Whilst that focussed principally on the implications for, and efficacy of, the type of award in issue the purpose this post is, in contrast, to look again at the argument that initially prevailed before the tribunal and what it would have meant for English arbitrations more generally had Flaux J accepted it.

The basis upon which the tribunal ruled that it could not make any award of damages will strike many as highly controversial.
The starting point was the reasoning of the ECJ that it deployed to outlaw the grant of an anti-suit injunction by one EU Member State court against proceedings brought in another in breach of an arbitration clause. In doing so the ECJ held that, although the proceedings for relief in the former came within the arbitration exclusion of Council Regulation 44/2001 (the “Regulation”), this did not mean they could be permitted to otherwise undermine the effectiveness of the Regulation. In the ECJ’s view an anti-suit injunction did this as it restricted the ability of the first seised court to rule on its own jurisdiction and interfered with a litigant’s right to a form of judicial protection to which it was entitled.

In the tribunal’s view (which is set out at paragraphs 22-26 of Flaux J’s judgment and was largely relied upon by the insurers before him) the “underlying theme” of the ECJ’s decision was that the right to bring proceedings before an EU Member State court in accordance with the Regulation is therefore to be given pre-eminence. That being the case, a decision by a tribunal with seat in England which would effectively punish a party for so doing could not be sustained. The Regulation accordingly constrained the ability of the tribunal to act for essentially the same reasons that an English court is precluded from granting the anti-suit injunction.

One can find great difficulties with this conclusion. Primarily, there is the arbitration exclusion to consider. Surely, it wholly covers the proceedings before the tribunal – which should therefore be free from any constraints. Crossing that threshold is an entirely different proposition from the matters that were before the ECJ.

Buttressing that argument are the observations made by AG Kokott at paragraphs 70-73 of her opinion (with which the ECJ did not disagree). She acknowledged that a consequence of arbitration’s place outside the Regulation was that parallel proceedings within the EU before an arbitral tribunal and a Member State court can arise and that this could lead to inconsistent rulings on jurisdiction and the merits of the case. Indeed, rectifying that exact situation was what that she saw as being the goal of the anti-suit injunction (albeit such being an impermissible means of achieving it).

These objections, which formed the thrust of West Tankers’ arguments before Flaux J, were, for the tribunal, not enough to displace its view of the width of the ECJ’s ruling.

Correctly, it is suggested, Flaux J disagreed with the tribunal. His primary conclusion (see paragraphs 51-68 of his judgment) was that the tribunal had erred in law and that it was not barred from making the award of damages. In particular, he held that there absolutely nothing in the reasoning of either the AG or ECJ to support the far-reaching conclusion that the tribunal itself fell within the scope of the ECJ’s decision.

In Flaux J’s opinion, not only was it the AG’s clear view (as evidenced by those parts of her opinion mentioned above) that a tribunal was simply not affected by the Regulation, it was, additionally, wrong to suggest that there could be any meaningful difference between living with the possibility of inconsistent decisions on the merits or jurisdiction, which the AG expressly recognised, and allowing the tribunal to award damages as a result of a breach of the arbitration clause. The latter was merely a manifestation of the aforesaid state of affairs. More generally, there was nothing in the reasoning of the ECJ itself to suggest that the type of constraints imposed on a national court by its decision should also extend to an arbitral tribunal.

Flaux J’s decision is clearly to be welcomed. If the insurers’ (and tribunal’s) position had been accepted it would not only have negated the ability of an English tribunal to grant the type of relief in issue but would have left it with difficult questions as to what else it cannot do if proceedings are brought in another EU Member State court. In that latter regard it is perhaps arguable, given the direct subject matter of the damages award, that distinguishing between other action taken and the award of damages for breach might not carry the difficulties that Flaux J suggested (at paragraph 74 of his judgment). Having said that, it is understandable why the judge would want to emphasise such a point in order to help ensure that any need for a tribunal to address such problems was avoided entirely.

Such problems would, of course, be the natural consequence of accepting an argument which amounts to little more than requiring the arbitration exclusion to be overridden by the Regulation even in those proceedings to which it should most clearly find application. The emergence of such arguments is perhaps no surprise given the use of similar reasoning by the ECJ in its decision. More happily, it appears that the English courts are more than ready to sensibly interpret the more difficult aspects of the ECJ’s ruling and to reaffirm the remaining boundaries between the courts and arbitration in this sphere.

The judgment is available here.

Background to the English court’s decision

The protracted history of this dispute will be familiar to many arbitration practitioners worldwide, and particularly to those in Europe. It all began in August 2000, when a vessel owned by West Tankers, under charter to Erg, collided with Erg’s jetty in Syracuse, Italy. The charter party was governed by English law and contained an agreement to arbitrate any disputes in London.

Erg claimed compensation from its insurers and also commenced arbitration proceedings in London against West Tankers for the excess in damages above that covered by the insurance. Sometime later, the insurers brought proceedings against West Tankers before an Italian court to recover the sums they had paid to Erg, despite the existence of the arbitration clause. The dispute gained considerable renown when West Tankers’ application for an anti-suit injunction restraining the insurers from pursing the Italian court proceedings was refused following a landmark ruling from the ECJ which held that such relief would not be compatible with the Brussels Regulation.

West Tankers subsequently secured a favourable award from the arbitral tribunal holding that it was under no liability to either Erg or Erg’s insurers. It then successfully sought to obtain a judgment in terms of that award, using section 66 of the Arbitration Act 1996 (the ‘Act’). In the latest proceedings, it sought from the tribunal an award of damages for the breach of the arbitration agreement as well as an indemnity for the costs of defending the Italian proceedings. The tribunal declined jurisdiction to make this award, which prompted West Tankers to file an appeal with the English Court on a point of law under section 69 of the Act. It is that decision which is the subject of the latest judgment of the English court. To date, the Italian court has not yet ruled on whether it has jurisdiction to hear the dispute.

