In a recent decision issued on 7 November 2011 on a request for annulment of a partial award on jurisdiction rendered by the Court of Arbitration for Sport (“TAS”), the Swiss Supreme Court recalled and applied its previous jurisprudence on the interpretation of pathological arbitration clauses (Case 4A_246/2011).

The case arose out of a contract between a football club and an agent relating to the transfer of a player. The contract contained a dispute resolution clause which provided that “[t]he competent instance in case of a dispute concerning this Agreement is the FIFA Commission, or the UEFA Commission, which will have to decide the dispute that could arise between the club and the agent.” After a dispute arose between the parties, the agent initiated arbitral proceedings before the FIFA Players’ Status Committee, a body tasked with adjudicating disputes arising from transfers of professional football players. However, on the basis of its internal rules, the Committee declined jurisdiction on the grounds that the agent was a legal person and not a natural person. The agent therefore requested the Zurich High Court (Obergericht) to appoint an arbitrator, which it did. However, the sole arbitrator subsequently found that he did not have jurisdiction on the grounds that the parties had agreed to submit disputes to arbitration under the rules of a sports arbitral institution.

Finally, the agent initiated arbitration before the CAS. In a partial award issued on 17 March 2011, the CAS ruled that it had jurisdiction over the dispute. However, the football club appealed to the Swiss Supreme Court pursuant to Article 190(2)(b) of the Swiss Private International Law Act (“PILA”) to annul the partial award on the ground that the CAS had erroneously held that it had jurisdiction, one of only two grounds available to a party to challenge a partial award (Article 190(3) PILA).

The football club first disputed that the Parties had even agreed to exclude the jurisdiction of the State courts. However, the Supreme Court, interpreting the Parties intentions according to the principle of normative consensus (“Vertrauensprinzip”), found that this was not the case (para. 2.3.1). The Court noted that while the dispute resolution provision did not expressly mention arbitration, the use of the terms “competent instance” and “decide the dispute” could be understood in good faith to mean that any disputes would be decided by one of the two football bodies in a binding manner, to the exclusion of the State courts. According to the Court, the provision did not give rise to doubts which would warrant a restrictive interpretation of the Parties’ alleged intention to exclude the jurisdiction of the State courts.

Of greater interest, however, is the manner in which the Court addressed the football club’s arguments that the arbitration clause was defective to the degree that it was impossible to apply, or alternatively that it had been extinguished by the decision of the FIFA Commission not to accept jurisdiction.

The Court began by setting out the approach in Swiss law to pathological provisions in arbitration agreements, which it defined as provisions which are incomplete, unclear, or contradictory (para. 2.2.3). As the Court explained, as long as such provisions do not relate to essential elements of the arbitration agreement, such as the binding submission of disputes to an arbitral tribunal, they will not in and of themselves lead to its invalidity. Rather, Swiss law requires courts and tribunals to look for a solution, either through interpretation or if need be by means of completing the contract, which respects the fundamental will of the parties to submit their dispute to arbitration. In this sense, Swiss law imposes a broad approach to interpretation of pathological arbitration clauses, once the parties’ intention to exclude State courts in favour of arbitration is established.

On this basis, the Court ruled that the fact that neither institution identified in the arbitration clause could have, according to their own rules, decided on a dispute between the parties, did not necessarily entail the nullity of the entire arbitration clause. According to the Court, the CAS had properly sought to determine whether the designation of the institutions was so essential to the arbitration agreement that the parties would not have agreed to submit their disputes to arbitration had they known that those institutions could not assert jurisdiction (para. 2.3.2). It further found that the CAS’s determination that the parties would nevertheless have agreed to submit their disputes to arbitration was not based on abstract considerations but rather on concrete indications arising from the facts of the case. In particular, the CAS considered that the parties’ designation of two alternative football associations in the arbitration clause indicated that they were not attached to one particular institution, and that, above all, they wanted to submit their dispute to an arbitral tribunal which was familiar with issues surrounding transfers of professional football players.

Having established that the institutions designated by the parties did not constitute essential conditions of their arbitration agreement, the Court turned to determining whether submitting the dispute specifically to the CAS was consistent with the Parties’ intentions. In doing so, the Court sought to correct the partial nullity of the arbitration clause, to the extent possible, by means of filling in the missing elements. The test applied by the Court was to ask what the parties would hypothetically have agreed to had they been aware of the defects in their arbitration clause (para. 2.3.3). After a review of the facts, the Court concluded that the parties would have agreed to submit any disputes directly to the CAS. In reaching its decision, the Court was particularly influenced by the fact that, by designating FIFA and UEFA, both of which are based in Switzerland, the parties indicated their intention to submit their disputes to an arbitral tribunal with seat in Switzerland, and that they intended such disputes to be decided by a sports organisation which was familiar with the football transfer market. In this context, the Court took into consideration that decisions of the FIFA Players’ Status Committee on transfers of players could in fact be appealed to the CAS.

In sum, the Supreme Court’s decision in case 4A_246/2011 is a good example of the broad and flexible pro-arbitration approach which has characterised the Court’s jurisprudence on pathological arbitration clauses in cases in which the parties’ intention to arbitrate is established. Despite being faced with an arbitration clause with clear references to two institutions which could not adjudicate the parties’ dispute, the Court did not find the clause to be invalid as a whole, but rather engaged in an exercise of filling in the missing elements in order to ensure that the fundamental intention of the parties to arbitrate their dispute was upheld. It is also noteworthy that in the first step of its analysis, namely establishing the intention of the parties to submit their dispute to arbitration, the Court did not consider the absence of the words “arbitration” , “arbitral tribunal”, “arbitrator”, or similar terms in the dispute resolution clause (which it itself acknowledged in para 2.3.1), to be decisive.

