In a decision dated 8 December 2009, published on 13 June 2010 (case 4A_446/2009, published as 136 III 107), the Swiss Federal Supreme Court held that persons acting as board of directors of a company that subsequently became insolvent cannot rely on an arbitration clause contained in the articles of association of that insolvent company for liability claims filed against them by the insolvent company’s creditors.

Background

The articles of association of corporation Y (”Y”) contain an arbitration clause which applies in case of a dispute between Y and its members of the board of directors or its shareholders. On 5 January 2004, Y was declared insolvent. In March 2007, Y’s shareholder and creditor A (”A”) filed a liability claim before the commercial court of canton of Bern requesting that the members of Y’s board of directors be ordered to pay CHF 1m. The respondent board member X (”X”), in turn, raised a plea of arbitration based on the arbitration clause contained in Y’s articles of association.

On 7 July 2009, the commercial court of canton of Bern decided that the arbitration clause did not include the dispute at hand and that the court had jurisdiction over the matter. Subsequently, X filed an appeal against the commercial court’s decision before the Swiss Federal Supreme Court.

Decision

The Federal Supreme Court dismissed X’s appeal and confirmed the commercial court’s holding that the arbitration clause did not apply. It held that by filing a liability claim against Y’s board members, A was not enforcing the rights of Y against its board members, but was enforcing the rights of Y’s creditors. For this reason, a board member could not bring forward all defenses it could have brought forward against a claim filed by Y itself. He could only bring forward the defenses he had against Y’s creditors.

The Supreme Court held that the plea of arbitration was not a defense X could bring forward against Y’s creditors. It was a defense X could only bring forward against a claim filed by Y itself. If such a defense could be brought forward against Y’s creditors, there would be a risk that, due to an arbitration clause in the articles of association, the enforcement of liability claims of creditors could be hindered. Since Y’s creditors had no influence on the content of the articles of association, they were not bound by the arbitration clause contained therein.

Comment

Liability claims against members of the board of directors can generally, in domestic and in international cases, be submitted to arbitration. This, however, is only the case where the arbitration clause satisfies the form requirements and where, e.g., the shareholders or board members – later a party to the dispute – validly consent to the respective arbitration clause. The consent requirement can be satisfied if a shareholder, when purchasing the company’s shares, or a member of the board, when accepting the appointment, at least by way of referral to the arbitration clause in the articles of arbitration consent to such arbitration clause. On the contrary, an arbitration clause is neither binding on those shareholders who purchased their shares prior to inclusion of the arbitration clause in the articles of association nor is it binding on the company’s creditors. With respect to the latter, it is established in legal literature that an arbitration clause is in particular not binding in the case of an insolvent company, where a creditor files a liability claim against the board members on behalf of all creditors of an insolvent company. The present case, published in the official Federal Supreme Court Case Reporter, confirms the existing view.

Georg von Segesser / Petra Rihar

In two decisions both dated 11 January 2010, published on 16 April 2010 (cases 4A_256/2009 and 4A_258/2009), the Swiss Federal Supreme Court dismissed two appeals regarding the irregular constitution of an arbitral tribunal by stating that the complainant failed to sufficiently substantiate his allegations.

Background

In 2006, two ICC arbitrations were initiated. They had the same factual background, but were based on different (yet interconnected) agreements. In the first arbitration (dealt with in the decision 4A_256/2009), AY (”AY”), a company incorporated under the laws of the Czech republic, initiated an arbitration against X (”X”), a Czech citizen. In the second arbitration (dealt with in the decision 4A_258/2009), X (Respondent in the first arbitration) initiated an arbitration against Y (”Y”), a Czech citizen, sole owner of AY (Claimant in the first arbitration).

In both arbitrations, the arbitral tribunal was composed of arbitrator Q (”Q”) (nominated by X), arbitrator P (”P”) (nominated by AY in the first arbitration and by Y in the second) and of the Chairman O (”O”) (nominated by the co-arbitrators). The tribunal decided not to consolidate the proceedings.

After the tribunal rendered the awards, X appealed before the Federal Supreme Court against both awards. In both proceedings, X argued that P and O were biased and that, therefore, there was no guarantee that the arbitral tribunal was impartial and independent of the parties.

Decision

The Federal Supreme Court dismissed both appeals.

As to P’s lack of independence, X argued that, end of Mai 2007, the Czech media reported that P had been nominated as arbitrator by Y or by persons connected with Y in approximately ten different arbitration proceedings. In fact, P had become the “house arbitrator” (”Hausschiedsrichter”) of Y. With respect to two (out of ten) proceedings, X personally knew of such nominations as he was acquainted with the proceedings. X further argued that in one further ICC arbitration between AY and a certain Mr. Z, P’s nomination had not been confirmed.