The decision of the English court

In finding that the majority of the tribunal had erred in law, Flaux J determined that there was nothing in the ECJ’s judgment (or the Opinion of the Advocate General on which it was based) which deprived the tribunal of jurisdiction to award relief for breach of the obligation to arbitrate. He relied heavily on the recognition by the ECJ of the possibility of parallel arbitration and court proceedings. Bearing in mind the fact that a tribunal and a court may reach inconsistent decisions on the merits and/or the scope and effect of the agreement to arbitrate, he held that there would be no qualitative difference between inconsistent judgments and an award of damages for breach of the arbitration agreement. In fact, a damages award would be an extension and consequence of the declarations made in the previous award as to the merits of the dispute.

Flaux J considered that the tribunal’s decision had been based on a misunderstanding of the principles underlying the ECJ’s decision as regards the application of the Brussels Regulation to arbitration. He acknowledged that arbitrators are bound to apply EU law but clarified that arbitration is excluded from the scope of the Brussels Regulation by Article 1(2)(d). In his view, the obligation to uphold the principle of effectiveness and mutual trust between Member State Courts in the context of the Brussels Regulation lies on ‘national authorities’ (which does not include private tribunals). As such, the tribunal was not obliged to defer to the Italian courts in the same way that an English court would need to under the Brussels Regulation.

But what is the practical effect of this decision?

Flaux J gave permission to appeal and commented that this case is likely to go further. Nonetheless, until any successful appeal, there is scope for a party faced with parallel proceedings in the EU in breach of an arbitration agreement to seek recompense from an arbitral tribunal for that breach, so as to put it (so far as possible) in the position it would have been had the parallel proceedings not been pursued. This would effectively allow it to seek compensation for the legal costs involved in defencing the parallel proceedings to the extent that was not ultimately recovered in the Italian proceedings.

Therefore, where proceedings before a court of a Member State run parallel with arbitration proceedings, the threat of being liable for compensatory damages should the national court decline jurisdiction may discourage parties from pursuing so-called ‘torpedo’ actions in future.

Does this decision represent progress for arbitration?

Alongside the previous judgment of the English court relating to section 66 of the Act, this is, in many ways, a result which represents progress for arbitration in Europe: parties who find themselves engaged in proceedings in a forum they have not selected will be comforted to know that this remedy may represent a deterrent for their counterparty. It also serves to limit the anti-arbitration ramifications of the ECJ’s decision regarding the anti-suit injunction by effectively rendering the Italian proceedings academic even though they cannot be injuncted.

However, it is questionable whether the advantages of this decision are confined to those who seek enforcement locally. Pending the reform of the Brussels Regulation, there is still little clarity on the interface between the jurisdiction of arbitral tribunals and the jurisdiction of the courts. This decision does not fully address what happens in the scenario whereby the court of a Member State accepts jurisdiction (notwithstanding the arbitration agreement), and issues a judgment which is inconsistent with that of an arbitral tribunal. In those circumstances, depending on where the relevant assets are located, the party who has been awarded damages may be left with no option but to return to the same national court which issued an inconsistent judgment in order to enforce this award. This could lead a court of a Member State to be asked to enforce an award which effectively seeks to undermine its own judgment. The question is then whether that court would be able to resist enforcement, and on what grounds. The New York Convention is likely to compel recognition and enforcement of the award, unless the dissatisfied party can rely on the public policy exception contained within Article V(2)(b). The way in which the court in question would interpret the public policy exception is, of course, an open question. Although generally seen as a last resort, this ground may be a convenient route for the dissatisfied party to negate entirely the effect of this latest judgment.

So, whilst it is on the one hand encouraging that a party faced with parallel proceedings in breach of an arbitration agreement may be entitled to compensation for its troubles in a private forum, it is not yet clear whether this decision will have the teeth required to ensure that it is effective.

The former Portuguese arbitration law was published in 1986 (not following the UNCITRAL Model Law) and despite being considered a progressive law at the time it was clear that it lacked the ability to respond to some of the issues that have been raised in more recent times. On this point, it should be noted that the 1986 law was amended in 2003, but only a few changes were introduced (dealing with very specific procedural aspects in the context of arbitration proceedings).

For a long time the legal community demanded a new arbitration law that could bring to Portugal a regulatory framework more suited to dealing with the current (and more sophisticated) disputes and providing arbitral justice with higher degree of legal certainty. This aspiration of the Portuguese legal community must be understood in a context of a lack of responsiveness on the part of the Portuguese State’s courts, particularly with regard to delays in the trial of cases and to the lack of specialisation of the Portuguese courts and judges in some areas of law.

In this context, in February 2009 the former Portuguese Government (Sócrates Government) invited the Portuguese Association of Arbitration to prepare a new draft law on arbitration. The initial draft was presented in March 2009 and after public debate, many ebbs and flows and a change of government, the Portuguese Association of Arbitration presented its final draft in July 2011 to the Passos Coelho Government. The project has been discussed in the Portuguese Parliament, which, after including some amendments, approved it in October 2011.

The approval of this new law should be understood within a context of promotion of alternative means of dispute resolution on the part of the Portuguese government, in order to mitigate the above mentioned structural problem of excess of pending proceedings. This problem has led to the circumstance that the Memorandum of Understanding on Specific Economic Policy Conditionality, executed on 17 May 2011 between Portugal, the European Central Bank, the European Commission and the International Monetary Fund, specifically provides for several measures to tackle this problem, including the approval of a new arbitration law.

This new law, published on 14 December 2011, is also intended as a means to achieve the objective of promoting and developing the Portuguese jurisdiction as a seat for international arbitration proceedings, particularly in relation to disputes involving entities linked to Portuguese-speaking countries (Brazil, Angola, Cape Verde, Mozambique, East Timor and São Tomé e Príncipe). The fact that Portuguese is one of the most widely spoken languages in the world (the 7th most spoken language, with approximately 240 million speakers) should not be disregarded, particularly when investors in those fast growing economies are selecting a neutral forum for settling their disputes.

