When discussing public policy, English lawyers like to quote the famous comment of an English judge in the early 19th century that “public policy is a very unruly horse, and once you get astride it you never know where it will carry you”.

Recent history shows how difficult it is to ride the ‘unruly horse’; most attempts to resist enforcement on grounds of public policy fail. But it remains a live issue, as the recent decision of the English court in Heinz v EFL illustrates.

Heinz revisits the thorny question of whether an enforcing court may re-open a decision of the tribunal in relation to an issue of public policy. This, of course, brings into play two potentially conflicting principles: the finality of arbitration awards and non-enforcement of awards which violate public policy.

Unsurprisingly, this issue has come up before in England, notably in three cases all dating from around 2000 – Westacre, Soleimany and Hilmarton.

Westacre concerned an attempt to resist enforcement in England of a Swiss award, on the basis of evidence which had not been produced at the hearing. This evidence was alleged to show, first, that the award had been procured by perjury and, second, that the contract was tainted by bribery.

On the perjury point, the Court of Appeal broadly speaking adopted the test applicable in English litigation, such that so-called “fresh evidence” may only be considered if it was not available to the party at the time of the hearing and is sufficiently strong that it may reasonably be expected to have been decisive at the hearing. On the basis of the facts of that case, it refused to consider the evidence.

As to the second point, the court found that it was clear from the award that the bribery allegation was rejected by the tribunal and refused to re-open the point. The award was therefore enforced.

Soleimany was different. It concerned an English arbitration which was conducted before the Beth Din, which applies Jewish law. It was apparent from the face of the award that the contract in question related to smuggling carpets and that the arbitrator considered that illegality was irrelevant as a matter of Jewish law. The English court found that it would be against English public policy to enforce an award which in turn enforces an illegal contract, but there was no question of re-opening the arbitrator’s findings of fact or law.

In Hilmarton, the attempt to resist enforcement of another Swiss award failed. For present purposes, it is sufficient to note that the English court commented that it would be “quite wrong” for it to entertain any attempt to go beyond the arbitrator’s “explicit and vital” finding of fact that there had been no bribery or corrupt activity. That left a question as to whether enforcement could be resisted in England on grounds of illegality under the place of performance which did not offend Swiss law (as the governing law of the contract) or Swiss public policy. The court held it could not and enforced the award. (There is an entirely separate discussion about how Hilmarton and Soleimany should be reconciled.)

That brings us then to Heinz. In the arbitration (which was seated in Hungary), EFL claimed damages in relation to three distribution agreements between it and third parties. Heinz argued that these distribution agreements were “shams”, entered into solely for the purpose of inflating EFL’s damages claim. The tribunal found that Heinz had not proved this allegation and awarded EFL damages in relation to those agreements.

Having failed to have the award set aside in the Hungarian courts, Heinz sought to prevent ELF enforcing the award in England on grounds of public policy. It argued – on the basis of fresh evidence it had gathered since the award – that the distribution agreements were forgeries.

The key issue was therefore whether Heinz was entitled to rely on the fresh evidence of forgery to counter the Tribunal’s finding as to the distribution agreements – that is, the first limb of the discussion in Westacre. On the facts, this boiled down to the question of whether the evidence was reasonably available to Heinz at the time of the hearing.

ELF argued that a reasonable solicitor could have discovered this evidence during the arbitration and that the “fresh evidence” test was not therefore satisfied. The judge held, however, that it was at least arguable that the proper test is whether Heinz and its solicitors should have discovered the evidence (i.e. whether they acted reasonably). He then found that it was arguable that Heinz’s failure to investigate “the opposite camp” before the hearing did not represent a failure to act reasonably.

Pausing there for some technical background, this was a summary judgment application, which meant that ELF had to show that Heinz’s arguments had no real prospect of success. The judge’s finding that Heinz’s position was arguable was therefore sufficient to dispose of the application, such that the case will now proceed to trial.

So what does Heinz mean? On its face, it is limited to cases where a party argues, based on fresh evidence, that an award has been obtained fraudulently. It is different, therefore, to cases like Hilmarton or the bribery limb of Westacre. But the point remains that alleging perjury or fraud in obtaining an award is still another way of seeking to re-open a tribunal’s findings of fact in enforcement proceedings. As was observed in the first instance court in Westacre, it represents an open invitation for a disappointed party to re-litigate a New York Convention award at the enforcement stage.

