Recent legislative developments in Oklahoma, and a few other U.S. states, reflect a growing mistrust of international and foreign law and legal systems. These proposed statutes and constitutional amendments are one aspect of parochial backlash in the United States and elsewhere against developments in international law and dispute resolution over the past decades. There are substantial doubts about the constitutionality of these legislative proposals under the U.S. Constitution, but they may prove to be the source of substantial mischief. For the moment, these legislative developments are more in the nature of eccentric curiosities than anything else. They nonetheless warrant careful monitoring – particularly if comparable legislative provisions begin to be proposed on a federal level in the U.S. Congress. Indeed, the proposed Arbitration Fairness Act, pending in Congress, has hints of a similar disregard for U.S. international obligations.

The leading example of legislative backlashes against international and foreign law is a proposed amendment to the Oklahoma State Constitution (1). Grandiosely titled the “Save our State Amendment,” the proposed amendment would purport to forbid Oklahoma State courts from “look[ing] to the legal precepts of other nations or cultures” or from “consider[ing] international law or Sharia Law.” The full text of the proposed amendment is available here.

The “Save our State Amendment” overwhelmingly passed in the Oklahoma House on 18 May 2010 (91 for – 2 against) and in the Senate just six days later, on 24 May 2010 (41 for – 2 against, 5 excused). The proposed amendment would provide:

“The [Oklahoma] Courts …, when exercising their judicial authority, shall uphold and adhere to the law as provided in the United States Constitution, the Oklahoma Constitution, the United States Code, federal regulations promulgated pursuant thereto, established common law, the Oklahoma Statutes and rules promulgated pursuant thereto, and if necessary the law of another state of the United States provided the law of the other state does not include Sharia Law, in making judicial decisions. The courts shall not look to the legal precepts of other nations or cultures. Specifically, the courts shall not consider international law or Sharia Law. The provisions of this subsection shall apply to all cases before the respective courts including, but not limited to, cases of first impression.” (2)

The proposed amendment is to be submitted to a referendum of Oklahoma voters, likely in November 2010. News sources predict that the amendment will be adopted by a large margin.

If Oklahomans adopt the amendment, what will it mean (putting aside questions of validity under the U.S. Constitution)? This is not an issue that has drawn the attention of the amendment’s sponsors, whose interest appears limited to stoking parochial bias and fear. Still, if adopted, courts will have to interpret the legislation.

One obvious area where the amendment may have application is conflict of laws. The amendment specifically provides that Oklahoma courts may not “consider” either international or Sharia law, and may only apply the law of sister states in the United States “provided the law of the other state does not include Sharia Law.” That fairly clearly excludes application of, for example, the law of states which have adopted Sharia law – presumably in cases where there is a contractual choice-of-law clause, as well as in cases where there is not. Although principles of international law are less likely to arise in commercial litigation, particularly in state courts, in those instances where they do (e.g., some human rights litigation, cases raising issues concerning foreign territorial boundaries), the Oklahoma amendment would appear to preclude application of those principles. Exactly how the amendment’s prohibition against the application of international law relates to the amendment’s preliminary acknowledgment that Oklahoma courts must apply federal law (which, under well-settled U.S. precedent, includes international law) is not addressed by the amendment or its drafting history.

There is a further issue, of greater practical importance, particularly if the amendment’s approach were adopted outside Oklahoma. Under the amendment, may an Oklahoma court apply any foreign law, as distinguished from international or Sharia law? In addition to providing that Oklahoma courts may not consider international and Sharia law, it also prohibits Oklahoma courts from “look[ing] to the legal precepts of other nations or cultures.” A serious argument could be made that this text forbids the application of foreign law in Oklahoma courts – including, for example, in tort, contract and other commercial disputes. Thus, if a dispute arose under a contract with a choice of law clause selecting foreign law (e.g., French or Russian), there is a substantial argument that the amendment would forbid application of French or Russian law; the argument is at least as strong in tort or contract cases where no choice-of-law clause existed. In neither case, the argument would run, could an Oklahoma court apply “the legal precepts of other nations.”