In its drafting, the new arbitration law is clearly influenced by the UNCITRAL Model Law (2006 version) and, regarding some specific aspects, by solutions adopted by several other European arbitration laws (notably the German, Swiss, Spanish, French and English arbitration laws). The noteworthy hallmarks of the new legislation are the following:

a) The main criterion of arbitrability of disputes has been changed: the disposability of rights standard was replaced by the economic nature of the disputed interest standard.

b) The negative effect of the principle of kompetenz-kompetenz has been specifically addressed by the new law, conferring jurisdiction on the State courts to primarily rule on the competence of arbitral tribunals only in cases where the arbitration agreement is manifestly null and void, inoperative or incapable of being performed. As a result of the protection of the negative effect of the principle of kompetenz-kompetenz, it is expressly determined that parties cannot resort to anti-suit injunctions to prevent the constitution or functioning of an arbitral tribunal.

c) It is established that in what refers to arbitration matters State courts can only intervene when such intervention is expressly provided for in the arbitration law.

d) An innovative regime is introduced to expressly regulate issues related to multi-party arbitration, particularly as to the constitution of the arbitral tribunal. In this regard, and taking into consideration the Dutco lessons, this new law provides for the possibility (as opposed to the obligation) of the State court appointing all members of the arbitral tribunal where multiple parties fail to jointly appoint an arbitrator.

e) Dealing with an issue which was not regulated in the former law, it is now provided that in the absence of agreement between the parties concerning the fees and expenses of arbitrators, these fees and expenses shall be set by the arbitral tribunal taking into account the complexity of the disputed issues, the value of the dispute and the time spent on the arbitral proceedings. If the parties do not agree with the amounts set by the arbitral tribunal, they may request the court to establish the amounts it considers appropriate. This is a very important development, because it was relatively simple for a non-cooperating party to avoid the constitution of the arbitral tribunal (particularly in ad hoc arbitrations) by simply failing to reach an agreement regarding this matter.

f) Following closely the amendments to the UNCITRAL Model Law in 2006, the arbitration law provides for the possibility of arbitral tribunals adopting interim measures, which may require assistance on the part of State courts for their enforcement. In this regard, it is also established that the arbitral tribunal may issue preliminary orders, which will remain valid and effective for a period of 20 days from the date of issue.

g) In contrast to the option followed by some recent arbitration laws, the Portuguese legislation expressly provides for a system of third party intervention. The new regulation on this matter is conservative, establishing as essential requirements for third party intervention that the third party be bound by the arbitration agreement and, in the case of subsequent adherence to the arbitration agreement, the acceptance of such adherence by all other parties and by the arbitral tribunal.

h) A regime for the interpretation, amendment or clarification of an arbitral award is now specifically provided for in the new law.

i) In respect of international arbitration, and following the examples of the Swiss and Spanish laws, there is an express adoption of the principle that States (or State-controlled entities) cannot resort to their internal law to contest the arbitrability of the dispute or their capacity to submit themselves to arbitration.

j) Also with regard to international arbitration, the new arbitration law provides for the material validity of an arbitration agreement that meets the requirements set out (i) by the law chosen by the parties to govern the arbitration agreement or (ii) by the law applicable to the merits of the case or (iii) by Portuguese law.

k) With regard to recognition and enforcement of foreign arbitral awards, the new arbitration law fully replicates the New York Convention regime and expressly confers jurisdiction on a high court regarding issues of recognition.

In conclusion, the regulatory framework for arbitration in Portugal has profoundly changed and emphasises the arbitration-friendly environment that already existed in Portugal.

The publication of this law has aroused great interest not only within the arbitral community, but also within the academic and judiciary communities. This interest has resulted in a large number of events for the presentation and discussion of the law. A special reference must be made to the dissemination work that has been done by the Portuguese Association of Arbitration with the general public and, in particular, with the users of arbitration and the judges of the State courts.

Nuno Ferreira Lousa and Miguel Pinto Cardoso, Linklaters LLP

The factual background to West Tankers has been widely discussed (and is summarised in paragraphs 1 to 14 of the judgment) and there is no need to do so again here. Before the Court of Appeal, West Tankers submitted that judgment be entered under s. 66(2) of the English Arbitration Act 1996 (the “Act”) against the insurers on the terms of a declaratory arbitral award. This was on the basis that such a judgment would allow West Tankers to establish the primacy of the award over any judgment by Italian courts in ongoing proceedings of the same dispute. The High Court held that “[t]he purpose of s. 66 (1) and (2) [of the Act] is to provide a means by which the victorious party in an arbitration can obtain the material benefit of the award in his favour other than by suing on it” and that “[w]here … the victorious party’s objective in obtaining an order under s. 66 (1) and (2) is to establish the primacy of a declaratory award over an inconsistent judgment, the court will have jurisdiction to make a s. 66 order because to do so will be to make a positive contribution to the securing of the material benefit of the award”.

The insurers appealed, arguing that Field J had erred in his construction of s. 66 of the Act, specifically in the meaning of the word “enforced”, and that a declaratory judgment (and in particular a negative declaratory judgment) is incapable of being “enforced” under the meaning of the section. Lord Justice Toulson, in the leading judgment, however agreed with West Tankers that a broader interpretation of the phrase ‘enforced in the same manner as a judgment to the same effect’ in s. 66 is “closer to the purpose of the Act and makes better sense in the context of the way in which arbitration works”. He rejected the insurers’ argument that in the present case the court would not be enforcing an award but only the rights determined by an award as being “an over subtle and unconvincing distinction [that] sits on shaky foundations”, emphasising that “the enforcement of any judgment or award is the enforcement of the rights which the judgment or award has established”. However, Toulson LJ emphasised that the language of s. 66 is permissive and requires the court to determine whether it is appropriate in the situation before it to enter judgment – it is not “an administrative rubber stamping exercise”.