X had challenged P’s nomination as co-arbitrator in both arbitrations for lack of independence before the ICC Secretariat pursuant to Article 11 of the ICC Rules. The ICC Court nevertheless confirmed P’s nomination without stating the grounds for dismissal of the challenge submitted by X.

The Federal Supreme Court held that X’s appeal was insufficiently substantiated and that X failed to sufficiently show circumstances giving rise to justifiable doubts as to the independence of P. X’s assertion that P had “recently” been nominated in numerous cases of Y or by persons connected with Y was based solely on a newspaper article of 20 May 2007 which was too vague to serve as evidence in an evidentiary hearing purposed to clarify whether or not X’s assertion was true. Whether or not P lacked independence could thus not be decided based on said article. The Federal Supreme Court continued that X should have named the different arbitrations proceedings by specifying the timing and the involved parties, by stating which party had appointed P and by showing what the relationship of that party to Y or to persons connected to Y was. Also the fact that P’s nomination in another ICC arbitration between AY and a certain Mr Z had not been confirmed did not lead to any conclusions as to P’s independence in these proceedings the Federal Supreme Court concluded.

As to O’s lack of independence, X brought forward that, end of October 2008, at the occasion of an arbitration in London between a trust established by X and a company B, X learned of several interconnections of O with companies (where O served as a member of the board of directors) and with persons who were connected to or closely worked with Y. In particular, X argued that O was a member of the board of directors of a company C collecting for Y (or one of the companies controlled by Y) one of the largest claims in the Czech Republic and that said company was receiving instructions from Y. To substantiate his allegations X submitted e-mails showing the described interconnections and dependencies.

The Federal Supreme Court held that X’s arguments were insufficient to show O’s lack of independence. In particular, X had not shown to what extent the connection of the company C to Y was supposed to influence O’s impartiality and independence in these proceedings. Rather, the Federal Supreme Court held, the cooperation described by X did not go beyond an “ordinary business relationship”.

Comment

Switzerland is known as an arbitration friendly place among others because the Federal Supreme Court only rarely interferes with the work of the arbitral tribunals. In these two cases, however, the commentators cannot escape the impression that the Federal Supreme Court circumvented the actual problem by stating that the complainant did not sufficiently substantiate his allegations. It seems somehow unsatisfactory to require a strict proof regarding the question of the number and time frame of previous appointments of an arbitrator by the same party or an affiliate of it . Such proof will not be possible for the complainant. For this reason, at least if it refers to past appointments, the exact fact should be established before the course of the ICC confirmation procedure. It should also be kept in mind that, to the knowledge of the authors, situations of “house arbitrator” do exist which is sometimes used as an argument against arbitration as a method of dispute resolution.

Georg von Segesser / Petra Rihar

In a decision dated 11 February 2010, published on 29 March 2010 (case 4A_444/2009), the Swiss Federal Supreme Court dismissed an appeal against a tribunal’s decision that it had jurisdiction over a request for declaration that damages are owed due to the violation of an arbitration clause. The Supreme Court dismissed the appeal because it had not been filed in a timely manner. However, it also held that the tribunal’s declaratory judgment concerning damages for breach of an arbitration clause did not violate Swiss public policy.

Background

On 1/22 December 2004, a Swiss manufacturer of pharmaceutical products (”Manufacturer”) and an Israeli distributor of such products (”Distributor”) entered into an exclusive distributorship agreement (”Agreement”) containing an arbitration clause. On 30 Mai 2006, after having terminated the Agreement, the Manufacturer initiated arbitration proceedings in Switzerland against the Distributor requesting payment of unpaid bills and of penalties. On 20 September 2006, the Distributor filed a claim against the Manufacturer before the district court in Tel Aviv-Jaffa requesting payment based on its claim for goodwill.

Before the district court in Tel Aviv-Jaffa, the Manufacturer requested that the proceedings be suspended due to the pending arbitration concerning identical parties and claims. Before the arbitral tribunal, on 21 June 2007, the Manufacturer requested, among others, a payment of CHF 100′000 arguing that the Distributor, by filing a claim before the district court in Tel Aviv-Jaffa, violated the arbitration clause. As to the violation of the arbitration clause, the Manufacturer later amended its prayer for relief and requested that the arbitral tribunal declare that the Distributor, due to this violation of the arbitration clause, owed the Manufacturer a compensation for damages suffered (Manufacturer’s request no. 4). The Distributor requested, among others, that the tribunal deny its jurisdiction with respect to the Manufacturer’s request no. 4.

