The case originated in 2000, when a Portuguese soccer player terminated his contract with Sport Lisboa E Benfica (Benfica) and transferred to the soccer club Atlético de Madrid SAD (Atlético). Based on the then applicable FIFA Regulations for the Status and Transfer of Players (FIFA Rules), Benfica claimed in 2001 a compensation from Atlético. The FIFA Special Committee upheld the claim and awarded Benfica USD 2.5 million, which decision Atlético appealed to the Commercial Court of the Canton of Zurich (Commercial Court). On the basis that the FIFA Rules were void as violating antitrust laws, the Commercial Court annulled in a decision of 21 June 2004 the decision of the FIFA Special Committee. A few months later, Benfica again sought a decision from the FIFA Special Committee as to payment of a compensation by Atlético Madrid, but this time the FIFA rejected Benfica’s claim. Benfica appealed the second FIFA decision to the CAS (i.e., not to the Commercial Court) as in the meantime the FIFA had introduced an arbitral review procedure for the decisions of the FIFA Special Committee. Notwithstanding the fact that Atlético opposed Benfica’s appeal by, inter alia, relying on the res judicata effect of the earlier judgement of the Commercial Court, the CAS upheld the appeal in part and ordered Atlético to pay a compensation in the amount of EUR 400’000. Atlético filed a petition with the Federal Supreme Court claiming that the CAS award violated public policy as it disregarded the binding effect of the previous ruling of the Commercial Court.

The Federal Supreme Court followed Atlético’s argumentation. By relying on previous case law, it confirmed that the principle of res judicata is part of procedural public policy and set aside the CAS award. The Supreme Court found that the proceedings in front of the Commercial Court did not involve an appeal against the first decision of the FIFA Special Committee, but the proceedings dealt with the annulment of a resolution of an association (the FIFA) under Article 75 of the Swiss Civil Code. Once a challenge of a resolution of an association is upheld and the resolution is annulled, this decision (as opposed to its rejection) has effect not only between the parties to the proceedings (that is the FIFA and Atlético) but erga omnes, which consequently put an end to Benfica’s claim for compensation on the ground of res judicata although Benfica was not a party to the proceedings before the Commercial Court. The fact that the FIFA subsequently introduced an arbitral review procedure for the decision of the FIFA Special Committee does not change the fact that the issue in front of the CAS had already been decided by the Commercial Court. In the same way as the Commercial Court would have been bound by its previous decision on the same issue, also the CAS obtaining jurisdiction for the second challenge could not examine anew an issue which had already been decided. The CAS award consequently disregarded the binding effect of the judgment of the Commercial Court.

Although this is not the first time that the Federal Supreme Court has held that the principle of res judicata is part of Swiss procedural public policy (see, e.g., the decision 4P.98/2005 of 10 November 2005, at consid. 5.1), this is the first time that the Federal Supreme Court has set aside an arbitral award on this basis. The Federal Supreme Court did so notwithstanding the fact that under Swiss law res judicata requires an identity of the parties in the previous and the subsequent proceedings which however was not the case in the proceedings before the Commercial Court and the CAS. Still, the decision should not be interpreted to open the door to the doctrine of “issue estoppel” known in the United States, under which, in certain circumstances, third parties may be precluded from re-litigating issues of fact and law that have been actually determined in the prior litigation. The Federal Supreme Court’s decision has to be read in light of the singular issue of the erga omnes effect of the previous decision of the Commercial Court, a fact which seems has not been sufficiently stressed by the Supreme Court. Taking this particularity into consideration, it remains to be seen to what extent (if at all) this decision will have the effect of weakening the principle set out under Article 186(1)bis of the PILA.

Georg von Segesser / Patrick Rohn

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

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

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

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

Roger Alford

The conclusive and preclusive effects of arbitral awards in further arbitral proceedings set forth below need not necessarily be governed by national law and may be governed by transnational rules applicable to international commercial arbitration.

I understand the motivation behind this recommendation, but am confused as to how it would be implemented. Because res judicata is viewed as procedural, its application depends on the lex fori, which means that one panel may adopt a civil law approach in one case and another panel may adopt a common law approach in the next case, expanding or contracting the rule depending on whether the situs of the arbitration is New York, London, Paris, or Geneva. The recommendations follow a transnational approach, which appears to represent a mix of common law and civil law traditions.

