Art. 207 of the Lisbon Treaty defines the new common commercial policy of the European Union, and states that it shall furthermore relate also to “foreign direct investments”. This provision has the appeal of an outright earthquake, given that the field of foreign investment, and in particular investment treaties, has always been the exclusive realm of the member states (at least in theory, the legal reality was different, though: the EU has concluded mixed free trade agreements with third states not only comprising matters of commercial policy, but also of investments). It has accordingly drawn the comments and critique of numerous scholars. Yet, to my mind it seems that this provision conceals more than it reveals: All we know so far is that the European Union will somehow take part in the foreign investment business in the future. The extent and the manner of its new role is widely unclear: The trouble starts with the term “direct foreign investment” itself, which is not defined. There are a number of other questions which are left unanswered by Article 207: What happens to existing BITs now that the competence to such treaties has – at least in part – been elevated to the EU level? Concededly, until the EU signs treaties of its own, there is little point in arguing that the member states have to cancel their existing BITs, but what happens if the EU does? Will there be parallel treaty structures in respect of direct and indirect investments? Or will there be joined treaties, negotiated and concluded by both the EU and the member states, originating from separate competences (I think, with regard to feasibility, this is the more likely option, especially with a view to the lack of competence of the EU to regulate matters of expropriation, cf. Art. 345 of the Lisbon Treaty)? When negotiating new investment treaties, will the EU take the position of an export- or an import-oriented state, given that the Union comprises both types of states?
Most of these questions require decisions to be made by the Commission and the ECJ, not so much because of legal considerations, but because the competence conferred by Art. 207 is too general and broad as to allow for a definite answer in either direction. It is this very indetermination of the competence, however, which is intriguing in that it allows for learned guesses on how the future of investment treaties in Europe could look. As an arbitration lawyer, I am personally most interested in the question of who would be liable and who would be eligible as a respondent in arbitration in the event a future EU investment treaty is breached.
If the investment treaty is signed by both the EU and the member states, i.e., a multilateral treaty (this is the scenario I would like to discuss, since it is, in my view the most probable one), there is, to my mind, a multitude of possible outcomes. The respondent and/or liable parties could possibly be:
1. only the entity which caused the breach, i.e., either the EU (in the case of a breach of EU officials, for example the competition authorities) or one or more infringing member states. This option would be inspired by a notion of the member states and the EU being coequal partners to the treaty and only severally liable.
2. The EU and the member state who breached the treaty. Such an option would, in legal terms, amount to several liability and attribution of a violation committed by a member state to the EU.
3. The EU and all of the member states, following a concept of joint and several liability.
4. The EU or the infringing member state, at the choice of the EU/member states. Such a mechanism would mirror the existing rule in s. 26 of the Energy Charter Treaty (“The communities and the member states concerned will determine who is a respondent party to arbitration proceedings (…)”.

Which will it be? I think that this depends first and foremost on the terms of the respective treaty, but which option would be desirable in terms of policy? Furthermore, in the absence of specific terms, the determination of liability and the status as respondent to investment arbitration proceedings might also require some deliberation as to the nature of the relationship between the EU and the member states in the context of multilateral investment treaties.

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

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

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

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

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

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

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

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

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

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

Then, March Rich is likely to survive.

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

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

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

“A judgment shall also not be recognized:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This calls for two observations.

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

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

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

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

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

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

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

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

Does a blind law professor intend to destroy the benefits of the New York Convention? Reading the post of Alexis Mourre, I was wondering whether I should react to it, as the post refers to my opinion at least incompletely. However, as I’m still convinced that a fair and open discussion is beneficial, I would like to make the following four annotations to his response: (1) I do not (longer) propose to delete the arbitration exception of the Judgments Regulation (JR) entirely; (2) the proposal of the Heidelberg Report is completely in line with Articles V and VII of the New York Convention; (3) the IBA Arbitration Committee’s proposals of enlarging the grounds of non-recognition under Article 34 JR run counter to the paramount objective of the current reform of the Regulation which shall abolish exequatur proceedings; (4) finally, despite of Alexis Mourre’s concerns, the proposals of the Heidelberg Report are compatible with the French practice of the negative “kompetenz-kompetenz”.

1. Alexis Mourre is not correct in stating that I am promoting a complete deletion of the arbitration exception in the Brussels I Regulation. It is true that this was the initial proposal of the Heidelberg Report. However, reacting to some of the critics on this proposal, I’ve modified my opinion. Just read the guest editorial at conflict of laws (an article which has been requested explicitly by A. Mourre for the Cahiers de l’Arbitrage by the way) where I suggested not to delete the arbitration exception of Article 1 (2) lit. d) JR entirely, but to replace it by a more restricted formulation.

The new provision shall clarify that the Regulation applies to declaratory relief under the (proposed) Articles 22 (6) and 27 (A) as well as to supportive measures under Articles 22 (6) and 31. For the sake of clarity, I would like to reiterate it here. The provision could read as follows:

“The Regulation shall not apply to ….
(d) Arbitration, save supportive measures and declaratory relief proceedings as provided for under Articles 22(6), Article 27A and Article 31.”

However, I would like to stress that this proposal does not change the basic idea of the Heidelberg Report which is found in the proposed Articles 22 (6) and 27A of the Judgment Regulation. The proposal is explained in detail in the guest editorial of 14 February 2010 at conflict of laws.

2. The main argument of Alexis Mourre relates to the inconsistent application of the New York Convention by the courts of its contracting parties. He stresses the fact that the New York Convention does not provide for a uniform law. I agree – but the objective of the NYC is certainly to provide for a uniform regime on the recognition of arbitral clauses and awards (this seems to me to be the reason why States ratified the convention). In this respect Alexis Mourre refers to Articles V (1) (c) (public policy clause) and VII (escape clause) of the New York Convention. He argues that these provisions clearly demonstrate that a different interpretation of the convention is still possible and is applied. Again, I agree. However, the real question is whether the EU-Member States are still free to interpret and apply the public policy exception of Article V NYC individually. In this respect, Alexis Mourre does not mention the ECJ’s judgment in case C-126/97, Ecco Swiss. In this case, the ECJ expressly urged the courts of the Member States to review arbitral awards under the NYC for their compliance with mandatory EU law (paras. 36 and 39). I suppose that Alexis Mourre agrees that the courts of all EU Member States must apply EU law in a coherent and uniform way. At present, most mandatory laws which apply in the context of the public policy exception of Article V NYC are found in EU law – I only mention the following examples: cartel law; company law; consumer protection law; further the principles of due process of law as well as procedural fairness (Articles 6 ECHR; 47 CFR). Accordingly, the public policy clause of Article V (1) (c) of the New York Convention must be interpreted coherently within the EU – eventually, the courts of the Member States must refer questions on the interpretation of mandatory EU law to the ECJ (Article 267 TFEU).

It must be mentioned here that this specific situation within the European Union is the main argument for the adoption of a regional regime in Europe aimed at supporting arbitration in the framework of the NYC. As I explained in the guest editorial on conflict of laws, a main reason for such a regional framework is the need of the European Judicial Area for a coherent enforcement of mandatory European law. This need also exists in the framework of arbitration (an argument not addressed by Alexis Mourre). In this respect the situation within Europe is distinctively different from the situation in so-called third states. The NYC plays a considerable role in the case law of the ECJ – but it is not regarded as a “distinct world” detached from the needs of the Internal Market – the ECJ held quite the contrary (see Ecco Swiss, para. 38). In addition, Article VII of the NYC does not give the green light to EU-Member States to derogate from mandatory EU-law in the context of the recognition of arbitral awards. In this respect, the decision of the Cour de Cassation in Putrabali seems to be doubtful in my opinion.