This invitation is, however, limited to situations where the disappointed party can point to fresh evidence. Much depends, therefore, on where the line is drawn in terms of the admissibility of such evidence. This should be explored at trial in Heinz, making it one to keep an eye on.

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.

The arbitrability of a dispute is not generally limited to private law. In many countries, including Germany and Switzerland, it is admitted that arbitration can also bear on claims derived from public law, and in particular on rights conferred upon by contracts subject to administrative law. Arbitrability of such disputes may however be more problematic in countries, like France, where the administrative jurisdiction plays an important role in the judicial system alongside with civil courts.

In that respect, French law has traditionally been said to be restrictive in permitting arbitration for administrative law disputes.

In France, under Article 2060 of the Civil Code, domestic disputes involving the State, as well as public entities (such as municipalities) and public establishments may not be referred to arbitration. Article 2060 provides, to that effect, that “there can be no arbitration […] in disputes concerning public collectives and public entities”. However, this provision has since long been excluded by the Cour de cassation (highest French jurisdiction in civil matters) as far as international disputes are concerned (Cour de cassation, 1re civil chamber, 2 May 1966, Galakis). The Court held on that occasion that “the State is not prohibited from concluding arbitration agreement in international matters”.

In 1975, a new provision was added to Article 2060 of the Civil Code, whereby “certain categories of public entities of an industrial and commercial character can be authorised to arbitrate by decree”. However, pursuant to an opinion given by the Conseil d’Etat (highest French jurisdiction in administrative matters), this provision is applied in a very restrictive manner and only authorises such entities to enter into an arbitration agreement after the dispute has arisen (compromis d’arbitrage).

The question then arose of the capacity of the French State and public entities to validly enter into an arbitration agreement with the American company Walt Disney in the contracts related to the construction of the Eurodisney Park.

In its Walt Disney opinion of 6 March 1986, the Conseil d’Etat pointed out that legal entities of public law could not circumvent the rules determining the jurisdiction of the French administrative courts if the dispute touches upon rules of French administrative law that are considered as being of public policy. It came to the conclusion that the contract envisaged with Walt Disney “resorts to the French domestic legal order” and can therefore not contain a valid arbitration clause, which would be null and void as a matter of public policy.

It therefore appeared that the Walt Disney opinion tended to restrict, in spite of the Cour de Cassation’s ruling in Galakis, the arbitrability of international disputes touching upon administrative law. In fact, the Walt Disney contract was certainly to be considered as international pursuant to Article 1492 of the French Code of Civil proceedings, as it involved the interests of international trade.

Since then, there has been considerable debate on how to open arbitration in France to public law disputes. On 7 April 2006, the Ministry of Justice commissioned a working group to consider the future of arbitration in the context of administrative law. The working Group issued its report (called the Labetoulle report, by the name of its author) on 13 March 2007 (Rev. arb., 2007, Vol. 3: p. 651, on which see J.-L. Delvolvé, Une véritable révolution inaboutie, remarques sur le projet de réforme de l’arbitrage en matière administrative ; and S. Lemaire, Rapport du groupe de travail, ib.).

The Labetoulle report proposed to abolish the prohibition preventing public bodies from agreeing to arbitrate, as set out in article 2060 of the Civil Code. As a result, a draft law was prepared in order to “broaden the possibility for recourse to arbitration for public bodies and to clarify the procedural regime of arbitrations involving public law” (Rapport du groupe de travail sur l’arbitrage en matière administrative, 13 mars 2007 in Rev. arb., 2007, Vol. 3, p. 651). This report was nonetheless criticized in the arbitration community for it set a special regime for the arbitration in administrative cases, distinct from that prevailing under the Code of Civil Procedure for other arbitrations. As a consequence, difficult issues of characterisation would arise, in particular in the context of an international arbitration, to define what would and what would not be an “administrative arbitration”. The Labetoulle report, however, has not so far been converted into law.

A particular and sensitive aspect of that debate is the allocation of jurisdiction between administrative and civil courts to hear challenges.

As it stands, challenges against international awards are brought before the Court of Appeal of the place of the arbitration, pursuant to Article 1505 of the Code of Civil Procedure, which court applies the rules provided for challenges by the French Court of Civil proceedings.

However, the question whether administrative courts should have jurisdiction in cases involving mandatory administrative laws has never been clearly settled.

This issue was however raised in the recent Inserm case.