But if this recommendation is followed, how would it be implemented? The recommendations are “commended” to arbitral tribunals, with a view to facilitate the “preclusive effects of prior arbitral awards.” But on what legal basis can a tribunal adopt recommendations that have not been accepted by the parties? Or would these recommendations be reflected in the contract between the parties or as part of the arbitration rules? It would seem that by following a recommendation to take a transnational approach, an arbitral panel would be rejecting the procedural rules of the lex fori, which presents its own set of problems.

To give you a concrete example, imagine that an arbitral panel makes a factual determination concluding that Company A wrongfully terminated President B’s employment status without just cause and ordered A to pay B lost wages. In a subsequent arbitration between A and B alleging that A subsequently defamed B by wrongfully asserting that B was fired for cause, a panel sitting in Geneva gave preclusive effect to the previous panel’s factual findings of wrongful determination. If my understanding is correct, this would be permissible under the ILA Recommendations–which adopts issue preclusion as a transnational norm–but it would not be permissible under Swiss law, which does not accept the doctrine of issue preclusion. In such a scenario, on what basis can an arbitral tribunal sitting in Geneva follow the recommendation of the ILA and reject the forum’s procedural rules?

Roger Alford

These two decisions raise a number of interesting questions.

Firstly, in countries where (as opposed to Switzerland), the law does not provide that the wrongful denial of jurisdiction of arbitral tribunals is a ground for annulment, the question raised is whether awards having declined the tribunal’s jurisdiction over parties bound by the arbitration agreement (even non signatories), can nonetheless be set-aside on other grounds, such as excess of powers or breach of the tribunal’s mandate?

Secondly, should courts entertaining such challenges proceed to a full review of the award or should the control be limited?

The next logical issue is that of the consequences of the annulment of awards on jurisdiction on subsequent awards rendered by the same arbitral tribunal and between the parties. This problem will arise when jurisdiction has been dealt with in a partial award. Does the nullity of the partial award entail the nullity of subsequent awards?

The Swiss Federal Tribunal has amended the award to extend the arbitration agreement included in the employment agreement to the signatories of the sales contract, which had not been included in the arbitration. This is an important step forward towards the admission of joinders in arbitration, an issue that is still debated amongst authors. Two important issues arise here. First, does the Swiss Federal Tribunal decision dispose of the jurisdictional issue? Has it res judicata with respect to the joined parties? Or should the jurisdiction issue be re-litigated with respect to such parties, as they did not have an opportunity to defend themselves on whether or not they are bound by the arbitration agreement?

“Extension” of the Arbitration Agreement, Joinders, Review of Awards Declining Jurisdiction and Public Policy: News from Paris and Lausanne

The Paris Court of appeal, on 25 September 2008, and the Swiss Federal Tribunal, on 5 December 2008 (see on the Swiss case, Georg von Segesser and Philipp Meier, Arbitration Clauses: Interpretation and Extension to Non-Signatories, Kluwer arbitration blog), have rendered two interesting decisions. These two decisions address issues of primary importance, such as the “extension” of the arbitration agreement, joinders, and the scope of review by courts of award having declined the tribunal’s jurisdiction.

The case leading to the Paris Court of appeal decision (Paris, 25 Sept. 2008, Joseph Abela Family Foundation) relates to a dispute between relatives who were shareholders of a Liechtenstein holding company. The bylaws of that holding company included an arbitration agreement providing for ICC arbitration. Years later the constitution of said company, a dispute arose between family members and shareholders of the holding company, with respect to the sale of certain assets. After having rendered a first award deciding that French law was applicable to the arbitration agreement, the arbitral tribunal rendered a second partial award whereby it declined its jurisdiction with respect to three of the respondents on the basis that they were not signatories of the arbitration agreement. A third partial award then decided on certain issues of time-limitation. The second and third partial awards were successively challenged (under French law, a challenge is immediately admissible against a partial award).

While the Court of appeal dismissed the challenge against the third partial award, it upheld the challenge against the second partial award declining jurisdiction. After having proceeded to an in-depth analysis of the circumstances of the case, the Court of appeal concluded that the three excluded respondents, even if non-signatories, were in reality bound by the arbitration agreement, mainly because of their implication in the performance of the contracts which were the subject-matter of the dispute.

Interestingly, the applicable provision of the French Code of civil proceedings does not contemplate the nullity of an award declining the tribunal’s jurisdiction. Article 1502-1 of the Code only provides that an award can be set aside if the arbitrators decided “with no arbitration agreement or on the basis of an invalid or expired arbitration agreement”. As a consequence, the nullity was decided on the basis of another provision of the Code, namely Article 1502-3, which permits setting aside an award if the arbitrators did not comply with their terms of reference.

