.655,33 US$ while the Respondent (the Greek company) counter-claimed unspecified damages estimated at the time of filing to be between 1-5 million US$. The arbitration hearings took place between 15-18 August 2005 in the USA, and an interim decision was issued by the Arbitrator on the acceptance of the change of the claimant’s company name, which took place at that time. On 6 September 2005 a final reasoned arbitration award was issued. The Arbitrator decided in favor of the Claimant and determined that the total amount due to the Claimant was 1.137.117,00 US$.

When the Claimant attempted to enforce the award in Greece on the basis of the provisions of the NY Convention of 1958, it was met with resistance by the Respondent who filed various objections against its enforceability. Thus the matter went through all instances of civil courts’ jurisdictions in Greece and found its way to the highest level (Areios Pagos/ Supreme Court) in civil law matters.

The Supreme Court was called to examine various alleged legal flaws and issued a comforting decision to proponents of ADR of both domestic and international level, as it highlighted and supported the viability of enforcing foreign arbitral awards in Greece, a matter that for a number of years has been in real need of such clarification from the highest judicial body, for securing the smooth foreign arbitration awards enforcement in Greece.

The Supreme Court’s approach on the issues before it, which concentrated on whether there were any legal flaws in the earlier Court of Appeal’s ruling, was rather careful and well-balanced. The Court made it quite obvious from the beginning of its rationale that the purpose of the proceeding was not to re-examine the arbitral award on the merits, as an “appeal” against it is not allowed by law. Furthermore, the Court noted that the three-month deadline following the issuance of the foreign arbitral award had elapsed with neither party filing a request for rectification or vacation as provided by the relevant Affidavit and Rules of the International Center for Dispute Resolution of the American Arbitration Association.

As such the Court went through the various objections made by the Respondent on the issues related to the actual enforceability of the award in Greece, namely that the enforcement of the award violates the provisions of article 5(2)(b) of the NY Convention of 1958, and is against the public policy of Greece, and rejected, ab initio, the following three objections made by the Respondent holding that as per the earlier Court of Appeal’s decision that they did not relate to enforcement issues per se but rather attempted to re-examine the issues on the merits, namely:

a. that the arbitration award failed to take into account the provisions of Article 81 of the EEC which prohibits discriminative policies and hindrance of competition in terms of invoicing policies.
b. That the arbitration award violated the Directive 86/653 EC and the Greek Presidential Decree 219/1991 regarding damages afforded to distributors.
c. That the contractual party in the Distribution Agreement was a different entity to the company that acted as the Claimant in the actual arbitration proceeding.

The Court therefore turned its focus on the Respondent’s objection that

a. the arbitration award lacked reasoning and;
b. the scope of the arbitration clause did not encompass the dispute at issue and therefore that the Arbitrator lacked or exceeded its competence in determining the matter and issuing the arbitration award.

The Supreme Court focused on the earlier determination of the Court of Appeal’s decision and while it held that it partially and indirectly violated the relevant conflict of laws and public policy provisions of both the NY Convention of 1958 and the Greek Civil Code by failing to actually examine the above allegations in full prior to issuing its decision, it still affirmed the earlier ruling and held in favor of the enforcement of the foreign arbitral award as it determined that no conflict of laws or public policy considerations should preclude its enforcement. The Court found that the allegations on lack of reasoning and lack of “competence” relating to the arbitration proceeding were unsubstantiated and dismissible. In doing so the Supreme Court confirmed the enforceability and proper application of international arbitration principles and norms in the Greek jurisdiction and fortified the viability and effectiveness of international ADR proceedings in Greece.

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

In the aftermath of the turmoil West Tankers has created in the arbitration community, the Cour de cassation has confirmed France’s reputation as being an arbitration-friendly jurisdiction by holding that anti-suit injunctions are not contrary to international public policy.

A French company (In Zone Brands Europe) had entered into an exclusive distribution agreement of beverages with an American company (In Zone Brand International). The contract granted jurisdiction to the courts of Georgia (USA). After the termination of the agreement by the American company, the French distributor and Mr X., President of In Zone Brands Europe sued it for damages before the Tribunal de commerce of Nanterre (France), whose jurisdiction was challenged by the American party. In parallel, In Zone Brand International seized the Superior Court of Cobb County, Georgia (USA). In a judgment dated 3 March 2006, the American judge issued an anti-suit injunction ordering the French party to discontinue the proceedings before the French courts and held that the French company owed monies to the American one. In Zone Brand International then sought recognition and enforcement (“exequatur”) of the American judgment (i.e. the anti-suit injunction) in France. On 17 April 2007, the Cour d’appel of Versailles upheld the decision of the first instance judges and recognised the anti-suit injunction granted by the Superior Court of Cobb County. On 14 October 2009, the Cour de cassation confirmed this ruling. (1)

The French Supreme Court approved the anti-suit injunction on the ground that “n’est pas contraire à l’ordre public international l’”anti suit injunction” dont, hors champ d’application de conventions ou du droit communautaire, l’objet consiste seulement, comme en l’espèce, à sanctionner la violation d’une obligation contractualle préexistante.” (2)

The judges’ reasoning consisted in verifying whether the three conditions required for enforcement of foreign decisions (as set forth by the last French Supreme Court case rendered in that respect) were fulfilled: (3) (i) the absence of fraudulent avoidance of the normally applicable law, (ii) the evidence of a sufficient link between the dispute and the foreign court having rendered the judgment subject to recognition and enforcement proceedings, and (iii) the enforcement of the judgement is not contrary to international public policy. Concerning the first condition, the Court has pointed out that “no fraud could arise out from seizing a court which has been expressly agreed to have jurisdiction“.

The claimant alleged that forbidding a party to refer to French courts was an infringement of sovereignty, as the French judge was denied the right to decide on its own jurisdiction. The Cour de cassation noted that such was not the case: none of the party is deprived of its right to a judge, for the very reason that the purpose of the American judgement is to deal with its own jurisdiction and to hold that the jurisdictional clause binds the parties. There can be no violation of international public policy in an anti-suit injunction, whose purpose is to provide redress for the breach of a jurisdictional clause that has been agreed to in advance by the parties. A party who has agreed to refer to the American judge by a jurisdiction clause cannot change its mind; it is bound by its choice.

