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

Background

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

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

Decision

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

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

Comment

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

Georg von Segesser / Petra Rihar

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

Background

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

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

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

Decision

The Federal Supreme Court dismissed both appeals.

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

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

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

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

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

Comment

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

Georg von Segesser / Petra Rihar

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

Background

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

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

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

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

Decision

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

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

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

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

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

Comment

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

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

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

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

Georg von Segesser / Petra Rihar

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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….

I am in Australia in advance of the investment law conference at Sydney Law School at the end of the week, and I took advantage of many plane hours to read the docket in the case pending between Ecuador and Chevron/Texaco Petroleum Company (TexPet) in the Southern District of New York. They repay study. In short, Ecuador has asked the U.S. federal court to stay an arbitral claim that Chevron and TexPet have submitted under the Ecuador-United States BIT and the UNCITRAL arbitration rules, and Chevron and TexPet have asked the court to dismiss the motion. These are only the latest in a series of events that date back to at least 1993, when a group of indigenous peoples filed claims in New York against Texaco, the indirect parent of TexPet, seeking damages and restitution for pollution in Ecuador allegedly resulting from TexPet’s oil and gas exploration and development activities (the Aguinda litigation). TexPet operated in Ecuador, as part of a consortium, under a concession agreement from 1965 to 1992. The initial New York case was eventually dismissed on forum non conveniens grounds, and has been re-filed in Ecuador by another group of plaintiffs, some of whom overlap with those in the first action (the Lago Agrio litigation). The refiled case is currently pending and the acts of the court hearing that litigation in Ecuador, along with measures allegedly taken by the executive branch of the Ecuadoran government, form the basis for the investment treaty claim.

In 1995 TexPet and the Government of Ecuador entered into a settlement agreement under which they agreed to a remediation plan for environmental damages caused on public lands and agreed on TexPet’s responsibilities for clean up. In 1998 TexPet and Ecuador certified that TexPet had satisfied the terms of the settlement agreement. Perhaps the most significant issue in all of these related cases is the scope of that settlement agreement and whether it encompassed the claims that the private plaintiffs are now seeking to advance in the Lago Agrio litigation. Certainly Chevron (which acquired Texaco some years after the 1995 settlement agreement) and TexPet argue that it did. According to Chevron and TexPet, the Government of Ecuador initially took that position but has now changed its view and is working with the private plaintiffs against Chevron and TexPet.

This constellation of cases raises a host of interesting issues; the following are those that sprang out immediately. No doubt many others will emerge as the case moves forward.

The motion to stay in U.S. court raises an unanswered procedural question under Article II of the New York Convention – can a court stay an arbitral proceeding if it determines that an arbitral agreement is “null and void, inoperable or incapable of being performed,” or can it only decline to order the parties to proceed to arbitration?

Chevron and Texaco have argued that the U.S. court lacks subject matter jurisdiction because an action to enjoin arbitration does not “arise under or relate to” the New York Convention, a prerequisite for establishing federal question jurisdiction. The language of Article II of the New York Convention provides: “The court of a Contracting State . . . shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.” The subject-matter jurisdiction argument is that the Convention only contemplates measures in favor of arbitration; it does not permit courts to enjoin arbitrations. (There is a similar argument under the Federal Arbitration Act).

I would suggest that the court has the authority to hear the case as it arises in an international arbitration that falls under the auspices of the New York Convention. It thus has subject matter jurisdiction in U.S. Constitutional law terms. A slightly different question is whether the New York Convention and the implementing legislation confer on the court the ability to order the relief requested. (For U.S. civil procedure buffs, can the plaintiffs survive a 12(b)(6) motion to dismiss?) The language of the New York Convention does not on its face permit a court to order a stay of arbitration; rather, it speaks in terms of compelling arbitration if the parties have an arbitration agreement. The New York courts have themselves recognized this apparent lack of authority in the Convention, though they have issued stays in a few cases, including one at the request of Petroecuador in yet another related case. That case, a AAA arbitration in which Chevron and TexPet sought contribution from Petroecuador under the 1965 Concession Agreement for any damages that would be awarded in the Lago Agrio litigation, was stayed because the court found that Petroecuador had never signed the joint operating agreement and therefore had never consented to arbitration.