The solution is neither original nor new in French law. On several occasions, French courts based the nullity of an award having declined the tribunal’s jurisdiction on the violation of the arbitrators’ terms of reference (See Paris, 16 June 1988, Rev. Arb. 1989, p. 309, note Jarrosson; Paris, 21 June 1990, Rev. Arb. 1991, p. 96, note Delvolvé; Paris, 7 July 1994, Rev. Arb. 1995, p. 108, note Jarvin; Paris, 26 Oct. 1995, Rev. Arb. 1997, p. 553). The ground of violation of the arbitrators’ terms of reference, which was used by the Paris court to fill the gap of Article 1502-1° of the Code, can be compared to that of excess of powers in Article 52 of the Washington convention. (“It is settled that an ICSID tribunal commits an excess of powers not only if it exercises a jurisdiction which it does not have under the relevant agreement or treaty and the ICSID Convention, read together, but also if it fails to exercise a jurisdiction which it possesses under those instruments“, 3 July 2002 Ah Hoc Committee Decision in Vivendi v. Argentina, § 86; for a criticism of that decision, see Suarez Anzorena, in Annulment of ICSID Awards, IAI Series on International Arbitration, n°1, p. 149 seq.). In commercial arbitration, the situation is however not as clear as it may be in investment disputes under the ICSID Convention. Both the NY Convention, the Geneva Convention and the Model Law only contemplate, as a ground for annulment, the invalidity of the arbitration agreement, or the fact that the award deals with a dispute not contemplated by or no falling within the terms of the submission to arbitration, or the fact that the award contains decisions on matters beyond the scope of the submission to arbitration. Literally, those grounds for annulment do not encompass the case in which the arbitral tribunal declines its jurisdiction in breach of a valid arbitration agreement. It can be noted, in this respect, that Article 16-1 of the Model Law also only refers to cases in which the arbitral tribunal retains its jurisdiction, as opposed to cases in which it declines jurisdiction over a particular dispute.

Excluding courts’ review on decisions of tribunals’ declining jurisdiction in breach of an arbitration agreement is of course not satisfactory. A party is either bound by the arbitration agreement or not. In the former case, other parties bound by the arbitration agreement have a right to arbitrate against that party, and any decision denying such right needs to be set aside. It is neither in the power nor in the discretion of an arbitral tribunal to exclude from the arbitration a party to which the arbitration agreement is indeed applicable.

The case leading to the Swiss Federal Tribunal decision of 5 December 2008 (4A_376/2008) relates to a shares purchase agreement. The agreement provided for the transfer of certain shares of company B. Ltd. by a company C. Ltd. (who owned the shares in its capacity of trustee of a beneficiary D) to a purchaser A. Party B was mentioned in the contract as director and creditor. The sales contract provided for arbitration by “the Arbitration Court of the International Chamber of Zürich in Lugano”.

On the same date, company B. Ltd. and A entered into an employment agreement, including the same arbitration agreement as in the sales contract. A dispute arose between A and company B. Ltd. under the employment agreement. Company B. Ltd. started ICC arbitration proceedings on the basis of the arbitration agreement contained in the contract.

Respondent A first objected that the arbitration agreement was pathological and did not provide for ICC arbitration, but for the arbitration of the Zürich Chamber of commerce. The Swiss Federal Tribunal, having decided that the arbitration was an international one pursuant to Swiss law, upheld the jurisdiction of the ICC sole arbitrator by holding that in case of doubt, the arbitration agreement has to be construed according to the parties will and that it was in the case beyond doubt that the parties had intended to submit their dispute to an arbitration institution; the question was in fact to interpret the parties will as to which institution they referred to in their agreement. The Swiss Federal Tribunal held on this point that the history of the negotiations between the parties demonstrate their clear intention to refer to ICC arbitration. The arbitration agreement having been concluded in 2006, i.e. two years after the entry into force of the Swiss Rules, the clause could not have been read as a reference to the arbitration of the Zürich Chamber (as the parties would in such a case have referred to the Swiss Rules).

The award was alternatively challenged by A on the ground that the sole arbitrator had declined jurisdiction over the sales contract and its parties (namely, company C. Ltd., B and D). The sole arbitrator had in fact decided that arbitration being based on consent, third party intervention cannot occur without the consent of all interested parties noting that the ICC Rules do not provide for any procedural mechanism for third party intervention. The sole arbitrator as a consequence held that the parties to the arbitration were only company B. Ltd. (claimant) and A (respondent), and that third parties D., company C. Ltd. and B. (signatories to the sales contract) could not be joined thereto.