From a domestic point of view, this new decision clarifies the position of the Cour de cassation on the enforcement of anti-suit injunctions in France. It had previously held, indirectly but explicitly, that anti-suit injunctions infringed on foreign sovereignty, affected the jurisdiction of the courts of the relevant State. (4) However, two years before, it had allowed French judges to force a litigant to stop proceedings started abroad, so as to ensure the principle of universality of the bankruptcy. (5)

The judges’ reasoning, which gives precedence to the binding effect of contractual obligations over the French judge’s jurisdiction, is in line with the recent French case law which gives effect to the application of the doctrine of estoppel in France. (6) More generally, even if that case does not deal specifically with international arbitration, it is in line with the French tradition of party autonomy, respecting the parties’ will not to have their dispute settled before French judges.

The scope of recognition of the anti-suit injunction remains narrow. First, it is excluded from the scope of international conventions and of EC law. Secondly, the decision is limited to anti-suit injunctions whose purpose is to condemn the breach of contractual obligations.

This favourable treatment of anti-suit injunctions stands in stark contrast to the traditional European hostility to what is regarded as an essentially Anglo-Saxon speciality. This reluctance has in particular been recently affirmed by the European Court of Justice, in the famous West Tankers case. (7) The ECJ held that the courts of an EU Member State could not issue an anti-suit injunction to restrain proceedings in the EU brought in breach of an arbitration agreement. This would be contrary to the general principle that every EU court seized of a dispute must itself determine whether it has jurisdiction to resolve the dispute before it; and any alternative would be inconsistent with the mutual trust and confidence between Member States’ courts.

Nevertheless, the French judges have been careful, in the In Brand Zone case, to specify that the recognition of an anti-suit injunction is excluded from the scope of EC law in order not to be seen to contradict the West Tankers case. Even with such a narrow scope, one wonders whether, in practice, the French judges will not authorize such measures when the purpose of the anti-suit injunction is to enforce a jurisdiction or arbitration clause. It will not be the first time French judges have a “dissenting” case law (see the famous French case law on the recognition of an award annulled in its country of origin, from the Hilmarton to the Putrabali case). `

As the Cour de cassation has limited the recognition to anti-suit injunctions whose purpose is to punish the breach of a contractual obligation, it seems that anti-suit injunctions would not be granted enforcement when they aim only to punish abusive proceedings, irrespective of a jurisdiction or arbitration clause.

Unlike the West Tankers case and further to French case law tendency, the In Zone Brand decision is obviously based on the party autonomy principle, which French courts are keen to defer to the furthest extent possible. Now that the Cour de cassation has recognised anti-suit injunctions whose purpose is to condemn the breach of a contractual obligation, without limiting its reasoning to jurisdictional clauses only, there is no reason to believe that it will not extend its protection to arbitration clauses. Party autonomy has a bright future ahead in France, and parties should pay attention to what they agree to per contract, as French courts are less and less likely to tolerate their reneging on their commitments.

1. Civ. 1ère, 14 October 2009, pourvoi n° 08-16.369, In Zone Brands.
2. ‘An anti-suit injunction’ is not contrary to international public policy (not within the scope of application of international conventions or European community law), whose purpose is only, as in the present case, to sanction the breach of a contractual commitment.”
3. Civ. 1ère, 20 February 2007, pourvoi n ° 05-14082, Cornelissen.
4. Civ. 1ère, 30 June 2004, pourvoi n° 07-03.248, Stolzenberg.
5. Civ. 1ère, 19 November 2002, pourvoi n° 00-22.334, SA Banque Worms.
6. See, for instance, Civ. 1ère, 6 July 2005, Bull. civ. I, n° 302 ; Ass. Plén., 27 february 2009 : Bull. ass. Plén. n° 1 ; Civ. 1ère, 3 February 2010 (pourvoi n° 08-21.288).
7. CJCE 10 February 2009, aff. C-185/07, West Tankers.

In recent years, there has been increasing concern about court orders aimed at preventing a party from initiating, continuing or participating in arbitration proceedings (see notably, IAI Series on International Arbitration, no 2, Anti-Suit Injunction in International Arbitration, E. Gaillard ed., 2005; ICCA Congress Series, No 13 International Arbitration 2006, Back to Basics?, A. J. Van Den Berg, Kluwer Law Int 2007).

The Paris court of first instance (Tribunal de Grande Instance) has in recent months rendered two interesting decisions in this respect. These two decisions address the issue whether and to what extent French courts can interfere with the arbitral proceedings, in particular when relief is sought in summary proceedings on the basis of an alleged risk of imminent or irreparable harm. In both sets of proceedings, the arbitrators were directly sued.

The first of these two cases led to an order of the Paris court of 6 January 2010 (S.A. Elf Aquitaine and Total v. Mattei, Lai. Kamara and Reiner). The claim amounted to an aggressive attempt to derail an ongoing arbitration by requesting the court to enjoin the arbitrators from pursuing the proceedings. The underlying dispute in the arbitration was concerned with a cooperation contract concluded between Elf Neftgaz, a subsidiary of Elf Aquitaine, and certain Russian parties. The basis for the request was that a shareholders’ assembly of Elf Neftgaz had decided the liquidation of said company. The Russian parties subsequently made an application to the president of the Paris tribunal of commerce to appoint an ad hoc representative for Elf Neftgaz to the effects of the arbitration they were about to commence against such company. The court accepted such request and appointed an ad hoc representative for Elf Neftgaz. The arbitration commenced with its seat in Paris, and the court appointed representative nominated an arbitrator on behalf of Elf Neftgaz. However, the judgment having designated the ad hoc representative was thereafter retracted upon request of Elf Aquitaine. Although such decision was appealed by the Russian parties, Elf Aquitaine and Total seized the court in summary proceedings (référé) against the three arbitrators (who were the only named defendants) to obtain an injunction to interrupt the arbitration. The request was based on the contention that Elf Neftgaz’s arbitrator had been appointed by a representative deprived of powers and that the continuance of the arbitration in spite of the withdrawal of the court decision having nominated Elf Neftgaz’s representative would be such as to cause irreparable harm.