3. The third argument forwarded by Alexis Mourre relates to the proposals of the IBA Committee on International Arbitration regarding the reform of the Regulation Brussels I. According to these proposals, the grounds of non-recognition provided for in Article 34 of the Regulation should be enlarged and include arbitral awards. With all due respect, this proposal completely runs counter the objective of the ongoing reform of Brussels I which shall reduce the grounds of non-recognition and replace exequatur proceedings by the principle of mutual trust. This objective is clearly expressed by the first question of the EU-Commission’s Green Paper on the Reform – I do not want to discuss the issue here in more detail.

4. Finally, Alexis Mourre expresses concerns regarding the proper operation of the proposed Articles 22 (6) and 27A JR with regard to the French doctrine of the negative “kompetenz-kompetenz”. In this respect, he stresses the fact that a French juge d’appui does not give a declaratory judgment on the validity of an arbitration clause. The judge will send the parties to arbitration unless he finds that the clause is manifestly null and void. Again, the drafters of the Heidelberg Report were well aware of this practice in France. However, as French procedural law explicitly provides for declaratory relief in the context of arbitration (if the juge d’appui finds that the clause is manifestly void) it seems to me to be possible that a French juge d’appui who is seized by a party under Article 22 (6) JR will stay his proceedings and send the parties to arbitration. If the arbitral tribunal finds that the clause is effective, it may give an interim award. The French juge d’appui can endorse the award (by a declaratory judgment). This judgment will be recognised in all other EU-Member States and the prevalence of the arbitration proceeding will be assured. I agree with Alexis Mourre that the proposal will entail a (limited) change of the practice in France. However, it seems to be feasible that the French courts will adopt their practice to the framework of Articles 22 (6) and 27A JR in order to preserve the importance of Paris as the “home of international arbitration”.

Professor Hess is the author of the chapter of the Heidelberg Report on the interplay between arbitration and the Regulation 44/2001 (“the Regulation”). As such, and quite understandably, he actively promotes the suggestion that the arbitration exception should be deleted from the Regulation.

The Heidelberg proposal has been followed by a Green Paper of the European Commission and by a public consultation, which has given rise to numerous reactions from the arbitration community. Many of these reactions expressed a variety of serious concerns on the impact that the extension of the scope of the Regulation to arbitration related court litigation could have. Those concerns relate to possible conflicts between the Regulation and the New York Convention due to the automatic recognition of judgments invalidating arbitration clauses and arbitral awards for reasons inconsistent with the New York Convention, as well as to the recognition of judgments inconsistent with an arbitration awards. They also relate to possible lis pendens situations between proceedings initiated in breach of an arbitral award and proceedings to set the arbitration in motion or to enforce an award. Finally, the suggestion that the lis pendens rule of Article 27 of the Regulation could be set aside in case of a declaratory action before the courts of the country where the arbitration has its seat raises legitimate concerns with respect to the negative effect of the competence-competence principle, as well as to the rush to courts that it might provoke (on these concerns, see the responses to the Commission’s public consultation, and in particular the position taken by the International Bar Association Arbitration Committee, see also our previous post on these issues).

Those concerns, according to Prof. Hess, are misplaced. In an article posted on www.conflictsoflaw.net , which will soon be also published in the 2010-1 issue of the Cahiers de l’arbitrage/The Paris Journal of International arbitration, Prof. Hess submits that they stem from a “misunderstanding” of his intentions (footnote 32). He also promises that “the implications of the proposal will be rather limited” and that “the present state of affairs will largely remain unchanged”. With due respect, this is wishful thinking. The deletion of the arbitration exception, if adopted, will on the contrary have profound and unpredictable consequences on the law of arbitration in EU Member States.

Prof. Hess’ is quite keen to convince the arbitration community that his proposal is arbitration friendly. The Heidelberg proposal would indeed be thought to offer post-West Tankers an alternative to anti-suit injunctions in order to protect arbitration against torpedo actions (“the starting point of the Heidelberg Report was the West Tankers decision of the ECJ”). Yet, it is doubtful that drafters’ primary intention was to remedy West Tankers, for the Heidelberg Report was drafted and published many months before the sinking by the ECJ of pro-arbitration anti-suit injunctions. At any rate, there are good reasons to believe that the medicine would be worst than the illness it is suppose to cure.

Prof. Hess’s confidence that his proposal is innocuous seems to be based on the assumption that “the New York Convention provides for a uniform law”, and that there is thus “a general assumption that the courts of its contracting parties will apply its provisions equally”. As all courts of the Union should be trusted in an equal manner, “there is no reason to oblige the courts of a contracting party in a regional framework to verify the validity of the agreement individually”. In other words, mutual trust between Members States would command to give the same deference to all courts decisions in the Union, which may be fine in Aldous Huxley’s best of all worlds, but is probably far from the reality of the Union. Prof. Hess himself recognises, by the way, that the distrust towards State intervention in arbitration proceedings has been caused by “the limited degree of uniformity created by the New York Convention which does not entirely eliminate differences between the national jurisdictions”, which acknowledgement is rather difficult to conciliate with the assumption that the New York Convention “provides for a uniform law”.

Be as it may, there should be no serious argument that there is indeed no “general assumption” that courts in Member States apply the New York Convention “equally”. It is indeed not the case. Quite to the contrary, there are considerable differences in the way different jurisdictions apply the New York Convention. This is, first, because the generality of the terms of the New York Convention permit courts to disregard its spirit while formally complying with its literal terms (for example by applying a wide interpretation of the concept of public policy). And, second, because the New York Convention is not a convention of uniform law (like, for example, the Vienna CISG). Its scope is not to replace the national laws on arbitration, but to provide for a minimal threshold for the enforcement of arbitration agreements and foreign arbitral awards. As such, the Convention permits Member States to apply more favourable rules. In short, the Convention’s application and interpretation falls back on national arbitration law (on the nature of the New York Convention and the more-favourable rule see A. Mourre, A propos des articles V et VII de la Convention de New York et de la reconnaissance des sentences annulées dans leur pays d’origine: où va-t’on après les arrêts Termo Rio et Putrabali ? rev. arb. vol. 2008, Iss. 2 pp. 263-298 ). On the contrary, international works such as the successful UNCITRAL Model Law are model uniform instruments with a defined aim to harmonize national arbitration legislations.

It is in any case rather doubtful that, as submitted by Prof. Hess, “the prevalence of the New York Convention would be ensured by Article 71 JR, guaranteeing the New York Convention’s priority as a so-called ‘special convention’”. If it were so, French courts would retain the possibility of enforcing in France, based on article VII of the New York Convention, an award annulled in another Member State, which is the exact contrary of what the Heidelberg report intends to achieve. Article 71 refers to special conventions relating to court jurisdiction and enforcement of judgments in special matters, which arguably does not encompass the New York Convention.

It would therefore be necessary, for the sake of clarity, to add to Article 71 an additional provision stating that: “Nothing in the present Regulation will affect the proper operation of the New York Convention”.

