An interesting issue regarding the enforceability of foreign arbitral awards, in relation to the provisions of the New York Convention of 1958 and its alleged conflict with domestic Greek Civil Code provisions in relation to conflict of laws and public policy doctrines arose in Greek jurisdiction. The matter is of specific interest as the dispute went all the way up to the Supreme Court for determining the viability of enforcing the particular foreign arbitral award in Greece.

The actual arbitration dispute arose in late 2004 in relation to a distribution agreement of 1998 between an American and a Greek company regarding medical equipment. The parties’ contractual arbitration clause called for an arbitration proceeding under the auspices of the International Center for Dispute Resolution of the American Arbitration Association. Both parties expressly submitted to arbitration after the dispute arose, and recognized the competence of the appointed sole arbitrator (the “Arbitrator”) to decide the matter.

The Claimant (the American company) filed a claim for the amount of 1.062.655,33 US$ while the Respondent (the Greek company) counter-claimed unspecified damages estimated at the time of filing to be between 1-5 million US$. The arbitration hearings took place between 15-18 August 2005 in the USA, and an interim decision was issued by the Arbitrator on the acceptance of the change of the claimant’s company name, which took place at that time. On 6 September 2005 a final reasoned arbitration award was issued. The Arbitrator decided in favor of the Claimant and determined that the total amount due to the Claimant was 1.137.117,00 US$.

When the Claimant attempted to enforce the award in Greece on the basis of the provisions of the NY Convention of 1958, it was met with resistance by the Respondent who filed various objections against its enforceability. Thus the matter went through all instances of civil courts’ jurisdictions in Greece and found its way to the highest level (Areios Pagos/ Supreme Court) in civil law matters.

The Supreme Court was called to examine various alleged legal flaws and issued a comforting decision to proponents of ADR of both domestic and international level, as it highlighted and supported the viability of enforcing foreign arbitral awards in Greece, a matter that for a number of years has been in real need of such clarification from the highest judicial body, for securing the smooth foreign arbitration awards enforcement in Greece.

The Supreme Court’s approach on the issues before it, which concentrated on whether there were any legal flaws in the earlier Court of Appeal’s ruling, was rather careful and well-balanced. The Court made it quite obvious from the beginning of its rationale that the purpose of the proceeding was not to re-examine the arbitral award on the merits, as an “appeal” against it is not allowed by law. Furthermore, the Court noted that the three-month deadline following the issuance of the foreign arbitral award had elapsed with neither party filing a request for rectification or vacation as provided by the relevant Affidavit and Rules of the International Center for Dispute Resolution of the American Arbitration Association.

As such the Court went through the various objections made by the Respondent on the issues related to the actual enforceability of the award in Greece, namely that the enforcement of the award violates the provisions of article 5(2)(b) of the NY Convention of 1958, and is against the public policy of Greece, and rejected, ab initio, the following three objections made by the Respondent holding that as per the earlier Court of Appeal’s decision that they did not relate to enforcement issues per se but rather attempted to re-examine the issues on the merits, namely:

a. that the arbitration award failed to take into account the provisions of Article 81 of the EEC which prohibits discriminative policies and hindrance of competition in terms of invoicing policies.
b. That the arbitration award violated the Directive 86/653 EC and the Greek Presidential Decree 219/1991 regarding damages afforded to distributors.
c. That the contractual party in the Distribution Agreement was a different entity to the company that acted as the Claimant in the actual arbitration proceeding.

The Court therefore turned its focus on the Respondent’s objection that

a. the arbitration award lacked reasoning and;
b. the scope of the arbitration clause did not encompass the dispute at issue and therefore that the Arbitrator lacked or exceeded its competence in determining the matter and issuing the arbitration award.

The Supreme Court focused on the earlier determination of the Court of Appeal’s decision and while it held that it partially and indirectly violated the relevant conflict of laws and public policy provisions of both the NY Convention of 1958 and the Greek Civil Code by failing to actually examine the above allegations in full prior to issuing its decision, it still affirmed the earlier ruling and held in favor of the enforcement of the foreign arbitral award as it determined that no conflict of laws or public policy considerations should preclude its enforcement. The Court found that the allegations on lack of reasoning and lack of “competence” relating to the arbitration proceeding were unsubstantiated and dismissible. In doing so the Supreme Court confirmed the enforceability and proper application of international arbitration principles and norms in the Greek jurisdiction and fortified the viability and effectiveness of international ADR proceedings in Greece.

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.