A dispute arose between the French National Institute for Health and Medical Research (Inserm), a French public entity, and a Norwegian foundation, with respect to an international cooperation agreement. The agreement provided for inter alia the construction in France of a building dedicated to research in neurobiology. It included an arbitration agreement.

A dispute arose, and the French party seized a French court, which declined to hear the case because of the existence of an arbitration agreement between the parties. Subsequently, the Inserm requested the Paris First Instance Tribunal to appoint an arbitrator.

The arbitrator was appointed and rendered an award in favour of the Norwegian company. A challenge against the award was brought before the Paris Court of Appeal. The Paris Court of Appeal decided (Inserm v. Association Fondation Letten F. Saugstad, Paris Court of Appeal, 13 November 2008, Rev. arb., 2009, Vol. 2, p. 389) that it had jurisdiction to hear the challenge, but rejected it on two grounds. Firstly, it found that the prohibition for States and State entities to arbitrate was limited to domestic contracts, and secondly that, pursuant to the principle of validity of arbitration clauses admitted in French law, the prohibition to arbitrate was not part of international public policy.

However, an action was also brought in parallel by the French party before the French administrative courts, which were requested to annul the award on the basis that the arbitration agreement was null and void.

The case was directly called to the French highest administrative jurisdiction, the Conseil d’Etat.

The question was therefore to determine which of the two judicial bodies, civil or administrative, had jurisdiction to hear the matter in the last resort.

The Conseil d’Etat decided that there were reasonable doubts with respect to the allocation of jurisdiction between civil and administrative courts, and it therefore decided to raise the case to the Tribunal des conflits, which is the French jurisdiction empowered to settle a conflict of jurisdiction between civil and administrative courts.

The Tribunal des conflits rendered its judgement on 17 May 2010. That decision has given rise to a certain level of criticism in the French arbitration community (See Th. Clay, Les contorsions byzantines du Tribunal des conflits en matière d’arbitrage, JCP G, n° 21, 2010, p. 1045, and E. Gaillard, Le Tribunal des conflits torpille le droit français de l’arbitrage, ib., p. 1096).

The Tribunal des Conflits decided that “a challenge against an arbitral award rendered in France on the basis of an arbitration agreement contained in a contract concluded between an entity of French public law and a foreign company, which contract has been performed on the French territory and which concerns the interests of international trade, is to be brought before the court of appeal where the award is rendered pursuant to article 1505 of the Code of Civil Procedure even if the contract is to be characterized as administrative according to French domestic law”.

The Tribunal however added that “the situation is different where a recourse brought under the same circumstances implies that the award be reviewed according to French mandatory rules of public law on the occupation of the public domain or according to the rules governing public expenditure that are applicable to public procurement, to public partnerships or to the delegation of public services, as such agreements are subject to a mandatory administrative regime that is of public policy. A recourse with respect to those contracts is subject to the jurisdiction of the administrative court”.

In other words, a challenge against an international award concerning an international administrative contract which involves the application of the mandatory rules of French administrative law is to be brought before the administrative court rather than before the civil court as it is normally the case. With respect to that particular dispute, the Tribunal found that the civil courts have jurisdiction, but the door is left open to the administrative jurisdiction if French administrative law’s mandatory rules are at stake.

It would certainly have been preferable if the Tribunal des conflits had clearly established that all international awards, even if they relate to administrative mandatory laws, are subject to the rules for vacatur provided by the Code of Civil proceedings and to the jurisdiction of the civil courts of the place of the arbitration. After all, such is the case when mandatory rules of another nature are at stake (such, for example, as European mandatory rules), and there is no real logic to treat administrative mandatory law differently. From that perspective, the decision is certainly a missed opportunity. It is, in addition, likely to increase the procedural difficulties in challenges against contracts concluded with the French State or with French State entities and that are performed in France. Ultimately, it is likely that parties will tend to place the seat of the arbitration in those contracts out of France in order to avoid these difficulties.

It should be noted, however, that the decision does not do much more than clarifying the situation as it resulted after the Walt Disney episode. Since Walt Disney, very little difficulties arose with respect to the jurisdiction of the French civil courts to hear challenges against international awards involving French public entities, and it is to be hoped that no more will arise after the decision of the Tribunal des conflits. If this is the case, hopefully, the Labetoulle report and the Inserm case will remain a storm in a teacup.

Alexis Mourre/Alexandre Vagenheim

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.

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.