One of the difficulties with the Heidelberg proposals is that it ignores the variety of cultures and legal realities that characterize arbitration. The Heidelberg Report is indeed impregnated by the idea that, if there is a dispute on the validity or enforceability of the arbitration agreement, it is for the courts to decide such dispute upfront. However, such a perspective, which is present in the laws of the United Kingdom and Germany, is totally absent in the French and Swiss perspectives (and Switzerland is now about to adopt the negative effect of Kompetenz-Kompetenz regardless of the seat of the arbitration – see Georg von Segesser/Dorothee Schramm latest post for an update on the legislative works being done in this respect). The way Prof. Hess approaches the problem is telling: the Heidelberg proposal does “not intend to increase satellite or parallel litigation in cases where the arbitration clause is undisputed” [emphasis added]. And he further considers that, would the Heidelberg proposals be adopted, “when the arbitration agreement is undisputed, parties may immediately initiate arbitration proceedings without any recourse to State courts” [emphasis added]. Considering that the parties may start their arbitration if they agree that there is a valid arbitration agreement is hardly an innovative proposition. But the reverse of the medal is interesting: if there is no agreement, courts should step in before the arbitration is started. Of course, from that perspective, the suggested declaratory action fits nicely in the picture.

Prof. Hess concedes that “even if the clause is disputed, Member States shall be free to provide a system of negative competence-competence where the arbitral tribunal decides on the validity of the clause”. This is acknowledged: the Regulation as amended would not invalidate Article 1458 of the French Code of Civil Proceedings. Whilst this might provide some comfort, Prof. Hess is however totally silent on the operation of article 27 of the Regulation in case of a conflict between an action in the merits in breach of the arbitration agreement and an action to put the arbitration in motion before the juge d’appui at the seat of the arbitration (e.g. the French juge d’appui. The question is of course relevant in case of an ad hoc arbitration where the parties did not select an appointing authority).

The easy answer could of course be that the decision of the juge d’appui according to which the arbitration shall proceed is a court decision and is thus able to set aside the lis pendens principle according to the proposed new article 27A. Is that so sure?

The proposed new article 27A is clear: it says that the lis pendens principle will be set aside “if a court of a Member State that is designated as the place of the arbitration in the arbitration agreement is seized for declaratory relief in respect to the existence, the validity, and/or scope of that arbitration agreement”. First, arbitration agreements which do not provide for the seat of the arbitration would be left unprotected. But more importantly, declaratory relief is what it is (unless the Commission intends to change the concept): a declaration, in the present case a declaration that the arbitration agreement is valid or enforceable. A French juge d’appui however takes no such decision. When seized of an action to put the arbitration in motion (and the same applies if the court is seized on the merits), a French court will limit itself to ascertain that the arbitration agreement is not manifestly null and void or inoperable. And this is a very demanding standard for parties who submit that there is such a manifest nullity or inoperability: according to French case law, it can only be so if the alleged nullity or inoperability is evident and does not need any complex analysis of the facts (see recently Cass. 1st Civ. 7 June 2006, Jules Verne c/ Sté ABS, rev. arb. Vol. 2006 Iss. 4, pp. 945 – 953 , note E. Gaillard, JDI Vol. 2006 Iss. 3 pp. 1384, note A. Mourre). Courts have been as far as deciding that the juge d’appui can only declare the arbitration agreement manifestly void or inoperable if there is no possible contrary solution (on this issue, see O. Cachart, Le contrôle de la nullité ou de l’inapplicabilité manifeste de la clause compromissoire, rev. arb. Vol. 2006 Iss. 4, pp. 893 – 908). Otherwise, it is for the arbitral tribunal to decide. There is, in other words, no declaration from the French juge d’appui as to the validity or applicability of the arbitration agreement.

In sum, the proposed new article 27A will not prevent a party having first started merit proceedings in breach of the arbitration agreement, and submitting before the court seized in the merits that the arbitration agreement is manifestly void or inoperative, from relying on the lis pendens rule to impose a stay to the French juge d’appui having to decide that the arbitration agreement is not void or inoperative.

In order for the Heidelberg proposal not to hamper the operation of the negative effect of competenz-competenz, the new Article 27A would have to be drafted as follows:

“A court of a Member State shall stay the proceedings once the defendant contests the jurisdiction of the court with respect to the existence and scope of the arbitration agreement (i) if a court of a Member State that is designated as the place of the arbitration is seized for declaratory relief in respect to the existence, the validity, and/or scope of that arbitration agreement, or (ii) if a judge at the seat of the arbitration has been seized to put the arbitration in motion or has been seized of a difficulty relating to the constitution of the arbitral tribunal, or (iii) if an arbitral tribunal, sitting in or outside the European Union, has been seized of said question” (accordingly, see the IBA position paper, § 25-28).

The issue that then arises is of course that many jurisdictions, like France, take quite a liberal approach as to the applicability of the arbitration agreement to non signatories, with the consequence that the above proposition would lead to generalise in the European Union the French arbitration friendly conception that arbitral tribunals have a priority in assessing their own jurisdiction, including with respect to non signatories. Are Prof. Hess and the Commission ready to endorse that principle? That would certainly be a considerable step forward for the laws on arbitration in Europe.

Another aspect of the lis pendens conundrum regards the enforcement of awards. Presumably, Prof. Hess’ proposed Article 27A would prevent any lis pendens situation between an action in the merits in breach of the arbitration agreement and an enforcement action at the seat of the arbitration. As a matter of fact, in case of a dispute on the award’s validity at the seat of the arbitration where a party would base its argument on the invalidity of the arbitration agreement, the court would be required to decide whether said agreement is indeed valid or enforceable, and its decision would be taken as equivalent to the declaration required by the proposed article 27A. But what if enforcement is sought in another country? The proposed Article 27A would then not protect the award and the Regulation’s automatic stay provision would then have the effect of preventing a party from enforcing the award.

It would therefore be necessary to include in the Regulation a new Article 27B as follows: “Article 27 shall not apply to the court of a Member State requested to enforce an arbitration award” (accordingly, the IBA position paper, § 40).

Finally Article 34 of the Regulation would need to be amended so to avoid the automatic recognition of judgments having disregarded a valid arbitration award or annulled an arbitral award on the basis of local standards. A new article 34A would therefore need to be included, as follows:

“A judgement shall also not be recognised:

a) if it has been rendered in disregard of an arbitration agreement that is valid under the law of the country of recognition;
b) as regards judgments rendered on the validity of an award, if (i) it has not been rendered by the courts of the country where the arbitration has its seat, or (ii) in case of annulment of the award, if it was not made on one of the grounds set out in Article V (1) (a) to (d) of the New York Convention” (accordingly, see the IBA position paper, § 40).

Encore un effort, Messieurs les réformateurs….

