Much to the surprise of many seasoned international arbitration practitioners, the D.C. Circuit vacated a US$ 185.3 million Final Award against Argentina, essentially nullifying a hard-fought, four-and-a-half year arbitration between the parties. The court vacated the Award on the basis that the “arbitral panel rendered a decision . . . without regard to the contracting parties’ agreement establishing a precondition to arbitration,” namely the clause in the Argentina-UK bilateral investment treaty (BIT) requiring claimants to submit disputes to the Argentine courts for 18 months before resorting to arbitration. In the underlying UNCITRAL arbitration, the tribunal had considered whether the dispute was admissible without having been first submitted to the Argentine courts. It ruled that such submission was not essential because it in this case it would have been an exercise in futility: the claimant could not have obtained relief anyway from the Argentine courts, given the Republic’s apparent interference with access to the courts and its punishment of all would-be local court litigants by excluding them from contract renegotiations. The tribunal concluded that in these circumstances, the 18-month provision could not “be construed as an absolute impediment to arbitration,” and therefore deemed BG Group’s arbitration claims admissible.

By contrast, the D.C. Circuit concluded that this entire analysis was misplaced, since in its view the BIT terms—which it analyzed principally by reference to U.S. domestic law on contractual intent to arbitrate, rather than under the Vienna Convention—were clearly designed to require prior recourse to the Argentine courts. The court found that the tribunal had exceeded its powers by permitting direct access to arbitration contrary to that expressed intent. Indeed, the court suggested that under U.S. case law, the tribunal should not have even engaged in an analysis of the feasibility or usefulness of prior resort to the Argentine courts, because as a threshold matter it had no proper authority under the BIT to admit such issues for substantive consideration.

In the most narrow sense, the D.C. Circuit’s decision did not directly repudiate the years of fairly consistent rulings by ICSID and UNCITRAL tribunals with respect to the 18-month local court requirement under similar Argentine BITs. That is because the BG Group tribunal had not relied on the BIT’s most-favored-nation (MFN) clause, upon which prior tribunals had rested their decisions, even though BG Group did argue that point. Nonetheless, the D.C. Circuit’s analysis implicitly suggests that it also might have overturned an MFN-based decision, since by the Court’s logic, the tribunals who rendered those decisions likewise would have had no authority to bypass the BIT parties’ allegedly clear intent to require local court proceedings in all circumstances. If the decision is read in this broader way, it can be seen as impugning the core logic of many prior decisions. This would include Maffezini v. Spain (ICSID Case No. ARB/97/7, 1 September 2000), where the tribunal allowed an Argentine investor to invoke (by way of an MFN clause) the Chile-Spain BIT to avoid the domestic court prerequisite in the Argentina-Spain BIT; Siemens v. Argentina (ICSID Case No. ARB/028, Decision on Jurisdiction, 3 August 2004), where the tribunal permitted a German investor to invoke the Argentina-Chile BIT to proceed directly to arbitration; National Grid plc v. Argentina (UNCITRAL, Decision on Jurisdiction, 20 June 2006), where the tribunal permitted a British investor to invoke a more favorable term in the Argentina-US BIT to avoid 18 months of litigation in the Argentine courts; and several other cases in the same line. Until the D.C. Circuit’s opinion, the jurisprudence appeared to be converging on consensus regarding the 18-month waiting requirement, even though much controversy remained about the broader application of MFN clauses in other, less procedural, contexts.

Now, with one 17-page decision, a national court not only has completely up-ended the result in one major case, but also in the process unsettled what most observers had thought to be a progression towards certainty, predictability and finality with respect to this issue. Much can—and undoubtedly will— be written about the substance of the court’s analysis. But at heart, it serves as a reminder that some degree of uncertainty is inherent in international arbitration in any forum, so long as there is any mechanism for review and challenge of arbitral awards. This is just as true for the “alternative” routes of ad hoc UNCITRAL or non-ICSID institutional arbitration as it is for ICSID arbitration, since all non-ICSID mechanisms allow for national court challenges under the New York Convention, and national courts (once vested of the matter) may be tempted to apply their own national laws, including on core issues such as arbitrability. Arguably, the uncertainty of national court review may be even greater than that of ICSID annulment review, since most national court judges are comparatively unfamiliar with investment treaty jurisprudence and may be less concerned about contributing to the growth of consensus or emerging doctrine. The choice between the two systems, thus, should not be framed as a quest for predictability and finality, but rather as something more fundamental: a decision about which decision-makers will evaluate challenges, and what rules and standard of review they will use in deciding.

By Jean E. Kalicki and Dawn Yamane Hewett

This is particularly true where the allegations of bribery are themselves in dispute, as well as where the parties have not raised any such allegation, but the facts and circumstances suggest that bribery has tainted the contract underlying the dispute. It is now well-settled that any such contract should be void as contrary to public policy and governing national laws. The enactment of the UK’s 2010 Bribery Act, and the first prosecution under that Act of a court clerk for having accepted a £500 bribe,[1] provide a suitable occasion to review the questions of bribery and international arbitration.

Arbitrability of Bribery Claims

Traditionally, arbitration was not perceived as an appropriate venue for adjudicating claims of bribery or corruption. The resistance to recognizing the arbitrability of bribery claims was based on a limited view of the tribunal’s jurisdiction, and included concerns about the tribunal’s restricted power to compel the production of evidence — particularly as compared with that of regulatory authorities that have traditionally investigated and prosecuted crimes of bribery — and the tribunal’s lack of authority to impose criminal penalties.