The case leading to the Paris First Instance Tribunal decision of 29 March 2010 (Republic of Equatorial Guinea v Fitzpatrick Equatorial Guinea, de Ly, Owen and Leboulanger) was concerned with a contract for the construction of a highway. A dispute arose between the parties, and Fitzpatrick initiated ICC arbitration. Like in the Elf case, the seat of the arbitration was in Paris. The Republic challenged the Arbitral Tribunal’s jurisdiction on the basis that the arbitral agreement and the laws of Equatorial Guinea imposed to exhaust local judicial remedies before arbitration could be initiated. The Republic also submitted that Fitzpatrick had been placed in insolvency proceedings in Equatorial Guinea and that only the receiver appointed by the local court had powers to represent it. The arbitral tribunal rendered a partial award upholding its jurisdiction, and proceeded to instruct the merits in the second phase of the arbitration. Meanwhile, the partial award was challenged before the Paris Court of Appeal. Based upon such challenge, the Republic made an application before the Arbitral Tribunal to stay the arbitration. The Arbitral Tribunal rejected such application and the Republic started summary proceedings to enjoin the arbitrators from continuing the arbitration until the Court of appeal decision in the setting aside proceedings.

Both sets of proceedings were initiated pursuant to article 809 of the Code of Civil Procedure, which provides that “The president [of the Tribunal of First Instance] may always, even if the request is subject to serious objections, order in summary proceedings such conservatory or protective measures that may be necessary to prevent imminent harm or to put an end to a manifestly illegal trouble”.

In the Elf case, the claimants alleged that the arbitration should not proceed for the judgment having designated the representative of a party had been retracted. As a consequence, the nomination of an arbitrator by such party was invalid, thus jeopardizing the entire constitution of the arbitral tribunal. The respondents objected that French law does not permit courts to deliver injunctions to an arbitral tribunal, and that based upon the negative aspect of Kompetenz-Kompetenz, arbitrators have exclusive jurisdiction to rule upon their own jurisdiction, the courts’ assessment being postponed until a possible challenge against the award, with the consequence that courts are deprived of any power to assess the arbitrators’ jurisdiction once the arbitral tribunal is constituted.

The court endorsed such arguments and decided that, once the arbitral tribunal is constituted, it is only for it to decide on its own jurisdiction, and that it is as a consequence for the arbitral tribunal to decide the consequences of the withdrawal of the court nomination of a party representative on the regularity of its own constitution: “notwithstanding the effect of the withdrawal of the order having designating the [party representative] and the irregular designation of two or three of the arbitrators, the question of the existence of this arbitral tribunal or of the regularity of its constitution falls exclusively within the jurisdiction of the arbitral tribunal, which excludes that the court be seized in summary proceedings”.

The court adopted the same principles in the Republic of Equatorial Guinea case.

The Republic argued that the arbitral tribunal manifestly lacked jurisdiction because the arbitral agreement and the local law requested exhaustion of local remedies. Based on such contention, it developed several arguments. First, it argued that it would suffer an imminent and irreparable harm if the arbitration were to proceed for the award on the merits would be rendered before the Court of Appeal has a chance to rule on the challenge against the interim award on jurisdiction. Although the claimant conceded that the award on the merits could not be enforced in France until such challenge is decided (in particular because the challenge stays the enforcement of the award under French law), it would nevertheless be faced with the risk of enforcement abroad. In addition, the ICC Court of Arbitration had requested the Republic to pay an additional advance on costs, which the Republic might not be able to recoup would the award be ultimately quashed. Finally, the Republic had lodged a criminal complaint on the ground of an alleged forgery, and it submitted that all proceedings should be stayed pending the criminal proceedings. The respondent raised a number of objections. First, the claim supposed that the court would express a view on the arbitral tribunal’s alleged lack of jurisdiction which had already been decided in the partial award, thus violating the res judicata of said award (awards have in France res judicata since they are rendered – Article 1476 of the Code of Civil Proceedings). Second, like in the Elf case, it submitted that the arbitral tribunal enjoys an absolute priority to decide issues relating to its jurisdiction. In addition, French courts are deprived of any jurisdiction to interfere with the arbitral proceedings and cannot give injunctions to an arbitral tribunal, even though it sits in France. Third, French law clearly sets the principle that a challenge against a partial award on jurisdiction does not stay the arbitral proceedings and the arbitral tribunal can therefore proceed to instruct the merits even though setting aside proceedings are pending (notably, Cass. 19 March 2002). Finally, the criminal proceedings that the Republic had instrumentally started do not have the effect of staying the arbitral proceedings (Cass. 25 October 2005).

The court rejected the application. It admitted that: “Article 809 of the Code of Civil Proceedings may be the basis for an order in summary proceedings [to prevent imminent harm or to put an end to a manifestly illegal trouble] even if the arbitral tribunal is already constituted and courts are deprived of jurisdiction to decide the dispute”. But such an order can only be taken “to secure the enforcement of the arbitral award” and the court can therefore not “order the arbitrators to stay the proceedings” as “to order such a measure would constitute an interference with the arbitral proceedings which does not fall within the jurisdiction of national courts, even in summary proceedings”.

These two decisions confirm in very clearly terms that in no circumstance is the court authorized to interfere in any manner with arbitral proceedings (in an earlier order dated 24 June 2004, the Court of Paris had already decided that “in no circumstance”, and “whatever the legal grounds invoked”, has the court any power to order an arbitral tribunal to stay its proceedings – TGI Paris, 24 June 2004, LV Finance Group, Rev. Arb. 2005, p. 1037).

In sum, French courts may only intervene in support of the arbitration and in the limited cases provided by the law. In no circumstance can they entertain instrumental claims aimed at staying or disrupting the arbitration.

A bon entendeur…

Alexis Mourre/Alexandre Vagenheim

Until very recently, the issue of moral damages had arisen in only a handful of investor-State disputes. However in 2008 and 2009 alone, no less than five arbitration awards discussed the issue. While some tribunals dismissed moral damages claims based on lack of evidence (Pey Casado v. Chile; Biwater v. Tanzania and Europe Cement v. Turkey) or lack of jurisdiction (Cementownia v. Turkey), in one such case, Desert Line Projects LLC v. Yemen, the Arbitral tribunal awarded an amount of US$1 million in compensation to a corporation. This post examines why and how arbitral tribunals established under investment treaties award monetary compensation for moral damages suffered by foreign investors as a result of treaty breaches committed by the host State of the investment (see, Patrick Dumberry, “Compensation for Moral Damages in Investor-State Arbitration Disputes”, 27(3) Journal of International Arbitration, 2010).