Several years ago, three United States Courts of Appeal contemporaneously dismissed actions to enforce foreign arbitral awards for lack of personal jurisdiction, a development that provoked expressions of concern from the arbitration bar. Adding to their dread, the United States Court of Appeal for the Second Circuit dismissed an enforcement action on forum non conveniens grounds in Monegasque de Reassurances S.A.M. (Monde Re) v. Nak Naftogaz of Ukraine, 311 F.3d 488 (2d Cir. 2002). That decision continues to generate so much opposition that it was singled out for rejection in a draft of the Restatement of the U.S. Law on International Commercial Arbitration, which was publicly discussed at a continuing legal education program sponsored by the American Law Institute in May 2009. Having formerly held (but overcome) similar views, the author of this post reflects on the appropriate use of forum non conveniens doctrine in proceedings to enforce arbitral awards under the New York and Inter-American Conventions.

Because observers tend to forget, one should begin by recalling that Monde Re grew out of a dispute that led to elevated political tensions and raised concerns about energy security in Europe. According to Russia, Ukraine’s state-owned gas concern had made significant, unauthorized withdrawals from pipelines carrying natural gas from Russia to Western Europe. Accepting the allegations as true, a reinsurer (Monde Re) covered the Russian losses and then (as subrogee) brought arbitration proceedings in Moscow against Ukraine’s state-owned gas concern. One year later, the tribunal awarded Monde Re over $88 million by majority vote.

In due course, Monde Re brought enforcement proceedings in New York against Ukraine’s state-owned gas concern and against the Ukrainian government, which was not a party to the underlying contract, had not been joined in the arbitration proceedings, and was not named in the award. As a result Monde Re’s enforcement action did not represent a typical, summary proceeding against the award debtor. Monde Re, 311 F.3d at 500. To the contrary, it sought to establish the Ukrainian government’s responsibility based on veil-piercing theories that were asserted in a politically volatile context and required complex examination of evidence located in East European capitals. Id. at 494-95, 500.

Given the circumstances just described, the Ukrainian government sought dismissal under the forum non conveniens doctrine, which affords U.S. courts the discretionary power to dismiss cases in the event that (1) there exists an adequate alternative forum, and (2) a combination of private and public interest factors outweighs the plaintiff’s choice of a U.S. forum. After consideration, the district court granted the motion, and the Second Circuit affirmed. In so doing, the Court of Appeals articulated two themes. First, it pointed out that (1) all parties were aliens, (2) who performed the underlying commercial transactions outside the United States, and (3) who resolved their differences through arbitration outside the United States. Monde Re, 311 F.3d at 500. Because those statements might apply to a very large range of enforcement actions under the New York and Inter-American Conventions (and might thus justify liberal use of forum non conveniens dismissals), they understandably provoked expressions of concern among the arbitration bar. Perhaps for that reason, this remains the theme that most observers associate with Monde Re.

Few people recall the Second Circuit’s main theme, which emphasized that the circumstances did not contemplate summary enforcement proceedings against the award debtor, but the extension of liability to a third party based on theories that would require a complex inquiry into politically sensitive relationships documented by evidence located in foreign states, which clearly had stronger interests in the matter. Monde Re, 311 F.3d at 494-95, 500-01. Because that particular factual matrix cried out for the exercise of discretion and does not seem prone to frequent repetition, one may regard Monde Re as a sensible decision that confirms the utility of preserving a limited scope for forum non conveniens dismissals in enforcement proceedings under the New York and Inter-American Conventions.

Subsequent practice indicates that federal judges possess the acumen and restraint needed to apply the forum non conveniens doctrine sensibly in the context of enforcement proceedings. Most recently, in Figueiredo Ferraz Consultoria e Engenharia de Projeto Ltda v. Republic of Peru, 665 F. Supp. 2d 361 (S.D.N.Y. 2009), a firm of consulting engineers received a $21.6 million award against a Peruvian government sponsored program known as “Water for All.” Subsequently, the firm commenced enforcement proceedings against the Republic of Peru in New York under the Inter-American Convention. Seeking to replicate the framework for Monde Re, Peru (1) claimed that the “Water for All” program was a separate legal entity, and (2) sought dismissal under the forum non conveniens doctrine.

Based on undisputed facts relating to the program’s genesis, financing, management, and function, the court regarded it as a political organ inseparable from the Republic of Peru for purposes of enforcement proceedings under the Inter-American Convention. Figueiredo, 665 F. Supp. 2d at 368-71. With respect to forum non conveniens, the court observed that the private interest factors did not favor dismissal in the context of summary proceedings to enforce arbitration awards, which are heard as motions (as opposed to plenary actions) under the Federal Arbitration Act. Id. at 376, 378. Turning to the public interest factors, the court recognized that the United States has an interest in enforcing foreign arbitral awards under U.S. treaties against respondents who possess substantial assets within the forum. Id. at 376-77. Having previously observed that Peru issued some $13 billion worth of debt securities in New York over the previous seven years, the court saw no reason to dismiss an action brought for the sole purpose of enforcing an award against Peru’s assets in that jurisdiction. Id. at 367, 373, 377.