Where the issue of bribery was raised previously in arbitrations, the response by tribunals often was to find a lack of jurisdiction over the dispute. The most well-known example is Judge Lagergren’s ICC Award in 1963, where, acting as a sole arbitrator, he held that he did not have jurisdiction over a contract dispute because the purpose of the contract was to secure commission payments that would then be used to bribe Argentinean officials. He famously declared that having allied themselves with corruption, the parties had forfeited “any right to ask for assistance from the machinery of justice.”

The concept of the arbitrability of disputes involving bribery claims began to gain acceptance first with a decision of the Swiss Federal Tribunal in 1994 in National Power Corp v Westinghouse affirming an arbitral tribunal’s exercise of jurisdiction over a matter involving allegations of bribery. The contemporary approach towards the arbitrability of disputes involving allegations of bribery is reflected in Westacre Investments Inc v Jugoimport SPDR Holding Co Ltd, a dispute that arose in the late 1990s. There, despite an allegation that the agreement at issue had been procured by bribery, the tribunal asserted jurisdiction over the dispute, investigated and rejected the bribery allegations, and issued an award on the merits.

The Westacre award was challenged in the United Kingdom, where the allegations of bribery and corruption were raised again. The English court held that the award was enforceable, based on considerations including the severability of the arbitration clause, the principle of competence competence, and the public policy of encouraging the enforcement of international arbitral awards, all of which weighed in favour of upholding the award.[2]

The arbitrability of disputes involving allegations of bribery is well recognized today. Such disputes no longer appear to confront arbitrators with questions of jurisdiction. Rather, arbitrators must now address the complex questions of proof where the allegations are in dispute, and determine how to approach situations where no allegation has been raised, but the facts and circumstances suggest the underlying contract may have been contaminated by bribery, and should therefore be void.

Examples of Bribery Allegations in Arbitration

Bribery allegations may arise in a number of ways in international arbitration. Some of the most well-known examples, such as the two set forth below, occurred where respondents sought the dismissal of claims seeking the performance of contractual obligations (or damages for failure to perform). By claiming the underlying contracts had been contaminated by bribery, the respondents were seeking to have the contracts declared void, which would result in the dismissal of any claims based on those contracts. Addressing the somewhat unseemly appearance of finding in favour of a respondent that had participated in bribery and then avoided its obligations due to that bribery, one tribunal noted that “claims founded on illegality have to be dismissed for the benefit of the public and not for the advantage of the defendant.”

Set forth below are two well-known examples of bribery allegations raised by respondents in arbitration:

• In the dispute that led to Judge Lagergren’s Award in 1963 in ICC Case No. 1110, the claimant had sought to enforce its contractual entitlement to 10% commission payments for all Argentinean energy contracts awarded to the respondent. The claimant’s “major asset” was the remarkable degree of influence he had with the political appointees that awarded the contracts. Here, the tribunal found that the purpose of the agreement was to facilitate bribery to the claimant and to his entourage. This led Judge Lagergren to deny jurisdiction, finding the parties had forfeited their right to justice.

• In World Duty Free Company Limited v the Republic of Kenya, ICSID Case No. ARB/00/7, Award dated 4 October 2006, the claimant alleged, among other things, that the Kenyan government had expropriated its two duty free complexes the Nairobi and Mombassa International Airports. In response, Kenya alleged that its underlying agreement with claimant was unenforceable because it had been obtained with a “personal donation” of $2 million to the then President, a fact that the claimant had described in detail in its original submission. The tribunal retained jurisdiction and found the facts surrounding the allegation of bribery were not in dispute. Based on its conclusion that bribery was against transnational public policy, the tribunal found the contract was void and dismissed the claimant’s claim.

Issues Raised by Allegations of Bribery in an Arbitration

When an issue of bribery is raised in a proceeding, the tribunal must decide how to address those claims. That decision can be a relatively easy or an exceedingly difficult one to make. Where the facts surrounding the alleged bribery are not in dispute, such as in World Duty Free Company where the best evidence of the bribery came from the claimant’s own witness statement, the decision is relatively straightforward. In World Duty Free Company, the tribunal found that bribery had occurred, and concluded that as a result, the contract was void and the claimant’s claims must be dismissed.

Where, however, the opposing side vigorously disputes the allegations of bribery, or particularly where neither party has raised an allegation of bribery but the facts and circumstances of the case suggest the contract is likely to have been tainted by bribery, the decision becomes much more difficult.

Arbitrators must consider a number of factors when deciding how to proceed, including their duty to adjudicate the claims before them and use their best endeavours to ensure that their awards are enforceable, as well as the limitation of their jurisdiction to the issues in dispute. To investigate claims of bribery, particularly where none have been raised by the parties, may invite challenges to the arbitrator’s jurisdiction and the validity of the award on the basis of ultra vires and/or ultra petita.

Conversely, to disregard the possibility of bribery in a dispute may also undermine the enforceability of the award. Enforcing a claim based on a contract that is void due to bribery would violate public policy, and result in any award likely being set aside. The general consensus is that this is a murky area for any arbitrator, and one that may arguably be affected by the passage of the Bribery Act and its expansive jurisdiction provisions.

