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.

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….

“the evidence before the Court is that the judgment in this case did not arise out of proceedings that comported with the international concept of due process. It arose out of proceedings that the Nicaraguan trial court did not have jurisdiction to conduct. During those proceedings, the court applied a law that unfairly discriminates against a handful of foreign defendants with extraordinary procedures and presumptions found nowhere else in Nicaraguan law. Both the substantive law under which this case was tried, Special Law 364, and the Judgment itself, purport to establish facts that do not, and cannot, exist in reality. As a result, the law under which this case was tried stripped Defendants of their basic right in any adversarial proceeding to produce evidence in their favor and rebut the plaintiffs’ claims. Finally, the judgment was rendered under a system in which political strongmen exert their control over a weak and corrupt judiciary, such that Nicaragua does not possess a ‘system of jurisprudence likely to secure an impartial administration of justice.’”

As Childress notes, the decision is important for three reasons:

This case is interesting on multiple levels. First, the district court applied an “international concept of due process.” This standard was seen to be in concert with, but different than, US notions of due process. Second, the court found that Nicaragua does not have impartial tribunals. In so doing, the court relied not only on US State Department pronouncements but also on expert testimony regarding what law is like on the ground in Nicaragua “on paper and in practice.” Finally, this case is perhaps most interesting because the general understanding is that it is hard to resist enforcement. This case shows that US courts, if presented with appropriate evidence, are willing to ascertain the validity of foreign judgments, especially in countries facing political and social turmoil that may negatively impact the administration of justice in those countries.

But the case also raises a host of issues on the nexus between enforcing judgments and pursing denial of justice claims in investment arbitration. Can Dole now bring a “denial of justice” claim against Nicaragua under the U.S.-Nicaragua BIT? What effect, if any, would the district court judgment have in such a case? Or consider the Dole case in light of Chevron’s litigation woes in Ecuador. I’m curious what relationship, if any, there is between its investment arbitration claim of denial of justice and attempts to prevent enforcement of foreign judgment for failure to provide due process. Does a successful “denial of justice” claim preclude enforcement as a matter of res judicata? Or is it persuasive authority for a future federal court? Is the opposite also true? If the claim for denial of justice is not successful, does that suggest the Ecuador judgment should be enforced? Finally, if the Ecuador court rules against Chevron and a U.S. court enforces the judgment prior to the issuance of an award, what impact would that have on the denial of justice claim in arbitration?

Roger Alford

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Alexis Mourre/Alexandre Vagenheim