One might phrase the question as whether the authority to enjoin arbitration is necessarily encompassed in the authority to decline to compel in the demonstrable absence of an arbitration agreement. It is noteworthy that Professor Michael Reisman, who filed an affidavit as an expert in the stay proceedings, appears to assume that the authority to enjoin is encompassed in Article II: “The only grounds for a federal court to intervene and to prevent an arbitration are if the agreement to arbitrate is ‘null and void, inoperative or incapable of being performed.’” On the other hand, if a court in any New York Convention country with jurisdiction over the parties can enjoin an arbitration even before a tribunal is constituted (as is the case in the BIT arbitration), the potential for court interference with arbitration is heightened. I do not propose to resolve this question here, but flag it for further exploration.

In this particular case, even if the U.S. District Court finds it has the authority to order a stay in the absence of a valid arbitration agreement, there appears to be no reason for it to exercise its authority. The investment treaty in question creates a valid arbitration agreement. To the extent that Ecuador challenges the jurisdiction of the UNCITRAL tribunal, it must do so before the tribunal under the doctrine of compétence-compétence, as so comprehensively explained by Professor Michael Reisman in his expert witness statement.

I would also like to preview briefly some of the interesting issues the investment arbitration is likely to raise, assuming it moves forward. First, there will likely be jurisdictional objections. Based on the public documents filed in the U.S. court, there are interrelated questions of jurisdiction ratione materiae and ratione personae– does either Chevron or Texaco Petroleum qualify as an investor under the BIT? The BIT entered into force in 1997. It is reasonably clear that TexPet qualified as an investor in the 1980s until its concession ended in 1992, but it is perhaps not as clear that TexPet was an investor after 1992, or after 1997 when the BIT entered into force. The final agreement purporting to settle the environmental clean up was signed in 1998, and the alleged acts of the Government of Ecuador in violation of that agreement occurred well after the entry into force of the BIT. Thus, one will likely see questions about the definition of investment – could the settlement agreement itself constitute an investment, for example? — and whether an investment of which the investor divested itself prior to the BIT’s entry into force could nonetheless serve as the basis for a claim when there is something akin to a continuing violation.

The merits of the case also will present fascinating issues. According to the Notice of Arbitration, the Ecuadoran judge presiding over the Lago Agrio litigation has already indicated publicly his determination to decide against Chevron and TexPet and to award damages in the tens of billions of dollars notwithstanding the fact that discovery has not yet closed. Moreover, the Ecuadoran Prosecutor General has allegedly circumvented proper criminal procedure to indict two Chevron attorneys who executed the 1998 Final Release even after initial investigations revealed no fraudulent conduct. This seems like a return to early claims commission cases, prior to the separation of human rights and investment law, and will raise the question of the appropriate remedy should the tribunal find the actions against the attorneys to have been politically motivated. With respect to the litigation itself, the Ecuadoran court has not yet acted, which could raise issues of ripeness, not to mention allegations of lack of finality à la Loewen v. United States.

In short, this is a fascinating case well worth attention due to the many questions it raises, including those regarding the intricate relationships among proceedings occurring simultaneously in different fora.

Andrea Bjorklund
Professor of Law
UC Davis School of Law

On November 30, 2009, an arbitral tribunal issued three interim awards for Yukos Universal Limited, Hulley Limited Enterprises, and Veteran Petroleum Limited v. the Russian Federation under the Energy Charter Treaty (“ECT”). These interim awards addressed the issue of jurisdiction over the Russian Federation, analyzing the Provisional Application under Article 45(1) and (2), labeling the following italicized portion of Article 45 as the “Limitation Clause”:

(1) Each signatory agrees to apply this Treaty provisionally pending its entry into force for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its constitution, laws or regulations. [italics added]

(2) (a) Notwithstanding paragraph (1) any signatory may, when signing, deliver to the Depository a declaration that it is not able to accept provisional application. The obligation contained in paragraph (1) shall not apply to a signatory making such a declaration. Any such signatory may at any time withdraw that declaration by written notification to the Depository.

(b) Neither a signatory which makes a declaration in accordance with subparagraph (a) nor Investors of that signatory may claim the benefits of provisional application under paragraph (1).