Of course there is also the question of how to investigate the allegations of bribery without the extensive police powers of a court or regulatory authority. Bribery may differ from traditional contract claims because it is often concealed and more difficult to detect. That being said, there is little reason why a tribunal would not be able to unearth the truth relating to bribery allegations any less ably than it does with other allegations that parties vigorously contest.

Moreover, it is well-settled that arbitrators have significant discovery tools available to them; they are able to order the disclosure of documents under many international arbitration institutions’ rules, which also provide tribunals with the authority to issue subpoenas for witnesses or documents. In addition, arbitral tribunals may also be assisted in compelling the testimony of witnesses or production of documents pursuant to the national laws of certain arbitral seats.

What Arbitrators Should Know about the Bribery Act

Bribery and corruption have been recognized as common law offenses in England since the early 1900s, but it was not until last year that the United Kingdom comprehensively addressed the issue of bribery overseas by English or multi-national companies.

In so far as arbitrators and lawyers are concerned, they must take heed of the fact that the Bribery Act significantly expands the UK’s anti-bribery laws in two ways: it does not differentiate between private and public entities, and it has an international ambit which is not restricted to UK nationals.

Arbitrators should be aware of the Bribery Act even where the governing law is not English law, the place of performance is outside the UK and the parties are not incorporated or formed in the UK, because the Bribery Act may still be relevant by virtue of its broad jurisdictional application.

The Act defines a ‘bribe’ as offering financial or other advantage to induce the person to perform improperly a relevant function or activity (or to reward the person for having done so).”[3] The Guidance issued on the Act confirms that “facilitation payments” – payments made to induce officials to perform functions they are otherwise obligated to perform – are included in the definition of Bribery under the Act (contrary to the U.S. Foreign Corrupt Practices Act 1977, which permits small facilitation payments).

The standard of proof imposed by the Bribery Act for criminal sanctions requires the prosecution to prove an offence beyond a reasonable doubt. The Bribery Act does not change the standard of proof in civil cases, applicable in arbitration, which is proof on the balance of probabilities. Some arbitrations have held that rumour and innuendo will not fulfil the requirement, and even that a higher standard of proof may be required for bribery allegations. The latter is based on the seriousness of the allegation, its inherent improbability and the potential for subsequent criminal sanctions.[4]

Set out below is a brief overview of the relevant sections of the Bribery Act:

Section 1 targets those who offer or give bribes to another where they intend to bring about improper performance of a “relevant function or activity.” This is a very broad term and includes any function of a public nature and activity connected with a business, or which is performed in the course of a person’s employment, whether corporate or unincorporated.[5] It is irrelevant whether the function or activity has any connection with the UK or is performed in a country outside the UK.

Section 5 sets the test for deciding whether conduct has been improper.

Section 6 creates the specific offence of bribery of a foreign public official with the intention of influencing the official in the performance of his official functions and obtaining business and/or an advantage in the conduct of business by doing so.

Section 7 provides that a corporation or partnership (whether or not incorporated in the UK) that carries on a business or part thereof in the UK, commits an offence under sections 1 or 6 if a person associated with it bribes another intending to obtain or retain business for the commercial organization or an advantage in the conduct of its business. The most significant aspect of this provision is that the country in which the person is based is irrelevant for the purposes of the Bribery Act, thus widening the scope of the Bribery Act beyond the UK. Section 7 also provides a defence for commercial organizations where it can prove it had adequate procedures in place designed to prevent persons associated with it from undertaking the conduct.

Section 12 provides that the Bribery Act applies to sections 1 and 6 offences committed within the UK and outside the UK where the offending person has a “close connection with the UK”.

[1] Court Clerk Face Bribery Charge, Press Association, dated 31 August 2011
[2] Westacre Investments Inc v Jugoimport SPDR Holding Co Ltd [1998] 3 WLR 770
[3] S1(2)(a) Bribery Act
[4] R (on the application of N) v Mental Health Review Tribunal (Northern Region) [2005] EWCA Civ 1605
[5] S3(2) Bribery Act, function or activity to which bribe relates includes: (a) all functions of a public nature; (b) all activities connected with a business (which includes a trade or profession); (c) any activity performed in the course of a person’s employment; (d) any activity performed by or on behalf of a body of persons (whether corporate or unincorporated).

By Gary Born, Kirsten O’Connell & Nathalie Allen

Overview

The new Ordinance will be of considerable interest (and importance) to all parties and practitioners dealing with or considering arbitration in Hong Kong. In this blog we provide a brief overview of certain key features of the new regime including:

1. the abolition of the distinction between ‘domestic’ and ‘international’ arbitration (and the transitional provisions which apply in the context of domestic proceedings);

2. the influence of the Model Law;

3. the availability of interim measures (including the basis on which the Hong Kong Courts may grant interim measures in support of foreign arbitral proceedings);

4. the new codified obligation of confidentiality;

5. the promotion of alternative dispute resolution (including the specific provisions of the Ordinance relating to so-called ‘med-arb’ and ‘arb-med’); and

6. the particular provisions which apply with regard to the enforcement of arbitral awards (including awards rendered in Mainland China).