Although Toulson LJ emphasised that the issue before the Court of Appeal “is not a question with a distinctively European flavour”, the consequences of the judgment, and more generally of the approach of the English courts, clearly are (as illustrated earlier in African Fertilisers). It remains uncertain whether the judgment falls under the arbitration exception to the Brussels Regulation 44/2001, thereby underlining the need for reform of the Regulation. As any such reform is likely to take time, there remains the real possibility that the English courts may, before any such reform, be faced with enforcement proceedings under the Regulation of an (inconsistent) judgment of the Italian courts. The questions presented by African Fertilisers remain unanswered for the time being.

Phillip Capper and Christian Blank

White & Case LLP
London

For those who may have missed the previous blog posts,² these proceedings occurred further to an application to set aside a partial arbitral award rendered under the auspices of the International Chamber of Commerce, initiated by a Greek company J&P Avax SA against an Italian company Société Tecnimont SPA. Tecnimont had concluded a subcontract agreement with Avax for the construction of a propylene factory located in Greece. A dispute between the parties arose and Tecnimont instituted ICC proceedings in Paris pursuant to the arbitration clause contained in the subcontract agreement.

At the time of his appointment in 2002, the Chairman was ‘Of counsel’ at a global law firm with an office in Paris. In his declaration of independence, the Chairman disclosed that the Washington DC and Milan offices of his firm had previously worked with the parent company of Tecnimont in a concluded matter in which he had never been involved.

During the proceedings, Avax’s counsel became aware that the Chairman’s law firm was assisting a company that was later acquired by the parent company of Tecnimont. Avax then unsuccessfully challenged the Chairman’s appointment before the ICC Court of Arbitration in September 2007. The ICC dismissed the challenge for undisclosed reasons and Avax continued to participate in the arbitration while reserving its rights. A partial award on liability was rendered in favour of Tecnimont on 10 December 2007, with further information regarding the links between the Chairman’s law firm and Tecnimont’s affiliated companies coming to light thereafter.

Subsequently, Avax filed an application to set aside the award with the Paris Court of Appeal.

On 12 February 2009, the Paris Court of Appeal annulled the award and held that the arbitrator was under a continuing obligation to inform the parties of any matter that could cast reasonable doubts on his/her impartiality and independence. The Paris Court rejected Tecnimont’s argument that Avax’s application to set aside was inadmissible because it had already unsuccessfully challenged the Chairman before the ICC on the same grounds and that such challenge was in any event waived as it was made beyond the time limit of 30 days required by the ICC Rules on challenging arbitrators. The Paris Court of Appeal found that Avax had only been notified of relevant facts and circumstances after it challenged the award and after the partial award was delivered. They left open the questions of whether the ICC Rules bind the court and whether the party had waived its right to challenge the award by failing to adhere to the time limitation imposed by the ICC Rules.

The Cour de cassation³ reversed this decision, holding that almost all of the grounds for challenge were already included in the request for challenge filed with the ICC in September 2007. The Cour de cassation considered that the Paris Court modified the terms of the dispute by relying on facts that came to light after the partial award rather than relying on those submitted by the parties, a breach of Article 4 of the Code of Civil Procedure. Consequently, the Supreme Court remitted the case to the Reims Court of Appeal to decide on the validity of the award.

The Reims Court of Appeal first considered that the setting aside application was admissible because the failure to challenge the Chairman within the ICC time limitation did not prevent Avax from applying for the award to be set aside. The Reims Court of Appeal then annulled the award due to the Chairman’s failure to spontaneously and comprehensively disclose that his law firm had advised Tecnimont and related companies during the time of the proceedings.

This decision confirms: (I) the inapplicability of the ICC Rules at least for challenging arbitrators before French courts once an award is rendered and (II) the French courts’ attitude of broadening the scope of the arbitrator’s duty to update and disclose conflicts of interests.

I. The Inapplicability of the ICC Time Rules for Arbitrator’s Challenge

Article 11 of the ICC (1998) Rules provides that challenge of arbitrators must be brought within 30 days from when the party became aware of facts and circumstances giving rise to the challenge. The reasons for the ICC decisions on arbitrators’ challenges are not provided or published. That rule has not been modified by the recent revision of the ICC Rules, despite discussions on the benefits of publishing decisions concerning challenges of arbitrators.

As the Cour de cassation‘s decision that the Paris Court of Appeal modified the terms of the dispute was of a procedural nature, the Reims Court of Appeal’s view on the admissibility of the application to set aside was much anticipated.

Indeed, some commentators argued that the only motive that could justify the Cour de cassation putting forward this procedural flaw is that its correction would have an impact on the admissibility of Avax’s claim. The Cour de cassation therefore has ruled on a technical issue only to enable a future reversal of the Paris Court of Appeal’s decision. It is probably not by coincidence that the designated court is chaired by Dominique Hascher, former general counsel of the ICC Court of Arbitration and previous judge at the 1st Chamber of the Paris Court of Appeal.

On this occasion, the Reims Court of Appeal was expected to provide some explanations as to the consequences of not filing the application within the time limit set forth in the ICC Rules.

Both the Reims Court of Appeal and the Paris Court of Appeal accepted that some facts were revealed after the ICC decision on Avax’s challenge. Thus, the ratio decidendi of the case stands in its analysis of the consideration given by French courts to the ICC Rules.

The Reims Court of Appeal’s conclusions are straightforward: challenges before the ICC Court and review of an award by a judge are separate proceedings and do not serve the same purpose; the two applications are before different authorities; and the judge that deals with the award is not required to abide by the ICC time limit to challenge arbitrators. The ICC decision is of an administrative nature and does not have res judicata effect. Furthermore, the appellate judges found that the party has not waived its right to challenge the award as the party raised the issue and reserved its rights whenever possible during the arbitration proceeding. This decision means that, once an award is rendered and notwithstanding the ICC’s decision or the failure of the parties to comply with the ICC Rules on challenges during the proceeding, the judge has full liberty to decide whether arbitrators’ independence may be called into doubt provided the party shows that it did question the independence of the arbitrator and therefore did not waive its rights to challenge.