Choice of law issues in most contexts are, under domestic U.S. law, governed by state (not federal) law. That would appear to make the amendment’s prohibition against application of foreign or Sharia law fully applicable in Oklahoma courts – absent some constitutional basis for invalidating the amendment (discussed below). Moreover, although the amendment applies, by its terms, only in Oklahoma state courts, at least arguably, U.S. federal courts in Oklahoma would be obliged to adopt the same rules as state courts in matters ordinarily governed by state law.

It is also not clear how the Oklahoma amendment might impact the recognition and enforcement of foreign judgments which are based on the application of foreign (or international) law by a foreign court. At least arguably, recognition of a foreign judgment would involve the indirect application of foreign (or international) law and, thereby, run afoul the Oklahoma amendment. For example, is a judgment from Egypt or Saudi Arabia capable of recognition in an Oklahoma court under the Oklahoma amendment? In the United States, the recognition of foreign judgments is largely the subject of state law and, as a consequence, the amendment would again appear prima facie to apply to the recognition and enforcement of foreign judgments in Oklahoma state and federal courts. Arguably, similar conclusions would apply to forum selection agreements providing for litigation in a foreign forum (particularly a forum where the Sharia might be applicable).

The impact of the proposed Oklahoma amendment on international arbitration would appear to be much more limited – reflecting in part the superior legal regime applicable to international arbitration, as compared to other means of dispute resolution. In particular, the Oklahoma amendment would not seem to preclude a party from enforcing a foreign award or international arbitration agreement, even if the award applied foreign or international law. The New York Convention and Federal Arbitration Act (Chapter 2) impose federal standards for most aspects of recognition of Convention awards and agreements, in either state or federal courts. The Oklahoma amendment would likely (very likely…) be preempted by the Convention and the FAA.

The immediate practical consequences of the amendment are limited. Oklahoma is not a forum for appreciable amounts of international commercial litigation and, if the amendment is adopted, Oklahoma choice-of-court and choice-of-law clauses will become (even) less common. In practical terms, few international disputes of any consequence are likely to be affected by the amendment.

There is also a substantial argument that various aspects of the Oklahoma amendment run afoul of constitutional limitations under the U.S. Constitution. As noted above, under well-settled U.S. authority, international law is both part of the law of the United States and is treated as federal law. As such, international law preempts, or supersedes, contrary state law and, if the Oklahoma amendment were interpreted to forbid application of international law in Oklahoma courts, it would likely be invalidated.

The amendment’s prohibition against application of foreign or Sharia law raises more complex U.S. constitutional issues. The prohibition may well run afoul of restrictions on state involvement in national foreign relations, imposed by a series of U.S. Supreme Court decisions from the mid-20th century. Singling out the laws of particular foreign states (e.g., Sharia law, which is the foundation of several foreign states’ law) and prohibiting their application in U.S. courts arguably violates these constitutional prohibitions by inserting state legislatures into matters of U.S. foreign relations. Finally, if the amendment is applied to prohibit application of any foreign law, it arguably would violate limitations imposed by the federal due process clause on choice-of-law decisions of state courts – although the existence and contents of such limits is a highly disputed topic.

One might be tempted to dismiss the “Save our State Amendment” as a local eccentricity without practical consequence. Unfortunately, that conclusion is premature. Similar legislative proposals are presently being considered in the Arizona State House and Senate Judicial and Rules Committees. The Arizona bill provides that “[a]ny decision or ratification of a private agreement that is determined, on the merits, by a judge in this state who relies on any body of religious sectarian law or foreign law is null and void, is appealable error and is grounds for impeachment and removal from office.” The full text of the Arizona House bill is here. Although predictions are always risky, one suspects that similar legislative proposals will surface in other states and, eventually, the U.S. Congress.

More broadly, and of even greater practical concern, the Oklahoma amendment is not unrelated to the so-called “Arbitration Fairness Act,” currently pending in the U.S. Congress. Versions of that legislation would invalidate broad categories of agreements to arbitrate consumer, employment, franchisee, and “civil rights” disputes. These legislative proposals are all designed to enhance the litigation options of local constituencies by guaranteeing a more favorable local forum applying local protections – including where parties (in an international commercial agreement) have agreed to resolve their disputes by arbitration. That result is very difficult to square with U.S. commitments under the New York Convention (and the Inter-American Convention). The Convention permits derogation from Article II’s obligation to recognize international arbitration agreements only in limited instances of disputes that are not capable of settlement by arbitration. Article II’s exception cannot easily be expanded to accommodate the proposed Act’s sweeping invalidation, in all circumstances, of broad categories of international arbitration agreements.