In holding that “Article 85 of the [EU] Treaty [now article 101 of the Treaty on the Functioning of the European Union – TFEU] constitutes a fundamental provision which is essential for the accomplishment of the tasks entrusted to the Community and, in particular, for the functioning of the internal market”, and that “the provisions of Article 85 of the Treaty may be regarded as a matter of public policy within the meaning of the New York Convention”, the European Court of Justice in Eco Swiss (Case C-126/97, 1 June 1999) has created the potential for a flood of challenges against awards for alleged misapplications of the law of competition. The risk caused for arbitration by the characterisation of European competition law as a matter of public policy under the New York Convention has further increased with the growing acceptance and importance of economics in competition policy and decision making, for economic thinking and economics models have never proven to be perfect guides, and may lead to highly unpredictable results. In addition, economic analysis is fundamentally fact-driven and the marriage between competition law and the doctrine of public policy in arbitration inevitably has the potential to lead the reviewing court to revisit the case on the merits. Being a matter of public policy, it may be considered that the arbitral tribunal’s findings should not bind the court reviewing the award. In addition, bad faith litigators are rewarded, as European courts will generally entertain a challenge based on competition law even if the complaining party never raised any such argument during the arbitration proceedings. Finally, given the broad scope of competition law, any award based on a contract of a certain importance may be challenged on the basis of a market power analysis showing that said contract has the effect of distorting the proper functioning of competition on the relevant markets. Then, instead of performing a limited review of the award, the court finds itself dragged into a complex dispute which may never have been argued before, where it is requested to review massive evidence, including expert reports, on market shares, structure of prices, etc…

It is clear that challenges of awards based on alleged distortions of competition have the potential of frustrating the parties of what they bargained for by agreeing to arbitrate: a one stop shop allowing them to resolve their dispute in a fast, efficient and final manner. A balance thus needs to be found between the principle of finality of awards and the public interest to an effective protection of competition. In France, the trend has been set by the famous Thalès case, where the Paris court of appeal found that an award can be quashed only where its solution entails an “effective and flagrant” violation of international public policy. Although criticised by certain authors as an undue limitation to the court’s powers to review the award under substantive public policy, the limited control posited by Thalès has now been endorsed in different ways by two recent court decisions in France and Belgium.

The first decision was rendered by the Court of Appeal of Brussels on 22 June 2009 and is part of the SNF v. Cytec saga. The other is from the French Court of Appeal of Paris and was handed down on 22 October 2009 in Halyvourgiki v. Linde. Both decisions confirm in different ways that courts should exercise restraint when entertaining a challenge based on an alleged breach of European competition law.

The SNF v. Cytec dispute (on which, A. Mourre and L. Radicati di Brozolo, Revue de l’arbitrage, 2007, 304 and A. Mourre, Revue de l’arbitrage, 2009, 594) arises from the termination by SNF of a long term supply agreement of a raw material called AMD, based on its alleged anti-competitive effects. The contract provided for ICC arbitration in Brussels. Cytec started an arbitration with the aim of challenging the contract’s termination and seeking damages, and SNF alleged before the arbitrators that the contract not only violated Article 81 EC [now article 101 of the TFEU] but was also an abuse of its dominant market position. Two awards were rendered in Brussels in 2002 and 2004 under the aegis of the ICC rules. The arbitrators decided in a partial award that one of the contracts indeed violated Article 81 of the EC Treaty since it had the effect of foreclosing SNF from the AMD market. The tribunal also decided that both parties were responsible for the nullity of the contract and that liability should thus be equally shared between them. In the final award, the tribunal nevertheless held that SNF had not established its losses and thus awarded damages only to Cytec, in an amount that roughly matched those that such company had initially sought for the termination of the contract.

SNF challenged the decisions on the basis that the award of damages to Cytec in an amount roughly equivalent to its initial claim amounted to giving effects to the annulled contract, and that in so doing the tribunal breached Articles 81 and 82. On 8 March 2007, the Tribunal of Brussels quashed the awards on the basis that the tribunal’s reasoning was inconsistent for it had on the one hand admitted that the contract was contrary to public policy and on the other hand awarded Cytec damages in amount equivalent to those that it had initially sought to compensate its allegedly wrongful termination. It is worth noting that, in parallel, Cytec had sought the enforcement of the awards in France and obtained its exequatur from the court of Paris. After subsequent proceedings, the Paris court of appeal (23 March 2006) and the French Supreme Court (4 June 2008, Clunet 2008, 1107, note A. Mourre) rejected SNF’s challenges against the exequatur by holding that enforcement of a foreign award could only be denied in case of a “flagrant and effective” violation of international public policy, that the solution given to the dispute by the awards did not materialise such a flagrant breach, and that SNF’s allegations that the contract had anti-competitive effects amounted to an attempt to reopen a debate on the merits that had been finally settled by the arbitrators.

Indeed, at this stage of proceedings, the decisions of the French court of cassation and the Belgian first instance tribunal illustrated the stark opposition between the so-called minimalist and maximalist approaches of the award’s scrutiny. The French position was certainly in accord with the dominant view, in and outside the European Union, that awards should only be quashed in case of manifest and egregious breaches of international public policy. In Switzerland, it is well known that the Swiss Federal Tribunal held in Tensacciai (TFS, 8 March 2006) that awards can only be quashed in case of breach of the most fundamental principles which form the basis of any legal order, and that competition law is not part of such “truly” international public policy. In the United States, courts have repeatedly upheld a pro-arbitration stance and decided that the award can only be quashed for breach of the law on competition if the arbitrator purposely ignored it when making the award (U.S. Court of Appeals, 5th Circuit, American Central Eastern Texas Gas Company v. Union Pacific Resources Group and Duke Energy). In another case, the 7th Circuit found that a mistake in the arbitral tribunal’s application of the competition law is not a ground on which to set aside an award (16 Jan. 2003, Baxter International Inc. v. Abbott). The High Court of New Zealand has also endorsed minimal review of awards under competition law (Gvt. Of New Zealand v. Mobil Oil, YCA 1988, 638). In Italy, both the court of appeal of Milan in Tensacciai (8 March 2006) and Florence (Nuovo Pignone, 21 March 2006) clearly stated that the scrutiny should be limited to verifying that the arbitrators duly considered the competition law issues and held that a misapplication of such rules is not tantamount to a violation of international public policy. In Sweden, the Svea court of appeal held in 2005 (Rep. of Latvia v. Latvijas Gaze) that the concept of public policy should be given a narrow application in the context of the review of an arbitral award and that a violation of competition law can only lead to an annulment in “obvious cases”. Although there is to our knowledge no case dealing precisely with a challenge based on European antitrust law in England, the Court of appeal in Westacre has clearly set the yardstick in favour of finality. Case law in Germany is still unsettled, with decisions in favour (OLG Düsseldorf, 21 July 2004) and against (OLG Thüringen, 8 August 2007) an in-depth review of the arbitrators findings, but well known authorities have supported the Thalès approach (P. Schlosser, Articles 81 and 82 EC-Treaty and Arbitration: A German Perspective, Cahiers de l’arbitrage, 2009-1, 25). Likewise, in Spain, although we are not aware of any case on point, leading judges have clearly expressed the view that court review of awards should be limited to the most egregious breaches of public policy and should never lead the court to revisit the arbitrators’ findings as to the facts of the case (A. G. de Paredes, L’annulation des sentences arbitrales en Espagne: à propos de la non révision au fond des sentences et du contrôle du respect de l’ordre public en droit espagnol: Cahiers de l’arbitrage, 2007-3, 27).

From that perspective, the stand of the Brussels court of first instance in SNF in favour of an in-depth review of the arbitrators’ findings in order to ensure a proper application of the law on competition was certainly isolated. To our knowledge, only once has a court entered into the exercise of revisiting the arbitrators’ findings in the merits (Court of appeal of The Hague, 24 March 2005, Marketing Displays International, for a critical analysis, A. Mourre and L. Radicati di Brozolo, Towards Finality of Arbitral Awards: Two Steps Forward and One Step Back, JOIA 2006, 180). Belgian courts have however now joined the mainstream pro-arbitration approach by annulling the Brussels court of first instance ill-grounded annulment decision.