The basic principle of State responsibility is, of course, that a State must make full reparation for any injury (whether material or moral) caused to another State or a foreign investor. A tribunal should therefore award an amount of compensation that is exactly equivalent to the actual moral damage suffered and should not award a single dollar in compensation over and above that.

The concept of moral damage is, however, vague and may be subject to different interpretations. The same is true for the quantification of moral damages. Thus, under the exact same circumstances, a certain type of moral damage that is considered by one tribunal to be worth US$10,000 in compensation could very well be deemed worth US$100,000 by another. There are only a select few instances where a tribunal, such as the UNCC, is bound by strict guidelines determining in advance the amount of compensation to be awarded for certain specific types of moral damages (see, UNCC Governing Council Decision no. 3, S/AC.26/1991/3 (23 October 1991); UNCC Governing Council Decision no. 8, S/AC.26/1992/8 (27 January 1992). In all other cases where no guidelines exist, tribunals will necessarily have a great deal of flexibility and discretion to determine what amount should adequately compensate an investor for the moral damage suffered. How should tribunals then exercise such discretion? This is where the issue of culpa matters.

The Desert Line award’s reference to “the physical duress exerted on the executives of the Claimant” which “was malicious and therefore constitutive of a fault-based liability” (para. 290) suggests that the Tribunal considered Yemen’s fault when finding its international responsibility. Similarly, in his concurrent and dissenting opinion in the Biwater v. Tanzania case, Arbitrator Born referred to Tanzania’s “deliberate” conduct causing moral damages to the Investor (para. 33). These statements seem to suggest that fault or malice by the host State is a condition for an award of compensation for moral damage. It should be recalled, however, that the work of the I.L.C. on State responsibility has clearly adopted the concept of the “objective” responsibility of a State whereby “it is only the act of a State that matters, independently of any intention” (J. Crawford, I.L.C.’s Articles on State Responsibility, Introduction, Text and Commentaries, at p. 84). In my view, malice or any other intent is clearly not a necessary precondition for a tribunal to award compensation for moral damages.

The presence of culpa will undoubtedly, however, have an impact on a tribunal’s decision with respect to the consequences of responsibility. Thus, State’s fault or malicious intent will be taken into account by tribunals when they actually quantify the amount of compensation to be awarded to remediate moral damages. This has long been recognised in doctrine as well as by the I.L.C. Special Rapporteur Arangio-Ruiz in his Second Report on State Responsibility (Yearbook ILC, 1989, vol. II, Part one, at para. 145 and 180: “[I]it seems both logical and rational, as recognized by a number of authorities, that the presence or absence of fault, and, if there is fault, the degree of wilful intent or negligence, play some role in the determination of the degree of responsibility and therefore of the forms and degrees of the reparation due”).

Thus, the amount of compensation should be proportionate to the seriousness of the offence committed by a State and its degree of responsibility. A tribunal may award a greater amount of compensation for moral damages in a situation where the conduct of the State is especially malicious or shocking. Simple common sense would dictate such a solution. This does not mean that there exists any higher threshold for finding a breach of international law in the context of moral damages claims. In my view, it is undesirable that only “egregious” State behaviour should result in awarding compensation for moral damages.

One illustration of the approach proposed here is the 1992 case of Letelier and Moffitt where the ad hoc Commission established by the United States and Chile awarded more than US$1 million in compensation for moral damages to three individuals and their heirs. This case arose from the assassination in 1973 in Washington of Mr. Letelier, a Chilean opponent to the Pinochet regime living in exile in the United States, by Chilean secret police agents. In his own “separate concurrent Opinion” Arbitrator Orrego Vicuña indicated that Chile “ha[d] given important steps to satisfy the moral dimension of the human rights situations with which it has had to deal” and that “[t]his positive attitude ha[d] certainly a bearence on the determination of compensation for moral damages.” (UNRIAA, vol. XXV, p. 16). The Commission therefore seems to have taken into account the “positive attitude” of Chile since the regime change in 1990 by awarding less monetary compensation than it would have had otherwise.

Arguably, tribunals should not only take into account the “positive” attitude of States regarding foreign investors but also, quite logically, any other “negative” factors. Any particularly condemnable governmental actions toward a foreign investor could have a bearing on the quantification of the actual amount of compensation to be awarded for moral damages.

When awarding compensation for moral damages, a tribunal is therefore not only wiping out all the negative consequences of a wrongful act. It is also sometimes expressing its strong concerns about a State’s unacceptable treatment of foreign investors, a concern which can be expressed in monetary terms. In such a case, the amount of compensation is not only attributed to remediate damage but also to send a clear message to the host State. There are several earlier examples of international law cases where arbitral tribunals have awarded monetary compensation in circumstances akin to moral damages with the clear intent of condemning unacceptable State conducts (see, Moke v. Mexico, U.S.-Mexico Mixed Claims Commission, 1871, in J.B. Moore, History and Digest of the International Arbitrations, Vol. IV, 1898, p. 4311).

In my view, a tribunal expressing strong concerns about State actions through an award of compensation to remediate moral damages must be distinguished from the notion of punitive damages. The concept of punitive damages is not recognized under international law (I.L.C. Commentaries, p. 243). Investor-State arbitral tribunals have also refused to award punitive damages (see, CMS v. Argentina, at para. 404). On the one hand, a State is not being imposed an extra amount of compensation in addition to the actual damages suffered. The amount of compensation awarded is in fact equivalent to the actual damage. On the other hand, the goal of awarding compensation still remains to remediate the actual damage suffered; it is clearly not to punish the host State. It may be that the concept of “aggravated” damages would in fact be a better term to describe this situation.