The Arbitration Fairness Act parallels the Oklahoma amendment in an even more troubling fashion in its treatment of the separability presumption and the doctrine of competence-competence. Both principles are universally-recognized, in national and international arbitration instruments, judicial decisions, arbitral awards and commentary from all of the world’s leading legal systems. Indeed, U.S. courts played a central role in developing both doctrines (for example, in the Supreme Court’s classic decision in Prima Paint).

Despite that, versions of the proposed Arbitration Fairness Act would abrogate both the separability presumption and the competence-competence doctrine in the context of international arbitration agreements (including in agreements outside the context of consumer, employment and franchise disputes). If adopted, this approach would violate the parties’ express and implied agreements in most international contexts — including where institutional rules, agreed to by the parties, adopt both doctrines; where foreign law, applicable to the agreement to arbitrate, adopted one or both principles; and where parties impliedly intend for these international principles to apply, which is true in virtually all international commercial contexts. By denying effect to the parties’ agreements on these issues, the Arbitration Fairness Act would also violate U.S. commitments under the New York (and Inter-American) Convention – preferring parochial domestic law and constituencies to the United States’ international engagements under Article II of the New York Convention and parallel provisions of the Inter-American Convention, in a manner uncomfortably reminiscent of the Oklahoma amendment.

It remains to be seen whether the legislative instincts that inspired the “Save our State Amendment” will spread in their most virulent form to Washington, DC. The likelihood appears slim. Nonetheless, if the Arbitration Fairness Act is ultimately passed in its current form it would violate U.S. treaty commitments – under the New York Convention – and depart from universally-accepted principles of international arbitration law. The possibility of this occurring remains uncertain and the risk of jingoistic federal legislation appears even more remote. But that conclusion is by no means certain. To put the question in practical terms, what odds would one have given twelve months ago for adoption of something like the “Save our State Amendment” in Oklahoma or anywhere else?

(1) 2010 Okla. Sess. Law Serv. Hs. Jt. Res. 1056 (West).
(2) The Oklahoma Attorney General has since supplemented the initially proposed Preliminary Ballot Title (the question that will be posed to the voters as a referendum) to explain to the voters what international law and Sharia law comprise: “This measure amends the State Constitution. It changes a section that deals with the courts of this state. It would amend Article 7, Section 1. It makes courts rely on federal and state law when deciding cases. It forbids courts from considering or using international law. It forbids courts from considering or using Sharia law. .International law is also known as the law of nations. It deals with the conduct of international organizations and independent nations, such as countries, states and tribes. It deals with their relationship with each other. It also deals with some of their relationships with persons. The law of nations is formed by the general assent of civilized nations. Sources of international law also include international agreements, as well as treaties. Sharia Law is Islamic law. It is based on two principal sources, the Koran and the teaching of Mohammed.” Letter from the Office of the Attorney General for Oklahoma State to the Oklahoma Secretary of State, the Speaker of the Oklahoma House of Representatives, and the Senate President Pro Tempore of Oklahoma, dated 4 June 2010, Re: Preliminary Ballot Title for State Question No. 755, Legislative Referendum No. 355.

By Gary Born and Noelle Berryman

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

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

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

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

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

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

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

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

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

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

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

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

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

On a first reading this might seem like a particularly narrow question. Perhaps geographically of limited utility.

But to almost every international organization in the industrial, defence and major projects sectors it is, in fact, one of the burning issues confronting their participation in a market planning to spend or invest $USD450billion in 2010.

In the current financial climate, the Middle East is the most real, immediate and accessible market for project and investment businesses, otherwise stymied in the economies of the USA and Europe.

The overall framework for this 4-part series will be first to briefly outline the current legal system that supports the region. To then to focus on the dispute resolution systems that are currently being used and to review their degree of success.

Some consideration will then need to be given to the recently (2007) introduced, bespoked, version of FIDIC ’99 for government work in Abu Dhabi and how that contract manages disputes. In that context, the role of a Dispute Administration Board is now mandated.