Much to the surprise of many seasoned international arbitration practitioners, the D.C. Circuit vacated a US$ 185.3 million Final Award against Argentina, essentially nullifying a hard-fought, four-and-a-half year arbitration between the parties. The court vacated the Award on the basis that the “arbitral panel rendered a decision . . . without regard to the contracting parties’ agreement establishing a precondition to arbitration,” namely the clause in the Argentina-UK bilateral investment treaty (BIT) requiring claimants to submit disputes to the Argentine courts for 18 months before resorting to arbitration. In the underlying UNCITRAL arbitration, the tribunal had considered whether the dispute was admissible without having been first submitted to the Argentine courts. It ruled that such submission was not essential because it in this case it would have been an exercise in futility: the claimant could not have obtained relief anyway from the Argentine courts, given the Republic’s apparent interference with access to the courts and its punishment of all would-be local court litigants by excluding them from contract renegotiations. The tribunal concluded that in these circumstances, the 18-month provision could not “be construed as an absolute impediment to arbitration,” and therefore deemed BG Group’s arbitration claims admissible.

By contrast, the D.C. Circuit concluded that this entire analysis was misplaced, since in its view the BIT terms—which it analyzed principally by reference to U.S. domestic law on contractual intent to arbitrate, rather than under the Vienna Convention—were clearly designed to require prior recourse to the Argentine courts. The court found that the tribunal had exceeded its powers by permitting direct access to arbitration contrary to that expressed intent. Indeed, the court suggested that under U.S. case law, the tribunal should not have even engaged in an analysis of the feasibility or usefulness of prior resort to the Argentine courts, because as a threshold matter it had no proper authority under the BIT to admit such issues for substantive consideration.

In the most narrow sense, the D.C. Circuit’s decision did not directly repudiate the years of fairly consistent rulings by ICSID and UNCITRAL tribunals with respect to the 18-month local court requirement under similar Argentine BITs. That is because the BG Group tribunal had not relied on the BIT’s most-favored-nation (MFN) clause, upon which prior tribunals had rested their decisions, even though BG Group did argue that point. Nonetheless, the D.C. Circuit’s analysis implicitly suggests that it also might have overturned an MFN-based decision, since by the Court’s logic, the tribunals who rendered those decisions likewise would have had no authority to bypass the BIT parties’ allegedly clear intent to require local court proceedings in all circumstances. If the decision is read in this broader way, it can be seen as impugning the core logic of many prior decisions. This would include Maffezini v. Spain (ICSID Case No. ARB/97/7, 1 September 2000), where the tribunal allowed an Argentine investor to invoke (by way of an MFN clause) the Chile-Spain BIT to avoid the domestic court prerequisite in the Argentina-Spain BIT; Siemens v. Argentina (ICSID Case No. ARB/028, Decision on Jurisdiction, 3 August 2004), where the tribunal permitted a German investor to invoke the Argentina-Chile BIT to proceed directly to arbitration; National Grid plc v. Argentina (UNCITRAL, Decision on Jurisdiction, 20 June 2006), where the tribunal permitted a British investor to invoke a more favorable term in the Argentina-US BIT to avoid 18 months of litigation in the Argentine courts; and several other cases in the same line. Until the D.C. Circuit’s opinion, the jurisprudence appeared to be converging on consensus regarding the 18-month waiting requirement, even though much controversy remained about the broader application of MFN clauses in other, less procedural, contexts.

Now, with one 17-page decision, a national court not only has completely up-ended the result in one major case, but also in the process unsettled what most observers had thought to be a progression towards certainty, predictability and finality with respect to this issue. Much can—and undoubtedly will— be written about the substance of the court’s analysis. But at heart, it serves as a reminder that some degree of uncertainty is inherent in international arbitration in any forum, so long as there is any mechanism for review and challenge of arbitral awards. This is just as true for the “alternative” routes of ad hoc UNCITRAL or non-ICSID institutional arbitration as it is for ICSID arbitration, since all non-ICSID mechanisms allow for national court challenges under the New York Convention, and national courts (once vested of the matter) may be tempted to apply their own national laws, including on core issues such as arbitrability. Arguably, the uncertainty of national court review may be even greater than that of ICSID annulment review, since most national court judges are comparatively unfamiliar with investment treaty jurisprudence and may be less concerned about contributing to the growth of consensus or emerging doctrine. The choice between the two systems, thus, should not be framed as a quest for predictability and finality, but rather as something more fundamental: a decision about which decision-makers will evaluate challenges, and what rules and standard of review they will use in deciding.

By Jean E. Kalicki and Dawn Yamane Hewett

Facts and Decision

The applicant (Kempinski Hotels) was a Swiss company which contracted to manage a hotel of the respondent (an Indonesian company called PT Prima) in Jakarta. The Indonesian Ministry of Tourism subsequently issued three decisions requiring the contract to be performed by an Indonesian company. Although certain proposed amendments to the contract were then raised between the parties, no amendments were effected nor did Kempinski Hotels change the entity operating the hotel to an Indonesian company.

After some time, following an alleged material breach by Kempinski Hotels, PT Prima purported to terminate the contract and Kempinski Hotels commenced SIAC arbitration proceedings in 2002 alleging wrongful termination. The contract was governed by Indonesian law. PT Prima defended the legality of its termination and also mounted counterclaims for alleged breaches of contract by Kempinski Hotels.

The tribunal, consisting of a sole arbitrator, released its first award relating to the effect of the Ministry’s decisions, by holding, inter alia, that the contract remained valid but had become incapable of performance in the manner stipulated. Following cross-examination of each party’s experts and written submissions, the tribunal released a second award. The second award held that there were alternative methods of performance consistent with the Ministry’s decisions. Consequently, any supervening illegality did not necessarily bar Kempinski Hotels from bringing a claim for damages if Kempinski Hotels could show that the contract was wrongfully terminated.

According to PT Prima, after the release of the second award, it learned that Kempinski Hotels had, prior to the release of the second award, entered into a new management venture, in full compliance with the Ministry’s decisions, to provide hotel management services in respect of another hotel located within a one mile vicinity of PT Prima’s hotel. PT Prima wrote to the tribunal to seek clarification on the first and second awards in light of this information. The tribunal held a conference to decide how the arbitration should proceed.