In holding that “Article 85 of the [EU] Treaty [now article 101 of the Treaty on the Functioning of the European Union – TFEU] constitutes a fundamental provision which is essential for the accomplishment of the tasks entrusted to the Community and, in particular, for the functioning of the internal market”, and that “the provisions of Article 85 of the Treaty may be regarded as a matter of public policy within the meaning of the New York Convention”, the European Court of Justice in Eco Swiss (Case C-126/97, 1 June 1999) has created the potential for a flood of challenges against awards for alleged misapplications of the law of competition. The risk caused for arbitration by the characterisation of European competition law as a matter of public policy under the New York Convention has further increased with the growing acceptance and importance of economics in competition policy and decision making, for economic thinking and economics models have never proven to be perfect guides, and may lead to highly unpredictable results. In addition, economic analysis is fundamentally fact-driven and the marriage between competition law and the doctrine of public policy in arbitration inevitably has the potential to lead the reviewing court to revisit the case on the merits. Being a matter of public policy, it may be considered that the arbitral tribunal’s findings should not bind the court reviewing the award. In addition, bad faith litigators are rewarded, as European courts will generally entertain a challenge based on competition law even if the complaining party never raised any such argument during the arbitration proceedings. Finally, given the broad scope of competition law, any award based on a contract of a certain importance may be challenged on the basis of a market power analysis showing that said contract has the effect of distorting the proper functioning of competition on the relevant markets. Then, instead of performing a limited review of the award, the court finds itself dragged into a complex dispute which may never have been argued before, where it is requested to review massive evidence, including expert reports, on market shares, structure of prices, etc…

It is clear that challenges of awards based on alleged distortions of competition have the potential of frustrating the parties of what they bargained for by agreeing to arbitrate: a one stop shop allowing them to resolve their dispute in a fast, efficient and final manner. A balance thus needs to be found between the principle of finality of awards and the public interest to an effective protection of competition. In France, the trend has been set by the famous Thalès case, where the Paris court of appeal found that an award can be quashed only where its solution entails an “effective and flagrant” violation of international public policy. Although criticised by certain authors as an undue limitation to the court’s powers to review the award under substantive public policy, the limited control posited by Thalès has now been endorsed in different ways by two recent court decisions in France and Belgium.

The first decision was rendered by the Court of Appeal of Brussels on 22 June 2009 and is part of the SNF v. Cytec saga. The other is from the French Court of Appeal of Paris and was handed down on 22 October 2009 in Halyvourgiki v. Linde. Both decisions confirm in different ways that courts should exercise restraint when entertaining a challenge based on an alleged breach of European competition law.

The SNF v. Cytec dispute (on which, A. Mourre and L. Radicati di Brozolo, Revue de l’arbitrage, 2007, 304 and A. Mourre, Revue de l’arbitrage, 2009, 594) arises from the termination by SNF of a long term supply agreement of a raw material called AMD, based on its alleged anti-competitive effects. The contract provided for ICC arbitration in Brussels. Cytec started an arbitration with the aim of challenging the contract’s termination and seeking damages, and SNF alleged before the arbitrators that the contract not only violated Article 81 EC [now article 101 of the TFEU] but was also an abuse of its dominant market position. Two awards were rendered in Brussels in 2002 and 2004 under the aegis of the ICC rules. The arbitrators decided in a partial award that one of the contracts indeed violated Article 81 of the EC Treaty since it had the effect of foreclosing SNF from the AMD market. The tribunal also decided that both parties were responsible for the nullity of the contract and that liability should thus be equally shared between them. In the final award, the tribunal nevertheless held that SNF had not established its losses and thus awarded damages only to Cytec, in an amount that roughly matched those that such company had initially sought for the termination of the contract.

SNF challenged the decisions on the basis that the award of damages to Cytec in an amount roughly equivalent to its initial claim amounted to giving effects to the annulled contract, and that in so doing the tribunal breached Articles 81 and 82. On 8 March 2007, the Tribunal of Brussels quashed the awards on the basis that the tribunal’s reasoning was inconsistent for it had on the one hand admitted that the contract was contrary to public policy and on the other hand awarded Cytec damages in amount equivalent to those that it had initially sought to compensate its allegedly wrongful termination. It is worth noting that, in parallel, Cytec had sought the enforcement of the awards in France and obtained its exequatur from the court of Paris. After subsequent proceedings, the Paris court of appeal (23 March 2006) and the French Supreme Court (4 June 2008, Clunet 2008, 1107, note A. Mourre) rejected SNF’s challenges against the exequatur by holding that enforcement of a foreign award could only be denied in case of a “flagrant and effective” violation of international public policy, that the solution given to the dispute by the awards did not materialise such a flagrant breach, and that SNF’s allegations that the contract had anti-competitive effects amounted to an attempt to reopen a debate on the merits that had been finally settled by the arbitrators.