Finally, there needs to be made some observations on the relevant institutional body for commercial arbitration in Abu Dhabi – the Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC), and its procedures and objectives. That arbitration body is now also mandated in the Abu Dhabi government’s FIDIC versions.

It is difficult to convey to people who have never spent some time in the region, the strikingly inverse relationship here between size and wealth, and indeed population numbers.

The United Arab Emirates (UAE) is a federation of seven Emirates, nestled between Saudi Arabia and Oman and the waters of the Persian Gulf.

The geographical size of the UAE approximates to the State of Maine in the USA. Total population is between 5-6 million people. The state of Abu Dhabi (both a city and an Emirate) occupies ¾ of the UAE’s area and has a population of close to ( or pehaps now just exceeding) 2 million people. It is also the Federal capital of the UAE.

For 2010, the GDP of Abu Dhabi is expected to pass $USD450 billion of which near 70% will be spent in the construction (55%) and oil and gas (15%) sectors.

To put these figures into context, for Australia, with a population of 24 million and a workforce of 11.5million, the GDP for 2009 was estimated to be between $USD 900 billion and $USD950 billion. Abu Dhabi is planning to exceed that number by 2013-2014, and then double it again by 2020.

In an investment report by Isthmus Partners released 31st March 2010, Abu Dhabi is quoted as having 95% of the UAE’s oil reserve, and 92% of the proven gas reserves. The report says that, based on current utilization, Abu Dhabi’s oil reserves, will last for 150 years.

Abu Dhabi certainly has its share of distressed real estate developments and postponed major projects. But nowhere near the scale being experience in Dubai.

The focus of dispute resolution in the UAE has been, for much of 2009 and early 2010, entirely dominated by events in Dubai and the government entities, Dubai World and its development subsidiary Nakheel. And these were not issues limited, geographically, to the Gulf. The bond-financing instruments used in Dubai were once seen as grade “A” investments and were (and are today) held by the likes of RBS and HSBC, together with a plethora of institutions and individual worldwide.

But now, as the appetite returns for reinvestment in the Gulf, and the schedule for major projects in Abu Dhabi is reactivated, it is legitimate to ask – can the existing dispute resolution systems – especially Abu Dhabi – possibly cope? If there are doubts – what can be done? Or perhaps better – are there lessons to be learned from the Dubai experience and if so, what are they?

Against the statistics and figures quoted above, now add to them the fact that, presently, the Abu Dhabi court systems has pending before it approximately 320,000 cases. Many of those caes relate to employment and labour issues and a significant proportion relate to small comercial dipustes. But on any view, the court system of Abu Dhabi has little real capacity to manage major complex construction disputes.

And may I conclude this first part of the series by also noting that the UAE does not have an arbitration law. It does have, in the UAE’s Civil Procedure Law (1992), Articles 203 to 218 which specifically address arbitration, aspects of it’s the process and the enforcing of domestic awards. But, with respect, those provisions were not designed in anticipation of the current dimensions of doing business in the UAE in 2010.

I should note, for completeness, that it has been mentioned that the UAE soon will receive a new arbitration law, but a number of commentators feel that in the current circumstances, the finalization of a new arbitration law is just not seen as having sufficient priority.

In the next parts of this series – focusing on dipute resolution in Abu Dhabi – I will review in more detail the principle forms of contracts and arbitration agreements that are used in the Emirate and look more closely at some of the recent initiatives that the government has introduced to help manage issue resolution in the light of one of the world’s biggest building programmes.

Under the Russian legal system, the last resort a party has with respect to challanging a court decision is to apply to the Constitutional Court of the Russian Federation with a claim to review the decision’s compliance with the Russian Constitution in terms of the provisions of laws and/or regulations applied by lower courts. There are very few cases in which the Constitutional Court opined on matters related to international arbitration.