The Swiss Federal Tribunal, as the French court did, disagreed with the Tribunal’s finding on jurisdiction. The Tribunal first stated that when dealing with an issue of jurisdiction it “freely examines the issues of law, including preliminary issues, that determine the jurisdiction or lack of jurisdiction of the arbitral tribunal“, and by so doing the court does not become, “an appellate tribunal” (§ 6). Further, the Swiss Federal Tribunal decides that when the arbitral tribunal deals with issues of jurisdiction, it has the duty “to decide who are the parties bound by the arbitration agreement and decide whether the arbitration agreement should be applied to non signatories” (§ 8.3). The decision thus clearly confirms, as provided by Article 190-2 (b) of the Swiss Private International Law Act (PILA) that an award declining the arbitral tribunal’s jurisdiction can be fully reviewed.

The Swiss Federal Tribunal also recalls that “Swiss case law – the law applicable in the present case – has already acknowledged the possibility of extending the arbitration agreement to non signatories, in spite of the fact that the written form is one of the requirements for the validity of the arbitration agreement pursuant to Article 178 PILA. Such an extension can occur in cases of assignment, or transfer of a debt. It has also been admitted that, in particular cases, the requirement of form can be satisfied by the conduct of the parties involved. For example, when the third party has interfered in the performance of the contract including the arbitration agreement, its conduct allow to conclude, on the basis of conclusive factual evidence, that such party intended to accept the arbitration agreement (DTF 134 III 565, par. 3.2 and quotes)” (§ 8.4).

The Swiss Federal Tribunal then proceeded to a careful examination of the facts and decided that the two contracts were closely intertwined, and were the expression of a same contractual operation. According to the Swiss Federal Tribunal, the employment agreement (on which basis the arbitration was started was instrumental to the performance of the sales agreement (in that it provided for non competing obligations which had to be enforced until transfer of the shares occurred, as well as for certain provisions relating to the management of company B. Ltd., see for more details on this case: Georg von Segesser and Philipp Meier, Arbitration Clauses: Interpretation and Extension to Non-Signatories, Kluwer arbitration blog ). The Swiss Federal Tribunal concluded that a breach of the employment agreement had correlative consequences on the performance of the sale agreement.

As a consequence, the Swiss Federal Tribunal decided that “in view of the intense participation of D, B, and company C. Ltd. in the negotiation of the employment agreement and their role in the performance of said agreement, such parties are bound by the arbitration agreement included in said contract, which content is, besides, identical to that included in the sales contract“.

These two decisions raise a number of interesting questions.

Challenge of decisions declining jurisdictions

In countries where (as opposed to Switzerland), the law does not provide that the wrongful denial of jurisdiction of arbitral tribunals is a ground for annulment, the question raised is whether awards having declined the tribunal’s jurisdiction over parties bound by the arbitration agreement (even non signatories), can nonetheless be set-aside on other grounds, such as excess of powers or breach of the tribunal’s mandate? The answer should, in our view, be positive. A party trying to enforce an arbitration agreement would otherwise be deprived of any recourse leading to a potential form of denial of justice.

The extent of review: minimalist vs. maximalist

Should courts entertaining such challenges proceed to a full review of the award or should the control be limited? The Paris Court of Appeal decision has been criticised as amounting to a review of the merits (Clay, Dalloz 2008, n°44, pp. 3117-3118). But it is generally accepted that the judge, when reviewing an award having declared its jurisdiction, can proceed to a full review of the award in fact and in law (in France, see Civ. 6 January 1987, Plateau des Pyramides, Rev. Arb. 1987, p. 469, note Leboulanger; Paris, 23 October 2003, Rev. Arb. 2006, p. 149; Paris, 15 May 2008, Rev. Arb. 2008, p. 344). The reason behind allowing full review on the issue of jurisdiction is that the arbitral tribunal would otherwise have the possibility to create its own jurisdiction ex nihilo, which is unsustainable. Why should the control be more limited when the arbitral tribunal wrongly declines its jurisdiction?