On 19 November 2008, in a Partial and Interim Award, the arbitral tribunal declared that it had jurisdiction with respect to Manufacturer’s request no. 4. No appeal was filed against this decision. On 3 August 2009, in a Second Partial and Interim Award, the arbitral tribunal, among others, confirmed its jurisdiction with respect to Manufacturer’s request no. 4. It further held that the Distributor had “breached the Arbitration Clause” contained in the Agreement “by filing its claim for goodwill in Israel on 20 September 2006″ and that the Distributor is liable to the Manufacturer for damages “incurred as a result of this breach”, provided that the Manufacturer, in later arbitral proceedings, can establish the remaining elements of its claim under Article 97 of the Swiss Code of Obligations.

The Distributor appealed against the decision of the arbitral tribunal before the Swiss Federal Supreme Court.

Decision

Before the Federal Supreme Court, the Distributor argued several reasons for setting aside the decision of the arbitral tribunal. As to the Manufacturer’s request no. 4, the Distributor argued before the Supreme Court that (i) the arbitral tribunal did not have jurisdiction and that (ii) it violated Swiss public policy as it dealt with the request for declaratory judgment although the Manufacturer did not show that it had legally relevant interest in such declaratory judgment and, (iii) as it denied the Distributor’s right to address a constitutionally guaranteed state court with its claim.

As to the jurisdiction of the arbitral tribunal regarding the Manufacturer’s request no. 4, the Federal Supreme Court held that the arbitral tribunal’s decision of 19 November 2008, where the arbitral tribunal declared that it had jurisdiction with respect to Manufacturer’s request no. 4, had not been appealed. The Distributor had filed an appeal only against the tribunal’s decision of 3 August 2009, however in this latter decision the tribunal only confirmed its respective decision of 19 November 2008 without deciding the issue of jurisdiction anew. The Distributor should have – but has not – appealed against the decision of 19 November 2008 in order to dispute the tribunal’s jurisdiction regarding the Manufacturer’s request no. 4. The Federal Supreme Court further held that the Distributor should have shown that the issue of violation of the arbitration clause is not covered by the arbitration clause itself and therefore the tribunal did not have jurisdiction to decide that issue. Instead, according to the Federal Supreme Court, the Distributor mixed the issue of the violation of the arbitration clause and of the jurisdiction over the Distributor’s goodwill claim.

The Distributor’s further argument that an arbitral tribunal may not influence the state court’s decision on costs of the proceedings and, in particular, may not punish a party for addressing a state court with its claims, also failed as the tribunal had only decided on its own jurisdiction (and not the jurisdiction of the state court) and did not try to influence the state court’s decision on costs. The Federal Supreme Court held that awarding the counterparty damages for the violation of the arbitration clause is a decision in substance and has nothing to do with the issue of jurisdiction. It could thus not be brought before the Federal Supreme Court.

As to the Distributor’s argument that the tribunal violated Swiss public policy in deciding over the request no. 4, the Federal Supreme Court held that the Distributor was right in alleging that, where Swiss law is applicable, according to the rules developed by Swiss state courts, the admissibility of a request for declaratory relief must be determined in accordance with Swiss law. However, since neither the requirements of Swiss law that need to be met for a request for a declaratory relief to be admissible before Swiss state courts nor the question of which requirements must be applied by an international arbitral tribunal constitute Swiss public policy, the Supreme Court denied to deal with Distributor’s argument that the arbitral tribunal did not properly apply said requirements.

The Distributor also argued that the tribunal violated Swiss public policy because it denied the Distributor’s right to address a constitutionally guaranteed state court with its claim. Here, the Federal Supreme Court held that with respect to arbitrable claims the parties are free to exclude the state court jurisdiction by entering into an arbitration clause. Since the Distributor and the Manufacturer validly concluded the arbitration clause, the exclusion of the state court jurisdiction was binding and the tribunal did not violate the public policy by deciding Manufacturer’s request no. 4.

Comment

With respect to the issue of jurisdiction, this decision clearly shows the importance of a timely complaint against an interlocutory award. Article 190 para. 3 of the Swiss Private International Law Act (”PILA”), which states that the time limit for lodging an appeal shall commence when the interlocutory award is communicated, does not only constitute a party’s right but also a party’s duty to appeal in a timely manner.