Since the adoption of the Law “On International Commercial Arbitration” founded on the UNCITRAL Model Law, the compliance of its provisions with the Russian Constitution has been challenged four times. Three times the subject of the challenge was Article 34 (“Application for setting aside as exclusive recourse against an arbitral award”) and/or Article 35 (“Recognition and enforcement”) in 1999, 2000 and 2001. The applicants, in particular, alleged that the limited range of grounds for setting aside an arbitral award or for refusal to recognize and enforce an award established by the said articles infringed upon the party’s right to judicial protection, which includes the right of recourse against any judgment or award rendered against a party. In each claim, the Constitutional Court refused to review the constitutionality of these provisions finding that the applications were inadmissible as the said provisions nowise violated the constitutional rights of the applicants. The rationale of the court contributed to the development of making the jurisprudence more favorable to international commercial arbitration. Thus, in its decision of October 26 2000 No. 214-О the court stated that “the applicants while entering into the contract failed to exercise their right to provide for resolution of the arising disputes by commercial court procedure, but instead signed an arbitration agreement (clause) on submission of them to arbitration under the Law of the Russian Federation “On International Commercial Arbitration”. Thus, having exercised their right of freedom of contract, they voluntarily chose this particular dispute resolution technique and agreed to comply with the rules established for international commercial arbitration court”.

Furthermore, in May 2009 the Constitutional Court ruled on international arbitration in its decision of May 28, 2009 No. 623-O-O. This time it examined an application challenging the constitutionality of the Article 16(3) “Competence of the arbitral tribunal to rule on its jurisdiction” of the Law “On International Commercial Arbitration”. In my opinion, the case is interesting and even in some way bizarre, thus it deserves a closer look.

A foreign company Mellain LLC filed a claim before the International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry (ICAC) to recover contractual debts from a Russian company. The ICAC ruled on its jurisdiction to hear the dispute. The Russian state courts of the first and cassation tiers set aside the ruling on the ground that the arbitration agreement was made by the claimant with another Russian company which did not act on behalf of the respondent. The courts rejected the arguments of Mellain LLC about the respondent having missed the time limit for submitting his application to the state court for setting aside the ruling of the arbitral tribunal on its jurisdiction.

Mellain LLC applied to the Constitutional Court of the Russian Federation challenging, in particular, the constitutionality of the provision of Article 16(3) of the Law “On International Commercial Arbitration” which provides that “the arbitral tribunal may rule on a plea referred to in paragraph (2) of this article [on the absence of jurisdiction] either as a preliminary question or in an award on the merits. If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court specified in article 6 to decide the matter, which decision shall be subject to no appeal. While such a request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award”.

The applicant argued that the wordings “within thirty days after having received notice of that ruling” lacked clarity as it failed to specify the moment of commencement of the period for filing the application to set aside the ruling of the arbitral tribunal as a preliminary question on its competence. On this ground the claimant alleged that it is contrary to Article 46 of the Constitution which provides that “everyone is guaranteed judicial protection of his rights and liberties”.

Furthermore, the applicant requested the Constitutional Court to review the ICAC ruling and to compel the ICAC and the Russian specialized professional periodical “International Commercial Arbitration” to publish a research paper on the competence of ICAC. Unsurprisingly, the Constitutional Court rejected these requests noting that resolving such matters falls beyond the competence of the Constitutional Court.

The Constitutional Court found that the ICAC Rules clearly specify the procedure for mailing and delivering the documents by the ICAC Secretariat. The court noted that the Rules in force as of the time of the dispute in question provided in Paragraph 12(2) that “the statements of claim, statements of defence, notices of the hearing, arbitral awards, rulings and orders shall be sent by registered mail with return receipt requested, or otherwise, provided that a record is made of the attempt to deliver the mail”. (The ICAC Rules that are currently in force have practically the same wordings of Article 16(3)). The Constitutional Court concluded that Article 16(3) considering its application together with the Arbitration Rules of the ICAC cannot be interpreted as lacking clarity.

Indeed, Article 16(3) of the Law on International Commercial Arbitration does not need to provide details on how to prove the exact time a notice of the ruling was received by each party. However, such details should be specified elsewhere, namely in the applicable arbitration rules.

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

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

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

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

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

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

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

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

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

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

Then, March Rich is likely to survive.

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

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

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

“A judgment shall also not be recognized:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This calls for two observations.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“A judgement shall also not be recognised:

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

Encore un effort, Messieurs les réformateurs….

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

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

Georg von Segesser / Dorothee Schramm

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

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

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

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

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

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

By Christophe von Krause and Marily Paralika

The emerging rule in the U.S. that, to recognize and enforce an arbitral award under the New York Convention, a U.S. court must have personal jurisdiction over the award debtor or his or her property in the forum, has attracted criticism. International arbitration specialists argue that this requirement restricts enforcement of valid arbitral awards in the U.S., in violation of the New York Convention. Upon reflection, the enforcement difficulty has perhaps more to do with the fact that the U.S. Federal Arbitration Act imposes a three-year statute of limitations on actions to recognize and enforce New York Convention awards.