Although many commentators support efforts to ensure impartiality and independence, this case has already been criticised by some commentators for the court’s lack of consideration as to the ICC Rules with respect to time limits for challenges of arbitrators. Some view that ICC Rules should not have been so easily bypassed given that they represent contractual obligations that bind the parties and arbitrators. Another concern is that allowing the challenge to go forward means the party receives an opportunity to re-litigate the same issue before different bodies.

It is true that this case represents a rare disregard of the ICC Rules by the French courts. Nevertheless, it is the first time that the French courts deliberated the parties’ agreement to abide by the ICC Rules with respect to that specific issue. The party could have also challenged the arbitrator by virtue of Article 11 after the new information was disclosed but did not do so. However, the Article 11 time-limit is internal to the ICC procedure for arbitrators’ challenging and cannot be imposed on French courts once the award has been rendered. Moreover the party made clear that it reserved its right to challenge the arbitrator before the court. This does not imply that the Reims Court of Appeal has denied the will of the parties. Rather they deemed that failure to respect the ICC procedural time limit did not prevent recourse before national courts after the award is rendered.

II. The Broad Scope of the Arbitrators’ Disclosure Obligations

The appellate judges concluded that information concerning the links provided by the Chairman had developed throughout the course of the proceedings. The relationship between the Chairman’s law firm and one of parties to the arbitration went beyond the information disclosed in 2002 by the Chairman and was not revealed in due time.

In that respect, the Reims and Paris Courts of Appeal had similar interpretations. However, the Reims judges further elaborated on the meaning of the duty of disclosure. The Court found that arbitrators have a continuous obligation to disclose not only personal circumstances that may call their independence into question, but also factual circumstances involving the law firms to which they belong throughout the proceedings. Notwithstanding the arbitrator’s position in the firm, the obligation to disclose covers other files handled by other branches of the law firm irrespective of the subject matter of the dispute or the amount of fees invoiced for these other files. Thus, a certain degree of objectivity was required from the arbitrator, beyond his/her personal connections. After reviewing each specific link, the Court concluded that the failure to inform the parties of these facts or the incomplete information given to the parties created reasonable doubts as to the independence of the Chairman.

The Reims decision demonstrates the importance of continuous and strict conflicts checks by arbitrators, after their appointment and throughout the proceedings. This ruling is in line with the French case law on the continuation of the duty of disclosure.⁴ Indeed, under the new Article 1456 of the French Code of Civil Procedure, an arbitrator is under the duty to ‘disclose any circumstances that may affect his or her independence or impartiality’ and ‘also shall disclose promptly any such circumstance that may arise after accepting the mandate.’

This decision also confirms a current trend in French case law that broadens arbitrators’ duty of disclosure, e.g. with respect to the number of appointments of an arbitrator by one of the parties as well as to the existence of a business relationship between an arbitrator and a party’s counsel. However, this is the first time an award is annulled on the basis of connections with other offices of the arbitrator’s international law firm, rather than the arbitrator’s personal connections.

Arbitrators involved in proceedings seated in France are under a duty to continuously investigate potential conflicts and ensure that conflicts databases are regularly updated. As companies frequently change ownership and affiliates, clients should also be requested to clarify precisely their corporate structure and line of control and communicate any changes to their lawyers. Some commentators have criticised the lack of cost-efficiency of such refinement of conflict checks and updates system. The Reims Court of Appeal decision adds to the responsibilities of arbitrators but serves to ensure that arbitrators sitting in international arbitration tribunals in France remain independent and impartial throughout the proceedings. This development is crucial to maintain the credibility and quality of international arbitration.

The duty to disclose is also in harmony with the colour coded IBA Guidelines on Conflicts of Interest in International Arbitration, addresses the issue of an arbitrator’s law firm’s involvement with one of the parties. Arbitrators must disclose if their law firms are rendering services to one of the parties or affiliates without creating a significant commercial relationship and without the involvement of the arbitrator. While the rendering of services must be disclosed, it does not per se amount to a conflict of interest under the IBA Guidelines. The individual circumstance would have to be further examined.

The French courts’ approach on this matter does not differ, as the Court of Appeal specified that the facts that the matters dealt with by the law firm were unrelated to the dispute submitted to arbitration and that the amounts billed by the firm with respect to the other files was nominal and did not create an impact. Specifically, the Court stated: ‘Once a client relationship is established, that relationship is not only financial: the independence of an arbitrator is not judged depending on the scale of the fees received by his/her law firm from a party.’

Applying the IBA Guidelines, the arbitrator in the Tecnimont case would have been under the same duty to disclose his law firm’s representations of affiliates of one of the parties. However, the law firm’s representations may or may not lead to an annulment of the award as the facts would still have to be analysed under the IBA Guidelines to determine if they create a justifiable doubt as to the arbitrator’s impartiality and independence. Similarly, the Reims Court of Appeal would not automatically annul the award for failure to disclose all this information but will also analyse each specific link between the law firm and the parties to arrive at its conclusion. As the judges indicated: ‘(…) the review court’s responsibility is to assess the impact of the non-disclosure and to determine whether or not it could have caused a reasonable degree of doubt, in the minds of the parties, as to the alleged lack of impartiality.’

A pourvoi en cassation or recourse has been lodged against the Reims decision with the Cour de cassation and it is uncertain whether the Cour de Cassation will adopt the Reims Court of Appeal’s view of the ICC Rules.