After the conference, the tribunal directed Kempinski Hotels to provide specific disclosure on four questions concerning the new management venture. Kempinski Hotels issued its response to those queries. The tribunal made another order directing Kempinski Hotels to disclose certain information relating to the new management venture. Kempinski Hotels stated that the new venture was irrelevant to the issue of liability in respect of PT Prima’s termination of the contract and sought directions for the further conduct of the arbitration.

Thereafter, the tribunal directed written submissions on the disposition of the dispute to be tendered. The tribunal subsequently published its third award. It held that (a) the new management venture was inconsistent with the contract; (b) the methods of performance that remained open after the Ministry’s decisions were no longer possible; and (c) the possibility of damages remained for the period between the date of alleged termination of the contract and the date the methods of performance ceased being possible. The tribunal requested submissions on damages.

PT Prima duly filed the relevant submissions. Kempinski Hotels took out proceedings before the Singapore High Court to set aside the third award instead. Thereafter, PT Prima requested the tribunal to make its determination on the issues of damages payable. Kempinski Hotels’ submissions however did not contain any argument on damages.

The tribunal issued a fourth award holding that, because no steps were taken to make performance of the contract lawful, an award of damages to Kempinski Hotels was not possible. The arbitrator also made a costs awards after requesting for submissions on costs. Kempinski Hotels took out similar proceedings to set aside the fourth and costs awards as well.

Before the Singapore High Court, Kempinski Hotels sought to set aside the awards on five grounds and failed on all but a pleading point which forms the focus of this note.

The learned Judge’s reasoning can be summarized as follows. Art 34(2)(a)(iii) of the Model Law (set out in the First Schedule of Singapore’s International Arbitration Act) provides that an arbitration award can be set aside when the matters decided by the tribunal were beyond the scope of the submission to arbitration. To determine whether matters in an award were within or outside the scope of submission to arbitration, a reference to pleadings would usually have to be made. An arbitrator is bound to decide the case in accordance with the parties’ pleadings, and the arbitrator is not entitled to go beyond the pleadings and decide on points which the parties have not given evidence or submissions.

Comment

A question of prejudice

Two questions can be posed. We start with the more intuitive question: what was the prejudice to Kempinski Hotels here?

If one accepts — as alluded to by the learned Judge — that pleadings exist to permit no surprises on the relevant issues so as to allow a party proper opportunity to meet the case against it, intuitively it is difficult to see where the surprise or prejudice to Kempinski Hotels was in this case.

After the issue of the new management venture was raised by PT Prima and the Tribunal had made directions for specific disclosure on that issue, the parties tendered not one but two rounds of submissions and one round of further expert opinions before the Tribunal published its third award. That must have given Kempinski Hotels ample opportunity to ventilate its position concerning the new management venture, even if the matter had only surfaced after the first award was published.

Indeed if PT Prima’s raising of the new management venture had caught Kempinski Hotels by surprise, the learned Judge would have simultaneously found a breach of natural justice by the tribunal for failing to give Kempinski Hotels a proper opportunity to meet the case against it. Yet far from contending so, one of Kempinski Hotels’ complaints concerning natural justice was that the tribunal had failed to consider Kempinski Hotels’ defences relating to the new management venture. Implicit in this submission is an admission that the opportunity to raise arguments concerning the new management venture was given and was taken.

The aim of having pleadings needs little introduction: pleadings define the issues to give the other party fair notice of the case which it has to meet and also enable the relevancy and admissibility of evidence to be determined. The importance of proper pleadings is undeniable. But in so far as fair notice had already been given and taken by the tendering of multiple rounds of submissions, having the result of a case turn on the precise state of pleadings may be, as other authorities have vividly noted, putting the cart before the horse. That must be so, whether in litigation or arbitration.

A question of principle and practice

The second question that can be posed is: can it be said that the new management venture falls within the scope of matters submitted to arbitration?

The Court of Appeal in CRW cited its earlier decision in PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597 (“Asuransi”) for the two-stage assessment the court has to embark upon when considering Art 34(2)(a)(iii). Specifically, the court has to determine:

(a) first, what matters were within the scope of submission to the arbitral tribunal; and

(b) second, whether the arbitral award involved such matters, or whether it involved “a new difference … outside the scope of the submission to arbitration and accordingly … irrelevant to the issues requiring determination”.

Art 34(2)(a)(iii) — with the specific expression “submission to arbitration” used therein — traces its lineage back to Art V(1)(c) of the New York Convention and Art 2(c) of the 1927 Geneva Convention. The report of the Drafting Committee of the New York Convention explained that:

“the expression ‘submission to arbitration’ was used in a broad sense, and was intended to include not only an arbitration clause in a contract, but also a specific ‘compromis’”. (emphasis added)

This could be read to mean that a matter is properly within the scope of arbitration as long as it falls within an arbitration clause in a contract or a compromis (which can be defined for present purposes as a submission agreement to arbitrate after a dispute arises). A literal reading of the equally authentic French text of the New York Convention supports this reading. When literally translated, the French text catches “a difference not contemplated by the submission agreement or not falling within the terms of the arbitral clause”. If one applies a literal reading of the French text of the New York Convention to the present case, there appears to be nothing to suggest that the arbitration agreement in this case precluded the tribunal from considering the new management venture.

Nonetheless, it has been suggested that if such a reading of Art V(1)(c) was intended, the Drafting Committee would have simply used the expression “arbitration agreement” which it used in Art V(1)(a) of the New York Convention, instead of the expression “submission to arbitration”. Most authors agree that this means that if tribunals deal with matters not falling within the questions submitted to the tribunal (also known as the tribunal’s mandate), that would be caught by Art V(1)(c) as well. It is suggested here that this view is consistent with the consensual nature of arbitration. Parties can confer a mandate on the tribunal that delimits the issues submitted to arbitration in spite of the presence of an existing arbitration agreement, and there is no reason why the law should deny binding effect to that mandate any less than an arbitration agreement.