U.S. courts have interpreted the Due Process Clause of the U.S. Constitution, which provides that no person shall be deprived of life, liberty or property without due process of law, to mean that jurisdiction can be maintained over a non-resident defendant (whether an individual or a corporation) only if that defendant has “certain minimum contacts with [the forum] such that maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice.’” Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463 (1940)). Courts have held that this “minimum contacts” requirement is also applicable in proceedings to recognize or enforce arbitral awards under the New York Convention.[1] In its recent decision in Frontera Resources Azerbaijan Corporation v. State Oil Company of the Azerbaijan Republic, 2009 WL 3067888 (2d Cir. 2009), the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) – the highest federal court in New York – confirmed this approach.

Some have criticized this approach, arguing that it is inconsistent with Article V of the New York Convention, which limits the grounds for non-recognition or enforcement to a narrowly-drafted list.[2] However, Article III of the New York Convention provides that contracting states shall recognize and enforce arbitral awards “in accordance with the rules of procedure of the territory where the award is relied upon.” The jurisdictional requirement arguably is nothing more than a local “rule of procedure.”[3] In the Second Circuit’s view, “Article V [of the New York Convention]’s exclusivity limits the ways in which one can challenge a request for [enforcement], but it does nothing to alter the fundamental requirement of jurisdiction over the party against whom enforcement is being sought.”[4] Nor does such a requirement constitute a “substantially more onerous condition” prohibited by Article III of the Convention, as it applies also to actions to recognize and enforce domestic awards.[5]

In practice, the Frontera approach is unlikely to result in many denials of recognition and enforcement. As the Second Circuit confirmed, the jurisdictional requirement can be satisfied by showing either that the award debtor has enough contacts with the United States to establish jurisdiction over his or her person, or that the award debtor has assets in the forum out of which the award could be satisfied (e.g., a bank account).[6] At least one of these circumstances will obtain in most cases. Indeed, if neither the award debtor nor its assets are present in the forum, one may question the fairness of forcing the award debtor to defend an action there.

However, the Frontera approach can impact enforcement if the award debtor does not have “minimum contacts” with the forum and the award creditor is unable to locate assets in the forum until after the three-year statute of limitations under the U.S. Federal Arbitration Act (9 U.S.C. § 207) has run. Locating assets against which to enforce an arbitral award is notoriously difficult. In a major commercial and financial center such as New York, it is not unreasonable for an award creditor to expect that the award debtor will have assets in the forum at some point in the future. But, as the law currently stands, the award creditor runs the risk of being time barred at that stage.

Thus, upon reflection, the difficulty appears to have more to do with the imposition of a limitation period, than with the U.S. jurisdictional due process requirements. The imposition of local limitation periods on enforcement actions under the New York Convention has given rise to surprisingly little debate, given the dire consequences for unfortunate award creditors.[7] It is often assumed without discussion that limitation periods are among the local “rules of procedure” contemplated in Article III of the New York Convention.[8] This is possibly so because a majority of jurisdictions apply some sort of limitation period to proceedings under the New York Convention.[9] But, even if a state practice relevant to the interpretation of the New York Convention could be established, the question remains whether the application of local limitation periods – diverging widely from jurisdiction to jurisdiction and at times much shorter than those applicable to the enforcement of judgments – is desirable and consistent with the object and purpose of the New York Convention. Further, if local jurisdictional rules are inconsistent with Article V, it is hard to see how local statutes of limitations could be consistent with Article V. Both are arguably “rules of procedure of the territory where the award is relied upon” within the meaning of Article III, both are not mentioned in Article V, and both may lead to a valid arbitral award not being enforced.

All these are reasons to keep our eye on Canada where, in the case of Yugraneft Corporation v. Rexx Management Corporation, the Supreme Court heard oral argument earlier this month on whether the courts of Alberta were well-founded in applying a local two-year statute of limitations to the enforcement of a New York Convention award.