By Laurence Franc-Menget and Vanina Sucharitkul, Herbert Smith LLP

In its decision 4A_574/2010 of 21 March 2011 the Swiss Federal Supreme Court dealt with a dispute that had arisen among the former members of a disintegrated law firm. One of the lawyers initiated the contractually agreed arbitration process against his former partners, but ultimately neither side paid the cost advances set by the arbitral tribunal. The arbitration did not move further. Some years later the same lawyer commenced court proceedings, taking the view that the courts were competent as the arbitration agreement had become inoperative. The Supreme Court recalled that the option to declare an arbitration agreement inoperative is not open if neither party pays the advance. In this case, the arbitration clause remains valid. Moreover, it remains in any event valid for disputes that are distinct from the one before the arbitral tribunal. In the case at hand, the factual matrix included circumstances that had come to light only four years after the arbitration had come to a halt due to the parties’ failure to pay the cost advances. Although the prayers for relief remained the same in the law suit subsequently initiated before the state courts, the dispute was thus distinct from the one in the arbitration.

In June 2010, the United Nations Security Council adopted new and tighter sanctions against Iran aiming at stopping Iran’s nuclear program (UN Security Council’s resolution 1929 of 9 June 2010). Based on this resolution the United States, the European Union and several other important countries (including Australia, Japan, Canada) implemented even broader sanctions against Iran. Those sanctions consist of strict economic and financial embargos banning imports from and exports to Iran, and also contain a blacklist of Iranian companies and individuals with whom trade is prohibited.

In August 2010, Switzerland transposed the UN resolution into Swiss national law by amending the existing Federal Ordinance of 14 February 2007 on Measures against the Islamic Republic of Iran. On 19 January 2011 Switzerland also tightened its sanctions against Iran by adopting a new Federal Ordinance (the “Ordinance”) which replaced the 2007 Ordinance. It came into effect on 20 January 2011 and, in principle, aligns Switzerland’s position with that of the UN.

The (new) Swiss Sanctions: The Federal Embargo Act (“EmbA”) is the legal basis for Swiss sanctions against foreign countries. Pursuant to Articles 1 and 2 EmbA, the Swiss Government can enact coercive measures imposed by the United Nations, by the OSCE, or by Switzerland’s most important business partners aiming to ensure the respect of public international law, namely compliance with human rights.

The Ordinance imposes a strict ban on export of so called dual use goods, technologies, and software (i.e. products and technologies normally used for civilian purposed which may also have a military application). Furthermore, since it is assumed that Iran finances the enrichment of uranium through the revenues of its oil and gas sector, the export restrictions also encompass goods that may be used in this sector. Furthermore, any financing of or shareholdings in Iran’s oil and gas sector is prohibited.

The Ordinance also affects Switzerland’s financial sector and contains e.g. a prohibition for Swiss (re-)insurance companies to contract with Iranian individuals or entities. Likewise, the law proscribes Swiss banks from transacting with Iranian banks. Furthermore, any money transfer to or from an Iranian individual or company over CHF 10’000 must be reported to Switzerland’s State Secretariat for Economic Affairs (the “SECO”); transfers exceeding CHF 50’000 even require a prior authorization from the SECO. The Swiss financial institution executing the transfer must file the request for authorization. Where that institution is not based in Switzerland, the Swiss beneficiary or the party ordering the money transfer must report it and seek prior authorisation. The SECO will grant a request if the money transfer does not violate the Ordinance or any other Federal Acts applying to the proliferation of armaments. Finally, the Ordinance also provides for a long blacklist of Iranian individuals and companies whose assets in Switzerland have been frozen and with whom any kind of transaction is prohibited.

Any violation of the Ordinance is punishable by imprisonment of up to one year or a fine of up to CHF 500’000.

Some Issues Arising under Swiss Law:

a. No bar to arbitration- The effect, if any, of a sanction on arbitration agreements is determined by the (arbitration) law at the place of arbitration. The nullity of the contract containing the arbitration agreement does not necessarily lead to the nullity of the arbitration agreement. Under Swiss arbitration law, all claims with a monetary value are arbitrable (Article 177 Private International Law Act), irrespective of whether the underlying contract is void or enforcement would be prohibited by international sanctions (Decision of the Swiss Federal Supreme Court Fincantieri v OTO Melara in ASA Bulletin 1993, 58 regarding sanctions against Iraq).

b. Illegality/Impossibility- Even if arbitration is possible, the claim may fail on the merits. Article 20 of the Swiss Code of Obligations (“CO”) sets forth three grounds on which a contract can be null and void: First, the contract is impossible to perform, second it has an illegal content, or third it violates bonos mores. A contract is illegal if its content, its conclusion or its purpose is incompatible with mandatory provisions of Swiss law. A contract must be lawful at the moment the parties conclude it. As a consequence, even if a dispute arises at a time when the contract is no longer unlawful (e.g. because the embargo was lifted), the contract remains null and void (Decision of the Swiss Federal Supreme Court 102 II 401 of 21 December 1976). This is, however, controversial and some scholars opine that in such circumstances, the illegality is cured (Claire Huguenin in Basle Commentary to the Swiss Code of Obligation I, 4th edition 2007 to Article 19/20 CO, N 16 with further references).

As to the impossibility of performance, it might arise from factual or legal circumstances. It is therefore not necessary that a given performance obligation under a contract be factually impossible so long as the law prohibits such performance, provided that the law is of permanent nature. Situations of temporary impossibility do not cause the nullity of the contract but are considered as being a situation of default under Swiss law. Most embargos are of temporary nature and therefore tend to cause default situations rather than a permanent impossibility. However, in a decision dating back to 1955, the Swiss Federal Supreme Court accepted embargos as possible causes for (permanent) legal impossibility (Decision of the Swiss Federal Supreme Court 81 II 613 of 13 December 1955). As a consequence, embargos such as that provided for by the Ordinance may give rise to a legal impossibility.

c. Supervening impossibility- If a contract becomes unlawful after its conclusion (“supervening impossibility”) by operation of a law enacted subsequently, the law cannot retroactively invalidate the contract (Decision of the Swiss Federal Supreme Court 100 II 105 of 28 March 1974). While impossibility ab initio under Article 20 CO renders a contract null and void ex tunc, an intervening impossibility merely exempts the obligor from its performance obligations as of the moment when the impossibility intervenes (Article 119 CO). Parties are free to include risk allocation clauses in their contract which apply in the event of international sanctions or provide for a mere suspension of performance in a force majeure clause (instead of extinction of the obligation as provided for by Article 119 CO).