In arbitral practice, the matters submitted for arbitration can be gleaned from various documents, such as the equivalent of a Notice of Arbitration, the equivalent of a Response to the Notice of Arbitration, a Terms of Reference, and of course, the pleadings. The ICC Terms of Reference for instance requires a list of issues to be set out unless the arbitral tribunal considers it inappropriate. It is commonplace for a ICC tribunal and parties to set out a list of issues but to include a statement that the list of issues will be subject to review and modification in accordance with the parties’ submissions. In like vein, the ICC Practical Guide for the drafting of Terms of Reference suggests adding the following reservation:

The issues to be determined shall be those resulting from the parties’ submissions and which are relevant to adjudication of the parties’ respective claims and defenses. In particular, the Arbitral Tribunal may have to consider the following issues (but not necessarily all of these, and only these, and not in the following order…). [emphasis added]

This approach of having regard to the parties’ submissions as they develop through the course of the arbitral proceedings, rather than the strict state of the pleadings, may not sit well with the holding at hand. The holding could permit a party to effectively re-open a case based on allegedly deficient pleadings even if the particular matter that was not pleaded had already been substantively (and many times, exhaustively) argued before the tribunal.

The Geneva Convention regulates issues such as the appointment of arbitrators (Article IV), objections to jurisdiction (Article V), and the applicable law (Article VII). However, it is the Geneva Convention’s provisions in relation to enforcement that are its most prominent feature. In particular, Article IX(2) of the Geneva Convention which limits the application of Article V(1)(e) of the New York Convention.

Article V(1)(e) of the New York Convention provides that recognition and enforcement of an award may be refused if the award has been set aside in the country in which it is made. However, Article IX(2) of the Geneva Convention provides that the fact the award has been set aside will only be relevant if the reason it was set aside was one of an exhaustive list of reasons set out in Article IX(1) of the Geneva Convention. The list of reasons in Article IX(1) of the Geneva Convention essentially mirror the grounds set out in Article (V)(1)(a) to (d) of the New York Convention (party incapacity; lack of notice and a right to be heard; issues beyond the scope of the arbitration agreement; and irregularity in the composition of the tribunal or the procedure). Notably, however, the exceptions set out in Article V(2) of the New York Convention do not appear in Article XI(1) of the Geneva Convention (namely: (i) lack of arbitrability; and (ii) public policy). Therefore, if an award has been set aside in the country of origin on the basis of these reasons (or, indeed, any other reason not set out in Article IX(1) of the Geneva Convention), the enforcing state’s courts may not refuse enforcement of the award on this basis.

Despite the limitations imposed by Article XI of the Geneva Convention, it is important to note that an enforcing state that is party to the New York Convention and the Geneva Convention can still refuse to enforce should the laws of the enforcing state provide that the subject matter of the dispute cannot be resolved by arbitration, or that enforcement would be contrary to public policy. Rather, the limiting factor in the Geneva Convention is that unless an award was set aside in the country of the arbitration for one of the reasons listed in Article IX(1), then the fact it was set aside cannot be used as a reason to refuse enforcement.

There are also two other notable features of the Geneva Convention. First, the Geneva Convention explicitly provides that “legal persons of public law” can validly conclude arbitration agreements (Article II). The term “legal persons of public law” has a wide scope and includes public corporations, the state itself and any of its independent state agencies as well as any federal states. This provision overrides any contradictory law within the home state’s jurisdiction, although it is possible for contracting states to make a reservation on this issue (to date, only Belgium has done so).

Second, the Geneva Convention contains provisions that may help overcome the problem of defective/pathological arbitration agreements (Article IV). In particular, the Geneva Convention provides a mechanism for determining certain details of ambiguous and unclear arbitration agreements, including: (i) whether the parties to an arbitration agreement have to refer their dispute to ad-hoc or institutional arbitration; and (ii) as regards institutional arbitration, which institution a dispute must be referred to.

Nonetheless, as set out at the beginning of this blog, the significant limitation of the Geneva Convention is the fact that its application depends not only on both the state of the award’s origin and the state of enforcement being signatories, but also that all parties to an arbitration agreement must have their place of residence or seat in a contracting state. Coupled with the fact that the Geneva Convention has been ratified by only 31 states, the Geneva Convention’s application is, in reality, severely limited.

However, on 20 July this year, the Arbitrazh Court of Kemerovo Oblast in Siberia relied on the Geneva Convention to recognise a partial ICC award that had been set aside in the country of the seat of the arbitration (Turkey). The decision is a timely reminder of the potential benefits of the Geneva Convention in promoting the enforcement of arbitral awards should all the relevant factors necessary to trigger the Geneva Convention apply.

Ciments Francais, a French company, Sibirskiy Cement, a Russian company, and Cimento Istanbul, a Turkish company, signed an SPA in 2008 under which Sibirskiy Cement undertook to buy shares in various Turkish companies controlled by Ciments Français. Sibersky paid a €50 million advance. The deal fell through and Ciments Français filed for arbitration under the ICC Rules with its seat in Istanbul. The tribunal rendered a partial award which declared that the agreement was valid and Clements Français was entitled to retain the €50 million advance.

The award was subsequently set aside by a Turkish court on three grounds set out in the 2001 Turkish arbitration law. These grounds were: (i) that the arbitrators exceeded their authority by ruling on matters that fell outside the scope of the arbitration; (ii) that the case overran the time limits in the ICC Rules; and (iii) that the award violated Turkish public policy.

Despite the Turkish court ruling, Ciments Français applied to the Arbitrazh Court for recognition of the partial award. Under Article 13(4) of the Arbitrazh Procedure Code of the Russian Federation, if an international treaty signed by the Russian Federation establishes rules other than those which are provided for by the law, the Arbitrazh Court shall apply those rules of the international treaty. In this scenario, the two relevant treaties were the New York Convention and the Geneva Convention.