By Ank Santens & Damien Nyer

[1] See, e.g., Telcordia Tech Inc. v. Telkom SA. Ltd., 458 F.3d 172, 178-79 (3d Cir. 2006); Glencore Grain Rotterdam B.V. v. Shivnath Rai Harnarain Co., 284 F.3d 1114, 1121 (9th Cir. 2002); Base Metal Trading v. OJSC Novokuzmetsky Aluminum Factory, 283 F.3d 208, 212 (4th Cir. 2002).

[2] See, e.g., William W. Park & Alexander A. Yanos, Treaty Obligations and National Law: Emerging Conflicts in International Arbitration, 58 Hastings L.J. 251, 255 (Dec. 2006) (“Park & Yanos”).

[3] See, by way of analogy, Monegasque de Reassurances S.A.M. v. NAK Naftogaz of Ukraine, 311 F.3d 488 (2d Cir. 2002) (finding that the doctrine of forum non conveniens was applicable as a “rule of procedure” under Article III of the New York Convention) (the authors do not take a view here on the correctness of this decision); Aristides Diaz-Pedrosa, Shaffer’s Footnote, 109 W. Va. L. Rev. 17, 24 (assuming that the due process jurisdictional requirement falls within the local “rules of procedure” in Article III). But see Park & Yanos at 262 (maintaining that such approach is not supported by the drafting history of the New York Convention).

[4] Frontera, 2009 WL 3067888, at *4.

[5] Indeed, this issue does not arise in most other countries because they do not require “minimum contacts” of the defendant or its property with the forum for the exercise of jurisdiction to decide a dispute on the merits, and thus a fortiori not for the exercise of jurisdiction to enforce a judgment or award.

[6] Frontera, 2009 WL 3067888, at *4. The latter type of jurisdiction is called “quasi in rem.” Note that some U.S. courts require a connection between the property and the dispute. See, e.g., Base Metal Trading v. OJSC Novokuzmetsky Aluminum Factory, 283 F.3d 208, 212 (4th Cir. 2002).

[7] The draft of a revised “New York Convention” presented by Professor van den Berg at the last ICCA Congress is silent on the issue of limitation periods. The only explanation offered by the accompanying explanatory note is that limitation periods vary considerably, from six month in the People’s Republic of China to 20 years in the Netherlands. Albert van den Berg, Hypothetical Draft Convention on the International Enforcement of Arbitration Agreements and Awards in Albert J. van den Berg, ed., 50 YEARS OF THE NEW YORK CONVENTION 649, 658 (2009).

[8] Albert J. van den Berg, The New York Convention of 1958: An Overview in Emmanuel Gaillard & Domenico Di Pietro, eds., ENFORCEMENT OF ARBITRATION AGREEMENTS AND INTERNATIONAL ARBITRAL AWARDS – THE NEW YORK CONVENTION IN PRACTICE 39, 54 (2008); see also Jean-François Poudret & Sébastien Besson, COMPARATIVE LAW OF INTERNATIONAL ARBITRATION 869 (2d ed. 2007). Note that in many jurisdictions statutes of limitations are considered substantive.

[9] A recent study conducted by the ICC found that 53 out of the 66 countries surveyed imposed such a limitation period. Guide to the National Rules of Procedure for Recognition and Enforcement of New York Convention Awards, ICC Bulletin 343-46 (Special Supplement 2008).

The seat of an arbitration is a crucial factor. It determines the lex arbitri and the courts with supervisory jurisdiction over the arbitration.

The important consequences of the seat require parties to choose the seat carefully. Cases where no seat is chosen by the parties are not uncommon. The English High Court in Shashoua v Sharma [2009] EWHC 957 (Comm) addressed an interesting aspect of this issue: does the selection of a ‘venue’ for arbitration imply choice of the ‘seat’? This decision has been the subject of considerable commentary relating to West Tankers [2009] EUECJ C-185/07, but the ‘seat’ aspects have received relatively less attention.

Shashoua v Sharma concerned a joint venture developing an exhibition and convention centre in India. The joint venture company was incorporated in India, and the law governing the shareholders agreement was Indian law. The shareholders agreement contained an arbitration clause which provided for ICC arbitration and stated that “the venue of the arbitration shall be London, United Kingdom”. A dispute arose between the parties and an ICC tribunal was constituted in London. The tribunal made an interim award against the defendant concerning costs of several procedural applications. The claimants were granted leave to enforce the award by the English court, but the defendant challenged the jurisdiction of the English court and brought proceedings in India to set aside the award. The claimants applied for an anti-suit injunction from the English courts to restrain proceedings in India, and the defendants resisted the application on the ground that proceedings in India were justified because, according to them, the seat of arbitration was in India.