The United States and Mexico signed the General Claims Convention of September 8, 1923 and thereby constituted the U.S.-Mexico General Claims Commission.* The Commission was asked to resolve all claims by U.S. and Mexican citizens against the other government for loss or damage to their person or property interests arising out of the period of political upheaval that followed a series of Mexican revolutions in the late 19th and early 20th Centuries. Perhaps the most cited opinion of the General Claims Commission is the one it issued in Neer v. United Mexican States, a denial of justice case brought by an American widow who alleged that the Mexican government violated international law when failing to dutifully prosecute her husband’s murderers. Neer v. United Mexican States, Doc. No. 136, Opinion (Oct. 15, 1926), reprinted in OPINIONS OF THE COMMISSIONERS UNDER THE CONVENTION CONCLUDED SEPTEMBER 8, 1923 BETWEEN THE UNITED STATES AND MEXICO 71-80 (1927) (hereinafter “OPINIONS”).

In Neer, the General Claims Commission was concerned with determining when a State can be held liable under international law for failing to provide adequate judicial remedies to protect the personal security of a foreigner. In numerous other opinions, however, the General Claims Commission commented specifically on when States can be liable under international law for impairing the contract and property interests of foreigners and thus, resolved claims more factually analogous to those arising under modern international investment agreements. Some of the most interesting of these opinions are those in which the Commission examined State responsibility for breach of contract under international law. Although these opinions are few among hundreds generated by the mixed claims commissions of the era, they provide guidance to modern practitioners attempting to distinguish between breach of contract claims that give rise to treaty violations and those that do not.

In Illinois Central Railroad Co. v. United Mexican States, the Commission considered Mexico’s motion to dismiss a claim for non-payment of monies owed on a contract for train engines on the grounds that claims for non-performance of contract obligations were not within its jurisdiction. See Illinois Central Railroad Co. v. United Mexican States, Doc. No. 432, Opinion ¶ 1 (Mar. 31, 1926), reprinted in OPINIONS 15 (1927). The Commission expressly disavowed a general rule that “mere nonperformance of contractual obligations by a government in its civil capacity withholds jurisdiction, whereas it grants jurisdiction when the non-performance is accompanied by some feature of the public capacity of the government as an authority.” Id. ¶ 4; (OPINIONS at 16). Instead, it interpreted Article I of the General Claims Convention as containing a broad grant of jurisdiction over “all claims” of an international character, including contract claims by a citizen of one country against the government of another country that are governed purely by municipal law. Id. ¶ 6; 17-18. Therefore, notwithstanding its decision to exercise jurisdiction over contract claims, the Commission expressly rejected the notion that international liability will necessarily follow from a government’s decision to exercise some sovereign prerogative when breaching a contract.

Against this backdrop, the Commission considered a claim for loss and damage flowing from Mexico’s alleged non-performance of a contract for dredging the port of Salina Cruz in North American Dredging Company of Texas v. United Mexican States. See North American Dredging Co. of Texas v. United Mexican States, Doc. No. 1223, Opinion (Mar. 31, 1926), reprinted in OPINIONS 21 (1927). The Commission found that it had jurisdiction to consider breach of contract claims based on its holding in Illinois Central Railroad, but dismissed the claim without prejudice because of the existence of a Calvo clause in the contract. The Calvo clause expressly deprived the contractor and its agents “of any rights as aliens” and prevented requests for diplomatic protection in relation to the contract. Id. at 22. Most international authority rejects the Commission’s conclusions regarding the validity of the Calvo clause, but the Commission’s insistence that the clause did not deprive the claimant of all international law remedies is instructive. See 1 ROBERT JENNINGS & ARTHUR WATTS, OPPENHEIM’S INTERNATIONAL LAW 931 (9th ed. 1992). The Commission reasoned that such clauses could not eliminate a national’s right “to apply to his own Government for protection if his resort to the Mexican tribunals or other authorities available to him resulted in a denial or delay of justice as that term is used in international law.” North American Dredging, ¶ 14; 27. With this, the Commission recognized that if a State fails to provide foreign nationals with minimum procedural guarantees for resolving breach of contract claims against it in its courts, international liability might lie.

The Commission reexamined the validity of the Calvo clause several years later, and in so doing, commented more directly on when a State can be liable at international law for contract claims. In International Fisheries Co. v. Mexico, the Commission considered a large claim arising out of Mexico’s cancellation of a concession contract for canning factories and fish markets. See International Fisheries Co. v. United Mexican States, Doc. No. 625, Opinion (July 1931), reprinted in OPINIONS 217-18 (1931) (upholding the validity of the Calvo clause notwithstanding a vehement and wide-ranging dissent by the U.S. Commissioner, Fred K. Nielsen). Mexico cancelled the concession by administrative decree after concluding that International Fisheries had failed to establish these factories and markets within the contractually agreed time-frame. The U.S. Agent urged the Commission to hear International Fisheries’ claim on the grounds that the decree constituted an arbitrary repudiation of contract and maintained that the only lawful way for Mexico to have terminated the contract was through its courts. Relying on a 19th Century note from the U.S. Secretary of State to one of his “Ministers,” the majority of the Commission held that the administrative decree could not be construed as arbitrarily repudiating or nullifying the contract, because the cancellation was pronounced in conformity with the contract’s terms. Id. at 218-19. In the Commission’s view, an “international delinquency” could not arise from a plain and simple notice by a government to its concessionary that the contract had been breached, even if that notice was communicated by fiat. Id. at 219. Thus, the Commission insisted that a State can rescind a contract by decree, according to the contract’s express terms, without creating a cause for international action.

Oppenheim’s International Law explains that “[i]t is doubtful whether a breach by a state of its contractual obligations with aliens constitutes per se a breach of an international obligation, unless there is some such additional element as denial of justice, or expropriation, or breach of treaty, in which case it is that additional element which will constitute the basis for the state’s international responsibility.” OPPENHEIM’S INTERNATIONAL LAW at 927. But identifying precisely what “additional elements” turn a State’s breach of contract into a treaty claim is not always clear. Some suggest that international responsibility should lie when a State exercises its sovereign power to repudiate a contract. See OECD DIRECTORATE FOR FIN. AND ENTER. AFFAIRS, WORKING PAPERS ON INTERNATIONAL INVESTMENT, No. 2006/3, INTERPRETATION OF THE UMBRELLA CLAUSE IN INVESTMENT AGREEMENTS 8 (2006). The opinion of the General Claims Commission in International Fisheries Co. suggests otherwise, at least when that repudiation is effected according to the terms of a particular contract provision. The General Claims Commission opinion in North American Dredging merely articulates the rule that international liability will lie when a sovereign breaches a contract with a foreign national and then denies the foreigner justice in its courts. While the Commission expressly disavowed its ability to draw a bright line between contract breaches that give rise to international responsibility and those that do not in Illinois Central Railroad, its subsequent opinions provide some guidance as to where such a line might be drawn.