1. Abolition of the distinction between domestic and international proceedings

One of the most significant changes introduced by the new legislation, and one which will be celebrated by most practitioners and parties alike, is the abolition of the dual regime for ‘international’ and ‘domestic’ arbitrations. Under the previous legislation, and in keeping with the practice adopted in many other major arbitral centres (including Singapore), a distinction was drawn between ‘international’ and ‘domestic’ arbitrations, with different provisions of the previous Arbitration Ordinance (Cap. 341) applying accordingly.

In practice, what this new reform means is that practitioners no longer need concern themselves with analysing the characteristics of the parties and the dispute in order to work out which particular provisions apply to any given arbitration. Instead, the intention is that all arbitrations in Hong Kong will be governed by a single unified regime based on the Model Law, and the drafting of arbitration agreements seated in Hong Kong need not differentiate international from domestic proceedings.

There is a caveat to this. Under pressure from certain sectors (most notably the construction industry), Hong Kong legislators chose to retain the key features of the ‘domestic’ regime in a series of ‘opt-in’ provisions set out in Schedule 2 of the new Ordinance. These will apply in place of certain of the Model Law-based provisions, where parties so choose. These specialised ‘opt-in’ provisions include, for example: (i) the ability of the courts to determine preliminary points of law; (ii) appeals to the courts allowed on questions of law arising from arbitral awards; (iii) challenges to awards permitted on grounds of serious irregularity; and (iv) provision for the consolidation of arbitrations or hearings. These features may, of course, be of use to many users of arbitration depending on their particular circumstances, but a distinguishing feature of the Hong Kong legislation (and one which sets it apart from other jurisdictions, notably England & Wales) is that these are ‘opt-in’ provisions; parties will only be subject to the greater court intervention prescribed under Schedule 2 if they expressly provide for this in their arbitration agreement.

A further caveat which is important to note – albeit one which is transitional in nature – is that the various ‘opt-in’ provisions set out in Schedule 2 will apply automatically to all arbitration agreements which provide for ‘domestic arbitration’ and which are entered into before or within six years of the new Ordinance coming into effect. In the longer term, however, it is anticipated that parties in the construction industry will be the primary users of the ‘opt-in’ system, albeit that other international parties may choose to avail themselves of this regime should they wish.

2. The influence of the Model Law

As noted above, the drafters of the new Ordinance have opted to rely heavily on the internationally-recognised and accepted framework of the Model Law. The new Ordinance generally follows the Model Law’s headings and chapters, which, in turn, mirror the chronological steps of a typical arbitration procedure. The Ordinance states clearly which features of the Model Law have been adopted (whether in whole or in part) and which aspects of the Ordinance are unique to Hong Kong.

The fact that the Ordinance draws heavily on the Model Law is a positive development which reflects Hong Kong’s position as a leading centre for arbitration. The Model Law (which was last updated in 2006) establishes certain minimum standards for national arbitration legislation. Amongst other things, the Model Law describes the (limited) circumstances in which domestic courts should be permitted to intervene in the arbitral process, confirming that arbitral tribunals are empowered to grant a wide-range of interim measures and rule on their own jurisdiction (the principle of kompetenz-kompetenz). The Model Law also provides that parties should be free to agree upon the procedure of any arbitration (subject to certain fundamental safeguards) and provides an outline framework which can be adopted in the absence of agreement (including provision for what is to happen in the event of default by any party). These features can all be found in the new Hong Kong Ordinance.

It would not be correct, however, to suggest that the Ordinance follows the Model Law slavishly. In certain instances, the language of the Model Law has been modified in order to impose a slightly different standard. For example, Article 18 of the Model Law provides that parties should have a “full” opportunity to present their respective cases, whereas the equivalent provision in the Hong Kong Ordinance (Section 46) provides that parties should have a “reasonable” opportunity to do so. In other instances, the provisions of the Model Law have been replaced entirely with bespoke clauses which reflect the peculiarities of arbitration in the region (the regime for the enforcement of arbitral awards being one such example, as described in greater detail below). Generally speaking, however, Hong Kong has adopted many of the salient features of the Model Law with little or no amendment. In that respect, the new Ordinance can be said to reflect best international practice.

3. Interim measures

One of the central themes underpinning the new legislation is the notion of minimal court intervention, with provisions of the new Ordinance vesting as much power as possible with arbitral tribunals. Adopting the Model Law’s provisions regarding interim measures, arbitral tribunals seated in Hong Kong are able to grant temporary measures, for example, to preserve assets or evidence, or to maintain or restore the status quo – and the Ordinance expressly confirms that this power includes the granting of injunctions. In addition, and again in line with the Model Law, Hong Kong arbitral tribunals can award preliminary orders preventing parties from frustrating any interim measure.

Separately, arbitral tribunals seated in Hong Kong are empowered inter alia to award security for costs and direct the discovery of documents or delivery of interrogatories – retaining the ‘general powers’ of an arbitral tribunal provided under the previous regime. Moreover, and an important feature of the new legislation, arbitral tribunals may make peremptory orders, which in other jurisdictions are a useful but underused resource of arbitral tribunals, specifying time limits for parties’ compliance in order to assist with the enforcement of their orders or directions.