Assuming that one can overcome visceral reactions to some of its unnecessarily broad language (described above as the first theme), Monde Re demonstrates that forum non conveniens dismissals may serve a constructive purpose in enforcement proceedings under the New York and Inter-American Conventions, albeit on rare occasions. Likewise, Figueiredo suggests that federal judges possess the insight needed to apply the doctrine in sensible ways. Under these circumstances, one feels the temptation to compare the forum non conveniens doctrine to kitchen knives: potentially dangerous, but useful and rarely mishandled.

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

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

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

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

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

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

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

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

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

In post-Soviet time Russian courts have already developed quite a vast practice of recognition and enforcement of international arbitral awards. One can even already fetch out some trends in such practice. Thorough case study shows that certain distrust to international arbitration and unexpected obstacles to the enforcement of the awards caused by lack of experience in dealing with foreign-related matters, reflected in some early judgments, gradually go.

In Russia the decisions on requests for enforcement of the arbitral awards made in disputes of commercial or other economic nature are vested with the commercial courts (“arbitrazhnyie sudy”). It should be mentioned that the arbitrazh courts have nothing in common with arbitral (non-state) tribunals, whether domestic or international. So the term “arbitrazh” (“arbitral” in the Russian language) as used in the modern Russian law has two meanings: the first stands for arbitral (non-state) tribunals while the second implies the state commercial courts. This is a particular heritage of the Soviet times, caused by historic peculiarities of domestic regulations.

A new noteworthy case is Venture Global Engineering LLC v. Avtotor-Holding Group OJSC heard by the Commercial Court of Kaliningrad region (court of first instance) and Federal Commercial Court of North-Western Circuit (court of cassation) in 2009. The arguments of the parties in this case as well as the courts’ approach in dealing with them are quite typical for the last years’ cases on foreign arbitral awards enforcement; hence worth special attention. The arbitration took place in Stockholm. On 22 December 2008 the ICC International Arbitration Court consisting of a sole arbitrator in case No. 13756/EBS/VRO ordered the Russian OJSC Avtotor-Holding Group to pay debt from the agency agreement in the amount of 1,233,917 USD, penalty at the rate of 8 % annually till the date the award was rendered, 63,000 USD of arbitration costs and 230,444.94 USD of attorney fees in favor of the US Venture Global Engineering LLC. Furthermore, upon the claimant’s request, the arbitrator obliged the defendant to prepare and provide to the claimant a complete and correct detailed list of items acquired from General Motors Corporation and some other information related to the agency agreement.

The debtor failed to fulfill the award voluntarily and the creditor applied at the Commercial Court of Kaliningrad region for its recognition and enforcement. The court granted recognition and enforcement by its ruling of 27 October 2009 in case No. A21-802/2009. The debtor challenged the court’s ruling at the Federal Commercial Court of North-Western Circuit. The range of grounds for refusal to recognize and enforce an award under the New York Convention being quite limited and the qualification of international arbitrators generally being high, yet as a matter of fact the debtors often advance plenty of reasons to oppose the recognition and enforcement. The case in question illustrates it well. The debtor advanced, to name but a few, the following objections:

1) The arbitrator rejected four of the five respondent’s motions to call for crucial evidence and the motion to demand and hear a witness and thus the respondent was unable to present his case;
2) The recognition and enforcement of the award would be contrary to Russian public policy as:

(a) the arbitrator incorrectly decided on the validity of the agency agreement;
(b) the arbitrator set the agent’s fees while neglecting the facts of the case and the evidence presented by the parties;
(c) the penalty in the amount of 8 % awarded under the law of the state of Michigan constituted punitive damages and was inadequate to the consequences of the breach. Such adequacy is an integral part of the Russian public policy.

However, the court of cassation rejected all the objections and upheld the lower court ruling.

The court clearly stated that the said debtor’s arguments amounted to attempts to review the case on the merits. In particular, the court refused to check the validity of the agency agreement and noted that this issue was fully in the competence of the arbitrator as it fell within the scope of the arbitration clause, and that the arbitrator thoroughly examined such validity. Any objections concerning reconsideration of specific facts of the case established by the arbitral tribunal are irrelevant in the case on the recognition and enforcement of the arbitral award.