Jennifer Thornton
*The author, Jennifer Thornton, is an Attorney-Adviser in the Office of the Legal Adviser at the United States Department of State, Office of International Claims and Investment Disputes. The views in this article are those of the author and do not necessarily reflect those of the U.S. Department of State or the U.S. Government.

Dispute resolution clauses often provide for negotiations, conciliation or a similar procedure before arbitration. Both UNCITRAL Model Law on International Commercial Arbitration and the Russian law contain no provisions on the legal effect of the pre-arbitration procedure of dispute settlement. In particular, they are silent on whether its non-fulfillment precludes the arbitral tribunal’s competence. Accordingly, state courts have to determine whether and where a failure to comply with such procedure forms grounds for refusal to enforce an arbitral award.

Sometimes in cases on foreign or domestic arbitral awards’ enforcement, or on setting aside domestic awards, debtors argue that the case was heard on the merits and the award was rendered by the arbitral tribunal despite the claimant’s non-compliance with the mandatory pre-arbitration procedure of dispute resolution agreed upon by the parties. As it is clear from the examples given below, Russian courts acted on the assumption that the issue of the parties’ compliance with the pre-arbitration procedure falls within the competence of arbitrators.

This issue was firstly considered by Russian courts in 2002. The Arbitration court at the Geneva Chamber of Commerce and Industry on April 6, 2000 obliged the Russian CJSC Neftekhimeksport to pay to the Swiss Cargill International S.A. over US$17 mln., including the indebtedness under the purchase agreement, penalty, interest and arbitration costs. The debtor did not execute this award voluntarily, and the creditor applied before the Moscow city Court to enforce the award (at that period the courts of general jurisdiction were competent to deal with such applications). The agreement provided that, should the parties fail to come to a mutually acceptable solution, the dispute shall be referred to a mediator to be appointed by the Geneva Chamber of Commerce and Industry. If such mediation does not result in a written settlement of the dispute within two months since the appointment of the mediator, any such dispute shall be finally resolved in accordance with the Arbitration Rules of the Chamber of Commerce and Industry of Geneva. The debtor declared that the creditor had not abided with the mediation clause. In the debtor’s opinion, the award as rendered could not be enforced under Article V(1)(c) New York Convention in respect of the dispute that is not covered by the arbitration clause.

The court rejected this argument and granted the award’s enforcement (case No. 5-Г02-23). The Supreme Court upheld the ruling and said that the pre-arbitration dispute settlement provisions do not form part of the arbitration agreement.

In 2005 a case of claimant’s failure to comply with the pre-arbitration procedure was heard by the Moscow Commercial Court which reached the same conclusion; however it took into account another significant aspect, this time of a procedural nature. The ad hoc arbitral tribunal in Stockholm, acting in accordance with the UNCITRAL Arbitration Rules, heard the dispute and rendered an award on recovery against OJSC Moscow Oil Refinery in favor of the Joy-Lad Distributors International Inc. (USA) of a penalty exceeding US$28 mln., interest and arbitration costs.

The contract provided: “The Parties shall take all necessary measures to settle any disputes, disagreements or claims which may arise out of or in connection with the present agreement, by mutual consultations. Should the Parties fail to reach an agreement on the said issues, then, with the exception of submission to courts of general jurisdiction, they shall be heard in the arbitration court of the city of Stockholm (Sweden) in accordance with the UNCITRAL Arbitration Rules (1976)”. The Stockholm Chamber of Commerce was specified as the competent body.

The court granted the enforcement and held: “In compliance with Article 30 of the UNCITRAL Arbitration Rules (1976), a party who knows that any provision of, or requirement under, these Rules has not been complied with and yet proceeds with the arbitration without promptly stating his objection to such non-compliance, shall be deemed to have waived his right to object”. The court found out that the defendant did not raise such objection in arbitration and thus have waived his right to object (case No. А40-64205/05-30-394). The higher court upheld the ruling.

In this case the non-compliance with the pre-arbitration procedure would have been impossible to prove anyway as its wording is too vague. Yet it is noteworthy that, unlike the Supreme Court in the aforementioned case, the Moscow Commercial Court found it necessary to determine whether the defendant had objected to non-compliance with the pre-arbitration procedure in the course of the arbitration proceeding.

Article 4 of the Law on International Commercial Arbitration is analogous to Article 30 of the UNCITRAL Arbitration Rules. Therefore, irrespective of the applicable arbitration rules, the defendant who failed to refer to the pre-arbitration procedure in the course of the arbitration proceeding, shall be considered to have forfeited the right to make such reference in future. Such approach appears reasonable.

In 2007 the Russian commercial courts addressed the issue of whether the failure by a claimant to comply with the pre-arbitration procedure might constitute a ground for the arbitral award’s cancellation. The International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (“the ICAC”) in 2006 issued an award (case No. 26/2006) on recovery from LLC Dunapak-Ukraine in favor of the Russian OJSC Oskoltsement of an amount about 2,300,000.00 roubles plus arbitration costs. The debtor applied to the Moscow Commercial Court to set aside the award.

The agreement between the parties stipulated that, if the parties fail to settle the disputes within 30 days since the start of the negotiations, such dispute shall be referred to the ICAC. The debtor argued that the parties had entered into a supplement agreement, and that the award creditor had not filed any demands in respect of performance of its terms and conditions but had filed a claim directly to arbitrate. In the debtor’s opinion, it proved that the pre-arbitration procedure was not adhered to, and that the dispute did not fall within the arbitration agreement, and hence the award was to be set aside. Nevertheless, the courts of first and cassation tiers in 2007 (case No. А40-15779/07-40-156) dismissed this argument stating that the issues of performance by the parties of the contractual obligations are irrelevant for the arbitral tribunal competence issue.