As set out above, under Article IX(2) of the Geneva Convention, where states are party to both the New York Convention and the Geneva Convention, the provisions of the Geneva Convention regarding recognition and enforcement of awards that have been set aside will prevail. Accordingly, the Arbitrazh Court concluded that none of the grounds for setting aside the award were present in Article IX(I) of the Geneva Convention. It therefore found in favour of Ciments Français and recognised the partial award.

The decision is significant for two main reasons. First, it is the first known instance where a Russian court has agreed to recognise an ICC award which has been annulled at the place of arbitration. This brings Russia (historically a jurisdiction that is perceived as hostile to international arbitration) into line with a select number of jurisdictions which have done so (notably France and the Netherlands). While the decision does not go as far as the French Hilmarton and Putrabali decisions, or the Dutch Yukos decision, it is nevertheless significant as it demonstrates that the Russian courts take the view that local standards of annulment at the place of arbitration shall not prevail if they are contrary to the applicable international standards – this is a very arbitration friendly position.

Second, the decision provides a rare examination of the interrelationship between the New York Convention and the Geneva Convention. It demonstrates that despite the Geneva Convention’s limitations, it can be a powerful tool to be used in enforcement proceedings should circumstances dictate that it applies. However, at the same time, the decision also highlights a notable disparity between the Geneva Convention and the New York Convention.

Mike McClure, Herbert Smith Moscow

The following states are signatories to the Geneva Convention: Albania, Austria, Azerbaijan, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Burkina Faso, Croatia, Cuba, Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Kazakhstan, Latvia, Luxembourg, Macedonia, Moldova, Montenegro, Poland, Romania, the Russia Federation, Serbia, Slovakia, Slovenia, Turkey and Ukraine.

If time permits, I may do another list for 2011. But, first I thought I’d take a look back at last year’s list and offer a brief update on those cases. Rather, than do all of the heavy-lifting here, I’ll direct readers of this blog to relevant reporting in my Investment Arbitration Reporter newsletter (not to be confused with Kluwer’s ITA newsletter) where appropriate. (You won’t need a subscription to view the articles that are referenced below, as we’ll make them publicly available.)

Without further ado, here’s a run-down of the ten cases from last year.

Suez, Vivendi, Anglian Water, et al. v. Argentina

In August, decisions on liability were finally rendered, holding Argentina liable for breaching investment protections owed to a Who’s Who of foreign investors in that country’s water and sewage sector. However, for those interested in the running debate about the coherence or fragmentation of public international law, the decisions may be something of a disappointment. While the arbitrators found breaches of Argentina’s bilateral investment treaty obligations, they gave short shrift to Argentina’s invocation of international human rights law obligations in its defence of these claims. Check out our reporting for a fuller run-down of what happened.

Fraport v. Philippines

Next on last year’s list was Fraport’s bid to annul an ICSID jurisdictional decision which had grounded the company’s bid for compensation over an expropriated airport terminal. In 2007, a divided tribunal ruled that the company’s claim should fail due to the fact that the claimant had quietly circumvented local laws designed to limit foreign control of the terminal project.

Well, tell your friends that you read it on the internet: Fraport got an early Christmas present on December 23rd when an ICSID annulment committee annulled the 2007 ruling. The annulment paves the way for a new arbitration, and one imagines that this will land on ICSID’s doorstep early in the new year. Keep an eye on the IAReporter newsletter for the fuller story on this one.

Brandes Investment Partners v. Venezuela

Last year, we noted that a decision should be forthcoming by a panel of arbitrators in a telecoms nationalization claim whose viability hinges on the ambiguous-looking arbitration clause in a domestic investment protection statute. Yeah, that’s a mouthful. But you’ve got time to digest it because, as of this writing, a decision in the Brandes case is still awaited.

Mind you, a different ICSID panel weighed in earlier this year with a notably restrictive interpretation of the same statute at issue in the Brandes case. Our report on that dimension of the Mobil v. Venezuela case is here. Now it remains to be seen what the Brandes tribunal makes of the ruling in the Mobil case.

El Paso v. Argentina

Nothing new to report here. El Paso turned to arbitration against Argentina back in 2003, alleging that the country’s handling of an earlier financial crisis triggered breaches of protections owed to El Paso. Arbitrators are still dotting their ‘I’’s and crossing their ‘t’’s on this long-anticipated decision. El Paso must be thoroughly demoralized given that the most likely outcomes are A) a dismissal of its case or B) a “victory” followed by a protracted annulment process.

AES v. Hungary

There is rather more to report in relation to another claim highlighted in last year’s list. AES was one of three foreign power producers to sue Hungary for allegedly failing to respect the terms of long-term power purchase agreements. However, in September, arbitrators handed down a verdict in favour of Hungary, finding no breaches of the country’s obligations under the Energy Charter Treaty. A fuller accounting of the case can be read here.

Foresti and others v. South Africa

A group of foreign miners drew international headlines when they alleged that South Africa’s Black Economic Empowerment program – and the country’s new BEE-inspired mining regime – had breached protections owed under South Africa’s bilateral investment treaties.

As was noted last December, the politically contentious dispute seemed to be fizzling out after the claimants signaled that they were prepared to lay down their arms. However, the claimants and South Africa could not agree on the peace terms, so it fell to arbitrators to hold a hearing and issue an award which drew a line under the case. Read all about it here.

RosInvestCo v. Russian Federation

On December 19, 2010, we reported that an arbitral award in one of three pending Yukos-related arbitrations against Russia had been quietly rendered back in September. The ruling had remained under lock and key until the Russian Federation moved earlier this month to set aside the award. Here’s our quick run-down of what happened, but keep an eye on our newsletter for a full accounting of the award’s holdings.

Chemtura v. Canada

Canada walked away victorious after arbitrators ruled in August of 2010 that a U.S. chemical company had failed to make out any of its claims under the North American Free Trade Agreement (NAFTA). The case had been watched nervously by public health advocates as Chemtura was attempting to second-guess Canada’s phase-out of the controversial agro-chemical, lindane. But, in the end, Canadians were left only with a hefty legal bill – not an arbitral edict requiring them to put a teapoon of lindane on their morning oatmeal. See this report for the crux of the tribunal’s ruling.