Indeed, at this stage of proceedings, the decisions of the French court of cassation and the Belgian first instance tribunal illustrated the stark opposition between the so-called minimalist and maximalist approaches of the award’s scrutiny. The French position was certainly in accord with the dominant view, in and outside the European Union, that awards should only be quashed in case of manifest and egregious breaches of international public policy. In Switzerland, it is well known that the Swiss Federal Tribunal held in Tensacciai (TFS, 8 March 2006) that awards can only be quashed in case of breach of the most fundamental principles which form the basis of any legal order, and that competition law is not part of such “truly” international public policy. In the United States, courts have repeatedly upheld a pro-arbitration stance and decided that the award can only be quashed for breach of the law on competition if the arbitrator purposely ignored it when making the award (U.S. Court of Appeals, 5th Circuit, American Central Eastern Texas Gas Company v. Union Pacific Resources Group and Duke Energy). In another case, the 7th Circuit found that a mistake in the arbitral tribunal’s application of the competition law is not a ground on which to set aside an award (16 Jan. 2003, Baxter International Inc. v. Abbott). The High Court of New Zealand has also endorsed minimal review of awards under competition law (Gvt. Of New Zealand v. Mobil Oil, YCA 1988, 638). In Italy, both the court of appeal of Milan in Tensacciai (8 March 2006) and Florence (Nuovo Pignone, 21 March 2006) clearly stated that the scrutiny should be limited to verifying that the arbitrators duly considered the competition law issues and held that a misapplication of such rules is not tantamount to a violation of international public policy. In Sweden, the Svea court of appeal held in 2005 (Rep. of Latvia v. Latvijas Gaze) that the concept of public policy should be given a narrow application in the context of the review of an arbitral award and that a violation of competition law can only lead to an annulment in “obvious cases”. Although there is to our knowledge no case dealing precisely with a challenge based on European antitrust law in England, the Court of appeal in Westacre has clearly set the yardstick in favour of finality. Case law in Germany is still unsettled, with decisions in favour (OLG Düsseldorf, 21 July 2004) and against (OLG Thüringen, 8 August 2007) an in-depth review of the arbitrators findings, but well known authorities have supported the Thalès approach (P. Schlosser, Articles 81 and 82 EC-Treaty and Arbitration: A German Perspective, Cahiers de l’arbitrage, 2009-1, 25). Likewise, in Spain, although we are not aware of any case on point, leading judges have clearly expressed the view that court review of awards should be limited to the most egregious breaches of public policy and should never lead the court to revisit the arbitrators’ findings as to the facts of the case (A. G. de Paredes, L’annulation des sentences arbitrales en Espagne: à propos de la non révision au fond des sentences et du contrôle du respect de l’ordre public en droit espagnol: Cahiers de l’arbitrage, 2007-3, 27).

From that perspective, the stand of the Brussels court of first instance in SNF in favour of an in-depth review of the arbitrators’ findings in order to ensure a proper application of the law on competition was certainly isolated. To our knowledge, only once has a court entered into the exercise of revisiting the arbitrators’ findings in the merits (Court of appeal of The Hague, 24 March 2005, Marketing Displays International, for a critical analysis, A. Mourre and L. Radicati di Brozolo, Towards Finality of Arbitral Awards: Two Steps Forward and One Step Back, JOIA 2006, 180). Belgian courts have however now joined the mainstream pro-arbitration approach by annulling the Brussels court of first instance ill-grounded annulment decision.

In a 22 June 2009 decision, the Brussels’ Court of appeal (Revue de l’arbitrage 2009, 574, with a note by A. Mourre), has in fact clearly confirmed that “the judge before which the award is challenged should not verify the accuracy of the arbitrators’ reasoning and cannot substitute his own valuation of the case to that of the arbitral tribunal. The Court of appeal adds that “the mission of the judge reviewing an award is to verify the regularity and the legality of the award: as a matter of principle, the review has to be performed to the exclusion of any revisiting of the merits of the case and only on the limited grounds set by Article 1704 of the Judicial Code if any such ground has been invoked”. And it rightly concludes that “the grounds developed by a party which pursues a complete revisiting of the merits of the case by asking the judge to reassess the consequences of the nullity of a contract in a manner different than the arbitrators’ appraisal are not part of public policy”.