In a 22 June 2009 decision, the Brussels’ Court of appeal (Revue de l’arbitrage 2009, 574, with a note by A. Mourre), has in fact clearly confirmed that “the judge before which the award is challenged should not verify the accuracy of the arbitrators’ reasoning and cannot substitute his own valuation of the case to that of the arbitral tribunal. The Court of appeal adds that “the mission of the judge reviewing an award is to verify the regularity and the legality of the award: as a matter of principle, the review has to be performed to the exclusion of any revisiting of the merits of the case and only on the limited grounds set by Article 1704 of the Judicial Code if any such ground has been invoked”. And it rightly concludes that “the grounds developed by a party which pursues a complete revisiting of the merits of the case by asking the judge to reassess the consequences of the nullity of a contract in a manner different than the arbitrators’ appraisal are not part of public policy”.

The Brussels Court of appeal approach is thus very close to that of French courts, as confirmed by a very recent and unpublished 22 October 2009 decision of the Paris Court of appeal in Linde Aktiengesellschaft v. Halyvourgiki. The two companies had entered into an agreement for the production of liquid gas by Linde in a steel plant belonging to Halyvourgiki, the gas being destined to the industrial needs of said plant. While Halyvourgiki argued that the contract included an implied exclusivity provision preventing Linde to sell the gas to other customers, Linde submitted that no such exclusivity provision had been agreed between the parties. Linde however raised before the arbitral tribunal no argument based on the invalidity of the alleged exclusivity agreement under the rules of competition. In its award, the arbitral tribunal found that, based on trade customs in these type of contracts for the production of gas on the customer’s site, the manufacturer is indeed under the obligation to reserve the full production made on site to the owner of the plant. The award was challenged before the Paris Court of appeal by Linde, who raised at this stage and for the first time the argument that the implied exclusivity agreement was a vertical restraint and that, given the parties’ shares of the relevant market, it did not fall under the relevant block exception. Linde also submitted that the implied exclusivity provision had the effect of distorting the operation of the liquid gas market in Greece and led to an increase in prices and to reinforcing the market power of its main competitors. The argument was based on lengthy and highly complex expert reports analysing the structure of the liquid gas market in Greece and in Europe, the structure of the prices, and the evolution of the main gas manufacturers’ market shares over a span of several years both in Greece and in Europe. Linde’s argument was disputed by Halyvourgiki both on the basis of arbitration law (the alleged misapplication of European competition law is not ground for quashing the award) and on the ground of competition law (as Halyvourgiki disagreed with Linde’s economic analysis, notably the identification of the relevant market and the parties’ market shares).

It should also be noted that the case was much more driven by economic analysis than Thalès was, for the exclusivity in dispute was a vertical restraint (as opposed to a horizontal one) which did not imply any breach per se of the law on competition but an alleged illegality based on the economic effects of the transaction.

In its decision, the Court of appeal fully endorsed the Thalès doctrine and held that the challenge amounted to an attempt to reopen a debate on the merits which should have taken place before the arbitral tribunal, that the control was restricted to the solution given tot the dispute by the arbitral tribunal in its award, and that the alleged anti-competitive effects of the agreement in dispute did not amount to a flagrant and manifest breach of international public policy.

The thrust of both the Brussels and Paris courts decision is that the award, if rendered by a competent arbitral tribunal in a regular procedure where both parties had the benefit of due process, has an intrinsic authority which should be acknowledged and recognised as such by the reviewing judge. There is nothing revolutionary there, as this is exactly the basis upon which the doctrine of private international law has established limited review of foreign judgments since more than fifty years. From that perspective, the limited review of awards under substantive public policy differs from the control performed by courts as to the jurisdiction of the tribunal. In fact, the authority of the award supposes that is has been rendered on a valid arbitral agreement. This explains why the nature of the limited review of awards under substantive public policy is sometimes characterized as “extrinsic”, as opposed to the review of the arbitral tribunal’s jurisdiction, which is “intrinsic” in the sense that it implies a review of the reasons given by the arbitrators to establish their jurisdiction.

Alexis Mourre

On 8 July 2009, the French Supreme Court rendered a decision confirming its position that the existence and the validity of an arbitration agreement should be determined primarily in light of the common intent of the parties (Société d’études et représentations navales et industrielles (SOERNI) et autres vs. Société Air Sea Broker limited (ASB), July 8, 2009, Case no. 08-16025).

The case concerned a transportation agreement entered into by SOERNI and ASB for the transport by ASB of a motorboat from Libreville to Pointe Noire. The agreement between the parties did not contain any arbitration clause. However the parties also entered into a hold harmless letter, which made reference to an arbitration clause contained in a bill of lading. ASB initiated arbitration proceedings, arising out of the sinking of the motorboat, on the basis of the arbitration clause contained in the bill of lading. Ultimately the arbitral tribunal would rule in favour of ASB and order SOERNI to pay damages to ASB.

The arbitral award was enforced by the Paris First Instance Court in August 2006. However, on 20 December 2006, SOERNI filed an action before the Paris Court of Appeal to set aside the enforcement order. After the Paris Court of Appeal confirmed the enforcement order, on 15 May 2008 SOERNI appealed that decision to the French Supreme Court. SOERNI argued that it had not seen the arbitration clause before entering into the transportation agreement and that under French law an arbitration agreement incorporated by reference is not binding if a party is not aware of its contents when entering into a contract referring to it. SOERNI also argued that it had been represented by an employee who had no binding authority.

In its decision dated 8 July 2009, the French Supreme Court confirmed the validity of the arbitration agreement. The French Supreme Court declared that the question of whether a party is or is not validly bound by an arbitration agreement should be examined in light of the parties’ common intent, the requirement of good faith, and the belief that the person who signed the clause had the power to bind the company. In doing so, the Supreme Court did not discuss the law governing the arbitration agreement, but considered only the following relevant facts: (a) the hold harmless letter made a clear reference to the arbitration agreement, (b) the employee was ASB’s only contact during the negotiations, and (c) ASB had never been informed by SOERNI that the employee lacked the authority to bind SOERNI.

Thus, the French Supreme Court confirmed its position in the Dalico case (see Municipalité de Khoms El Mergeb v. Société Dalico, December 20, 1993, Case no. 91-16828) according to which the validity of the arbitration agreement depends primarily on the parties’ common intent, without reference to the law governing the contract or other national law. As in the SOERNI v. ASB case, the French Supreme Court chose not to apply a conflicts of law analysis when considering the validity of an arbitration agreement, but to turn to the relevant facts and examine the common intent of the parties, i.e., to apply the French substantive rules of international arbitration to the arbitration agreement. The French Supreme Court has adopted this position on a number of occasions previously (see L’Entreprise Tunisienne d’Activités Pétrolières (ETAP) v. Bomal Oil, November 9, 1993, Case no. 91-15194; Société anonyme Française Entrepose GTM pour les Travaux Pétroliers Maritimes (ETPM) v. Société anonyme Empresa Constructoria Financiera (ECOFISA), December 4, 1990, Case no. 88-13336).

This recent decision confirms, once again, the pro-arbitration approach of French courts.

By Christophe von Krause and Marily Paralika

In the recent decision in Youell v La Reunion Aerienne [2009] EWCA Civ 175 the English Court of Appeal applied the ECJ decision in West Tankers and upheld a Commercial Court decision holding that the mere fact that a contract contains an arbitration clause does not deprive the court of jurisdiction under the Brussels Regulation. The appropriate remedy for a party alleging that English court proceedings are brought in breach of an arbitration agreement was therefore not to challenge the court’s jurisdiction but rather to seek a stay of the court proceedings under Section 9 of the Arbitration Act.

The claimants, London market insurers, and the defendants, French market insurers, both subscribed to the insurance programme of a French group of companies. The wording of the London insurers’ policy was expressed largely to follow that of the French insurers. The policies were governed by French law. The French insurers’ policy contained an arbitration clause and there was evidence suggesting that French law would regard that clause as incorporated into the London insurers’ policy.