As is the case with initial impossibility, likewise a supervening impossibility must be of a permanent nature, which may not hold true for most embargos. Nevertheless, as already outlined, Swiss courts have accepted payment restrictions imposed by Switzerland as a potential cause of legal impossibility. In a case involving a Swiss (national) embargo on exports of certain types of machines that could be potentially used in the production of nuclear weapons, the Swiss Federal Supreme Court ruled that the enactment of embargo qualified as a supervening legal impossibility within the meaning of Article 119 CO. The Supreme Court specified, however, that the seller of such goods may still be held liable for any damages resulting from non-performance if he knew or could have known about the future embargo at the time the contract has been entered into (Decision of the Swiss Federal Supreme Court 111 II 352 of 3 September 1985).

As stated, certain Swiss legal scholars consider that a temporary embargo does not constitute a legal or permanent impossibility within the meanings of Articles 20 and 119 CO, respectively, but merely a default situation. In this context, the award in ICC arbitration no. 7575 is of interest (Reported in Journal de droit international 2010, p. 1377). As the relevant embargo (against former Yugoslavia) was no longer in place, the arbitral tribunal found that there was no obstacle to the future performance of the contract. Another interesting question examined by the arbitral tribunal was whether interest continued to accrue during the embargo. The tribunal considered that interest was due and served to redress currency devaluation.

by Matthias Scherer (mscherer@lalive.ch) and André Brunschweiler (abrunschweiler@lalive.ch) @ LALIVE

Sports arbitration, however, gives rise to a specific concern with respect to the issue of consent. Often, athletes find themselves before arbitral tribunals whose jurisdiction was not directly chosen by them, but to which they are attracted for the sole reason that they signed an agreement with a federation which submits its disputes to arbitration. Courts, and in particular the Swiss Supreme Court, have seldom held arbitration agreements by reference in the sport context to be contrary to due process. The stated reason, to which the author adheres, is that arbitration representing the functional equivalent of judicial process, an athlete cannot be deemed to enter into an engagement violating its personality rights (and in particular Article 27 of the Swiss Civil Code) when entering into an arbitration agreement. Moreover, the recourse to arbitration is often in the best interest of the federations, by ensuring an harmonious case law, and of the athletes, by ensuring in particular a speedy resolution of their disputes.

Nevertheless, the situation changes when, as a result of the entering into an arbitration agreement by reference, a party looses his right to see his matter decided by a judge.

A 2009 decision of the Swiss Supreme Court raises this specific issue.

In a decision 4A_600/2008 dated February 20, 2009, the Supreme Court had to consider a challenge of a decision of the CAS which deemed an appeal withdrawn after the appellant failed to pay the advance on costs.

The facts of the matter arise out of a claim filed with the International Football Federation by a football club against the club’s former coach, whereby the club claimed EURO 400,000 to the coach for early termination of the employment agreement. The coach, alleging that the sum had already been paid, concluded that the claim be dismissed.

The Commission of the Player’s Status considered that proof of payment had not been brought with satisfaction and condemned the defendant to pay the amount plus interests.

The defendant appealed this decision before the CAS. The CAS acknowledged receipt of the appeal and brought the attention of the parties to the fact that they would have to pay an advance of costs. About a month later, the CAS informed both parties that the advance on costs had been set at CHF 19,000 each, and asked to be paid this amount by 15 September 2008. While the appellant paid this amount within the deadline, the appellee did not. On September 25, 2008, the CAS set the appellant another deadline until October 10, 2008 to pay the advance on costs. The letter of CAS reminded the appellant that “in the absence of payment within the said time limit, the appeal will be deemed withdrawn”.

On October 15, 2008, the CAS reminded the appellant that the deadline had passed and asked him to provide evidence of payment of the advance on costs. Counsel for appellant replied that the advance on costs would be paid shortly.

On 12 November 2008, the advance on costs having not been paid, the CAS send a fax to the parties informing them that the appeal was deemed withdrawn and that a closing order would be sent shortly.

On 13 November 2008, appellant’s counsel sent a confirmation of payment to the CAS and asked to be informed of the continuation of the proceedings. Attached to this correspondence was a letter dated 12 November 2008 of the appellant requesting his bank to wire CHF 19,000 on the CAS’ account.

By order of 18 November 2008, the President of the CAS Appellate Chamber [verify terminology] declared the proceedings closed. On 20 November 2008, the CAS received a notice of credit informing it that the appellant had paid CHF 19,000 on its account.

The CAS order of 18 November 2008 was challenged before the Supreme Court. The CAS took position to dismiss the challenge on the ground that the order was not an award. The Supreme Court admitted the challenge but rejected it on the merits.

One of the grounds raised by the appellant was the fact that the CAS had been excessively formalistic in holding the appeal as withdrawn although the advance on costs had been received, albeit late. Because of the CAS dismissal, the appellant was loosing any chance not to pay EURO 400,000 a second time. The Supreme Court dismissed however this argument, holding that it was not excessively formalistic for the CAS to withdraw the appeal when it was conditioned upon the payment of an advance on costs and when the appellant had been duly informed of the amount of the advance and of the deadline for payment.

Although this decision did not receive much attention, it raises difficult issues of due process which go beyond the sole issue of consent. Here, the defendant lost an opportunity to have his case heard by the CAS. The CAS, in this case, would have been the first instance external to the FIFA and thus truly independent.