A further interesting issue in this case is the issue of claims for damages based on the fact that one party has, in breach of the arbitration agreement, filed a claim in another court. Although the Federal Supreme Court did not have to address this issue because of late filing of the appeal, it stated obiter dictum that an arbitral tribunal has jurisdiction for such claims. Furthermore, regarding the merits of the damage claim, it rejected the ordre public violation claim which was based mainly on the fact that the Israeli courts had accepted their jurisdiction and thus no violation of the arbitration clause could be perceived. This decision might deter parties in arbitration proceedings with seat in Switzerland to file parallel proceedings before state courts.

As to the question of which rules apply to the admissibility of declaratory relief in international arbitration (since such issue does not pertain to the public policy), the Federal Supreme Court left such question unanswered. The following comments, however, are noteworthy:

In the Swiss legal literature it is disputed whether the test for admissibility of declaratory relief pertains to the procedure or to the substance (merits) of the case. If this question is considered a procedural issue, there is some uncertainty for the users of arbitration what test (if any) applies (since the procedural rules at the seat of the arbitral tribunal do not apply automatically). If it is considered a substantive issue, under Swiss law the situation is as follows: Prayers for declaratory relief are limited to seeking a declaration on the existence or non-existence of a certain legal relationship or on the legal consequences of such legal relationship based on certain facts. Where a party is in a position to request specific performance of duties arising from the same legal relationship or payment of a certain amount of money, a request for declaratory relief is inadmissible and must be dismissed without prejudice. More specifically, where a request for specific performance is possible, the party seeking merely a declaratory relief lacks the “legally relevant interest” in such declaratory relief because the uncertainty pertaining to the legal relationship between the parties can be eliminated by way of the performance request and therefore such performance request is a valid option for obtaining an enforceable judgment granting an affirmative relief. Only where the request for performance is not possible and the uncertainty regarding the legal relationship between the parties can only be eliminated by way of a declaratory judgment, an interest in a declaratory judgment is worthy of protection under Swiss law.

Georg von Segesser / Petra Rihar

This year’s ICCA Congress in Rio de Janeiro not only confirmed that nobody knows to party better than cariocas, but also served as an impressive reminder of the increasing pro-arbitration approach of Brazilian courts, the remarkable growth in the number of arbitration proceedings in Brazil and the high sophistication of the Brazilian arbitration bar.

Yet less than two weeks after the ICCA Congress concluded, a court in São Paulo issued an injunction ordering a sitting ICC arbitration tribunal to widen the scope of the expert evidence it was considering. The underlying dispute arose out of the construction of the “Yellow Line,” a new subway line in the city of São Paulo. In order to timely complete the construction, the subway operator, Companhia do Metropolitano de São Paulo, known simply as “Metrô,” and the consortium constructing the new subway line, Consórcio Via Amarela, agreed to change the tunneling method, which resulted in additional costs. A dispute arose as to which party had to cover these costs. After a Dispute Avoidance Board recommended that Metrô compensate Via Amarela for the additional costs, Metrô initiated an ICC arbitration. The three-member ICC tribunal, seated in São Paulo and chaired by Brazilian arbitrator Carlos Alberto Carmona, issued a partial award in June 2009 holding that Via Amarela was entitled to be compensated for the additional costs and that the quantum of compensation would be fixed in the second phase of the arbitration by an accountant.

Metrô subsequently requested that the quantum be determined by engineering experts. After the tribunal rejected the request, Metrô initiated proceedings before São Paulo courts to set aside the partial award. In addition, Metro sought a writ of mandamus (“mandado de segurança”) ordering the tribunal to accept engineering evidence.

On 7 June 2010, the São Paulo Tribunal de Justiça issued a writ of mandamus ordering the ICC tribunal to consider the engineering expert evidence, which in the court’s view was a more reliable means of establishing the compensation amount. At least two aspects of the court’s order are worth noting here. First, the judge interfered in the ongoing arbitration proceedings by reviewing the tribunal’s decision not to consider the engineering expert evidence and concluding that in doing so, the tribunal had violated the principles of “reasonableness” and public policy. In issuing the writ, the judge not only violated the Brazilian Arbitration Act and the New York Convention, but also ignored a number of strong precedents by Brazilian courts confirming the autonomy of arbitration proceedings. It goes without saying that due process and public policy arguments, whatever their merits in this case, can only be raised in annulment proceedings.