In case No. 18/2007 OJSC Gazprom v. Moldovan-Russian JSC Moldovagaz on recovery of payment for supply of goods, the ICAC found that the claimant failed to comply with the contractual pre-arbitration procedure of dispute settlement and terminated the proceedings. Though the Moscow Commercial Court dismissed the award on formal grounds, it did not question the termination of the proceedings. The court referred to Art. 19(2) of the Law on International Commercial Arbitration and held that, in the absence of an agreement between the parties on the procedure for initiation of the proceeding, the tribunal had conducted the arbitration in the manner as it considered appropriate. The ruling was upheld by the higher court (case No. А40-27465/08-50-207).

Thus in the said cases, the courts, having based their decisions on different rationale, concluded that the issue of compliance with the pre-arbitration procedure falls within the exclusive competence of the arbitral tribunal.

In my opinion, the parties’ compliance with the pre-arbitration procedure should be explored by the arbitral tribunal when deciding on its competence. It has nothing to do with Art. V(1)(c) of the New York Convention. If the arbitral tribunal hears the case despite an evident violation by the claimant of an explicit pre-arbitration procedure agreed upon by the parties, and the defendant expressly refers to such violation in course of the arbitral proceeding, the arbitral procedure is not in accordance with the agreement of the parties (Art. V(1)(d) of the New York Convention). Under Art. 21 of the Law on International Commercial Arbitration, unless otherwise agreed by the parties, the arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent. The parties’ arrangement on the arbitration proceeding starting only upon completion of the agreed pre-arbitration procedure may well be considered as “other” agreement. The compliance with the pre-arbitration provision is a condition precedent for hearing the case on the merits.

For example, let’s assume that the parties stipulated in the agreement that, should a dispute arise, one party shall send to the other party a written demand, and that the arbitral tribunal shall not be entitled to hear the case until such demand is sent and a fixed period for reply expired. Should the claimant fail to send the demand and to wait, and the arbitral tribunal ignored such violation notwithstanding the respondent’s objection, the court may refuse to enforce the award because the arbitration process did not conform to the parties’ agreement. However, much depends on the wording of the dispute resolution provisions and the specific facts of the case.

Dmitry Davydenko

Under the Russian legal system, the last resort a party has with respect to challanging a court decision is to apply to the Constitutional Court of the Russian Federation with a claim to review the decision’s compliance with the Russian Constitution in terms of the provisions of laws and/or regulations applied by lower courts. There are very few cases in which the Constitutional Court opined on matters related to international arbitration.

Since the adoption of the Law “On International Commercial Arbitration” founded on the UNCITRAL Model Law, the compliance of its provisions with the Russian Constitution has been challenged four times. Three times the subject of the challenge was Article 34 (“Application for setting aside as exclusive recourse against an arbitral award”) and/or Article 35 (“Recognition and enforcement”) in 1999, 2000 and 2001. The applicants, in particular, alleged that the limited range of grounds for setting aside an arbitral award or for refusal to recognize and enforce an award established by the said articles infringed upon the party’s right to judicial protection, which includes the right of recourse against any judgment or award rendered against a party. In each claim, the Constitutional Court refused to review the constitutionality of these provisions finding that the applications were inadmissible as the said provisions nowise violated the constitutional rights of the applicants. The rationale of the court contributed to the development of making the jurisprudence more favorable to international commercial arbitration. Thus, in its decision of October 26 2000 No. 214-О the court stated that “the applicants while entering into the contract failed to exercise their right to provide for resolution of the arising disputes by commercial court procedure, but instead signed an arbitration agreement (clause) on submission of them to arbitration under the Law of the Russian Federation “On International Commercial Arbitration”. Thus, having exercised their right of freedom of contract, they voluntarily chose this particular dispute resolution technique and agreed to comply with the rules established for international commercial arbitration court”.

Furthermore, in May 2009 the Constitutional Court ruled on international arbitration in its decision of May 28, 2009 No. 623-O-O. This time it examined an application challenging the constitutionality of the Article 16(3) “Competence of the arbitral tribunal to rule on its jurisdiction” of the Law “On International Commercial Arbitration”. In my opinion, the case is interesting and even in some way bizarre, thus it deserves a closer look.

A foreign company Mellain LLC filed a claim before the International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry (ICAC) to recover contractual debts from a Russian company. The ICAC ruled on its jurisdiction to hear the dispute. The Russian state courts of the first and cassation tiers set aside the ruling on the ground that the arbitration agreement was made by the claimant with another Russian company which did not act on behalf of the respondent. The courts rejected the arguments of Mellain LLC about the respondent having missed the time limit for submitting his application to the state court for setting aside the ruling of the arbitral tribunal on its jurisdiction.

Mellain LLC applied to the Constitutional Court of the Russian Federation challenging, in particular, the constitutionality of the provision of Article 16(3) of the Law “On International Commercial Arbitration” which provides that “the arbitral tribunal may rule on a plea referred to in paragraph (2) of this article [on the absence of jurisdiction] either as a preliminary question or in an award on the merits. If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court specified in article 6 to decide the matter, which decision shall be subject to no appeal. While such a request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award”.

The applicant argued that the wordings “within thirty days after having received notice of that ruling” lacked clarity as it failed to specify the moment of commencement of the period for filing the application to set aside the ruling of the arbitral tribunal as a preliminary question on its competence. On this ground the claimant alleged that it is contrary to Article 46 of the Constitution which provides that “everyone is guaranteed judicial protection of his rights and liberties”.

Furthermore, the applicant requested the Constitutional Court to review the ICAC ruling and to compel the ICAC and the Russian specialized professional periodical “International Commercial Arbitration” to publish a research paper on the competence of ICAC. Unsurprisingly, the Constitutional Court rejected these requests noting that resolving such matters falls beyond the competence of the Constitutional Court.

The Constitutional Court found that the ICAC Rules clearly specify the procedure for mailing and delivering the documents by the ICAC Secretariat. The court noted that the Rules in force as of the time of the dispute in question provided in Paragraph 12(2) that “the statements of claim, statements of defence, notices of the hearing, arbitral awards, rulings and orders shall be sent by registered mail with return receipt requested, or otherwise, provided that a record is made of the attempt to deliver the mail”. (The ICAC Rules that are currently in force have practically the same wordings of Article 16(3)). The Constitutional Court concluded that Article 16(3) considering its application together with the Arbitration Rules of the ICAC cannot be interpreted as lacking clarity.