Section 45 of the Ordinance also empowers the Hong Kong Courts to grant certain interim measures in support of arbitral proceedings – whether seated in Hong Kong or not – albeit that the Courts may decline to grant such relief if it is considered more appropriate for the interim measure sought to be granted by the arbitral tribunal. Furthermore, the Hong Kong Courts may only grant interim measures in support of proceedings seated outside of Hong Kong if: (a) the arbitral proceedings are capable of giving rise to an arbitral award which may be enforced in Hong Kong; and (b) the interim measure sought belongs to a type or description of interim measure which may be granted in Hong Kong.

4. Confidentiality

A feature of the new legislation likely to prove attractive to many parties is the inclusion of express provisions in relation to confidentiality. Although confidentiality is often perceived as a major advantage of arbitration, it is not always guaranteed. In certain jurisdictions (including, for example, Singapore and England & Wales) an obligation of confidentiality is said to be ‘implied’ into the arbitration agreement between the parties, albeit that the precise boundaries of this obligation are somewhat uncertain. In other jurisdictions, notably Australia, the concept of imposing any obligation of confidentiality in arbitral proceedings by law has been rejected by the national courts.

The new Hong Kong Ordinance expressly prohibits parties from disclosing any information relating to the arbitral proceedings or the award, subject to the usual exceptions regarding disclosure to professional advisors or disclosure required by law. In addition, and marking another significant change from the previous regime, the default position under the new Ordinance is that court proceedings relating to arbitration are to be conducted in closed court. Parties with arbitrations seated in Hong Kong can therefore assume that duties of confidentiality will bind their proceedings without the need for any additional drafting in this regard.

5. Mediation

A further specialised feature of the new Ordinance, and one which has been borrowed and enhanced from the old regime, is that express provision is made for both ‘med-arb’ (where a mediator is appointed to try and resolve the dispute before arbitral proceedings are commenced) and ‘arb-med’ (where the arbitral tribunal assumes the role of mediator part way through the proceedings in an effort to bring about an early settlement). These provisions follow the spirit of the recent Civil Justice Reform in Hong Kong in promoting ADR (at present, if a litigant in the Hong Kong courts fails unreasonably to engage in mediation, they face potentially adverse costs consequences) and set Hong Kong apart from other leading arbitration centres.

Under the Ordinance, a member of an arbitral tribunal is permitted to serve as a mediator after arbitration proceedings have begun, provided that all parties give their written consent. The Ordinance provides that, in these circumstances, the proceedings are to be stayed in order to afford the mediation the maximum chance of success – although if the mediation fails, the arbitrator-mediator is required to disclose to all parties any confidential information obtained during the mediation which he considers to be “material to the arbitral proceedings”. This latter requirement may deter some parties from engaging in frank discussions during any mediation (particularly during any caucus sessions with the arbitrator-mediator), which may impede the effectiveness of the overall process. Furthermore, parties should also be wary of anything which might jeopardise the enforceability of a subsequent arbitral award; whilst the Ordinance states that the existence of the ‘arb-med’ process will not in itself give rise to a ground for challenge if the relevant provisions of the legislation are respected, recent case law from the Hong Kong Courts illustrates that awards may be set aside on grounds of public policy if the ‘arb-med’ process is conducted in such a manner as to create an impression of bias (Gao Haiyan v Keeneye Holdings Ltd [2011] HKEC 514).

6. Enforcement of arbitral awards

One final feature of the new Ordinance which is worth flagging concerns the regime for the enforcement of arbitral awards, which departs from the provisions of the Model Law in favour (largely) of the enforcement procedure established under the previous regime. The key point is that arbitral awards are enforceable in the same manner as a court judgment but leave of the court is required. Moreover, separate provisions in the new Ordinance distinguish between: (i) awards rendered in Mainland China; (ii) awards rendered in New York Convention states (referred to in the Ordinance as “Convention Awards”); and (iii) other awards (e.g. awards rendered in Taiwan). Whilst the evidentiary requirements are the same for all three categories of award (the party seeking enforcement must produce an original or certified copy of both the award and the underlying arbitration agreement), the rules which govern enforcement will depend on the place in which the award was rendered. For example, subject to certain limitations, awards rendered in Mainland China may not be enforced in Hong Kong if an application for enforcement is also outstanding on the Mainland (Section 93 of the Ordinance). These features illustrate that, whilst the Hong Kong Ordinance largely reflects international practice, there are certain aspects of the legislation which are tailored to the particular circumstances of the region.

Conclusion

Hong Kong is already a major centre for international arbitration in Asia. As the gateway to China, enjoying the rule of law and New York Convention signatory status, Hong Kong is a natural option for international parties looking to trade in the region. The reforms introduced by the new Ordinance, couple with the recently promulgated HKIAC Administered Arbitration Rules and the opening by the ICC of a branch of its Secretariat in Hong Kong, are likely to enhance further Hong Kong’s position as a major hub for dispute resolution in the Asia-Pacific region and as an important centre for international arbitration more generally.

Justin D’Agostino, Simon Chapman and Ula Cartwright-Finch
Herbert Smith

On May 12th, 2010, the Tribunal de Justiça do Estado de Rio de Janeiro (which is similar to a Court of Appeals) rendered a decision on the timing and admissibility of urgent measures before Brazilian courts. In Durval Biancalana da Silva e outros vs. DTP Participações e Investimentos S/A e outros the dispute arose from a quota purchase agreement containing an institutional arbitration clause providing for the administration by CCBC – Centro de Arbitragem e Mediação da Câmara de Comércio Brasil-Canadá.