I do not know what happened to the dispute afterwards, and in particular if the defendant tried to bring the matter before a state court, and more importantly whether a state court would have heard an issue already decided by the FIFA.

In light of the circumstances of the case, and in particular of the CAS’ numerous attempts to see the advance of costs paid, I do not believe that it can be blamed for the outcome of the case, in particular in light of the negligence displayed by counsel for the defendant.

But the matter remains unsettling, particularly if the defendant consented to arbitration by reference. In this case, not only did the defendant not choose to bring the matter to arbitration, but also, because of this imposed dispute resolution mechanism, ended up without the possibility to have his dispute reviewed by a court of independent jurisdiction. This result seems to be pushing the limits of the constitutionally guaranteed right to an access to a judge.

The new law clarifies the role of French courts. The President of the Paris Court of First Instance (Tribunal de grande instance de Paris) has been attributed the official title of “support judge” (“juge d’appui”), a term first introduced in scholarly works and used in case law, and now has sole jurisdiction to “support” international arbitration proceedings in case of related procedural disputes (Article 1459). This centralisation of power with the Paris Court is designed to ensure consistency in decisions.

Consistent with the previous law, this “support judge” has jurisdiction when the place of arbitration is France, or the parties have chosen to apply French procedural law. In addition, the “support judge” now also has jurisdiction if the parties have expressly agreed to refer their procedural disputes to French Courts or where one of the parties is exposed to a risk of denial of justice (Article 1505), which is a noteworthy innovation. French case law had previously upheld the jurisdiction of the President of the Paris Court of First Instance as “support judge” of an international arbitration between two foreign parties, in order to avoid denial of justice (NIOC case, dated 1 February 2005). In this case, the French Supreme Court noted, as one of the grounds for its decision, that there was a link, even if remote, with France. The new law goes further still. The “support judge” has jurisdiction in case of a risk of denial of justice, without there needing to be a link with France, thus granting universal jurisdiction to the “support judge”.

The new law also clarifies the respective powers of national courts and arbitral tribunals to take conservatory or provisional measures. Before appointment of the arbitral tribunal, national courts have sole jurisdiction to order such measures. Once constituted, arbitral tribunals have jurisdiction to take conservatory or provisional measures during arbitration proceedings, with the exception of conservatory seizures or judicial securities which are within the exclusive jurisdiction of national courts (Article 1468).

Further, the law introduces new rules governing the production of evidence. Arbitral tribunals are entitled to order parties to produce evidence subject to penalties should they fail to do so (Article 1467). Parties to the arbitration may, upon leave of the arbitral tribunal, request the “support judge” to order a third party to produce documents relevant to the case (Article 1469).

Another aim of the new law is to reinforce recognition and enforcement of arbitration awards and, therefore, provide more certainty to the parties relying on arbitration to settle their disputes.

Thus, according to the new law, “by way of a specific agreement the parties may, at any time, expressly waive their right to bring an action to set aside” the arbitration award (Article 1522). The parties’ waiver under this provision (which applies only to arbitration agreements entered into after 1 May 2011) does not affect their right to appeal a court decision to enforce the award in France (exequatur).

To accelerate enforcement of awards, the new law provides that any claim to set aside an award must be filed within one month of notification of the award (Article 1519) (three months for a foreign party), instead of one month (or three months) of service of the judgment enforcing the award (jugement d’exequatur) under the previous law.

The new law also facilitates proceedings for court enforcement (exequatur) of the award. It no longer requires a certified translation of the award or the presentation of the original copy of the award (Article 1515).

Finally, and importantly, to minimise unnecessary delays, the existence of court proceedings to set aside an arbitration award no longer stay the enforcement of the award, unlike under the previous law. Instead, the arbitral award is provisionally enforceable, unless the party against which the award is sought to be enforced applies for a stay of the award with the Court of Appeal. However, this party would have to demonstrate that enforcement of the award would be highly detrimental to its rights (Article 1526). The purpose of this provision – which will apply to awards rendered after 1 May 2011 – is to discourage parties from initiating frivolous annulment proceedings to delay the enforcement of awards.

These new provisions are by no means an exhaustive description of the new arbitration law. They are though illustrative of how the new law confirms France’s desire to remain a pro-arbitration jurisdiction.

Christophe von Krause and Paul Giraud

The law allows for the establishment of local ADR providers (which would be private, not-for-profit corporations jointly formed by a local Bar Association and a local Chamber of Commerce) and are accredited by a Mediation Certification Committee, under the auspices of the Ministry of Justice. Mediators are certified following examinations before the relevant Committee.

The entire mediation process is confidential and no transcripts can be taken during the process; the mediator is free to communicate with the parties as needed in each case however the information obtained from one party cannot be shared with its adversary without the former party’s consent.

Following the completion of the mediation process, a report stipulating the outcome must be drafted, including the parties’ and the mediator’s details, a reference of their agreement to mediate and of course the outcome of the mediation, whether successful or not. The report must be filed at the relevant civil court of first instance with locale jurisdiction, and once court-certified, it becomes enforceable as equivalent to a judicial court order. The preservation of strict confidentiality and the special provisions pursuant to which submission to mediation stops the clock in relation to the applicable statute of limitations, are some of the important aspects of this new law for ensuring mediation is indeed user-friendly and hopefully becomes a popular means of resolving disputes in Greece, out-of-court.

Further, another distinctive parameter relates to the mediator’s compensation, which is on an hourly rate basis and pro-rated at a fee cap of 24 hours total, in order to ensure mediation remains a viable option for resolving disputes, that does not burden the parties financially or in any other way and offers them the option of expedited, low-cost resolution of cross-border disputes.

The great significance of this new development is that it bridges a gap where it existed earlier in relation to the solid establishment of mediation as an ADR procedure in Greek jurisdiction and it alleviates the pressure from a bogged-down judicial system with an extensive case-load as it is. It is hoped that this new law will turn the page to a new era in ADR in the Greek jurisdiction.