Indeed, Article 16(3) of the Law on International Commercial Arbitration does not need to provide details on how to prove the exact time a notice of the ruling was received by each party. However, such details should be specified elsewhere, namely in the applicable arbitration rules.

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.

In post-Soviet time Russian courts have already developed quite a vast practice of recognition and enforcement of international arbitral awards. One can even already fetch out some trends in such practice. Thorough case study shows that certain distrust to international arbitration and unexpected obstacles to the enforcement of the awards caused by lack of experience in dealing with foreign-related matters, reflected in some early judgments, gradually go.

In Russia the decisions on requests for enforcement of the arbitral awards made in disputes of commercial or other economic nature are vested with the commercial courts (“arbitrazhnyie sudy”). It should be mentioned that the arbitrazh courts have nothing in common with arbitral (non-state) tribunals, whether domestic or international. So the term “arbitrazh” (“arbitral” in the Russian language) as used in the modern Russian law has two meanings: the first stands for arbitral (non-state) tribunals while the second implies the state commercial courts. This is a particular heritage of the Soviet times, caused by historic peculiarities of domestic regulations.

A new noteworthy case is Venture Global Engineering LLC v. Avtotor-Holding Group OJSC heard by the Commercial Court of Kaliningrad region (court of first instance) and Federal Commercial Court of North-Western Circuit (court of cassation) in 2009. The arguments of the parties in this case as well as the courts’ approach in dealing with them are quite typical for the last years’ cases on foreign arbitral awards enforcement; hence worth special attention. The arbitration took place in Stockholm. On 22 December 2008 the ICC International Arbitration Court consisting of a sole arbitrator in case No. 13756/EBS/VRO ordered the Russian OJSC Avtotor-Holding Group to pay debt from the agency agreement in the amount of 1,233,917 USD, penalty at the rate of 8 % annually till the date the award was rendered, 63,000 USD of arbitration costs and 230,444.94 USD of attorney fees in favor of the US Venture Global Engineering LLC. Furthermore, upon the claimant’s request, the arbitrator obliged the defendant to prepare and provide to the claimant a complete and correct detailed list of items acquired from General Motors Corporation and some other information related to the agency agreement.

The debtor failed to fulfill the award voluntarily and the creditor applied at the Commercial Court of Kaliningrad region for its recognition and enforcement. The court granted recognition and enforcement by its ruling of 27 October 2009 in case No. A21-802/2009. The debtor challenged the court’s ruling at the Federal Commercial Court of North-Western Circuit. The range of grounds for refusal to recognize and enforce an award under the New York Convention being quite limited and the qualification of international arbitrators generally being high, yet as a matter of fact the debtors often advance plenty of reasons to oppose the recognition and enforcement. The case in question illustrates it well. The debtor advanced, to name but a few, the following objections:

1) The arbitrator rejected four of the five respondent’s motions to call for crucial evidence and the motion to demand and hear a witness and thus the respondent was unable to present his case;
2) The recognition and enforcement of the award would be contrary to Russian public policy as:

(a) the arbitrator incorrectly decided on the validity of the agency agreement;
(b) the arbitrator set the agent’s fees while neglecting the facts of the case and the evidence presented by the parties;
(c) the penalty in the amount of 8 % awarded under the law of the state of Michigan constituted punitive damages and was inadequate to the consequences of the breach. Such adequacy is an integral part of the Russian public policy.

However, the court of cassation rejected all the objections and upheld the lower court ruling.

The court clearly stated that the said debtor’s arguments amounted to attempts to review the case on the merits. In particular, the court refused to check the validity of the agency agreement and noted that this issue was fully in the competence of the arbitrator as it fell within the scope of the arbitration clause, and that the arbitrator thoroughly examined such validity. Any objections concerning reconsideration of specific facts of the case established by the arbitral tribunal are irrelevant in the case on the recognition and enforcement of the arbitral award.

The court dealt in detail with the public policy argument. It is worth mentioning that invoking Russian public policy by debtors in the proceedings on the enforcement of the awards has been very popular. This is due to the past inclination of the Russian courts to broadly interpret this exception. In this case the court expressly mentioned that an essential difference between a foreign law applied by the arbitrator and Russian law does not itself constitute ground to apply the public policy clause. Otherwise it would be impossible to apply foreign law in Russia at all, which would be contrary to the principles of Russian law. ‘Russian public policy’ is a totally different notion than ‘Russian law’ and embraces “the bases of the morality, core economic and cultural traditions which formed Russian society, main religious postulates and fundamental principles of Russian law”.

The court said that the public policy clause may be applied only in cases where the application of foreign law and/or enforcement of the arbitral award can engender a result inadmissible from the viewpoint of the Russian ‘legal sense’. The court held that there is no reason to believe that enforcement of an award of debt and penalty by a Russian company to a foreign company under agency agreement could engender such a result.

The case reflects positive trends in the practice of enforcement of arbitral awards in Russia. Indeed, there are already many a judgment which confirm that a judicial review on the merits of a case resolved by an arbitrator is inadmissible, including the judgments by the High Commercial Court of the Russian Federation which is the court of the highest instance in the system of Russian commercial courts.

In particular, in a recent case the Federal Commercial Court of Moscow Circuit (ruling of 27 August 2009 КГ-А40/8155-09) held that “an argument that the awarded damages amount does not correspond to the principle of adequacy of civil liability measure to the consequences of the breach falls into the merits of the resolved case and does not pertain to the grounds for refusal of recognition and enforcement of a foreign judgment and a foreign arbitral award”. As it happens, understanding the approach of this court is of great importance: many big Russian companies involved in international business are registered in the Russian capital, and thus in accordance with the Russian procedural rules many cases on the recognition and enforcement of foreign arbitral awards are heard by the Commercial Court of Moscow in the first instance and by the Federal Commercial Court of Moscow Circuit in the cassation instance.

One of the main points illustrated by the above case is that now to oppose a foreign arbitral award recognition and enforcement using the public policy exception the debtor must refer to some grave consequences which such recognition and enforcement would engender in Russia. What such consequences could be is a good subject for a separate discussion.