The court of first instance examined a request for injunctive relief based on arguments of an urgent need to prevent irreparable harm, considering contractual breaches and default committed by the respondents. The claimants argued that unless certain restraining orders were granted against the company’s administration, its officers would have the opportunity to act contrary to the purchaser’s interests, causing substantial damages to the business. However, the court decided to dismiss the request on the ground that only the arbitral tribunal should rule on any matter originated from the contract due to the presence of an arbitration clause, including a decision on injunctive remedies.

In the consideration of the appeal, the Tribunal de Justiça overturned the decision, partially granting the relief sought by the claimant. The Tribunal de Justiça first examined the language of the arbitration clause which included a provision on the possibility of requesting urgent measures to the judiciary before and after the arbitral proceedings, and concluded that until the arbitral tribunal had been constituted the parties were allowed to request such remedies.

The respondents, however, had filed a memorial with evidence contending that the arbitration proceedings were already initiated under the auspices of the CCBC. Despite this argument, the Tribunal de Justiça found that the constitution of the arbitral tribunal was still on its way and that only after that point would the judiciary lack jurisdiction. It also pointed out that the appointment of arbitrators, the acceptance of their duties and the signature of the term of independence would all together take enough time to justify the injunction issued by the judiciary with regard to the urgency.

In sum, the Tribunal de Justiça correctly reversed the decision from the court of first instance, interpreting the initiation of the arbitral proceedings as the constitution of the arbitral tribunal. This ruling complies with the competence-competence principle and the generally accepted moment of the constitution of the arbitral tribunal and the rules enshrined in the national arbitration statute, which are applicable both to domestic and international arbitration.

This case reveals two relevant arbitration trends in vogue in Brazil. First, the decision from the court of first instance shows the recent eagerness of more engaged Brazilian judges to enforce arbitration agreements and respect the jurisdiction of arbitral tribunals. It is in essence a very good sign in favor of arbitration, from a country where the full understanding of the institute and its implications is yet to be widely consolidated.

Second, the position of the judiciary to review the matter from a supportive perspective also reveals a growing understanding of the limits and duties of every actor in the dispute resolution process through arbitration, including courts. A decision such as this ensures international observers that it is now much safer to set their arbitration seats in Brazil.

Ferroatlàntica, on one hand, and Zeus and Zeus’ individual owners (altogether “Zeus”), on the other, had entered into a joint venture agreement for the research and exploitation of minerals in Brazil. They had also formed a company incorporated in Brazil, FAT Brasil, to perform the research and the exploitation. Zeus had to contribute mining rights to FAT Brasil while Ferroatlàntica had to invest US$22 million in FAT Brasil. The joint venture agreement contained an arbitration clause, which referred to the International Chamber of Commerce (ICC) Rules of Arbitration, whereas the articles of incorporation of FAT Brasil provided for arbitration under the Rules of Arbitration of the Brazil-Canada Chamber of Commerce. The place of arbitration in both agreements was São Paulo, Brazil.

The joint venture agreement also granted Ferroatlàntica an exit option: in the event the research results did not meet certain targets, Ferroatlàntica had the right to exit the joint venture and be repaid the US$22 million invested minus FAT Brasil’s research expenses.

Considering the research results targets had not been met, Ferroatlàntica exercised its exit rights and requested the reimbursement of the balance of its investment in the joint venture. After Zeus refused to pay, Ferroatlàntica initiated an ICC arbitration seeking payment of those sums. In response, Zeus filed a lawsuit before a court in Caetité, in the state of Bahia, Brazil, and obtained an ex parte injunction requesting a stay of the arbitration. Ferroatlántica thereafter filed an interlocutory appeal against the injunction before the Court of Appeals of the State of Bahia, which issued an order vacating the injunction.

When seeking a stay of the arbitration, Zeus had relied on the conflict between the two arbitration clauses and argued such conflict raised “doubts” as to which rules should govern the arbitration.

Since Brazilian law on arbitration provides for judicial assistance at the outset of the arbitration, the Court of Appeals of the State of Bahia had to determine whether the conflict between the arbitration clauses justified such judicial intervention.

The Court of Appeals decided that the existence of conflicting arbitration agreements does not constitute a sufficient cause for a provisional stay of an arbitration. The court found that although conflicting arbitration agreements may raise difficulties for the resolution of a dispute, such difficulties did not justify judicial intervention to allow the arbitration to proceed.

Parallel arbitration proceedings pose a risk of insecurity regarding the outcome of the adjudication procedure. This risk derives from the likelihood that different arbitral tribunals will reach contradictory or incompatible decisions. In some cases, the two decisions may even out at the end. In others, the application of one or both becomes impossible. The most likely consequence is that one or both parties will continue to litigate in the available fora, making compliance with the award(s) unlikely and defeating what many consider to be the purpose of choosing arbitration in the first place: to have an effective and technical decision on the merits using a reasonable amount of resources.

Consolidation of proceedings would be advisable to avoid parallel proceedings. This can always be done in international commercial arbitration if the parties agree to it after the dispute arose. Such an agreement is not uncommon, because, as we have commented above, the prospect of parallel proceedings is a grim enough incentive to opt for consolidation.

In some cases, one of the parties, who is usually the party that has more to lose from the arbitration than the status quo, instead opts for dilatory tactics and litigation in court. More often than not, it is the respondent in the arbitration that takes this road, which is exactly what Zeus, in the possession of US$ 22 million, did.