The Brussels Court of appeal approach is thus very close to that of French courts, as confirmed by a very recent and unpublished 22 October 2009 decision of the Paris Court of appeal in Linde Aktiengesellschaft v. Halyvourgiki. The two companies had entered into an agreement for the production of liquid gas by Linde in a steel plant belonging to Halyvourgiki, the gas being destined to the industrial needs of said plant. While Halyvourgiki argued that the contract included an implied exclusivity provision preventing Linde to sell the gas to other customers, Linde submitted that no such exclusivity provision had been agreed between the parties. Linde however raised before the arbitral tribunal no argument based on the invalidity of the alleged exclusivity agreement under the rules of competition. In its award, the arbitral tribunal found that, based on trade customs in these type of contracts for the production of gas on the customer’s site, the manufacturer is indeed under the obligation to reserve the full production made on site to the owner of the plant. The award was challenged before the Paris Court of appeal by Linde, who raised at this stage and for the first time the argument that the implied exclusivity agreement was a vertical restraint and that, given the parties’ shares of the relevant market, it did not fall under the relevant block exception. Linde also submitted that the implied exclusivity provision had the effect of distorting the operation of the liquid gas market in Greece and led to an increase in prices and to reinforcing the market power of its main competitors. The argument was based on lengthy and highly complex expert reports analysing the structure of the liquid gas market in Greece and in Europe, the structure of the prices, and the evolution of the main gas manufacturers’ market shares over a span of several years both in Greece and in Europe. Linde’s argument was disputed by Halyvourgiki both on the basis of arbitration law (the alleged misapplication of European competition law is not ground for quashing the award) and on the ground of competition law (as Halyvourgiki disagreed with Linde’s economic analysis, notably the identification of the relevant market and the parties’ market shares).

It should also be noted that the case was much more driven by economic analysis than Thalès was, for the exclusivity in dispute was a vertical restraint (as opposed to a horizontal one) which did not imply any breach per se of the law on competition but an alleged illegality based on the economic effects of the transaction.

In its decision, the Court of appeal fully endorsed the Thalès doctrine and held that the challenge amounted to an attempt to reopen a debate on the merits which should have taken place before the arbitral tribunal, that the control was restricted to the solution given tot the dispute by the arbitral tribunal in its award, and that the alleged anti-competitive effects of the agreement in dispute did not amount to a flagrant and manifest breach of international public policy.

The thrust of both the Brussels and Paris courts decision is that the award, if rendered by a competent arbitral tribunal in a regular procedure where both parties had the benefit of due process, has an intrinsic authority which should be acknowledged and recognised as such by the reviewing judge. There is nothing revolutionary there, as this is exactly the basis upon which the doctrine of private international law has established limited review of foreign judgments since more than fifty years. From that perspective, the limited review of awards under substantive public policy differs from the control performed by courts as to the jurisdiction of the tribunal. In fact, the authority of the award supposes that is has been rendered on a valid arbitral agreement. This explains why the nature of the limited review of awards under substantive public policy is sometimes characterized as “extrinsic”, as opposed to the review of the arbitral tribunal’s jurisdiction, which is “intrinsic” in the sense that it implies a review of the reasons given by the arbitrators to establish their jurisdiction.

Alexis Mourre

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In a recent post , Andrew Newcombe queried whether investor misconduct should be dealt with by arbitrators not as a jurisdictional issue, but rather at the merits, damages or costs phase.

His post was published as I was wading through 100’s of pages of old international claims commission awards (for reasons too obscure to get into here).

It may be of some interest to readers of this blog to note that there are several interesting claims arbitrated by the US-Mexico General Claims Commission in the mid-1920s which discuss whether alleged misconduct of an alien should vitiate the Commission’s jurisdiction to hear claims for breach of international law.

The Macedonio J. Garcia case may be the most eyebrow-raising insofar as the US Government, acting on behalf of Mr. Garcia, was seeking re-payment of $161,000 for loans tendered by Mr. Garcia to the (then) Governor of Mexico’s Sonora province. The loans were to assist the Governor’s efforts to seize power in Mexico by means of revolution. When the former Governor and friends ascended to power, Mr. Garcia insisted that he was entitled to repayment by the Mexican state for his loans to the revolutionary cause.