Second, the use of a mandado de segurança as a procedural tool to interfere in arbitration proceedings is highly questionable and reminiscent of the use of amparos in some other Latin American jurisdictions. Under Brazilian law a court may issue such a writ to protect a “clear and perfect” (“liquido e certo”) right, whenever the party responsible for the illegal actions or abuse of power is a public official or an agent of a corporate legal entity exercising Government functions. The judge reasoned that arbitrators should by analogy be regarded as public officials, and hence be subject to a writ of mandamus, because arbitration involved the “delegation of the jurisdiction by the State.” However, to equate arbitrators with public officials not only appears to be mistaken, but would also open the floodgates for further judicial intervention in arbitration proceedings.

The decision is troubling to many because it was issued by a court in São Paulo, which, together with Rio de Janeiro, serves as seat for the great majority of arbitrations in Brazil and has been building a reputation as a seat for international arbitrations. It therefore does not surprise that the court’s anti-arbitration injunction has caught international attention and has been reported in the Global Arbitration Review.

Yet the import of this decision should not be exaggerated. Since the adoption of the 1996 Arbitration Act and the Supreme Court’s December 2001 decision confirming the constitutionality of the provision in the Arbitration Act regarding the specific performance of the arbitration clause, courts in Brazil have increasingly adopted a pro-arbitration approach. Anti-arbitration injunctions have remained the exception rather than the norm. At the same time, Brazilian courts have shown no reluctance to grant emergency conservatory measures in support of arbitration proceedings. As a result, the number of arbitrations in Brazil has increased drastically.

The attention raised by the occasional anomalous court decision, such as the writ of mandamus in Metrô v. Consórcio Via Amarela, is more likely to strengthen than weaken the pro-arbitration approach of Brazilian courts, because such decisions engender a healthy debate about important arbitration issues within the judicial community. Such anomalous decisions further provide higher courts with the opportunity to rule on appeal on important arbitration issues thereby adding to and strengthening their pro-arbitration jurisprudence. At the same time, they highlight the importance of the continued need to educate lower-level judges about arbitration.

On 30 June 2010 Via Amarelo obtained a suspension of the effect of the injunction pending a decision on the appeal. It is likely that the injunction will be overturned on appeal and that Brasil will have yet another important pro-arbitration precedent.

Dietmar W. Prager, Debevoise & Plimpton LLP

Recent legislative developments in Oklahoma, and a few other U.S. states, reflect a growing mistrust of international and foreign law and legal systems. These proposed statutes and constitutional amendments are one aspect of parochial backlash in the United States and elsewhere against developments in international law and dispute resolution over the past decades. There are substantial doubts about the constitutionality of these legislative proposals under the U.S. Constitution, but they may prove to be the source of substantial mischief. For the moment, these legislative developments are more in the nature of eccentric curiosities than anything else. They nonetheless warrant careful monitoring – particularly if comparable legislative provisions begin to be proposed on a federal level in the U.S. Congress. Indeed, the proposed Arbitration Fairness Act, pending in Congress, has hints of a similar disregard for U.S. international obligations.

The leading example of legislative backlashes against international and foreign law is a proposed amendment to the Oklahoma State Constitution (1). Grandiosely titled the “Save our State Amendment,” the proposed amendment would purport to forbid Oklahoma State courts from “look[ing] to the legal precepts of other nations or cultures” or from “consider[ing] international law or Sharia Law.” The full text of the proposed amendment is available here.

The “Save our State Amendment” overwhelmingly passed in the Oklahoma House on 18 May 2010 (91 for – 2 against) and in the Senate just six days later, on 24 May 2010 (41 for – 2 against, 5 excused). The proposed amendment would provide:

“The [Oklahoma] Courts …, when exercising their judicial authority, shall uphold and adhere to the law as provided in the United States Constitution, the Oklahoma Constitution, the United States Code, federal regulations promulgated pursuant thereto, established common law, the Oklahoma Statutes and rules promulgated pursuant thereto, and if necessary the law of another state of the United States provided the law of the other state does not include Sharia Law, in making judicial decisions. The courts shall not look to the legal precepts of other nations or cultures. Specifically, the courts shall not consider international law or Sharia Law. The provisions of this subsection shall apply to all cases before the respective courts including, but not limited to, cases of first impression.” (2)

The proposed amendment is to be submitted to a referendum of Oklahoma voters, likely in November 2010. News sources predict that the amendment will be adopted by a large margin.

If Oklahomans adopt the amendment, what will it mean (putting aside questions of validity under the U.S. Constitution)? This is not an issue that has drawn the attention of the amendment’s sponsors, whose interest appears limited to stoking parochial bias and fear. Still, if adopted, courts will have to interpret the legislation.