The dispute that gave rise to the decision commented here was quite simple in practice because all the claims presented by Ferroatlàntica were related to the joint venture agreement. However, in other cases, the relation between the various agreements at issue or the nature of the claim may be such that it is more complex for the parties to determine which arbitration agreement governs their dispute. In those cases, the need for judicial intervention to determine which arbitration agreement prevails could arise. The rationale for such intervention would be similar to the arguments in favor of judicial intervention to support the enforcement of an arbitration agreement where (i) the terms of the agreement themselves are not sufficient to start the arbitration; (ii) one of the parties resists arbitration; or (iii) another obstacle to arbitration arises. The decision by the Court of Appeals of Bahia is an indication, however, that no such action is possible in case of conflicting arbitration

FAT Ferroatlàntica S.L. vs. Zeus Mineração Ltda.

It was suggested that Dallah highlighted a possible divergence between the apparent pro-arbitration and pro-enforcement attitude of English law, and the reality of practice before the English courts, where very limited deference is afforded to foreign arbitral awards in the circumstances of challenge to enforcement pursuant to section 103(2). As hoped, Dallah has now been granted leave to appeal to the Supreme Court, where the allocation of jurisdictional competence between the arbitral tribunal and the English courts – particularly as regards the finality of New York Convention awards – will hopefully be given close scrutiny.

Subsequent to Dallah, however, there have been a number of other cases that highlight the current tension between the English legal community’s pro-arbitration and pro-enforcement attitude, and the Act, which may allocate jurisdictional competence to the English courts rather than international arbitral tribunals. This blog briefly reviews several such decisions, namely three recent challenges to the substantive jurisdiction of international arbitral awards pursuant to section 67 of the Act.

Who is Most Competent? Section 67 of the Act and Finality of Arbitral Decisions in England

Similarly as with Dallah, recent case law from the English courts indicates that when considering challenges to the substantive jurisdiction of an award pursuant to section 67, the English courts will conduct a complete rehearing into the matter, not just a review of the tribunal’s determination. An arbitral tribunal’s ruling as to whether there is a valid arbitration agreement; whether the tribunal is properly constituted; and what matters were submitted to arbitration in accordance with the arbitration agreement, are all subject to being reopened and reheard on the merits before the English courts. Such challenges are available both at the enforcement stage, and as a preliminary question. Moreover, section 67 is a mandatory provision of the Act and parties agreeing to international arbitration in England cannot contract out of it.

In Republic of Serbia v Imagesat International NV [2009] EWHC 2853 (Comm) the High Court considered a challenge to the substantive jurisdiction of an ICC tribunal pursuant to section 67 of the Act. The tribunal, seated in England and applying English law, determined its jurisdiction as a preliminary issue in the arbitration. The ICC tribunal held that under the terms of reference it had substantive jurisdiction to deal with, among other things, the interesting question of whether Serbia had conferred on the ICC tribunal jurisdiction to determine if it was the “continuator/successor” of the former State Union of Serbia and Montenegro for the purposes of the latter’s contract with Imagesat, and thus whether it was a party to the arbitration agreement.

For present purposes we are interested in the High Court’s application of section 67 of the Act. In this regard the Court held, applying Azov Shipping Co. v Baltic Shipping Co., that in hearing a challenge under section 67 “it is for the court to determine whether the arbitrator had jurisdiction and whether he was correct in deciding that he did.” In undertaking this enquiry, the Court “does so without any preconception that the arbitrator made the right decision.” The Court in Serbia went further still, stating that the “arbitrator’s determination [as to jurisdiction] can only be provisional.” That sweeping pronouncement is difficult to reconcile with the proposition that arbitral awards are final and binding between the parties, subject to limited judicial oversight. Equally, the tenor of the pronouncement is in some tension with the notion that that judicial review of arbitral awards is limited, with substantial deference being afforded to the arbitrators’ decisions.

The English Court again considered its section 67 jurisdiction in Habas Sinai ve Tibbi Gazlar Isthisal Endustri AS v Cometal SAL [2010] EWHC 29 (Comm). The High Court did not consider it controversial that it would be conducting a rehearing of the arbitral tribunal’s determination on jurisdiction. In that case Habas applied to set aside an interim final arbitration award on jurisdiction, which determined that the parties had concluded an arbitration agreement. The contract in question did not contain an arbitration clause but provided that “All the rest [of the terms] will be same as our previous contracts,” of which there had been 14. The arbitral tribunal held that the reference to the terms of “our previous contracts” was to the terms of the 11 previous contracts between the parties, which were prepared by the respondent and contained London arbitration clauses (notwithstanding that the first three of the 14 contracts between the parties did not provide for arbitration).

Similarly, the February 2010 decision in Norscot Rig Management PVT Ltd v Essar Oilfields Services Ltd [2010] EWHC 195 (Comm) confirmed that a section 67 application involved a rehearing of the jurisdictional point. In Norscot Rig the applicant challenged the jurisdiction of the arbitrator to adjudicate certain set-offs and counterclaims by the defendant, Essar, in the arbitration. Those set-offs and counterclaims arose not by way of breach of the contract containing the arbitration agreement, but pursuant to breach of a second contract between the same parties, but which did not contain an arbitration clause. The arbitrator determined that he had jurisdiction under the arbitration agreement to determine the counterclaim. The High Court dismissed the section 67 challenge, holding that while the counterclaims did not “arise out of” the terms of the contract giving rise to the arbitration, they did “relate to” the contract under which the arbitration was commenced and therefore within the scope of the arbitration agreement.