When no payment was forthcoming, the dispute fell to arbitration before the Commission. Perhaps not surprisingly, the Mexican authorities argued that the Commission had no jurisdiction over such a transaction:

“In behalf of the respondent Government it has been argued that, it being assumed that money was loaned by Garcia as described in the Memorial, that act was a participation by him in Mexican politics as a result of which, under international law he lost the right to invoke the protection of the United States, and the latter has no right to intervene in the case.”

However, the Commission held otherwise:

“The Commission is of the opinion that no question of jurisdiction can properly be raised by the contentions made in behalf of the Mexican Government on this point which is one the pertinency of which could only be considered in connection with the question of the validity of the claim under international law.”

Lest the somewhat-opaque language of the Commission leave any doubts as to its reasoning, subsequent rulings of the Commission seem to make clear its view that at least some forms of misconduct were not sufficient to vitiate jurisdiction.

For instance, in the Chattin case (and 3 other parallel claims brought by former colleagues of Mr. Chattin) the Commission affirmed that certain forms of misconduct – in this case, the fact that the aliens allegedly escaped from Mexican prison custody – could not bar the U.S. from bringing an international claim against Mexico.

Notably, the Commission did weigh the “fugitive” status of the claimants at the damages phase of the arbitration:

“Taking into consideration, on the one hand, that this is a case of direct governmental responsibility, and, on the other hand, that Chattin, because of his escape, has stayed in jail for eleven months instead of for two years, it would seem proper to allow in behalf of this claimant damages in the sum of $5,000.00, without interest.”

Another case on the Claims Commission docket which seems relevant in the context of investor misconduct is the Francisco Mallen case , brought against the United States, wherein the alleged mistreatment of a Mexican Consul at the hands of US policeman was at issue.

In objecting to the claim, the U.S. Government noted that Mr. Mallen had misrepresented and exaggerated events in his correspondence with Mexico, as well as in his submissions to the Commission. The U.S. also contended that Mr. Mallen – during the second of two run-ins with the same police officer – was carrying a pistol, in violation of Texas law.

The Presiding Commissioner rejected the claim that Mr. Mallen had breached local law by carrying the pistol, and further dismissed the U.S. argument that Mr. Mallen’s misrepresentations or exaggerations should rob the Commission of jurisdiction. In a concurring opinion, another of the three Commission members noted that such considerations were not questions of jurisdiction at any rate:

“Neither the fact that Mr. Mallen violated the law of Texas nor the fact that he has furnished inaccurate or exaggerated statements can in any way affect the right of the Mexican Government to present against the United States a claim grounded on an assertion of responsibility under rules of international law, although obviously these matters are pertinent with respect to a determination of the merits of the claim, because account must properly be taken of them in reaching a conclusion regarding the nature and extent of the wrongs inflicted on Mr. Mallen. If he violated the law of Texas a charge of false arrest and imprisonment can not be maintained. And clearly the extent of his injuries and losses has been exaggerated by the testimony which he has furnished.”

* * *

It’s certainly possibble that adjudicators in subsequent years have scrutinized, and ultimately rejected, the approach of the US-Mexico General Claims Commission in the above cases. I’ve not undertaken a historical study of all relevant international rulings, and I offer no grand statements as to the legal force of the above judgments.

Moreover, given that these were all diplomatic protection claims, advanced by the home state – which would have been blameless of any misconduct alleged – one wonders if these cases offer useful guidance in the case of investor-state claims (which are brought by the very individuals alleged to have engaged in misconduct). Indeed, in the Chattin case, the Commission touches on this issue:

“It is true that more than once in international cases statements have been made to the effect that a fugitive from justice loses his right to invoke and to expect protection—either by the justice from which he fled, or by his own government—but this would seem not to imply that his government as well loses its right to espouse its subject’s claim in its discretion.”

Only time will tell what relevance modern-day adjudicators will ascribe to these decisions – and perhaps other earlier arbitral rulings which still wait to be disinterred. Nevertheless, as an old history student, I find it quite interesting to discover that the above-mentioned rulings of the Claims Commission weigh in decisively on some of the questions which are so heatedly debated in contemporary investor-state arbitration.