Chevron v. Ecuador (Round One)

While a bruising multi-front legal fight over liability for Amazonian oil pollution gathered pace last year, arbitrators also weighed in with a ruling on a less-publicized under-card battle between the two combatants: Chevron corporation and the Republic of Ecuador.

In what could be a hefty victory for Chevron, arbitrators ruled that Ecuador was liable for delaying the judicial resolution of a series of contract disputes. As we made clear in an analysis of the arbitral ruling, the tribunal appeared to break new ground in ruling that an international tribunal can step into the shoes of domestic courts that are failing to deliver justice in a timely fashion.

Libananco v. Turkey


Various claimants came out of the woodwork to sue Turkey following that country’s winding up of the Uzan family business empire. Libananco, a Cyprus-based entity, has long maintained that it has the most credible claims. The off-shore company insists that it held stakes in two valuable electricity concessions prior to their being taken over by the government. With all of the other known arbitration claims brought by shell-companies now having been dispatched on jurisdictional grounds, a ruling in the Libananco case is the only thing left to be written.

However, if Libananco should prevail, it will have to contend with a recent ruling by a New York judge that any ICSID arbitration winnings must accrue to the benefit of those who suffered a Billion Dollar fraud at the hands of the Uzans. See our story here.

Luke Eric Peterson
Editor
http://www.InvestmentArbitrationReporter.com

The ICC partial award had been quashed by a 12 February 2009 judgment of the Court of Appeal of Paris, because the chairman of the arbitral tribunal, a well-known international arbitrator who is part of one of the world’s largest law firms, had failed to disclose certain links between his firm and one of the parties’ group.

Tecnimont had however raised before the Court an estoppel argument based on the fact that the arbitrator had already been unsuccessfully challenged before the ICC Court of Arbitration for the very same grounds that were invoked before the Court of Appeal, and that such challenge was belated pursuant of Article 11(2) of the Rules for having been made more than 30 days after the date when the party making the challenge had been aware of the facts upon which it was based. According to Tecnimont, the consequence was that the challenging party (Avax) was precluded from objecting to the independence and impartiality of the arbitrator.

The Court of Appeal, however, did not accept this argument on the basis that the grounds for challenge would in fact not have been known to Avax before the award was rendered.

The French Supreme Court (Cour de cassation), in a judgment handed down on 4 November 2010, disagreed with such findings and held that “almost all the adduced [grounds for challenge] were included in the request for challenge notified on 14 September 2007 [to the ICC]”.

As a consequence, the Supreme Court held that the Court of Appeal had modified the terms of the dispute, in breach of article 4 of the French Code of Civil Proceedings.

Article 4 provides that “the subject matter of the dispute is determined by the parties’ allegations”; the case law of the Supreme Court consistently holds, in this respect, that a Court of Appeal which bases its decision on facts different from those submitted by the parties violates Article 4. In this case, the annulment decision rendered by the Court of appeals of Paris is quashed, but the matter is remitted to the Court of appeals of Reims, which will have to decide on the validity of the award.

The Supreme Court does not express any view as to the existence of a bias such as to justify the setting aside of the award for lack of independence and impartiality of one of the arbitrators, which constitutes in French law an irregularity in the constitution of the arbitral tribunal [Article 1502-2 of the French Code of Civil Proceedings].

As a consequence, the conclusion reached by the Court of Appeal of Paris, according to which the links between the arbitrator’s law firm and one of the parties constitutes a conflict of interest, is not criticized as such. In this respect, certain authors have wondered whether the Court of Appeal’s decision should be understood as implying that any failure to disclose relevant circumstances should as such justify a challenge (Th. Clay, rev arb 2009-3, p. 193). We do not believe that to be the case, and the reference by the court of Appeal to a “conflict of interest” simply means that the circumstances in dispute were such as to cast serious doubts in the eyes of a reasonable and informed third party as to the arbitrator’s independence and impartiality. From this perspective, the Court of Appeal findings as to the existence of an appearance of bias is, in our view, consistent with previous case law as well as with the established international arbitration practice as embodied the IBA Guidelines on conflicts of interest in international arbitration (General Standard 2.b).

Neither has the Supreme Court expressed any views as to whether non-compliance with the procedure established by the applicable institutional rules should have any bearing in setting aside proceedings.

Nevertheless, by holding that all the grounds for the challenge in dispute were present in the application made to the ICC, the Supreme Court implies (as the ground for annulment of the Paris court decision would otherwise be deprived of any relevance) that the Court of Appeal should have examined and decided Tecnimont’s argument that such challenge was belated and that Avax should therefore be considered as having waived its right to challenge.

The Court of Appeal decision, in this respect, was highly unsatisfactory. If the parties accepted institutional rules setting time-limits for challenges, why should such time-limits not be enforced by the judge? (see my 19 May 2009 blog; see also in the same sense, Th. Clay, case note op. cit., p. 196). Institutional rules accepted by the parties are incorporated in the arbitration agreement and are as such binding upon the parties. As a consequence, a breach of a provision such as the thirty-days time-limit provided in Article 11 (2) of the ICC Rules of arbitration should be treated as a waiver of the right to challenge, which waiver should prevent any later request to set aside the award on the same grounds.

It is equally unsatisfactory that the decision made by the institution on the challenge be thrown in the waste basket by the judge. Much time is devoted by the parties in arguing these matters before the institution, and institutions carefully weight the parties’ arguments to decide the challenge in the most appropriate manner. In this respect, the IBA recommendation that equal standards be applied to challenges at all stages of the proceedings in order to determine whether grounds for disqualification of an arbitrator exist or existed should be recalled. The facts and circumstances alone are relevant to that effect, and not the current stage of the proceedings or the consequences of the withdrawal (IBA Guidelines, Explanation to General Standard 3(d)). As a consequence, there would be no impediment for the Court of Appeal in setting aside proceedings to give due consideration to the reasons why a challenge was rejected by the institution.