One obvious area where the amendment may have application is conflict of laws. The amendment specifically provides that Oklahoma courts may not “consider” either international or Sharia law, and may only apply the law of sister states in the United States “provided the law of the other state does not include Sharia Law.” That fairly clearly excludes application of, for example, the law of states which have adopted Sharia law – presumably in cases where there is a contractual choice-of-law clause, as well as in cases where there is not. Although principles of international law are less likely to arise in commercial litigation, particularly in state courts, in those instances where they do (e.g., some human rights litigation, cases raising issues concerning foreign territorial boundaries), the Oklahoma amendment would appear to preclude application of those principles. Exactly how the amendment’s prohibition against the application of international law relates to the amendment’s preliminary acknowledgment that Oklahoma courts must apply federal law (which, under well-settled U.S. precedent, includes international law) is not addressed by the amendment or its drafting history.

There is a further issue, of greater practical importance, particularly if the amendment’s approach were adopted outside Oklahoma. Under the amendment, may an Oklahoma court apply any foreign law, as distinguished from international or Sharia law? In addition to providing that Oklahoma courts may not consider international and Sharia law, it also prohibits Oklahoma courts from “look[ing] to the legal precepts of other nations or cultures.” A serious argument could be made that this text forbids the application of foreign law in Oklahoma courts – including, for example, in tort, contract and other commercial disputes. Thus, if a dispute arose under a contract with a choice of law clause selecting foreign law (e.g., French or Russian), there is a substantial argument that the amendment would forbid application of French or Russian law; the argument is at least as strong in tort or contract cases where no choice-of-law clause existed. In neither case, the argument would run, could an Oklahoma court apply “the legal precepts of other nations.”

Choice of law issues in most contexts are, under domestic U.S. law, governed by state (not federal) law. That would appear to make the amendment’s prohibition against application of foreign or Sharia law fully applicable in Oklahoma courts – absent some constitutional basis for invalidating the amendment (discussed below). Moreover, although the amendment applies, by its terms, only in Oklahoma state courts, at least arguably, U.S. federal courts in Oklahoma would be obliged to adopt the same rules as state courts in matters ordinarily governed by state law.

It is also not clear how the Oklahoma amendment might impact the recognition and enforcement of foreign judgments which are based on the application of foreign (or international) law by a foreign court. At least arguably, recognition of a foreign judgment would involve the indirect application of foreign (or international) law and, thereby, run afoul the Oklahoma amendment. For example, is a judgment from Egypt or Saudi Arabia capable of recognition in an Oklahoma court under the Oklahoma amendment? In the United States, the recognition of foreign judgments is largely the subject of state law and, as a consequence, the amendment would again appear prima facie to apply to the recognition and enforcement of foreign judgments in Oklahoma state and federal courts. Arguably, similar conclusions would apply to forum selection agreements providing for litigation in a foreign forum (particularly a forum where the Sharia might be applicable).

The impact of the proposed Oklahoma amendment on international arbitration would appear to be much more limited – reflecting in part the superior legal regime applicable to international arbitration, as compared to other means of dispute resolution. In particular, the Oklahoma amendment would not seem to preclude a party from enforcing a foreign award or international arbitration agreement, even if the award applied foreign or international law. The New York Convention and Federal Arbitration Act (Chapter 2) impose federal standards for most aspects of recognition of Convention awards and agreements, in either state or federal courts. The Oklahoma amendment would likely (very likely…) be preempted by the Convention and the FAA.

The immediate practical consequences of the amendment are limited. Oklahoma is not a forum for appreciable amounts of international commercial litigation and, if the amendment is adopted, Oklahoma choice-of-court and choice-of-law clauses will become (even) less common. In practical terms, few international disputes of any consequence are likely to be affected by the amendment.

There is also a substantial argument that various aspects of the Oklahoma amendment run afoul of constitutional limitations under the U.S. Constitution. As noted above, under well-settled U.S. authority, international law is both part of the law of the United States and is treated as federal law. As such, international law preempts, or supersedes, contrary state law and, if the Oklahoma amendment were interpreted to forbid application of international law in Oklahoma courts, it would likely be invalidated.