(c) Notwithstanding subparagraph (a), any signatory making a declaration referred to in subparagraph (a) shall apply Part VII provisionally pending the entry into force of the Treaty for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its laws or regulations.

In determining whether it could assert its jurisdiction over the Russian Federation, the arbitral tribunal addressed how to apply this Limitation Clause. The overall question was whether the arbitral tribunal should read Article 45(1) and 45(2) as requiring a piecemeal approach as the Russian Federation suggested (i.e. comparing each ECT provision with that of the signatory’s constitution and laws searching for inconsistencies) or follow the Claimant’s principle of provisional application approach (i.e. merely looking at the signatories’ constitution and laws to see whether the principle of provisional application itself would be inconsistent)?

When interpreting the relationships between the ECT Articles 45(1) and 45(2), the Russian Federation argued that two separate regimes existed: (a) inconsistency of laws, literally taken to mean a piecemeal comparison of each ECT provision (Article 45(1)), or (b) making a separate declaration opting out of the provisional application (Article 45(2)). The pertinent point being that the two articles were entirely separate.

In contrast, the Claimants viewed the ECT Article 45(1) as substantive, which can only be invoked by fulfilling the declaration requirement found in ECT Article 45(2). In other words, the ECT Article 45 did not create two separate regimes, but one regime with two provisions giving its substantive and procedural aspects.

To resolve this jurisdictional issue, the arbitral tribunal conducted the following analysis:

Before addressing the overall question, the arbitral tribunal considered the sub-issue of whether a declaration needed to be made, in accordance with Article 45(2) in order to invoke Article 45(1). If not, would a signatory need to give any type of notice or declaration to the other signatories to benefit from Article 45(1)’s Limitation Clause?

The arbitral tribunal relied upon Articles 31 and 32 of the Vienna Convention on the Law of Treaties (“VCLT”) to interpret the ECT provisions. Both parties argued plain meaning and looked to the travaux preparatiores, which these VCLT articles discuss. However, since the arbitral tribunal concluded that it was unambiguous that the Russian Federation’s interpretation (i.e. two regimes) was correct, looking to the travaux preparatoires was unnecessary and inappropriate. The Limitation Clause is, therefore, self-executing. Interestingly enough, the arbitral tribunal did acknowledge that following the travaux preparatoires could lead to a conclusion that only one regime existed had they been applicable.

Second, the arbitral tribunal looked at the plain meaning of the Article 45(1) coupled with the practice of other signatory states to conclude that no formal declaration of any kind was required.

Finally, the arbitral tribunal considered whether or not the Limitation Clause required a principles analysis or a piecemeal clause by clause comparison. It is at this point that the Claimants won the most important point: the award states “In the Tribunal’s opinion, by signing the ECT, the Russian Federation agreed that the Treaty as a whole would be applied provisionally pending its entry into force unless the principles of provisional application itself were inconsistent ‘with its constitution, laws or regulations”. In other words, it is only necessary to consider whether or not the signatories’ laws and constitution conflicted with the principle (i.e. the concept) of provisional application in this treaty.

Concluding that this is not the case with respect to the Russian Federation, the arbitral tribunal noted that the principle of provisional application of treaties was recognized under Russian law. Therefore, the Russian Federation could not utilize Article 45’s Limitation Clause.

The Swiss Parliament is currently contemplating a reinforcement of the negative effect of the “competence-competence” principle in the Swiss legislation. According to a parliamentary initiative, a Swiss court that is seized on the merits and faced with a plea of lack of jurisdiction based on the existence of a valid arbitration agreement should review such arbitration agreement only on a prima facie basis. Unlike today, the initiative provides that this should be the case regardless of the seat of arbitration. After a positive vote from the first chamber of the Swiss Parliament, the initiative will now come before the second chamber.