Thus, as with the position under section 103, in considering a section 67 application, the Court is to undertake a full rehearing on the merits of the jurisdictional issue under challenge. This wide jurisdictional oversight again highlights a divergence between the apparent pro-arbitration and pro-enforcement attitude of the English legal community, and the very broad scope of the English High Court’s jurisdiction to hear section 67 challenges – where no deference is afforded to the international arbitral awards at issue.

Azov Shipping Revisited

In light of this tension it is worth returning to the leading authority on section 67 jurisdiction, Azov Shipping, and examining the High Court’s interpretation of its jurisdiction in that case. Notably, during the course of the Azov Shipping saga, on three separate occasions three justices of the High Court, Rix J (as he then was), Longmore J (as he then was) and Coleman J, each had opportunity to comment on the Court’s section 67 jurisdiction.

Rix J, the first of the three to interpret the scope of Court’s oversight function pursuant to section 67, held that it enabled the challenger “to present his case and challenge the opposing party’s case on the question of jurisdiction with the full panoply of oral evidence and cross-examination so that, in effect, the challenge becomes a complete rehearing of all that has already occurred before the arbitrator.” Rix J considered Lord Saville’s distinguished Departmental Advisory Committee Report on the Arbitration Bill 1996 (1996 DAC Report), stating that “[i]t is not as though the court is required to review a challenge to the arbitrator’s award on jurisdiction through the eyes of the arbitrator or on his findings of fact. As para 143 of the report on the Bill makes clear: ‘A challenge to jurisdiction may well involve questions of fact as well as questions on law.’”

Coleman J also justified a wide section 67 jurisdiction by reasoning that it “is intended to reflect the principles that, whereas an arbitrator has a limited jurisdiction of a provisional nature in line with the internationally accepted doctrine of Kompetenz-Kompetenz, his determination cannot be conclusive between the parties because of the nature of the intrinsic issue, for his jurisdiction can only be founded on the very mutual assent which is in issue.” That view was based on the 1996 DAC Report, which advised that clause 30 of the Bill (later to become section 30 of the Act) “states what is called the doctrine of Kompetenz-Kompetenz,” but that “clearly the tribunal cannot be the final arbiter of a question of jurisdiction, for this would provide a classic case of pulling oneself up by one’s own bootstraps.”

Reallocation of Jurisdictional Competence in England: Room For Debate

The 1996 DAC Report and the subsequent enactment of the Act marked a watershed in arbitration law in England, in particular the Act banished the position that arbitrators could do no more than express a view as to whether they had jurisdiction or not. Tribunals could now determine their own jurisdiction, including in a final award, subject to rights of challenge in the courts. The Act, however, did not go as far as to adopt the classic doctrinal conception of Kompetenz-Kompetenz, as the 1996 DAC Report might appear to suggest.
That original conception of Kompetenz-Kompetenz (under German law) was historically understood as recognizing an arbitral tribunal’s jurisdiction to finally decide questions regarding its own jurisdiction, without the possibility of subsequent judicial challenge or review. Instead, the Act adopts its own formulation of Kompetenz-Kompetenz (by way of both sections 7 (separability) and 30), just as almost every significant international arbitration jurisdiction has adopted (and continues to develop) its own unique concept of the doctrine, affording different degrees of priority and finality to an arbitral tribunal’s exercise of its Kompetenz-Kompetenz, or more accurately, its jurisdictional competence.

Recognizing this, together with the evolving law of international arbitration, there should continue to be debate about whether English law strikes the best balance between acceptable judicial oversight of the international arbitral process (so as to ensure it is not subject to abuses or practices that undermine its legitimacy as best practice for international dispute resolution), and the interests of party autonomy and the efficient and flexible resolution of international disputes.

In Azov Shipping, Rix J expressed a common pro-oversight sentiment, that “[u]ltimately, a question of justice, where it conflicts with a modest prejudice to expedition or increase in cost, must be given greater weight.” The other side of the coin is that none of the section 67 challenges in Azov Shipping, or the more recent Serbia, Habas Sinai or Norscot Rig cases were successful. In the words of Longmore J in Azov, the applicants, having already lost their jurisdictional challenges before the tribunal were “effectively now having a second bite at the same cherry.” It can readily be seen how parties can abuse the section 67 procedure, and it is questionable whether the interests of justice are served by providing recalcitrant parties with an instrument of cost and delay.

Just as importantly, the ability to require as of right a complete rehearing of jurisdictional issues (both fact and law) already determined by an arbitral tribunal, significantly undermines the cornerstones of the international arbitration regime, being procedural neutrality, judicial non-intervention, party autonomy, flexibility of procedures, and the finality and enforceability of arbitral awards. The potential for section 67 to erode the efficacy of international arbitration as an international dispute resolution procedure must also be considered alongside the stated purposes of the Act, which are to “obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense” and that “the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest.”

These recent cases should again promote debate about whether the Act strikes the right balance between these competing interests.

Gary B. Born and Timothy J. Lindsay

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.

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”.