The problem is, of course, that the ICC, like other institutions, does not provide reasons for its challenge decisions. This matter is currently being discussed in the context of the ongoing revision process of the ICC rules of arbitration. Some institutions do provide reasoned decisions, including ICSID, DIS, VIAC, LCIA, NAI and PCA. Reasoned decisions may certainly add to the burden of institutions, and in some instances slightly delay the process; they, however, add confidence in the arbitral process and, more importantly, provide the court in setting aside proceedings with useful information that it can rely on.
Going further, one can wonder whether it is satisfactory to re-litigate before the judge the same challenge discussed before the institution. Would it not be more appropriate to treat challenge decisions rendered by arbitral institutions as if they were awards? Institutional decisions on challenges are in theory of an administrative nature, and they therefore have no res judicata. The nature of those decisions can however be discussed for, at the difference other decisions made by arbitral institutions, they arguably meet the standard of jurisdictional decisions as adopted in many jurisdictions: they are made by a neutral third party (the arbitral institution) and they settle a dispute of a legal nature (whether grounds for disqualification of an arbitrator exist).

Certainly, admitting the jurisdictional nature of such decision would further increase the time and costs of the arbitration, as such an evolution would imply that the parties be granted a reasonable opportunity to present their views before the institution. However, it would spare the parties the burden of litigating twice the same issues. One could imagine that such “challenge awards” could be in turn be the subject of an immediate and expeditious judicial review. Such an evolution may require some amendments to the applicable arbitration laws, but the effort is probably worth making as it would avoid the risk, which is perfectly illustrated by Tecnimont, of having to throw away years of arbitral proceedings and millions of dollars in legal costs, which risk is even compounded when, as in Tecnimont¸ the annulled award resurrects like Lazarus out of its cave, until when it may again disappear if the Court of appeals of Reims decides that the award should be quashed anyway…

Alexis Mourre

England
The question of whether arbitrators can be called as witnesses in subsequent court proceedings is not subject to any provision of the English Arbitration Act 1996.
There is, in the words of Gordon Blanke, “a discrete body of English common law that sheds light on the issue” (“Whether Arbitrators Can be Called as Witnesses: the Position under English Law”, (2008) 74 Arbitration 2, p. 114).
Duke of Buccleuch (1871-1872, L.R. 5 H.L. 418) constitutes the leading case in this area. In that case, the House of Lords held:

“1. That the umpire was a competent witness, like any other person to prove matters material to the issues [i.e. determining the arbitrators’ jurisdiction].
2. That questions might be properly put to him for the purpose of proving the proceedings before him, so as to arrive at what was the subject-matter of adjudication when the proceedings closed, and he was about to make his award.
3. That as regards the effect of the award no questions could properly be put to the umpire for the purpose of proving how it was arrived at, or what items it included, or what was the meaning which he intended at the time to be given to it.”

The court observed that it did not know of any objection to the very possibility to hear arbitrators as witnesses. For the court, the reasons preventing judges from testifying and being cross-examined did not extend to arbitrators. The arbitrator could therefore be questioned as to what took place before him. The House however refused to hear arbitrators on the content of the award. It held:

“As soon as the award is made it must speak for itself . . . but cannot be explained or varied or extended by extrinsic evidence of the intention of the person making it”

There are indeed good reasons for not allowing the arbitrators to give testimony on the content of the award, one of which being that the arbitrator is functus officio once the award is rendered. He can therefore not deviate from or modify the award in any way once it is signed (subject to a limited right to correct and interpret it).
Moreover, admitting testimony on the content of the award would jeopardize its finality:

“The award taken by itself is something certain and fixed, and settles the rights of the parties; but if evidence be admitted of the intention and state of mind of the umpire when he made it, its certainty is destroyed, and its effect depends on his memory . . .”

This early case was confirmed in Dare Valley Railway Co in which the court ruled:

“I can see no reason why the arbitrator should not be just as well called as a witness as anybody else, provided the points as to which he is called as a witness are proper points upon which to examine him” (L.R. Eq. 429 at 435).

English courts have later held that the testimony of arbitrators should only be heard in exceptional circumstances, when the facts of the case could not be ascertained by any other means:

“In the view of the Court this is an exceptional case, and in this exceptional case the Court has arrived at the conclusion that the only way in which it can satisfactorily deal with the matter before it, is by having the assistance of the evidence of the arbitrators, who, being independent persons, can tell the Court what it is unable to ascertain from perusal of the affidavits on one side and the other – namely what are the essential facts of the case” (Leisarch v Schalit [1934] 2 K.B. 353).

This issue has again been dealt with by the House of Lords in a Scottish case in which the Court held that “in proceedings where the award itself was not in issue, it was not incompetent to call the arbiter as witness” (Cooperative Wholesale Society Ltd v Ravenseft Properties Ltd (No.2) (2002) S.C.L.R. 644).

Under English law, arbitrators are therefore not privileged from giving testimony and can be called to testify in setting-aside proceedings. Their testimony is nonetheless limited to the factual account of the arbitration procedure and it is therefore excluded that the arbitrators would have to explain the reasoning that led to the award or provide clarification on their state of mind at the time the award was made.

Norway
The Supreme Court of Norway rendered on 14 March 2008 a decision relating to the right of a party to call an arbitrator as a witness in proceedings brought for the annulment of an award (Trygg-Hansa, Bertrand, “The witnessing arbitrator,” http://avocats.fr/space/edouard.bertrand; Langeland et al., “Supreme Court Rules on Arbitrators as Witnesses,” ILO Newsletter, 10 July 2008).
The dispute related to a reinsurance agreement. The arbitral tribunal had made an award based on a clause which provided that the interpretation of the reinsurance contract would be made “from a practical view and on the basis of equity rather than in a strict legal sense”.The losing party applied to the Norwegian courts for an order vacating the award on the grounds that no party had asserted this interpretation provision in the arbitral proceedings, and the arbitral tribunal had therefore breached due process requirements in applying it without hearing the parties’ arguments in this respect.