Article 7 of the Private International Law Act (PILA) states that if the parties have entered into an arbitration agreement, a Swiss court must decline jurisdiction unless, among other reasons, the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed. Article 7 of the PILA only applies where the seat of the arbitration is in Switzerland. In this case, the Swiss Federal Supreme Court has held consistently that a Swiss court shall limit its review of the validity of the arbitration agreement to a prima facie examination. In accordance with the principle of negative “competence-competence”, this leaves it to the arbitral tribunal to make the first full review of the validity of the arbitration agreement.
By contrast, if the seat of the arbitration is outside Switzerland, Article II (3) NYC applies and a Swiss court uses its full powers to review the validity of the arbitration agreement (see, for instance, Swiss Federal Supreme Court, 29 April 1996, ATF 122 III 139 at 142, reason 2b).
The parliamentary initiative intends to do away with this distinction between arbitrations seated in- or outside Switzerland. It proposes to insert a second paragraph into Article 7 of the PILA that reads: “In international matters, and regardless of the seat of arbitration, the Swiss court before which the action is brought only renders a decision once the arbitral tribunal has decided on its own jurisdiction, unless a prima facie examination shows that there is no arbitration agreement between the parties.” While this provision does not change the current state of law in cases where the seat of the arbitration is in Switzerland, it limits the Swiss courts’ powers in case of a seat of arbitration outside Switzerland.
Article II (3) NYC does not provide whether the national court can examine the validity of the arbitration agreement with full powers of review or whether it is restricted to a prima facie examination. This depends on the extent to which the national law of the forum recognizes the negative effect of the “competence-competence” principle. There are still considerable differences from one country to another. The newly proposed Article 7 (2) PILA shall clarify this question under Swiss law.

Georg von Segesser / Dorothee Schramm

In my last post I questioned whether investor misconduct (such as fraud, illegality and corruption) is invariably a jurisdictional issue.  This post focuses on the use of admissibility as a filtering mechanism to screen investor claims.  Although it has been suggested by at least one investment treaty tribunal that the concept of admissibility does not apply in investment treaty arbitration, I argue that investment treaty tribunals can use admissibility to rule on whether claims may be heard.  Further, admissibility can be a useful tool for approaching questions of investor misconduct.

The terms jurisdiction and admissibility are not used consistently in investment treaty arbitration (or for that matter by international courts and tribunals).  Pleadings and awards often refer to objections to jurisdiction and admissibility without distinguishing between the two.  In his recent treatise, The International Law of Investment Claims, Zachary Douglas presents a taxonomy of preliminary issues distinguishing between the existence of adjudicative power (jurisdiction) and the exercise of adjudicative power (admissibility or the merits).  Admissibility goes to the question of whether a  tribunal can “exercise its adjudicative power in relation to the specific claims submitted to it” (para. 297).  See also paras. 306-312 for further discussion.  In other words, the distinction lies in whether the objection takes aim at the tribunal or the claim (para. 311).  For a succinct and edifying analysis of the issue, see Jan Paulsson’s article “Jurisdiction and Admissibility”.

Perhaps the clearest articulation of the distinction in an investment treaty decision is that by the late Keith Highet is his dissenting opinion in Waste Management, Inc. v. United Mexican States, where, in discussing the issue of waivers under Article 1121, NAFTA, he stated:

International decisions are replete with fine distinctions between jurisdiction and admissibility. For the purpose of the present proceedings it will suffice to observe that lack of jurisdiction refers to the jurisdiction of the Tribunal and inadmissibility refers to the admissibility of the case. [para. 57]

… Jurisdiction is the power of the tribunal to hear the case; admissibility is whether the case itself is defective—whether it is appropriate for the tribunal to hear it. If there is no title of jurisdiction, then the tribunal cannot act. [para. 58]

In a footnote, he provides the example of where the “claim is time-barred or where there is a similar substantive defect on the face of the complaint which does not, however, invalidate or depreciate the Tribunal’s jurisdiction as such.”