The French insurers settled a claim to which the London insurers refused to contribute, contending that the settlement had been reached without their authority or involvement. The French insurers commenced an arbitration in Paris against the London insurers. The London insurers disputed the existence of an arbitration agreement between the parties and issued proceedings in the English courts seeking a declaration of non-liability. The English insurers relied on Article 5(1)(a) of the Brussels Regulation as the basis for the English court’s jurisdiction. Article 5(1)(a) allows proceedings to be brought in the courts of the place of performance of the relevant contractual obligations (in this case the alleged obligation to pay the French insurers in England). The French insurers made an application to the English court for a finding that it had no jurisdiction to hear the claim, arguing that the claim fell within the arbitration exception under Article 1(2)(d) of the Brussels Regulation.

The Commercial Court found that the mere fact that the contract contained an arbitration clause did not mean that the claim fell within the arbitration exclusion. The Commercial Court rejected the challenge to its jurisdiction and held that the London insurer was entitled to rely on Article 5(1) of the Brussels Regulation because the place of performance of the alleged contractual obligation to pay was England.

The Court of Appeal agreed with the Commercial Court’s finding. Applying West Tankers, the Court of Appeal held that the nature of the claim before the Court was critical. The subject matter of the London insurers’ claim was that it was not liable under an alleged contract. It did not matter that the French insurer sought to establish that liability in an arbitration. The fact that a contract contains an arbitration clause does not mean that all claims on that contract are excluded from the scope of the Brussels Regulation by the arbitration exclusion. It is the nature of the claim that is crucial, meaning the substance of the claim itself. In this case, the nature of the London insurers’ claim in the English courts related to a contract. The claim was therefore within the scope of the provisions of the Brussels Regulation relating to jurisdiction in contractual and insurance disputes and was not excluded by the arbitration exclusion. Claims that might be captured by the exclusion would therefore only be those concerned with arbitration itself in a very narrow sense.

The Court of Appeal noted that, notwithstanding the inapplicability of the arbitration exclusion, a party may still apply under section 9 of the Arbitration Act 1996 for a stay of proceedings in the event that proceedings have been brought in breach of an arbitration agreement. Such an application for a stay under the relevant legislation implementing Article II.3 of the New York Convention is the proper remedy within the EU for parties served with court proceedings in breach of an arbitration agreement.

A green paper reviewing the Brussels Regulation was published by the European Commission in late April 2009 with comments invited by 30 June 2009.

In the fact of the English proceedings, the French market had several options. The first and obvious option was to seek a stay under section 9 of the Arbitration Act 1996. The second was to defend the case on the merits. The third was to ignore the proceedings. Each of those options presented it with tactical problems. Instead, it sought to claim that the English court had no jurisdiction. That led to an interesting discussion about the scope of the arbitration exclusion in the judgment of the Court prepared by Collins LJ (the editor of Dicey on Conflicts of Laws). All this however could have been avoided if a straightforward application to stay the English proceedings had been made under section 9.

Germany has introduced an amendment to its Foreign Trade and Payments Act. It is a direct response to increased activities and acquisitions by sovereign wealth funds (SWFs), as they are often perceived to pursue economic as well as political aims. Despite this origin, the legislation does not only apply to SWFs. Instead, it allows the German government to effectively block any acquisitions of stakes in any German businesses if:

 the purchaser is a non-EU person, or 25 per cent or more of the voting rights in the purchaser are owned by a non-EU person,
 following the transaction, the purchaser directly or indirectly holds 25 per cent or more of the target company’s voting rights, and
 the transaction poses a threat to public order or public safety in Germany.

Some commentators have wondered whether the broad scope of the Act might not actually prove to be counterproductive. Extending its application to any industry is more likely to be subject to severe scrutiny, particularly in relation to existing laws and regulations for the protection of foreign investment, than a narrowly tailored approach might have been. It also remains unclear whether the amendment may affect obligations assumed by Germany under its Bilateral Investment Treaties.

Under the Act, if the purchaser is a non-EU person, or if one non-EU person controls 25 per cent or more of the voting rights in the purchaser individually, the government’s right of review is triggered. Conversely, no right to review is triggered if there are several non-EU shareholders with a combined shareholding of 25 per cent or above, as long as each of them individually remains below 25 per cent. However, any voting rights held indirectly through other entities in which the relevant non-EU person holds 25 per cent or more of the voting rights are attributed to that person (as well as voting trusts). An exception to this general rule applies to EU acquisition vehicles that have “sufficient substance”. This means a company that has not been set up exclusively for the purpose of circumventing the review process, in other words, a company with its own business activities, employees and/or assets will not trigger the review process, even if a third country person holds 25 per cent or more of the voting rights in that company.

For the purpose of the Act, persons and companies from the European Free Trade Association (EFTA), namely Iceland, Liechtenstein, Norway and Switzerland are treated like EU persons.

The Review Process
The only ministry that has authority to act under the amended legislation is the Ministry of Economics and Technology (MET). The MET may decide to enter into a formal review process within three months from the conclusion of a sale-and-purchase agreement or the announcement of a public takeover offer. For at least the duration of this review period any transaction remains subject to a condition subsequent of the MET prohibiting such transaction.

If the MET decides to institute a review, the purchaser has to provide the ministry with the relevant documents of the transaction. Upon receipt of all the required documents, the statutory review period of two months begins to run. The only ground upon which the MET can order annulment is a determination of a “threat to public order or safety”.

Alternatively, an investor may apply for a certificate of non-objection (Unbedenklichkeitsbescheinigung) from the MET before the conclusion of the acquisition. In this case, it is merely necessary to outline the basic elements of the planned acquisition, the investor and his field of business.

In the event the MET decides to prohibit the transaction, the legal consequence is the invalidity of the underlying sale-and-purchase agreement under German civil law. If shares have already been transferred to the purchaser, the MET can limit or restrain completely the voting rights in the German target or appoint a trustee to unwind the transaction.

Under the Act, an investment can only be denied if it poses a threat to public policy or public order. Any limitation exercised must be within the scope set by the European Court of Justice (ECJ). In very limited circumstances the ECJ has recognized this exception in the areas of Freedom of Establishment and Free Movement of Capital. However, any measure taken must not be a disguised form of protectionism, must be strictly necessary and no less restrictive measure must be available.

Further limitations on restricting investments result from the General Agreement on Trade in Services (GATS). It contains detailed rights that guarantee capital access of investors.

Considering the legal limits resulting from the EC Treaty and GATS, it will be interesting to see what happens if an investment is denied on this basis. A situation is conceivable where an investor successfully raises EC or GATS concerns. It further remains to be seen whether there is an impact with regard to rights under Germany’s Bilateral Investment Treaties.

Dr. Patricia Nacimiento
Partner
White & Case LLP

The relationship between Arbitration and European Judicial Private Law has not always been easy. The bedrock European Law principle in this field, as embedded in the European Council Regulation (EC) No. 44/2001 of December 22, 2000 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (“the Judgment Regulation”), is the free movement of judgments in the European Judicial Area. Arbitration law, in contrast, is diverse, each country having is own rules and its own conceptions of the status and effects of international awards.