The Court of Appeal in C v D [2007] EWCA Civ 1282 had confirmed that any setting aside of an award is to be only in the courts of the seat of the arbitration, so in Shashoua v Sharma the English court first had to make a determination concerning the seat. The arbitration agreement provided for London as the ‘venue’ of the arbitration but was silent as to the ‘seat’. The Arbitration Act 1996 provides in section 3 that, in the absence of designation by the parties, the arbitral institution or the tribunal (if authorised by the parties), the seat must be determined “having regard to the parties’ agreement and all the relevant circumstances”. Cooke J concluded that the designation of London as venue of the arbitration – in an arbitration clause that provides for arbitration to be conducted in accordance with the ICC Rules – provided sufficient evidence to satisfy the court that London was the juridical seat of arbitration intended by the parties. He did not consider that other “relevant circumstances” were weighty enough to counter this inference. Indeed, he noted that there was “great force” in the argument that if the parties had intended to name a ‘venue’ that was distinct from the ‘seat’, they would have specifically named both.

In reaching the above conclusion, Cooke J rejected the two main arguments made by the defendant. First, the defendant argued that because the lex causae was Indian law, the law of the arbitration agreement must also be Indian law. Cooke J recalled his decision in C v D [2007] EWHC 1541, approved by the Court of Appeal, that the law of the arbitration agreement is much more likely to coincide with lex arbitri rather than lex causae. He considered the defendant’s argument to be circular and accorded little weight to it. Second, the defendant noted that the arbitration agreement provided for each party to bear its own costs of the arbitration – a position which is inconsistent with section 60 of the Arbitration Act 1996. Therefore, the defendant suggested, the parties could not have intended London to be the seat or English law to be the lex arbitri. Cooke J dismissed this argument as “weak” because he considered that the parties would not have contemplated this section of the Act in particular when agreeing to share costs. He also noted that there were provisions in the arbitration agreement which were inconsistent with the Indian Arbitration Act and, therefore, on the defendant’s reasoning, unhelpful to the position that the parties intended India to be the seat.

Two authorities relied on by the defendant were distinguished from the present case. In Dubai Islamic Bank PJSC v Paymentech [2001] 1 LLR 65 there was no designation of a seat or venue at all and Mr Justice Aikens determined the seat having regard to all the relevant circumstances. In Braes of Doune v Alfred McAlpine [2008] EWHC 426 there was a potential conflict between the law of the arbitration agreement and the law of the seat, and Mr Justice Akenhead was persuaded that reference to the ‘seat’ was merely a designation of the place where the arbitration was to be held, where all other references showed the parties agreeing that the seat and the curial law was that of England and Wales.

Cooke J noted that ‘London arbitration’ is a “well-known phenomenon”, and London is often chosen by foreign nationals as the seat of the arbitration with a different lex causae because of the English legislative framework and the reputation of English courts. Accordingly, he concluded:

“When therefore there is an express designation of the arbitration venue as London and no designation of any alternative place as seat, combined with a supranational body of rules [ie ICC] governing the arbitration and no other significant contrary indicia, the inexorable conclusion is, to my mind, that London is the juridical seat and English law the curial law.”

The decision in Shashoua v Sharma provides helpful guidance on the question of how much weight the English courts are prepared to accord to circumstances of a case in determining the seat of the arbitration. Certainly, the designation of a ‘venue’ will be considered as strong evidence of intention that the seat should be in the same jurisdiction. In contrast, the lex causae or the geographical connection of the facts of the case or the parties will not necessarily be regarded as conclusive.

Would the English courts have come to the same conclusion if the venue of the arbitration had been outside England (perhaps an ‘exotic’ jurisdiction not popular with English judges) and the lex causae had been English law? Conveniently, the venue of the arbitration in Shashoua v Sharma (and the seat in C v D) was London!

By Phillip Capper, Dipen Sabharwal, Clare Connellan