The court dealt in detail with the public policy argument. It is worth mentioning that invoking Russian public policy by debtors in the proceedings on the enforcement of the awards has been very popular. This is due to the past inclination of the Russian courts to broadly interpret this exception. In this case the court expressly mentioned that an essential difference between a foreign law applied by the arbitrator and Russian law does not itself constitute ground to apply the public policy clause. Otherwise it would be impossible to apply foreign law in Russia at all, which would be contrary to the principles of Russian law. ‘Russian public policy’ is a totally different notion than ‘Russian law’ and embraces “the bases of the morality, core economic and cultural traditions which formed Russian society, main religious postulates and fundamental principles of Russian law”.

The court said that the public policy clause may be applied only in cases where the application of foreign law and/or enforcement of the arbitral award can engender a result inadmissible from the viewpoint of the Russian ‘legal sense’. The court held that there is no reason to believe that enforcement of an award of debt and penalty by a Russian company to a foreign company under agency agreement could engender such a result.

The case reflects positive trends in the practice of enforcement of arbitral awards in Russia. Indeed, there are already many a judgment which confirm that a judicial review on the merits of a case resolved by an arbitrator is inadmissible, including the judgments by the High Commercial Court of the Russian Federation which is the court of the highest instance in the system of Russian commercial courts.

In particular, in a recent case the Federal Commercial Court of Moscow Circuit (ruling of 27 August 2009 КГ-А40/8155-09) held that “an argument that the awarded damages amount does not correspond to the principle of adequacy of civil liability measure to the consequences of the breach falls into the merits of the resolved case and does not pertain to the grounds for refusal of recognition and enforcement of a foreign judgment and a foreign arbitral award”. As it happens, understanding the approach of this court is of great importance: many big Russian companies involved in international business are registered in the Russian capital, and thus in accordance with the Russian procedural rules many cases on the recognition and enforcement of foreign arbitral awards are heard by the Commercial Court of Moscow in the first instance and by the Federal Commercial Court of Moscow Circuit in the cassation instance.

One of the main points illustrated by the above case is that now to oppose a foreign arbitral award recognition and enforcement using the public policy exception the debtor must refer to some grave consequences which such recognition and enforcement would engender in Russia. What such consequences could be is a good subject for a separate discussion.

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….

On January 15, 2010, the United States Supreme Court granted a writ of certiorari in Rent-A-Center West, Inc. v. Jackson, Case No. 09-497, agreeing to revisit the oft-litigated issue of whether the court or arbitrator should determine arbitrability under the Federal Arbitration Act (“FAA”). The Court’s prior jurisprudence has established the general rule, as a matter of federal substantive arbitration law, that challenges to a contract’s validity as a whole should be heard by the arbitrator, while those specific to the arbitration provision should be heard by the court. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445 (2006). The variation now before the high court concerns the extent to which the parties can contract around that rule. The question presented to the Court is whether a court is required in all cases to hear claims that an arbitration agreement subject to the FAA is unconscionable, even when the parties have clearly and unmistakably assigned the decision to the arbitrator.

Background and Holdings Below:

Antonio Jackson filed a lawsuit in the federal district court in Nevada against his employer, Rent-A-Center, alleging race discrimination and retaliation. Rent-A-Center moved to compel arbitration, relying on a standalone arbitration agreement Jackson signed as a condition of his employment (the “Agreement”). The Agreement provided, inter alia, that “[t]he Arbitrator, and not any federal, state or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including, but not limited to any claim that all or any part of this Agreement is void or voidable.” Rent-A-Center argued that, in light of this provision, the threshold question of whether the arbitration agreement was valid and enforceable was for an arbitrator, not the court, to decide. Jackson argued in response that the Agreement was substantively and procedurally unconscionable. The district court granted the motion to compel arbitration, reasoning that the parties “clearly and unmistakably” provided the Arbitrator exclusive authority to decide the enforceability of the arbitration agreement.

A panel of the Ninth Circuit Court of Appeals reversed the district court in part. Jackson v. Rent-A-Center, 581 F.3d 912, 920 (9th Cir. 2009). The two-judge majority held that where “an arbitration agreement delegates the question of the arbitration agreement’s validity to the arbitrator, a dispute as to whether the agreement to arbitrate arbitrability is itself enforceable is nonetheless for the court to decide as a threshold matter.” Id. at 919. In the majority’s view, the parties’ agreement to arbitrate arbitrability –like all arbitration agreements– was not enforceable per se but rather was subject to ordinary state-law principles governing contracts. Thus, the majority concluded that the fact that the parties signed the Agreement was not dispositive in the face of Jackson’s contention that he could not meaningfully assent.