The amendment’s prohibition against application of foreign or Sharia law raises more complex U.S. constitutional issues. The prohibition may well run afoul of restrictions on state involvement in national foreign relations, imposed by a series of U.S. Supreme Court decisions from the mid-20th century. Singling out the laws of particular foreign states (e.g., Sharia law, which is the foundation of several foreign states’ law) and prohibiting their application in U.S. courts arguably violates these constitutional prohibitions by inserting state legislatures into matters of U.S. foreign relations. Finally, if the amendment is applied to prohibit application of any foreign law, it arguably would violate limitations imposed by the federal due process clause on choice-of-law decisions of state courts – although the existence and contents of such limits is a highly disputed topic.

One might be tempted to dismiss the “Save our State Amendment” as a local eccentricity without practical consequence. Unfortunately, that conclusion is premature. Similar legislative proposals are presently being considered in the Arizona State House and Senate Judicial and Rules Committees. The Arizona bill provides that “[a]ny decision or ratification of a private agreement that is determined, on the merits, by a judge in this state who relies on any body of religious sectarian law or foreign law is null and void, is appealable error and is grounds for impeachment and removal from office.” The full text of the Arizona House bill is here. Although predictions are always risky, one suspects that similar legislative proposals will surface in other states and, eventually, the U.S. Congress.

More broadly, and of even greater practical concern, the Oklahoma amendment is not unrelated to the so-called “Arbitration Fairness Act,” currently pending in the U.S. Congress. Versions of that legislation would invalidate broad categories of agreements to arbitrate consumer, employment, franchisee, and “civil rights” disputes. These legislative proposals are all designed to enhance the litigation options of local constituencies by guaranteeing a more favorable local forum applying local protections – including where parties (in an international commercial agreement) have agreed to resolve their disputes by arbitration. That result is very difficult to square with U.S. commitments under the New York Convention (and the Inter-American Convention). The Convention permits derogation from Article II’s obligation to recognize international arbitration agreements only in limited instances of disputes that are not capable of settlement by arbitration. Article II’s exception cannot easily be expanded to accommodate the proposed Act’s sweeping invalidation, in all circumstances, of broad categories of international arbitration agreements.

The Arbitration Fairness Act parallels the Oklahoma amendment in an even more troubling fashion in its treatment of the separability presumption and the doctrine of competence-competence. Both principles are universally-recognized, in national and international arbitration instruments, judicial decisions, arbitral awards and commentary from all of the world’s leading legal systems. Indeed, U.S. courts played a central role in developing both doctrines (for example, in the Supreme Court’s classic decision in Prima Paint).

Despite that, versions of the proposed Arbitration Fairness Act would abrogate both the separability presumption and the competence-competence doctrine in the context of international arbitration agreements (including in agreements outside the context of consumer, employment and franchise disputes). If adopted, this approach would violate the parties’ express and implied agreements in most international contexts — including where institutional rules, agreed to by the parties, adopt both doctrines; where foreign law, applicable to the agreement to arbitrate, adopted one or both principles; and where parties impliedly intend for these international principles to apply, which is true in virtually all international commercial contexts. By denying effect to the parties’ agreements on these issues, the Arbitration Fairness Act would also violate U.S. commitments under the New York (and Inter-American) Convention – preferring parochial domestic law and constituencies to the United States’ international engagements under Article II of the New York Convention and parallel provisions of the Inter-American Convention, in a manner uncomfortably reminiscent of the Oklahoma amendment.

It remains to be seen whether the legislative instincts that inspired the “Save our State Amendment” will spread in their most virulent form to Washington, DC. The likelihood appears slim. Nonetheless, if the Arbitration Fairness Act is ultimately passed in its current form it would violate U.S. treaty commitments – under the New York Convention – and depart from universally-accepted principles of international arbitration law. The possibility of this occurring remains uncertain and the risk of jingoistic federal legislation appears even more remote. But that conclusion is by no means certain. To put the question in practical terms, what odds would one have given twelve months ago for adoption of something like the “Save our State Amendment” in Oklahoma or anywhere else?

(1) 2010 Okla. Sess. Law Serv. Hs. Jt. Res. 1056 (West).
(2) The Oklahoma Attorney General has since supplemented the initially proposed Preliminary Ballot Title (the question that will be posed to the voters as a referendum) to explain to the voters what international law and Sharia law comprise: “This measure amends the State Constitution. It changes a section that deals with the courts of this state. It would amend Article 7, Section 1. It makes courts rely on federal and state law when deciding cases. It forbids courts from considering or using international law. It forbids courts from considering or using Sharia law. .International law is also known as the law of nations. It deals with the conduct of international organizations and independent nations, such as countries, states and tribes. It deals with their relationship with each other. It also deals with some of their relationships with persons. The law of nations is formed by the general assent of civilized nations. Sources of international law also include international agreements, as well as treaties. Sharia Law is Islamic law. It is based on two principal sources, the Koran and the teaching of Mohammed.” Letter from the Office of the Attorney General for Oklahoma State to the Oklahoma Secretary of State, the Speaker of the Oklahoma House of Representatives, and the Senate President Pro Tempore of Oklahoma, dated 4 June 2010, Re: Preliminary Ballot Title for State Question No. 755, Legislative Referendum No. 355.