In order to establish that this provision had been asserted before the arbitral tribunal, the opposing party requested permission to call the three arbitrators as witnesses.The court of first instance authorized the testimony of the president of the arbitral tribunal. This decision was upheld on appeal and before the Supreme Court.

The Supreme Court noted that, while calling arbitrators as witnesses was in principle prohibited, this prohibition was not absolute. It is permissible under Norwegian law to request the testimony of an arbitrator as to what actually happened during the arbitral proceedings. However, the testimony of an arbitrator may not address his personal view of the case, nor can it be used to clarify or supplement the award.

France
French courts have adopted a different approach and considered that the arbitrators should enjoy a privilege similar to those of judges when it comes to being heard as witnesses. In a case dated 1992, a party challenging an arbitral award requested leave of the court to order the arbitrators to appear before the court. Such request was rejected on the following grounds:

“The arbitrator . . . is not a third party in relation to the dispute which he has decided . . . On accepting his functions, he assumes the status of a judge, as a result of the contract appointing him. He therefore enjoys the same rights and is subject to the same duties as a judge, and it is not legally possible for a judge to be heard in person in proceedings to which he is not a party” (Paris Ct App., May 29, 1992, Consorts Rouny, Rev. arb. 1996.408).

The position of the court was expressed in general terms and has been approved by scholars (Dubarry, Loquin, 1992 RTD Com. 588; Fouchard: “Le statut de l’arbitre dans la jurisprudence française”, Rev. arb. 1996.325).

Switzerland
In Switzerland, the practice concerning testimony of arbitrators further differs. Section 102 of the Federal Law on the Federal Tribunal sets a deadline to the arbitral tribunal to submit its comments on a motion to set its award aside. The arbitral tribunal’s failure to submit any such comments bears no consequence.
The Swiss Federal Tribunal can therefore seek observations from the arbitrators on the way the arbitration was handled. This however constitutes a mere invitation made to the arbitrators who are not bound to appear before the tribunal and remains rare in practice.

Conclusion: A brief analysis shows that testimony by arbitrators in subsequent court proceedings is subject to various practices which differ from jurisdiction to jurisdiction. The extent of the rights and obligations of arbitrators arising in setting-aside or recognition and enforcement proceedings of an international award remains to be defined.

Edouard Bertrand notes that the admissibility of the arbitrators’ testimony raises a number of questions: Is the arbitrator entitled to refuse to testify? Is the arbitrator entitled to receive compensation for the time spent on his testimony? In cases where there are several arbitrators, should the president alone testify? What would happen if the testimonies of the arbitrators differ with one another? Could an arbitrator be subject to cross-examination? Should this issue be dealt with by institutional arbitration rules?
It seems there is at least one point of agreement: the scope of the arbitrators’ testimony is limited and it can only bear on the factual account of the arbitral proceedings. On the contrary, arbitrators’ testimony cannot involve the substance of the award, which cannot be altered in any way. In any case, one may wish that courts would only make arbitrators witnesses in exceptional circumstances, when the evidence cannot be secured by any other means. This could otherwise well become yet another guerrilla tactic in international arbitration.

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

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.

Blood samples taken from Claudia Pechstein at the International Skating Union (ISU) World Speedskating Championships in Hamar, Norway, in February 2009, showed elevated reticulocytes values. On 1 July 2009, the ISU Disciplinary Commission declared Claudia Pechstein responsible for an anti-doping violation under the ISU Anti-Doping Regulations by using a prohibited method of blood doping. Pechstein and the German Speedskating Association appealed that decision to the Court of Arbitration for Sport (CAS) in Lausanne, Switzerland.

An arbitral panel at the CAS, in a decision dated 25 November 2009, rejected the appeals and confirmed the sanction imposed by the ISU Disciplinary Commission. The CAS panel determined that Pechstein’s abnormal blood readings and the unusual variations in the reticulocytes values recorded several weeks before, at, and a few weeks after the Hamar event, could not be reasonably explained by the various justifications submitted by Pechstein nor by a congenital medical condition. Rather, the CAS panel found that “they must … derive from the Athlete’s illicit manipulation of her own blood, which remains the only reasonable alternative source of such abnormal values.”

A copy of the full CAS award is available here:

<a href="http://www.tascas.org/d2wfiles/document/3802/5048/0/FINAL%20AWARD%20PECHSTEIN.pdf“>

Pechstein filed a petition to set aside the Award before the Swiss Federal Tribunal, urging a fast resolution in light of the upcoming Winter Olympic Games.

In its 10 February 2010 decision, the Federal Tribunal rejected Pechstein’s petition. While the judgment (4A_612/2009) is not yet published, the Federal Tribunal issued a press release outlining its decision (available here: http://www.bger.ch/mm_4a_612_2009_d.pdf).

Procedurally, in order to be able to render a decision prior to the start of the Olympic Games, the Federal Tribunal treated the case with priority and waived the exchange of written pleadings.

On the merits, the Federal Tribunal reaffirmed that Art. 190(2) of the Swiss International Private Law Act contains the exclusive list of grounds for appeal of international arbitral awards. Pechstein had invoked procedural violations, had submitted new medical expert reports, and had argued her elevated blood readings at Hamar were the result of manipulation. The Federal Tribunal rejected all of these arguments. In particular, and in line with long-standing jurisprudence, the Federal Tribunal held that it had no power to review the factual findings made in the CAS Award, nor to assess new evidence. The Federal Tribunal can only review an international arbitral award on the merits for a violation of the Swiss Ordre Public.

This decision is noteworthy for the procedural “fast track” that the Swiss Federal Tribunal was willing to adopt in order to render a decision only a little over two months from the date of the CAS Award and before the matter would have become moot with the start of the Winter Olympics on 12 February 2010. It is unusual to waive the exchange of written pleadings in setting-aside proceedings before the Federal Tribunal. The decision reaffirms the Federal Tribunal’s willingness to decide appeals against international arbitral awards quickly and to show flexibility in responding to the needs of Parties.

Georg von Segesser / James Menz