The issue as to the extent of review of courts seized of an annulment action has given rise to an intense debate among French scholars and created a division between those in favour of a minimalist approach, among which the present authors, and those clearly favouring a maximalist approach. The terms of the debate were however substantially different and the reasons militating for or against one conception were concerned with substantive public policy, as opposed to procedural public policy. The precedent is now in French law set up by the much-debated Thales case (see Radicati Di Brozolo, L’illicéité “qui crêve les yeux”: critère du contrôle des sentences au regard de l’ordre public international, Rev. Arb. 2005, p. 529 contra Seraglini, L’affaire Thalès et le non usage immodéré de l’exception de l’ordre public, Cahiers de l’arbitrage, Recueil Vol. III, p. 87) and the recent confirmation by the French Cour de cassation in the SNF v. Cytec case (Civ. 4 June 2008, Rev. Arb. 2008, p. 473, note Fadlallah; JDI. 2008, pp. 1107, note A. Mourre ), which decided that the violation of international public policy should be blatant, effective and concrete. It is however submitted that the terms of this debate cannot be imported to grounds of procedural public policy, including those relating to the Tribunal’s jurisdiction. When it comes to ascertaining an arbitral tribunal’s jurisdiction, courts have full power to review in fact and in law whether a tribunal rightfully accepted and, for present purpose, wrongfully declined jurisdiction over the subject matter of the dispute and over all the parties deemed to be bound by it, whether original signatories or attracted to the arbitration by extension of the arbitration agreement.

The effects of the annulment of partial awards on subsequent awards

The next logical issue is that of the consequences of the annulment of awards on jurisdiction on subsequent awards rendered by the same arbitral tribunal and between the parties. This problem will arise when jurisdiction has been dealt with in a partial award. Does the nullity of the partial award entail the nullity of the subsequent awards? There is probably no general answer to this question (in this respect see A. Pinna, L’annulation d’une sentence arbitrale partielle, Rev. Arb. 2008, pp. 615 seq.). If the award is quashed because the arbitration agreement is invalid, all subsequent awards rendered on the basis of such clause will logically be null and void. If, on the contrary the award is partially set aside because the arbitration agreement was not applicable to certain parties, but applicable to others, subsequent awards may stand in respect to such other parties. The situation of an award having wrongfully declined jurisdiction is a bit different. In the Abela case, the Paris Court of appeals rejected the challenge against the third partial award, dealing with issues of time limitation. The question is then: is that third partial award applicable to the parties in respect to which the arbitral tribunal had (wrongfully) declined its jurisdiction? That would certainly be difficult to accept, as those parties did not participate to the phase of the proceedings leading to the third (not quashed) partial award. Should the conclusion not be that the same issues would have to be re-judged with respect to those third parties? But is the arbitral tribunal still impartial to decide the same issues a second time? If not (and assuming another tribunal would have to be appointed), isn’t there a risk of conflict of decisions? Certainly, all those issues should be considered with care by arbitral tribunals considering a bifurcation.

The path towards joinder of third parties in commercial arbitration

The Swiss Federal Tribunal has amended the award to extend the arbitration agreement included in the employment agreement to the signatories of the sales contract, which had not been included in the arbitration (company C. Ltd., D and B). This is an important step forward towards the admission of joinders in arbitration, an issue that is still debated amongst authors (see Mourre, L’intervention des tiers à l’arbitrage, Cahiers de l’arbitrage, Recueil, Vol. I, pp. 100 – 109 and Rev. Brasil. Arb. pp 76 – 97). Two important issues arise here. First, does the Swiss Federal Tribunal decision dispose of the jurisdictional issue? Has it res judicata with respect to the joined parties? Or should the jurisdiction issue be re-litigated with respect to such parties, as they did not have an opportunity to defend themselves on whether or not they are bound by the arbitration agreement? The second issue regards the applicable institutional arbitration rules (in case, the ICC Rules). How can the Swiss Federal tribunal’s decision to modify the award and join third parties be conciliated with the Rules? Should the Rules be amended to include a joinder provision? Such a joinder provision exists in the Swiss Rules. In the case of the ICC Rules, it may however have to take into account the role of ICC Court of arbitration in deciding prima facie whether the arbitral agreement is applicable. This is indeed the solution adopted in the new ICC model clause for trusts disputes (ICC Bull Vol. 19/No2, 2008). Any joinder provision would also have to take into account the principle of equality of the parties in the constitution of the arbitral tribunal, as established by the French Supreme court in Dutco (Civ, 7 January 1992, Rev. Arb. 1989, p. 470, note P. Bellet). It remains to be seen whether or not this path will be followed…

Alexis Mourre/Alexandre Vagenheim