By Gary Born and Noelle Berryman

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.

A defining characteristic of international arbitration is the ability to choose the decision-makers who determine the dispute. The parties’ right to choose their arbitrator is qualified by the requirement that the arbitrator adhere to standards of independence and impartiality. Where the parties consider that the arbitrators do not meet these standards, they can bring a challenge. The challenge procedure is a fundamental element of the arbitral process, ensuring that arbitrators adhere to the standards of impartiality and independence, essential to the legitimacy of arbitration. Currently, few institutions publish reasons for their decisions on challenges and therefore there is limited publicly available jurisprudence setting out reasons for successful and unsuccessful challenges. Gradually, institutions are increasingly providing parties with reasons to accompany decisions on challenges. This is a welcome development. However, these reasons are not being published for the wider arbitration community. Greater transparency would enhance the predictability and consistency of decisions and would reduce the number of opportunistic challenges.

The major arbitral institutions’ rules, and the key non-institutional arbitral rules, do not require the body which decides a challenge to provide reasons for its decision to the parties. Most of the major arbitral rules are silent on this topic, and as such no obligation exists. While no rules require a decision-maker to provide the parties with reasons for the success or failure of a challenge, there is a trend towards providing parties with a reasoned decision to the challenge of an arbitrator [1]. In addition, some institutions from time to time publish summaries of the reasoning in respect of selected decisions on arbitrator challenges (for example the ICC does this).

Reasons underlying decisions on arbitrator challenges should be routinely provided to the parties to enhance the transparency of the arbitral process. Most institutions do not stipulate whether or not they will provide reasons, but the ICC has set out that it will not do so. (This is largely to avoid any further embarrassment to the challenged arbitrator.) Parties pay significant fees to the bodies that make the decisions in relation to arbitrator challenges, and it is not appropriate for them to be denied information about the reasons for a decision on the crucial subject of the fitness for office of an arbitrator. The reasoning is of fundamental interest to the parties, in particular to the challenging party, who may have serious concerns about the suitability of an arbitrator to continue to act in the proceedings. Providing parties with decisions in response to arbitrator challenges would increase the parties’ confidence in the decision-making processes of the bodies ruling on arbitrator challenges. A reasoned decision is likely to hold greater legitimacy in the eyes of the parties, and would make the decision-making bodies more accountable for their reasoning. It is also more likely to be considered seriously if the challenge decision is ever appealed to the state court.

In addition, all arbitral institutions should regularly publish summaries of the reasoning underlying their decisions on arbitrator challenges. Evidently, such reasons would need to be published in a way that safeguards the confidentiality of the arbitration (i.e. by providing generic descriptions of the issues in question). Publishing the reasons underlying a decision regarding a challenge would augment the presently limited jurisprudence available, providing more information to bodies ruling on challenges to arbitrators, and it is likely this would increase the predictability and consistency of challenge decisions. This body of reasoning would also be of use to parties and counsel, to guide them in making and responding to challenges, hopefully reducing the number of spurious challenges. Such jurisprudence would also be of interest to arbitrators, in guiding their disclosure of information to parties. As arbitrators come from a variety of legal backgrounds where conflict of interest rules differ greatly, a body of jurisprudence on the standards of independence and impartiality expected in international arbitration would be of assistance to them.

[1] The LCIA Court, which decides arbitrator challenges, does provide reasons to the parties along with the decision (P. Turner and R. Mohtashami, A Guide to the LCIA Arbitration Rules, 2009, at para. 4.124), as does the Board of the Centre of the VIAC, which decides arbitrator challenges, also provides reasons to the parties for its decisions (F. Schwarz and C. Konrad, The Vienna Rules: A Commentary on International Arbitration in Austria, 2009, at 16-045). Where cases are governed by PCA rules, the decision-making body will provide reasons for a challenge decision where they are requested to do so by the parties. Practice in respect of challenges under the ICSID and DIS rules demonstrates a trend towards providing the parties with reasoned decisions, although there is no obligation to do so.

By Daisy Joye and Nathalie Allen

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

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.