The treatment of investor misconduct in investment treaty arbitration raises a series of complex issues.  Allegations of investor misconduct (such as fraud, illegality and corruption) can arise in the context of the making of an investment, during its operation, or in the investment treaty claim making process.   How should a tribunal address investor misconduct if it is proven?  When does investor misconduct deprive a tribunal of jurisdiction?  What powers do investment treaty tribunals have to decline investor claims based on principles such as abuse of rights, abuse of process or international public policy?  If a tribunal declines an investment the substantive benefits of the investment treaty before addressing the investor’s claim on the merits, should we refer to this as a form of substantive inadmissibility?  When, if ever, is investor misconduct an issue that goes to the merits, damages or an award of costs?

In my posts in the coming months I will explore these issues, which form part of an ongoing research project on mapping the complex intersections between investor misconduct and investor-state arbitration.

Although there may be little sympathy for the investor that has engaged in serious misconduct, it is not so clear that investor misconduct is necessarily a jurisdictional issue, as suggested in a number of cases, notably Phoenix Action, Ltd. v. Czech Republic, ICSID Case No. ARB/06/5 (Phoenix).  One of the problems with addressing investor misconduct as a jurisdictional issue is that in complex investment relationships, misconduct may not be unilateral.  From a policy perspective, there is much force in the point made by Dr. Cremades in his dissent in Fraport v. Philippines:

If the legality of the Claimant’s conduct is a jurisdictional issue, and the legality of the Respondent’s conduct a merits issue, then the Respondent Host State is placed in a powerful position. In the Biblical phrase, the Tribunal must first examine the speck in the eye of the investor and defer, and maybe never address, a beam in the eye of the Host State. Such an approach does not respect fundamental principles of procedure. (Dissent, para. 37)

As discussed in previous posts by other Kluwer Arbitration Bloggers (here and here), in Phoenix the tribunal found that good faith was a jurisdictional requirement and declined jurisdiction.  At para. 100, the tribunal stated that:

The purpose of the international mechanism of protection of investment through ICSID arbitration cannot be to protect investments made in violation of the laws of the host State or investments not made in good faith, obtained for example through misrepresentations, concealments or corruption, or amounting to an abuse of the international ICSID arbitration system. In other words, the purpose of international protection is to protect legal and bona fide investments.

On the good faith requirement, the tribunal applied the bona fide test to what it referred to as Phoenix’s abusive distortion of the requirements for jurisdiction.  However, the Tribunal also noted that good faith: “is not so limited and may also play its role when it comes to the analysis of the substantive protection for investments under international treaties, which is a matter for the merits” (para. 143).

As John Gaffney has argued in a previous post, rather than viewing the misconduct at issue in Phoenix as a question of jurisdiction, the outcome in the case could have been “achieved through the exercise by the Tribunal of an inherent power to dismiss the proceedings for abuse of process, rather than on alleged failure to meet one of a number of investment criteria required to establish the Tribunal’s jurisdiction.”

The good faith requirement outlined in Phoenix as a jurisdictional requirement appears to be at odds with the approach of some other tribunals, where misconduct has been the basis for denying the claim either as substantively inadmissible or on the merits.  For example, in Plama v. Bulgaria, the tribunal found that the investor was not entitled to the substantive protections of the Energy Charter Treaty because it obtained its investment through fraudulent misrepresentations.  Likewise, in Azinian v. Mexico, the tribunal, having found that the investment was made on false pretences, rejected the investor’s claims and decided in favour of Mexico.  In World Duty Free v. Kenya, the tribunal dismissed World Duty Free’s claim and stated that the “Claimant is not legally entitled to maintain any of its pleaded claims in these proceedings as a matter of ordre public international and public policy under the contract’s applicable laws.” (para. 188).  In all these cases, the tribunals dismissed the claims on the merits or on the basis of substantive inadmissibility, rather than for lack of jurisdiction.

As noted above, from a policy perspective there is merit to addressing issues of misconduct as either questions of admissibility or the merits (and in less egregious cases perhaps at the damages or costs phase of the proceedings).  Cases of illegality raise unique issues, particularly where the illegality under local law means that no property rights could ever have been acquired.  This issue will be discussed in later postings.

It might also be noted that viewing investor misconduct as a jurisdictional issue has two further implications.  If investor misconduct is jurisdictional, a state may be unable to bring a counterclaim to a merits determination.  Second, upon review by either an ICSID annulment committee or a national court, an arbitral award dismissing a case for lack of jurisdiction might be subject to a higher degree of review for failure to exercise jurisdiction compared to a review of an award where a tribunal dismisses the claim on the merits or on the basis of substantive inadmissibility.

As I continue to work and post on these issues any comments or views would be most welcome.