The Judgment Regulation, as well-known, does not apply to arbitration, which is expressly excluded from its scope of application by Article 1 (2) d (“the Arbitration Exception”). The current revision process of the Judgment Regulation has potential far-reaching consequences on the law of arbitration in the European Union. If arbitration is included in the scope of the Regulation, as suggested by a recent Green Paper of the European Commission dated April 21, 2009, many of the principles presently applied in certain jurisdictions, such as the negative aspect of Kompetenz-Kompetenz, the legal autonomy of the arbitration agreement and the recognition of awards annulled in their country of origin would have to be revisited. The arbitration law of EU Members States would in many respects have to be changed according to uniform rules compliant with principles such as the free circulation of judgments and mutual trust between jurisdictions. Choice of law rules would have to be introduced, while new procedures meant to allow the courts of the seat of the arbitration to decide, in a binding manner for other courts, on the validity and scope of the arbitration agreement would have to be introduced. The Commission report and Green Paper opens a consultation expiring on June 30, 2009. Depending the outcome of this 70 days consultation, the face of arbitration in Europe might completely change.

The 70 days that might shake Arbitration in Europe
The relationship between Arbitration and European Judicial Private Law has not always been easy. The bedrock European Law principle in this field, as embedded in the European Council Regulation (EC) No. 44/2001 of December 22, 2000 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (“the Judgment Regulation”), is the free movement of judgments in the European Judicial Area. Arbitration law, in contrast, is diverse, each country having is own rules and its own conceptions of the status and effects of international awards.

The Judgment Regulation, as well-known, does not apply to arbitration, which is expressly excluded from its scope of application by Article 1 (2) d (“the Arbitration Exception”). The Arbitration Exception has given rise to significant doctrinal debates as to its scope, meaning and effects (see, e.g. in favour of the Arbitration Exception, Mourre, Faut-il un statut communautaire de l’arbitrage? ASA Bull., Vol. 23, No. 3, 2005 p. 409; in favour of its suppression, Van Houtte, Why Not Include Arbitration in the Brussels Jurisdiction Regulation?¸ Arb. Int. Vol. 21 No. 4 (2005), pp. 509 – 521). It may be fair to say that the case law does not support the statement that the Arbitration Exception has raised insurmountable difficulties. In the 40 years passed since the Brussels Regulation was adopted, only three times has the European Court of Justice had to deal with referrals relating to arbitration. The first was in the well-known Marc Rich case, to decide whether the Arbitration Exception applies to ancillary proceedings relating to the appointment of an arbitrator. We seem to have lived with the answer, handed down in 1991, without major difficulties. Then came the Van Uden decision in 1998, to confirm that court’s jurisdiction to deal with provisional measures is subject to the Regulation within the European Union, even if the parties agreed on an arbitral agreement. Finally, the last episode occurred with the much debated judgement in West Tankers, relating to the compatibility of anti-suit injunctions in aid of the arbitration with the Judgment Regulation. The Court’s “no” could certainly not be a surprise to anyone, considering the previous condemnation of this type of relief in Turner. It is certainly true that, in some occurrences, the Arbitration Exception has given rise to contradictions of judgments. This has been the case in Fincantieri, where French courts enforced an award rendered in France in spite of a decision of the Rome Court of appeal according to which the arbitral agreement was null and void. It has also been the case in Putrabali, where French courts enforced an arbitral award that had been set aside in England.

Whether this limited number of inconsistencies requires a sweeping change of law by suppressing the Arbitration Exception is of course a question open to debate. The European Commission seems to opine that it is indeed the case. In a Report to the European Parliament and to the Council and the European Economic and Social Committee (COM (2009) 174 Final), the Commission submits that “the interface between the Regulation and arbitration raises difficulties”, and that “even though the 1958 New-York Convention is generally perceived to operate satisfactorily, parallel court and arbitration proceedings arise when the validity of the arbitration clause is upheld by the arbitral tribunal but not by the court; procedural devices under national law aimed at strengthening the effectiveness of arbitration agreements (such as anti-suit injunctions) are incompatible with the Regulation if they unduly interfere with the determination by the courts of the other Member States of their jurisdiction under the Regulation; there is no uniform allocation of jurisdiction in proceedings ancillary to or supportive of arbitration proceedings; the recognition and enforcement of judgments given by the courts in disregard of an arbitration clause is uncertain; the recognition and enforcement of judgments on the validity of an arbitration clause or setting aside an arbitral award is uncertain; the recognition and enforcement of judgments merging an arbitral award is uncertain; and, finally, the recognition and enforcement of arbitral awards, governed by the NY Convention, is considered less swift and efficient than the recognition and enforcement of judgments” (Report, § 3.7).

The Judgement Regulation is now under a revision process. Pursuant to article 73 of the Regulation, the Commission was to present to the European Parliament a Report on its application no later than five years after its entry into force. The Report, which excerpts are quoted above, was released on April 21. Its conclusions are based on the “Heidelberg Report” prepared by Prof. Dr. B. Hess, Prof. Dr. T. Pfeiffer, and Prof. Dr. P. Schlosser (Verlag C.H. Beck München, 2008; see also Cahiers de l’arbitrage, Recueil Vol. IV p.151). The Commission Report is accompanied by a “Green Paper”, which purpose is to launch a broad consultation on possible ways to improve the operation of the Regulation with respect to the points raised in the Report. Of particular focus is point 7 of the Green Paper, addressing the issue of the interface between the Regulation and Arbitration, where a suppression of the Arbitration Exception is contemplated. The April 21 Green Paper is submitted to public consultation until June 30. Depending on the feedback of the arbitration community, the Commission will or will not endorse the proposal to suppress the Arbitration Exception. These 70 days might thus entirely change the future of Arbitration in the European Union.

The Heidelberg Report has been prepared on the basis of 25 national reports, which reflected a general consensus in favour of the Arbitration Exception. In particular, almost all the national reports reflected the idea that the 1958 New York Convention is perceived to operate satisfactorily, and that a suppression of the Arbitration Exception would not enhance the effectiveness of arbitral agreements and arbitral awards in Europe. Still, the Heidelberg Report endorsed the idea of suppressing the exception. Although the Green Paper acknowledges that “it would seem appropriate to leave the operation of the [NY] Convention untouched”, it submits to the public consultation certain proposals “to ensure the smooth circulation of judgments in Europe and prevent parallel proceedings”.

The Green Paper envisages “a (partial) deletion of the exclusion of arbitration from the scope of the Regulation”. Although it is unclear what a “partial deletion” could mean, the Paper clearly delineates its consequences.

First, court proceedings in support of arbitration would come within the scope of the Regulation, and a special rule allocating jurisdiction in such proceedings would have to be created. To that effect, it is proposed to grant exclusive jurisdiction for such proceedings to the courts of the Member State of the place of arbitration. Of course, the question is then to set uniform standards to define the seat of the arbitration. As is well known, the solutions adopted in different jurisdictions in this respect are diverse. In a footnote, the Green Paper suggests that the seat of the arbitration would be determined by reference to “the agreement of the parties or the decision of the arbitral tribunal”. In absence of agreement of the parties, however, a choice of laws rule would have to be introduced, by connecting the seat to “the courts of the Member State which would have jurisdiction over the dispute under the Regulation in the absence of an arbitration agreement”.

Another potentially far-reaching consequence of the suppression of the Arbitration Exception is that the jurisdiction to issue provisional measures in support of the arbitration would be submitted to “all the Regulation’s jurisdiction rules”, and not only to Article 31, as it is the case since ruling of the European Court of Justice in Van Uden. The Green Paper is mute, however, on a number of important issues: will provisional measures include evidentiary measures? If yes, what will be the interplay between the Judgment Regulation and the Evidence Regulation?