The dissenting judge disagreed, stating that the question of the arbitration agreement’s validity should have gone to the arbitrator. The dissenter relied on the Supreme Court’s prior holding that “although the general rule gives the threshold question of arbitrability to courts, parties may provide for the arbitrator to decide the question instead if they do so ‘clearly and unmistakably.’” Id. at 921 (quoting AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643, 649 (1986)). The dissenting judge pointed out that even the majority conceded that the Agreement was neither silent nor ambiguous as to who should determine arbitrability.

Application to Arbitration Agreements under the New York Convention (Chapter 2 of the FAA):

Although Rent-A-Center arises in the domestic arbitration context, the Supreme Court’s forthcoming decision may impact international arbitration cases. There is a split of authority in the federal appellate courts as to whether a state-law challenge of unconscionability is a ground for non-enforcement of an arbitration agreement under the New York Convention. The Eleventh Circuit Court of Appeals has held that the defense of unequal bargaining power does not fit within the narrow scope of Article II(3) of the New York Convention, which limits the potential defenses to arbitration agreements that are “null and void, inoperative or incapable of being performed.” See Bautista v. Star Cruises, 396 F.3d 1289, 1302 (11th Cir. 2005) (holding that unconscionability was not within the limited scope of the “null and void” clause of the Convention, which encompassed “only those situations –such as fraud, mistake, duress, and waiver– that can be applied neutrally on an international scale”). The First Circuit Court of Appeals, however, has entertained the defense of unconscionability against an arbitration agreement governed by the New York Convention, reasoning that unconscionability is a “standard contractual challenge” to an arbitration agreement that is consistent with the Convention’s “null and void” clause. DiMercurio v. Sphere Drake Ins., Plc, 202 F.3d 71, 79-81 (1st Cir. 2000); see also Rogers v. Royal Caribbean Cruise Line, 547 F.3d 1148, 1158 (9th Cir. 2008) (assuming without deciding that unconscionability renders an agreement “null and void” under the Convention).

Moreover, the Court’s opinion in Rent-A-Center may shed light as to the extent to which parties can assign other jurisdictional issues (sometimes referred to as “gateway issues”) to an arbitrator by express agreement. Parties to international arbitrations commonly agree to rules that expressly empower the arbitrator to determine challenges to the existence, scope or validity of the arbitration agreement. See e.g., ICC Arbitration Rules, Art. 6(2); ICDR Arbitration Rules, Art. 15(1); LCIA Arbitration Rules, Art. 23.1. The federal courts have generally respected the incorporation of institutional rules as a method of assigning arbitrability decisions to the arbitrator. See Contec Corp. v. Remote Solution Co., 398 F.3d 205, 208 (2d Cir. 2005) (“when . . . parties explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator”); Terminex Int’l Co., v. Palmer Ranch Ltd., 432 F.3d 1327, 1333-34 (11th Cir. 2005) (same) (AAA Arbitration Rules); Apollo Computer, Inc. v. Berg, 886 F.2d 469, 473 (1st Cir. 1989) (same) (ICC Arbitration Rules); but see Microchip Tech. Ins. v. U.S. Philips Corp., 367 F.3d 1350, 1358 (Fed. Cir. 2004) (holding that whether the parties agreed to arbitrate was to be decided by the court but failing to analyze effect of parties’ incorporation of the ICC Rules in arbitration agreement). However, at least one federal circuit court has attempted to carve out an exception to this rule for cases where a party alleges the arbitral forum itself is illusory. See Awuah v. Coverall North America, Inc., 554 F.3d 7, 13 (1st Cir. 2009) (holding that party was entitled to court’s review of whether arbitration agreement was an illusory remedy, notwithstanding incorporation of AAA’s rules empowering arbitrator with jurisdictional determinations). The validity and boundaries of such an exception are still uncertain. See Jackson, 581 F.3d at 921 n.4 (Hall, C.J., dissenting) (disagreeing with the majority’s expansive interpretation of the holding in Awuah). Accordingly, the Supreme Court’s forthcoming opinion in Rent-A-Center could provide necessary guidance to lower courts in this developing area of the law.

Oral argument in Rent-A-Center is scheduled for April 26, 2010.

Raoul G. Cantero III
Erika M. Serran
White & Case

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

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

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

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

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

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

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

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

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

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

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

Andrea Bjorklund
Professor of Law
UC Davis School of Law

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

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).