Of relevance to the issue of investor misconduct, he noted that the matter of admissibility is also related to the question of severability (para. 61).  Mr. Highet asked why the entire claim should be dismissed on jurisdictional grounds where only one part of the claim might be inadmissible.  In his words, the Waste Management tribunal “has heaved the baby, enthusiastically, out with the bath-water: the entire NAFTA claim has been undone.” (para. 63)

The status of the concept of admissibility remains unclear in investment treaty arbitration.  Indeed, at least one award suggests that there is no power to dismiss claims on the basis of inadmissibility.  In Methanex v. United States, in response to a challenge by the United States to the admissibility of Methanex’s claims, the tribunal stated:

… There is here no express power to dismiss a claim on the grounds of “inadmissibility”, as invoked by the USA; and where the UNCITRAL Arbitration Rules are silent, it would be still more inappropriate to imply any such power from Chapter 11. [para. 124]

It is unnecessary to develop these materials further. This Tribunal has no express or implied power to reject claims based on inadmissibility… [para. 126]

The tribunal’s statement should, however, be viewed in its context.  As noted by Jan Paulsson in his article, “Jurisdiction and Admissibility”, the US argument was that Methanex’s claims were legally hopeless, not that the case was unhearable.

The terms admissibility and inadmissibility do not appear in the UNCITRAL Rules, the ICSID Convention or the ICSID Arbitration Rules.  Further, the indices of leading treatises on international commercial arbitration (such as the new edition of Gary Born’s International Commercial Arbitration and Fouchard Gaillard Goldman on International Commercial Arbitration) do not refer to admissibility or irrecevabilité as distinct concepts or principles in international commercial arbitration.   And although the distinction between jurisdiction and admissibility is recognized in Art. 79 of the ICJ’s Rules of Court, care must be exercised in drawing conclusions from the ICJ’s jurisprudence.  Since its decisions are not reviewed by other judicial authorities, any distinction it draws between jurisdiction and admissibility does not have the same consequences as for arbitral awards subject to review by national courts or annulment within the ICSID system (see Jan Paulsson’s article on this point).

Although the distinction between jurisdiction and admissibility is often hard to draw, the concept of admissibility has a long-standing place in the international law relating to claims of diplomatic protection.  Issues such as nationality, exhaustion of local remedies and delay have been viewed as issues of admissibility (see Article 44, Admissibility of Claims, ILC Articles on State Responsibility).  Although care needs to be exercised in applying the law relating to diplomatic claims to investor-state arbitration, I would argue that the principle that there can be impediments to the bringing of claims can be drawn from general principles of international law.  For example, laches—or unwarranted delay in making a claim—might appropriately be viewed as a bar to the admissibility of a claim.

Similarly, I argue that abuse of process and egregious forms of investor misconduct can be the basis for denying the admissibility of a claim.  Although the tribunal has jurisdiction, the claim may not be heard because of a procedural or substantive impediment.  This is exactly what happened in Plama v. Bulgaria, where the tribunal found that the effect of the claimant’s fraud and illegal conduct was to “preclude the application of the protections of the ECT” (para. 135) and that the “[c]laimant is not entitled to any of the substantive protections afforded by the ECT” (para 325).  In its reasons, the tribunal states that granting the protection of the ECT would be contrary to the principle of nemo auditur propriam turpitudinem allegans—no one is heard when alleging one’s own wrong (para. 143).  The operative idea is that the claim cannot be heard because of the fraud and illegality, not because the tribunal lacks jurisdiction.

As a final point, it is interesting to note that the recently released interim awards in the Yukos-related claims under the Energy Charter Treaty (Hulley Enterprises Limited (Cyprus) v. The Russian Federation, Yukos Universal Limited (Isle of Man) v. The Russian Federation and Veteran Petroleum Limited (Cyprus) v. The Russian Federation) are each titled “Interim Award on Jurisdiction and Admissibility”.  The three interim awards confirm that the disputes are admissible and within the tribunal’s jurisdiction, subject to two issues; first, they defer the “decision on the objection to jurisdiction and/or admissibility based on Article 21 [Taxation] of the ECT to the merits phase of the arbitration”; second, they confirm that the “decision on the objections to jurisdiction and/or admissibility involving the Parties’ contentions concerning “unclean hands” and Respondent’s contention that “Claimant’s personality must be disregarded because it is an instrumentality of a criminal enterprise” is deferred to the merits phase of the arbitration” (see the final decision in each of the interim awards).  It should also be noted that in the Yukos claims, the parties treated the denial of benefits provision in Art. 17 of the Energy Charter Treaty as a question of admissibility. It remains to be seen whether the tribunal in the three Yukos cases views allegations of unclean hands as an issue going to jurisdiction or admissibility.