An obvious consequence of the suppression of the Arbitration Exception will be the recognition of judgments deciding on the validity of an arbitration agreement (e.g. the Court of Rome decision in Fincantieri) or an arbitral award (e.g. the High Court decision setting aside the Putrabali award). This might of course be the end of the exception française in this field too, although it is not excluded to see French courts going on the barricades to try circumventing the new community rules. Whether this is advisable will of course depend from the perspective from which arbitration is perceived. But we will all need to be aware that in a European Union enlarged to 27 States, the principle of mutual trust which is at the core of European law might produce unwarranted results for the users of arbitration. At the very least, a careful choice of the seat of the arbitration will become even more important.

The other side of the coin would of course be that arbitral awards which are enforceable under the NY Convention could benefit from a rule “which would allow the refusal of enforcement of a judgment which is irreconcilable with that arbitral award”. In the current situation of European law, an award can only prevent the recognition of a contrary judgment if it has been enforced (exequatur) in the requested jurisdiction. The solution envisaged by the Green Paper would therefore consist in assimilating an award rendered in a Member State to a judgment. A further step forward would be “to grant the Member State where an arbitral award was given exclusive competence to certify the enforceability of the award as well as its procedural fairness, after which the award would freely circulate in the community”. In other words, an award rendered in France and to which the exequatur would be granted in France, would be enforced in any other Member State, with no requirement of additional exequatur. The proposal would be in line with the idea of a suppression of exequatur for judgments, and would undoubtedly be in favour of the efficiency of arbitration. The contrary situation, where judgments would freely circulate with no need for an exequatur (under the revised Regulation), whereas awards would still need to be recognised and enforced in each single country, would certainly be detrimental to arbitration. An alternative to this system would be to adopt at the European level a uniform recognition rule inspired from Aricle IX of the Genva Convention (the Green Paper contemplates “taking advantage of Article VII of the NY Convention to further facilitate at EU level the recognition of arbitral awards”).

Where the Green Paper enters dangerous waters is, however, when it addresses “the coordination between proceedings concerning the validity of an arbitration agreement before a court and an arbitral tribunal”. The issue here is that of the so-called “Italian Torpedoes” which gave rise to the West Tankers case (in that case, a Sicilian Torpedo). For example, parties A and B have an arbitration agreement providing for ad hoc arbitration by three arbitrators in Paris. Party B anticipates an arbitration request by Party A and sues at the court of its domicile (say, the Court of Craiova, Romania), where it believes that it will be better treated than his opponent. Party B requests to the Court of Craiova to decide that the arbitral agreement is null and void, or that it does not apply to the dispute. Party A serves a request for arbitration and appoints an arbitrator. Party B refuses to do so. Just like in March Rich, Party A goes to the court of the seat to request the appointment of the second arbitrator. Party B objects that the arbitral agreement is null and void or inoperative. In the current state of French law, the court would appoint the arbitrator unless the arbitral agreement is manifestly void or inoperative. As arbitration is not included in the scope of the Judgment Regulation (and March Rich confirmed that proceedings for the constitution of the arbitral tribunal fall within the scope of the exclusion), the court does not have to pay attention to the proceedings in Craiova. Now, however, if the Arbitration Exclusion was suppressed, the lis pendens provision of Article 27-1 of the Judgment Regulation would apply. That provision obliges, where proceedings involving the same cause of action and between the same parties are brought in the courts of different Members States, the court second seized to stay the proceedings until such time as the jurisdiction of the court first seized is established. In the case at hand, the same question (whether the arbitral agreement is valid or operative), would be pending between the same parties before the two courts. The fact that the parties agreed on an arbitration agreement would not prevent the application of Article 27, for exactly the same reasons that led the European Court of Justice to decide in Gasser that the lis pendens rule applies even in presence of a choice-of-court agreement.

In order to avoid this unwarranted result, the Green Paper suggests a solution which we believe would be a step backwards for arbitration, namely to concentrate the litigation of the validity or applicability of the arbitration agreement before the courts of the seat of the arbitration. In other words, in order to avoid parallel proceedings, Party A would have to seek a declaratory judgment in France.

The first problem which arises here is that, in many jurisdictions, there is no such procedure, and the law would therefore have to be amended to create it. In addition, in order to be efficient, a declaratory action would have to be decided in a short time-limit. Is that realistic?

Further, there is the problem to know what would happens in jurisdictions which admit the negative effect of Kompetenz-Kompetenz and limit themselves to verifying that the arbitration agreement is not manifestly void or inoperative. Is it conceivable that a decision ascertaining that the arbitration agreement is not manifestly void or inoperative would bind the courts of another Member State where a declaratory action or an action on the merit would have been brought? Strictly speaking, such decision does not decide on the existence, validity and scope of the arbitral agreement, but defers this issue to the arbitral tribunal first. Alternatively, would it be possible to expand the Green Paper proposal to arbitral tribunals as well as courts. The Green Paper proposal would then have to be read as follows: “One could, for instance, give priority to the courts of the Member State where the arbitration takes place or the arbitral tribunals to decide on the existence, validity and scope of the arbitration agreement”. Still, the backdrop of such a proposal would be to instate a difference of regime between arbitrations having their seat in and out of the European Union.

Another fundamental aspect of the problem would be the potential divide that the Regulation would create between ad hoc and institutional arbitration. In an ICC arbitration taking place in Paris, for example, the problem that we just described would not exist, because the arbitral tribunal would be appointed by the institution and the arbitrators would be able to render their award in spite of the parallel proceeding in Craiova. However, the lis pendens issue would still reappear at the enforcement stage. Once the award will have been rendered, and assuming the Craiova court would not have yet finally decided upon its own jurisdiction (some courts are indeed slower than arbitral tribunals), any EU court requested to enforce the award would be faced with a lis pendens objection, as Party B would certainly oppose the enforcement on the basis that the arbitration agreement is void or inoperative. In order to avoid this result, the priority contemplated by the Green Paper in favour of the courts of the seat should include the courts having to deal with the enforcement of the award. Even in this case, the problem would remain if enforcement is sought in a EU court other than the court of the seat. In practice, the situation would re-introduce a form of double exequatur.

The Green Paper proposes to address these concerns by introducing two new concepts. The first would be that of “a strengthened cooperation between courts seized, including time-limits for the party which contests the validity of the agreement”. The second would be the introduction of a uniform choice of law rule concerning the validity of the arbitration agreement. The conflict of laws rule would connect to the law of the State of the place of the arbitration. It is unlikely that these proposals will suffice to resolve the complex lis pendens problems arising. The result would be, for example, to determine the law applicable to the arbitration agreement by applying rules of jurisdiction whenever the seat has not been determined directly or indirectly by the parties (as the default rule would be, according to the Green Paper, the courts having jurisdiction in absence of an arbitration agreement). This would be all the more difficult that, in many instances, the regulation opens jurisdictional options to the plaintiff.

These issues are complex. The consequences of a suppression of the Arbitration Exception are far reaching. The balance between arbitration and community law is subtle. Arbitration law is at the same time diverse and universal, whereas Community law strives towards uniformity and is driven by political and institutional objectives.

This is not to say that the need for coordination of arbitration and court proceedings should not be addressed. The issue is however whether such concerns would not be better addressed in a specific international arbitration law instrument rather than in a regional community law regulation, with the risk of fragmenting each Member State’s arbitration laws.

Whatever the answers to those questions are, the authors urge the arbitration community to put forward their views by replying to the public consultation by the June 30, 2009 deadline.

Alexis Mourre/Alexandre Vagenheim